Q2 2022 Alexander & Baldwin Inc (Hawaii) Earnings Call
Good day and welcome to the Alexander <unk> Baldwin's second quarter 2022 earnings Conference call. All participants will be in a listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one. Please note. This event is being recorded I would now like to turn the conference over to Steve Swett Investor Relations. Please go ahead Sir.
Thank you Hello, Hi, and welcome to our call to discuss Alexander <unk> Baldwin's second quarter 2022 earnings.
With me today for our earnings call or a N B's President and Chief Executive Officer, Chris Benjamin Our Chief operating Officer, Lance Parker, and our Chief Financial Officer, Brett Brown.
Clayton Chun Chief Accounting Officer is also present and will be available for Q&A portion of the call.
Before we commence please note that statements in 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 that 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 with and the Companys plans and responses to the COVID-19 pandemic and related economic disruptions.
Such forward looking statements speak only as of the date of the statements were made and are not guarantees of future performance.
Statements are subject to a number of risks 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 COVID-19, and its impacts on the company's business results of operations liquidity and financial condition and the evaluation of alternatives by the company related to its materials <unk> construction business as well as other factors discussed.
Just in the company's most recent Form 10-K Form 10-Q, and other filings with the SEC.
The information in this call and 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 slides from this presentation are available for download at the Investor section of our website at Www Dot Alexander Baldwin Dotcom.
Chris will open up today's presentation with a strategic update he will then turn the presentation over to Lance for an update on our real estate operations and then Brett will discuss financial matters, Chris will return for some closing remarks, and then we will open up the call for your questions with that let me turn it over to Chris.
Thanks, Steve and good afternoon to our listeners the second quarter was another outstanding quarter for Alexander <unk> Baldwin.
Our portfolio of high quality retail industrial and ground lease properties produced excellent results and we ended the quarter with leased occupancy of 94.6% approaching pre pandemic levels.
Beyond the continued stellar CRE performance, we meaningfully advanced our strategic agenda during the quarter as we closed on the sale of approximately 18900 acres of non core land holdings on coli.
I'm pleased that we're now on the verge of successfully completing our strategic transformation to a pure commercial real estate company.
I'll provide a high level summary of our results and then Lance and Brett will provide more details on our portfolio performance the noncore land sale transaction and our financials.
Commercial real estate revenue in the second quarter increased five 8% over the prior year quarter.
Portfolio NOI was up 4.5% and same store NOI grew by four 4%.
Core F F O was up nine 7% and core <unk> per share was up 12%.
As I mentioned, we ended the quarter at 94, 6% leased occupancy just 30 basis points below our occupancy at the end of the first quarter of 2020.
Our industrial portfolio had leased occupancy.
Of 98, 4% up 60 basis points from one year ago, and our retail portfolio occupancy was 93, 1% up 80 basis points from last year.
During the second quarter, we signed 76 leases for about 174000 square feet of gross leasable area and captured blended rent spreads of six 2% for comparable leases.
We continue to benefit from strong underlying economic growth across the state.
Domestic visitor arrivals for each of the first six months of 'twenty to 'twenty two have exceeded pre pandemic levels.
And we're up over 11% year to date compared to 2019.
Additionally, international visitors visitor arrivals are increasing which should provide incremental economic benefits.
While our portfolio was community based and not heavily dependent on tourist activity. The resurgence in Hawaii tourism, just providing a broad benefits of Hawaii's economy with.
With the state unemployment rate down to 4.3% for June 2022.
An improvement of over 18 percentage points from the peak nearly two years ago.
Inflationary pressures and economic uncertainty our potential concerns, but so far we've not seen significant impacts across our business.
Our portfolio performance remains strong due to excellent leasing activity.
Interest in Hawaii real estate remains robust also allowing us to make significant progress on our noncore land sales, including the 18900 acre transaction, we closed during the second quarter.
On the acquisition front the market remains tight, but we continue to pursue opportunities.
With a strong balance sheet and local market presence, we have historically been able to take advantage of market dislocations. So this environment may play to our strengths, but we are maintaining our investment discipline.
