Q2 2023 Alexander & Baldwin Inc Earnings Call
Good afternoon, and welcome to the Alexander <unk> Baldwin's second quarter 2023 earnings Conference call.
All participants will be in a listen only mode and should you need any assistance. Please signal a conference specialist by pressing the Starkey followed by zero.
After todays presentation, there will be an opportunity to ask questions.
Please note that today's event is being recorded.
Now I'd like to turn the conference over to Steve Swett of Investor Relations. Please go ahead Sir.
Thank you Aloha and welcome to our call to discuss Alexander <unk> Baldwin's second quarter 2020 earnings.
With me today for our earnings call or a N B's Chief Executive Officer, Lance Parker, and our Chief Financial Officer Clayton Chun.
We're also joined by Kim Nolan Senior Vice President of asset management, who is available to participate in the Q&A portion of the call.
During our call. Please refer to our second quarter 2023 supplemental information available on our website at investors <unk> Alexander Baldwin Dot Com Board slash supplements.
Before we commence please note that the statements in this call that are not historical facts are forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
They 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 aren't limited to statements regarding possible or assumed future results of operations business strategies growth opportunities and competitive positions such forward looking statements speak only as of the date. The statements were made and are not guarantees of future performance forward.
Forward looking 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 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-K.
Form 10-Q , and other filings with the SEC.
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. Please refer to our statements regarding the use of these non-GAAP measures and reconciliations included in our second quarter 2023 supplements.
Lance will open up today's presentation with an overview of the quarter and provide an update on real estate operations and then Clayton will discuss financial matters Lance will return for some closing remarks, but where upon we will open it up for.
And for your questions with that let me turn it over to Lance.
Thank you, Steve and Hello, everyone beginning.
Beginning with our commercial real estate portfolio in the second quarter, we again generated excellent results for our shareholders our portfolio consisting of high quality retail industrial and ground lease assets produced strong results and continued our momentum from the first quarter in 2022.
CRE revenue was up seven 6% in the second quarter compared to the year ago quarter, driven primarily by higher base rent the impact of removing certain tenants from cash basis revenue recognition and higher expense recoveries same store NOI was up four 6% accelerating from the first quarter.
Sure.
These strong results reflect the quality of our diversified portfolio and the focused efforts of our team.
Our performance continues to benefit from a robust local economy.
He added nearly 20000 jobs over the past 12 months, an increase of two 7%.
Non farm wages increased two 7% in June 2023, as compared to the prior year.
And the unemployment rate at the end of June adjusted for seasonality with 3% continuing its downward trend.
Throughout our market, we are seeing solid economic activity across most sectors, including the large construction and tourism industries.
As we have said before our portfolio is generally community base and less dependent on tourist activity.
But tourism supports the state's overall economy.
Turning to our CRE portfolio leasing metrics same store leased occupancy at quarter end was 94, 3% a decrease of 30 basis points from 12 months earlier same.
Same store retail leased occupancy was up 90 basis points to 94% and same store industrial at least occupancy was down 260 basis points to 95, 8%.
As we noted last quarter the decrease in overall portfolio in industrial leased occupancy year over year.
Primarily due to an expected tenant move out at Kaka Uncle Commerce Center in the first quarter of 2023.
Same store economic occupancy at quarter end was 92, 3% down 20 basis points from 12 months earlier.
Same store retail economic occupancy was up 120 basis points to 91, 8% in.
And same store industrial economic occupancy was down 330 basis points to 94%.
Annualized base rent attributable to signed but not opened or ethanol leases at quarter end were $3 $1 million. This compares to $3 million from 12 months earlier and $2 $3 million last quarter.
During the second quarter, we executed 72 leases and our improved property portfolio for approximately 220000 square feet and achieved blended spreads of five 8%.
Reds for industrial leases at six 6% and spreads for retail leases at five 6%.
This activity included two.
<unk> leases related to properties located in kailua, including a car he park shopping center totaling approximately 31000 square feet of GLA and $1 $3 million of ABR.
One lease at Pearl Highlands Center totaling approximately 35000 square feet of GLA and $1 million of ABR.
And for leases at Queens marketplace totaling approximately 13700 square feet of GLA and $700000 of ABR.
