FRP Holdings, Inc.
Q1 2017 Earnings Call Transcript

Published: 2 May 2017

[Operator:]

Excuse me, everyone. We now have John Baker, Executive Chairman and CEO of FRP Holdings, Inc. 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, instructions will be given as for the procedure to follow, if you would like to ask a question. I would now like to turn the conference over to John Baker. Sir, you may now begin.

[John Baker:]

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 we may make forward-looking statements during the course of this call, such statements reflect our current views with respect to financial results related to future events and are based on assumptions and expectations that may not be realized and are inherently subject to risks and uncertainties. Future events and actual results may differ from the results discussed in such forward-looking statements. Please refer to our 10-Q and other documents filed with the SEC by the Company for further information. Our net income for our first quarter of 2017 was $1,443,000 or $0.14 per share versus $1,820,000 or $0.18 a share in the same period last year. The decline was primarily driven by a $771,000 increase in loss from joint ventures as we booked expenses and depreciation during the lease up of our Washington D.C. apartment project, doc 79. Now let me turn it over to our President, David deVilliers to discuss our operations during the quarter.

[David deVilliers:]

Thank you, John and good day to those of you on the call this afternoon. I will now take you through our results for quarter just ended March 31. As John articulated in his opening remarks, we enjoyed another successful quarter in both of our income producing segments. Our development segment was busy further preparing certain non-income producing assets for income production. Relative to the asset management segment, total revenues from our building platform for the quarter just ended decreased 3.8% to $7.285 million as a result of lower operating expenses and related imbursements. Net operating income increased $247,000 or 4.5% over the same period last year to $5.689 million, due primarily to the acquisition of the Gilroy Road warehouse building in Hunt Valley, Maryland in July of 2016. We ended this quarter with a total occupied square feet of 3,525,234 square feet, an increase of 177,122 square feet or 5.3% over the last year same quarter. Our occupancy level was 90.8% of 90 basis points from the previous quarter and leased square footage was 93.9% at the end of the quarter versus 92.5% on December 31. As the same-store, average annual occupancy for the quarter increased 61,048 square feet or 1.7% to 92.3%; and the corresponding net operating income for the same period increased 1% to $5,508,000 from $5,454,693. Relative to the mining and royalty segment, revenues were adjusted down slightly for the quarter just ended over the same period last year by 0.9% or $16,000 to $1,762,000. This is largely due to $112,000 decrease in royalties at our Lake Sand location, the consequence of Bakken [ph] having fully depleted our proven reserves there. Further capital expenditures would be required by our tenant to change their mining plan and realize more than 3 million tons of probable reserves at Lake Sand which we do not anticipate at [indiscernible]. Total operating profit this segment was $1,559,000, a decrease of $15,000 versus $1,574,000 in the same period last year. We believe the volumes will continue with the higher levels from our locations for the foreseeable future as construction activity in Florida and Georgia continues to improve. 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 in income production. Thus this segment generates minimal revenues but incurs significant costs to accomplish these objectives. This business segment is the main driver behind our growth. To this end we've spent a net $3.7 million and an extensive amount of time during the quarter on capital projects including; one, the ongoing construction of 103,653 square foot building at Patriot Business Center in Manassas, Virginia which as of April 1 was placed in service and is 83% leased. Two, the reconstruction of the bulkhead along the Anacostia River at our 664E property, an anticipation of a few future high-rise developments similar to our RiverFront Project, which off-note is less than half a mile down the river. Three, working with our joint venture partner with ongoing leasing and marketing strategies for Dock 79 or Phase I at RiverFront. Four, pre-development activities for the next phase of RiverFront or Phase II. And five, the conceptual planning for a planned unit development application to the appropriate authorities for our Hampstead property, which we have previously rezoned from industrial to residential in order to maximize the asset's profitability and expedite its disposition. So, Phase 1 or Dock 79 began pre-leasing activity in late May of 2016; and as of April 23, the residential units were 71% occupied and 80% leased, and four of the five retail suites are 80% leased with occupancy scheduled for the summer of 2017. This project is currently above pro forma in effective rents and leasing absorption with residential stabilization expected sometime in the third quarter of 2017. Last fiscal year, we finalized our joint venture agreement for the development of our remaining acreage at the Windlass Run Business Park. During the most recent period, the venture has been going through the final stages of completing the entitlement process for a multi-building business park consisting of approximately 329,000 square feet of single-story office space. Land development and ultimately the commencement of the first phase of vertical construction is anticipated to begin in the summer or early fall of 2017. In conclusion, we will have some backfilling to do at some of our warehouse locations as a result of an inordinate amount of tenants that have and will be vacating during the balance of the year but I'm hopeful we will prevail. The velocity of our marketplace has been strong and barring something unforeseen, we believe it will remain for the foreseeable future. Thank you, and I'll now return the call back to John.