Financial results in our materials and construction segment were below our expectations for the quarter, primarily due to the timing of key projects Covid.
Covid impacts on our workforce and inflationary cost pressure.
Still we made good progress in ramping up paving operations late in the quarter and securing new work.
And this positions us well for the balance of the year.
Given the improvements made over the past few years and operations cost management and bidding.
Our great progress with simplification.
And the fact that gray specific is now the loan significant noncore asset we still own.
Our board has authorized a formal marketing process to sell Grace.
This is a compelling business with a long history, a strong market position and many competitive advantages, we hope to find a strategic buyer for whom Grace is a more natural fit.
We will provide updates as we progress but cannot comment further on the process or expectations at this time.
With that I'll now turn the call over to our Chief operating Officer Lance Parker to review, our recent CRE highlights and land sales activity.
Thank you, Chris and Hello, everyone.
Beginning with operations, our CRE portfolio continued to perform exceptionally well in the second quarter.
Same store NOI was up four 4% year over year, reflecting improved tenant performance and collections.
We executed 76 leases for approximately 174000 square feet during the second quarter and achieved increased rent spreads of 11, 9% for new leases and five 4% for renewal leases.
Some of the significant leases executed during the period with two leases at our P&L warehouse that sustained the 100% leased occupancy of the industrial property and a total of 12 leases related to properties in Kailua, including <unk> Park shopping center.
Overall, our same store leased occupancy at quarter end.
Was 94, 6% up 60 basis points from 12 months earlier.
Over the same period same store retail leased occupancy was up 80 basis points to 93, 1% and same store industrial leased occupancy was up 50 basis points to 98, 3%.
With regard to growth our team is active across our target markets on Oahu, Maui, Hawaii Island in Hawaii and are pursuing opportunities in our preferred asset classes.
Expectations are changing between buyers and sellers around market performance and pricing and we believe our deep market knowledge and long standing relationships will enable us to uncover opportunities and realize long term value.
We remain disciplined in our approach and believe our ample liquidity will provide advantages as the market shifts.
In the meantime, we continue to pursue internal opportunities such as development or redevelopment yields remain attractive and we can better control timing.
Our redevelopment efforts at a coffee Park shopping center are nearing completion toward the fourth quarter of 2022 target stabilization.
Manure marketplace, which we introduced last quarter as the next property in our redevelopment pipeline construction work is set to commence soon to improve the visitor experience at this well located neighborhood center, while incorporating sustainable design and building elements.
The topic of sustainable properties construction of the one three megawatt rooftop solar installation at Pearl Highlands Center continues on schedule towards completion in September 2022.
Turning to our land sales in the second quarter, we closed on the sale of approximately 18900 acres of non core land holdings comprised primarily of conservation and agricultural land in Kuwait.
As well as 100% of the company's ownership interest in the bright resources, Inc. The operator of hydroelectric power facilities on the island.
This was great execution on another large step towards completing our simplification efforts Bret.
Brent will provide more details on the financial aspects of this significant transaction.
We remain in active discussions with interested buyers on our remaining non core land holdings and expect to make additional monetization progress this year I.
I'll now turn the call over to Brett for financial details Brett.
Thanks, Lance and Hello, everyone, starting with our financial results for the second quarter, we recorded net income of $4 million or five cents per diluted share.
F O of $13 $2 million or 18 cents per diluted share and core <unk> of $23 million or 28 cents per diluted share.
Of note each of these metrics for 2022 benefited from reserve reversals of approximately $1.8 million or <unk> <unk> per share in the second quarter of 2022 compared to $1 $6 million and also <unk> <unk> per share in the second quarter of 2021.
On a year to date basis, net income was $14 $5 million or 20 cents per diluted share.
<unk> of $32 $9 million or 45 cents per diluted share.
And core <unk> of $41 $1 million or <unk> 56 per diluted share.
Each of these metrics for 2022 benefited from reserve reversals of approximately $3 $8 million or five cents per share in the first half of 2022.
Compared to $2 8 million or four cents per share in the first half of 2021.
