A&B Reports Second Quarter 2017 Financial Results

Alexander & Baldwin, Inc. today announced its financial results for the second quarter of 2017.

Alexander & Baldwin photo of HC&S Puʻunēnē mill and surrounding sugar fields. Courtesy image.

2017 Financial Highlights

Commercial Real Estate – 2Q17 operating profit declined $1.3 million to $13.4 million, driven by realignment of internal costs. Same-store net operating income 1 for 2Q17 increased 4.7%, including Hawaiʻi retail same-store NOI1 that was up 5.1%.

Portfolio occupancy at the end of 2Q17 increased 70 basis points to 94.1%, fueled by a 140 bps increase in Hawaiʻi portfolio occupancy.

Comparable 2Q17 cash leasing spreads of 19.8%, including a strategic anchor renewal with Regal Cinema at Pearl Highlands Center.

Materials & Construction 2Q17 operating profit improved to $6.7 million from $4.9 million for 2Q16.

2017 Strategic Accomplishments

Elected to be a real estate investment trust effective for the 2017 taxable year.

Appointed REIT-experienced board director and chief financial officer.

Acquired the Honokohau Industrial center in June for $10.1 million with proceeds from sales of non-income producing assets.

Advanced redevelopment and development projects like Lau Hala Shops and Hoʻokele Shopping Center.

Redeployed agricultural lands into diversified agriculture activities such as ranching, renewable energy, and food and energy crops.

“We’re achieving our strategic objective of commercial real estate growth as evidenced by a solid increase in same-store NOI during the quarter and comparable leasing spreads of 19.8%. On the acquisitions front, in June, we added the 73,200-square-foot Honokohau Industrial center on the Island of Hawaii to our CRE portfolio, which was completely funded with 1031 sales proceeds from non-income producing properties,” said Chris Benjamin, president & chief executive officer. “Taken together with the recent announcement of our conversion to a REIT, these actions position us for continued growth as a Hawaii-focused commercial real estate company,” he said.

“Land Operations contributed modestly to quarter earnings while Materials & Construction’s financial performance in the second quarter improved compared to the first quarter of 2017 and last year’s second quarter,” he added.

Financial Results
2Q17 vs. 2Q16

Consolidated – The company reported consolidated income from continuing operations available to A&B shareholders, net of taxes, of $3.7 million, or $0.07 per diluted share, for 2Q17, compared to $3.1 million, or $0.06 per diluted share, for 2Q16. Results for 2Q17 included $1.6 million of after-tax costs ($2.2 million pre-tax), or $0.03 per diluted share, related to the Company’s conversion to a REIT, compared to $1.5 million of after-tax costs ($1.9 million pre-tax), or $0.03 per diluted share for 2Q16.

Net income attributable to A&B shareholders (which includes the effect of discontinued operations) was $4.3 million for 2Q17, compared to a net loss attributable to A&B shareholders of $0.7 million for 2Q16. In addition to the aforementioned REIT conversion costs, results for 2Q17 and 2Q16 included the discontinued operations of Hawaiian Commercial & Sugar (HC&S)—$0.8 million, or $0.02 per diluted share of after-tax income for 2Q17 and $3.7 million, or $0.07 per diluted share, of after-tax losses, for 2Q16.

Revenue for 2Q17 was $98.1 million, compared to revenue of $82 million for 2Q16. The increase in revenue is attributable to increased Materials & Construction revenue and development and parcel sales, partially offset by lower commercial real estate revenue due to the timing of the Manoa Marketplace acquisition in January 2016 and related dispositions of mainland assets in June 2016.

Commercial Real Estate. CRE performed well in 2Q17, although increased G&A expenses and the Manoa Marketplace exchange timing impacted CRE operating profit, lowering it from $14.7 million for 2Q16 to $13.4 million for 2Q17. Increased G&A expense reflects the strategic shift to focus on the growth of the commercial real estate portfolio through acquisition, development and redevelopment, resulting in a reallocation of certain personnel costs to the CRE segment, as well as the temporary overlap in personnel costs related to bringing property management and leasing in-house while transitioning from existing third-party property management arrangements. Same-store NOI1 increased by 4.7% in the quarter, compared to 2Q16. Supporting the same-store NOI growth were improvements in Hawaii occupancy, which increased by 140 bps, improved performance from the Kailua Town retail assets and retroactive rent received on a ground lease that was renewed in 2Q17. For the quarter, Hawaii properties produced 87% of total same-store NOI and mainland properties produced 13%.

