Alexander & Baldwin - Q4 2022

Transcript

Operator (participant)

Good day, and welcome to the 4th quarter and full year 2022 Alexander & Baldwin earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press Star then 1 on your telephone keypad. To withdraw your question, please press Star then 2. Please also note this event is being recorded. I would now like to turn the conference over to Steve Swett. Please go ahead.

Steve Swett (Investor Relations)

Thank you. Aloha, and welcome to our call to discuss Alexander & Baldwin's Q4 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 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.

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 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, 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 others 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 investors section of our website at www.alexanderbaldwin.com. 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.

Chris Benjamin (CEO)

Thanks, Steve, and good afternoon to our listeners. The Q4 was another excellent quarter for A&B's commercial real estate business. Our high quality retail, industrial and ground lease properties again produced strong results. We also booked a solid volume of land sales in the quarter. Perhaps most importantly, we have reclassified Grace as a discontinued operation in light of our commitment to exit the business. While that process is not yet complete, the final major step in our strategic simplification is advancing, and our financials will henceforth reflect our new simplified business model. Our outstanding Q4 continued the trends we had seen earlier in the year. Lance and Clayton will provide more details on our Q4 performance, but let me summarize our results for the full year.

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, 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. During the year, we signed 261 new and renewal leases representing 778,000 sq ft and achieved blended leasing spreads of 4.4%. We ended the year with leased occupancy of 95%, up 70 basis points from the end of 2021, and economic occupancy was 93.6%, up 140 basis points.

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 3 times during the year from $0.18 per share at the end of 2021 to the current $0.22 per share level. Our balance sheet remains strong and poised to support commercial real estate growth with a debt to total market capitalization ratio of 25.8% at year-end and a net debt to trailing twelve months consolidated adjusted EBITDA of 2.7 times. These results reflect the strength of our portfolio with growth driven primarily by our retail segment and supported by the ongoing improvement in Hawai'i'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 Hawai'i's economy. As we've said before, our portfolio is generally community-based and less dependent on tourist activity, but the resurgence in Hawai'i tourism and a robust construction industry continue to support Hawai'i's strong economy, with the state's 3.2% unemployment rate in December 2022 below the national unemployment rate of 3.5%. With regard to marketing Grace Pacific for sale, market conditions, including the challenging debt markets, have not helped the process. We remain engaged and focused on achieving a disposition this year. The impairment we recognized in the Q4 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. 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 3rd annual corporate responsibility report. Our first rooftop photovoltaic system was completed in late 2022 at Pearl Highlands 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. Finally, with regard to the leadership transition we recently announced, I wanna 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 Hawai'i commercial real estate company. 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. Lance?

Lance Parker (President and COO)

Thank you for your kind words, Chris, and aloha, everyone. Beginning with operations, our CRE portfolio continued to perform well in the Q4. CRE revenue was up 4.8% in the Q4 compared to last year. NOI was up 1.3% year-over-year, and Same-Store NOI was up 1.1%. In the Q4 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. Overall leased occupancy and Same-Store leased occupancy at year-end were 95%, an increase of 70 basis points from 12 months earlier.

Same-store retail leased occupancy was up 70 basis points to 93.8%, and same-store industrial leased occupancy was 98.3%, up 140 basis points from the Q4 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%, and industrial economic occupancy was up 120 basis points to 98.2%. We executed 61 leases for approximately 130,000 sq ft during the Q4 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 Kailua, including Aikahi Park Shopping Center, totaling approximately 23,000 sq ft, and 6 leases at Kakaako Commerce Center, totaling approximately 21,000 sq ft. We are pleased with our portfolio performance following another robust quarter of leasing that resulted in 95% overall leased occupancy, and we have a solid pipeline of active deals and prospects. Our well-located properties are experiencing elevated foot traffic, and most of our tenants are reporting higher sales, resulting in percentage rents significantly greater than expected. This, in addition to higher base rents, drove our strong Q4 results rather than rent reversals. With regard to growth, our investment team is pursuing acquisition opportunities that are complementary to our current portfolio.

While transaction activity has slowed due to changes in the financial markets and interest rates, we remain creative and disciplined in our approach and believe our deep market knowledge, relationships, and ample liquidity will help us to unlock opportunities. In the meantime, we continue to pursue internal growth opportunities, such as development or redevelopment, where we can better control investment timing and yields. 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. Turning to our land sales, during the Q4, 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 segment. I'll now turn the call over to Clayton for financial details. Clayton?

Clayton Chun (Executive VP, CFO, and Treasurer)

Thanks, Lance. Aloha, everyone. Starting with our financial results, for the Q4, we reported income from continuing operations available to shareholders of $16.2 million or $0.22 per diluted share. Q4 FFO was $25.3 million or $0.35 per diluted share. Our FFO was $22.2 million or $0.31 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 Q4 of 2022, compared to $900,000 in the Q4 of 2021. For the full year 2022, we reported income from continuing operations available to shareholders of $36.9 million, or $0.50 per diluted share.

