Q1 2022 Alexander & Baldwin Inc (Hawaii) Earnings Call

Assembly and patiently building our pipeline, we are uniquely positioned to benefit from our Hawaii relationships and market knowledge.

We do still have some noncore assets to sell but theyre not constraining, our core business or our growth strategy.

Grace is making important progress towards the kind of profitability, we know it's capable of.

Which will position us to achieve the final big element of our simplification.

We are positioning for a possible marketing process.

As early as the late summer.

In the meantime, Grace doesn't distract us from our CRM efforts or impede the obvious success of that segment.

The success was demonstrated by strong results in the first quarter CRE revenue grew more than 15%.

Total commercial real estate portfolio, NOI and same store NOI were both up more than 17%.

And core <unk> per diluted share was up by 38%.

We saw particular strength in our retail segment, which achieved a more than 26% improvement in same store NOI continuing.

The recovery that we saw last year.

Our industrial portfolio also produced strong same store NOI growth of nearly 8%.

We ended the quarter at 94, 5% leased occupancy up 70 basis points from a year ago.

Our retail portfolio is again over 93% leased and our industrial assets are 98% leased.

We had strong leasing activity in the quarter with over 369000 square feet leased in total rent spreads at three 2%.

We continue to see robust economic growth across the state domestic visitor arrivals have exceeded pre pandemic levels for each of the first three months of 2020 to up about 8% compared to 2019 levels.

Additionally, since the start of the year International visitor arrivals have been trending upward and should continue to rebound providing incremental economic benefits.

While our portfolio is community based and not heavily dependent on tourist activity. The resurgence in Hawaii tourism is providing a broad benefit to Hawaii's economy with the state unemployment rate down four 1% for March 2022, an improvement of over 18 percentage points from the peak of 22, 4% nearly two years ago.

So.

Overall, Hawaii's economy is rebounding more quickly than expected, leading the state department of business economic development and tourism to raise the 2022 economic.

Growth forecast to three 2% from 3%.

And these broad tail winds are not only supporting strong leasing demand for our high quality commercial real estate assets, but driving strong demand for Hawaii real estate in general, including our remaining noncore lens we.

We had non core land sales in the first quarter totaled approximately $8 million, including $3 nine acres at Maui business Park, two and 173 acres of other non core land holdings.

As importantly, our materials and construction segment produced $4 1 million of adjusted EBITDA in the quarter $1 9 million of this at grade specific and the balance attributable to other materials and construction activity.

While Grace's earnings were modest we're pleased with momentum that business is gaining and expect continued growth in EBITDA over the balance of the year.

As I noted we are positioning for a second half marketing process if conditions seem right.

We will likely make that decision before our next earnings call.

Turning to growth, while we have not announced any acquisitions in 2022, we have a robust pipeline of opportunities we're evaluating we remain.

Focused primarily on our existing asset classes neighborhood retail and light industrial.

Now I'll turn the call over to our Chief operating Officer Lance Parker to review, our recent commercial real estate highlights and land sales activity.

Thank you, Chris and Aloha, everyone beginning.

Beginning with operations in the first quarter of 2022, our CRE portfolio continued to perform exceptionally well.

Same store NOI was up 17% year over year, reflecting improved tenant performance and collections.

We executed 74 leases for approximately 369000 square feet during the first quarter and achieved spreads of eight 8% for new leases and two 9% on renewal leases.

The most significant lease with a strategic long term renewal of our largest tenant at Pearl Highlands Center, a 181000 square foot Sams club.

We were pleased to extend them and invest in the refresh of their store, providing stability and enhancing the customer experience at the center.

We'll also see the opening of local restaurant favorites, Leehar bakery and little Joe Steakhouse later this year.

This recent lease activity has maintained the 99, 8% occupancy at our largest retail asset.

In addition to SaaS, we completed two leases at harbor industrial totaling approximately 33000 square feet of GLA.

A 26500 square foot lease at <unk> Industrial park sustaining the 100% occupancy of the property.

And 10 leases related to properties located in Kailua, including Icon Park shopping center totaling approximately 11600 square feet of GLA.

Overall leased occupancy at quarter end was 94, 5% up 70 basis points from 12 months earlier.

Same store leased occupancy was 94, 4% up 60 basis points from the first quarter of 2021.

With regard to growth our team is active across our target markets on Oahu, Maui, Hawaii Island and Copa and.

And we are earmarking $50 million to $75 million or more as an annual pace.

To expand such efforts to other properties.

Turning to landfills, we had a successful first quarter, we sold five units totaling 3.9 acres at Maui business part too as well as approximately 173 acres of other non-core landholdings for approximately $8 million of total proceeds.

We remain in active discussions with interested buyers on many of our remaining non-core landholdings and expect to make strong monetization progress this year.

