FRP HOLDINGS, INC. CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying unaudited consolidated financial statements and related notes in Item 1 and with the audited consolidated financial statements and the related notes included in our annual report on Form 10-K. The statements in this discussion regarding industry outlook, our expectations regarding our future performance, liquidity and capital resources and other non-historical statements in this discussion are forward-looking statements. These forward-looking statements are subject to risks and uncertainties, including the risks and uncertainties described in "Forward-Looking Statements" below and "Risk Factors" on page 5 of our annual report on Form 10-K. Our actual results may differ materially from those contained in or implied by any forward-looking statements. We assume no obligation to revise or publicly release any revision to any forward-looking statements contained in this quarterly report on Form 10-Q, unless required
by law. The following discussion includes a non-GAAP financial measure within the meaning of Regulation G promulgated by theSecurities and Exchange Commission to supplement the financial results as reported in accordance with GAAP. The non-GAAP financial measure discussed is net operating income (NOI). The Company uses this metric to analyze its continuing 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. Refer to "Non-GAAP Financial Measure" below in this quarterly report for a more detailed discussion, including reconciliations of this non-GAAP financial measure to its most directly comparable GAAP financial measure.
Business Overview -
Lands leased to mining companies, some of which will have second lives as development properties;
Residential apartments in
Warehouse or office properties in the Mid-Atlantic states either existing or under development;
Mixed use properties under development in
Properties held for sale. We believe our present capital structure, liquidity and land provide us with years of opportunities to increase recurring revenue and long-term value for our shareholders. We intend to focus on our core business activity of real estate development, asset management and operations. We are developing a broad range of asset types that we believe will provide acceptable rates of return, grow recurring revenues and support future business. Capital commitments will be funded with cash proceeds from completed projects, existing cash, owned-land, partner capital and financing arrangements. We do not anticipate immediate benefits from investments. Timing of projects may be subject to delays caused by factors beyond our control. Reportable Segments We conduct primarily all of our business in the following four reportable segments: (1) asset management (2) mining royalty lands (3) development and (4) stabilized joint ventures. For more information regarding our reportable segments, see Note 3. Business Segments of our condensed consolidated financial statements included in this quarterly report. 20 Asset Management Segment.The Asset Management segment owns, leases and manages commercial properties. These assets create revenue and cash flows through tenant rental payments, lease management fees and reimbursements for building operating costs. The Company's industrial warehouses typically lease for terms ranging from 3 - 10 years often with 1 or 2 renewal options. All base rent revenue is recognized on a straight-lined basis. All of the commercial warehouse leases are triple net and common area maintenance costs (CAM Revenue) are billed monthly, and insurance and real estate taxes are billed annually. 34 Loveton is the only office product wherein all leases are full service therefore there is no CAM revenue. Office leases are also recognized on a straight-lined basis. The major cash outlays incurred in this segment are for operating expenses, real estate taxes, building repairs, lease commissions and other lease closing costs, construction of tenant improvements, capital to acquire existing operating buildings and closing costs related thereto and personnel costs of our property management team.
As of
1)34 Loveton Circle in suburbanBaltimore County, Maryland consists of one office building totaling 33,708 square feet which is 95.1% occupied (16% of the space is occupied by the Company for use as ourBaltimore headquarters). The property is subject to commercial leases with various tenants. 2)155 E. 21st Street inDuval County, Florida was an office building property that remains under lease throughMarch 2026 . We permitted the tenant to demolish all structures on the property during 2018.
3)
4) Hollander
Management focuses on several factors to measure our success on a comparative basis in this segment. The major factors we focus on are (1) net operating income growth, (2) growth in occupancy, (3) average annual occupancy rate (defined as the occupied square feet at the end of each month during a fiscal year divided by the number of months to date in that fiscal year as a percentage of the average number of square feet in the portfolio over that same time period), (4) tenant retention success rate (as a percentage of total square feet to be renewed), (5) building and refurbishing assets to meet Class A and Class B institutional grade classifications, and (6) reducing complexities and deferred capital expenditures to maximize sale price. Mining Royalty Lands Segment. OurMining Royalty Lands segment owns several properties comprising approximately 16,650 acres currently under lease for mining rents or royalties (excluding the 4,280 acres owned by ourBrooksville joint venture with Vulcan Materials). Other than one location inVirginia , all of these properties are located inFlorida andGeorgia . The Company leases land under long-term leases that grant the lessee the right to mine and sell reserves from our property in exchange for royalty payments. A typical lease has an option to extend the lease for additional terms. The typical lease in this segment requires the tenant to pay us a royalty based on the number of tons of mined materials sold from our property during a given fiscal year multiplied by a percentage of the average annual sales price per ton sold. As a result of this royalty payment structure, we do not bear the cost risks associated with the mining operations, however, we are subject to the cyclical nature of the construction markets in these states as both volumes and prices tend to fluctuate through those cycles. In certain locations, typically where the reserves on our property have been depleted but the tenant still has a need for the leased land, we collect a minimum annual rental amount. We believe strongly in the potential for future growth in construction inFlorida ,Georgia , andVirginia which would positively benefit our profitability in this segment. In the fiscal year endedDecember 31, 2021 , a total of 8 million tons were mined. The major expenses in this segment are comprised of collection and accounting for royalties, management's oversight of the mining leases, land entitlement for post-mining uses and property taxes at our non-leased locations and at our Grandin location which, unlike our other leased mining locations, are not entirely paid by the tenant. As such, our costs in this business are very low as a percentage of revenue, are relatively stable and are not affected by increases in production at our locations. Our current mining tenants include Vulcan Materials,Martin Marietta ,Cemex ,Argos andThe Concrete Company . 21
Additionally, these locations provide us with opportunities for valuable "second lives" for these assets through proper land planning and entitlement.
