FRP Holdings Inc

NASDAQ:FRPH

Earnings Call Analysis

FRP Holdings Sees Strong Net Income and NOI Growth in Q3 2024

In the third quarter of 2024, FRP Holdings reported an 8% rise in net income to $1.4 million, while year-to-date net income increased by an impressive 94% to $4.7 million. The company's net operating income (NOI) surged 39% to $11.3 million for the quarter, predominantly driven by its multifamily segment. The successful implementation of joint ventures led to significant contributions, with a total of $4.7 million in revenue from new projects. Looking ahead, management expects sustained growth in NOI, albeit at a moderated pace due to a shift towards more stabilized assets. Meanwhile, total project investments are projected at $145 million with anticipated returns of 6% to 7% upon stabilization.

Strong Financial Performance Reflects Growth

FRP Holdings demonstrated a notable financial performance in the third quarter of 2024, exemplified by an 8% increase in net income, totaling $1.4 million or $0.07 per share, compared to $1.3 million from the previous year. Furthermore, for the first nine months of the year, net income soared by 94% to $4.7 million, a significant leap from $2.4 million during the same period last year. This burgeoning growth signals the company's ability to generate substantial profits, enhancing its attractiveness to potential investors.

Impressive Growth in Net Operating Income

The company's pro rata share of net operating income (NOI) rose 39% in the third quarter, reaching $11.3 million, while year-to-date NOI grew by 28% to $29 million. This success can largely be attributed to the multifamily segment, which reported enhanced performance across all six stabilized multifamily projects, contributing an additional $3.7 million to the NOI for the first nine months. The mining segment also boosted performance by adding $1.8 million compared to last year's results.

Development Pipeline: A Strategic Focus on Industrial Projects

Looking ahead, FRP Holdings has an ambitious development pipeline focusing primarily on industrial projects, totaling approximately 649,000 square feet in new Class A industrial space with an estimated capital expenditure of $118 million. This strategic pivot is largely influenced by recent guidelines indicating stable construction costs and interest rate cuts, creating a favorable environment for industrial development. The company anticipates this development will not only generate growth but also provide stabilization as the new projects come online.

Stabilized Projects Expected to Moderate NOI Growth

While the company has enjoyed a remarkable compound annual growth rate of 26.4% in NOI over the past three years, CEO John Baker III mentioned this pace may not be sustainable going forward. As more projects stabilize, the growth rate of NOI is expected to moderate. Investors should remain cognizant of this transition as the organization shifts its focus from pioneering growth to sustaining profitability through stabilized assets.

Valuation Insights: Strengthening Asset Portfolio

In recent disclosures, FRP Holdings updated the valuation approach for its mining royalty asset stream, transitioning to a cap rate methodology rather than an EBITDA multiple. This adjustment, alongside an assessed per-share value range of $34.54 to $39.15 for their real estate assets net of debts, suggests a growing and robust asset portfolio. This strategic update emphasizes management's commitment to accurately reflect asset values and provide relevant insights to stakeholders.

Monitoring Market Conditions: Adjusting Strategies

Management is keenly aware of market dynamics, especially within the multifamily sector where occupancy rates have decreased slightly due to increased supply. The company is diligently managing tenant retention and monitoring rental rates, demonstrating a proactive approach to maintain competitive positioning. Furthermore, expected rental rate increases are stabilizing back to historical norms of about 3% to 4%, indicating potential challenges for revenue growth in the near term.

Conclusion: Cautious Optimism Moving Forward

With an impressive track record of financial performance and a robust development pipeline, FRP Holdings presents a cautiously optimistic outlook. Their focus on industrial developments positions them well to weather market fluctuations, while careful management of their multifamily assets assures operational stability. However, investors should monitor the anticipated moderation in NOI growth and remain informed about market trends impacting their occupancy rates and rental income as the company progresses into 2025.

Earnings Call Transcript 2024-Q3

[Operator]

Good day, everyone, and welcome to today's FRP Holdings, Inc. Third Quarter 2024 Earnings Call. [Operator Instructions] Please note this call is being recorded. [Operator Instructions] It is now my pleasure to turn the conference over to Matt McNulty, CFO of FRP.

[Matthew McNulty, executive]

Thank you. Good afternoon. I am Matt McNulty, CFO of FRP Holdings, Inc. With me today are John Baker III, our CEO; David deVilliers III, our COO; David deVilliers, Jr., our President; John Baker II, our Chairman; John Milton, our Executive Vice President and General Counsel; and John Klopfenstein, our Chief Accounting Officer.

