Logo of jester cap with thought bubble.

Image source: The Motley Fool.

FRP Holdings Inc  (NASDAQ:FRPH)
Q4 2018 Earnings Conference Call
March 07, 2019, 1:00 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 in conference. 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, instruction 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 Daniel Baker -- Executive Chairman and Chief Executive Officer

Thank you, and good afternoon to you all. This is John Baker, and I'm Chairman and CEO of FRP Holdings. With me are David deVilliers Junior, our President; John Milton, our CFO; and John Klopfenstein, our CAO.

Before we begin, let me remind you that any statements made today, which relate to the future are, by their nature, subject to risks and uncertainties that could cause actual results and events to differ materially from those indicated in such forward-looking statements. These risks also include those listed from time-to-time in our SEC filings, including, but not limited to, our annual and quarterly reports.

Our earnings for the quarter were $706,000 or $0.07 per share compared to $13,203,000 or $1.31 per share in 2018. Last numbers -- last year's numbers included an adjustment reducing income taxes because of the President's tax bill of $12,043,000 or $1.20 per share.

As you know, after the sale of our warehouses last year, our earnings now come primarily from four sources: First, royalties and rents from aggregates operations, which were at an all-time record in 2018; second, rents from our three remaining commercial properties; third, Dock 79, our apartment joint venture in Washington, DC; and, finally, investment earnings from the cash and bonds held for investment generated by the sale.

The results of the quarter also include about $1.7 million of one-time expenses, including a loss on the sale of a PG&E bond after their bankruptcy, due diligence done on properties that we examined in hopes of finding 1031 properties to reduce the tax effect of the sale, environmental and organization cost on Phase 2 of our RiverFront project in Bryant Street and, finally, our annual stock options which were historically done in the second quarter, but done in December this year. Having mentioned the properties examined for potential 1031 treatment, I'd need to inform you that those were not purchased as we pass on those potential acquisitions after we had done the due diligence.

As we've discussed, management's biggest challenge at this point is the careful and prudent use of proceeds from the sale. As of the end of the quarter, we have a $188 million of cash and investments on our balance sheet. During the quarter, we invested $55 million into $32 million of equity and $23 million of preferred stock in our joint venture with MRP on a mixed-use project in Northern DC, which we call Bryant Street. This is the first phase of a multi-phase project on five acres adjacent to the Metro Line and we'll have 488 apartments and 86,000 square feet of first floor retail, about 61% of the retail is pre-leased.

The announcement of the Amazon HQ2 across the river in Northern Virginia makes this project even more special. Additionally, this project is in an opportunity zone, which will enable us to defer and possibly reduce some of our federal income taxes that were previously paid out of the gains on the Blackstone sale. It will also make tax free -- any future gains from the project provide, we hold the project for the required 10-year holding period. As further use of proceeds, we have committed to lend $13,750,000 of mezzanine funding to Phase 2 of our RiverFront project at a 7.5% interest rate, of which $8.7 million had been advanced by year-end. Also, we will receive 8% dividends on the $23 million of preferred stock we invested in Bryant Street.

Finally, during the quarter, we purchased 121,000 shares of our stock at an average price of $47.06. This means that we will deploy about $70 million of the cash proceeds of the sale and still have $188 million of cash and investments on the balance sheet. We will continue to look for other suitable projects, but we will be careful. The prospect of having both Maren and Bryant Street projects come online in '20 and '21, and the potential of recession in that timeframe makes us both glad to have the cash and a very picky acquirer of any future operations. At some point, if we don't deploy our cash, we will consider our dividend, but our preference is to use it as dry powder for now.

Let me now turn it over to David deVilliers to walk you through our various projects.

David 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've been busy initializing the redeployment of cash into potential future opportunities for the business. I'll provide greater detail about these opportunities as I get into highlights of our development section.

So relative to our asset management segment and to reiterate, most of this business segment was reclassified to discontinued operations during the year, including one warehouse facility that an affiliate of Blackstone has an option to purchase for $11.7 million, pending the outcome of litigation with the current tenant relative to its first right of refusal option, which should be sometime in the third quarter of this year. Thus, our remaining asset management segment consists of three office buildings.

This being said, total revenues for the quarter for this business segment were up 3.1% to $592,000 and operating profits were $261,000, an increase of 7.9% over the same period last year.

The mining and royalty segment enjoyed a 17.6% increase in its revenues for the quarter just ended, increasing $327,000 over the same period last year to $2,187,000. Total operating profit in this segment was $1,950,000, an increase of 15%, also, over the same period last year. I might add, this is the fourth straight quarter of increased revenues and what's more impressive is the fact that this past year produced the most revenue and operating profit this segment has generated in any year ever.

With respect to land development and construction, this segment, as of the beginning of the year, has now been renamed 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 cost 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. We've scheduled completion in the second quarter of 2019. This new project is updated in its design to include 32-foot clear ceiling heights and a generous supply of exterior drop trailer storage to expand the prospect plate to suit the last mile tenant.

Two, shelled building completion was achieved at the end of the year for Phase 1 of our joint venture with St. John Properties, consisting of four buildings totaling 100,000 square feet of single story and small bay retail space in Baltimore County, Maryland. Marketing leasing efforts began during the fourth quarter with stabilization projected for the fourth quarter of 2020. Subsequent to the end of the quarter, we leased up one of their two office buildings or 36,000 (ph) square feet. Historic absorption in this market has been plus or minus 40,000 square feet on annual basis.