In addition to improved property activity. We also executed the ground lease renewal at Woodbridge City shopping center, which renewed on a fair market value reset to $3 $9 million from $2 $8 million or a spread of 39%.
We are pleased with the continued pace of leasing activity and pipeline of active deals.
Turning to growth as previously noted during the quarter, we acquired a 33200 square foot industrial property in a sale leaseback transaction.
For $9 $5 million or approximately $286 per square foot.
The property is 24 foot clear Heights dock high loading and is located in the Koppel a submarket on Oahu in close proximity to our other industrial assets.
Based on the 10 year lease the going in cash cap rate is five 6% with 3% annual increases in base rent.
Our investment team continues to pursue opportunities that are complementary to our portfolio.
Similar to other markets in the country, we have seen wide bid ask spreads, but we continue to remain disciplined and believe our deep market knowledge will help us execute nimbly when accretive opportunities arise in.
In the meantime, we continue to pursue value creation opportunities within our portfolio.
Our refreshed shipment all marketplace. The only grocery anchored neighborhood center in the Manila area remains on track for completion in the third quarter.
We believe this refresh focused mainly on cosmetic improvements to enhance customer experience will result in higher rental rates over time.
We continue to evaluate additional opportunities within our portfolio for capital deployment to drive long term growth in cash flow and value.
With that I'll turn the call over to Clayton for financial details.
Clayton, Thanks, Lance and Aloha everyone.
<unk> with our consolidated metrics on table seven of our supplemental.
For the second quarter of 2023 net income available to shareholders was $13 $3 million or <unk> 18 per diluted share.
Turning to <unk> and <unk>.
Second quarter, <unk> was $19 $8 million or 27 cents per diluted share.
Core <unk> was $21 $3 million or 29 cents per diluted share.
Each of these metrics for the second quarter of 2023 benefited from collections of amounts reserved in prior years of approximately $600000 or one cent per diluted share as compared to $1 8 million.
Or <unk> <unk> per diluted share in the second quarter of 2022.
The quarter to date metrics also benefited from $1 $3 million or <unk> <unk> per diluted share.
<unk> from the removal of certain tenants from cash basis in the second quarter of 2023.
There were no tenants removed from cash basis in the second quarter of 2022.
For additional details on our results and comparisons to prior periods in 2022.
Please see our earnings release and supplemental information package.
Let me now turn to our commercial real estate segment on table eight.
For the second quarter, CRE revenues increased seven 6% or three and a half million dollars over the prior year quarter to $49 $5 million.
This increase from the year ago quarter was driven primarily by higher base rents the impact of removing certain tenants from cash basis in.
And higher expense recoveries.
Theory same store NOI increased four 6% or $1 3 million to $31 1 million compared to the same period last year.
Excluding collections of previously reserved amount in both 2022 and 2023.
Same store NOI growth would have been nine 2% for the second quarter.
Turning to land operations presented on people 18, adjusted EBITDA was $1 $7 million in the second quarter of 2023.
<unk> to $53 million in the same quarter last year.
The change was due primarily to the $54 million gain on sale of non core assets on the island of Hawaii that occurred in the second quarter of 2022.
G&A is highlighted on table too.
But the second quarter of 2023, G&A expenses were $9 9 billion.
Compared to $9 3 million in the second quarter of 2022.
The higher G&A was primarily a result of onetime management transition related costs.
We reported income from discontinued operations of $4 $2 million in the second quarter.
Which is made up primarily of great specific operations.
Grace remains in discontinued operations as we work to complete the sale of the entity.
We continue to make progress on this goal, but we cannot provide additional details at this time.
Turning to our balance sheet and liquidity metrics on table six.
At June 32023, total debt outstanding was $506 9 million and we had total liquidity of four.
$441 1 million.
Made up of approximately $8 $2 million in cash.
And $432 $9 million available on our revolving credit facility.
At quarter end net debt to trailing 12 month consolidated adjusted EBITDA was four seven times.
For comparative purposes, we were at two four times last year, primarily because of the gain on the sale of the noncore assets.
Hawaii.
Net debt to trailing 12 months consolidated adjusted EBITDA, Excluding land operations was five three times at the end of the quarter compared to four nine times in the second quarter of 2022.
We paid a second quarter dividend of 22 per share on July 5th and our board recently declared a third quarter dividend of 22.
