FRP Holdings Inc (FRPH) 2018 Q1 法說會逐字稿

Excuse me, everyone, we have John Baker in conference, Executive Chairman and CEO of FRP Holdings, Inc. (Operator Instructions)

I'd now like to turn today's conference call over to Mr. John Baker. Sir, you may now begin.

Thank you, and good afternoon. As mentioned, I'm John Baker, Chairman and CEO of FRP Holdings, Inc. 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 this call may contain forward-looking statements. Such statements reflect management's current views with respect to the business and its financial results related to future events and are based on assumptions and expectations that may not be realized and are inherently subject to risk and uncertainties. Future events and actual results, financial or otherwise, may differ perhaps materially from the results discussed in such forward-looking statements. Additional information regarding these and other risk factors may be found in the company's other filings made from time to time with the Securities and Exchange Commission.

You all have seen our numbers. Sales for the quarter were up 36% from the March 31, 2017, quarter, driven primarily by the inclusion of our Dock 79 apartment project into our financials. Earnings of $1,560,000 were up 8% versus last year. Our Asset Management segment earnings were up 8%, royalties were flat, and Dock 79 showed a loss because of the huge depreciation and amortizations on that asset. A more revealing metric is our net operating income, which was up 22% over last year.

During the quarter, we concluded negotiations with an affiliate of Blackstone Real Estate Partners to sell them our 41 warehouses located primarily in the Baltimore-Washington market for $358,900,000. Pending shareholder approval at our annual meeting on May 14, we expect to close on this transaction the following week. It is our belief that the combination of low but rising interest rates, the current low cap rates the industrial assets are going for and the enactment of the corporate tax reduction made this an opportunistic time for us to sell.

Assuming the sale goes through, our charge will be to invest the after-tax proceeds in projects that yield a better return on our investment. We are looking at several opportunities with both saved taxes as a 1031 exchange and net acceptable returns, but we are a long way from pulling the trigger on any of them. Our goal is to proceed conservatively, knowing full well that we are late in the cycle and facing expensive cap rates on the buy side as well.

Cash is a wonderful asset, and we will treat it dearly. We will look for opportunities to develop properties or buy aggregate assets, is our target. If unsuccessful, we may buy stock back or we may return the cash to our investors as dividends.

Let me now turn the conversation over to David deVilliers. We hopefully will have sold a large percentage of our revenues and assets within a few weeks, and I've asked him to focus on what your company will look like after the sale. David?

Thank you, John, and good day to those on the call this afternoon. As John articulated in his opening remarks, we had a busy, and I must say, a productive quarter in all of our business segments. Normally at this time, I would be reporting on the performance of our Asset Management business segment. But in light of the proposed upcoming sale, it would appear to make the metrics for the first quarter of 2018 somewhat inconsequential. I am happy to provide them during the Q&A, if asked.

Relative to our Mining and Royalty segment, revenues increased slightly for the quarter just ended over the same period last year by 0.6% or about $10,000 to $1,772,000. This is mainly due to increases in tonnage sold at several locations, offset by an unusually harsh winter and logistical issues at a few of our more northern locations. Total operating profit in this segment was flat at a $1,541,000, a decrease of about $18,000 over the same period last year. We expect the aggregate pricing to improve and volumes should pick up at Fort Myers as our tenant begins to mine more on our property.

Finally, as we had mentioned last quarter, our tenant, Cemex, received approval from the appropriate authorities to mine our property at Lake Louisa. The county should issue the mining permit during the third quarter of 2018, and Cemex expects to begin mining operations by the end of 2019.

With respect to our Land Development and Construction segment, this segment is the main driver behind our growth. And as John mentioned in his opening remarks, we have a lot of work to do. In any event, this segment generates minimal revenues but incurs significant cost to accomplish its objectives. Capital expenditures in this segment for the quarter were $925,000, most of which were attributable to the ongoing construction of our latest spec building at the Patriot Business Park in Manassas, Virginia. This is our final building in this park, and it is also part of the proposed warehouse sale.

In addition to the actual capital outlays, an extensive amount of time during the quarter was spent on our many development projects, including: one, working with our joint venture partner with the ongoing management of Dock 79, or Phase 1 at Riverfront.

Two, finalizing the predevelopment activities for the next phase of Riverfront, or Phase 2.

Three, the future -- furthered the refining of entitlement request for both our Hampstead property and a new residential land development and building lot sale project, entitled Essexshire, that will consist of 129 single-family dwelling lots. Both plans include several multifamily product types in order to maximize each asset's profitability and expedite their disposition.

And finally, we've been working with our other joint venture partner as we begin to move toward completing construction this fall and the beginning of the marketing of Phase 1 of our Windlass Run Business Park venture, which now includes 4 buildings totaling 100,000 square feet of single-story office and small-bay retail space. At full buildout, this project will provide over 325,000 square feet of single-story office and small-bay retail.

Relative to our Riverfront on the Anacostia business segment, the Washington Business Journal had its annual awards ceremony for best deals of 2017 earlier this month, announced that Dock 79 was the first place recipient in the Best Residential Real Estate Project for 2017 category. Needless to say, we are proud of this achievement.

As to the metrics, occupancies as of March 1 were down slightly from the previous quarter to 90.8%, along with percentage leased down to 91.8%. This was down slightly from the previous quarter, but the winter months historically are cause for a slight falloff in traffic and related new occupants.

