FRP Holdings, Inc. (FRPH) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the FRP Holdings, Inc. Second Quarter 2026 Earnings Call. [Operator Instructions] At this time, it is my pleasure to turn the call over to Matt McNulty.

Thank you, Mike. Good morning, and thank you for joining us today. I'm Matt McNulty, Chief Financial Officer of FRP Holdings, Inc. And with me as speakers today are John Baker, III, our CEO; David deVilliers, III, our President and Chief Operating Officer; and Mark Levy, our Chief Investment Officer. Also joining us on the call are John Baker, II, our Chairman; David deVillier, Jr., our Vice Chairman; John Milton, our Executive Vice President; and John Klopfenstein, our Chief Accounting Officer. As a reminder, any statements on the 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. Additionally, 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. The non-GAAP financial measures referenced in this call are net operating income, or NOI, pro rata NOI, funds from operations, or FFO, and FFO per share. We also reference debt service coverage and net debt as a percentage of the fair market value, which are not measures calculated in accordance with GAAP. FRP uses these non-GAAP financial measures to analyze its operations and to monitor, assess and identify meaningful trends in our operating and financial performance. These measures are not and should not be viewed as a substitute for GAAP financial measures. To reconcile net operating income to GAAP -- to GAAP net income, please refer to our most recently filed 10-Q, earnings press release and our quarterly earnings deck published on our website. I will now turn the call over to our President and Chief Operating Officer, David deVilliers, III, for his report on operations. David?

Thank you, Matt, and good morning, everyone. The second quarter unfolded largely as we expected. Industrial leasing continues to take longer than we originally underwrote, but tenant activity continues to improve. Our balance sheet remains exceptionally strong, and our long-term strategy has not changed. Let me begin with where FRP is headed because it frames everything we do. At FRP, disciplined capital allocation is at the core of our strategy. We continually evaluate where each incremental dollar can earn the highest long-term risk-adjusted return. That philosophy has created a portfolio and pipeline that includes industrial, multifamily and mining royalties. Each business generates recurring NOI, creates long-term shareholder value and plays an important role in our company. As we look ahead, however, we believe our greatest opportunity is industrial. Industrial real estate includes logistics, manufacturing, distribution and service-oriented industrial users. This offers the most attractive long-term investment opportunity across our markets. Accordingly, we expect most of our future discretionary growth capital to be invested in expanding our industrial portfolio. We are not changing who FRP is. We are changing where incremental capital goes. Our objective is to grow industrial into a larger contributor to NOI and FFO over time while continuing to own, operate, develop and maximize the value of our multifamily and mining businesses. Our Riverfront project along the Anacostia River illustrates that philosophy well. It is not simply another multifamily development. It is a legacy land position where years of entitlement, infrastructure investment and development have created value and returns that would be difficult to replicate by acquiring a comparable site today. Those legacy opportunities remain an important part of FRP's long-term value creation. Together, these 3 businesses provide recurring NOI, financial strength and the flexibility to continue investing for the long term. We are executing that strategy from a position of financial strength. We ended the quarter with approximately $130 million of liquidity, including approximately $101 million of cash, supported by a conservatively leveraged balance sheet. That financial strength gives us the flexibility to lease, stabilize and selectively invest while maintaining the discipline that has long defined FRP. For the quarter, we generated approximately $9.4 million of pro rata NOI and FFO of approximately $4.1 million or $0.21 per share. During the past year, the acquisition of the Altman Logistics significantly expanded both the scale of our industrial platform and the operating capabilities needed to execute this strategy. As our current industrial development pipeline delivers to the first quarter of next year, our industrial portfolio will grow from approximately 800,000 square feet at the end of 2025 to approximately 2.1 million square feet. Encouragingly, leasing momentum continues to improve. Property tours, proposals, tenant discussions and active negotiations have all increased across multiple markets. We have signed approximately 20,700 square feet and have another approximately 97,500 square feet in active lease negotiations. While lease execution remains uneven, tenant activity today is materially stronger than it was a year ago, giving us greater confidence that occupancy and FFO will improve as more of those discussions convert into signed leases. Mining generated approximately $4.1 million of NOI during the quarter, an increase of approximately 12% year-over-year. It remains a highly efficient business that produces durable recurring cash flow while requiring very little incremental capital and continues to provide important funding and balance sheet flexibility for our development strategy. The multifamily development pipeline will deliver 510 units in Greenville, South Carolina and Estero, Florida in the first quarter of 2028, growing the portfolio from 1,827 units to 2,337 units. Within multifamily, the operating environment remains mixed. Greenville continues to perform well, while Washington, D.C. continues to be affected by elevated new supply and higher delinquency. We continue to view the supply pressures as cyclical rather than structural, although collections and delinquency remain influenced by the district's regulatory environment. Our focus is straightforward: operate the portfolio well, complete the developments already underway and continue creating long-term value through disciplined execution. Multifamily remains an important business for FRP, just as mining remains an important business. And together, they complement the continued growth of our industrial platform. Together, our industrial and multifamily development pipeline discussed above represents approximately $506 million of total project costs and approximately $34 million of expected stabilized NOI, of which approximately $16.6 million is FRP share. Our objective is straightforward: deliver these projects, lease them, stabilize them and maximize the value they create for shareholders. We now expect full year NOI of approximately $36.2 million, compared with our original plan of $37.1 million. The roughly $900,000 reduction primarily reflects $800,000 from delayed industrial lease-up and $1 million of operating headwinds in our Washington, D.C. multifamily portfolio. This is partially offset by the $850,000 of stronger-than-expected mining performance. Near-term FFO will continue to reflect lease-up timing, elevated platform costs and higher interest expense. Importantly, the investments we have made in people, systems and technology have established the operating platform needed to support a much larger company and should generate meaningful operating leverage as occupancy improves. Our balance sheet remains one of our greatest competitive advantages with debt service coverage of approximately 2.82x and net debt equal to approximately 19% of fair market value and substantial available liquidity. Our strategy is straightforward: continue leasing our industrial portfolio, deliver and stabilize the developments already underway, maintain one of the strongest balance sheets in the industry and continue investing in the long-term growth of our industrial platform while maximizing the value of the multifamily and mining businesses we already own. We believe consistent execution against those priorities will create substantial long-term shareholder value. With that, I'll turn the call over to Mark Levy, our Chief Investment Officer.

