FRP Holdings' (FRPH) CEO Tom Baker on Q3 2016 Results - Earnings Call Transcript

| About: FRP Holdings, (FRPH)

FRP Holdings, Inc. (NASDAQ:FRPH)

Q3 2016 Earnings Conference Call

August 02, 2016, 13:00 ET

Executives

Tom Baker - CEO

David deVilliers - President

Analysts

Bill Chen - Rhizome Partners

Myron Cohn - Stifel, Nicolaus

Operator

Excuse me, everyone. We now have Mr. Tom Baker, CEO of FRP Holdings, Inc. in conference. Please be aware that each of you line 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 the conference over to Tom Baker. Sir, you may begin.

Tom Baker

Good afternoon to you all. As mentioned, I'm Tom Baker, CEO of FRP Holdings and with me are John Baker, our Chairman; John Milton, our CFO; David deVilliers, our President; and John Klopfenstein, our Treasurer and CAO. Before we get into our results, let me caution you that any statements made during this call that relate to the future are by their nature subject to risk and uncertainties that could cause actual results and events to differ materially from those indicated by such forward-looking statements. Additional information regarding these and other risk factors and uncertainties may be found in the Company's filing with the Securities and Exchange Commission.

Net income for the third quarter of fiscal 2016 was $774,000 or $0.08 per share versus $2,046,000 or $0.21 per share in last year's third quarter. Total revenues were $9,243,000, up $746,000 or 8.8% from last year's third quarter. Total cost of operations were up $2,669,000 or 57.9% as the Company recorded an environmental remediation expense of $2 million as a not to exceed amount for the Company's estimated liability under the proposed agreement with our joint venture partner, MRP, to develop Phase II of Riverfront on the Anacostia.

With the exception of taking the hit for the environmental liability in Washington, we are very pleased with our third quarter performance. Let me turn it over to David deVilliers to walk you through the performance of each of our segments.

David deVilliers

Thank you, Tom and good day to all of those on the call this afternoon. I will now take you through our results for the third quarter of fiscal 2016. We enjoyed another successful quarter in both of our income producing segments and our development segment was busy further preparing certain non-income producing assets for income production.

The real performer in this quarter was the mining and royalty segment. To the combination of increased royalty rates and tons sold, revenues were up in this year's third quarter over last year's third quarter by 18.7% or $324,000 to $2.59 million. These increases result in operating profits of $1.888 million, including the $171,000 benefit of the reallocation of our corporate and management company expenses. As a result, operating profits increased 39.6% or $535,000 over the same quarter last year. We believe that volume increases from our locations will be the norm for the foreseeable future as construction activity in Florida and Georgia continues to improve.

Relative to the Asset Management segment, rental revenues from our building platform for the third quarter were $6,927,000, up 6.4% over last year's third quarter and net operating income was $5.485 million up $213,000 or 4% over the same quarter last year, mainly due to the acquisition of the Port Capital building in Baltimore in October 2015. We ended this quarter with total occupied square feet of 3,319,891 square feet, an increase of 63,486 square feet or 1.9% over last year's third quarter.

Relative to renewals, our success rate was 63% for the 123,500 square feet that came up during the third quarter. Relative to same-store, average annual occupancy was down by 56,588 square feet or 90 basis points to 89.2% at the end of the quarter as compared the same period last year. NOI or net operating income, however, for the same period increased 1.1% to $5,57,937 from $5,611,000, evidencing rent growth for the platform.

And finally, to our Land Development and Construction segment. As I previously stated, this segment is responsible for seeking opportunistic purchases of income producing properties and managing and developing our non-income producing assets into income production. Thus, the segment generates minimal revenues but incur significant cost to accomplish these objectives. This segment is the main driver behind our growth.

To this end, we spent $611,000 and an extensive amount of time during the third quarter on capital projects in this segment towards; one, construction of the 79,550 square foot spec building at our Hollander Business Park which was completed at the end of the third quarter; two, commencing construction of 103,653 square foot building in Patriot Business Center, of which 51,727 square feet is now pre-leased and has a scheduled completion date during the fourth quarter of the next fiscal year; three, permitting for the reconstruction of the bulkhead along the Anacostia River at our Square 664E property in anticipation of a high-rise mixed use development, similar to our Riverfront project which is located less than a mile up the river; four, working with our joint venture partner on the management of the ongoing construction of Phase I at Riverfront on the Anacostia now called Dock 79; five, in-depth research into the feasibility of commencing free development activities for Phase II; and six, preparation for an upcoming rezoning hearing for our Hampstead property currently zoned industrial that we hope to change to residential.

