FRP Holdings, Inc.

Good day, everyone, and welcome to today's FRP Holdings Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, you will have an opportunity to ask questions during the question and answer session. You may register to ask a question at any time by pressing the star and one keys on your telephone keypad. Please note this call is being recorded and that I will be standing by should you need any assistance. It is now my pleasure to turn today's program over to John Baker. Sir, please go ahead.

Good morning. I'm John Baker III, Chief Financial Officer and Treasurer of FRP Holdings. And with me today are David DeVilliers, Jr., our President, John Baker II, our Chairman and CEO, John Milton, our Executive Vice President and General Counsel, John Koffenstein, our Chief Accounting Officer, and David DeVilliers III, our Executive Vice President. 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. These risks and uncertainties are listed in our SEC filings. 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 financial results presented in accordance with GAAP, FRP presents certain non-GAAP financial measures with the meaning of Regulation G promulgated by the Securities and Exchange Commission. The non-GAAP financial measure referenced in this call is Net Operating Income, or NOI. FRP uses this non-GAAP financial measure 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 gap to net income, please refer to the segment titled Non-Gap Financial Measures on page 12 and 13 of our most recent earnings release. Now for our financial highlights from the second quarter. Net income for the second quarter was $598,000, or six cents per share, versus $657,000, or seven cents per share, in the same period last year. Second quarter of 2023, and when compared to the previous year, was impacted primarily by an increase of $2,281,000 in equity and loss of joint ventures from two projects in lease-up, an increase in management company expense of $235,000 due to new hires and recruiting costs, as well as an increase in interest expense of $390,000, offset by an increase in interest income by $2,005,000. First quarter pro rata NOI for all segments was $7,610,000 versus $6,550,000 in the same period last year for an increase of 16.3%. Net income for the first six months of 2023 was $1,160,000 or 12 cents per share versus $1,329,000 or 14 cents per share in the same period last year. The first six months of 2023 compared to the same period in 2022 were impacted by an increase in equity and loss of joint ventures of $4.3 million as we lease up The Verge and 408 Jackson, an increase in management company indirect expense of $300,000, an increase in interest expense of $658,000, offset by an increase in interest income of $3,489,000. The first six months of 2022 were also positively impacted by a $733,000 gain from property sales, which we did not repeat in the first six months of 2023. Revenue, operating profit, and NOI are all experiencing strong growth this quarter and for the year to date. Compared to the second quarter of 2022, we grew revenue by 11.1%. operating profit by 33.9% and pro rata NOI by 16.3%. For the first six months compared to last year, these metrics grew by 13.5%, 63.9%, and 24.5% respectively. And yet, net income has been more or less flat. The situation is not new to the company, but the product of development and lease up when equity and loss in joint ventures are at their highest and have a negative impact financially on our net income. This was the situation during previous lease-ups, and it is quite literally the cost of doing business. We count ourselves very fortunate that we have a shareholder base that understands the situation and is patient while we transition these products into stabilization and income production. I'll now turn the call over to David for his report. David?