Thank you, David, and good morning. I'd like to spend a few minutes providing some perspective on our industrial portfolio, what we are seeing in the leasing market today and how we are positioning the business as the current development cycle continues to evolve. An important place to start is where we are in the life cycle of the portfolio. A significant portion of our development pipeline has either only recently delivered or still approaching completion. This is against the backdrop of improving leasing fundamentals. Although tenant decision-making remains deliberate and transaction time lines remain longer than historical norms, activity overall has significantly increased as tenants across the spectrum continue to have solid operational results and maintain strong corporate balance sheets. Most tenants are focused on the necessary investment to continue growth and increase market share. We are observing a manifestation of this across our portfolio. We currently have in process more than 110,000 square feet of renewals and pending new transactions, which is significant in the context of our available vacancies and have seen a notable increase in new-to-market leasing activity, particularly at Delray, Davie and Lakeland, the latter 2 of which have not yet reached substantial completion. While concessions remain elevated prior -- relative to prior cycles, rental rates have remained quite resilient. The supply environment is also becoming increasingly constructive. Nationally, the industrial construction pipeline has contracted roughly 60% from its 2022, 2023 cycle peak. At the same time, absorption is strengthening. We believe this combination should create an increasingly favorable supply-demand environment for projects delivering in the near to immediate term. This dynamic is particularly evident in our core markets of Florida, New Jersey and Maryland, where regulatory constraints, development restrictions and community opposition have made bringing new industrial supply to market increasingly difficult. Last, we have made meaningful changes to how we approach leasing and marketing across the portfolio. We have changed almost all elements of our leasing playbook anchored by leaning heavily into long-standing relationships with tenants and the brokerage community. Those relationships are an important competitive advantage and differentiator as we work to convert this activity to executed leases. Looking ahead, our priorities are consistent and remain unchanged. We remain focused on incremental improvements in occupancy quarter-over-quarter while selectively advancing new opportunities in core logistics markets supported by long-term demand drivers and meaningful barriers to entry. While the near-term objectives of leasing are indisputable, it is equally important we seek to build enterprise scale as we transition to a highly focused industrial operating and investment platform. With that, I'll turn the call over to John Baker for his closing remarks.

