A&B Reports 2016 Financial Results, Ending Pivotal Year

HC&S final harvest 12.12.16. Photo by Wendy Osher.

Alexander & Baldwin, Inc. today announced its financial results for the fourth quarter and year end for 2016, as the company closed a chapter on an era of sugar production on Maui.

“2016 was a pivotal year in A&B’s 147-year history. As we bade farewell to our sugar operation, we proactively advanced our project pipeline, increased portfolio net operating income, and charted a more focused course forward for the company, with a primary emphasis on Hawaiʻi commercial real estate,” said Chris Benjamin, president & chief executive officer.

“To that end, we continued the migration of our commercial properties from the US Mainland to Hawaiʻi with the acquisition of Mānoa Marketplace and the sale of three mainland properties; we advanced important redevelopment projects within our Hawaiʻi portfolio, most notably the exciting redevelopment of the Kailua Macy’s into Lau Hala Shops; and we planned a new Safeway-anchored shopping center next to Maui Business Park, which was announced last week,” said Benjamin.

“Although financial results for the quarter and year were challenged because of the strategic decisions that were made, we are poised for success in 2017 as we complete our REIT evaluation, pursue targeted CRE acquisitions in Hawaiʻi, advance several development projects and our Maui diversified agriculture initiatives, and capitalize on our substantial paving backlog at Grace Pacific,” he said.

Full-Year 2016 and Recent Highlights

Commercial Real Estate

• Operating Profit/NOI Increased operating profit 3.0% to $54.8 million in 2016 from $53.2 million in 2015 and increased NOI by 2.9%.¹ Both were driven by strong same-store Hawaiʻi retail performance.
• Renewals/Re-leasing Renewed or re-leased 142 expiring comparable leases representing 14.9% of total gross leasable area of the improved portfolio with a comparable cash leasing spread of 13.2%.
• Acquisitions Acquired the 139,300-square-foot Mānoa Marketplace in January 2016 for $82.4 million, expanding the Company’s grocery-anchored portfolio to a strategic location in urban Honolulu. In December, the Company acquired the leased fee position in an adjacent gas station property for $2.8 million using 1031 exchange proceeds, gaining ownership of additional roadside frontage for the Marketplace.
• Dispositions Sold three mainland properties totaling 408,500 square feet of GLA in June 2016 for $60.7 million, furthering the Company’s strategic portfolio migration to Hawaiʻi. Used proceeds to reverse-fund the Mānoa Marketplace acquisition.
• Redevelopment/Repositioning  Completed the 18,415-square-foot expansion of Gateway at Mililani South at a 13% stabilized yield on cost of $6.0 million. The expanded space is now 100% leased; Commenced pre-construction work on the 48,400-square-foot Lau Hala Shops (former Kailua Macy’s) with an expected 9-11% stabilized yield on cost of $21.0 million. Leases and letters of intent have been signed for 87% of the space; Started pre-construction work on the 6,300-square-foot Pearl Highlands Center Food Court with an expected 10-12% stabilized yield on cost of $3.0 million. Letters of intent have been signed for 60% of the space.
• Development-for-Hold In February 2017, the Company announced the development of the 94,000-square-foot, Safeway-anchored Hoʻokele Shopping Center on 9.8 acres of its historical landholdings adjacent to Maui Business Park. The Company projects a 7.5-8.5% stabilized yield on cost of $41.9 million.

Land Operations

• Development for Sale Closings Closed 451 units at The Collection in November and December 2016 for total sales revenue of $303.8 million. The Collection represented the largest Hawaiʻi condominium project closed in 2016.
• Parcel Sales Sold three vacant Maui parcels, including an urban-zoned parcel, totaling 611 acres for $27.7 million.
• Impairments Made a strategic decision not to develop or invest further in certain for-sale development projects, resulting in $11.7 million of non-cash write downs. Additionally, joint venture write downs of certain development projects amounted to $3.5 million and reduced “Income related to joint ventures” in the Company’s Consolidated Statement of Operations for 2016. Together these amounts totaled $15.2 million.

