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Edited Transcript of FRPH earnings conference call or presentation 6-May-19 6:00pm GMT

Q1 2019 FRP Holdings Inc Earnings Call

JACKSONVILLE May 10, 2019 (Thomson StreetEvents) -- Edited Transcript of FRP Holdings Inc earnings conference call or presentation Monday, May 6, 2019 at 6:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David H. deVilliers

FRP Holdings, Inc. - President

* John Daniel Baker

FRP Holdings, Inc. - Executive Chairman & CEO

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Conference Call Participants

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* Curtis Robert Jensen

Robotti & Company Advisors, LLC - Portfolio Manager

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Presentation

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Operator [1]

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Excuse me, everyone. We now have John Baker, Executive Chairman and CEO of FRP Holdings, Inc. in conference. (Operator Instructions) I would now like to turn today's conference over to John Baker. Mr. Baker, you may begin.

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John Daniel Baker, FRP Holdings, Inc. - Executive Chairman & CEO [2]

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Thank you, and good afternoon and thank you all for joining us today. As mentioned, I'm John Baker, Executive Chairman and CEO of FRP Holdings. And with me today are David deVilliers, our President; John Milton, our Executive Vice President and General Counsel; John Baker III, our CFO; and John Klopfenstein, our Chief Accounting Officer.

Before we begin, let me remind you that any statements made on this call relating to the future are, by their nature, subject to risk and uncertainties that could cause the actual results and events to differ materially from those indicated in such forward-looking statements.

Some of these risks are delineated in our SEC filings, including but not limited to our annual and quarterly reports.

Those of you who've followed our company for a while will notice that the titles of some of our officers changed in my introduction. It's my pleasure to say that the Board appointed John Baker III as our Chief Financial Officer today. John has trained under John Milton for the last 3 years and is well prepared to take on this new role. John Milton will assume the position of General Counsel and will continue to be actively involved in the strategic and legal activities of the company.

I'm also excited that our shareholders elected Margaret Wetherbee to our board. Her background in real estate matters as a lawyer will give us further perspective on our board.

During the quarter, we've continued to focus on redeploying the proceeds gained from the sale of our warehouse portfolio last year. We've reviewed several projects, which we have declined, and continue to look at others. At the risk of repeating myself, we will be very cautious in any major redeployment. We believe that asset prices are very high, perhaps even at a peak, and we only will engage where we see above-average risk-adjusted returns.

I've been asked if we intend to institute a dividend as a way of sharing the proceeds with our shareholders. At this point, in the real estate cycle, I would prefer not to begin a dividend program that locks us into regular and hopefully, increasing payouts.

We are mindful of the fact that we have committed to 2 very large projects; Phase 2 of Riverfront, which we also call The Maren; and Bryant Street. Construction of The Maren is scheduled to complete in 2020 followed by a year or so of lease-up. Bryant Street will be completed a year later. With 2 projects of this size coming to fruition within a year or so of each other, we think it is prudent to keep our liquidity intact through that period, unless a just unmissable opportunity comes along. In the meanwhile, we intend to look after our shareholders by repurchasing our stock in an opportunistic way. Last quarter, we bought 36,000 shares after buying well over 120,000 shares in the previous quarter.

Looking to our results. Net income in the first quarter was $1.898 million or $0.19 a share versus $0.16 a share a year ago. Of that $0.19, $0.01 came from discontinued operations.

We expect to sell one of the office -- one of the 3 office buildings left in our portfolio, and we'll continue for opportunities to sell or develop our permitted lots.

Let me now turn it over to Dave deVilliers to walk you through our operations.

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David H. deVilliers, FRP Holdings, Inc. - President [3]

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Thank you, John, and good day to those on the call this afternoon.

As a follow-up to John's opening remarks, we began this year a very different company than we were at the start of 2018. During the first quarter of 2019, we were busy on all fronts, initiating our strategy of redeploying our cash into potential future opportunities for the business. I'll provide greater detail as I get into highlights of the different business segments.

After the sale of our warehouse platform, most of the Asset Management segment was reclassified to discontinued operations, leaving only 3 commercial properties and 1 recent value-add industrial acquisition called Cranberry Run, which we purchased this quarter for $6.411 million. Cranberry Run is a 5-building industrial Park in Hartford County, Maryland, totaling 268,000 square feet of industrial and flex space. The park is currently 26% leased and occupied, and it is our plan to make substantial improvements totaling over $1.46 million for a total investment in this project of $29.35 per square foot, thereby, increasing value and generating greater interest for the prospective tenants.

Also during the quarter, we entered into a purchase and sale agreement to sell one of our suburban office buildings, 7030 Dorsey Road in Anne Arundel County, Maryland, for $8.8 million, which is one of the 3 commercial properties remaining after the asset sale last May. The due diligence period for the purchaser has expired and we expect to close in the second quarter of 2019.

The total revenues in the Asset Management segment for the quarter were $641,000, up $60,000 or 10.3% over the same period last year. There was an operating loss of $66,000, down $322,000 compared to the same quarter last year due to higher allocation of corporate expenses and operating losses associated with the new Cranberry Run acquisition. Relative to the Mining and Royalties segment, total revenues were $2.229 million versus $1.772 million in the same period last year, an increase of 25.8%.