Thank you, Mark, and good morning to everyone on the call. Overall results for the quarter were down modestly versus a year ago, but largely in line with our expectations, reflecting the occupancy pressures that have affected our D.C. multifamily assets and our Maryland industrial portfolio over the past several quarters. Those headwinds are still with us. But as I said last quarter, we've begun to see increased inquiry and leasing activity across most of our markets. That activity and engagement with potential tenants remains much higher than last year. We just have yet to see that activity and engagement translate into additional signed leases. The optimism I expressed in Q1 remains, albeit a more cautious optimism. But as David said, execution is the priority, and we are focused on the things we can control. We have strengthened our leasing team to bring it in line with our stated focus of getting our industrial and logistics assets leased and stabilized. As I said before, the single most important lever we have to improve the company's performance is same-store leasing. It has the most immediate impact and requires very little capital relative to development. It remains management's top priority. And while we did not see our efforts translate into tangible results, all of us are of one mind that given our assets and the team behind them, we will. Focusing on process over results is a cliche for a reason. It's true. Operator, let's open the call for questions.

[Operator Instructions] Our question comes from Bill with Rhizome.

I'm trying to figure out what's going on in the multifamily in D.C. We own Camden, and obviously, rent and NOI trends are weak everywhere in D.C. in the Sunbelt. But it doesn't -- it seems like the D.C. assets owned by FRP is getting hit a little bit harder. Can you give -- provide some color on that?

Sure, Bill. Good to hear from you. I mean to get a little granular with D.C., I would say that our renewal increases, we are seeing positive. Across the board I would say all of them are above 1.5% in terms of renewal increases for this quarter. Where we're really getting hit is trade-outs when people leave and we've got to bring new tenants in, the trade-out rates are 10% lower than the previous tenant. So there's a focus on keeping tenants for sure, and our renewal rates on tenants are above 50%. So that's the good part. The tough part is about 8% of these tenants aren't paying, and that's the real headwind. And it's really a product of the district's policies. And right now, the court systems are packed with all of us trying to get these tenants out. I mean we're looking at 12 months, 18 months to get these tenants out. So once a tenant stops paying and that delinquency stays with us for a long, long time. And that's kind of the landscape down in D.C. right now. And I don't see it changing anytime soon. We're getting better at interviewing and preempting delinquencies, which has helped some. I would say that our economic occupancy this quarter has ticked up probably 75 basis points, and we hope to continue to see that trend. But we still have a pretty significant delinquency headwind from occupancy to economic occupancy.

Okay. So I would like to clarify, is that consistent across Maren, Dock 79, Bryant Street and Verge? Or is it more heavily weighted towards a Bryant Street, which is -- I spent a lot of time on the ground there. The Maren and Dock are, in my opinion, are one of the more premier assets down there with market-leading rent. Is the issue across the whole portfolio in D.C.? Or is it just specific to certain properties?

It's across the board. It's across the board. It really is.

Yes. It's -- unfortunately, it's all related to what David said is the district's policies on being able to evict tenants, and it takes so long that people have learned this. I mean, there's whole scams out there about it, and they're coming into the building knowing they're never going to pay rent. So it doesn't matter what building it is. They just -- if they can get past the guard gate and get a lease signed, they don't intend to pay. That's the big problem. And it's not everybody, obviously. I mean most people are good people and they pay the rent. There's just -- there's a small portion of people out there that have figured out this problem and are taking advantage of it, and the district has got to do something to fix it.