For additional details on our results, including comparisons to 2021 results. Please see our earnings release and supplemental information package.
Let me now turn to our commercial real estate segment.
For the second quarter, CRD revenues increased by five 8% or $2 $5 billion over the prior year quarter to $45 $8 million and NOI increased by four 5% or $1 3 million to $29 $8 million compared to the same period last year.
This 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 year rents prior period rents.
Second quarter same store NOI increased four 4% or $1 $3 million over the prior year quarter to $29 $7 million.
Orlando operations business generated adjusted EBITDA of $52 8 million in the second quarter of 2022.
Associated with the sale of approximately 18900 acres of noncore land holding on Hawaii, including the company's 100% ownership interest in Mcbride resources.
A $54 million gain on disposal of assets in the period.
On a go forward basis related to this sale, we will lose approximately $3 million to $4 million of annualized operating profit. Although this income one scheduled to run off in the relative near term.
Another benefit of this sale worth mentioning is the substantial reduction of long term liabilities and potential risks. So this was another very important step in simplifying and focusing our company.
Our materials and construction segment posted modest results for the second quarter with a $600000 operating loss and positive adjusted EBITDA of $700000.
This compares to a $1 $9 million operating loss and positive $700000 of adjusted EBITDA in the second quarter of 2021.
As Chris noted our board has decided to commence the process to celebrate specific to a more natural owner.
Once the process is fully underway, we will provide more updates on timing, but at this point. We are pleased to officially commit to completing this important step as quickly and efficiently as possible.
For the second quarter of 2022.
General and administrative expenses were $13 2 million compared to $12 $4 million in the second quarter of 2021 and in line with our budget.
Turning to our balance sheet and liquidity metrics at June 32022, our total debt outstanding was nearly $476 million and we had total liquidity of more than 300 $532 million, including over $33 million of cash and full capacity on our $500 million credit facility.
With the sale of the non core land holdings on Kuwait, including our interest in Mcbride resources, a portion of those sale proceeds was used to pay down the remaining $50 million balance on our credit facility.
With that we also terminated the interest rate swap on that balance, which was set to mature in February 2023, recognizing a half a million dollar gain on termination.
At June 30th 99% of our debt was effectively fixed with the only floating rate debt being the G. L. P asphalt credit line, which had $5 $1 million outstanding at quarter end.
Also at quarter end net debt to trailing 12 months consolidated adjusted EBITDA was two four times.
Excluding the one time non core monetization and MNC impairment impact net debt to consolidated adjusted EBITDA would have been five times.
And finally, our debt to total market capitalization stood at 26, 7% at quarter end.
We feel where we are in an enviable position of having low leverage and ample liquidity and with no material debt maturing for nearly two years.
I also want to remind everyone as Ive mentioned on prior calls we have terminated our defined benefit pension plans in.
In the second quarter, we incurred pre tax settlement charges of $73 $7 million with an associated $18 3 million income tax benefit and funded $20 million and $29 million in cash, which was well below our expected range communicated on prior calls.
Within the land operations segment during the second quarter, the net impact of the pension settlement charges and the gain on the non core land holdings sale was a $1 $4 million loss, essentially an offset of two meaningful steps toward our simplification.
With respect to our dividend our board recently declared a third quarter 2022 dividend of 22 per share an increase of 10% or <unk> <unk> per share payable on October five 2022 to shareholders of record at the close of business on September 19 2022.
This third consecutive quarterly dividend increase reflects strong second quarter commercial real estate results and expected performance for the remainder of 2022.
Finally, turning to guidance, we are raising our full year 2022 guidance, a second time with core <unk> per share to a new range of $1 <unk> per share to $1 11 per share from the prior range of $1 <unk> per share to $1 seven per share.
This increase was due to an improvement in our outlook for commercial real estate same store NOI growth.
We now expect CRE same store NOI growth within a range of 4% to 6% from our prior range of 2% to 4%.
Same store NOI growth, excluding prior year reserve reversals is expected within a range of three 5% to five 5% from our prior range of 3% to 5%.
With that I'll turn the call over to Chris for his closing remarks.
Thanks, a lot Brad.
