FRP Holdings, Inc. (FRPH) Q4 2017 Earnings Report, Transcript and Summary

Ladies and gentlemen, and thank you for patience and holding. We now have Mr. John Baker, Executive Chairman and CEO of FRP Holdings Incorporated in conference. [Operator Instructions] It is now my pleasure to introduce Mr. Baker, you may begin, sir.

Good afternoon. I'm John Baker, Chairman and CEO of FRP Holdings, Inc. and with me today are David deVilliers, our President; John Milton, our CFO; and John Klopfenstein, our Chief Accounting Officer. Before we begin, let me remind you that any statements on this conference call 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 include risks listed from time to time in our SEC filings including but not limited to our annual and quarterly reports. Net income for the fourth quarter of 2017 was $13,203,000 or $1.31 per share versus $1,682,000 or $0.17 per share in 2016. Fourth quarter numbers include $12,043,000 or $1.20 per share after taxes due to a reduction in the provision for income taxes, resulting from the company’s net deferred tax liabilities and reduction in corporate tax rates by the Tax Cuts and Jobs Act of 2017. Revenue for the quarter were $12,455,000, up 30.9% from last year, primarily because of the addition of rental revenues from our new D.C. apartment building, Dock 79. Net income for the full year 2017 was $41,750,000 or $4.16 per share versus $12,024,000 or $1.22 per share a year ago. The majority of this uptick in income is the result of our partnership interest in a pretax gain on remeasurement of investment of $39.7 million in our Dock 79 real estate partnership and the $12,043,000 gain I mentioned earlier as a result of the tax cuts. The increase in net income was also augmented by $1 million environmental charge in 2016 but mitigated by a $620,000 increase in a loss of joint ventures, primarily driven by the $5 million increase in depreciation, resulting from the write-up of Dock 79. As the numbers indicate, 2017 was a game changer for FRP Holdings. In addition to the swift run-up of Dock 79, we gained approval for Phase 2 of that project, which will also be an apartment building. We also received approvals allowing mining on our property that is leased to Vulcan Materials at Fort Myers, Florida, and the property leased to Cemex near Lake Louisa in Central Florida. These 2 projects will have a significant effect on the future growth of our royalties, and both will have development or potential when the mining reserves are exhausted. Finally, given the lower tax rates, we have decided not to proceed with the REIT election that we have discussed in previous conversations. Now if I could, let me turn it over to our President, David deVilliers, to walk you through to our segments.