Ah now turn the call over to breath for financial details right.

Thanks, Lance good afternoon, everyone, starting with our financial results for the first quarter. We recorded net income of 10, and a half million dollars 14 cents per share F. S O of $19.7 million or 27 cents per share and <unk> of $28 million or 29 cents per share.

For additional details on our results, including comparisons to the first quarter of 2021, please see our earnings release and supplemental information package as a note. Each of these metrics for 2022 benefited from reserved reversals of approximately $2 million or three per share in the first quarter of 2022 compared to 1.4 million.

Or two cents per share in the first quarter of 2021.

I will now turn to commercial real estate segment for the first quarter CRE revenues increased by nearly 15.5% or $6 $2 million over the prior year quarter to $46 $1 million and NOI increased by 17.8% or four and a half million dollars.

229, $8 million compared to the same period last year.

Increase from the year ago quarter again reflects the overall recovery of our tenants, which resulted in improved rent collections, including both current and prior period rats.

First quarter same store, NOI increased 17% or $4.3 million over the prior year quarter to $29.6 million.

Our land operations business produced revenue of $12 $9 million and generated adjusted EBITDA of $2.8 million in the first quarter of 2022.

With limited activity expected for the second quarter as we've mentioned in the past with episodic transactions revenue may be lighter and adjusted EBITDA could be negative for the quarter.

Our materials of construction segment at a solid start to the year with operating profit of $3.2 million and adjusted EBITDA a $4.1 million. This compares to a 4 million dollar loss and negative $1.4 million, respectively. In the first quarter of 2021.

As Chris noted the materials and construction segment at its best quarter in a year and a half contributing to the strong segment results was great specific adjusted EBITDA of $1.9 million, while other <unk> business added $2 $2 million.

For the first quarter of 2022, DNA expenses were $12.4 million compared to $12.2 million in the first quarter of 2021 and in line with our budget.

Turning to our balance sheet and liquidity metrics at March 31st 2022, our total debt outstanding was $522 million and we had total liquidity of $483 million, including approximately $34 million of cash and $449 million remaining.

Capacity on our credit facility.

At quarter end net debt too trailing 12 months consolidated adjusted EBITDA was three four times.

Excluding the one time non-core monetization and MSC impairment impacts net debt to consolidated adjusted EBITDA would be in the low to mid five times range.

Our debt to total market capitalization stood at 23.7% headquarter rats.

With respect to our dividend the board recently declared a second quarter of 2022 dividend of 20 per share a one or 5.3% increase from the first quarter of 2022 dividend and second consecutive quarterly increase reflecting are strong first quarter CRE results and expected performance for the remainder of two.

Thousand 22.

The second quarter dividend is payable on July 6th 2022 to shareholders of record.

Close of business on June 17th 2022.

Finally, turning to guidance, we're raising our 2022 guidance for court F. F O per share to a new range of one dollar one to $1 seven per share from the prior range of 94 cents to one dollar per share the.

The increases primarily due to the improvement in our outlook for CRE Same-store NOI growth.

We now expect CRE same store NOI growth within a range of 2% to 4% from our prior range of zero to 2%.

CRE Same-store NOI growth excluding prior year reserve reversals has also been revised upward within a range of 3% to 5% from our prior range of 2% to 4%.

I also want to remind everyone as I've mentioned on prior calls while it's not part of our guidance as it is not part of <unk>, we expect to incur an 81 to.

$95 million pretax settlement charge in the second quarter related to the the seasons of our pension plan.

Cash contributions for the pension Defeasanced is expected to range between $34 million to $48 million.

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

Thanks, Brett.

I'm pleased with our results across all segments for the first quarter.

Our CRE portfolio continues to have outstanding performance building off momentum from last year with strong NOI growth, increasing occupancy and robust leasing activity.

Renewed focus on CRE growth supported by a strong and flexible balance sheet should enable us to expand our portfolio in Hawaii strong market with excellent long term growth drivers and where our strategic advantages will enable us to uncover opportunities in value.

On the ESG front, we are actively advancing multiple environmental and social initiatives and we kicked off new employee led environmental and social Council's last month.

These employee groups will help us accelerate our ESG progress.

We're particularly proud of the commencement of our of construction on a 1.3 megawatt solar PV installation at Pearl Highland Center.

With that will now open the call for your questions.

We will now begin the question and answer session.

To ask a question you May press Star then one on your telephone keypad.

If you're using a speaker phone please pick up your handset before pressing the keys.

To withdraw your question. Please press Star then too.

At this time, we will pause momentarily to assemble our roster.

Alright. The first question is from Connor Mitchell with Piper Sandler. Please go ahead.

Hi, Thank you for taking my question.

Okay, I guess first.