The second quarter results as well as the outlook that Brett just summarized demonstrate the quality and the strength of our commercial real estate portfolio.
With high occupancy robust leasing activity and strong rent spreads in the portfolio.
We completed the meaningful sale during the quarter of non core land holdings, and the Mcbride resources business on Hawaii.
Well those lines generated some nice non REIT income as Bret described they also Bruce had a significant.
Liabilities associated with them and the potential for meaningful income loss as power purchase agreements expire in the future.
So that traction that transaction was an important part of our simplification process and further strengthens our balance sheet.
With the sale and the sale of <unk> the last year. The successful completion of our strategic transformation is in sight.
Specific because now our loan significant noncore asset and with the board's decision to commence the sales process for Grace our goal of being a focused commercial real estate company is near.
We have the balance sheet and the available liquidity to pursue acquisitions as they arise and market dislocations have historically played to our strengths.
On the ESG on the ESG front.
We will begin renewable energy generation within our commercial portfolio in September when we complete a 1.3 megawatt solar PV installation at Pearl Highlands.
We've been producing renewable energy for over a century through our agricultural and land operations, but we're now focused on ensuring that our commercial real estate portfolio because boards, both a source of generating renewable energy and is very energy efficient in terms of its consumption of energy.
We are analyzing T V expansion opportunities that additional properties and are actively advancing other environmental and social initiatives I'm pleased to announce that our third annual corporate responsibility report will be published in August highlighting our efforts and progress on ESG matters.
In closing I'm extremely proud of our team and their efforts to maintain strong performance amid our pivot to a more focused platform.
Which will provide us with the opportunity to grow into the future and create value for our shareholders, while living up to our mission as partners for Hawaii with.
That well now open the call to your questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two and our first question today will come from Alexander Goldfarb with Piper Sandler. Please go ahead.
Hey, I think it's still morning out there to sustain early a busy earnings season.
So why are awesome that you guys are finally going to put up the for sale sign on Grace. So that they are a little bump that you sold the power plants. It was pretty cool to cover a company that had its own in a waterfall power plant, but it is what it is so maybe just taking the recycling of proceeds.
And as you guys sell great and you've sold a lot of non income producing assets.
How do we think about the <unk> impact in the near term and then the time it takes to redeploy that capital into assets so generating assets.
So hey, Alex it's Brett.
Thank you for the comments there and yes. It is still morning here.
So the initial use of proceeds as I mentioned is paying down debt that we were able we had a very limited amount of floating rate debt and then I did have the balance on the revolver I was able to pay down.
But then in the near term.
Obviously looking to deploy into our.
Our core sectors of retail industrial and <unk>.
The ground leases.
As well as internal growth opportunities and so we'll continue to deploy it as we're able.
I think we'll announce what we what we can when we see it but I.
I don't know Lance if you want to get into any opt.
Opportunities that youre seeing on the.
The investment side, Yes, I'll go ahead and take it I mean sort of implicit in that question. Alex is maybe what are we seeing in the market and I would just say.
Previously referenced sort of Andy.
Annual run rate of deploying $50 million to $75 million per year in growth capital I will say on the acquisition front our investment team continues to be very busy.
Uncovering opportunities, we're getting a lot of good looks in the marketplace, but I'd also say, we're seeing some pricing dislocation and so we remain very disciplined in that regard, but then of course, we've also got our internal growth opportunities and what I would say is between actual spend this year on redevelopment.
Things like manure marketplace as.
As well as pipeline opportunities with tenants that we are in conversations with either for redevelopment within our retail portfolio.
Or build to suit within our industrial land holdings, we do have a pipeline sufficient to meet that growth expenditure.
So just big picture as we think about it let's say complete by year end right. How much earnings would come out like what would <unk> be impacted by in a full year basis.
And then it sounds like.
It's hard to redeploy it probably something like 2020 for Jeff you know at the time.
Did you find something by it close whatever so I'm just trying to figure out the short term earnings impact before we can think about the longer term.
Earnings benefit.
So the short term impact as I mentioned was three to 4 million in operating profit in the.