First, a disclosure regarding forward-looking statements and non-GAAP measures used by the company. As a reminder, any statements on this 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. We have no obligation to revise or update any forward-looking statements except as imposed by law, as a result of future events or new information. To supplement the presentation of our GAAP financial results, FRP presents certain non-GAAP financial measures within the meaning of the SEC's Regulation G. The non-GAAP financial measures referenced in this call are net operating income or NOI and pro rata NOI.

FRP uses these non-GAAP financial measures to analyze its operations and to monitor, assess and identify meaningful trends in its operating and financial performance. This measure is not and should not be viewed as a substitute for GAAP financial measures. To reconcile NOI to GAAP net income, please refer to the segment titled Non-GAAP Financial Measures on Pages 14 and 15 of our most recent earnings press release.

Now for certain financial highlights following our third quarter. Net income for the third quarter increased 8% to $1.4 million or $0.07 per share versus $1.3 million or $0.07 per share in the same period last year. For the first 9 months, net income saw a 94% increase to $4.7 million or $0.25 per share versus $2.4 million or $0.13 per share for the first 9 months of last year.

The company's pro rata share of NOI in the third quarter was up 39% to $11.3 million and year-to-date was up 28% to $29 million. The year-to-date increase in NOI was mostly driven by the performance of our multifamily segment due to improved results at all 6 of our stabilized Multifamily projects versus the same period last year. Year-to-date, these 6 Multifamily projects contributed an additional $3.7 million of pro rata NOI, while the Mining segment contributed an additional $1.8 million of NOI. And the Industrial and Commercial segment, an additional $829,000 versus the first 9 months of last year.

Over the last 3 years, we have grown pro rata NOI at a compound annual growth rate of 26.4% on a trailing 12-month basis. In the third quarter, we exceeded that pace due mainly to a onetime $1.9 million minimum royalty payment received during the quarter. This payment was a back payment for 24 months of additional minimums owed to us by the mining tenant after failing to meet a minimum production requirement in the lease.

Earlier today, we posted to our website an updated presentation of financial highlights for the third quarter and year-to-date results, which includes an estimated value of our real estate assets, net of debt and liabilities. Our analysis yielded a per share value in the range of $34.54 to $39.15. In this most recent release, we changed the way we value the mining royalty asset stream from an EBITDA multiple to a cap rate valuation, as management believes this methodology more appropriately reflects how these assets should be valued.

Any reference to cap rates, asset values, per share values or the estimated value of our assets net of debt and liabilities are for illustrative purposes only as a reflection of how management uses various assets for purposes of informing management decisions and do not necessarily reflect the price that would be obtained upon a sale of the asset or the associated costs or tax liability.

I will now turn the call over to our COO, David deVilliers III, for his report on operations. David?

[David deVilliers, executive]

Thank you, Matt, and good day to those on the call. Allow me to provide an operational perspective on the third quarter results of the company. Starting with our Commercial and Industrial segment. This segment consists of 9 buildings totaling nearly 550,000 square feet which are mainly warehouses in the state of Maryland. At quarter end, 95.6% of the buildings were occupied. Total revenues and NOI for the quarter totaled $1.5 million and $1.2 million, respectively, an increase of 0.9% and 10.3% over the same period last year.

Moving on to the results of our Mining and Royalty Business segment. This division consists of 16 mining locations predominantly located in Florida and Georgia with one mine in Virginia. Total revenues and NOI for the quarter totaled $3.2 million and $5.1 million, respectively, an increase of 3.8% and 79.9% over the same period last year. NOI for this quarter included a $1.9 million onetime cash royalty received during the quarter that is straight lined over the life of the agreement.

As for our Multifamily segment, this business segment consists of 1,827 apartments and over 125,000 square feet of retail located in Washington, D.C. and South Carolina. At quarter end, the apartments were 91.9% occupied and the retail space was 79.4% occupied. Total revenues and NOI for the quarter were $14.2 million and $8.2 million, respectively. FRP's share revenues and NOI for this quarter totaled $8.2 million and $4.7 million, respectively.

This is a significant increase over prior quarters due to our Bryant Street and 408 Jackson joint ventures being included in this segment as of January 1, 2024, and the verge being included in this segment as of July 1, 2024. These 3 projects contributed $4.7 million and $2.5 million in revenue and NOI this quarter versus $3.6 million and $1.8 million in last year's third quarter.

As a Same-store comparison, which only includes Dock, Maren and Riverside, FRP share of revenues and NOI for the quarter totaled $3.5 million and $2.2 million, respectively, an increase of 2.2% and 6.5% over the same period last year. New deliveries and existing supply in the DC market will continue to put pressure on vacancies and revenue growth for these DC assets in the foreseeable future. Management continues to be diligent in tenant retention and related rental rates in the market.