[John Baker:]

Thanks, David. As we have discussed previously, we are preparing the company for a possible conversion to a real estate investment trust. We converted our September 30 fiscal year to a calendar year to comply with REIT accounting rules and we have contributed our mining reserves to a wholly owned subsidiary. Because the parent company still retained control of the underlying land itself, the portion of the mining royalties non-attributable to the reserves more closely resembles ground rents which are readable income as opposed to the payment from minerals which is not. There are number of issues we must resolve before we make the decision to convert but the most important one will be the tax rate the company will pay if we don't convert. If President Trump has proposed 15%, rate is approved by Congress. My recommendation to our board would be not to become a REIT at this time as tax savings would no longer outweigh the loss of financial flexibility we would give up as a REIT. Obviously, however, there will be a lot of twist and turns before that is resolved. More to come, and thanks for your patience. Finally, I want to thank Tom Baker for serving as our CEO since 2010 and wish him well with his new responsibilities at Vulcan Materials. I look forward to working with you again as your CEO. We appreciate your interest in our company and look forward to talking to you next quarter. We'd be interested in answering any questions you might have at this time.

[Operator:]

Thank you very much. [Operator Instructions] Our first question will come from Richard Earlson, RCS Asset Management.

[Richard Earlson:]

Could you tell us what the proximate percentage number of three-bedroom apartments at Dock 79 and one bed apartments?

[John Baker:]

You're talking about the number of three-bedrooms versus one-bedrooms?

[Richard Earlson:]

Yes.

[John Baker:]

I don't think we have any three-bedroom apartment.

[Richard Earlson:]

Okay. I thought on your website I thought I saw some, for rent. Okay. And so are there mostly two bedrooms?

[John Baker:]

They are mostly studio and one-bedroom apartments

[Richard Earlson:]

Okay.

[John Baker:]

With a few two-bedrooms but there's a greater majority of them are studios or one bedroom.

[Richard Earlson:]

Maybe I could ask another one. Could you tell us your average rents so far?

[John Baker:]

I don't think we've made that public. Is it on the website?

[Richard Earlson:]

No. It's not. I could figure it out.

[John Baker:]

All we've said is its above our pro-former rents but we'll probably make that public at the time we reach stabilization.

[Richard Earlson:]

Okay. And you still own 77% of that, is that correct?

[John Baker:]

At this time, yes sir.

[Richard Earlson:]

And the Hampstead property, what kind of it's owning did you get through the PUD?

[John Baker:]

The zoning change was from industrial to residential and we are seeking a PUD processing development at this present time.

[Richard Earlson:]

Okay. So it's zoned for residential. That's quite an accomplishment. Congratulations.

[John Baker:]

Thank you.

[Richard Earlson:]

The 664Es, I don't want to manipulate this by the questions I'll get off. 664 property; so Vulcan has an options for five more years after the termination of their lease. Have you got any indication whether they'll extend?

[John Baker:]

I don't think there's any question but they would extend.

[Richard Earlson:]

They would extend. So you really can't do anything with their property till 2026 or so. Is that correct?

[John Baker:]

That's probably correct.

[Richard Earlson:]

Okay. And phase two of the Riverfront Project, so that's been approved I take it? And you'll start building two years, of course you know that one.

[John Baker:]

No sir. We're waiting on the order from disowning commission to become final and we expect that in a next 30-45 days. After that becomes final. We could begin construction as soon as late this fall or early next spring.

[Richard Earlson:]

Okay. And is that building going to be approximately the same size as the Dock 79?

[John Baker:]

It doesn't have quite as many units. I think it's scheduled for about 255 units.

[Richard Earlson:]

And then you have two more in your plan, is that correct that are sort of on paper?

[John Baker:]

Pages three and four but we haven't finalized exactly what they will be.

[Richard Earlson:]

Okay. And this is my last question. Of the subsidiary in which you put Vulcan; how you account for that if you become a reed. So you'll have operating income and I guess under each standards you're going to have some. Can you tell us what the rents could be and if you can, could you tell us how you account for it?

[John Baker:]

Well sir, at this point in time if we make a reelection; the amount that is paid for the reserves and attributable to that for going into income as a taxable reach subsidiary. So it will be taxed as a see cord, as a subsidiary of the reed. And as such it will be limited to fewer than 20% of the gross assets of the combination and less than 15% of the gross income

[Richard Earlson:]

Oh, so that's quite a larger number than I thought.

[John Baker:]

We didn't say it was going to be that large. Those are just the limits.

