Bill Chen breaks down $FRPH's SOTP (podcast #95)

Bill Chen breaks down his thesis for FRPH. FRPH is a conservatively managed real estate company with a great management team and a history of growing NAV and monetizing assets at opportunistic times. You can see my thread on FRPH here, and a rough FRPH SOTP here.

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Transcript begins below

Andrew Walker: Hello. Welcome to yet another Value Podcast. I am your host, Andrew Walker. And with me today, I am happy to have my friend, Bill Chen. Bill is a managing partner at an institutional real estate fund. Bill, how is it going?

Bill Chen: Great. Thank you for having me on. I appreciate it.

Andrew: Hey, thanks for coming on. Let me start this podcast the way I do every podcast. First, a disclaimer to remind everyone that nothing on this podcast is investing advice. Please consult your financial advisor, do your work, all that type of stuff. And then second, a pitch for you, my guest, the obvious pitch here would be to let listeners know that you are by far the best croquet player I know. I will take you over anyone on pinch with. Bill gave me quite the beatdown last fall. But look, I have known you for a couple of months. You're a great guy. You're a great investor in New York City real estate, in particular. Maybe that's because as you were telling me before, you've seen a hundred different ways to lose money in New York real estate. But I have seen yourself, I know you do great due diligence on the companies you invest in. And for that reason, I am excited to go to the company we are going to talk about today. So, that out the way, let us dive right into the company we are going to talk about. I know this is a high conviction idea for you. It is FRP Holdings. The ticker is FRPH. And all that out the way, I'll turn it over to you. What is so interesting about FRPH?

Bill: I think what is interesting about FRPH is a good way to think about it is that there is a billionaire family and they own a collection of high-quality hard assets that work in an inflationary environment, that works in a deflationary environment that you could buy today, you pay $55 for it, it is probably worth $90. It is my personal opinion that it would be worth about $110, two years out. And again, it's got a good collection of trophy assets. You could buy it at roughly sixty cents on a dollar. It probably grows 10% at its fair market value. Actually, on a look-through basis, you are compounding at about 18% roughly, give or take. And then there is a huge gain that you could potentially get from that gap closing. But just the fact that you are buying at sixty cents on a dollar and the inner asset is growing at 10%. That gives you an 18% compounding.

And I think that's attractive. I am a brick-and-mortar guy, so I get into the assets and I think about the public market, the private market. What the private market will pay for this collection of assets versus what you could buy in a public market. And frankly, any big REIT would love to own this collection of assets. Any big family office that is managing more than $10 billion would love to own this collection of assets at the price today. And that assures this is one of the advantages of being a public investment is that you could own a collection of assets like this at a fraction of what it would cost in the private market while the billionaire family, you get to tag along while they are doing all the heavy lifting for you. So, that is what gets me excited about it.

Andrew: Yes, that was a great overview because everything that I've got on my question list and everything, you hinted out there. So we are just going to be diving into everything you just went through in the interview. Let's start with the controlling shareholder. I don't think FRP is a REIT yet, right? Right now they are just a normal public company. There has been talked of REIT conversion, but one of the things with big public companies with chunky real estate holdings like this is you have got to trust in the management team, right?

Because a big building, it's going to throw off lots of cash flows. They're going to have to reinvest it and it runs the gamut. We all know of public companies that have lots of real estate holdings and the money just goes into management's pocket one way or the other or there are real estate companies that compound value over time. Let's start with FRPH's management team. I know there is a really interesting history here of how they got to the current set of assets. Let us just go in the background there.

Bill: Let us go into the background of all of this. the Baker family owns about 30% of shares outstanding, and who is the Baker family? Right before the financial crisis, and I think around 2006, Vulcan Materials approach a company called Florida Rock Industries. So, Florida Rock Industries, FRP, hence the FRP Holdings. So the Baker family used to run the Florida Rock Industries, which was a multibillion-dollar company. In '06, housing was hot. They got approached by Vulcan. They got a bid, and they said this bid is too good. We have fiduciary to our minority shareholders.

We don't want to sell this, but it is not just us even though they own a lot of Florida Rock Industries. They said, "We needed to do the right thing for our shareholders," and they sold the company to Vulcan Materials. That was one instance where someone would approach them with a bid. They weren't looking to sell. Someone approached them with a bid that they thought was very attractive and they took the bid. The second time that happened was in 2018. Blackstone, for the last ten years, has been approaching everyone who owns a warehouse portfolio that's more than four million square feet. They've accumulated, I think about a billion square feet at this point of warehouses.

Andrew: I live in a one-bedroom apartment in New York City. I think if it was a two-bedroom they may have approached me about turning it into a warehouse and making a bid on it.

Bill: So, Blackstone approached them and they went out and got an opinion from investment bank and they said, "Okay, we'll sell it to you but it has to be the absolute highest end of our valuation." So, if you look at the proxy that was filed when they sold the warehouse portfolio for $359 million to Blackstone in 2018, there's a lot of background of how much time, it took them about a year of going back forth in negotiating.

I think Blackstone visually pushes them for $300 million. They're like, "No, it has to be 359," and they got the deal done at 359. So, this is a family, and we have a long conversation with them over time, where they said that given a high enough price, every asset is for sale. So, there's a history of the families that only Florida Rock Industries when they got approached by Vulcan. And it seems like they are always selling when they're getting a really good price. So, I think that taking away perhaps 90% of this High inside ownership will control families for real estate companies.

Because they could kind of treat it like, this is our family business, go away, we don't want to be bothered. And then if you look at also their GNA. The GNA runs about 6$ million a year. And by my estimate, this pool of assets is about $700 million. So, if you were going to get money to a real estate private equity. In that sense, you're getting your pay no preferred and you're paying eighty basis point management fee and you get the legal quiddity. Again, I'm constantly looking at what can I get in a private market and what can I get in a public market? And in my opinion. This is a much better approach, this is a much cheaper, much better, and cost-effective way to get this kind of high-quality real estate exposure in the public market.

Andrew: Fantastic. I'm with you. I hadn't thought of putting it like that but eighty basis points, annually of the management fee as you call it, versus if you went to Blackstone and you took someone with this track record of two sales, maybe selling warehouse in 2018 wasn't the top of the market but they've got a very good price for it. That history, you'd be paying two and twenty in a heartbeat, right? Eighty basis points for student training, that's great. Lots of places to go here. But again, this is a real estate company. So I think there are lots of interesting things to talk about here, but we don't have to make it too crazy complex. Right? There's real estate, we need to value it. We can talk about interesting optionality, but I think the most important thing is the share price is fifty-five right now. You mentioned REIT NAV is around $90. Let's talk about what goes into the NAV around $90 per share.