Significant "2nd life"
Location Acreage StatusBrooksville, FL 4,280 +/- Development of Regional of Impact and County Land Use and Master Zoning in place for 5,800 residential unit, mixed-use developmentFt. Myers, FL 1,907 +/- Approval in place for 105, 1 acre, waterfront residential lots after mining completed.
Total 6,187 +/-
Development Segment.
Through our Development segment, we own and are continuously monitoring for their "highest and best use" several parcels of land that are in various stages of development. Our overall strategy in this segment is to convert all our non-income producing lands into income production through (i) an orderly process of constructing new commercial and residential buildings for us to own and operate or (ii) a sale to, or joint venture with, third parties. Additionally, our Development segment will purchase or form joint ventures on new developments of land not previously owned by the Company. Revenues in this segment are generated predominately from land sales and interim property rents. The significant cash outlays incurred in this segment are for land acquisition costs, entitlement costs, property taxes, design and permitting, the personnel costs of our in-house management team and horizontal and vertical construction costs.
Development Segment - Warehouse/Office Land.
At
1) Six acres of horizontally developed land at
build-to-suit currently under construction.
2) 55 acres of land that will be capable of supporting over 690,000 square feet
of industrial product located at
3) 17 acres of land in
feet of industrial development.
We also have three properties that were either spun-off to us fromFlorida Rock Industries in 1986 or acquired by us from unrelated third parties. These properties, as a result of our "highest and best use" studies, are being prepared for income generation through sale or joint venture with third parties, and in certain cases we are leasing these properties on an interim basis for an income stream while we wait for the development market to mature.
Development Segment - Significant Investment Lands Inventory:
Approx.
Location Acreage Status NBV
Riverfront on the 2.5 Conceptual design program $6,166,000
Anacostia Phases III-IV ongoing
Hampstead Trade Center, 118 Residential zoning applied for $9,968,000
MD in preparation for sale
Square 664E, on the Under lease to Vulcan Materials
Anacostia River in DC 2 as a concrete batch plant $7,594,000
through 2026
Total 122.5 $23,728,000
22
Development Segment - Investments in Joint Ventures
The third leg of our Development Segment consists of investments in joint ventures for properties in development. The Company has investments in joint ventures, primarily with other real estate developers which are summarized below:
Property JV Partner Status %Ownership
Brooksville Quarry, Vulcan Future planned residential LLC near Materials development of 3,500 acres which 50%
lease
park in progress
Bryant Street Mixed-use development with 487
Partnerships for 5 MRP Realty residential units and 91,661 61.36%
acres of land in square feet of retail partially
Washington, D.C. completed
Aberdeen Station $31.1 million in exchange for an
residential interest rate of 10% and a 20%
development in preferred return after which the Financing
Harford County, Company is also entitled to a
Maryland portion of proceeds from sale
Amber Ridge $18.5 million in exchange for an
residential interest rate of 10% and a
development in preferred return of 20% after Financing
Prince George's which the Company is also
County, Maryland entitled to a portion of
proceeds from sale
1800 Half Street Construction underway on
property in Buzzard MRP Realty ten-story structure with 344 61.37%
Point area of apartments and 8,356 square feet
Washington, D.C. of ground floor retail
Construction underway on
.408 Jackson Woodfield mixed-use project with 227
property in Development multifamily units and 4,539 40%
Greenville, SC square feet of retail space
began in May 2020
in February 2020
Joint ventures where FRP is not the primary beneficiary are reflected in the
line "Investment in joint ventures" on the balance sheet and "Equity in loss of
joint ventures" on the income statement. The following table summarizes the
Company's investments in unconsolidated joint ventures (in thousands):
The
Company's
Share of Profit
Profit
Common Total Total Assets of (Loss) (Loss) of the
Of the