Can you guys. Please just expand on what was mentioned about the expanding exponentially pipeline.

Barbara focus on ground leases industrials or another property type.

<unk>.

Sure.

US so Connor, we remain focused on or what we view to be our three major food groups. So retail industrial ground leases in terms of our acquisition efforts.

I would say more broadly just in terms of the acquisition market.

It remains relatively tight here with very few marketing deals, but I would say that I'm pleased with the number of looks that we're getting in the marketplace.

And so we feel confident in our ability to to find appropriate deals.

And the year.

Okay. That's helpful and then.

Just a second question.

Related to guidance.

Some experts, but is it the increase in guidance is that mostly driven by the first quarter outperformance or also inclusive of a stronger outlook for the remainder of the year.

Hey, counter it's Brett most of that was driven by the outperformance in the first quarter as we're very early in the year. So it would be hard to.

Comment more on the later quarters, but mostly driven by the first quarter outperformance yes.

Okay. Thank you and then can you just repeat again, what you said regarding the pension plan and how much did that by.

In fact, I thought you said the second quarter earnings.

It is anticipated to flow through in the second quarter that's correct.

And so the overall dollar amount as I mentioned, there is approximately $81 million to $95 million pretax settlement charge.

That will happen.

Second quarter, and then a cash contribution of $34 million to $48 million.

Okay. That's.

Very helpful. At all for me. Thank you very much alright.

Alright, Thanks Connor.

The next question is from Marla backer with pseudo to you. Please go ahead.

A lot of the you know.

Commentary in recent quarters has been around opportunities on redevelopment, giving.

Given what we're seeing in terms of the inflationary environment the interest rate environment.

Do you think some of your plans might be impacted are pushed out as a result of the current macroeconomic factors.

Hey, Marla this is lance.

I would say generally in terms of macro economic impact so specific to inflation.

And maybe to a lesser extent supply chain issues were certainly ceiling seeing impacts.

On supply seats supply.

Chain side.

We have had some delays in sourcing materials and so we've programmed that into our timelines.

It may be a little later in terms of our C DS and being able to go economic but they are not going to have a material impact on our underwriting or or a desire to move forward with some of our redevelopment projects on.

On the pricing side, we're certainly seeing increases in certain materials.

We are having contractors now only holding pricing firm for 30 days, which is short relative to where it was.

In previous periods and so we're just speak more deliberate and our decisions and again factoring that in but from our internal opportunities for growth and so specific to finishing up by cohee progressing with mono a marketplace in Pearl Highlands, we feel good about those opportunities and expect to complete them and then I would say prospectively with some of our ability.

What's that were in conversations with tenants on similarly feel optimistic about that.

Uh-huh. Okay. Thanks, and then one question housekeeping question on rental collections, where are you in terms of you know any kind of against Charles that you offer during the pandemic.

There was.

The question around the collections relating to those.

Programs.

So overall yeah.

Yeah, Okay with respect to the collection side of things, we're actually doing quite well overall.

Collections overall, we're we're basically at.

Pre pandemic levels of in excess of 90% overall for CRE and within that are that differed amounts. So our tenants have been able to recover.

The pandemic and as a result, we've been able to benefit from cash collections.

Okay. Thank you.

Thank you Marilyn.

The next question is from Sheila Mcgrath width Evercore ISI. Please go ahead.

Hi, Yes, good afternoon Christmas you mentioned that he.

You mentioned the international travel travelers picking up just wondering if you could give us your bigger picture view on the mainland travel travelers and if there are any COVID-19 restrictions for people travelling till I at this point.

Yeah.

It's crowded here the streets are grounded the hotels are crowded the restaurants are crowded.

I think that we're essentially back to full strength in terms of <unk>.

Capacity relative to pre pandemic levels, it's a different mix.

Tourists and because it's a different mix I think it it does have some impact still probably negative impacts on some of those retailers and destinations that are most closely most most dependent on the Asian visitor.

That would be waikiki and some of the retail in waikiki, but from the standpoint of our portfolio. The unemployment rate as I've mentioned is down to 4%.

Which is just slightly above where it was pre pandemic and so when you think about our portfolio of grocery anchored retail and the things that drive that and then also the two resorts centers that we have are both on neighbor islands that are not heavily dependent on international arrivals.

We're essentially back to full strength in terms of the economic drivers that influence our portfolio, that's not to say that everybody in Hawaii is back to normal as I said because some some.

Landlords and tenants rely a lot more on the Asian visitor than we do.

Okay, Great. That's helpful and then on that and just curious I know, it's still kind of new but with the backup in interest rates. Your thoughts on if this might help denounced the buyer pool that maybe would improve.

Acquisition kind of hit rate for Alexander and Baldwin just your thoughts on that.