Thank you, John, and good day to those on the call this afternoon. As John articulated in his opening remarks, we had a busy quarter in all of our business segments. Relative to the Asset Management segment, total revenues from our building platform for the quarter just ended, were up 6.8% to $7,816,000 over the same period last year, mainly due to higher reimbursements from operating expenses and higher straight line rents as a result of our increased building platform and increased occupancy. Net income -- net operating income was only up slightly versus the same period last year to $5,813,000. This is due primarily to the straight lining effect of new leases with free rent periods that contained an unrealized rent component, which is excluded from the NOI calculation. We ended this quarter with total occupied square feet of 3,707,724 square feet, an increase of 218,769 square feet, or 6.3% over the same period last quarter. Our occupancy level increased from the previous quarter ended September 30, to 93.1% from 91.3%, and leased square footage from 92% on September 30 to 94.8% at the end of December. As to same-store, average annual occupancy for the quarter decreased slightly by 40 basis points to 91.2% over the same quarter last year. And the corresponding NOI for the same period was down 2.6% to $5,365,000 from $5,508,000. This decrease is primarily due to several large, long-term single-tenanted building vacancies, partially offset by income from short-term, temporary leases. To our Mining and Royalty segment, revenues declined for the quarter just ended over the same period last year by 1% or $20,000 to $1,860,000. This is mainly due to decreases in tonnages sold at several locations because of weather and more normalized volumes at Keuka and Newberry Cement. Total operating profit in this segment was $1,696,000, a decrease of $12,000 versus $1,708,000 in the same period last year. We do believe that volumes will revert back to previous higher levels in the foreseeable future as construction activity in Florida and Georgia continue to improve and our friends in D.C. push for further infrastructure rehabilitation. As John mentioned, in November, our tenant Cemex received approval from the appropriate authorities to mine our property at Lake Louisa. We expect the county to issue the mining permit during the third quarter of this fiscal year. Assuming [entitlements] Stay on track, Cemex expects to begin mining operation by the end of 2019. With respect to our Land Development and Construction, this business segment is the main driver behind our growth. And as I said in the past, this segment generates minimal revenues but incurs significant cost to accomplish its objectives. Capital expenditures this quarter were over $2.6 million, most of which was attributable to the ongoing construction of our latest spec building at Patriot Business Park in Manassas, Virginia. This is our final building in this park. In addition to the actual capital outlays, an extensive amount of time during the quarter was spent on our many capital projects, including: one, working with our joint venture partner with ongoing leasing, marketing and completing with refinancing for Dock 79 for Phase 1 at Riverfront; two, the predevelopment activities for the next phase of Riverfront on or Phase 2; three, the further refining of a PUD application for our Hampstead property to be ultimately presented to the appropriate authorities. The plan is to include several multi-family product types in order to maximize the asset's profitability and expedite its disposition. Finally, we've been working with our other joint [venture] partners to refine and ultimately initiate construction of our first phase of the Windlass Run Business Park venture, which now includes 4 buildings, totaling 100,300 square feet, a single-story office and small retail space. Groundbreaking for this exciting new project that will total over 325,000 square feet when complete, was initiated in late August. A further note on our Dock 79 project, from an operational standpoint, as of December 31, Dock 79 was 96.7% leased and 96.1% occupied. More importantly, as the first generation of leases expired over the quarter, the retention rate was 58% and at an average rental increase of 3.74%, both metrics of which were in line or better than budgeted. In conclusion, as you can see for the 93-plus percentage occupancy level at the end of the year in our Asset Management segment, we were pretty successful in leasing and renewing spaces in our warehouse locations after an inordinate amount of tenants vacated during the fiscal year. In fact, we leased and renewed over 1 million square feet over the period. This upcoming year, we also have an unusually large amount of expirations, but we continue to feel positive about the markets we serve. The velocity of our marketplaces has been strong, and barring something unforeseen, we believe it will remain for the foreseeable future. We also have a lot of exciting new projects in the queue and look forward to converting them into income production. Thank you, and I'll now turn the call back to John.

Thank you, David. We're now happy to entertain any questions that any of you all might have.

[Operator Instructions] Our first question comes from Curtis Jensen with Robotti & Company.

What's -- just any kind of update on the kind of the multi-family outlook in the capital Riverfront, just supply and demand absorption, all of that?

Curtis, it's David deVilliers. We are -- we still remain pretty positive in those programs. We -- most of the apartment complexes in the area are doing pretty well as you can see from our occupancies and our leases. We're staying pretty close to a strong pro forma. We don't see any unforeseen -- unless something unforeseen happens, we feel pretty good about the things going forward.

Curtis, we just finished a marketing report for our Phase 2, and that further underlines what David had just said.

Great. And I guess some of the learning from Phase 1 will be applied to Phase 2. And so do you think when you net it all out and kind of your design and construction expenses and all of that, I don't know if it's -- you kind of expect similar economics to what happened with Phase 1? I guess it's a smaller building to some extent, but roughly, kind of proportionally similar economics or is that -- is it going to be...

I would say, Curtis, first of all, the building is a different shape, but -- which causes a little bit of an increase in the cost per square foot. But general construction costs alone have gone up dramatically. But once again, like John articulated a little earlier that we had a market study done and that everything is pretty favorable going forward. So we have a pretty conservative outlook on what we believe the market rates are going to be, but we feel pretty comfortable that the program going forward will do well for us.

Rental rates -- Curtis, rental rates have gone up very nicely since we started Phase 1, and of course, that helps offset the cost, as well. So we're -- our pro formas probably were about the same as they were when we did them for Phase 1 and they turned out to be a lot better on Phase 1 because of the rental rates going up. And hopefully that will happen again but none of us are smart enough to be sure of that.

