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FRP Holdings Inc (FRPH) Q1 2019 Earnings Call Transcript

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FRP Holdings Inc  (NASDAQ: FRPH)
Q1 2019 Earnings Call
May. 06, 2019, 2:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Excuse me everyone. We now have John Baker, Executive Chairman and CEO of FRP Holdings Incorporated. Please be aware that each of your lines is in a listen-only mode. At the conclusion of Mr. Baker's presentation, we will open the floor for questions. At that time, instructions will be given as to the procedure to follow if you would like to ask a question.

I would now like to turn today's conference over to John Baker. Mr. Baker, you may begin.

John D. Baker II -- Executive Chairman and Chief Executive Officer

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 D. 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 have 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 is trained under John Milton for the last three 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 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 two very large projects, phase two 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 leaseup. Bryant Street will be completed a year later. With two 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 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 in the previous quarter.

Looking to our results, net income in the first quarter was $1,898,000 $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 three 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.

David H. deVilliers Jr. -- President

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 three commercial properties and one recent value-add industrial acquisition called Cranberry Run which we purchased this quarter for $6,411,000.

Cranberry Run is a five building industrial park in Harford 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 from 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 three 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.

So 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 a higher allocation of corporate expenses and operating losses associated with the new Cranberry Run acquisition. Relative to the mining and royalty segment, total revenues were $2,229,000 versus $1,772,000 in the same period last year, an increase of 25.8%.

Total operating profit in this segment was $2,001,000, an increase of $460,000 versus $1,541,000 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 begun in earnest, was more than double 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 at our Hollander Business Park in Baltimore, Maryland. This new project is updated and is 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 four 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 one of our joint venture with St. John Properties. Marketing leasing efforts began during the fourth quarter of 2018 with stabilization projected for the fourth quarter of 2020. Phase one 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 taking plan 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 a 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 town homes and four 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 two 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 one 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 two 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 defer the capital gains on some of the pre-tax profits from the warehouse platform sale. Phase one will consist of 487 apartments and 86,000 square feet of first floor and freestanding retail. 51,000 square feet or the retail has been pre-leased.

We settled on the land in late December of '18 and demolition of 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 are finding projects with strong potential for appropriate returns, but a 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 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 three restaurants are fully open for business and are experiencing (ph) 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 our 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.

John D. Baker II -- Executive Chairman and Chief Executive Officer

Thank you, David. 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.

Questions and Answers:

Operator

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

Curtis Jensen -- Robotti & Company Advisors -- Analyst

Hey. Good afternoon.

John D. Baker II -- Executive Chairman and Chief Executive Officer

Good afternoon, Curtis. Thanks for joining us.

Curtis Jensen -- Robotti & Company Advisors -- Analyst

Yeah, thanks. And just thinking about Fort Myers on the mining side, when did that -- that started in 2018 officially?

John D. Baker II -- Executive Chairman and Chief Executive Officer

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

Curtis Jensen -- Robotti & Company Advisors -- Analyst

Was it -- their tonnage there was 400,000-odd (ph) . Is that just kind of the second half of the year?

John D. Baker II -- Executive Chairman and Chief Executive Officer

That's exactly right.

Curtis Jensen -- Robotti & Company Advisors -- Analyst

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

John D. Baker II -- Executive Chairman and Chief Executive Officer

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

Curtis Jensen -- Robotti & Company Advisors -- Analyst

Yeah. And are their royalties kind of in line with your -- the corporate average last year was $1-and-change (ph) or something or is that --?

John D. Baker II -- Executive Chairman and Chief Executive Officer

Yeah, that's about right.

Curtis Jensen -- Robotti & Company Advisors -- Analyst

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

John D. Baker II -- Executive Chairman and Chief Executive Officer

What we're 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%. But that'll be if homebuilding slows down, that will go back some.

Curtis Jensen -- Robotti & Company Advisors -- Analyst

Yeah.

John D. Baker II -- Executive Chairman and Chief Executive Officer

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.

Curtis Jensen -- Robotti & Company Advisors -- Analyst

Okay. And on the Dorsey Road property that was sold, maybe this is for David, I don't know, was there much in the way of NOI from that property? Almost (ph) like two-thirds leased or something?

David H. deVilliers Jr. -- President

Yeah. Hang on, Curtis. Let me get that for you. It's scheduled for settlement, while we're looking at -- scheduled sometime at 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.

Curtis Jensen -- Robotti & Company Advisors -- Analyst

Right. (ph)

John D. Baker II -- Executive Chairman and Chief Executive Officer

I think the annualized NOI for that project is $500,000.

Curtis Jensen -- Robotti & Company Advisors -- Analyst

All right. And then -- was there any update on the warehouse at Quarry Road and when that (multiple speakers) for sale?

David H. deVilliers Jr. -- President

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.

Curtis Jensen -- Robotti & Company Advisors -- Analyst

Okay. I guess the last thing I'd say is and just from my $0.02, I am 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. The last thing you want in a development business is a dividend. (multiple speakers) I'd rather see you guys do buybacks on an opportunistic basis and that's my $0.02.

John D. Baker II -- Executive Chairman and Chief Executive Officer

I like your $0.02. 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 I appreciate your comment.

Curtis Jensen -- Robotti & Company Advisors -- Analyst

All right. Keep up the good work. Thank you.

John D. Baker II -- Executive Chairman and Chief Executive Officer

Thank you.

Operator

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

John D. Baker II -- Executive Chairman and Chief Executive Officer

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

Operator

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

Duration: 21 minutes

Call participants:

John D. Baker II -- Executive Chairman and Chief Executive Officer

David H. deVilliers Jr. -- President

Curtis Jensen -- Robotti & Company Advisors -- Analyst

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