Q3 2021 Alexander & Baldwin Inc (Hawaii) Earnings Call

This call and presentation that are not historical facts are forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.

Involve a number of risks and uncertainties that could cause actual results to differ materially from those contemplated by the relevant forward looking statements.

These forward looking statements include but are not limited to statements regarding possible or assumed future results of operations business strategies growth opportunities and competitive positions as well as the rapidly changing challenges within the Companys plans and responses to the novel COVID-19, pandemic and related economic disruptions.

Such forward looking statements speak only as of the date. The statements were made and are not guarantees of future performance.

Looking statements are subject to a number of risks and uncertainties assumptions and other factors that could cause actual results and the timing of certain events to differ materially from those expressed in or implied by the forward looking statements.

These factors include but are not limited to prevailing market conditions and other factors related to the company's REIT status and the company's business risks associated with the COVID-19 pandemic and its impacts on the Companys businesses.

Results of operations liquidity and financial condition evaluation of alternatives by the company related to its materials <unk> construction business and by the company's joint venture related to the development of cuckoo ULA generally discussed in the company's most recent Form 10-K Form 10-Q, and other filings with the SEC.

Information in this call and the presentation should be evaluated in light of these important risk factors.

We do not undertake any obligation to update the company's forward looking statements.

Management will be referring to non-GAAP financial measures during our call today.

Included in the appendix of today's presentation slides is a statement regarding our use of these non-GAAP measures and reconciliations.

From this presentation are available for download at the Investor section of our website at Www Dot Alexander Baldwin Dot com.

Canada is a focused commercial real estate company.

Now onto our third quarter results.

Our commercial real estate portfolio produced excellent results. Once again this quarter delivering core F. F. O of 25 cents per diluted share up 56% from the same quarter last year.

This performance reflects not only the strong fundamentals of Hawaii's economy, but also the strength of our portfolio and the leasing environment.

The foundation of that strong leasing environment is Hawaii has dramatically improved economy.

We spoke last quarter of the significant recovery during the first half of 2021 and now that we have dodged the worst of the Delta variant our outlook remains very positive the states unemployment levels continue to improve thinking to an 18 month low of six 6% in September.

Passenger arrivals for peak summer travel in July were at 89% of 2019 levels.

And while we did have a small pull back due to the delta variant expectations are for a strong holiday season.

Further just this week, the governor announced loosened gathering restrictions in Hawaii and alignment with federal International travel requirements, which should help welcome more meaningful levels of international travelers beginning November eight.

It's important to note that the state's strong tourism levels. So far in 2021 are with essentially no international travelers.

That's a great sign for further growth to come.

Although we're not heavily dependent on tourist activity to drive traffic at our community based retail properties. The resurgence in Hawaii tourism is providing a broad benefits of economic activity, which is driving positive results across our portfolio.

The market for residential real estate also remained strong and we continue to see good sales results at <unk> in the third quarter.

Where we closed 11 units in our bulk parcel generating $10 million in total cash proceeds from joint venture projects during the third quarter.

Year to date at the project, we've closed sales of 37 units in two bulk parcels, making this the best annual sales result of the last decade.

It generated positive EBITDA of two point to a positive adjusted EBITDA of $2 2 million.

Reflecting another quarter of sequential improvement in performance.

We're encouraged by the underlying factors that should support a continuation of this positive trend most notably we are finally seeing more of the backlog that we built in 2020 and added two in 2021.

Be converted to contracted work.

As a result work has added I'm sorry, as a reminder, work is added to backlog.

When were confirmed as the winning bidder, but it must be converted to a contract before we can do the work.

Generate the revenue the.

This significant uptick and contracted work in the third quarter as shown in the chart on this slide.

Positions us to be more productive and drive greater earnings in the quarters ahead already in the fourth quarter. We are starting to see the benefits of these additional jobs with an uptick in paving volumes.

With that I'm pleased to turn the call over to our new Chief Operating Officer, Lance Parker, who will review our recent commercial real estate highlights rents.

Thank you, Chris beginning with operations in the third quarter of 2021, our CRE portfolio continues to perform very well.

NOI is up 30% year over year, reflecting greatly improved tenant performance and collections.

Acquisition in two years.

Be at a smaller scale using $10 33 funds that were set to expire we have acquired an industrial property located within the urban core of Honolulu.

The adjacent to the port in minutes from the airport.

It's great to be back in the market and growing our portfolio, especially given the strong industrial fundamentals and our desire to extend expand our industrial footprint.

We look forward to sharing additional acquisitions as we pivot towards CRE portfolio growth.