Total operating profit in this segment was $2.001 million, an increase of $460,000 versus $1.541 million or 29.9% in the same period last year.

Among the reasons for this increase in revenue and operating profit is the contribution from our Fort Myers quarry, the revenue from which, now that mining has been begun at earnest, was more than double of the minimum royalty we have been receiving until recently. I might add, this is the fifth straight quarter of increased revenues and operating profits for this business segment.

With respect to Land Development and Construction, this business segment as of the beginning of 2019 was renamed the Development to more accurately describe our strategy going forward.

Just as before, this business segment is the main driver behind value creation. Therefore, it generates minimal revenues and incurs significant costs to accomplish its objectives.

So with respect to ongoing and new projects, they include: one, the ongoing construction of a 94,350 square foot spec warehouse in our Hollander Business Park in Baltimore, Maryland. This new project is updated and it's designed to include 32-foot clear ceiling heights and a generous supply of exterior drop trailer storage to expand the prospect type to suit the last mile tenant. This new facility was recently completed on time and under budget. We are now actively showing the building to prospective tenants. Two, shell building completion consisting of 4 buildings totaling 100,000 square feet of single-story office and small bay retail space in Baltimore County, Maryland, was achieved at the end of the year for Phase 1 of our joint venture with St. John's Properties. Marketing and leasing efforts began during the fourth quarter of 2018 with stabilization projected for the fourth quarter of 2020. Phase 1 is currently 44% leased. Historic absorption in this market has been plus or minus 40,000 square foot on an annual basis. So this is a good start for this new project. Three, efforts have continued before the appropriate governmental agencies seeking planned unit development entitlements for our 118-acre tract in Carroll County, Maryland. This project is now known as Hampstead Overlook. The zoning change from industrial to residential became unappealable shortly after the new year and concept plans for its combination of 255 single-family and townhouse building lots will be submitted for review during the second quarter. Four, last year we became the principal capital source in another residential land development venture, this one in Baltimore County, Maryland, now known as Hyde Park, which was previously named Essexshire. We have committed up to $9.2 million with a charged 10% interest rate and a minimum preferred return of 20% above which a profit-induced waterfall determines the final split of proceeds.

This past quarter, our final development plan was approved and the appeal period has expired, and we are entitled for 122 townhomes and 4 single-family building lots that will be offered to national homebuilders either at record plat finalization or as fully developed lots. Final infrastructure design and construction drawings have begun and marketing efforts have commenced.

In April of 2018, construction began on Phase 2 of our Riverfront on the Anacostia project in Washington, D.C, now known as The Maren. This mixed-use development consists of 264 apartments and 6,900 square feet of first-floor retail. All 14 floors of the concrete structure were completed during the quarter and the building is expected to receive its first resident in mid-2020.

Like we did for Phase 1, or Dock 79 as it's now known, this is a joint venture with MidAtlantic Realty Partners or MRP, in which FRP is the major partner.

Also in December of '18, we entered into a joint venture with our partner at Riverfront, MRP, to develop the first phase of a multi-phased, transit-oriented, mixed-use residential and retail development adjacent to the Red Line Metro station in Northeast Washington, D.C. The project is known as Bryant Street, which is just 2 stops north of Union Station.

We contributed $32 million in common equity and another $23 million in preferred equity to the joint venture and will be -- also be a major partner. This property is located in a designated opportunity zone, which allow us to do defer the capital gains on some of the pretax profits from the warehouse platform sale.

Phase 1 will consist of 487 apartments and 86,000 square feet of first-floor and freestanding retail.

51,000 square feet of the retail has been preleased. We settled on the land in late December of '18 and demolition the existing buildings has commenced with completion scheduled for 2021.

These aforementioned projects will utilize approximately $128 million of equity over the next several years. As I've said before, we are encouraged that we're finding projects with strong potential for appropriate returns but are resolute to the fact that spending monies realized from the warehouse sale need to be done carefully and prudently.

I also think it's important to mention that the investment in these projects does not begin to consume all of the proceeds from the sale, which provides us a nice cushion to absorb a potential downturn in the economy, while also providing some dry powder should an extraordinary investment come our way.

Finally, it's also important to mention that while tax-deferral type acquisitions and investments, such as opportunity zone purchases, et cetera, could save us $10 million to $15 million in taxes from the warehouse platform sale, we are driven to these projects by the baseline economics of their potential development.

Moving on to our Stabilized Joint Venture segment, formerly known as Riverfront on the Anacostia. Average occupancy for the quarter was 93.5%. And at the end of the quarter, Dock 79 was 94.8% leased and 93.1% occupied.

During the first quarter, 60.87% of expiring leases renewed with an average increase in rent of 2.58%. Net operating income for this segment was $1,630,679, up by a 9.78% compared to the same quarter last year.

