ALEXANDER & BALDWIN. Third Quarter 2017 Earnings Call. November 7, 2017

Transcription

1 1 ALEXANDER & BALDWIN Third Quarter 2017 Earnings Call November 7, 2017

2 SAFE HARBOR STATEMENT 2 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 and the Company business generally discussed in the Company s most recent Form 10-K, Form 10-Q and other filings with the Securities and Exchange Commission. 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.

3 STRONG PROGRESS ON STRATEGIC IMPLEMENTATION 3 CRE portfolio performance CRE portfolio growth Monetization of development pipeline Advancement of diversified agriculture initiatives Operational initiatives at Grace REIT conversion and related final steps

4 SOLID 3Q17 FOR CRE SEGMENT 4 Strong Same-Store Cash NOI growth of 4.0%, including Hawaii Same-Store Cash NOI growth of 3.5% Total occupancy improved 280 bps to 94.1%, compared to 3Q16 Cash leasing spreads of 8.4% achieved in 3Q17, including Hawaii retail leasing spreads of 4.5% 2017 FY outlook is for portfolio-wide space lease spreads between 13% and 15% Three ground leases renewed at a weightedaverage increase of 33% Note: See appendix for a statement on management s use of non-gaap financial measures and reconciliations.

5 CRE PERFORMANCE METRICS 5 Performance Metric 3Q17 YTD Sept 30, 2017 Same-store NOI +4.0% +4.3% Leasing spreads +8.4% +15.8% % Occupancy As of Sept. 30, 2017 ABR/sf Hawaii Mainland Total Hawaii Retail $27.62 Industrial $13.48 Office $29.07 Total $23.17 Note: See appendix for a statement on management s use of non-gaap financial measures and reconciliations. Waipio Shopping Center

6 HAWAII MARKET FUNDAMENTALS SUPPORT RETAIL PERFORMANCE 6 2.5% September Unemployment +0.5% September Seasonally Adjusted Non-ag Jobs +6.5% YTD August Individual Income +4.8% YTD August General Excise Tax Revenue Sources: Hawaii Department of Business, Economic Development & Tourism (DBEDT), Monthly Economic Indicators August State of Hawaii Department of Labor and Industrial Relations. Data provided for informational purposes only; no endorsement implied.

7 HAWAII ECONOMY PERFORMING WELL 7 Visitor arrivals and expenditures poised for a 6th consecutive record year Oahu residential resales (YTD 9/17 vs. YTD 9/16) Single Family: $757,000, up 3.4% Condo: $407,000, up 5.4% Value of construction permits up 5.8% (YTD through August) Sources: Hawaii Dept. of Business, Economic Development & Tourism; Department of Labor and Industrial Relations; U.S. Honolulu Board of Realtors, Colliers International Data provided for informational purposes only; no endorsement of forecast implied.

8 RETAIL LOCATIONS THROUGHOUT HAWAII MAKE A&B THE LANDLORD OF CHOICE 8 KAUAI OAHU MAUI BIG ISLAND Hanalei Lihue Waimea Poipu Haleiwa Waianae Mililani Pearl City Kapolei Kaneohe Downtown Manoa Kailua Kaanapali Lahaina Kahului Wailea Waimea Hana Kukio Kailua-Kona Hilo Captain Cook

9 9 Pearl Highlands Center Food Court PHASE TARGET STABILIZATION CAPITAL INCREMENTAL STABILIZED NOI STABILIZED YIELD ON COST SQ. FT. Pearl Highlands Center food court/ Regal renovation* Construction 1Q18 $6.0M $0.6M % 54,000 Lau Hala Shops (Kailua Macy s) repositioning Construction 1Q19 $21.0M $ M % 50,500** Ho`okele Shopping Center development for hold Preconstruction 2Q20 $41.9M*** $ M % 94,000 $68.9M $5.6-$6.6M % 198,500 PROJECT ACTIVE FOR-HOLD PROJECTS Total As of Sept 30, 2017 ** Includes $3M of tenant improvement capital to Regal Entertainment for their renovations that provide a 10.3% stabilized yield on cost Projected GLA increased from 48,400 to 50,500 in 3Q17, as the Company executed a lease with Down to Earth that includes a mezzanine space that was not previously expected to be leased. *** Includes land at book value; stabilized yield on cost would be about 100bps lower if included at market value Note: Complete table, including leasing activity, is included the quarterly Supplemental Information report.

