FRP Holdings, Inc. 2026 Q2 Earnings Call

Thank you, Mike. Good morning, and thank you for joining us today. I'm Matt McNulty, Chief Financial Officer of FRP Holdings, Inc. 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 deVilliers 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 forma 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 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 three 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 forma 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 through 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's 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 2.82 times 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 is still approaching completion. This is against the backdrop of improving leasing fundamentals. Although tenant decision making remains deliberate and transaction timelines 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 two of which have not yet reached substantial completion. While concessions remain elevated 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.