Q4 2022 Alexander & Baldwin Inc (Hawaii) Earnings Call
Speaker 1: I per.
Speaker 2: Good day and welcome to the fourth quarter and full year 2022 Alexander and Baldwin Erniex conference call. All participants will be in a listen-only mode. Should you need assistance please signal confidence specialist by pressing the star key followed by zero.
Speaker 2: After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star than one on your telephone keypad. So with your question, please press star then two. Please also note, this event is being recorded.
Speaker 2: I would now like to turn the conference over to Steve Sweat. Please go ahead. Thank you. Aloha and welcome to our call to discuss Alexander and Baldwin's fourth quarter and full year 2022 earnings. With me today for our earnings call are A&B's Chief Executive Officer Chris Benjamin, our President and Chief Operating Officer Lance Parker, and Chief Financial Officer Clayton Chun. Before we commence, please note that statements in this call and presentation that are not historical facts.
Speaker 2: are forward-looking statements within the meaning of the Private Security 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.
Speaker 2: Such forward-looking statements speak only as of the date the statements were made and are not guarantees of future performance. Forward-looking statements are subject to a number of risks, uncertainties, assumptions and other factors that could cause actual results in 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 read status, the company's business, results of operations, liquidity and financial condition, and the evaluation of alternatives by the company related to its materials and construction business, as well as other factors discussed in the company's most recent Form 10-Q and other filings with the SEC.
Speaker 2: 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.alexanderbolden.com.
Speaker 2: Chris will open up today's presentation with a strategic update. He will then turn the presentation over to Lance for an update on real estate operations and Clayton will discuss financial matters. Chris will return for some closing remarks whereupon we will open up the call for your questions. With that let me turn the call over to Chris. Thanks Steve and good afternoon to our listeners. The fourth quarter was another excellent quarter for A&B's commercial real estate business. Our high quality retail industrial and ground lease properties again produce strong results.
Speaker 3: we had seen earlier in the year. Lance and Clayton will provide more details on our fourth quarter performance, but let me summarize our results for the full year.
Speaker 3: Commercial real estate revenue grew 7.5% year over year and our same store NOI increased by 6%. Core FFO increased 18.3% to 82.2 million.
Speaker 3: and core FFO per share was up 17.7% to $1.13 per share, which exceeded the high end of our twice increased guidance range.
Speaker 3: During the year, we signed 261 new and renewal leases representing 778,000 square feet and achieved blended leasing spreads of 4.4%. We ended the year with least occupancy of 95% up to 70 basis points from the end of 2021. An economic occupancy was 93.6% up 140 basis points.
Speaker 3: In land operations we generated adjusted EBITDA of $67 million from the sale of approximately 20,200 acres of non-core land and 4.9 acres at Maui Business Park. We raised our quarterly cash dividend three times during the year from 18 cents per share at the end of 2021 to the current 22 cents per share level and our balance sheet remains strong and poised to support commercial real estate growth with a debt total market capitalization ratio of 25.8%.
Speaker 3: at year end and a net debt to trailing 12 months consolidated adjusted EBITDA of 2.7 times. These results reflect the strength of our portfolio with growth driven primarily by our retail segment.
Speaker 3: supported by the ongoing improvement in Hawaii's economy. Domestic visitor arrivals exceeded pre-pandemic levels for each month of 2022. Additionally, the gradual return of international visitors, now back to approximately 50% of 2019 levels, will further aid Hawaii's economy.
Speaker 3: we've said before our portfolio is generally community-based and less dependent on tourist activity but the resurgence in Hawaii tourism and a robust construction industry continue to
Speaker 3: with the state's 3.2% unemployment rate in December 2022 below the national unemployment rate of 3.5%.
Speaker 3: With regard to marketing GRACE specific for sale, market conditions, including the challenging debt markets, have not helped the process. But we remain engaged and focused on achieving a disposition this year. The impairment we recognized in the fourth quarter related to our transfer of GRACE to discontinued operations gives us flexibility to achieve the simplification goal we have long sought. I continue to believe in the business and in the management team that has returned it to profitability.