Per share that is payable.
On October 4th.
We are pleased with our results and are raising guidance for the year.
We expect core <unk> in the range of $1 10 to $1 14 per diluted share due primarily to an improvement in our outlook.
Our CRE same store NOI performance.
We expect same store NOI growth within a range of two and a half to $4 two 5% and.
And same store NOI growth, excluding prior year reserve reversals within a range of 5.5% to 675%.
With that I'll turn the call over to Atlanta for his closing remarks.
Thanks Clayton.
The second quarter again demonstrated the strength of our portfolio the depth and experience of our team and the ongoing health of the Hawaii market.
As we look to the remainder of the year. We believe these factors will continue to drive our peripheral our performance I want to thank our entire team for their contributions to our success.
I would also like to thank the team for their dedication to environmental social and governance related matters today.
Today, we focused on our operational results, but our fourth annual corporate responsibility report will be published in August highlighting our commitment to ESG.
I am just as proud of what we have.
Of what we have accomplished is where partners for Hawaii.
Finally, as you know this is my first earnings call as CEO .
I want to thank Chris Benjamin for his friendship and Mentorship over the many years that we have worked together and thank the board for the opportunity to lead this fantastic team into the future.
With that without open the call up to questions.
We will now begin the question and answer session.
I'll 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 and to withdraw a question. Please press Star then two.
At this time, we will take our first question, which will come from Alexander Goldfarb with Piper Sandler. Please go ahead.
Hey, good.
Good morning, good morning out there.
So just a few questions and.
I think it was part of your no comment, but you know I have to ask.
The latest on Grace and do you feel comfortable that it will be exited by year end or do you think this will drag into next year.
Hey, Alex Good afternoon to you this is lance.
So we.
We are still engaged in a formal process with grace so I can't comment specifically on buyers.
Rice or timing for the integrity of that process, but what I can say.
Is that the disposition of the Grace business is an absolute priority for us.
Okay. Okay.
The next question I think you guys said you are signed but not yet opened is is about 3 million, which.
And sort of rough numbers sounded like with the same that it was previously.
A number of your peers that side, but not yet commenced seems to grow every quarter and I'm just curious given the strong portfolio performance that you guys talked about.
The fact that I think you still have like 25% or something at the top.
20, or top 30 retailers on the mainland and not yet in Hawaii, I would expect that number to sort of grow. So maybe you could just talk a little bit more about the signed but not yet commenced maybe you are just you know.
Putting people in space is much quicker so that delayed pipeline just doesn't grow because youre Quaker at leasing or maybe they are just other dynamics in there.
Yes, maybe I'll start with just a general comment and then I'll ask Ken to provide some some color so.
Our $3 1 million of S. N O for Q2 is about the same year over year, but it did improve pretty dramatically sequentially.
So just with that general statement chip, maybe you can provide some additional color.
Hey, Alex how are you doing.
Doing well.
Good so the spread between leased and economic it's a it's a really healthy 190 basis points right now and that is up 40 basis points sequentially. So is two three in Q2 and its now three one.
So that is pointing to some significant ABR that's coming online in the next few months.
And to your question about retailers that are not here yet.
We're engaged in many discussions with many different retailers, we have brought on some new ones in the recent past ones like Chick Fil, a and we continue to do so and we're seeing some strong interests from some other anchors in the market.
Okay and just the final question is.
Insurance is definitely been a big topic in REIT land.
Yes, we don't hear much about what's going on in Hawaii on the insurance market, but just curious you know.
What what you guys are seeing both from the property level and then from your tenants. So meaning obviously you guys have an ability to absorb insurance increases I would imagine better than your mom and pops, but and clearly you need viable mom and pop. So just wanted to get a sense from a <unk> perspective, what you guys are seeing.
And property insurance.
Premiums and renewals and then two what your tenants are seeing and as far as their ability to sustain that or if there's a way for you guys using the corporate wrapper to sort of help you know provide economies of scale. If you will to be able to buy for their for the tenants to buy insurance via your.
Year wrapper.
Hey, Alex Clayton How're you doing.
Wow.
So with respect to insurance that has a cost.
There's significant cost as part of our overall property operations and like everyone else. We are monitoring what's happening with the insurance rates in general we are.
