FRP Holdings, Inc.

Good day everyone and welcome to today's FRP Holdings Incorporated second quarter 2024 earnings conference call. At this time all participants are in a listen only mode. Later you will have the opportunity to ask questions during the question and answer session. You may register to ask a question at any time by pressing star 1 on your telephone keypad. Please note this call is being recorded. I will be standing by if you should need any assistance It is now my pleasure to turn the conference over to CEO John Baker III. Please go ahead.

Thank you, Angela, and good afternoon. I'm John Baker III, Chief Executive Officer of FRP Holdings, Inc., and with me today are David DeVilliers, Jr., our President, John Baker II, our Chairman, David DeVilliers III, our Chief Operating Officer, Matt McNulty, our Chief Financial Officer, and John Milton, Jr., our Executive Vice President and General Counsel. 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 generally accepted accounting principles, FRP presents certain non-GAAP financial measures within 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 and pro rata net operating income. FRP uses this non-GAAP financial measure to analyze its operations, and to monitor, assess, and identify meaningful trends in its operating 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 9 and 10 of our most recent earnings release. Any reference to cap rates, asset values, per share values, or the analysis of the estimated value of our assets, net of debt and liabilities, or for illustrative purposes only as a reflection of how management views its various assets for purposes of informing management decisions and do not necessarily reflect the price that would be obtained upon the sale of an asset or the associated costs or tax liability. Now, for our financial highlights from the second quarter. Despite revenues and operating profit remaining largely flat net income for the second quarter increased 242% to $2 million or 11 cents per share versus $598,000 or 3 cents per share in the same period last year. For the first six months, net income saw a 188% increase to $3.3 million or 18 cents per share versus $1.2 million for the first six months of last year. This increase was driven partly by the improved performance during lease-ups of our most recent multifamily development in D.C., The Verge, which drove down our equity and loss in joint ventures by $891,000 compared to the second quarter last year and $1.6 million compared to the first six months of last year. The primary driver for the improvement in net income was the performance of our most recent lending venture, Aberdeen Overlook. In the second quarter, Aberdeen Overlook generated $1.5 million in investment income compared to $560,000 in the second quarter last year from a previous lending venture project. Year to date, the project has generated $2.1 million in investment income compared to $614,000 from a previous project through the first six months of last year. By providing a developer we know and trust with the money required to develop land, for national home builders that are desperate for lots. These projects, while not part of our core business strategy in the long term, have generated returns for our cash well in excess of treasuries without tapping into the time and energy of our management and employees. Over the last three years, we have grown pro rata NOI at a compound annual growth rate of 21.6%. We've maintained that pace in the second quarter and the first six months of this year. Per-rata NOI for the second quarter was $9.2 million, a 22% improvement over the second quarter of 2023. For the first six months, per-rata NOI was $17.8 million, a 22% increase over the same period last year. Primary drivers of this growth were the multifamily segment and the industrial and commercial segment, as our mining royalty NOI is more or less flat compared to last year. Multifamily pro rata NOI increased by 84% this quarter compared to 2023 and 88% for the first six months compared to the same period last year. This growth is a result of the transfer to the multifamily segment of our 408 Jackson asset in Greenville and Bryan Street in DC from the development segment upon the stabilization of these assets when they reached 90% occupancy for 90 days. Same store NOI for Dock 79 and the Marin in Riverside was basically flat in the first six months compared to last year. NOI for Bryant Street and 408 Jackson compared to the second quarter last year when these projects were part of the development segment increased by 37.6% and 292% respectively. For the first six months, these projects increased 27.9% and 867 percent compared to the same period last year. These increases in NOI were the drivers from the multifamily segment for the improvement we saw in overall pro rata NOI. The transfer of the verge to this segment upon stabilization in the third quarter of this year should only improve this segment's performance on an NOI basis. Industrial and commercial NOI increased by 41 percent in the second quarter to $1.19 million and by 44% in the first six months to $2.3 million compared to the same periods last year. These increases are the result of having burned through the rent abatement concession periods at two buildings at our Hollander Business Park. These assets are now generating real cash as opposed to the unrealized revenues that we recognized in the early phases of occupancy from straight lining rents for gap purposes. Yesterday, we posted to our website a brief slideshow of financial highlights for the second quarter. For those who have not seen it, we are now publishing, for illustrative purposes, an estimated value of our real estate assets, net of debt and liabilities. Our analysis yielded a per share value in the range of $31.90 to $37.87. We provide this information to reflect how management views its various assets for the purposes of informing management decisions and do not necessarily reflect price that would be obtained upon sale of the asset or the associated costs or tax liability. I will now turn the call over to our Chief Operating Officer, David D'Avelio III, for his report. David.