FFO for the full year was $73.4 million, or $1.01 per diluted share. Core FFO was $82.2 million, or $1.13 per diluted share. 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 Q4, CRE revenues increased 4.8%, 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. CRE NOI increased by 1.3%, or $400,000, to $29.2 million compared to the same period last year.

Our land operations segment generated Adjusted EBITDA of $10.7 million in the Q4 of 2022. The decrease in year-over-year Adjusted EBITDA was partly attributable to lower volume sales in the Q4 of 2022 as compared the prior year quarter. For the Q4 of 2022, G&A expenses were $8.2 million, compared to $10.7 million in the Q4 of 2021 and in line with expectations. As Chris noted, we moved Grace Pacific into discontinued operations during the Q4 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 31st, 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 Q4, we entered into 2 forward starting interest rate swaps that provide A&B 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 Grace Pacific, was 4.7 times. Our debt to total market capitalization stood at 25.8% at year-end. You'll note we repurchased 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 which we may use from time to time. With respect to our dividend, we paid a Q4 dividend of $0.22 per share on January 6th, and our board recently declared a Q1 2023 dividend of $0.22 per share. Finally, turning to guidance.

We are providing initial full year 2023 guidance with Core FFO within a range of $1.08-$1.13 per share. This range is supported by our outlook for CRE Same-Store NOI growth within a range of 2%-4% and CRE Same-Store NOI growth excluding prior year reserve reversals within a range of 5%-6.5%. I should mention that our 2023 guidance is impacted by a couple factors that are non-recurring 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 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 $0.07 per share and our Same-Store NOI guidance by approximately 250 basis points. With that, I'll turn the call over to Chris for his closing remarks.

Chris Benjamin (CEO)

Thanks, Clayton. The Q4 again demonstrated the quality of our commercial real estate portfolio with high occupancy and solid growth. We remain active in pursuit of growth opportunities that deepen our presence in the Hawai'i market and that are complementary to our existing portfolio. As we look ahead, our business focus, strong balance sheet, and deep Hawai'i ties are strengths that will fuel our growth and success as a commercial real estate company. 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 land, to the 2021 sale of Kukui'ula, we have systematically transformed a 153-year-old diversified conglomerate into a focused commercial real estate company.

More important than anything else we've done, we have built, in my opinion, the best real estate team in Hawai'i 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. 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, excuse me, for your questions.

Operator (participant)

Thank you. We will now begin the Q&A session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star and then 2. At this time, we will pause momentarily to assemble our roster. The first question will be from Alexander Goldfarb, from Piper Sandler. Please go ahead.

Alexander Goldfarb (Managing Director and Senior Research Analyst)

Afternoon out there. First, Chris, hey, Chris, congrats on your final earnings call. I guess this means no more NAREIT. Lance, unfortunately, looks like you're gonna have to endure NAREITs for the next few years, so good luck. 2 questions here. First, you know, appreciate the exit on Grace. Appreciate, not appreciate the impairment, obviously, you know, 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.

From a recycling perspective, is it safe to say there's not much to recycle, or is it a difference of GAAP treatment versus the actual cash proceeds that you anticipate, in which case there is actually a healthy amount that can be cash recycled into the ongoing business?

Chris Benjamin (CEO)

Thanks, Alex. This is Chris. Let me respond. First of all, just to clarify, I'm around till June 30th, so one more earnings call, one more NAREIT. We look forward to seeing you in March for our investor day. You're not done with me yet. With respect to Grace, there's not a whole lot I can add, partly because we're still, you know, in the midst of the process. I would say that while it's, you know, not insignificant cash that I we would expect to be able to redeploy, you know, I'd say it's, you know, the ballpark is probably, you know, consistent with what you're thinking.

It's not gonna be a huge needle mover, but it's gonna be, you know, some additional de-levering and strengthening of our balance sheet and strengthening of our position to grow the company.

Alexander Goldfarb (Managing Director and Senior Research Analyst)

Okay. For the guidance for this coming year, you guys have Core FFO, you know, $1.08 to $1.13. A 2-part question here. One, given the tremendous cleanup that you've just done, curious why you're continuing to report Core and what the deltas are between Core and Nareit. I would think as you transition to a pure play, you'd wanna, you know, just simply report Nareit FFO to present a clean story that, you know, there's nothing sort of legacy in there. The second 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 sort of the post-Grace, you know, sort of new A&B run rate?

Chris Benjamin (CEO)

Alex, let me start, and then I'll kick it to Clayton. This is Chris. 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 activity. 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, at, you know, better values, that could be a positive, and then there could be some things that are dragged. I think until we get past the end of the simplification process, there is still some benefit in disclosing both.

I'll let Clayton comment on, you know, any more specifics around the difference between the 2. As far as the Core FFO number, the guidance that we provided, 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. The management transition, et cetera, we think that should be consistent with actual outcome. You wouldn't have to further adjust that.

Clayton Chun (Executive VP, CFO, and Treasurer)

Right.