And David, correct me if I'm wrong, but the issue of delinquencies has been something of a constant and the extent to which it impacts us has sort of ebbed and flowed from quarter-to-quarter. The real issue that's been hitting us hard lately is just increased supply in the kind of Anacostia submarket of D.C., right?

I mean the supply really hurts us on the trade-outs. We're trying to compete with all these new deliveries and concessions are up to attract trade-outs, we've got to compete against that. So that's a piece of it. Again, as the supply gets filled and that asset kind of moves into a more stabilized position, we're kind of all on a more equal playing field, and we see that coming out. But the delinquencies are -- I don't see that changing anytime soon. That is a big hit.

I think to your point, we've been dealing with the delinquency issue for the last few years for sure. I think it's ticked up slightly in the last 6 to 9 months.

Well, I appreciate the color and the -- I'm just a little bit surprised because Camden is our biggest position and 13% of their footprint -- I mean, 13% of the NOI is in D.C. And I met with them for the past few years, they told us about this particular issue in Atlanta. And it was a big issue for them in Atlanta with the fraud, and I have never heard of them mention anything about D.C. being -- and I'm aware that this is an issue. People are very entrepreneurial, as you could say, if they could get a year free rent. But I -- it's just not an issue that they're dealing with. I don't know if it's better detection, the use of AI, whatever it may be. But I'm just a little bit surprised by the delta between what you guys are facing and the degree of delinquency versus what they are -- it's just not even mentioned about whenever I talk with them, and we had a face-to-face with them in June. So I would encourage the team to...

Bill, Camden is located where?

They have [indiscernible] units. They have 60,000 units and 13% of their NOI is in the D.C., Northern Virginia area.

Got you.

I mean that's an insignificant. I mean 60,000, 13% of that, that's a lot of units. I mean they definitely have exposure to the area. I mean, I would -- my suggestion would be they're clearly doing something where they're not dealing with this level of tenants not paying, I would definitely look into what kind of tools they're implementing because I think the screening process needs to improve here.

Yes. yes, we agree that the screening -- and we have been working on that with our property manager for the last 18 months and have implemented some new things, and they've been pleased with some of the results of being able to detect fraud in ways they couldn't before. So we'll continue to work on it for sure, but we know it's an issue.

I know a few years ago, we were all really excited about some of the acquisitions that we've made in the Maryland area for industrials. And Cranberry for a little while, looked like a really good use of capital, and that was very quickly leased up. And then we kind of had -- I was a little bit surprised by a lot of tenants leaving there. And then Chelsea, I think that's still really -- I mean, that's functionally all vacant right now. Can we just like help me understand what's going on there? I know that U.S. overall vacancy is higher. But again, it's just the degree of delta. I know you guys have a smaller portfolio. So if you get a couple of leases that don't come through, it's magnified. But again, what's going on with the Maryland, Baltimore market as it relates to warehouses? I kind of thought that Chelsea would be a little bit further along on the lease-up -- and I don't know -- I can't tell what percent occupied lease Cranberry is these days. If you can provide some color on that, that would be helpful.

Sure. I'll start, and I will hand it over to Mark. As it relates to, I would call our Maryland same-store, which is really the Hollander Business Park in Baltimore City and the Cranberry Business Park in Harford County. That -- that same-store portfolio in Maryland was 92% occupied Q1 2025. And to your point, over time, currently, it sits at 70.6% occupied. And we lost a number of tenants, a lot of government tenants. And we had one tenant that basically went bankrupt and we had to throw them out, which was a big, big headwind. We have tremendous activity at Cranberry right now, and we really see that picking up into next quarter. We have a number of renewals that we're working on right now, and we've got a number of tenants that we're in lease negotiations with right now, and we hope to see some changes here in the very, very near future. Chelsea we delivered last year is a product of really, really long, long decision cycles for tenants. And with that, I'll kind of turn it over to Mark to give additional color on the market and what he's seeing on the ground.