Land operations segment that being said as we also indicated that was a reducing.
Income stream there.
That was not a not a long term generation there.
The paydown of debt that came out of roughly 100000, a month so on an annualized basis, obviously that's 20000.
Excuse me $1 2 billion.
And then I would hope we would be able to redeploy sooner than 'twenty 'twenty four but we'll see what the opportunity set is clearly anything that happened. This year would be later in the year would not have a material impact on <unk>.
2022, but we would hope to see some decent impact favorable impact on 2023.
What about the earnings.
Great.
Okay great.
So great and it's been volatile but.
Didn't want to go back to what Brent was mentioning as far as the.
The impact of Mcbride the other thing to consider is the termination of the pension itself.
Itself does result in the avoidance of.
Costs associated with us having those plans then.
So as far as the impact.
To our P&L on average it was about $3 million to $4 million of total pension expense that we were incurring each year and so that would be effectively in an offset.
Okay and then the second question is.
<unk>, obviously, it's something that is getting more and more focused certainly Hawaii is understandably a big.
Environment's very important let's go you guys were a public company there has to be an economic advantage.
Is this really more of a check the box or how do you guys measure because you could E. S. P anything and not get yeah, you could not get a return how do you measure the economic benefit to the company to shareholders through the dividend and how do you strike a balance between what you know maybe social warriors.
Would want a company to do versus what is economically viable. So how do you strike that balance and how do you measure the economic returns.
Yeah.
Thanks, Alex for the question, so I'm going to invite when I'm done with my remarks, I'm going to invite either lance or or Clayton their breath to jump in on the economic returns that we expect from the solar installation, which are actually very very strong and probably only getting better as energy prices rise, but let me comment more generally on E. S.
G. So first of all we've always believed that being a company.
A company that's committed to the local community pays back in many ways in terms of the I think the the patient approach that we took with our tenants during the pandemic has proven to be.
Financially very very.
Attractive inappropriate because as we've collected rents beyond what we are.
Beyond what we ever expected, we would it's proven that keeping those tenants in place and taking that kind of long term approach has been very helpful and I would call that sort of an ESG friendly step, but we do other things we get back to the community and we're involved in the community and I think that when you have a.
Company, a REIT that is geographically concentrated like we are in a relatively small market those things pay dividends. The other thing that I would say pays dividends in and look at it it's hard to it's hard to generate a calculated return from that how much of a rebound in NOI is due to that patient approach.
Versus.
Just a rebound in the economy I can't tell you definitively, but I truly believe that the community based approach and community sensitive approach. We took is helpful. And then similarly on the workforce side.
I truly believe that the.
The things we do on the ESG front with our employees helps reduce turnover helps reduce therefore recruitment costs and other costs associated with turnover and so I do think there are economic benefits, having said that completely agree with you that there needs to be Oh and economic returns.
Things, we do but I'm firmly convinced that the decisions that we make on ESG are not only the right thing to do but I think they are the right thing for our business and our shareholders.
In the sense that they just improve our standing with our tenants.
With our community and with our employees.
But specific to the the.
The PV installation.
<unk> jumped in and share a little bit about what.
We were able to do that so I'll go ahead and jump in and just.
All of the things that Chris said are correct and appropriate.
We do have other ESG and particularly on the E side, Alex where it is a little easier to quantify some of the benefits that I'm thinking specifically to the one three megawatt solar rooftop installation at Pearl Highlands, which we are hoping by the way is really just the first of a broader rollout of.
Systems across the portfolio.
Where we will get a pickup on incremental pick up of about $300000 in NOI and I will state that that was based on original underwriting. Since then electric electricity costs have increased and so if anything the economic benefit could be even better to us, but I think we found a way the.
The right balance about doing the right thing, but then also finding opportunities to get paid for it as well.
Thank you.
Thanks, Alex.
And our next question will come from Sheila Mcgrath with Evercore ISI. Please go ahead.
Yes, good afternoon on the.
Land sale I was wondering if you could give us a little insight on what portion was comps.
<unk> land.
And then versus and I, just I only ask that because in our model. We just assumed kind of zero conservation value that.