Materials & Construction

• Operating profit/adjusted EBITDA Earned operating profit of $23.3 million and adjusted EBITDA of $34.2 million.¹
• Backlog Increased Grace’s backlog at year end to $242.9 million², up 7.2%² year over year.

Financial Results

2016 vs. 2015

Consolidated 2016 income from continuing operations available to A&B shareholders, net of taxes, was $32.2 million, or $0.65 per diluted share. Results included $8.1 million of after-tax costs related to the evaluation of a REIT conversion ($9.5 million pre-tax) and the previously described write downs of development and joint venture projects of $15.2 million pre-tax, or $9.3 million after taxes. Adjusted income from continuing operations available to A&B shareholders, net of taxes, excluding the impact of these items was $49.6 million.¹ Income from continuing operations available to A&B shareholders for 2015 was $56.2 million, or $1.14 per diluted share. In addition to the aforementioned items, comparative performance was negatively affected by lower development sales, paving margins and materials sales, partially offset by strong performance by the CRE segment.

The Company reported a 2016 net loss available to A&B shareholders of $8.9 million, or $0.18 per diluted share, compared to 2015 net income available to A&B shareholders of $26.5 million or $0.54 per diluted share. Results for 2016 and 2015 included $41.1 million and $29.7 million of after-tax losses from discontinued Hawaiian Commercial & Sugar operations, respectively.

Revenue for 2016 was $387.5 million, compared to revenue of $472.8 million for 2015. The decline in revenue primarily is attributable to lower development sales and paving and material sales, offset by increased CRE revenue.

Commercial Real Estate CRE performed well in 2016, posting operating profit of $54.8 million, up 3.0%, compared to $53.2 million in 2015, primarily due to the timing of acquisitions and dispositions and an increase in Hawaii retail same-store performance. NOI was $86.4 million¹ in 2016, up 2.9%¹ from 2015, and was in line with previously provided guidance. For 2016, Hawaii properties produced 85% of total NOI and mainland properties produced 15%.

Hawaiʻi occupancy remained stable at 93%, and mainland occupancy fell from 95% to 93% due to an industrial tenant downsizing by 154,000 square feet in July 2016 (to date 118,000 square feet, or 76.6%, of this vacancy has been re-leased). As a result of the lower mainland occupancy, overall portfolio occupancy fell to 93% compared to 94% in 2015.

In 2016, the Company renewed or re-leased 142 expiring comparable leases, representing 14.9% of total GLA of the improved portfolio, with positive comparable cash leasing spreads of 21.7% on new leases and 11.2% on renewals for a blended spread of 13.2%.

Land Operations Land Operations posted operating profit of $6.6 million, which included joint venture income from 451 closings of The Collection units and associated developer fees, three vacant parcel sales on Maui, including an urban-zoned parcel and a lot at Maui Business Park, sales of two residential units on Kahala Avenue and agricultural operations. Offsetting these positive effects on segment operating profit were $25.0 million of reductions, including previously described write downs of certain development and joint venture projects of $15.2 million and non-cash reductions of the carrying value of the Company’s investment in the Waihonu and KRS II solar projects of $9.8 million, as recognition of tax benefits related to the projects reduce the value of the investments. These tax benefits, which offset the non-cash reductions over the lives of the investments, amounted to $8.7 million and are recorded in the “Income tax expense” line on the income statement.

In 2015, the segment’s operating profit was $61.7 million and included joint venture income from unit closings (329 at Waihonua, 22 at Kukuiʻula, and 12 at Ka Milo), five Kahala Avenue units, 18.4 acres at Maui Business Park, 10 vacant parcels on Maui and agricultural operations.