Relative to the progress of Phase I at Riverfront or Dock 79, construction is on time, within budget and still on schedule for full completion in the early fall of 2016. Also during the third quarter, we finalized our joint venture agreement with St. John Properties, Inc. for the development of our remaining acreage at Windlass Run Business Park. The 50-50 partnership calls for the combination of our 25 acres valued at $7.5 million with St. John Properties' adjacent 10 acres fronting on a major state highway valued at $3,239,536, resulting in an initial cash distribution to FRP of $2,130,232 which we received in May of this year.

Going forward, the venture will jointly develop the combined properties into a multi-building business park consisting of approximately 329,000 square feet of single-storey office space. With final construction approvals expected this fall, land development and ultimately the commencement of the first phase of vertical construction is anticipated to begin in the spring of 2017.

So, in summary, we have a lot of exciting projects in the queue and look forward to converting them into income production. Thank you and I'll now turn the call back to Tom.

Tom Baker

Thank you, David. That was a very good report. As David just showed and I mentioned earlier, we are pleased with our results and feel like we’re executing our plan to grow our earnings to turning non-revenue producing assets into revenue producing assets and taking advantage of opportunistic purchases of revenue producing assets. At the same time, our Mining Royalty business has shown nice growth as volumes and prices from our properties have continued to increase.

Our apartment venture, Riverfront on the Anacostia, Dock 79, is progressing nicely. We started pre-leasing activity for the 305 residential units in late May, 2016. And as of August 1, we were 24% pre-leased with occupancy of the first several floors commencing this week. We have also pre-leased three of the five potential retail spaces. We have begun pre-development activities for Phase II on the Riverfront property and we have quite a bit going on and are very excited about our future and our ability to continue to grow shareholder value.

This time, we'll be happy to answer any of your questions.

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question comes from Bill Chen with Rhizome Partners.

Bill Chen

I was just wondering if you could talk about - I know that we have a in Hollander 95 that, I believe, is completed right now. Could you provide the updates on leasing activities at that building?

David deVilliers

We literally just finished that building at the end of the third quarter. We've had a tremendous amount of velocity, a lot of proposals out but no letters of intent signed as of today.

Bill Chen

And then, so moving on to the Windlass Run development, how should we think about - could you, I guess, there is like two parts of question. Given the cash which is taken now, what's our ownership in that JV going forward? And then, in two, three, maybe two years out, how do we think about [indiscernible] strategy for that development project? Would that eventually be sold or would we somehow consolidate that revenue and cash flow onto the balance sheet sometime in the future?

David deVilliers

Bill, you're ahead of us. We are 50-50 partner with an outfit, Mr. Ed St. John is our partner, through his entities, he's been in the market for 30 plus years, he has got an incredible track record. We switched to this purpose for this Windlass Run Park because they were absorbing office space more rapidly than industrial warehouse space in this area.

We look to build the square footage out in the joint venture over the next couple of years, the exact timing of which will depend on how much absorption the market has and we have no commitments beyond then as to whether we will continue to hold them in our portfolio, where we will be opportunistic and look to exit those, but it's pretty clear from his historical operating, I call it footprint, that Mr. St. John's Properties, he holds for a long time. So he knows them, he manages them and he holds them and that will be our initial approach until we see a need to change for the benefit of the Company.

Bill Chen

And I saw the Phase II buildings on the Jbland.com website for Windlass Run Phase II, could you talk about timing on that in terms of zoning approval and then any anticipated timeline in terms of construction and what not going forward on Phase II?

David deVilliers

We have a hearing to get the final architectural approvals, if you will, sometime this fall and then it will - final approval will most likely happen in the first quarter of calendar 2017. At that point, we would then initiate the full set of construction drawings which will take and then also to seek the building permit and that process can take anywhere from 10 months to a year. So, if you lease your timeline at the earliest, it would be the fall of 2017, most likely, the spring of 2018 before we could start.

Bill Chen

And then, I guess, given the construction timeline on Phase I, I'm assuming another 12 months to complete the build out from that point when it starts, is that fair?

David deVilliers

Well, Phase I is - we’re expecting occupancy of the [indiscernible] actually in the next week and we look for complete occupancy there probably sometime in the beginning of October. And so, phased and then - so literally, we will be leasing and completing the leasing up over the next 12 months to 18 months while we're preparing Phase II for construction.