Thank you, John, and good morning to those on the call. As I have done for the last few quarters, I'd like to provide you with a perspective on the results of the company from an operational standpoint. We report our business segments in designated silos, which are important in analyzing the company. However, operationally, we have overlap and synergies that are difficult to follow using the business segments as reported. So employing a day-to-day look at FRP, which we call our real estate operations, let me offer the following. Our real estate operations consist of a four-pronged approach that has been the core of our business programming since mid-2018 when we liquidated our legacy warehouse portfolio. One, in-house, which happens to be the same as our reported asset management business segment, includes our industrial, commercial, and land development platforms. These properties are developed, managed, and owned 100% by FRP. Two, mining and royalties. Three, third-party joint ventures, which as the name implies, are projects developed in conjunction with third parties, where FRP is the major owner but relies on seasoned and respected third-party operating partners to perform the lion's share of entitlements, construction, and day-to-day operations. And four, lending ventures, which we are the principal capital source for residential land development activities. Relative to our in-house or asset management platform, occupancy at our three buildings at Hollander Business Park since the beginning of the year, as well as rent growth on renewals at Cranberry, have produced a healthy lift to our NOI. As of last month, our buildings in Hollander, totaling 247,000 square feet, are fully occupied, helping to lift second quarter NOI for our in-house properties to $834,000 versus $681,000 in the same period last year. This represents a 23.8% increase. Our industrial pipeline is strong with three projects in the queue. The 17-acre parcel in the Perryman industrial section of Harford County, Maryland, not too distant from our other assets in Aberdeen, received its building permit this week for our planned 259,000 square foot warehouse building, which based upon current market conditions, we plan to commence construction this month. Pre-development activities on our 170-acre tract in Northeast Maryland are ongoing and pending favorable market conditions. We could break ground as early as mid-2024 on a 900,000-square-foot distribution facility at this location. Finally, our 55-acre tract of land in Aberdeen, Maryland, adjacent to the Cranberry Run Business Park, is being designed with multiple options to deliver several buildings or a single large distribution center. Options include 600,000 to 700,000 square feet under roof, depending on final design and market dynamics. Existing land leases for the storage of trailers onsite help to offset our carrying entitlement costs on this property. Depending on market demand, we could very well begin construction here in 2025 or 2026. Completion of these three aforementioned development projects will add over 1.9 million square feet of additional warehouse product to our industrial properties. That, when added to the assets already in operation, will create over 2.35 million square feet. Relative to mining and royalty, as John Third stated in his opening remarks, our mining and royalty division saw revenues for the quarter of $3,264,000 versus $2,883,000 in the same period last year. This is record revenue for any quarter in the mining and royalty segment for the second quarter in a row. NOI was $3,125,000, an increase of 14% over the same period last year. Moving on to our third-party joint ventures, currently we operate both underdevelopment and stabilized projects with four distinct partners, MRP, Stewart Investment Company, Woodfield, and St. John properties. The difference between under development and stabilized being a sustained occupancy level of 90% for a minimum of 90 days. As of 6-30, our JV platform includes six, or excuse me, seven mixed-use projects. Six mixed-use residential projects totaling 1,827 apartments and 198,000 square feet retail and one mixed-use office project, totaling 72,000 square feet of single-story office and 27,950 square feet of retail. Four mixed-use residential projects are located in Washington, D.C., where MRP is our joint venture partner. Our neighboring projects, Dock 79 and Marin, along the Anacostia River, where our partners include MRP Realty and most recently, Stewart Investment Company, remained healthy with occupancies of 95.4% and 94.3% respectfully at quarter's end, with all retail fully leased. Quarterly renewal success rates consist of DOC 79 at 65.31% and Marin at 39.6%, with rental rate increases of 3.74% and 6.6% respectively. Bryan Street, a multi-building, transit-oriented, mixed-use project located on the wetland in Northeast, contains three residential buildings as well as a movie theater, anchored retail building, and a flexible outdoor platform fully leased to a unique entertainment concept called Metro Bar. At the end of the second quarter, Bryan Street's three residential towers, totaling 478 residential units, were 93% 93.2% occupied and its retail components were 95.9% leased and 79% occupied. 67.25% of expiring residential tenants renewed their lease with a combined average rental rate renewal increase of 2.86% for the quarter. Our food hall, Bryan Street Market, opened in March and has seen early success with eight of nine stalls leased, and the first four tenants have opened for business. A grand opening for the Bryan Street Market is planned for the fourth quarter this year. The Alamo Drafthouse Theater and Entertainment Venue continues to see greater revenues that have been enhanced by blockbuster films such as Mission Impossible, Oppenheimer, and Barbie. Our fourth and newest mixed-use residential project in the district, Verge, received its final certificate of occupancy in the first quarter and is showing strong performance at 68.6% leased and 43.3% occupied. A significant boost in leasing over the first quarter with nearly half or 45% of retail spoken for as of the end of June. In terms of velocity, we gained occupancy of 22 units per month on average during the second quarter at Burge. Moving on, our two projects in Greenville, South Carolina with Woodfield Development as our development partner are seeing great success. Riverside and its 200 apartments was 95.5% occupied and renewed 61.76% of expiring leases with rental rate increases of 11.96% for the second quarter. 408 Jackson was placed in service during the fourth quarter of 22, and at quarter's end, its 227 apartments were 85.9% leased and 76.2% occupied. Another strong performer in lease up, 408 demonstrated a significant boost in occupancy over the second quarter. averaging 29 units per month. Its retail component is fully leased and targeting an opening date in the fourth quarter of this year. Relative to the six aforementioned mixed-use residential joint venture projects, FRP's share of NOI was $3,290,250 versus $3,049,948 in the same quarter last year. 7.9% increase. The last, or seventh, mixed-use project that makes up our third-party JV division is undertaken with St. John's Properties, a pioneer in flex and office development and former National Developer of the Year. With St. John, we are developing windlass run in Baltimore County, Maryland that includes 72,080 square feet of single-story office and 27,950 square feet of retail. This project is now 62.79% leased and 48% occupied overall due to an increase in lease space over the second quarter as a result of a new 12,000 square foot office lease. NOI for this past quarter for this asset was $109,213 versus $102,400 over the same period last year, or a 6.7% increase. Lending Ventures, the last leg of our operating stool. This is a program where we provide working capital toward the entitlement and horizontal development of single-family residential projects and ultimately a sale to national home builders. The first of our two current projects is Amber Ridge in PG County, Maryland, with a total commitment to this project of $18.5 million. The investment includes a charged 10% interest rate and a minimum preferred return of 20% above which a profit-induced waterfall determines the final split of proceeds. All but 23 of the 187 lots have been taken down as of June 30, and $19.6 million of principal interest and profits has been returned as of the end of the quarter. The final 23 units providing additional profits are on track to be taken down by year-end. Our other current lending venture is called Presbyterian Homes, which is a 344-lot, 110-acre residential development project in Aberdeen, Maryland. We've committed $31.1 million in funding under similar terms as Amber Ridge. The National Home Builder is under contract to purchase all of the lots, which include 222 townhomes and 122 single-family dwellings. Horizontal construction has begun, and we expect the first lots to be taken down in Q4 this year. In closing, we are pleased with the company's performance this quarter. I would be remiss not to mention the headwinds facing us. In Washington, D.C., the volume of new apartment units being delivered is significant. We'll present a challenge for our leasing terms and could impact our rental rate expectations. Additionally, a rising interest rate Environment presents challenges for construction material pricing and availability as well as affordable financing terms. On a positive note, competitive developers who may not be buttressed by a balance sheet like ours might not be able to obtain or have the available capital to construct projects like our upcoming 259,000 square foot warehouse facility at Chelsea Road. We have flourished in a constantly changing environment due in no small part to the strength of our financial foundation and the consistent efforts of our talented teams. We look forward to building upon our successes and finding new ways to exploit our skills in the marketplace. Thank you, and I'll now turn the call back to John.