Bill: Sure. And I think, why do we start with the royalty business, right? That's interesting. This is probably one of the harder assets. I think most real estate
people could value a multi-family. They put a copyright on it, they put a dollar per square foot on it. And the Royalty is kind of a different beast. From my conversation with the Bake family over the years, we've owned this since 2015, so we've gotten to know them very well and they've been very candid in terms of feedback and whatnot. In a sense, they said that given the choice of buying a multi-family or a warehouse.

Like a four and a half cap rate or whatever you want to call it. They would rather buy the royalty business at the same cap rate on any given day. And let's think about why. But before we get into any of it, if you look at the historical performance of this aggregate business, they have had 200 thousand dollars of CapEx since 2006. And in that sense, I think they pulled out more than, at this point probably somewhere around 100 million dollars from 2006.

Andrew: Can we just take a step back? I agree It's a great business and they've got some slides and stuff, but I just wanted to find for listeners who haven't dug into the filing chip. What is the royalty business? What is the aggregate business?

Bill: Absolutely, fantastic. So Peter Lynch. This goes to the accumulation of knowledge. I found this couple of weeks as I read Peter Lynch's book, ONE UP ON WALL STREET. And Peter Lynch on One UP ON WALL STREET very bizarrely mentioned the aggregate business is one of the businesses out there. Because you get it. It's literally like you're buying a ton of sand, gravel, crushed stones and it's worth next to nothing. There's no value for these assets and that is the inherent molt of an aggregate business. Because it cost you probably $10 a ton but if you want to ship it fifty miles, the trucking causes $10 a ton. So, you kind of draw a circle, and within that radius, you have a ton of pricing power.
If you're doing a construction project, say in New York City. You'll never go to Chicago to buy rock. It doesn't matter how good the rocks are. You won't even go to New Jersey because by the time you bring it over it's going to cost you more to buy it locally.

So, these are at worst local oligopolies. A lot of times the industry is very consolidated. There's more Marietta and bulking. And then there are some players like Cemex and a few other French boys, but they're local at worst local, either local monopolies whole duopolies or local all accomplished logo, got these awards that you could get. Yes, and the other thing is, there's a very strong in [inaudible] angle to it. It's probably five or six years for you to get a permit approval because let's face it. Right? Like everyone will love it. Lovely neighborhood. They don't want a big rock quarry in that backyard and heavy trucks and you know, noised us and you got, you know, rocks falling off and like it just like there's not a curb appeal. So we love messing to be assets because what it means is that basically, your chance of new supply coming onto the market is very, very well. So if you got a portfolio that's already cash flowing, that's already been mine, that's got a minimum of a 60-year life, that with half a billion tons of rocks of reserves, that's incredibly valuable.

Andrew: And so FRP they own these quarters, these are accurate, they own them, but correct me if I'm wrong, they don't operate them, right. They'll spend Vulcan, you mentioned they sold a lot of these to Vulcan in 2006. But some of the ones they still own the least the Balkan and Vulcan just paste them the pure profit they get. I think it's a percentage of sales. Volumes monster.

Bill: Yeah. So, this is the other aspect. And you know that, that, that why they're there's so Bhisma so beautiful. It's a pure top-line royalty, right? Like, like we they never disclose the actual percentages, but we estimate that it's about 10%. So 10% of the top line. So there's no cost overrun, there's no inflationary concern where you know, your labor cost goes up or equipment cost goes up. If anything, you know, inflation is so the top of mind, this, this is probably one of the best assets to own my opinion, in an inflationary environment, right? Because, you know, inflation goes through this, this an asset that naturally has a lot of pricing power, they could usually, usually increase prices by three 4%, like GE CPI plus two, right? So you could beat inflation. And there's no like I said, you know, I look back to 2006, I think there was like, $200,000, of CapEx in the entire business, that that threw off Kozue I guess, like around $100 million, or royalty income.


Andrew: Yep. Perfect. So as you said, this is a great business for inflation, because especially what they own, they're just taking a percentage of the royalties, local ngapi, as you said, The Rock it's not very expensive to mine and sells. But if you want to transport it more than 50 miles or something to transport costs are going to eat into all the costs. So you get nice pricing power and everything. Let's talk valuation, right. So great business. How do you look at the value of this? And I think this is one of four different pieces of value, just so people can keep that in mind as we do the sum of the parts. How do you look at the value of this business?

Bill: So if you look at you know, a company itself has kind of, you know, in their investor day presentation, they have a great investor presentation, and they have kind of said that you know, more Marietta and Vulcan are good comparables, right? And they use Evie to EBIT up metric. But the reality with this is that I think you really shouldn't be using Evie to EBIT, right? Because they have no CAPEX, I suppose. Right? And Vulcan has CAPEX, right. So I think if you look at more Marietta and Vulcan, I think they trade at over 20 times, which will give you invert that that's about a 5% cap rate. Right. So So, on a run-rate basis, this business royalty business is doing about $10 million, in royalty income. Now, the reality is that all you're doing is you're sitting around cutting, you know, royalty check, right, your staff, the satellite with a little bit of extra kind of GNA, overhead, whatever they want to sell at. This is probably a 98% EBIT margin type of business. Right. So you can use the revenue as like.

So if you do 10 million divided by 5% cap rate, right? I mean, that gets you to two to about $200 million, roughly, right. And now there's, there's more to it, right, they just pass it, we just pass it infrastructure plan, right. And spending on infrastructure projects has got to go up to 20%. It's commonly expected that, you know, on the investor day, they mentioned that we could probably see very large increases in pricing, and about 5% increase in volume, right. And that will probably translate into the royalty Inc, you know, revenue hitting about 12 million in the next two years. So you go out two years, you know, 12 million on a five cap. Now you're in that I think I think you're in a 240 range, right? Like, you're in a 240 range. So, but there's there's more to this business, right? There's more to this business, there's a terminal value component to this, right. Like, it's like, what step? It takes about 5% cap rate, like, Is that appropriate? Well, there's 60 year life, there's a 60 year life, right? When you DCF ever out, right? It like if you run the DCF with like a 4% price increase, and at 5% initial yield, like like that, that's a very, very reason because you're actually getting a probably like a 9% return on asset by owning this by holding on to it for six years. And you know, like we'd get really technical, it's probably worth like, it's probably got 100 year old life because as you dig down, you tend to find more rocks. Like from a county perspective, you can't really record it, right. But typically, when you dig down, you find more rocks, right? There's probably 100 year life there. Now there's a little more because they own to, they own all the land. When when the mining gets completed, they own all the land. And what's super interesting is that they own a site down in Florida in Fort Myer, where, where this like so big picture, they own 19,000 acres of land in Georgia in Florida and being a real estate nerd. Like I've actually physically seen all these rock quarries in person, right.