Ownership Investment The Partnership Partnership Partnership (1)
As ofJune 30, 2022 Brooksville Quarry, LLC 50.00 %$ 7,546 14,461 (42 ) (21 ) BC FRP Realty, LLC 50.00 % 5,485 22,115 (90 ) (45 )Bryant Street Partnerships 61.36 % 58,253 203,480 (4,787 ) (3,186 ) Aberdeen Station Loan 917 917 - - DST Hickory Creek 26.65 % 6,000 45,186 (271 ) 171 Amber Ridge Loan 6,234 6,234 - -1800 Half St. Owner, LLC 61.37 % 39,112 119,957 - (64 )Greenville /Woodfield Partnerships 40.00 % 16,108 92,947 (563 ) (225 ) Total$ 139,655 505,297 (5,753 ) (3,370 ) 23 The major classes of assets, liabilities and equity of the Company's Investments in Joint Ventures as ofJune 30, 2022 , are summarized in the following two tables (in thousands): As of June 30, 2022 Total Riverfront Bryant Street DST Hickory 1800 Half St. Greenville/ Apartment/ Holdings II, LLC Partnership Creek Partnership Woodfield Mixed Use Investments in real estate, net $ 0 195,633 43,124 119,311 92,149$ 450,217 Cash and cash equivalents 0 2,831 579 646 466 4,522 Unrealized rents & receivables 0 4,859 1,181 0 14 6,054 Deferred costs 0 157 302 0 318 777 Total Assets $ 0 203,480 45,186 119,957 92,947$ 461,570 Secured notes payable $ 0 128,697 29,360 47,128 51,148$ 256,333 Other liabilities 0 3,077 144 11,876 3,402 18,499 Capital - FRP 0 54,814 4,179 37,414 15,359 111,766 Capital - Third Parties 0 16,892 11,503 23,539 23,038 74,972 Total Liabilities and Capital $ 0 203,480 45,186 119,957 92,947$ 461,570 As of June 30, 2022 Brooksville BC FRP Aberdeen Amber Ridge Apartment/ Grand Quarry, LLC Realty, LLC Loan Loan Mixed Use Total Investments in real estate, net$ 14,279 21,305 917 6,234 450,217$ 492,952 Cash and cash equivalents 178 224 0 0 4,522 4,924 Unrealized rents & receivables 0 431 0 0 6,054 6,485 Deferred costs 4 155 0 0 777 936 Total Assets$ 14,461 22,115 917 6,234 461,570$ 505,297 Secured notes payable $ 0 11,093 0 0 256,333$ 267,426 Other liabilities 42 164 0 0 18,499 18,705 Capital - FRP 7,546 5,429 917 6,234 111,766 131,892 Capital - Third Parties 6,873 5,429 0 0 74,972 87,274 Total Liabilities and Capital$ 14,461 22,115 917 6,234 461,570$ 505,297
Stabilized Joint Venture Segment.
Currently the segment includes three stabilized joint ventures which own, lease and manage buildings. These assets create revenue and cash flows through tenant rental payments, and reimbursements for building operating costs. The Company's residential spaces generally lease for 12 - 15-month lease terms and 90 days prior to the expiration, as long as there is no balance due, the tenant is offered a renewal. If no notice to move out or renew is made, then the leases go to month to month until notification of termination or renewal is received. Renewal terms are typically 9 - 12 months. FromMarch 2020 through the end of 2021, we were prohibited from increasing rent on renewals by emergency measures inWashington, DC designed to ease the burden of the pandemic on its citizens. These measures expired at the end of 2021. The Company also leases retail spaces at apartment/mixed-use properties. The retail leases are typically 10 -15-year leases with options to renew for another 5 years. Retail leases at these properties also include percentage rents which average 3-6% of annual sales for the tenant that exceed a breakpoint stipulated by each individual lease. All base rent revenue is recognized on a straight-line basis. The major cash outlays incurred in this segment are for property taxes, full service maintenance, property management, utilities and marketing. The three stabilized joint venture properties are as follows: 24 Property and Occupancy JV Partner Method of Accounting % OwnershipDock 79 apartments Washington, D.C. MRP Realty Consolidated
66%
305 apartment units and 14,430 square feet of retail The Maren apartments Washington, D.C. 264 MRP Realty Consolidated as of 70.41% residential units and 6,758 March 31, 2021 square feet of retail DST Hickory Creek 294 apartment Capital Square Cost Method 26.6% units inHenrico County , MD
Second Quarter Operational Highlights
·
for the fifth straight quarter
· 7.33% increase on renewals at
· Best second quarter of revenue for mining royalties in segment's history
· 55.1% increase in Asset Management Revenue versus same period last year
· 16.0% increase in NOI (
last year
Comparative Results of Operations for the Three months ended
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