[Richard Earlson:]

I see. Thank you very much. I appreciate your comments and I'll pass.

[John Baker:]

Thank you, Richard.

[Operator:]

Thank you. Our next question will come from Dean Hagans, Code Three Capital. Dean, if you're on mute would you please unmute your phone now? Okay, we'll go onto our next question from Carter Jensen [ph], Robotic and Company.

[Unidentified Analyst:]

Good afternoon. Just a quick question on -- couple of few questions I guess. Page two, in terms of a construction loan; is that on the to-do list at this point? Is there any sense of timing and what the size of such a loan might be?

[John Baker:]

It will be some percentage of construction cost. We don't have that finalized yet and we don't have the final terms of construction financing nor do we have a final contract construction.

[Unidentified Analyst:]

Okay.

[John Baker:]

That's to-do list for the summer.

[Unidentified Analyst:]

Okay. And then coming to phase one, what's the plan on the construction loan for phase one? Is that just going to be refinanced somehow and what kind of options do you have there?

[John Baker:]

We're exploring those as well and we'll have a year or so to work that out.

[Unidentified Analyst:]

Alright and then going down river I guess, 664 budget point; what if it's Vulcan's going to be mining there for the next 5-10 years. What was the need to -- why did you have to lay out capital to reinforce the bulkhead? Or redo the bulkhead.

[John Baker:]

It's a good question. But we did it to keep the land from washing away. It was in awful shape and we literally had to do it to preserve the land and make it usable for them as well. We get a nice rent from them. They're actually in the concrete business on that property and so they've got trucks running over it and it was a safety issue as much as anything else. But its money you wish you didn't have to put out but we did.

[Unidentified Analyst:]

Is there a possibility that you couldn't negotiate with them in five years and say -- give them some upside as to, if you could accelerate development there given what else is going on. I think the coast guard building's getting redeveloped and obviously these three united and

[John Baker:]

Absolutely. Obviously, there's a possibility of doing anything, that will be a very special read-mix plant site location and so it'll be an existing negotiation if we can get it done.

[John Milton:]

Now you've already mixed plants in the country.

[John Baker:]

Right.

[Unidentified Analyst:]

And you know Washington DC generally -- what's your best sense of -- I guess it seems like there's a fair amount of new supply and what's your sense of kind of like job growth and the new supply and absorption trends; lot of competitive products around, relative to the kind s of things you're developing.

[David deVilliers:]

There has -- this is David deVilliers. We've been actively involved in watching DC grow from a popular standpoint. What's been happening down in the South-East which is the quadrant that we're operating and it's been quite significant over the last several years and the word on the street is there's still a pretty good run rate left to develop and also to -- from a supply and a demand level. So we're being cautiously optimistic about the future but we think that we've got a pretty good plan and certainly a pretty good location.

[John Baker:]

We've gotten to this point in eight months. So we're at 80% at least in eight months which is certainly ahead of projection. We sat down with our partner and go through the marketing studies before we'll actually kick it off but my gut feel to you is that when we see those numbers we're going to find them to be even better than what we say when we kicked off phase one and the one thing we know for sure is that being on the river has a real attraction as supposed to be an even a block or two back. And so we feel like we've got a really a really a niche opportunity and there's something we'll always be in higher demand.

[Unidentified Analyst:]

Yes. And then just last thing is, anymore color on -- I think somebody had talked about the kind of relatively high level of lease expiries and your flex industrial and any more color on that? And -- your sense as to how things might go this year?

[John Milton:]

Not really. We've -- it's an even flow business and we've been pretty fortunate over the year so to maintain a pretty strong occupancy level. We're in submarkets that are pretty strong in and around the ball over Washington marketplace and it's just part of avid flow of our business.

[John Baker:]

But we've got a slug of businesses coming open. It takes us 15-20 months on average when we don't reel at it immediately to get it filled up and I would anticipate that that's what would be the scenario here.

[Unidentified Analyst:]

Okay. Alright, thank you very much. Keep up the good work

[John Milton:]

Thank you.

[Operator:]

[Operator Instructions] Our next question will come from Richard Earlson, RCS Asset Management

[Richard Earlson:]

I just had a couple of follow-up questions. Could you give us a little color of Fort Myers Vulcan facility?

[John Baker:]

We've got 1900 acres of land down and Fort Myers -- it's been under lease for a long-long time to Vulcan and to its predecessor Fort Rock and we just found out literally this week that all the permits have been achieved for that property. In the first phase of that property there is a 1051 acre residential loch. It will be like front loch and it will become available when that first phase mining is done. Obviously, that's up to Vulcan and they'll mine it as fast as is logical for them but it is pretty good rock and we expect them to get on it and while we don't see in this year any dramatic change in royalties we expected the royalties from net operation will pick up pretty substantially beginning next year and then five or six year we'll be at a position where we can start developing those loch which should have tremendous value.