Speaker 3: but the time has come to part with grace as it simply doesn't fit our commercial real estate model. We continue to strengthen our ESG programs in 2022 and enhanced our disclosures to shareholders including a well-received third annual corporate responsibility report.
Speaker 3: Our first rooftop photovoltaic system was completed in late 2022 at Pearl Highland Center, and we are advancing additional renewable energy generation projects across the portfolio in support of our goal of owning, operating, and managing sustainable properties.
Speaker 3: Finally, with regard to the leadership transition we recently announced, I want to congratulate Lance on his promotion to President as of January 1 and CEO as of July 1. I've had the pleasure of working with Lance for nearly 19 years. He's an extremely talented and experienced real estate executive and I cannot think of a better person to run A&B as a Hawaii commercial real estate company.
Speaker 3: While we transition, I will remain focused on completing our simplification efforts while Lance leads the team in running and growing the commercial real estate operations. Now I'll turn the call over to Lance. Thank you for your kind words, Chris, and aloha everyone.
Speaker 4: Beginning with operations, our CRE portfolio continued to perform well in the fourth quarter. CRE revenue was up 4.8% in the fourth quarter compared to last year. NOI was up 1.3% year over year and SameStore NOI was up 1.1%.
Speaker 4: In the fourth quarter of 2022, there was approximately $500,000 of prior period reserve recovery, compared to $900,000 in the same quarter of 2021. This $400,000 difference represents about 140 basis points of NOI growth.
Speaker 4: Overall, lease occupancy and same store lease occupancy at year end were 95% an increase of 70 basis points from 12 months earlier. Same store retail lease occupancy was up 70 basis points to 93.8% and same store industrial lease occupancy was 98.3% up 140 basis points from the fourth quarter of 2021. Economic occupancy at quarter end was 93.6% up 140 basis points from 12 months earlier. Retail economic occupancy was up 180 basis points to 91.7%.
Speaker 4: and industrial economic occupancy was up 120 basis points to 98.2%. We executed 61 leases for approximately 130,000 square feet during the fourth quarter and achieved spreads of 3.2% for new leases and 5.7% on renewal leases. This activity included 15 leases related to properties located in Kaiduwa, including the Aikahi Park Shopping Center totaling approximately 23,000 square feet and six leases at Kaka'ako Commerce Center totaling approximately 21,000 square feet. We are pleased with our portfolio performance following another robust quarter of leases.
Speaker 4: We remain creative and disciplined in our approach and believe our deep market knowledge, relationships and ample liquidity will help us to unlock opportunities.
Speaker 4: In the meantime, we continue to pursue internal growth opportunities, such as development or redevelopment, where we can better control investment timing and yields.
Speaker 4: The significant refresh of Manoa Marketplace is progressing to improve the visitor experience at this well-located neighborhood center while incorporating sustainable design and building elements, including LED lighting, water-efficient fixtures, and EV parking stalls.
Speaker 4: Turning to our land sales during the fourth quarter, we sold approximately 1,100 acres of non-core land and 1.1 acres at Maui Business Park for total proceeds of approximately $20 million. For the quarter, we recorded adjusted EBITDA of $10.7 million within our land operations saving the profit.
Speaker 4: of now-tall term the call over to Clayton for financial details. Clayton? Thanks, Lance and Aloha, everyone. Starting with our financial results, the fourth quarter reported income from continuing operations available to shareholders of $16.2 million or 22 cents per diluted share.
Speaker 4: Fourth quarter FFO was $25.3 million or $35 cents per diluted share. Core FFO was $22.2 million or $31 cents per diluted share. As a note, each of these metrics for 2022 benefited from collections of previously reserved amounts of approximately $500,000 in the fourth quarter of 2022 compared to $900,000 in the fourth quarter of 2021.