Thank you, John, and good day to those on the call. Allow me to provide an operational perspective on the second quarter results of the company. Starting with our commercial and industrial segment, this segment consists of nine 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 in NOI for the quarter totaled $1.4 million and $1.2 million, respectively, an increase of 2% and 41% over the same period last year. The large variance between revenue growth and NOI growth is due to several tenants beginning their lease term with rent abatement periods. GAAP requires the entire lease term to be straight-lined when calculating revenues. As a result, GAAP revenues are higher during the first half of the lease term than what is being received, and the variance is more pronounced during a rent abatement period. As stated above, NOI is a non-GAAP financial measure. NOI calculations back out the straight-lining effects. As a result, 2023 NOI reflected the reduced rental payments and 2024 NOI reflected the full lease payments. This is why we saw a 41% NOI growth compared to a 2% revenue growth this quarter 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 $3 million, respectively, a decrease of 1% and 3% over the same period last year. These decreases were primarily the result of a $277,000 reduction in royalties to resolve a 2023 overpayment by our tenant at our Manassas quarry, which overestimated our portion of production tons, which is shared with other property owners. The outstanding balance of this overpayment credit is $53,000, which we expect will be exhausted in the first month of the third quarter of this year. As to our multifamily segment, this business segment consists of 1,483 apartments and over 117 locations located in Washington, D.C. and South Carolina. At quarter end, the apartments were 92.6% occupied, and the retail space was 75.6% occupied. Total revenues in NOI for the quarter were $11.9 million and $7 million, respectively. FRP's share of revenues in NOI for the quarter totaled $6.9 million and $4 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 adding $3.5 million of revenue and $1.9 million of NOI this quarter. As a same-store comparison, which only includes Dock, Marin, and Riverside, FRP's share of revenues and NOI for the quarter totaled $3.4 million and $2.1 million, respectively. a decrease of 0.9% and 3.7% over the same period last year. This is primarily the result of the average vacancy and average expenses increasing by 1% and less rental overage payments from our retail tenants this quarter as compared to 2023. An abundance of supply in the D.C. markets will continue to put pressure on vacancies and revenue growth in the foreseeable future. Rising real estate taxes and insurance premiums may also remain a headwind for NOI growth, which increased over 5.25% from a same-store perspective this quarter compared to 2023. Management continues to be diligent in tenant retention and rental rates in the market. We are pleased to have renewal success rates over 60%, with all renewal rental rates showing positive growth and a majority of our trade-out rental rates being positive as well. Now on to the development segment. This segment is where we acquire, entitle, develop, and create new income-producing assets that are transferred into our commercial, industrial, and multifamily business segments. Upon reaching certain completion and occupancy benchmarks, the segment uses capital to entitle and develop lands and fund our vertical construction endeavors with the goal of turning our non-NOI producing assets into NOI producing assets. The segment also lends funds to prepare and develop lands for sale to national home builders in exchange for principal and interest payments and profit sharing. In terms of our commercial industrial development pipeline, our 258,000 square foot state-of-the-art Class A warehouse building in the Perryman Industrial Sector of Harford County, Maryland is nearing completion and is expected to be delivered on or before November 1st of this year. Upon shell completion, this asset will be moved to the industrial commercial segment and will impact NOI negatively until it is occupied and stabilized with the operating expenses being passed through to the tenants. Our 200,000 square foot Class A warehouse building in Lakeland, Florida, located along the I-4 corridor between Tampa and Orlando, is where FRP intends to be a 90% partner with BBX Logistics and is well into the