And just if you could give us did that all the acreage and the.
Powerplant go to one buyer.
So Sheila.
Sure. This is Chris taking it in reverse order, yes. It was it was one buyer and in fact it was the same buyer that bought the cuckoo ULA project from Us and it was not.
They were completely separately negotiated deals we didn't have any discussions about the.
Subsequent land sale until after we closed on the <unk> sale, but.
But we felt that there were some good synergies for that buyer and and they agreed and so essentially the same.
Group, that's Colorado that bought the COO of property bought the rest of these lands.
On the land maybe someone has the number the exact number in front of them, it's roughly 10000 or 11000 acres of the land was conservation.
Somebody asked about <unk>.
Conservation one one third agriculture, Chris.
Yeah Okay.
So yes from a from a pure land standpoint, you're right Sheila that typically conservation land has very little value. We don't typically assign zero, but we assign you know in the hundreds of dollars not in the thousands or tens of thousands of dollars to conservation land.
It cannot be developed however, the conservation land that we sold at least some of the good chunk of it was the land where water is collected for hydroelectric power generation and so while the underlying land and may not have a lot of value on the hydro plant that was associated with.
Those lands.
<unk> did have valued because of the incumbent generates.
So I hope that's helpful too.
No that's great and then.
Just let us know how much noncore lamb.
Lands are left to sell and was there any tax leakage on that sale.
So there was actually Clayton do you want to take those questions.
Sure so as far as non core land holdings, we have about.
About 5300 acres remaining.
And so as far as your second question tax leakage there was no tax leakage.
That was in the Trs and we were able to.
<unk> utilized some of our tax attributes that we have available to us.
Okay great.
And then on the acquisition pipeline.
Just curious if you think that your probability of hitting you know near term targets with the cost of debt higher for the leverage buyers are you seeing any evidence of it.
You know those type of buyers falling away and that would be to your advantage.
I'd like to.
I'd like to think that we'll see some of those opportunities Sheila and I think what we're seeing right now is a little bit of a pause in the market and people moving.
To sort of their respective sides of the table, but it is certainly.
I don't know if I want to say expectation.
But one of the things I think we're well positioned both from being here, having the relationships, but also from our balance sheet.
To be very opportunistic so to the extent that we do get those opportunities we are poised to move very quickly.
To to pursue them.
Okay and then on.
There was some time in the supplemental I saw quickly.
And industrial acquisition, but it was from Grace Pacific. So I'm just wondering if that's a new industrial development or what that asset is.
So Sheila that is the industrial building that was part of our great specific operations and so.
What happened during the quarter was we had simply just transferred that into the commercial real estate portfolio.
Okay. So.
If grace's sold you'll be like the landlord and they'll lease it back is that the plan.
Correct it would be retained.
Okay, Great and then.
You did bump the dividend.
Just wondering how investors should think about dividend policy are you targeting a certain payout ratio.
Sheila it's Brent we're still trying to pay out right around 100% of re taxable income in the current environment.
Yes.
Okay and one last one is on the there were or in the supplemental there's a number of ground lease resets that are listed sometime in 2022.
Hum are those already like factoring true.
<unk> results or something or do you think that there'll be some uplifting groundless.
The ground leases in the back half of Dear.
We do have.
I'm thinking of two specifically Sheila one is a contractual reset and so we would have that come through later in the year and then we also have another thats a fair market value reset.
That is currently we're currently in discussions with the tenant around what that rate will be but I would I would expect an impact although I'm not sure how much it will.
It will occur later in the year I'm, just not sure how much we will actually impact our our NOI in 2022, we'll get the full pickup of it in 2023.
Okay, great. Thank you.
Thank you Sheila Thank you Sheila.
And this will conclude our question and answer session I'd like to turn the conference back over to Steve Swett for any closing remark.
Thank you Paul and thank you all for joining US today. If you have any follow up questions. Please feel free to call us at 8085 to $5 eight for seven five.
E Mail us at Investor Relations at <unk> Dot Com Aloha and have a great day.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.
Okay.
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Yeah.
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