Dock 79 is a joint venture between the company and MRP in which we are the majority partner with 66% ownership. The retail component of this project, which totals 14,100 square feet, was 76% occupied and leased at the end of the quarter. All 3 restaurants are fully open for business and are experiencing high levels of traffic and related revenues.

So as this chapter of your company continues to unfold, we will continue our opportunistic approach of seeking out investments that will allow us to exploit our knowledge and expertise to extract the highest value from those assets we develop. We will be doing so with a streamlined team and a watchful eye on the horizon.

Thank you. And I'll now turn back to John.

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John Daniel Baker, FRP Holdings, Inc. - Executive Chairman & CEO [4]

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Thank you, David. I appreciate you summing that up that way. That's very helpful. I think at this point, we should go to any questions that any of you all might have at this time.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question will come from Curtis Jensen with Robotti & Company.

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Curtis Robert Jensen, Robotti & Company Advisors, LLC - Portfolio Manager [2]

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Just thinking about Fort Myers on the mining side. When did that -- did -- that started in 2018 officially?

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John Daniel Baker, FRP Holdings, Inc. - Executive Chairman & CEO [3]

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It started in 2018, but for the first half of the year, we've been receiving minimums. And so we really never got enough royalties to exceed the minimum. So beginning in '19 is when you really see the pop-up.

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Curtis Robert Jensen, Robotti & Company Advisors, LLC - Portfolio Manager [4]

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Was it -- their tonnage there was 400,000-odd, is that just kind of the second half of the year?

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John Daniel Baker, FRP Holdings, Inc. - Executive Chairman & CEO [5]

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That's exactly right.

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Curtis Robert Jensen, Robotti & Company Advisors, LLC - Portfolio Manager [6]

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And any sense of what the tonnage might be in 2019 or...?

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John Daniel Baker, FRP Holdings, Inc. - Executive Chairman & CEO [7]

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It's not up to us, unfortunately. If you did the arithmetic of how much time they have to mine it and how many tons are there, you would expect 800,000 to 1 million, but that will probably rise and fall with the market.

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Curtis Robert Jensen, Robotti & Company Advisors, LLC - Portfolio Manager [8]

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Yes. And are there royalties, kind of, in line with your -- what are -- the corporate average last year with the Bakken change or something or is that...?

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John Daniel Baker, FRP Holdings, Inc. - Executive Chairman & CEO [9]

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Yes, that's about right.

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Curtis Robert Jensen, Robotti & Company Advisors, LLC - Portfolio Manager [10]

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All right. And what about excluding, kind of, Fort Myers and excluding any natural disasters or anything? What do -- would you expect your volumes to be up this year just with -- at all the other locations?

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John Daniel Baker, FRP Holdings, Inc. - Executive Chairman & CEO [11]

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What we are seeing from Vulcan Materials and Martin Marietta in their quarterly results is that the prices are going up 5% or 6% and the volumes are going up 1% or 2%. That will be -- if homebuilding slows down, that will go back some. If there is an infrastructure program, it would shoot up. So that's a cyclical business, but I think we're really in a good part of it right now.

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Curtis Robert Jensen, Robotti & Company Advisors, LLC - Portfolio Manager [12]

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And on the Dorsey Road property that was sold -- maybe this is for David, I don't know -- is there -- was there much in the way of NOI from that property? That was like 2/3 leased or something?

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David H. deVilliers, FRP Holdings, Inc. - President [13]

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Yes. Let's -- hang on, Curtis. Let me get that for you. The -- it's scheduled for settlement -- while we're looking at, scheduled sometime in the end of June, and we have a pretty strong deposit that's actually gone hard. So I think it's probably going to go forward. And I think the annualized NOI for that project is $500,000.

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Curtis Robert Jensen, Robotti & Company Advisors, LLC - Portfolio Manager [14]

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All right. And then was there any update on the warehouse at Quarry Road, the one that's [up for] sale?

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David H. deVilliers, FRP Holdings, Inc. - President [15]

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You mean the 1502, they're still going through the right of first refusal program with the court system in the first quarter. We should find out pretty much any day what the future holds for that.

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Curtis Robert Jensen, Robotti & Company Advisors, LLC - Portfolio Manager [16]

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Okay. And I guess the last thing I'd say is in -- just my two cents. I'm not a -- pretty modest sized shareholder but from where I sit, I think the idea of a dividend is not a great one. It's in my mind kind of a second mortgage, and the last thing you want in a development business is a dividend. I'd rather -- you guys do buybacks on an opportunistic basis and that's my two cents.

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John Daniel Baker, FRP Holdings, Inc. - Executive Chairman & CEO [17]

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I like your two cents. I've never thought of a dividend as being like a second mortgage, but I think it's a very good analogy in this case and appreciate your comment.

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Operator [18]

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(Operator Instructions) Mr. Baker, there are no more questions at this time.

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John Daniel Baker, FRP Holdings, Inc. - Executive Chairman & CEO [19]

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Well, thank you all for joining us today. We appreciate your interest in FRP and we look forward to talking to you next quarter.

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Operator [20]

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Thank you, Ladies and gentlemen. This concludes today's teleconference. You may now disconnect.