Yeah, you know.

Clearly, we we don't want to we don't wish for difficult economic times and interest rates rising and the economy's slowing down and having said that and <unk>.

You've covered the company long enough to know that we have historically been able to take advantage of dislocations and challenges in the market.

With a strong balance sheet.

And ability to perform where a lot of buyers may not be able to perform as the economy changes in interest rates rise we do <unk>.

Generally think that there could be nice opportunities for us on the acquisition side. So lance.

<unk> may have more specifics he wants to add but.

I would say generally this kind of disruption could tend to benefit us.

Yeah, I would just I would just add that.

We're seeing this play out in real time, but certainly our expectation would be for.

More highly levered asset.

That type of buyers that they're going to be impacted.

Disproportionately with rising interest rates and with the solid balance sheet that we have in the debt that we were able to pay down last year through our non are non-core monetization. We're feeling very good about our operated a opportunity to.

To pursue the right the right deals.

Okay, Great and then Lance maybe you could comment on the pricing I haven't had a chance to take care of that but the pricing of the land at Mountain Park in the other non core land sales and then just give US a perspective, if you anticipate you know additional activity in.

In the landfill bucket this year.

I would say generally Sheila were feeling good about our Latin core art.

Or non core land activity on both specific time Howie business Park as well as other lands that the company has.

So starting with with Maui business Park, we'd probably have to break out separately, the actual pricing and get that to you, but I would say we're feeling good about interest you know we had strong interest from buyers last year that interest has continued through Q1 and.

Looking forward, we continue to get strong inquiries from buyers and then importantly, as we've discussed in the past we've.

We've also been getting inquiries from tenants on the industrial side for build to suit. So that's another avenue that we continue to pursue.

And then on the non core land for the rest of the portfolio, it's always challenging for us to to sort of provide guidance and timing, but we do have a number of transactions in various stages and feeling optimistic about our opportunities for continued monetization and that segment.

Okay, Great and then Uhm Grace it was nice to see a pick up there I just wondered if you could comment like do you think it's driving the improved performance and how much was a one time and given the recovery of EBITDA there.

Does that help move a sale process along that that might be a 22 event.

Yeah. So this is Chris let me address.

I think three things there one.

Within Grace itself, where we posted $1.9 million of EBITDA.

We didn't have any one timers driving that but we did have one project that got off to a later start than we expected and we do expect that that's just a timing issue. So we we actually.

Think that will be making up some ground as we go forward on that one project, but we're hopeful that we can trend upward from that $2 million number as we go forward.

Balance of the year so.

We're optimistic on Greece itself, the balance of the $4.1 million was related to a JV investment we have an another materials and construction business and that was largely driven by a one time.

Essentially an accounting related.

Entry.

Recognition of a one time gain I guess I should say so.

So that would probably not recur, but the biggest focus and to your third question.

His grace performance and how does that position us for a sale, we're very pleased with the the momentum.

Grace and the fact that we're back in the Black and we have a really good backlog the biggest backlog with that in four years and the government does seem to be spending more money. We don't know for sure whether it's infrastructure bill related but we're seeing a lot more requests for paving work from the gum.

<unk> on some of these maintenance maintenance contracts we have.

So we are hopeful that we will see a continued pick up the timing of a disposition as I said in my prepared remarks it really.

Depends on the situation, we see come.

Probably early third quarter, both with respect to our earnings trajectory as well as the broader market the impact of interest rates what the buyer.

Pool is thinking and looking like.

So I don't want to commit too.

Specific the specific timing, but suffice it to say that this.

This positive momentum and operating performance should position us.

Better for a disposition of the business.

Over the next six to 12 months.

Okay, great one more I'm, assuming I'm the last one asking questions but.

That's so interesting how that works like what's the capital investment on your end you know is there a return on it and.

And is it a potential to roll out to the rest of the portfolio.

So I'll start broadly and then invite the rest of the team to add some specifics Sheila.

But we did it we effectively structure to deal with one of the local banks, where they take the tax credits available.

From putting the solar and use that as sort of a of form of financing so our actual investment.

Is relatively nominal.

For the first year and then we start to get.

NOI that we've estimated to be about $300000 a year once we turn it on.

And so we're hopeful that we'll be able to get the system in place and up and running by by year end and then we have the.

The right to purchase the system later in the lease structure and then passed effectively pass.

Some of the savings onto our tenants to reduce through reduced cam charges and in some cases specific electricity rates to some of our tenants.

Okay. Thank you.

This concludes our question and answer session I would like to turn the conference back over to see sweat for any closing remarks.

Thank you operator, and thank you all for joining us today.

If you have any follow up questions. Please feel free to call us at 8085258, 475 or email us that investor relations at <unk> Dot com.

And have a great day.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

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