Speaker 4: For the full year 2022, we reported income from continuing operations available to shareholders of $36.9 million for $50 per diluted share. FFO for the full year was $73.4 million for a dollar one per diluted share, and Core FFO was $82.2 million for a dollar 13 per diluted share. FFO for the full year
Speaker 4: For additional details on our results, including comparisons to 2021, please see our earnings release and supplemental information package. Let me now turn to our commercial real estate segment. For the fourth quarter, zero revenues increase 4.8 percent or $2.2 million over the prior year quarter to $48.4 million. The increase from the year ago quarter reflects the strength of our tenants and portfolio driven by higher base rent and the impact of removing certain tenants from cash basis designation.
Speaker 4: or $400,000 to $29.2 million compared to the same period last year. Our land operation segment generated adjusted EBITDA of $10.7 million in the fourth quarter of 2022. The decrease in year-over-year adjusted EBITDA was partly attributable to lower volume sales in the fourth quarter of 2022 as compared to the prior year quarter. For the fourth quarter of 2022, G&A expenses were $8.2 million compared to $10.7 million in the fourth quarter of 2021 and in line with expectations. As Chris noted, we moved Grace Pacific into discontinued operations during the fourth
Speaker 4: due to our intent to complete a disposition this year, which triggered an impairment of $89.8 million. Turning to our balance sheet and liquidity metrics. At December 31, 2022, total outstanding debt was $472.2 million, and we had total liquidity of $520 million, including approximately $33 million of cash and $487 million available on our revolving line of credit facility. During the fourth quarter, our balance sheet was $2.8 million.
Speaker 4: we entered into two forward starting interest rate swaps that provide EMB with a fixed blended interest rate of 4.86% on $130 million of future financing. $130 million of financing is expected to be negotiated towards the end of the year and will be used to refinance existing debt that is scheduled to mature in 2024. At quarter end, net debt to trailing 12 months consolidated adjusted EBITDA was 2.7 times, whereas net debt to trailing 12 months core adjusted EBITDA, which excludes land operations in Greece,
Speaker 4: was 4.7 times. Our debt to total market capitalization stood at 25.8% at year-end. You'll note we purchased approximately 81,000 shares of stock during the quarter at an average price of $16.95 per share. As we have stated before, our share repurchase plan provides an additional capital allocation tool.
Speaker 4: which we may use from time to time. With respect to our dividend, we paid a fourth quarter dividend of 22 cents per share on January 6th, and our board recently declared a first quarter 2023 dividend of 22 cents per share.
Speaker 4: Finally, turning to guidance. We are providing initial full year 2023 guidance with core FFO within a range of $1.8 to $1.13 per share.
Speaker 4: This range is supported by our outlook for CRE same-store NOI growth within a range of 2 to 4 percent and CRE same-store NOI growth excluding prior year reserve reversals within a range of 5 to 6.5 percent.
Speaker 4: I should mention that our 2023 guidance is impacted by a couple factors that are nonrecurring in nature. First, our 2022 results included reversals of prior year reserves due to collections that are about $2.6 million higher than our expectations for 2023. Second, our 2020 results included reversals of prior year reserves due to collections that are about $2.6 million higher than our expectations for 2023. Second, our 2020 results included reversals of prior year reserves due to collections that are about $2.6 million higher than our expectations for 2023.
Speaker 4: our guidance incorporates approximately $2 million of G&A-related expenses due to the management transition. Combined, these items totaling approximately $4.6 million impact our core FFO guidance by about 7 cents per share, and our same store and old.
Speaker 4: SAME store NOI guidance by approximately 250 basis points. With that, I will turn the call over to Chris for his closing remarks.
Speaker 3: to our existing portfolio.
Speaker 3: As we look ahead, our business focus, strong balance sheet, and deep Hawaii ties are strengths that will fuel our growth and success as a commercial real estate company.
Speaker 3: It has been a long transformation process and the changes have been many. From the 2016 shutdown of our sugar plantation to the 2018 sale of the underlying lands to the 2021 sale of Cucuila, we have systematically transformed the 153-year-old diversified conglomerate.