Materials & Construction The segment posted operating profit of $23.3 million for 2016 and $30.9 million for 2015, and adjusted EBITDA of $34.2 million¹ for 2016 and $41.0 million¹ for 2015. 2016 operating profit was impacted by a $2.6 million accrual for environmental-related costs of remediating a leased former quarry site, and a $1.6 million write down in the third quarter of a surplus vacant parcel held by an unconsolidated affiliate. The parcel was subsequently sold. These negative impacts were partially offset by a $0.6 million gain on the sale of another vacant parcel by an unconsolidated affiliate. 2016 operating profit was impacted by decreased paving, quarrying and material sales resulting from inclement weather. Oʻahu crew days lost to weather were 32.5% higher than 2015. The environmental reserve accrual, decreased paving, and lower quarrying and material sales caused the decrease in adjusted EBITDA.

Fourth Quarter 2016 (4Q16) vs. Fourth Quarter 2015 (4Q15)

Consolidated The Company reported 4Q16 income from continuing operations available to A&B shareholders, net of taxes, of $13.3 million, or $0.27 per diluted share. Results included $4.8 million of after-tax costs related to the evaluation of a REIT conversion ($5.7 million pre-tax), and the previously described write downs of development and joint venture projects of $15.2 million pre-tax, or $9.3 million after taxes. Adjusted income from continuing operations available to A&B shareholders, net of taxes, excluding the impact of these items was $27.4 million.¹ Net income from continuing operations available to A&B shareholders, net of taxes, for 4Q15 was $9.4 million, or $0.19 per diluted share.

The Company reported a 4Q16 net income available to A&B shareholders of $0.3 million, or $0.01 per diluted share, compared to a 4Q15 net loss available to A&B shareholders of $14.0 million or $0.29 per diluted share. Results for 4Q16 and 4Q15 included $13.0 million and $23.4 million of after-tax losses from discontinued Hawaiian Commercial & Sugar operations, respectively.

Revenue for 4Q16 was $111.2 million, compared to revenue of $103.3 million for 4Q15. 4Q16 revenue was higher primarily due to higher vacant parcel sales.

Commercial Real Estate The segment posted operating profit of $13.5 million, compared with $13.4 million in 4Q15. NOI was $20.7 million¹ in 4Q16, down 2.4%¹ from 4Q15, due to $0.5 million of retroactive ground lease rent and a $0.5 million lease termination payment received in 4Q15. Portfolio occupancy was lower at 92%, compared to 94% in 4Q15, which was primarily due to a decline in mainland occupancy from 94% to 91% resulting from the previously described large industrial tenant downsizing in July 2016. Hawaiʻi occupancy was also lower at 93% for 4Q16, compared to 94% for 4Q15.

Land Operations Land Operations posted operating profit of $13.9 million, which included joint venture income from 451 closings of The Collection units and associated developer fees, two vacant parcel sales on Maui, a residential unit on Kahala Avenue, previously described write downs of certain development and joint venture projects of $15.2 million and agricultural operations. 4Q15 operating profit was $10.6 million and comprised eight vacant parcels (five on Maui and three on Kauai), a one-acre parcel at Maui Business Park and agricultural operations.

Materials & Construction The segment posted operating profit of $4.8 million for 4Q16 and $9.2 million for 4Q15, and adjusted EBITDA of $6.4 million¹ for 4Q16 and $11.6 million¹ for 4Q15. 4Q16 operating profit was affected by the previously-described $2.6 million accrual for environmental-related costs and the $0.6 million gain on sale of a vacant parcel by an unconsolidated affiliate. 4Q16 operating profit was also affected by decreased paving, quarrying and material sales resulting from inclement weather. Oʻahu crew days lost to weather for 4Q16 were 27.8% higher than 4Q15. Adjusted EBITDA was lower due to the environmental cost accrual and decreased paving, quarrying and material sales resulting from inclement weather.

Previous 2016 guidance related to the former Agribusiness segment was affected by the application of discontinued accounting treatment to HC&S and by the change in business segments. As a result, 2016 operating profit (loss) from sugar operations included in discontinued operations of $10.9 million (see above) is not comparable to previous guidance. Below are results compiled on a comparative basis to previous guidance.