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Should You Consider Investing in FRP Holdings (FRPH)?

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East 72, an investment management firm, published its third-quarter 2021 investor letter – a copy of which can be downloaded here. A quarterly portfolio gross return of 2.1% was recorded by the fund for the third quarter of 2021 and a +36.7% gross return over the fiscal year. You can take a look at the fund’s top 5 holdings to have an idea about their best picks for 2021.

East 72, in its Q3 2021 investor letter, mentioned FRP Holdings, Inc. (NASDAQ: FRPH) and discussed its stance on the firm. FRP Holdings, Inc. is a Jacksonville, Florida-based holding company with a $530.7 million market capitalization. FRPH delivered a 23.82% return since the beginning of the year, while its 12-month returns are up by 34.45%. The stock closed at $56.40 per share on October 13, 2021.

Here is what East 72 has to say about FRP Holdings, Inc. in its Q3 2021 investor letter:

FRPH (all figures in US$) is an unusual $526million equity capitalised company, in which we have previously invested. FRPH stands for Florida Rock Properties Holdings and was a spin off from Florida Rock Industries (FRK), an aggregates business in 1986. If you think about Boral or Brickworks with their “mined out” land, selected quarries or other surplus property, FRPH was akin to placing that into a separately floated vehicle14. The largest shareholders in FRPH are the Baker family who are descendants of the original founder of FRK, Thompson Baker, in 1929.

FRK itself was acquired by Vulcan Materials in 2007 for $4.7billion. The quarry retention in FRPH provides an annuity revenue stream, mainly from Vulcan and Martin Marietta, on a minimum royalty and per ton basis across 14 properties, which averages out at just over $1.00 per ton of aggregate. The royalty yielded $9.5million over the past twelve months to June 2021, and is immensely valuable whilst producing a virtually risk free, stable growing cash flow, as well as two specific sites which are being prepared for a “second life” as development properties.

FRPH has four segments: • the Mining royalty lands noted above, which based on comparable multiples of aggregates companies potentially has a value of ~$140million, excluding “second life”; • Asset management which owns three commercial properties (2 in Maryland, one in Duval County, FL); • Stabilized JV’s which own 66% and 70% of two waterfront apartment buildings totaling 569 apartments at Dock 79 and Maven on the Anacostia waterfront (“Navy Yards”) in Washington DC plus 27% of a smaller complex in Maryland; • Development which is a mix of 11 JV’s across business parks, residential, and mixed-use projects, with a carrying value of ~$145million

FRPH has a narrow equity base of only 9.4million shares (priced at just over US$500million) has attached all debt ($178m) on a non-recourse basis to the waterfront apartments, has $138million of cash at the head corporate level and has demonstrated a past track record of strong capital management and recycling of assets on an opportune basis. Most notably, FRPH sold its 41 property industrial portfolio to Blackstone in May 2018 for US$359million.

We believe the assets are underappreciated at the current stock price given the value of the existing residential buildings in Washington DC, to be supplemented by further development along the riverfront in a high value precinct adjacent to Nationals Park15, in a city with an extremely stable workforce. Additionally, there is protection form the mining royalty and onbalance sheet cash.”

Based on our calculations, FRP Holdings, Inc. (NASDAQ: FRPH) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. FRPH was in 7 hedge fund portfolios at the end of the first half of 2021, compared to 6 funds in the previous quarter. FRP Holdings, Inc. (NASDAQ: FRPH) delivered a 0.46% return in the past 3 months.

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by 115 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.

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Disclosure: None. This article is originally published at Insider Monkey.