10 DEVELOPMENT/PARCEL SALES MONETIZING PIPELINE THROUGH SALES OF EXISTING INVENTORY AND SELECT PARCEL SALES 10 Development/parcel sales Brydeswood development (Kauai) for $8.1 million Vacant parcel (Maui) for $7.9 million Half-acre parcel at Maui Business Park (Maui) for $1.0 million Operating profit contribution totaling $10.5 million Joint venture sales Two townhomes at The Collection (Oahu) Three units at Kukui ula (Kauai) Four units at Ka Milo (Big Island) Equity in income of joint ventures totaled $2.9 million

11 Increment I - total units Units closed as of 11/7/17 Bound units as of 11/7/17 Units expected to close in 4Q17

12 12 70 Total units 62 Bound units as of 11/7/17 30 Units expected to close by 1Q18

13 ADDITIONAL SALES ACTIVITY 13 Expected 4Q17 closings: Three townhomes at The Collection Kahala Avenue property Maui Business Park lot Four Kukui`ula units Other sales interest: Maui Business Park lot Wailea parcel Two Kahala Avenue properties

14 ADVANCING DIVERSIFIED AG ON FORMER SUGARCANE LANDS 14

15 MATERIALS & CONSTRUCTION PERFORMANCE 15 3Q17 vs 3Q16 performance Operating profit of $6.5M vs $5.6M Adjusted EBITDA of $9.1M vs $8.0M Factors affecting 3Q17 vs 3Q16 Improved performance from unconsolidated joint ventures 30.7% increase in paving tonnage Lower paving margins Competitive pricing environment Increased mix of lower margin projects Hired new COO, Pike Riegert Comprehensive organizational efficiency initiative underway Note: See appendix for a statement on management s use of non-gaap financial measures and reconciliations.

16 REIT CONVERSION AND RELATED STEPS 16 Holding Company Merger Special meeting of shareholders held 10/27/ % of shares voted approved the merger Establish standard ownership limitations and transfer restrictions to facilitate ongoing compliance with the REIT requirements Enhance corporate governance practices REIT conversion costs expected to be between $25M-27M, within previous guidance

17 17 Financial Review James Mead Chief Financial Officer Alexander & Baldwin

18 AMOUNTS AVAILABLE TO A&B SHAREHOLDERS DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS Continuing operations, net of income taxes 3Q Q Discontinued operations, net of income taxes Diluted Earnings (Loss) Per Share Available to A&B Shareholders 3Q17 3Q16 Continuing operations, net of income taxes Discontinued operations, net of income taxes (0.02) (0.27) Net income (loss) 0.13 (0.03) Net income (loss) 18

19 MAJOR DRIVERS OF RESULTS DOLLARS IN MILLIONS 19 3Q17 3Q16 Variance Income from continuing operations before income taxes (2.1) Major 3Q17 drivers: CRE Land Operations Materials & Construction Operating profit General corporate expenses (8.9) (5.5) (3.4) REIT evaluation/conversion costs (4.4) (1.9) (2.5)

20 MAJOR DRIVERS OF RESULTS G&A AND REIT CONVERSION COSTS DOLLARS IN MILLIONS 20 G&A 3Q17 3Q17 3Q17 Actual Transition Costs As Adjusted CRE 1.9 (0.2) 1.7 Land Operations 4.7 (0.2) 4.5 Materials & Construction 4.6 (0.1) 4.5 General corporate expenses* 8.9 (4.1) 4.8 Total 20.1 (4.6) 15.5 REIT Conversion Costs Conversion costs through 2Q Q Subtotal 20.9 Estimated 4Q Total projected conversion costs * Includes $3.2M of transition costs and $0.9 million of pension costs that will be removed from G&A due to accounting changes in 2018.

21 $48M TAX-ADVANTAGED PENSION FUNDING 21 Qualified pension plans 96% funded $22.5M net cash outlay Tax savings of $19.0M Reduction in cash component of Special Distribution of $6.5M Enables match funding of the plans assets and liabilities

22 SPECIAL DISTRIBUTION 22 $785M to $805M estimated range Declared in mid-november 2017, paid in January 2018 To be paid 80% stock and 20% cash in the aggregate Comprises: E&P purge About 90% of the Special Distribution at the midpoint Taxable for 2017 Qualified dividend 2017 dividend related to distributable REIT income Taxable for 2017 Non-qualified dividend 2018 dividend related to distributable REIT income Taxable for 2018 Non-qualified dividend

23 FINANCING ACTIVITIES 23 Revolving credit facility Increased capacity by $100M to $450M Rate lowered Increased financial covenant flexibility Private note shelf Increased financial covenant flexibility $75M rate locked at low rates $50M at 4.04%, maturing 2026 $25M at 4.16%, maturing 2028