Andrew: Yeah, I have seen pictures of it you know, out there with hardhats.

Bill: So what's interesting is that there is a parcel of land and Fort Myer, where they're going to dig down and then this area is going to fill what this turquoise blue water, and it's been zone 401 luxury waterfront lakefront. Like it's the best business that I come upon, right? Because someone's paying you to dig out the rock and create an artificial lake for you. And then you now could sell the lakefront lots, right? Like I don't know a better business, than that. Right. And, you know, what we see on Zillow is that landlords down in that neck of the woods will go for probably, you know, we saw on a one-acre lot, probably one and a half million right today. And you figure but they won't be able to sell till 2028. So if you DCF that back at 12%, right, you know, with like little 3% annual price increases on it, you know, that gets us to about $16 million for that, for that what we should be able to get about $130 million in 2028. Right? Yep. And that's something that there's another kind of code for 1000 acres in Brooksville, which a few years ago was probably a depressed area, but with you know, Florida being so hot like it's about an hour north of Tampa.

I mean, that could potentially become like a housing development right? And we valued at 20 million. I think, you know, that's just like a little bit further away, right? So I think if you add everything up like it, you, you get to a high two hundred, three, you know, high 200. So like, right around that 300 million. But what's important to understand about this asset is that we've owned this company since 2015, right? Every year we sit down to do an evaluation, we're like, oh, like, like, yeah, they took more rocks out of the ground. They took like another 6 million or eight No, and then like tons of rocks out and around, but like the values increase, right? Because of that, because of that pricing power. Because that ability to keep pushing 4% cpi plus two and this is an acid that took us a long time to like understand but, um, but this is, you know, I'm starting to see the world the way they view it that that that, you know, between the multifamily and this like, like, I'd rather own this and you get, and you get in the long-run exposure to Georgia and Florida like, you know, we're demographics and you know, you got all the right trends going for you.

Andrew: That can be one of the most fun things about following a company for a while where there's like one segment or one thing they do where you just wish they wouldn't do this or wish they'd do something else. The company tells you to know, you're gonna love this gonna be so good. And sometimes three years later, you look, you look back, you're like, God, damn, why did those people keep doing that? That was so dumb, but I love it when it comes this way where it's like, no, they were right, this is better. But just to put those numbers in perspective. So right now, it's about $55 per share price for the whole company. You mentioned on the very low end, the first number you threw out was 200 million. And then as you started throwing in some more things, I think you said a $300 million, there are a little under 10 million shares outstanding. So we'll just round up and call 10.

But on the lowest end, this side of the business is worth $20 per share. On the higher end, it would be pushing over $30 per share. So what's that serious numbers right? Well, we've only talked about this one segment. And we've already got somewhere between 40% over 40% to over 50% of the value of the company. I think that's good on the royalty business. The second part, I'm just going to throw out the company, they have no recourse debt that you have debt, but it's all at the property level, not at the level, they've got $170 million or so of cash and 1600 70. I'll do the math for you. 10 10 million shares are under outstanding. That's about $17 per share. Do you want to say anything else on the cash? Because we will come back to it later when we discuss it?

Bill: No not really. I mean, I think I think that I think one of your questions is like the opportunity costs of the cash, right?

Andrew: Let's come to that later. Because I want to establish some of the parts and I just wanted to jump through the cash because you add that to the royalty business. And now we're talking like, Hey, we're at least $40 per share value. And we haven't even talked about the things that I think most real estate investors know this company for and get excited about. So let's dive into that. They've got a lot of real estate projects, asset management, JV. Let's talk about the last pieces of some of the parts here.

Bill: Sure. So I think this is a little bit hard to do verbally. You know, I think I think if you look at some of the photos, you know, they own a few multifamily projects, most of them Washington DC in an area by the National Baseball Stadium, and it's so they don't eight multifamily assets, right. And the way to think about is that there's a DC waterfront play, right. So Washington DC, kind of revitalize the baseball area that was kind of when the very rundown industrial area. And there's a lot of both private and public capital that went into it. And there was a couple called for the city for city enterprise that build out a big kind of mixed-use multifamily office that got bought by Brookfield, right.

And where their asset sits is they sit on the water between the Anacostia River and the Washington National Baseball Stadium. So inherently like Buffett talks about moats all the time, right? They're like, Oh, you want to own own own businesses with a moat? It's like, it's like, what is a physical book? A physical moat is a body of water, right? Where people can attack you right in the real estate business of moat is some sort of geographic constraint, right? Where, where people can't build anymore, right? So if you're right on the edge of the water, you got a real moat because they can't build anymore. Like you got that you got the river view. Right. And that's what gets me excited about the location right when you're in this upcoming like it's not up and coming, because it's already like one of them, you know, one of the fate favorite neighborhoods in Washington, DC. And what makes it cool is that you got this Riverwalk down there, you got an entire kind of park outdoor park here, you're about a 15-20 minute walk to Capitol Hill.

So you'd like there's, you will get the staffing, right. Like, like a lot of people who live in that area, is that they're there? 15% I think there's like military, there's, there's like if you watch NCIS, like on the outside, like, like, that's right next to there, right? You got Capitol Hill, a lot of people are lobbyists who live in these buildings. You got a lot of big four accounting people, folks who were there and those categories are about half of the residents. And what's most impressive about this asset, right people talk about, okay, like when you when we stress test, it's like How bad did it get right? Like, doing COVID? You know, that's 79 you know, which is what a building's on on the award of their occupancy like was only down about 1% And they kept red flag right, but it is one of the most impressive for an urban location. That's one of the most impressive performances that I've seen and you know, we like, we editorial position when we saw that, and then if you look at the mirror, which is a new building right next door, they went from zero to 45%. Lease and 2021. In q2, right, like they, it was leasing up with people using iPhones to light life, you know, kind of lie, like to give people life tours through iPhones.