Currently in a position, where we're I think overall it hasn't had an impact to our historical results, but what I would say is that we are closely monitoring we are hearing we have our agents out there that are helping us.
Keep keep apprised of trends and so that's something that we will continue to manage our way through.
And what about your tenants are they having any challenges with insurance or it's really not the issue that.
Out there that we see on the mainland.
I think nobody is immune to it for sure at the portfolio level, we have done a lot to restructure and look at different ways to take advantage of that sale cost structure. Overall, we've heard is an issue for tenants and that's been true for the past year or so but the good news is that <unk>.
Customer traffic is significantly up it's up 7% over last year and that's translated into higher tenant sales and both in terms of anchors as well as our inline tenants.
Okay.
Thank you.
And our next question will come from Mitch Germain with JMP Securities. Please go ahead.
Mitch Your line is open.
Can you hear me.
Yes, sorry about that.
My apologies I'm curious about leasing trends.
Aye.
I guess, it probably is a little bit of mix, but you know some of the spreads.
The decline quarter over quarter.
Is there anything to read into there or is it really just mix of our leases that rolled.
Okay.
I'll, let maybe get into some of the details on spreads spreads specifically, Mitch, but you know what I would say is the.
The strength of the leasing market continues we had good activity in 2022, we had good activity in Q1, and then Q2, we had very strong activity just in terms of total number of leases signed.
ABR GLA and in real time, as we've talked about in the past just through our lease committee process that we use on a weekly basis, we do get sort of real time visibility into demand and I would say that.
Tenant demand for space remains strong so maybe with that backdrop kit you can you can speak specifically to spreads.
Sure. So we exceeded expectations overall in terms of volume GLA ABR and spread.
65% of the deals in the quarter were in the retail portfolio and what we're really really happy about is that new deal volume has been significant and far higher than we anticipated and that points to future gains in economic occupancy.
Okay, that's super helpful.
How would you characterize the activity.
That newly vacant.
Property.
You referenced.
Yes, so just by way of some background <unk> Commerce Center is it's about a 200000 square foot industrial building that we own in urban Honolulu.
It's a multi storey facility.
So while it is five of the six floors are industrial the sixth floor was converted quite some time ago pre acquisition for us to office and that's where the vacancy occurred. So we had about 25000 square feet with this single tenant which represented.
About 12, 5%.
<unk> vacancy to the building and you can see it flowing through through the industrial asset class as well as the portfolio.
The office market here is stable, but I wouldn't say, it's certainly not as strong as as industrial.
So we will likely have to it will take a little bit of time for us to backfill the space from what is our preferred use which would be a a backfill of an office tenant.
But we will we would consider converting that space to other uses depending on tenant demand.
Okay, that's super helpful.
Last question on guidance.
Hi.
Correct, you've done 29 cents for the last two quarters.
If I just look at annualized at that number it looks like it's going to trend above the high end of your core ethical range.
What what am I missing in the back part of the year that could that could bring the numbers down.
Hi, Mitch Clayton.
So as far as.
As far as our core <unk>.
Had.
Commented when we provided our original guidance that there are a couple of different factors that are influencing our overall results for this year one of which is it is G&A. There is also impact of the.
Reserve reversals that occurred in last year, and so as we look forward to the second half of the year. There is still some some level of uncertainty and I think that in terms of our ability to.
Execute on the second half those those factors will continue to.
Affect our overall results and.
But on a whole on the whole.
The fact that we had our performance year to date and second quarter for same store NOI. We feel we felt good about where we are trending and as a result, we had increased the core <unk> guidance to where we ended up.
Okay. That's helpful. So it just appears as if you're just baking in some conservatism on the macro backdrop for now.
And you know, let the year progressing and revisit as each quarter has as you proceed is that the way to think about it.
Yes, I think Thats fair right.
Great nice quarter, thanks, guys.
Thanks rich thanks.
And this concludes our question and answer session I would like to turn the conference back over to Steve Swett for any closing remarks.
Thank you operator, and thank you all for joining us today.
You have any follow up questions. Please feel free to call us at 80852, $584 75, or email us at Investor Relations at <unk> Dot Com Aloha and have a great day.
The conference has now concluded. Thank you very much for attending today's presentation. You may now disconnect your lines and have a great day.