24 CRE ACTIVITY AFFECTING FUTURE QUARTERS 24 Sale of Midstate 99 Distribution Center Concord Commerce Center lease termination Termination fees expected to be received in 4Q17 and 2Q18 Negative impact to Same-Store Cash NOI in 2018

25 CAPITALIZATION & LIQUIDITY PRO FORMA FOR COMMITTED FINANCINGS 25 $358M available on line of credit 5.2x net debt / TTM EBITDA 21.5% debt to total capitalization 86% fixed-rate debt 6.2 years weighted-average maturity 4.3% weighted-average interest rate 78% of commercial properties are unencumbered* * Based on net book value of commercial propeties. Note: See appendix for a statement on management s use of non-gaap financial measures and required reconciliations.

26 26 Closing Remarks Chris Benjamin President & CEO Alexander & Baldwin

27 CLOSING REMARKS 27 Progress toward strategic initiatives CRE portfolio performance CRE portfolio growth Monetization of development pipeline Advancement of diversified agriculture initiatives Operational initiatives at Grace REIT conversion and related final steps Team makes A&B a compelling Hawaii investment

28 28 ALEXANDER & BALDWIN Premier Hawaii Real Estate Company THIRD QUARTER 2017 EARNINGS CALL QUESTIONS & ANSWERS

29 29 Appendix

30 Key Hawaii Economic Indicators 30 (Percent change, except unemployment rate) F DBEDT DBEDT DBEDT UHERO DBEDT Real Gross Domestic Product Visitor Arrivals* Visitor Expenditures Real Personal Income Unemployment Rate Sources: University of Hawaii Economic Research Organization (UHERO), State Forecast Update September Hawaii Department of Business, Economic Development & Tourism (DBEDT), Outlook for the Economy 3Q Data provided for informational purposes only; no endorsement implied. * UHERO forecasts of visitor arrivals consider visitor arrivals by air only. DBEDT forecasts consider air and cruise ship arrivals.

31 Visitor Arrivals & Expenditures 31 Visitor Arrivals (in Millions) Sept. YTD 2017 v. Sept. YTD 2016 Arrivals: 4.9% Expenditures: 7.1% Visitor Expenditures ($ in Billions) F Visitor Expenditures Visitor Arrivals 6 Source: DBEDT, Outlook for the Economy 3Q Hawaii Tourism Authority September 2017 Visitor Highlights Data provided for informational purposes only; no endorsement of forecast implied.

32 Hawaii & U.S. Unemployment Rate 32 Percent Hawaii Average Unemployment Sept % Sept % F Hawaii U.S. Sources: DBEDT, Outlook for the Economy 3Q Federal Reserve Forecast as of September 2017; State of Hawaii Department of Labor and Industrial Relations; Data provided for informational purposes only; no endorsement of forecast implied.

33 Hawaii Real Estate Overview Oahu Oahu Single Family Homes & Condo Resales (Quarterly Data) ,000 2,500 Median Price ($) 700, , , , , ,000 2,000 1,500 1, Sales Volume 100, Oahu- SFH Median Price Oahu- Condo Median Price Oahu - SFH Sales Volume Oahu- Condo Sales Volume Source: Title Guaranty Statewide Housing Statistics report, Honolulu Board of Realtors September Data provided for informational purposes only; no endorsement implied.

34 STATEMENT ON USE OF NON-GAAP FINANCIAL MEASURES 34 The Company presents the certain non-gaap financial measures in this presentation. The Company uses these non-gaap measures when evaluating operating performance because management believes that they provide additional insight into the Company s and segments' core operating results, and/or the underlying business trends affecting performance on a consistent and comparable basis from period to period. These measures generally are provided to investors as an additional means of evaluating the performance of ongoing core operations. The non-gaap financial information presented herein should be considered supplemental to, and not as a substitute for or superior to, financial measures calculated in accordance with GAAP. The Company s methods of calculating non-gaap measures may differ from methods employed by other companies and thus may not be comparable to such other companies. Required reconciliations of these non-gaap financial measures to the most directly comparable financial measure calculated and presented in accordance with GAAP are set forth in the following slides.