Andrew: It's easy to forget, I mean, q2 is before that was right before the vaccine roll up really got going. Right. Like, by July, people thought that we were going back to normal, and then Delta and Omicron came back. But then q2, I mean, that is the right at the start of the vaccine days. So that was still a very tough time in New York City. I know, you know, New York City. Well, that was the end of hey, get four months free on a one-year lease in New York City, April and May were right at the end. So for them to go zero 45. That's pretty impressive.

Bill: But I think I think you're thinking April of 21. This is
2008 was April 2020.

Andrew: Oh, yeah. That is way, way worse.

Bill: But there's like no clarity. There's no clarity. They went from zero to 45. In q2, like when we were just locking down like, like, if you think about do you want to lease multifamily in an urban location, but this was like, not the time, and they got 45% lease in one quarter. I mean, now-

Andrew: I completely misread the investor presentation. That's way more impressive than I was, you know what I think it was I had a mental block that there's no way anybody could rent out a multifamily deal in April 2020. That's probably, yeah.

Bill: So I mean, it's like, I think if you start with the worst case, and you work backward, you say, How bad could it get? Right? This is the worst they could get. And they have this type of performance. So So I think in this category, on dancing on the marathon, it's kind of easy to value, right? Like the marathon when it's stabilized. There was a press release that said, If valued at $150 million, and then you can kind of like work through the 88 million that was a mortgage then. Yep. And like arrive at a value. You know, docks, I mean, I would generally use a $7.3 million. Noi, like, like, that's what we think when we kind of normalize like, what that will be an El Cap rate assumption is about four and a quarter, right, like, most multifamily in the US Tre in a forehand, though, with the Sunbelt being in the threes, right? And this is, you know, these buildings were built in 16 and 20. Right?

So these are brand new I trophy Class A, like a great location, waterfront, right. So, between these two buildings, we get to about 97 $98 million, like, like, caught 969 $7 million of equity value for those two buildings alone. Right. And then there are two more land parcels right next to it, that they could build without you that at about $51 million. And there's a lot of conflicts, you know, we've done a lot of digging, where there are land transactions sold in, in those areas that were away from the water. And they're generally, you know, we're valuing those at court, you know, 85 $85, a square foot, and those were from years ago, right, like, as a naval gets further build out that the value increases, using a comp further away from the river. Right. So we think that's very reasonable. And then there's 1800 hash rate. And Brian St. You know, we value that, that at 38. And Colet $59 million. And that's very simple. We're just using book value. Now, when you think about a real estate development, like you, you know, pour the foundation as you build that out as you stabilize and do the interior and lease it up, right. But the value gets created on a, you know, daily, weekly, monthly basis, right. But because of GAAP accounting, you say, it is worth you know, I like it is worth this initial book value. And then there's a quarter where they'll issue a press release and say, Oh, you created you double your equity value in this development project, right. And that all happens once.

And that's what happened with America, right? The marathon, I think in q1 or q2 of 21, when it stabilized, they came out with a big press release that says, either 40 $50 million of GAAP net income and you gotta adjust it for like the joint venture value, right? But nonetheless, what I'm getting at is that there's a big headline, there's a big press release, that's going to say, you know, there's a big gap income, a big step up, and what that what that is supposed to convey is that that's how much value they created through the development process. And they usually get that value from the bank appraiser when they put a permanent mortgage on it, right?

Andrew: Yeah no, they don't those can be my question. So where are you getting those equity values? It's not like they're, they're pulling them out of nowhere. It's either Hey, we sold A piece of this to a JV partner and this is the equity value that the value that or more likely, hey, you know, it's on our books for 80 million, but we just went in took out $140 million loans on this thing because it was appraised that 200 million or something is where you're pulling these numbers on the developer. So I'm pulling on the development projects, literally holding them from the 10 Q. Again, its historical cost, its historical costs from, I guess, like, but these two projects, you know, and these projects are like two to two years in two and a half years in, and they're, you know, in lease-up. And, you know, I talk a lot.

So, you know, I'll talk about catalysts a little bit, but I'll go through it, you know, they got a project down in, you know, bring Greenville, South Carolina. So now you're in like more Sunbelt territory. And those projects should do well. So if I aggregated you know, all those, all those assets, right? I got about a $297 million equity value in that in that bucket. Right. And this is net of debt, and then of JV interest, right, like, you know, there's a lot of like, so let's talk about like cat. So you do 296 divided by its nine and a half million shares that I use, if you close round it up, Bill, come on, is making the math easy. Yeah, no, make math easy. So you know, you're talking about like $30 a share in the multifamily. And this is probably one of the best portfolios because it's waterfront, it's, you know, it's in like, this really exciting neighborhood in DC, right. And like someone like watch someone like Brookfield, the home would be like a very much firewall like Avalon Bay.

Andrew: And you know, insurance company buying RD, lease style multifamily. So I think that's great. So let's just pause right here. So some of the parts, right, we've got $17 per share and net cash on the balance sheet, no recourse debt. So there's $17 per share ish, then we've got call it $30 per share in the royalty business that we mentioned earlier if you include the value of the fort Meyers land and everything. It's called $30. There, and then a little bit around $30, as well in the multifamily. So we've got 30 plus 30, plus 17 if I'm doing my math right on the fly, that 77. And I was probably conservative because I was using tenants at nine and a half. And then there's probably another 100 million of miscellaneous, you know, office warehouses and stuff. I don't think there's anything too chunky in there that we need to dive into. But again, that's another $10 per share, add all together, that's 87. Again, I was using 10, seven, nine half. So we're at your 90, Is that about right at that point?

Bill: Yes, that's that's about right. And I think one thing you may want to just take away from is that they do have some deferred income taxes, you know, as you sell real estate, and what they've done is they've done a really good job, either using 1031 changes or investing in opportunity zones for those taxes, right. So I think the actual record, the book value is something in the 50 $60 million range, but like, you're not gonna pay it today. And the opportunity's own has a lot of energy is where you hold it for 10 years, you kind of almost indefinitely, the further so I MPV it, and I call it 25 million, right? So you probably want to take two and a half dollars away from it, you know, and I think we're in the right ballpark like, like I have, in my model about an $89 value, like, you know, court like we're in the right ballpark for it.