Yes. So really, what we're seeing overall is that Harford County and Cecil County, sort of, call it, the Baltimore North markets, really, I would describe those markets as being caught between sort of larger logistics markets. And what is happening is that a number of larger users, call it, north of 250,000 square feet have been really looking at consolidation and figuring out ways that they can centralize their distribution operations to service a much larger region. And so that is just a part of the overall evolution of sort of the dynamics around sort of supply chain. So what is happening is that users are really looking at locations that allow them to essentially get from, call it, Richmond to New York City within kind of a day's drive. And so oftentimes, a lot of those decisions lean into markets like Pennsylvania and New Jersey. There's been a tremendous amount of vacancy in Southern New Jersey, what I would describe as south of exit 6 on the turnpike. And there has been a tremendous opportunity for tenants to take advantage of the oversupply that has existed there. And that has frankly captured a lot of the tenant demand that is in the market. That is sort of compounded by the fact that a lot of those sites in New Jersey have economic incentives associated with them, i.e., pilots and other job creation incentives, which further create a delta between Chelsea and those opportunities. So that's kind of where we've been. The good news is that a lot of that space has really been absorbed. So the amount of supply that remains -- competitive supply that remains is a fraction of what it has been over the last, call it, 15 months. And there is very few new projects in the pipeline. So we are sort of seeing an opening relative to being able to capture some of that demand just based on pure availability. So that is kind of what I would sort of describe as the story over the last 15 to 24 months overall. I think relative to Cranberry, look, I think it's -- the local tenant pool is not very deep. You're talking about generally smaller tenants that are looking at that project. That tenant pool tends to draft off of larger tenants. And there are ancillary businesses that are sort of created or grow based on servicing a larger tenant base. So given that, that market has been slow, there has not been a lot of sort of organic growth within that local tenant pool. Cranberry is not going to attract a tenant from outside of the market. It is really going to -- it's -- again, it's very organic in nature. So those are the reasons. But I would tell you that optimistically, for the reasons that I just mentioned, I think that we have sort of turned the corner relative to that. We've got a couple of build-to-suits that we're looking at that are fairly large and especially in our Phase 2 at Crouse. So I do think that there are better days ahead for the market.

I mean, I've been following this company for -- I've been a for 12 years now, I don't know, somewhere in that range. And I've seen a lot. You mentioned build-to-suit and you mentioned Crouse. Is the strategy going forward to do any more spec? Or I mean, Crouse is 635,000 square foot. As a shareholder, I'd be very worried about doing a spec on something like Crouse or Mechanics Valley given the size.

Well, yes, look, I don't think the business plan today is to build or to deliver more spec space into the market unless sort of the fundamentals would dictate otherwise. The build-to-suit market is unique in the sense that there are very specialized operational requirements that tenants have that oftentimes cannot be accommodated in a spec building, at least cost effectively. So I think our focus relative to Mechanics Valley and Crouse is to continue to market those sites relative to build-to-suit opportunities. And if the fundamentals in the market change and we see some durability in those fundamentals, then I think we will obviously have a conversation as to whether or not it makes sense to develop a spec project. But I don't -- there is no immediate or near-term plans to do that. I think there are plans, though, to have those sites shovel-ready and to get the entitlements perfected. So if there is an opportunity to execute that we are in a position to do so quickly.

Okay. And Mark, I mean, since I asked you here, the projects in Broward County, Camp Lake, Davie and Lakeland now represents a big chunk of the company's asset. Could you give some color on kind of the -- kind of leasing outlook or just kind of updates on those properties?