Speaker 3: into a focused commercial real estate company. But more important than anything else we've done, we have built, in my opinion, the best real estate team in Hawaii and are positioning them with the resources to take the business to the next level. We will be hosting an investor day in March. The details are on the screen.
Speaker 3: And I hope you can make it to Honolulu not just to see our amazing properties, but to meet our amazing team. With that, we'll now open the call for your questions. Thank you. We will now begin the question and answer session. If you ask a question, you may press star then one on the telephone keypad. If you're using a speaker phone, please check up your hands up before pressing the keys.
Speaker 5: out there. Our first Christian.
Speaker 5: Hey Chris, congrats on your final earnings call and I guess this means no more nay reads. So Lance, unfortunately it looks like you're going to have to endure nay reads for the next few years. So good luck. So two questions here. First, appreciate the exit on grace. You know, not appreciate the impairment obviously, you know.
Speaker 5: topic for the prior management board that approved grace, but at least you guys are sort of resolving to move on from a reinvestment proceeds Basis it doesn't seem like there's much to reinvest if you wrote off another 90 million so from a recycling perspective
Speaker 5: Is it safe to say there's not much to recycle or is it a difference of gap treatment versus the actual cash proceed that you anticipate in which case there is actually a Healthy amount that can be cash recycled into the into the ongoing bed. Thanks, Alex. This is Chris. Let me respond. First of all
Speaker 3: You know, in the midst of the process, but I would say that while it's not insignificant cash that I, we would expect to be able to redeploy. You know, I'd say it's.
Speaker 3: you know, the ballpark is probably, you know, consistent with what you're thinking. It's not going to be a huge deal mover, but it's going to be, you know, some additional delivering and strengthening of our balance sheet and strengthening of our position to grow the company.
Speaker 5: Question here: 1, given the tremendous cleanup that you've just done, curious why you're continuing to report core and what the delas are between core and nre. That, would think, is you transition to a pure play. You'd want to, you know, just simply report nit.
Speaker 5: to present a clean story that there's nothing legacy in there. The second is, is that $1.08 to $1.13 a good number or are there some items, whether it's executive transition costs or other sort of odd items that are in the numbers such that $1.08 to $1.13 is not the post-grace new A&B run rate.
Speaker 3: Yeah so Alex let me start and then I'll kick it to Clayton this is Chris. So first of all with respect to core FFO versus FFO you're absolutely right that from an operating business perspective there is not a lot of non core
Speaker 3: activity, but we do still have some legacy obligations that we are working through. These are post-closing obligations on prior sales and things like that that could drive some economic, frankly, either way because they're generally fully reserved and if we can resolve some of them, you know, better values that could be a positive and then there could be some...
Speaker 3: You used the word good. I would say that is a clean sort of net number that is after consideration of all one timers that we anticipate. So the management transition, et cetera, we think that that should be consistent with actual outcome. You wouldn't have to further adjust that.
Speaker 4: Right, so if I could just add a little more color. So the main distinction between QuarFFO and FFO is FFO is taking consolidated A and B. And so that is inclusive of land operations and as well as
Speaker 4: All aspects of the business and so as we have gone through the simplification process our intent was to provide Core FFO which is focusing on our core business commercial real estate so for comparative purposes it's still meaningful for us to focus on core FFO, but with
Speaker 4: The simplification largely behind this one, Grace is also behind us. We then will be at a point where you will see a convergence of Core FFO and FFO and our focus from that point really will be on FFO. So we still have some noise in the past for comparative reasons with FFO and so that's why we focused on Core FFO. Hopefully that makes sense.