To add to John, the mix is a little different as it relates to size, bedrooms and that sort of thing, but nothing dramatic.

Okay. I guess there's been a little bit of movement on the Frederick Douglass Bridge, and is that...

Yes sir, it has.

Good news I guess, but it's still a few years off, is it impacting any of your thinking at this point for further development on 3 and 4, or is it -- that's just way too premature right now?

Actually, they've started. They initiated the construction for this about a couple of months ago. I think you'll see some pretty dramatic activity down there in July after the All-Star Game. It is played at the Nationals' Baseball Stadium. And that's going to -- we're going to outline their limits of the service and they're off and running actually. They have a contractor, they have a design build and they're up and running. And so it's about a 4 to 5-year construction project. And we think that, that kind of fits pretty well within the program that we have for 3 and 4.

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

I was just wondering if you could talk about the industrial leasing front. What you're seeing in the market as we have a lot of leases coming off. Just kind of -- is there an opportunity to re-tenant those spaces at higher or similar kind of rental rates going forward. And the -- with there a conference recently, industrial reality conference, and I don't think I've seen such bullishness at an industry conference. So just wondering if you could comment on what you guys are seeing on the ground.

First of all, Bill, it's David. We see some -- there's some strong velocity in the marketplace as I alluded or as I said in my notes to you all earlier. We did a pretty good job of backfilling and renewing in '17. I mean, the lease and renew over 1 million square feet on a 4 million square-foot portfolio is a pretty interesting task. And going forward, we'd like to think we're still pretty bullish on being able to do that, and we've been able to get some greater rent than we had anticipated. Because in a lot of cases, these are long-term tenants that have been there 7, 10 years with 3% annual bonds. So those rents will start running off pretty high as you know, but we've been able to capture some pretty good rental rates for some of these renewals of the larger tenants. So we feel pretty good about the program, and we'd like to think that we'll meet or exceed our expectations for the year.

Got you. And just on Hollander, which is kind of right on 95, are we seeing any interest to potentially develop more sites at that location? Because I've been through there a few times and it just seems like it's right in the center of everything.

Well, as you know, we just finished the lately, the -- I guess not the last spec we did, but the one before, we leased up to a single tenant over a 16-year period, that's up and that's a pretty strong lease and a strong tenant. The other building that we have is the multi-tenanted building. And over the last 12 months, we've had a lot of movement around those 2, go through expand. We did lose the tenant to down the street, but we instantly back filled them with another one and expanded another, and that building is a 100% occupied. So we're taking a long hard look at the possibility of starting another spec there sooner rather than later.

Got you. That's helpful. And also just can't help but notice that the Amazon HQ2 kind of have 3 locations that are geographically somewhat -- it's Montgomery county, Northern Virginia and D.C. Could you maybe just kind of help me -- help us think about, if it does land in any of those 3 locations, how do you think that impacts our footprint and our portfolio?

It's interesting, Bill. The -- one of the locations is right down at the Anacostia there in the Southeast, which would be an interesting dynamic for that area, but I don't know that, that area needs a whole lot more with the interesting dynamic with the new soccer stadium and everything else going up. The Montgomery county space, which I guess you're alluding to, is just outside of 495 on the Beltway. We don't have any other budding product near there other than, I guess, you could say [ Manassas], which is 100% -- pretty much 100% build-out. And then up near Baltimore, Washington International Airport and those buildings are all in -- been pretty good shape. So it's hard really to say what could happen if one of the 3,000-pound gorilla shows up at your front door, and how you're going to react to that.

At this time we have no other questioners in the queue.

Okay. Well thank you all for joining us today. As we mentioned, we are very bullish about our markets. David talked about the fact that we do have about 10% of our tenants' leases expiring, and yet a year ago that would have been donning. And at this point, we're very, very bullish about going up those spaces much quicker than we would've normally expected. So you all have been great to have an interest in our company, and we look forward to talking to you next quarter. Thank you.

Ladies and gentlemen, that concludes today's presentation. You may disconnect your phone lines and thank you for joining us this afternoon.