With regard to our redevelopment activity I call. He park shopping center has reached substantial completion of the central shops.

Continue on the tenant build out in additional refresh work is also underway to upgrade and expand this well located center in Kailua.

We have realized incremental NOI here in 2021 and will receive additional income next year as leasing is completed.

With anticipated incremental annual NOI uplift of one five to $1 7 million.

Representing projected returns of eight 2% to 9%.

We are pleased to share the next property in our redevelopment pipeline minoa marketplace.

Plans are to improve the shopping experience of this grocery anchored neighborhood center.

Or 30% higher than the third quarter of 2020.

Turning to leasing we had a record quarter for new leasing volumes with 34, yes. Overall, we completed 77 standard leases totaling approximately 216000 square feet.

For comparable leases spreads were two 3% portfolio wide and eight 7% for new leases. In addition, this quarter, we signed three COVID-19 related lease modification extensions down from 16 in the second quarter and totaling approximately 5000 square feet at a weighted average term of two and a half years.

The continued high volume of leasing activity reflects the exceptional tenant demand and excellent fundamentals, we're seeing across the Hawaii market.

Our land operations business produced revenue of $5 4 million and generated EBITDA of $2 million in the third quarter of 2021.

Included in the quarterly results is $2 $5 million of joint venture income primarily related to <unk> were 11 units and the bulk parcel was sold resulting in total cash proceeds to A&P of approximately $10 million.

As Chris mentioned due to the sales activity at Tukwila, we received a partner distribution for a third straight quarter.

Our materials and construction segment generated adjusted EBITDA of $2 2 million for the third quarter with the <unk> with the sequential increase attributable to the commencement of paving projects.

Finally, with respect to our G&A, we are pleased with our consolidated G&A reductions and expect the decreases to continue as we advance our simplification and streamlining efforts.

For portable G&A expenses for Q3 were $12 6 million up from the third quarter of 2020 due to a combination of the very low G&A levels experienced at the height of the pandemic last year and the 2021 costs related to the pension termination process and refinancing transaction.

We now expect G&A to be in the range of 52 million to $54 million. This year well below our 2019 G&A year end total of nearly $59 million.

Reflecting the steady progress we've been making in our streamlining efforts.

Let me now turn to our balance sheet and liquidity metrics. This quarter, we were within our target leverage range of five to six times net debt to adjusted EBITDA and had ample liquidity at quarter end.

We paid off two small mortgage loans totaling $14 million with a draw on the credit facility, adding these properties to the unencumbered pool of assets, which now exceeds $1 2 billion in gross book value.

At September 32021, our total debt outstanding was $628 million and we had total liquidity of $383 million, including approximately $26 million of cash and $357 million of remaining capacity on our credit facility.

During the quarter, we established an at the market equity issuance program to go along with our existing share repurchase authorization.

The ATM is authorized for issuance of up to $150 million of common stock.

During the third quarter, we did not issue any shares under the ATM or repurchase any shares also during the quarter. We completed the recast of our credit facility, increasing the total capacity from $450 million to $500 million.

In order to repay the $50 million bank syndicated term loan extending the term out to August 2025, and lowered spreads by up to 80 basis points.

Under the facility, we may further reduce our cost of funds by achieving an investment grade credit rating as a ratings based pricing grid was added to the agreement among other improvements.

We are very happy to have the support of the banks and other lenders to enhance our capital markets capabilities and options. These steps are intended to ensure we have all the necessary tools to maximize shareholder value as a REIT together, our new credit facility, the ATM and our share repurchase authorization will provide us robust capital markets tools as we complete our simplification.

And pivot to growth.

Almost based incentive compensation accruals.

With that I'll turn the call over to Chris for his closing remarks.

Thanks, Greg.

We were very pleased with our results this quarter generating record new leasing activity and significant NOI growth as their portfolio continues to benefit from the robust fundamentals of the Hawaii economy.

Strategically were advancing are simplification and strengthening our balance sheet to support further growth and commercial real estate.

The acquisition, we completed in October with a small one it's just the beginning as we pivot our focus back to growth I Wanna, Thank and acknowledge the entire ANV team for their good work and dedication this year.

Lastly, a quick note on our long standing commitment to environmental social and governance practices.

Which are key components of our success. We recently released our second annual corporate responsibility report, which is available on our web site and how the highlights our commitment to be partners for Hawaii and responsible corporate citizens.

In areas for example, rain the most common one the bigger your contracted work total the number of jobs that you have to choose from the better able you are to pivot and flex and moved to a different part of the island keep your cruise fully productive and then of course there are also schedule an issue. So the more jobs, you've got even though you can't necessarily.