entitlement stage. Permits for the development should be in hand on or before Q1 2025. FRP and BBX also closed on land that will support two 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 now underway and permits may be in hand by Q1 2025 as well. In Cecil County, Maryland, along the I-95 corridor, we are in the middle of pre-development activities on 170 acres of industrial land that will support a 900,000 square foot distribution center. We look to secure permits in Q2 of 2025. we are in the initial permitting stage for a 55-acre tract in Harford County, Maryland. The intent is to obtain permits for four buildings totaling some 635,000 square feet of industrial product. Existing land leases for the storage of trailers on site help to offset our carrying and entitlement costs until we are ready to build, which could be as early as 2025, pending favorable market conditions. Completion of these industrial commercial development projects will add over 2.1 million square feet of additional industrial commercial product to our industrial platform, growing the business segment from 550,000 square feet to over 2.7 million square feet. Over the next three to five years, we will focus on the permitting, construction, and lease up of the Perryman, Lakeland, Fort Lauderdale, and 212,000 square foot building in Harford County. These four buildings represent over 850,000 square feet of new industrial commercial product with a total project cost estimated at $142 million. With 6% to 7% return on cost expectations upon stabilization, these projects represent some $8.5 million to $10 million in potential NOI. As to our multifamily development pipeline, The Verge, our 344 residential unit project located in the district, was 90.7% occupied at quarter end. Total revenues in NOI for the quarter were $2 million and $1.16 million, respectively. FRP's share of revenues in NOI for the quarter totaled $1.3 million and $710,000, respectively. While our development focus is currently weighted toward our industrial assets, we continue to watch market conditions and their impact on four multifamily projects in our development segment pipeline, located in Washington, D.C., Greenville, South Carolina, and Estero, Florida. These projects represent over 1,200 apartments, and 58,000 square feet of retail. Turning to our principal capital source strategy or lending ventures, I have the following updates to our two current projects. Amber Ridge in Prince George's County, Maryland consisting of 187 lots is completely sold out. Final development activities to get off bonds are ongoing. And upon completion of this project, interest income and profits are expected to total $3.9 million, a 21% profit on funds drawn. Our second lending venture, Presbyterian Homes or Aberdeen Overlook, consists of 344 lots located on 110 acres in Aberdeen, Maryland. We have committed $31.1 million in funding $24.6 million was drawn as of quarter end, and over $12.7 million in preferred interest and principal payments have been received to date. A national home builder is under contract to purchase all the finished building lots by Q4 2027. 78 of the 344 lots were closed upon, and we expect to generate at least a 20% internal rate of return and funds drawn upon completion of the project. In closing, we are pleased with the entitlement progress being made on several industrial land assets, particularly on our Lakeland and Fort Lauderdale projects in Florida. The renewal and trade-out rent growth within our multifamily assets is encouraging and a key indicator of where we are on the supply and demand curve. Interest rates and construction costs have appeared to stabilize, interest rate spreads have eased, and although new supply of apartments in the DC waterfront submarket remains a headwind for rent growth, absorption and demand for apartments and warehouse space remain a bright spot. As we look ahead, our focus remains on the margin between revenue and expense growth at our existing assets. having a fundamentally sound capital stack with sensible construction financing terms, and hyper-focused development, leasing, and property management teams. With several permits expected in 2025, our efforts and entitlements to vertical due diligence. Through our cautious, patient, and thorough vertical due diligence process, we will make informed and calculated decisions to weight, or pull the trigger on vertical construction. Thank you, and I'll now turn the call back to John.