As a result, we are pleased to have renewal success rates over 50% with all renewal rental rates showing positive growth and the majority of our trade out rental rates being positive as well.

Now on to the Development segment. In terms of our commercial industrial development pipeline, our 258,000 square feet state-of-the-art Class A warehouse building in the pyramid industrial sector, Harford County, Maryland, is nearing completion and is expected to be delivered before year-end. Upon shell completion, this asset will be moved to the Industrial/Commercial segment and will impact NOI negatively until it is occupied and stabilized. Thereafter, the operating expenses can be passed through to the tenants.

The project is estimated to cost of $116 per square foot, exclusive of contingencies. Our 200,000 square foot Class A warehouse building in Lakeland, Florida, located along the I-4 corridor between Tampa and Orlando, where FRP tends to be a 90% partner with BBX Logistics, is well into the entitlement stage. Permits for development should be in hand on or before Q1 2025. The project is estimated to cost of $141 per square foot with contingencies.

FRP and BBX also closed on land that will support 2 Class A warehouse buildings in Broward County, Florida, totaling over 182,000 square feet. The site is minutes from Port Everglades and the Fort Lauderdale Hollywood International Airport with frontage on I-595, accessing the Florida Turnpike and I-95. The entitlement process is well underway and permits may be in hand by Q1 2025. The project is estimated to cost some $318 per square foot with contingencies.

In Cecil County, Maryland, along the I-95 corridor, we are in the middle of permitting activities on 170 acres of industrial land that will support a 900,000 square foot distribution center. We look to secure permits in Q3 of 2025.

Finally, we are in the initial permitting stage for our 55-acre track in Harford County, Maryland. The intent is to obtain permits for 4 buildings totaling some 635,000 square feet of industrial product with construction of our first building in the park, slated for 2026 pending favorable market conditions. The building totaling 212,000 square feet with an estimated cost of some $133 per square foot.

Existing land leases for the storage of trailers on-site helped to offset our carrying and entitlement costs until we are ready to build. Over the next 3 to 5 years, we will focus on the permitting, construction and lease-up of the Perryman, Lakeland, Fort Lauderdale and the 212,000 square foot building on our Harford County property. These 4 buildings represent over 850,000 square feet of new industrial commercial product with an estimated total project cost of $145 million, of which FRP share is $130 million.

With 6% to 7% return on cost expectations upon stabilization, these projects represent some $7.8 million to $9.1 million in potential pro rata NOI.

In closing, we are excited to bring online our 258,000 square foot Perryman industrial building by year-end. This is our first industrial delivery since Q1 2023. Building permits for our Lakeland joint venture project should be in hand by year-end, with building permits for our Fort Lauderdale JV project coming in Q1 2025, followed by our 212,000 square foot building in 2026.

With the Federal Reserve lowering interest rates for the first time since 2020 and construction costs appearing to stabilize there are some positive signals for developing our industrial and residential assets. However, Industrial and Multifamily vacancy rates are slightly up across all markets as a result of new deliveries that took place over the last 2 years, especially in the D.C. Waterfront submarket. Rental rate increases have decelerated and appear to be coming back to historical annual 3% to 4% norms. It is our plan to continue to monitor these data points and see where we are in 2025.

Thank you, and I'll turn the call over to John Baker III, our CEO.

[John Baker, executive]

Thank you, David, and good afternoon to all those on the call. The 26.4% NOI compound annual growth rate, that Matt referenced that we've achieved over the last 3 years is remarkable. It's also unsustainable. Our ratio of stabilized assets to project under development is beginning to shift. So while we expect to continue to grow NOI both organically on a same-store level and incrementally through future development, the rate at which we will grow NOI should moderate as earnings and cash flow growth increase with more stabilized projects.

Though our NOI growth rate might taper on a percentage basis, we are by no means slowing down. As David spoke to, we have a healthy industrial development pipeline of joint ventures and 100% in-house projects, which in the immediate future will deliver 3 projects totaling 649,000 square feet of new Class A industrial space and an estimated -- costing an estimated $118 million in total CapEx.

Further interest rate cuts and stable construction costs make the prospect of Multifamily Development more palatable than it has been in some time. We will continue to monitor the fundamentals of that asset class. But at least for now, the lion's share of our development strategy remains focused on industrial.

I will now open the call up for any questions you might have.

[Operator]

[Operator Instructions] I'm sure we have no questions in the queue at this time.

[John Baker, executive]

Thank you all, and we appreciate your continued investment and interest in the company. That concludes the call.

[Operator]

That concludes today's teleconference. Thank you for your participation. You may now disconnect.