Really do more than a certain amount and it in a in a day and so we wouldn't expect revenue to double because our contracted work has doubled we would expect to keep our cruise more productive.

As a result of that higher volume of contracted work. So that's good news and I'd say, that's probably one of the most encouraging things in the business. There have been other things too just to pick up in construction activity in Hawaii generally has helped our aggregate sales the the pick up and not only in our paving activity, but other people's paving activity.

Been helpful. Because we sell a rock and hot mix two other providers. So we do have a an improving outlook for the fourth quarter I always have to caveat fourthquarter forecast with the reality that it does tend to get ranier in the fourth quarter I'm actually looking out the.

The pandemic driven surge in demand for residential land in Hawaii, and so we got a bit fortunate is probably you know there are a few silver linings from the pandemic here and there and obviously overall, it's been devastating for the people of our state and it was very tough on parts of our business, it's probably the one part of our business.

So there's probably benefited from the pandemic is is the lot sales that could kill yourself. So that's really what's driving the surge inactivity. It could pull you up and that positions us than four monetization. We went to the market a few years ago decided not to sell because the the performance of the project.

It's not as strong as we would've liked and we didn't get a strong reaction in the market currently both because of the better performance of the project and because of all the <unk> the capital out there chasing land deals generally in Hawaii and elsewhere.

We we did run a marketing process and we have selected a buyer to work with on that project now we always caveat at that you know we'd never know when these transactions will clothes or if they'll close but we do feel that we're advancing toward at least the potential transaction.

Pivoting, our investments team to growth and looking more towards the market.

The market was pretty tight through through Covid, and we are starting to see a little bit of falling so excited to have to be more engaged with potential sellers.

In terms of assets.

Our priority will will continue to be to buy into our existing three asset classes. So retail industrial with this acquisition ground leases as well, we think there's sufficient room for us to continue to grow in those asset classes here in Hawaii, and so that really will be our focus.

In terms of pricing I would expect.

To be to have to see some cap rate.

Compression in the market just given how type things are into Chris's earlier comments with a significant amount of liquidity in the market chasing.

Opportunities and so the pricing for this industrial acid in particular was about a five one kept going in we do think that there is some additional room for growth, but given some of the pricing expectations. We've seen we feel actually really good about the pricing.

That we achieved and as I indication as I indicated location is very good and then just the building at the building attributes 24 foot clear dark high building.

It's a good asset for us to add to our portfolio.

Okay, Great and then same store.

Oh I on the retail with like a monster increase I just one.

No. It's Brett maybe you can remind us.

And it sounds like commercial and <unk>. The last large land deal that you did on the eggs to sorry, you were able to structure. It. So there is no tax leakage I'm just wondering how we should think about that do you think you'll be able to execute these without.

Having to pay significant in Texas.

<unk> <unk> <unk>.

Sure.

Okay.

<unk> I think that.

Most of the land, but we are sowing or will hope to sell over the next you know the balance of this year and into next year fits within the text will root subsidiary, but within the tiara, we have I believe sufficient credits and carryforwards.

Or or losses within the current period to shelter most of that income from from any stuff leakage and like a lot of that is related to.

The past Simpson past losses, and then also when we do sell completely you even though you know from a book standpoint, we would expect it to most likely be favorable you'll recall that we had a big book right off a few years ago and so the tax basis in particular is quite high and.

Yeah.

Hi.

Hi, I'm Marla, it's Lance I was just going to add to that to Chris's earlier comments nor are we.

Dependent on having to use those proceeds to reinvest on a tax efficient basis, we have historically been 10 31 buyers to recycle capital, but given the.

The advantages, we have particularly in the Trs.

Once we received those proceeds we can be a little bit more patient in.

Replacing them into the market into the appropriate acquisitions for us.

Okay. Thank you.

Now what we're seeing in terms of.

No.

Poor for a little bit of growth Sheila as I indicated we continue to see strong leasing interest.

But to your point the majority of our vacancy at this point is it just a handful of spaces, where we have.

Larger mid box vacancy available.

So while we continue to be in discussions with potential tenants for that I wouldn't expect to see any near term improvement within that portion of our portfolio.

So I wouldn't plan on any material growth within the retail portfolio heading towards the end of the year, but certainly stability in terms of the numbers that we've been able to achieve year to date.

Okay, and then Chris can you remind us I know, it's a board decision on the dividend policy are you.

Is the thought that you're managing to a certain payout ratio or.

Just kind of a broad based comment on the dividend policy.

Yeah. Thanks Sheila.

The broad policy, which has been the same pretty much since we.

Yeah.

Sure.

[music].