[Richard Earlson:]

Is that held in the mining subsidiary?

[John Baker:]

Yes.

[Richard Earlson:]

It is. Could you give me a little bit more color on your comment on if the tax rate goes to 15%? I missed with long term and the corporate rate. And why they have such a bearing?

[John Baker:]

Well think about it this way. If you convert to a reek of course what you're trying to do is make your income tax free to your shareholders and you can distribute out and what we -- I think it's 90% is requirement that you've got to distribute out 90% of your pre-tax income to your shareholders as a rate. If the tax rate went to 15% from 39%, you've really taken a lot of the motivation of avoiding taxes out of the picture because the give and take is, you give up a lot of financial flexibility when you become a reach. You have to dividend out 90%, you've got to dividend out initially all your earnings and profits going back since the beginning of the company which hurts your liquidity a little bit. So it's one of those things where you get all the facts together, you make your judgments and you say this makes the most sense now that we know all these things and I just wanted to bring it up and I appreciate you asking it again so we could shine the light on it. We're shareholders in this company just like you are and what we want is Board to be the most tax efficient way to benefit our shareholders while still leaving us with the ability to grow and create value. So it'll be a balanced, it'll be a decision we'll make probably at the end of this year but if we don't make it at the end of this year we'll make it next year and so what I would tell you is repeat it up to where we can make that decision and go forward as a rig that there's nothing that would require us to do it if the corporate tax rates go down to a very low level.

[Richard Earlson:]

So if the corporate tax rate went to 20, you'll reevaluate it and 15 is an out buyer I take it.

[John Baker:]

That's the number the man threw out and I think I would agree with you.

[Richard Earlson:]

Okay. And my last question, can you tell me so I don't have to figure out how many two bedrooms and one bedrooms there are at Dock 79?

[John Milton:]

We'll get you that right now.

[Richard Earlson:]

Okay. I can see the rents on your website. You're right, clear no three bedrooms.

[John Milton:]

There are 65 two bedrooms, 14 junior two bedrooms and the rest are one bedroom and studios.

[Richard Earlson:]

Can you tell me how many studios or how many one bedrooms?

[John Milton:]

The studios are 45. And the rest are one bed rooms. There's eight that are one bedroom plus tent and then the rest are one bedroom

[Richard Earlson:]

So you've been getting close to $4000 for two bedrooms per month. That's incredible. Wow. Alright, that's all the questions I have. Thank you. You guys doing a great job by the way. Thank you very much.

[John Milton:]

Thanks, Richard.

[Operator:]

Thank you. Our next question will come from Bill Chen, Rhizome Partners.

[Bill Chen:]

Hi guys. Lot of my questions has been answered. I was just wondering the -- if we do elect few convert into reek, we haven't estimated amount though, how much needs to pay out and if you have a view whether you will pay that out in the stocks versus -- I think the rule is it has to be at least 25% cash and at most 35% stock. So really kind of two questions, one; what would that purge distribution be and then do you have any thoughts on what that cash stock nets would be?

[John Milton:]

We don't have an absolute answer but either one of those yet. On the first issue, we're looking back and very carefully at how we allocate the earnings and profits in connection with this spin-off we accomplished and there may be an alternative to allocate those in a different manner that would lower the dividend requirement. We don't have an answer on that yet and we're investigating that. And the second answer is we still up in the air as to how much we would pay in cash or stock and we'll let you know when and if we make the decision.

[Bill Chen:]

Yes, sure; if I may ask a follow-up question. I think some time ago we have -- there's has been the possibility that aggregate royalties maybe casual restructuring into some sort of volume-metric payment which would qualify it to be readable. Is there still an option on the table or is that no longer an option?

[John Milton:]

That's really not an option at this stage. What we've done is we've basically used a taxable re-subsidiary structure to take a substantial portion of the royalty income that will not qualify as readable income and we'll keep that value underneath the threshold required to remain reek.

[Bill Chen:]

I see. Okay. Those are my questions.

[John Milton:]

Thanks.

[Operator:]

Thank you, again. [Operator Instructions] Speakers, at this time we have no further questions in the queue.

[John Baker:]

Well, thank you all for your interest in our company. As you can tell we're excited about where we stand. We're excited about the DC market and what that means and we look forward to talking to you next quarter.

[Operator:]

Thank you very much. Ladies and gentlemen, at this time this conference is now concluded. You may disconnect your phone lines and have great rest of week.