Sure. So in Broward County, I think by all measures, Broward County, Florida is probably the most supply-constrained submarket in the country with a sub-4% vacancy rate and extraordinarily high barriers to entry relative to identifying new development opportunities. Our site in Davie is really at the intersection of 2 major highway systems, actually 3 major highway systems 595, the Florida Turnpike and I-95, and it's very centrally located to both the airport and Port Everglades. So it's a very unique asset in terms of its location. The building is not yet delivered. We are very close to signing a lease at a very strong rental rate for roughly 25,000 square feet, which I think will be a good bellwether for activity in the market. But we feel very, very confident that we will be highly successful in the lease-up of that project at rental rates that may set sort of new precedent in the market. As it relates to Central Florida, that is really sort of the population growth story in Florida. There has been tremendous migration from inside or within the state of Florida to the I-4 corridor specifically. And there is also a number of tenants that are looking to consolidate operations that may exist separately within sort of the Tampa and Orlando markets. So again, similar to what we talked about in the Northeast, there are tenants that are looking at a consolidation play in a central location that allows them to service a larger sort of population base. So ultimately, that is one of the primary drivers of Lakeland. We are seeing really a tremendous amount of activity there. We have not signed any leases. The building is not complete, but we're seeing very strong activity. Camp Lake is really a population growth story as well. It's more of a localized sort of service business type opportunity. So think about home services and contractor requirements, things like that. So based on the large expansion of the residential base in sort of Lake County and the surrounding geography, that is really driving a lot of the demand for Camp Lake, which is very early in the process. So I hope that answers your question. Certainly, I'm happy to dive in deeper if you'd like.

No, that's helpful. And I don't have any more questions, but I think I just want to share some thoughts as somebody who's been a shareholder for 12 years and who once owned probably like a top 5, top 10 shareholder in the company. I just want to say that given that the 10-year is almost 5% at this point, we've had one thing that I want the management and Board to think seriously about is there has to be a strategy to return some capital to shareholders either in the form of dividends or stock buybacks. And I say this is somebody who's owned the stock for 12 years. So I'm not someone here who's looking for some sort of quick catalyst. I've been with this company for a really long time. And we could buy REITs, really high-quality ones that pay 6% dividend yield that's also going to grow that dividend. And in the face of that kind of opportunity, there's a real opportunity cost. But I think what's more important is that the -- there has to be some thought into 5 years from now, are we going to be still here and saying we're going to go on another round of huge build-out. I think there is a very -- I think there's a happy medium where the company could set aside a certain amount of cash flow, even if small one into either share buybacks and not a share buyback just to offset management stock-based comp, but to buyback shares so that capital could be returned to shareholders and also do so accretively or pay a dividend because as someone who's been with the company for 12 years, I think I've earned the right to speak my mind freely. And I think that if there is no thought that goes into any form of capital return, I mean, the whole point of owning real estate and hard asset is that we do share in some sort of cash flow at some point. And it's been a really long time. And I think that in 5 years from now, when all these assets stabilize, this company should have a lot of cash flow, a lot more cash flow than it does today. And that is something that I think management team and Board really have to think about because there's no thought given -- if there's no thought on it, then it's just another company that's just going to invest a lot more capital into the ground into building to grow a bigger pie, but when are we going to share it in some of the cash flow. So that's -- I just want to speak my mind freely. I know many people on this call many, many years, think highly of you, but I thought that -- I think that's an area that where the company really haven't really done much on. So that's it. And thank you for answering my questions today and thank you for allowing me to express my thought.

Absolutely, Bill. Yes, we hear you for sure. And we appreciate you expressing your thoughts.

We now from Stephen Farrell with Oppenheimer.

I just have a quick question. There was a recent deal across from Bryant Street. Do you guys have any comment on that? Or what are your thoughts?

Stephen, if it's the deal that I'm thinking about, it did come up. We are in negotiations of refinancing Bryant Street. One of the major pieces to refinancing is the appraisal that did show up there. And I think it's a good indication of where that market is right now. And I think that's my comment. I think that's a good, good -- I think that's a good comp of where things are right now. I believe it was the Trammell Crow, the Rowan building.

The Rowan building.

Yes. And there was -- and it kind of closed at 6% cap rate. And I think that's a good indication of what people think about D.C. and that market right now, that's kind of my follow-up.

Just from that -- how do you think Bryant Street compares just as a -- not only like location, but this is retail, and I don't believe that had any retail. Is Bryant Street more attractive just compared to that asset or no, very similar?

I am always partial to our assets, and I'll leave it at that.

Okay. And with the development pipeline and what we have coming in the next, call it, to the end of 2027, I know we have the opportunities on taxes, I think, are in the first quarter next year. How much cash on the balance sheet is right now earmarked for developments and future use?