Andrew: And look, if it's 86 versus 90, the share price is 55. So that's fine. So let me get into my pushback here, right? I think this is great. Because the thing that jumps out is me it's really hard to you know, people talk about the pre mortems, right, where you kill an investment for us, it's really hard to see how you do poorly too poorly here, right? You've got to a management team that seems committed to shareholder value that's done well over time. They're not raking their pockets with fees of $17 per share of net cash on the balance sheet that gives you a long way for downside protection. You know, dc, dc already leased apartment buildings. This is a great asset portfolio. So it's tough to kill yourself on the downside. But the things I worry about here are things like first opportunity cost, right?

Okay, I worried that this is an investment where 10 years from now you and I are you're beating me at croquet or maybe I've gotten better and I'm beating you but 10 years from now we're out in the croquet fields and I say oh, hey, how's that for pH doing? Say, oh, you know, it's great. And i ne v is at 180. Now it's at 140 or something right? So that's not too bad two and a half over 10 years but that's not outstanding, you know, we didn't make any great alpha so my first pushback would be just Are we really gonna make a lot of alpha here short of the you wake up in three months and they've decided to sell the whole company thing?

Bill: Sure. I'm in I think that. So what's important is so let's talk about catalysts, right? Like why does it make the gap close? And I think that if you know. The way that the so a couple of things, let's talk about Catalyst, and let's talk about their track record. And I think that tracker is also really, really important items to talk about, right? I think that if you look at how they've allocated capital since 20, oh, 2015, you know, when we sort of own this company, every project that they've done, they have achieved by my estimate, open, you know, 20% IRR or higher. Okay. They, you know, that that applies to multifamily development that applies to warehouse development that applies to the opportunity to sick residential, you know, homebuilding lot development, where they're getting 20% IRR on those projects as well. Right.

So I think, I think when you and they're very, very selective, right, like the process is that they've seen 100 deals, why am I talking with them is leasing 100 deals, and they've only invested about a handful there. And that was since they sold the portfolio to Blackstone, right? So I think I think that's key. Because if you're invested with family where they could get, they could get you 20% IRR on the capital that they do deploy, right. They're very conservative, very selective. But when they do put capital to work, you're getting points in IRR on it. Right? I would say that I'm willing to bet that over time, people will start to agree with me because of that track record, right. Like we're talking five years from now. I think people will see a lot of these assets stable, you know, stabilize and, and there's also a, on the capital side, there's a resource conversion, right, I think I think it was Marty Whitman, who coined the term resource conversion, right? Like you take land that's thrown off any cash flow, you put a building on it, right, now throws off, you know, call it like seven or $8 million of net operating income and you put something on it, right? Like, you could, you could, you could get $5 million.

And were like, even as soon as two years from now, like, fast forward, you're in next year, right? You're in 2023. By my investment, I think they could do $35 million of FFL, or, you know, operating cash flow, right, and most REITs, most high-quality multifamily REITs, trade at 2530 times FFL. And that's just, you know, you could pull up like, you know, the big industrial reads, The Big multifamily reads as a high quality read, will trade at 2530 times for multiple, right. So in the short term, there's that catalyst potentially working for you, right? In that, you know, I like to own these assets, when it's hidden land value, that doesn't grow up in cash flow, and over three years, it gets converted into cash flow, and then people could put a multiple on and say, oh, yeah, that office is cheap. Right. So I think that's, that's one of the mechanisms. Right.

The other angle is that you know, you mentioned, the opportunity costs $170 million of cash, right? You know, they're putting that to work. And, and part of the reason why they have this cash is that it's so good at these developments, you know when they do a development project, that sometimes they'll finance it with both equity and preferred. And when it gets they will, as they get that preferred back now, they got more cash on the balance sheet, right. They recently identified a couple of projects that so remember why this is a company that has its roots in warehouse development, right, they built up this warehouse portfolio from nothing to fully own square foot and solar devices. So they recently gain, you know, the, they have the rights to about 2 million square foot warehouse. So you figure to develop, you know, usually buy the land, I think you know, what, they've been buying it for about 10 $15 a square foot, right, but it's worth 20 30,000 square foot, but will cost him probably another nine hours to to to kind of build the shell build the foundation and get that lease. So there will be a use of very productive use to that to that capital. And, you know, they'll probably do 40% return on the asset on that deployment into the warehouse base.

Andrew: No, that's perfect. That was going to be my next question on how they pay cash. Let me just ask two questions about the warehouse. Yeah, so obviously the first sale of the warehouse they did from the kind of 2010 to 2015 and six blocks, and that was great. Do you know what the IRR that they invested that they kind of realized? That portfolio was?

Bill: Sure I mean, I think I think the cost basis was about 180 mil like some somewhere in that 180 to 200 million, and they sold it to three for 359. Right? And a lot of it was built now keep in mind, they're also collecting, I think was doing about $21 million. And then I bring a con when they sold it right? They were getting $20 million of cash flow every single year and they sold it for this essentially double what they pay for. And if you do the IR and something like that you're like, in the teens, and the thing is these guys, the family doesn't use a lot of leverage, right? Like, they use a lot of leverage, like we probably have an IR-like lever IR in the 20.

Andrew: If Bill and Andrews optimally leveraged finance shop had done what they did, we would have been in the 30%. No, that's great. So second question, this warehouse portfolio that they're about to build up, you mentioned, hey, they got the land for about $10 per square foot, you think the lands was $20 per square foot, and they're gonna go build it out, you know, $90 per square foot of cost, but the build-out and I are sure at the end will be very successful as it was a bit. I mean, my pushback there would be alright, these guys have been great at developing but it's not like the warehouse game is exactly a secret at this point. Like who's selling to them for $10 a square foot when there's a warehouse by at this point? How are they getting access to this?

Bill: Financial question and this is where I think that the thing about like, their experience and where they have a lot of knowledge, right, they're, they're like, very, in the DC, Maryland, like in the middle Atlantic area, that's there, that's their backyard, right? That's where they have a real edge. And, and they're, you know, historically, from a corporate perspective, they built 4 million square feet now everyone's looking to do to the warehouses, right? Because that's, that's one of the hottest asset classes, the reality is that when you buy something for $10 a square foot, you got to take the time to get that entitle. And get that, you know, get that approved, get that ready to build, right. And, and that entitlement process, remember going back to the $6 million GNA, right?

