Description

FRP holdings was written up here three years ago at roughly the same price. Please refer to the detailed and excellent write-up and the company presentation for additional details.

https://www.valueinvestorsclub.com/idea/FRP_Holdings/2036425130

http://frpholdings.com/assets/presentations/Sept_2019_investor_presentation.pdf

This is a fairly straight forward story – NAV is over $60 on a conservative basis with legacy warehouse segment sold and converted to cash ($16+/share) and should grow at $4-5 annually. The two remaining businesses (aggregate mining royalty and real estate development) should both benefit if we were to enter a highly inflationary environment. The company is run by a shareholder friendly management team with a lot of skin in the game, who has TWICE sold the core business at/near the top. The upside from current price may not be super exciting, but the cash provides downside support and carries option value – share repurchase during market sell-offs (stock dipped to low $30’s in late March) and potential distressed investment opportunities. Mgmt bought back near 1% of shares in Q1 at $41.5, “well below its intrinsic value even if you haircut valuation with the virus’s fair shares”, and just instituted another buyback program.

Mining Royalty: This is a legacy segment from the Florida Rock days and basically comprises 10+ rock quarries in the Southeast leased to the likes of Vulcan Materials and Cemex. Aggregates are well-known local monopolies due to NIMBY and transportation costs, leading to strong pricing power proven during the worst downturns. FRP simply takes a cut of all the rocks extracted and hauled by its customers and has virtually no operating cost/capex needs. The estimated reserves are well beyond any reasonable investment horizon for investors. The financials speak for themselves.

Sales were flat in Q1, with delays in housing largely offset by public works (empty roads). Considering housing starts relative to historical average and the well documented need to improve highway infrastructure, it is hard to argue current revenue as above normal. A long awaited infrastructure spending bill and/or inflation would be just icing on the cake. VMC trades at over 18x 2019 and 2021 EBIT (my crude way of estimating “normal” earnings), and ditto for MLM. FRP’s asset light royalty business clearly deserves to trade at a higher multiple. Using 18x multiple on $9m EBIT gives $162m EV. Then there is the land value once the quarry is depleted, a playbook that has been executed several times in the past. This segment has $40m stated book value, but the most promising/interesting land parcel is in Fort Myers, which mgmt. estimates to be up to 105 one-acre lake front residential lots ready by 2027. This is worth at least $30-50m discounted to today. So this segment should be worth $200m or $20/share.

Real Estate Development: Over the years, FRP has gradually pivoted to developing real estate with local partners. The majority of the value is in Washington DC, where the company is building a series of apartment complexes on a legacy piece of land on the Anacostia River right next to the Washington National Stadium. The first phase, Dock 79, has 305 luxury apartment rental units and is 94% occupied. The second phase, Maren, has just been completed and is in the process of renting its 264 units. The company is also working with the same partner (MRP) on two other projects in DC (“Bryant Street” and “1800 Half Street”). There is obviously some concentration risk in the DC area and legitimate concern about whether the recent new supply in the area combined with CV Virus could hurt demand and rental pricing. Mgmt has indicated on the earning call that impact so far has been limited. FRP likely got lucky with the fact that Amazon selected Crystal City for HQ2, which is easily accessible to most of its properties. Mgmt has also diversified into other regions, including Greenville, SC.

Overall, I don’t have unrealistic expectation for the returns on these development projects, but mgmt. has proven opportunistic and conservative in the past, and have insisted on projects that generate adequate IRR on its own before possible tax savings/deferral. The carrying value on B/S of these real estate investments minus debt and minority interest is roughly $220m, or $22/share. This almost certainly understates the economic value, as the various projects are at different stages of development and incurred costs with no corresponding reevaluation on the B/S. I expect that there will be a re-evaluation event with Maren sometime this year and Bryant Street next year, similar to Dock 79 in the past. I value this segment at $25/share.

Holding companies trading at a meaningful discount to NAV is a dime a dozen. I feel very comfortable with FRP because of the controlling shareholders. The Baker family has proven that they are no empire builders – they sold Florida Rock Industries to Vulcan in 2007 right before the housing bust, and they sold the industrial warehousing business to Blackstone in 2018. One may argue that they have left some money on the table with the 2^nd sale, as they likely could have fetched a higher price had they waited a bit longer and the cash pile is currently dragging down returns for the company.  The following paragraph is from the 2018 shareholder letter. I will let you decide whether this is the type of management team you want to work for you.

“This asset sale provides us with substantial liquidity as we head into a period of time when dry powder may prove to be at a premium. At the very least, it gives us the very enviable problem of what to do with a substantial amount of money. We have said before that because we believe we sold at the top, we are not anxious to turn around and reinvest at the top. Though we believe there are still some investment opportunities out there right now that make financial sense— our most recent joint venture with MidAtlantic Realty Partners (MRP) in northeast Washington, DC is an excellent example— we would like to hold on to most of the cash until asset prices cool off and the economic future becomes a little clearer. In the event of a rainy day, we would like to be the company selling umbrellas.”

Lucky or not, they have proven prescient again and now have plenty of dry powder to deploy. Indeed, they bought back 1% of shares in Q1, and just initiated another stock buyback program last week. I will leave with this quote on the earning call last week.

“some incredible opportunities, and the normal returns that we would expect to get from these projects could double or triple as you get a chance to pick up something that just can’t be supported by the existing owners. So we’re going to opportunistic mode and watch and wait”.

Catalyst

No specific catalyst.