Portfolio-wide CRE occupancy improved 70 bps to 94.1% at the end of 2Q17 from 93.4% at the end of 2Q16. Hawaii occupancy improved 140 bps at the end of 2Q17 to 93.8% from 92.4% at the end of 2Q16, and mainland occupancy fell 30 bps from 94.9% at the end of 2Q16 to 94.6% at the end of 2Q17.

In 2Q17, the Company executed 57 leases, 43 of which were comparable (either renewals or new leases of the same space within 12 months) and were renewed/re-leased with cash leasing spreads of 19.8%, which includes a strategic renewal of a 47,700-square-foot lease with Regal Cinema, an anchor tenant at Pearl Highlands Center.

Land Operations. Land Operations posted 2Q17 operating profit of $1.7 million. Results for 2Q17 included the sale of a 3-acre parcel at Wailea, Maui for $3.6 million, and vacant parcel sales on Oahu and Maui totaling $1.4 million (operating profit contribution for the three sales amounted to $2.1 million). Results also included joint venture sales of four Kukui’ula units and four Ka Milo units (equity in earnings of real estate joint ventures totaled $0.6 million). Offsetting the operating profit contribution from these sales were a $0.2 million write down of the Company’s investment in the Waihonu solar project (recognition of tax benefits related to the project reduce the carrying value of this tax equity investment) and segment and agricultural operations net expenses.

In 2Q16, the segment’s operating loss was $11.5 million, which was primarily driven by a $9.5 million reduction in the carrying value of the Waihonu solar project. Segment operating loss also included joint venture expenses that were partially offset by joint venture sales of two units at Kukui`ula and three units at Ka Milo (equity in losses of real estate joint ventures totaled $0.1 million). The remaining operating loss was primarily attributable to segment and agricultural operations net expenses.

Materials & Construction. The segment posted operating profit of $6.7 million for 2Q17, compared to $4.9 million for 2Q16, and EBITDA1 of $9.8 million for 2Q17, compared to $7.9 million for 2Q16. 2Q17 operating profit and EBITDA were higher due to a 63.9% increase in tons of asphalt placed in 2Q17, compared to 2Q16, despite continued margin pressure from competitor pricing for paving work and weather.

Other. Interest expense declined from $6.8 million for 2Q16 to $6.2 million for 2Q17, due to lower borrowings during 2Q17, compared to 2Q16. There were no sales of improved properties in 2Q17. Gain on sale of improved property of $8.0 million for 2Q16 relates to the sale of three mainland commercial properties to complete the funding for the Manoa Marketplace acquisition. General corporate expenses were higher, increasing to $5.9 million for 2Q17 from $4.0 million for 2Q16. The increase was primarily due to higher personnel-related and compensation costs, and professional services fees.

Consolidated Results Year to date through June 30, 2017 vs. Year to date through June 30, 2016

The Company reported consolidated income from continuing operations available to A&B shareholders, net of taxes, of $8.1 million, or $0.16 per diluted share, for 1H17, compared to $6.8 million, or $0.14 per diluted share, for 1H16. Results for 1H17 included $5 million of after-tax costs ($7.0 million pre-tax), or $0.10 per diluted share, related to the REIT conversion, compared to $1.5 million of after-tax costs ($1.9 million pre-tax), or $0.03 per diluted share for 1H16.

Net income attributable to A&B shareholders (including discontinued operations) was $10.6 million, or $0.23 per diluted share, for 1H17, compared to a net loss attributable to A&B shareholders of $8.2 million, or $0.16 per diluted share, for 1H16. In addition to the REIT conversion costs, results for 1H17 included $3.2 million, or $0.07 per diluted share, of after-tax income from discontinued HC&S operations. Results for 1H16 included $14.5 million of after-tax losses, or $0.30 per diluted share, from discontinued HC&S operations.

Revenue for 1H17 was $191.3 million, compared to revenue of $173.4 million for 1H16. The increase in revenue is primarily attributable to increased Materials & Construction revenue and development and parcel sales, partially offset by lower CRE revenue due to the timing of the Manoa Marketplace acquisition in January 2016 and related dispositions of mainland assets in June 2016.