That's what you're paying these guys for. Right? What you're paying these guys for is that anyone could buy a parcel of land, but to get it to shovel ready. There's a value creation process. And, and, and that's part of it, like like, it's like, what why did you buy that? 10? I think one, they found a good deal. But like, maybe someone else may have to pay 15 $20 a square foot, but to take it through entitlement. You know, there's a, there's a time component, and then there's a cost component to it. Where I mean, frankly, you know, when I spoke with them, they think that you got shovel ready land in the middle attic right now. It's probably 35 $40 a square foot. Yeah. Yeah. I mean, that's, you know, we own another warehouse company. So we're very, like, you know, in tune with, like, what land costs, what construction costs, like what rent is in each market. So this is, you know, this is a market where I, you know, I remember correctly, I think I think for a brand new class, a warehouse, you're getting $7, a square foot net, right? So if you could buy land, a tenant will take it through entitlement and built, you know, the shelf when it was like you're getting your building to 7% cap rate, and the warehouse cap rate is probably, you know, in that market life on a quarter today, you know, so like, you're creating a ton of value, creating value by developing these warehouses.

Andrew: Let me ask this question. You mentioned earlier, the private market valuation versus public market valuation, and people go, I put this in my notes, like, I can point to a lot of REITs, where I think they would say, hey, our Private Market Value is a lot higher than our public market value. You know, the one I put in the notes was SL grade, which is all New York City. Now, that's New York City, which has its unique things. They've been saying it for a year, they've been pointing out, hey, like, our navy is way higher than our stock price do they bought, they buy back shares pretty aggressively. They have slides, they say, look, we've been saying this for years. And every time like, this is not some illusory thing. We sell assets at or above our nav there are, you know, there are lots of comps, where the building next door sells to us for a 3% cap rate in our nav has our building a three and a half percent cap rate.

So they've been saying something similar for years, right? It's actually kind of I think it's along the same lines. There. I think they say their nav is like 115 and their stock 70, which is kind of the same as you say, nav here is 90 and mph is 55. So I guess my two questions here are, again, opportunity costs, why are pH over one of the many other REITs that are trading at a discount to private market value. And then the second thing is just as an investor, whenever I look at these things, like I get it, like I can see and not just every SLG Bernado all these guys, I can see that the public market, the private markets are a lot higher than public market. But I just say like, what is the public market missing?

Bill: Public markets are smart, they're not going to discount a whole sector for no reason. Is it just like, they think cap rates are unsustainable? Is there something else they're missing? Well, I think I think so. That's a good question. And obviously, this is something that I pay a lot of attention to, in my premortem analysis. Right. And I think I think in the case of Vornado so great, I think specifically has to do with that these are office assets, right? And if you look at the last 10 years, kind of rent growth, what you have to pay in terms of concession and leasing commissions and TR it like get an office lease-up in New York City. What the actual owners keep hasn't gone up a lot. Right? Like, like, it's just been a very challenge. And then you got COVID. And this whole work from home, I think I. So a better way think about is terminal value is extremely important in real estate because you're naturally buying assets at, you know, caught, like 20 times cash flow, right. So, you know, what, if there are any sorts of doubt on terminal value risk, right, automatically, it kind of doesn't work. People may not want to own that, right. So like, let's, let's, let's kind of walk through this, what gets me excited about FRP? Is what let's, let's look you got an infrastructure bill, right for the next five years, that's going to result in in in strong demand for aggregates. Right. And then the other thing is, what how would you impair you know, 14 sites and Georgian floor of aggregate royalty business? It's like trying to try to nuke that right?

Andrew: If you want to get crazy, like one of the recent targets I had Vadim on and we talked beat that and one of his things was, hey, you know, I can't they're gyms. And there's an out-there risk where we all go into the metaverse or we invent a pill that you take once a day and get you super fit. I mean, we could invent a risk here where Georgia and Florida Florida are underwater, five years from now from global warming or something right now. That's great. But you can invent some strange receipt. One thing, my wife always talks like, oh, we should buy real estate, and sometimes we should buy an apartment. Sometimes like, Yeah, we should let's get a rent payment out of here. But other times like, Well, it sounds nice when you've been in New York City, and you're writing the 80s to 2020. Boom. But if you did Detroit real estate from 80 to 2020. I don't think anybody thought Detroit was like going downhill at the time, but it wouldn't have been great. So I don't know. I'm kind of rambling, but I do hear you on that. I agree with the Georgia Florida feature.

Bill: I think they joined Florida. The I think given the let's say, for the next 1020 years in terms of kind of the tax regime in terms of demographics, like where people migrating to the demand for homebuilding housing affordability I think, I think you don't have any of that New York City, like will people go back to the office like, like, you just don't have any doubts. Right. And I think I think that's a critical factor. And like, you know, people pitching me will bill what several times is real cheap, right? And I've been pitched that name for the last 10 years. And it's been cheap in some departments. Oh, this is super important. And I don't mean to like, you know, talk negative about surcharging, Messrs but I think-

Andrew: I'm just laughing because once every two years I look at Sarah Taj on the same thing. I'm like, it looks cheap. But there's a lot of heavy lift in here. This is it's too hard, man.

Bill: Well, there's, there's a there's something to be said about owning an asset where you can sleep well at night, right? You pay a 5% cap rate for 20 Multiple, but you could wake up next year, we got five years from now 10 years, 10 years from now you're like like they got pricing power. This is not being impaired, right? Versus like retail, right? Like, even five to 10 years ago. But you know, I had this conversation when people say, Hey, Bill, what are you looking at sabotage is so cheap on some of my interests me less when you're buying into a melting ice cube or potential melting ice cube.

Andrew: Yeah. No, I, the older I get, you know, Warren Buffett said, I think there's Buffett time is the friend of the wonderful business and the enemy of the poor business. And it sounds so trite, but the older I get those trite Warren Buffett sayings they have so much and I think one of the reasons buying good businesses buying good assets, like your with fPh versus probably midway Cirrus is does have some good assets. But the nice thing is if you buy it for Pah, and it is a good business, and I think you've said you've made a good case like the value just keeps growing. So yeah, maybe you're 55 to 90 get doesn't close until they announced the deal 10 years from now, but guess what, the value just keeps growing over time. So as maybe the discount stays the same, but it just keeps going. And that's just such a nice tailwind to have behind you.