Bill Chen

Any more detail on the who the two additional tenants on the retail side is? I know the first retailer is, I think, the [indiscernible].

Tom Baker

I'm not sure, Bill, that we've made that public. We do have leases and so forth on the three of the five, but we're going to defer to our partner before we disclose the actual tenant names. We're not sure what the agreement is there.

Bill Chen

Okay. And just on the ownership, just want to clarify, with the Phase I on the disclosures, I believe we have either 76% or 77% ownership. Is that an outright equity ownership? Was there some sort of prefer over the promote if the IR sees certain rate of return?

Tom Baker

In the agreement, there is a note in favor of MRP, our partner, the 13% partner and that promote depends on how soon we get to stabilization and at what rate of return. And at that point in time, those rates of return will be measured and depending on what hurdle rates it makes and there are different ones, then their interest could be greater than 13%.

Bill Chen

So, MRP is 13%--

Tom Baker

Greater than 23%. I'm sorry, Bill, I missed you.

Bill Chen

MRP's interest is currently 23% or 13%?

Tom Baker

It's 23%. I'm sorry, I misspoke.

Bill Chen

And I guess, if they hit a certain arrow, their interest could be higher than 23%, is what you're saying?

Tom Baker

Correct. It's really a bigger profit interest to them if they exceed the pro forma.

Bill Chen

Is there a max in terms of what they would max out at if they have - if there is a very high IRR on that?

Tom Baker

It's a pretty nice IRR for us and I really don't recall that there is a practical max put it that way but we've not made that public, we'll have to look back at it.

Bill Chen

I'm just - from my perspective, I'm just trying to figure out - we've been - I've used 77% for our ownership, but in reality, if the project works out very well, the effective ownership from an equity perspective could be lower than that. I'm assuming that's a fair statement to make, alright?

Tom Baker

I feel that is a fair statement to make. That document is filed. It's fairly complex to interpret but if you want to verify it, you can, it is public.

Bill Chen

Okay, so we did file that document at some point?

Tom Baker

We filed it with the SEC.

Bill Chen

Do you recall what date that is, so I could go and look at that?

Tom Baker

Substantially two years ago, I think when we entered into it.

David deVilliers

It was two years ago.

Bill Chen

And then, just one last question, a humorous one. Any thought on which presidential candidate becomes President and its effect on the DC market?

David deVilliers

Bill, we're not going to get into politics, but we'll tell you what our management company Kettler told us that what happens in a change of administration in the DC apartment market is that we never lose as many people as we gain and so there will be a net gain of people if history holds true through the change of administration which should bode well for apartment [ph].

Bill Chen

And then, one last question on the Mining Royalty side, everything seems like it's all firing on all cylinders and very strong volume increases. How do you think about, at some point in the future when there ever really is a downturn, I'm assuming that unit pricing hold up fairly strong because of the nature of these assets but if volume drops, can you just help me think that through?

Tom Baker

Well, it varies with the different locations. Some locations have minimum royalty, so that if you drop below a certain volume, our revenue doesn't drop. We're now above minimum I think at every location, but one. And so, I would encourage you to read - Vulcan Materials is our largest tenant and their press release just came out day before yesterday and you can read and learn more from their projections of what will happen in the marketplace then you can from ours. The volume that they produce and they can sell will govern ours.

Bill Chen

Any update in terms of that Fort Myers [indiscernible]? Have we started mining that yet?

David deVilliers

They have not started mining it yet. They would like to as quickly as possible, but I think they're still trying to get through of I think maybe one last permit, but I believe it's pretty close to being ready to go, but I don't know whether we're talking about a couple of months or six months.

Operator

Our next question comes from Myron Cohn with Stifel.

Myron Cohn

Just the Fort Myers question made me think anything happening in Brooksville?

Tom Baker

It's still there, Myron. It's not moved and nobody has moved to it yet.

Myron Cohn

Is there any thoughts about moving?

Tom Baker

Well, every now and then, we get a feeler from a land developer but right now, its tar kickers.

Operator

[Operator Instructions]. And Mr. Tom Baker, there are no other questions in queue.

Tom Baker

Well, we thank you all for your interest in the Company. We look forward to speaking to you again next quarter. Thank you.

Operator

Thank you, everyone. At this time, this concludes today's teleconference. You may now disconnect.

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