35 CRE CASH NET OPERATING INCOME 35 Cash Net Operating Income (Cash NOI) is a non-gaap measure used by the Company in evaluating the CRE segment s operating performance as it is an indicator of the return on property investment, and provides a method of comparing performance of operations, on an unlevered basis, over time. Cash NOI is calculated as total property revenues less direct property-related operating expenses. Cash NOI excludes straight-line rent adjustments, amortization of favorable/unfavorable leases, amortization of tenant incentives, general and administrative expenses, depreciation and amortization (including amortization of maintenance capital, tenant improvements and leasing commissions). In connection with the Company's decision to convert to a REIT in 2017, the Company has revised its definition of NOI to adjust Operating Profit for termination income, lease incentive amortization, and favorable/unfavorable lease amortization. We refer to amounts reported in this presentation under our new definition as "Cash NOI" to distinguish from the amounts previously reported under our prior definition. While there is no standard industry definition of NOI, the Company believes its revised definition is more closely aligned with current practices of other REITs. The Company s methods of calculating non-gaap measures may differ from methods employed by other companies and thus may not be comparable to such other companies.

36 CRE CASH NET OPERATING INCOME RECONCILIATION OF GAAP TO NON-GAAP MEASURES ($ IN MILLIONS) 36 Three Months Three Months Ended Ended Change** September 30, September 30, CRE Operating Profit $13.6 $13.5 Plus: Depreciation and amortization Less: Straight-line lease adjustments (0.3) (0.4) Less: Lease incentive amortization* - - Less: Favorable/(unfavorable) lease amortization* (0.6) (0.9) Less: Termination income* - - Less: Other (income)/expense, net Plus: Selling, general, administrative and other expenses CRE Cash NOI $21.2 $ % Acquisition/dispositions and other adjustments (1.8) (1.5) CRE Same-Store Cash NOI $19.4 $ % Represent changes from prior definition of NOI ** Change calculated on non-rounded amounts. Note: Additional information is included in the Company s quarterly Supplemental Information report, which is furnished to the SEC and available at

37 EBITDA EBITDA is presented for the Company on a consolidated basis. EBITDA represents the Company s consolidated net income adjusted to exclude the impact of depreciation and amortization, interest expense and income taxes. The Company provides this information to investors as an additional means of evaluating the performance of the Company s operations and should be not be viewed as a substitute for, or superior to, financial measures calculated in accordance with GAAP. A reconciliation of consolidated net income to EBITDA follows: 37 Dollars in Millions Trailing Twelve Months Ended September 30, 2017 Net income 19.0 Depreciation & amortization expense 67.3 Interest expense 24.7 Income tax expense 6.3 EBITDA Note: Additional information is included in the Company s quarterly Supplemental Information report, which is furnished to the SEC and available at

38 EBITDA 38 Trailing Twelve Months Ended Other discrete items impacting EBITDA September 30, 2017 Income attributable to noncontrolling interests (2.4) Income from discontinued operations before interest, income taxes and depreciation and amortization (14.3) REIT evaluation/conversion costs 17.1 Reduction in solar investments, net 2.7 Impairment of real estate assets 11.7 Net gain on sales of improved property (3.0) Other discrete items related to unconsolidated investments in affiliates: Share of impairment of real estate assets (Land Operations segment) 3.5 Share of net loss on non-core parcels (Materials & Construction segment) (0.6) Note: Additional information is included in the Company s quarterly Supplemental Information report, which is furnished to the SEC and available at

39 M&C EBITDA & ADJUSTED EBITDA 39 Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) is a non-gaap measure used by the Company in evaluating the Materials & Construction segment's operating performance on a consistent and comparable basis from period to period. The Company provides this information to investors as an additional means of evaluating the performance of the Materials & Construction segment's ongoing operations. EBITDA is calculated for the Materials & Construction segment by adjusting segment operating profit (which excludes interest and tax expenses), by adding back depreciation and amortization. Adjusted EBITDA is calculated for the Materials & Construction segment by subtracting income attributable to noncontrolling interests from segment EBITDA. The Company s methods of calculating non-gaap measures may differ from methods employed by other companies and thus may not be comparable to such other companies.

40 M&C EBITDA & ADJUSTED EBITDA RECONCILIATION OF GAAP TO NON-GAAP MEASURES ($ IN MILLIONS) 40 Three months ended September 30, Three months ended September 30, Materials & Construction operating profit (excludes interest and taxes) $6.5 $5.6 Depreciation and amortization Change Materials & Construction EBITDA $9.6 $ % Income attributable to noncontrolling interest (0.5) (0.5) Materials & Construction Adjusted EBITDA $9.1 $ % Note: Additional information is included in the Company s quarterly Supplemental Information report, which is furnished to the SEC and available at