Bill: Well not meant by going back to our original math, right. Like quite say it takes 10 years for you to close this gap right to I don't know whether like investors paid now for like, the actual prime market value or you get or you get, you know, get bought out or something, you know, something some sort of event happens. You know, if you think the private market value could compound at 10% a year, right and why 10% Usually, when you put leverage, you know, usually you put mortgages on a good multifamily asset, right, you could usually get to about a 10% lever IRR. That's usually from my experience. I mean, that's why pension funds endowments, the big insurance companies they all love these multifamily assets, right because we put 50% mortgages on it with like three, three and a half percent debt on it and get by To 3% rent increases, you could get to a 10% lever IRR on Yeah, right. So, so the anger business, you know, you get a 5% yield, you get like a 4% price increase, you get to around a 9% return on that without the use of any leverage, right.

And then any sorts of development that they do in the other pocket, they tend to hit, you know, 15 20% IRR, the only project that they haven't done well is this kind of like, mixed-use retail slash office asset. And that's been a little slow to lease-up. But that's like 1% of the Aum. I mean, other than that, and then all their projects since 2015, have been home runs. And I think that's the aspect that the market doesn't necessarily appreciate, right? And I just kind of look at it and I say, I kind of look at FRP my portfolio like, Why do I own it? Like I kind of view, it as drafting, like a really good offensive lineman, right? Like, they're not the like, like, this is a position. That's where you're like, you draft a really good left tackle, like someone like Joe Thomas of the Cleveland Browns, and you're like, he's got a lie, you know, a lot of value for you for the next 10 years.

Andrew: How can you argue with the last 10 years of Cleveland Brown football results, Bill? Come on, you can't bring the Cleveland Browns up here.

Bill: Well, I'm talking specifically about Joe Thomas, who I never miss.
I know I this is, I agree.

Andrew: This is one of those. I mean, I'm just getting a chance to go through the podcast, but it's almost like everything you look at it's the same way I view charter in my portfolio, like everything you look at, I think charter can do mid-double digits IRR pretty easy for the next couple of years. Like I feel so common in terminal value. Everything I look at, it has to be compared to buying more charter and for you, I'm sure it's similar to FRP His I'm getting to that 40% discount to NAV the NAV is gonna grow 10% There's no recourse debt so it's really hard to get it you know, like anything you can do that sleep at night double-digit IRR like it's tough, tough to beat that. Let me ask you, I've got two more questions here. First, as you know, I share repurchases I'm just obsessed with share repurchases. I love share repurchases. I and I always find it interesting when a company goes from aggressive share repurchases to slow share repurchases. And the company, I tweeted this out, you know, they said, Hey, in 2020, we did a nice job buying shares back our stock was screaming cheap, and we took advantage and I think they retired about 5% of their shares outstanding, I'd have to check my math, but they didn't show buying back shares. They're not buying back shares today, despite the undervaluation. We've discussed a great balance sheet, no recourse debt, they say, Hey, we're not buying back shares. And that's fine. They've got some projects, we talked about the warehouse projects that can deliver solid errors, but it does strike me as interesting. If the company isn't buying back shares. And their history is when they're undervalued, they buy pretty aggressively. Why should I be buying chairs today? Does that make sense?

Bill: Yeah, no. That's very valid. And this is something that took me a long time to kind of like understand and one so this right, so first of all, like, not every company is like a John Malone share buyback optimizer. Right. And, and, you know, my understanding is that, if you will get previous, the higher range of previous share buybacks, it's in the high for the high 40s. Right. So you could make an argument that at $55, right, like, you could potentially where they will stop, I'm not sure it will probably be a 49 hour like, as a high forehand home. Right is where so you're maybe sent off. So that's, that's just another reference point. Um, in terms of like, why not? I think that you know, like, like people say, yeah, there's so many companies out there trading at some parts discount, right? Like, why on this one, right. They're trying to solve that problem. Right. It's like, I think, I think sometimes shareholders could kind of be like, like, oh, like why would I want to own it? I think what they're trying to do, I think they have a board with some competent people on it, who told him well, you know, what, like for you to get fair value, you need to convert these assets into cash flow and assets. So, in the long run, Wall Street could you know put a cap rate or put an FFL multiple on it and you will trade to full value and you know, another company that we own is a company called Griffin industrial which is now converted into inducing Realty trust, right. And get belly owns a lot of that company.

You know, I spoke to Mario Bao and at a conference very briefly, and you know, Gabelli was very public about asking them to buy back shares right. If you look at what happened with that company, have they bought back more shares? They will own a lot of land in Connecticut with what very low cash flow right that the market would not care about. But instead, they pivoted into Lehigh Valley. They went into Charlotte, they sold land, and in Hartford, Connecticut, and they use 1031. They what diversify went into another market now their warehouse platform, right? I think when it comes to real estate, they're unique. trades in terms of like, how do you this is what I think about daily, right? As you mentioned, charter Charter is a deeply liquid stock where you could wake up on any given day, you could buy back as many shares as you want, right? There's, there's, I mean, there is trading liquidity, right. And I think like how you solve that, how you close that gap, in the long run, is, you go about the route of resource conversion, right, you convert your land into cash flow and assets that the market could put a cap rate on or multiple on, and then you build up enough of it, where and then it brings in enough investors if you so if you bought our shares, you like, you know, further creates a liquidity problem, right? Like, like, like, as a value investor, you're like, you're like, Yeah, but like, if you're at a discount, like, like, just my dad, you create so much more value. Three, I was like, at the same time, why, like, if someone who's big want to buy, you know, build a tunnel in opposition, it's gonna take a long time, I think, I think there is an element and 10 years ago, I was said, That's hogwash. Like I don't care, right? But trading liquidity and who could own the stock makes a huge difference in terms of the discount that you trade yeah?