Three, efforts have continued before the appropriate governmental agencies seeking Planned Unit Development entitlements for our 118-acre tract in Carroll County, Maryland, which has been annexed into the town of Hampstead. The 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 in the second quarter of this year.

Four, during the 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. Subsequent to the end of the quarter, our final development plan was approved for a 122 townhouses and four single-family building lots that can be sold to national homebuilders either at record flat finalization or as fully developed lots. Final infrastructure design and construction drawings will commence during the second quarter and free marketing efforts will begin at the same time.

Next, in April of this year, construction began on Phase 2 of our RiverFront on the Anacostia project in Washington, DC, now known as The Maren. As John described, it's a mixed-use development that consist of 264 apartments and 6,900 square feet of first floor retail. As of December 31, we were out of the ground pouring the concrete for the third of 14 floors. The building is expected to be ready to receive its first resident in mid-2020. Like we did for Phase 1, or Dock 79 as it's now known, this is the joint venture with MidAtlantic Realty Partners, or MRP, in which FRP is the majority partner.

Also, during the third quarter, we entered into a letter of intent for the purchase of a value-add class B warehouse park, inclusive of five buildings totaling 268,000 square feet on 21 acres in Harper County, Maryland, known as Cranberry Run Business Park. The project passed due diligence and subsequent to the end of the quarter we settle on the project. Our plan contemplates rehabilitation of certain areas that have been somewhat neglected in recent years, making each building extremely functional and competitive in the marketplace the property serves.

Additionally, at the end of this past quarter, we entered into a joint venture with our partner at Riverfront, MRP, to develop the first phase of a multiphase mixed-use residential and retail development adjacent to the Metro Line station in Northwest DC, known as Bryant Street, just two stops north of Union Station. As John mentioned in his opening remarks, we contributed $32 million in common equity and another $23 million in preferred equity to the joint venture. This property is located in a designated opportunity zone, which allows us to defer the capital gains on some of the pre-tax profits from the warehouse sale. This phase 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 pre-leased. We settled on the land in late December and demolition of one of the existing buildings has already commenced.

Finally, at the end of this last quarter, we executed a contract of sale to purchase several contiguous parcels of raw land totaling approximately 300 gross acres near the port of Baltimore. This project did not pass due diligence and we terminated the contract. These aforementioned products -- projects will utilize approximately $95 million of equity over the next several years.

Needless to say, we're encouraged that we are 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 consume all of the proceeds, 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 acquisition such as opportunity zone purchases, et cetera, could save taxes from the warehouse platform sale. We are driven to these projects for the baseline economics of their potential development.

Moving on to our RiverFront on the Anacostia business segment, like the remaining of the -- or the renaming of the land development and construction segment, this segment, as of January 1, is called stabilized partnerships. For the moment, the only asset in this segment is Dock 79. Average occupancy for the quarter just ended at Dock 79 was 94.6% and for the year it was 94.8%.

This past quarter, the retention rate was 65.6% at an average rental increase of 3.36%. And, for the year, the success rate was 58.4% with an average rental increase of 3.29%, both metrics exceeded our expectations. Our primary focus on this project now consists of resident retention, maximizing rental rates and optimizing expenses. The retail component of Dock 79, which totals 14,100 square feet was 76% occupied and 76% leased as of the end of the year, leaving one suite vacant of, about 3,300 square feet.

Restaurants that are fully open for business continue to be well received and are experienced high levels of traffic and related revenues. So as the next chapter of your company unfolds, our strategy is to redeploy proceeds from the May 28, 2018, sale of our warehouse platform into asset classes that allow management to exploit its knowledge and expertise. So as we embark on a more opportunistic approach to extracting the highest value from the assets we develop, we will be doing so with a streamlined group and a watchful eye on the horizon. I'm sure you'll agree. We have a lot of work to do.

Thank you, and I'll now turn the call back to John.

John Daniel Baker -- Executive Chairman and Chief Executive Officer

Thank you, David. If there are any questions at this time, we'd be happy to entertain them.

Questions and Answers:

Operator

Thank you. At this time, we will open the floor for questions. (Operator Instructions) Our first question will come from Curtis Jensen with Robotti & Company.

Curtis Robert Jensen -- Robotti & Company Advisors -- Analyst

Hey, good afternoon.

John Daniel Baker -- Executive Chairman and Chief Executive Officer

Good afternoon, Curtis.

Curtis Robert Jensen -- Robotti & Company Advisors -- Analyst

Just to double check the $88.8 million secured note, that's a mortgage on Dock 79 or is there other stuff?

John Daniel Baker -- Executive Chairman and Chief Executive Officer

That's correct.

Curtis Robert Jensen -- Robotti & Company Advisors -- Analyst

Okay. Is your 10-K out yet or?

John Daniel Baker -- Executive Chairman and Chief Executive Officer

No, I think it will be next week.

Curtis Robert Jensen -- Robotti & Company Advisors -- Analyst

No pressure. All right. Keep up the good work. Thank you.

John Daniel Baker -- Executive Chairman and Chief Executive Officer

Thanks.

Operator

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

John Daniel Baker -- Executive Chairman and Chief Executive Officer

Well, thank you all very much. We appreciate your interest in the company, and appreciate you joining us today, 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: 18 minutes

Call participants:

John Daniel Baker -- Executive Chairman and Chief Executive Officer

David deVilliers Jr. -- President

Curtis Robert Jensen -- Robotti & Company Advisors -- Analyst

More FRPH analysis

Transcript powered by AlphaStreet

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.