Chris Benjamin (CEO)

So Clayton-

Clayton Chun (Executive VP, CFO, and Treasurer)

If I could just add a little more color. The main distinction between Core FFO and FFO is FFO is taking consolidated A&B, and that is inclusive of land operations and as well as all aspects of the business. 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. For comparative purposes, it's still meaningful for us to focus on Core FFO. With the simplification largely behind us, once 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.

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.

Alexander Goldfarb (Managing Director and Senior Research Analyst)

Clayton, what is the delta between Nareit FFO and Core FFO? Is it like $0.10, $0.20?

Clayton Chun (Executive VP, CFO, and Treasurer)

We had for the full year, it was about $9 million between Core FFO and FFO. From a per share basis, I think that translates to. So in any event, it's about $9 million. The delta really largely reflecting the impact of the non-core business.

Alexander Goldfarb (Managing Director and Senior Research Analyst)

It's $9 million for 2023 as well, or that you were only referring to 2022? I'm just trying to understand how much...

Clayton Chun (Executive VP, CFO, and Treasurer)

Yeah. Correct. I'm referring to 2022. For 2023, we're expecting it to be a smaller delta, and I think you're looking at maybe $4 million or so.

Alexander Goldfarb (Managing Director and Senior Research Analyst)

Okay. Okay, that includes the executive transition.

Clayton Chun (Executive VP, CFO, and Treasurer)

That includes the executive transition. For purposes of your question around the guidance, we did have those 2 significant factors that I had referenced, which was the G&A impact of about $2 million. Additionally, you had the impact of the reserve reversals of $2.6 million that's embedded in our guidance for Core FFO.

Alexander Goldfarb (Managing Director and Senior Research Analyst)

Okay. Okay, listen. Thank you very much.

Clayton Chun (Executive VP, CFO, and Treasurer)

Thank you, Alex.

Operator (participant)

The next question is from Mitch Germain from JMP Securities. Please go ahead.

Mitch Germain (Managing Director)

Congrats to Lance, and you Chris as well, on the next phase.

Clayton Chun (Executive VP, CFO, and Treasurer)

Thanks, Mitch.

Mitch Germain (Managing Director)

I'm curious about the retail sector, and we're hearing about some tenants, whether it be bankruptcies or store closings begin to materialize, given some of the economic headwinds. I'm curious, given the supply constraint nature of the markets that you own in, does some of that creep in, or are you able to avoid some of those headwinds?

Clayton Chun (Executive VP, CFO, and Treasurer)

Hey, Mitch, this is Lance, and thanks for the congratulatory remarks. You know, I would say, you know, our portfolio is more needs-based. As we've talked about in the past, you know, our portfolio also doesn't have as much exposure to some of the mainland tenants that are typically identified for watch lists. While we don't identify a watch list, I would say we have lower exposure generally to those. From a bankruptcy perspective, you know, really the only sort of risk tenant in our portfolio on a national basis is Regal. We do have them at one center, and we continue to work with them and expect that we will be able to retain them as a tenant there.

I'd say on a local/regional basis, you know, we are not immune to the economic headwinds. We did survey tenants in the Q4. We have conversations with them often. We are hearing about increased labor costs and other pressures on margin. You know, I did in my prepared remarks speak to increased sales that we are seeing just on the revenue side. We continue to see top-line growth for a lot of our tenants, but recognize that there could be some challenges just with costs. 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.

Mitch Germain (Managing Director)

Great. Just one more for me in terms of capital allocation. You know, obviously retail, industrial, even ground. I'm curious about, you know, kind of where you see, a priority with regards to how you consider, you know, the main sectors or the main investment options, even stock at this point. Obviously, you're active on the buyback, but you know, kind of how do you consider capital allocation in terms of your, like, priorities going forward?

Clayton Chun (Executive VP, CFO, and Treasurer)

Yeah. From a capital allocation perspective, our approach is we want to be disciplined. Although our objective is to grow the commercial real estate portfolio, we're gonna do it in a disciplined way, and we're gonna make sure that as we evaluate our investment options, that we're deploying it towards opportunities that will be accretive. Whether it's retail investment opportunities, industrial ground leases. I would say that those are all of our food groups from a 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.

You know, from the perspective of evaluating, 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. We are gonna be just judicious in how we approach capital allocation.

Lance Parker (President and COO)

Mitch, I would just add, you know, at the asset level, 2/3 of our NOI is generated from retail. We are the market leader in that space in terms of largest landlord at 22%, we still like the asset class a lot. Similarly, you know, we have an appetite for increased growth within industrial and the ground lease sector. It's really more opportunistic. To Clayton's point, just thinking about, you know, disciplined approach, risk-adjusted returns, and making decisions based on that basis.

Steve Swett (Investor Relations)

Great. Thank you guys.

Lance Parker (President and COO)

Thank you.

Clayton Chun (Executive VP, CFO, and Treasurer)

Thanks.

Operator (participant)

Ladies and gentlemen, this concludes our Q&A session. I would like to turn the conference back over to Steve Swett for any closing remarks.

Steve Swett (Investor Relations)

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 808-525-8475, or email us at [email protected]. Aloha, and have a great day.

Operator (participant)

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