Andrew: No, I 100%. Agree. And as you're saying here, like, as we're talking, it's almost the end of the trading day, the stocks traded 3000 shares, right? So that's 55 shares, I'll make the math easy on myself, we're talking $150,000 of trading value, like, yeah, it'd be nice if they were buying back shares at this discount, but they can't buy back all of the shares, right? So it's gonna be a drop in the bucket, you know, for these companies. I'm with you. Five years ago, I would have said, Hey, screw that they need to buy back shares. And I'm like, Well, look, there are dynamics behind this, I'm sure they're trying to create value. And honestly, with that trading volume, it might not even be worth the headache to try to retire shares versus Hey, let's go do 20% IRR is to build out the next great warehouse platform and we'll sell it again to Blackstone in 2024. And make a huge premium something. Last thing I said a couple of times. One of the nice things here is great DC multifamily assets, right $17 per share in cash on the balance sheet. I think pretty inflation resistant, you know, everybody's talking about inflation these days, you've got the ROTC course, multifamily should be pretty inflation resistance because your leases are turning over about every year, you're in everything. What kills you here? What keeps you up at night, when you're investing in FRP? Ah, what am I missing as a big risk here?


Bill: I think that the, you know, what, we talked about what this continuing to trade out of this big discount in there, right? Like, like, if, if this professional, he trades at a 6% discount in there, then you may, you know, like that thing, like your return is lower. Right, like that, then. So that's one concern. You know, I tend to think, yeah.

Andrew: That doesn't kill you that just, you know, you're
fundamentally right. Yeah, that's just hey, you know, I'd like to do 15% annually for here, but I ended up doing 8%. Right. It's not the end of the world. It's not great, but it's up and the world is there. But it sounds like to me, you're saying it's tough to see something that kills you?

Bill: It is it is. It's tough. You know. You know, my lawyers told me to alter, alter one more. Yeah. You know, lots of people said real estate, one of the reasons it's been such a great asset over the last 30 years is interest rates went from 15 to zero or something, right? You even said when you were talking about the math behind them running, building warehouses, if I remember correctly, they built it. And, all in math, they can build it to about a seven or 8% cap rate. But warehouses are worth about a 4% cap rate, and I'm just making it, so they built it real cheap. I do wonder, you know, interest rates, we get seven hikes this year or something. Interest rates are fundamental gravity is going from I'll just going up to 4%. Right? Yeah, free to go from four to six and a half percent. All of a sudden, these warehouses that we thought they were building creatively, they built value-neutral, and there's not that much margin of safety there where if interest rates are a little higher, or cap rates were a little higher, for some reason, they built out a loss. Do you worry that so much of I hate says because, again, interest rates higher inflation is higher? So the multifamily property is good, the quarries do good. But do you worry that some of it is just interest rates are so low that almost any build-out looks good right now?

Bill: Yeah. So I mean, that's, I think, I think that's a great question. Right. Like, and frankly, that's a question that a lot of investors that are you know, 50 and younger, right? Or maybe like definitely 48 Yeah, they're like, never have to deal with the right like, as we've been, we've been in this since the 80s. We've been climbing interest rate environment, right. And it's something that I'm very, very common sense Enough. So let's walk through the mechanism, right? I think when you have a rising interest rate where it kills you, and this is what I saw that same group a walk, right? Usually, you get into a lot of trouble if you get a mark to market, it is not as bad. If you get a sudden need to repay the principal, that's when you get into a lot of trouble. Right. And, and I think that if you look at how they're financing it as Doc said, Marin has 12 years fixed rate of 3% interest, right? You could say if interest rates go up to 5%, tomorrow, right on a mark to market basis, you may say, oh, that's, that's worth a lot less now. Right?

I think the mitigate is that you don't have to deal with that balloon payment until 12 years from now. Yeah, and 12 years from now, if we're in a 5% interest rate environment, there's probably a pretty good chance, you're able to go from two 3% Rent decrease to five or 6% in rent increase, right? Because it probably indicates like a highly inflationary environment. So I think I think when you paint it, like, like you got to pay attention to not just the you know, the terms of the debt is just as important as the interest rate. Now, I, you know, we done an internal analysis, where I think if you get to a six cap for 6% cap rate for the multifamily and you put a 6% cap rate on the aggregate business, and kind of like impair everything else by 50% you get roughly what the what the stock is trading at today. Yep. And and I think, I think like, like if you ask most private guys, like would you want to buy a trophy waterfront class, a DC multifamily at 6% cap rate? Like I mean, I think there's gonna be a lot of people are like knocking down doors, I, you know, look into by that.

Andrew: It reminds me of a lot of times all talk to someone else, say like, oh, this company just to make it simple trades for eight times EBIT on all the columns straight for 10 times EBIT, and they'll say, and I think this company slightly better, right, let's say, Oh, well, what if it comes down to eight times? He does? And I think, you know, it sounds interesting as a pushback, because the bear case always sounds more interesting. But the answer is, well, I'm already buying an eight, so everybody else is down 20%. And I'm glad and in your case, like the market is already pricing in at a 6% cap rate. So if everything comes to a 6% cap rate, well, we got to cash in the meantime, and we're breakeven, so again, it doesn't kill you. Anyway, we're running pretty long. So I just want to last alternate for PAH I think we did a nice job covering but anything we didn't cover you wish we did anything you wish we had hit a little harder?

Bill: Oh, no, I think I think I think we did a pretty good job. Maybe one last thing would be I mean, there are ways to hedge out some of that interest rate and market exposure like, you know, this is a smaller company you could buy you go 15 20% Out of money just buy puts in like an Avalon bay or like a Prologis or you could even buy 5% out of the money puts in barbarian and welcome right like like, as part of risk management for my portfolio. Like I just rolled this. And you know, my bills out here worried about giving it and then he's talking complex hedging strategies.

Andrew: No, I'm, I'm total with you know, like, again, it comes back if you're buying something for 8x. And all the peers are at 10x. Like, you could just take the market risk, or you can go hedge with peers, you know, I think I've looked at a lot with a lot of oil companies seem to imply like $55 oil and their stock price, but oil is at 90, there are ways to hedge that right. So and capture that spread again, that gets more complex. Everybody should do their work to their diligence, but I'm definitely with you there anything else that I've heard PH?

Bill: No. I mean, I think I think I think we did a pretty good job covering it. And this has been a fantastic conversation. I've enjoyed it.

Andrew: Hey, I know you do great work. I saw all the photos of you with the hard hats here. But this has been even better just like diving in here. This is why I love the podcasts. I mean, these things. Bill Chen is, a great real estate investor. Thanks so much for coming on. We're gonna have to have you back. So you can tell everybody your New York City apartment thesis at some point because that's a banger one as well. Hey, you know, maybe I didn't come back to talk about that one. Bill, thanks so much for coming on. And we'll talk soon, buddy. Alright, sounds good. Thanks.

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