The velocity has picked up recently, and we have every reason to believe occupancies will reach higher levels by the end of the second quarter. As a matter of fact, this past Sunday, our occupancy level was back to 94.7%. More importantly, as the first generation of leases have expired, we continue to exceed our budgeted success rates and rental rate increases. This past quarter, the retention rate was 62% at an average rental increase of 2.8%.

Also during the quarter, the second retail space opened for business and has been received with great enthusiasm by the public. The retail component of Dock 79, which totals 14,176 square feet, was 46% occupied and 76% leased as of the end of the quarter. The third of 4 retail suites is currently under construction and will not be ready to serve the public until after the baseball season in October.

In conclusion, to echo John's comments earlier, this past quarter was one of our most important ever for obvious reasons. Our portfolio of industrial real estate took decades to put together, and the majority of the assets came from land we purchased, developed and ultimately managed ourselves. The reduction in corporate income tax rates, combined with such a low cap rate environment, as John has said earlier, was simply too good an opportunity to pass up.

Though monumental, the sale of such a substantial portion of this company will not leave us wanting for things to do. Some of the larger projects include the vertical development of the remaining 5 building lots at 2 of our business parks in Hollander and Lakeside capable of handling over 500,000 square feet of warehouse office buildings. And the remaining phases of Riverfront on the Anacostia will require our attention, not only in the near term but for well into the next decade. And finally, our aggregate royalties and the second life of the quarries will be generating returns for this company and occupying management's time for longer than many of us will be around.

In the short term though, we will be hard at work on Phase 2 of Riverfront on the Anacostia, consisting of 264 apartments and 6,900 square feet of retail, which broke ground in early April; constructing a spec warehouse of some 95,000 square feet at Hollander Business Park, which also broke ground in April; completing construction and beginning the lease-up for the phase -- first phase of our joint venture at Windlass Run Business Center; and other projects mentioned above.

But most importantly, our greatest priority will be determining the highest and best use for the proceeds of the sale. So in addition to seeking appropriate and opportunistic investments to replace the elimination of 60% of our revenue stream resulting from the sale of the warehouse platform, 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.

Thanks, David. That's a great report. Now we'll turn it over for questions if you all have any.

(Operator Instructions) Our first question will be from Bill Chen with Rhizome Partners.

I just want to start out by saying that I really commend you guys for pulling the trigger on something that 99% of the other companies that I invest in would not have done, which is take the opportunity from Blackstone and sell at what you consider to be a very attractive cap rate. So I really want to start out by commending you guys for likely a tough decision, which is probably similar to what you guys did over 10 years ago with the Aggregate business. And I think you guys do deserve a lot of credit for that.

My question really kind of surrounds on the -- if you -- when we've now got a lot of cash, and maybe if it's possible, you could go into a little bit of detail on what we would do with that. I think you guys had mentioned there's some potential 1031 opportunities to the first sum of that taxes. And then the shares kind of trade higher today than they have in the past, probably the highest -- actually the highest that they have in a long time. And then is there a number you could provide on how much capital we could kind of put back into the ground? And just so that I could have a good sense of where that cash goes. And just -- if the answer is we'd like to sit on some dry powder and take advantage of any delta, I think that's perfectly fine as well.

The answer to your second question is it's the question we wake up with every morning. We are looking at some properties, but we are a long way from pulling the trigger, as I mentioned, because we're doing due diligence. We're trying to make sure that we're comfortable. We do not want to let this money burn a hole in our pocket. And so we will look at these opportunities carefully. It's always a temptation to try to save the taxes, but it will not be a temptation for us if we do not think it is a good, sound investment on its own. And so that's what we'll spend the next -- certainly the next 45 days. Because in order to get a 1031, that's what -- we have to identify any properties we might do. But it'll be -- we also then have 6 months. So it'll be an evolution. We're looking at some aggregate properties. We're looking at potential development properties, I think those are what we do best, and that's where we would like to focus our energy. I appreciate your comment about keeping dry powder. My thought is very similar, the way I interpreted yours. Now would not be a great time to buy stock in, but you don't know. I mean, we'll weigh that. If we are unable to find things that we're comfortable with, then we're going to dividend the money out to you. I'm not saying in -- it'll be in 6 months or a year, but it will be when we come to the conclusion that we're not adequately and appropriately redeploying the property. And we'll make sure you get your money back.

Got you. I totally trust any sort of capital allocation position that you guys make will be best for all the shareholders. Just a little follow-up. And I really do mention -- yes, I really do mean everything that I said earlier about your position to sell. I think that's well deserved. Just following up on the last part of my previous question is, any estimate on how much of the capital could kind of go into the existing development projects that we have? Just so that I can understand on how much will be put to work and earn a development-style return on that capital.

David, do you want to take a cut at that? The answer would be the equity and debt we put into Phase 2, which is...

We're going to put it, Bill, probably in the neighborhood of about $20 million into Phase 2.

Starting at a warehouse.

We started -- we've got a new spec building warehouse that we just started. That's about $7.5 million. We're getting -- doing some permitting and -- or beginning the permitting for the next one after that. We've got a couple of these land development projects that are going through the entitlement process that will ultimately be sale-type programs. So we've got, take a number right off the bat, on the drawing board we've got probably close to about $35 million scheduled. And as John said, we're looking at some other potential acquisitions, but there -- we really don't have any real grasp yet as to exactly what they are and if there's any real interest.

(Operator Instructions) I'm showing no further questions at this time.

Well, thank you very much for joining us. For those of you who are shareholders, we have our Annual Meeting next Monday, where we will vote on the sale of the warehouses. I hope you will join us. And if not, we will see you or talk to you next quarter. Thank you so much.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may now disconnect.