Speaker 4: Clayton, what is the delta between NAHREED FFO and Core FFO? Is it like $0.10, $0.20? We had for the full year it was about $9 million between Core FFO and FFO and from a
Speaker 4: per share basis, I think that translates to, what is it about? So in any event, it's about $9 million, and so the delta really largely reflecting the impact of the non-core business. So it's $9 million for 23 as well? Or that was, you were only referring to 22. I'm just trying to understand how much. Correct, so I'm referring to 2022 for.
Speaker 4: For 2023, we're expecting it to be a smaller delta, and I think you're looking at maybe 4 million or so. Okay, and that includes the executive transition.
Speaker 4: That includes the executive transition. So for purposes of your question around the guidance, we did have those two significant factors that I had referenced, which was the G&A impact of about 2 million dollars.
Speaker 4: Additionally, you had the impact of the reserve reversals of $2.6 million that's embedded in our guidance for Core FFO. Okay. Okay, listen, thank you very much.
Speaker 4: you had the impact of the reserve reversals of $2.6 million that's embedded in our guidance for core FFO. Okay, okay listen thank you very much. Thank you all.
Speaker 4: And the next question is from Mitch Germain from JMP Securities. Please go
Speaker 2: Congrats to Lance and you, Chris, as well on the next phase. Thanks, man. I'm curious about
Speaker 2: to Lance and you Chris as well on the next phase. I'm curious about the retail sector.
Speaker 2: And we're hearing about some tenants, whether the bankruptcy is a store closing, the income materialized, given some of the economic headwinds. And I'm curious given the supply constrained nature of the markets that you own in, does some of that creep in or are you able to avoid some of those headwinds? Hey Mitch, this is Lance and thanks for...
Speaker 4: And so why we don't identify a watch list, I would say we have lower exposure generally to those. So from a bankruptcy perspective, you know, really the only sort of risk tenant in our portfolio on a national basis is is regal. We do have them at one center and we continue to work with them and expect that we will be able to to retain them as a tenant there.
Speaker 4: I'd say on a local slash regional basis, we are not immune to the economic headwinds. We did survey tenants in the fourth quarter. We have conversations with them often. We are hearing about increased labor costs and other pressures on margin. I did in my prepared remarks.
Speaker 4: speak to increase sales that we are seeing just on the revenue side. So we continue to see top-line growth for a lot of our tenants, but recognize that there could be some challenges just with costs. And so I would say that you know we're no different, but we certainly wouldn't expect any increased risk within the portfolio. If anything, I would say just the opposite.
Speaker 2: Great. And just one more for me in terms of capital allocation. Obviously retail industrial even ground I'm curious about where you see a priority with regards to how you consider the main sectors of the main investment options even stock at this point obviously you're active on the buyback. But how do you consider capital allocation in terms of your view of a priority?
Speaker 4: Opportunities that will be a creative and so whether it's.
Speaker 4: Retail, investment opportunities, industrial, ground leases. I would say that those are all of our food groups from...
Speaker 4: asset class perspective that we are seeking to expand. You had mentioned the fact that we did have some share repurchases and we did have a modest amount of repurchases during the quarter. From the perspective of evaluating
Speaker 4: where we could place our cash. We wanted to make sure that that was understood, that that is a tool that's available to us. And so we are going to be just judicious in how we approach capital allocation.
Speaker 4: And Mitch, I would just add, you know, at the asset level, two thirds of our NOIs generated from retail, we are the market leader in that space in terms of largest landlord at 22%. But we still like the asset class a lot. And so we look to grow there. Similarly, you know, we have an appetite for increased growth within industrial and the ground lease sector.
Speaker 4: So it's really more opportunistic and then to Clayton's point just thinking about you know disciplined approach risk adjusted returns and making decisions based on that basis Right. Thank you. Yes. Thank you.
Speaker 2: Ladies and gentlemen, this concludes our question and answer session. I would like to turn the conference factor to Steve Sweat for any closing remarks. Thank you Chad and thank you all for joining us today. If you have any follow up questions, please feel free to call us at 8085258475 or email us at investorrelationsatabhij.com.
Speaker 4: Aloha, and have a great day. Thank you, sir. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.