ALEX
#Good day, ladies and gentlemen, and welcome to the 2016 first-quarter earnings conference call.
My name is Whitley, and I will be your operator for today.
(Operator Instructions) As a reminder, this conference is being recorded for replay purposes.
I will now turn the conference over to your host for today, Ms.
<UNK> <UNK>, Director Investor Relations.
Please proceed.
Thank you, Whitley.
Aloha and welcome to Alexander & Baldwin's first-quarter earnings call.
On the call with me today are <UNK> <UNK>, President and CEO, and <UNK> <UNK>, Senior Vice President and CFO.
Joining us for the Q&A portion of the call are <UNK> <UNK>, A&B Vice President Corporate Development, and <UNK> <UNK>, president of A&B Properties.
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.
Factors that could cause actual results to differ materially from those contemplated in the statements include, without limitation, those described on pages 17 to 29 of the Company's 2015 annual report on Form 10-K and in other subsequent filings with the SEC.
These forward-looking statements are not guarantees of future performance, and we do not undertake any obligation to update our forward-looking statements.
Management will be referring to non-GAAP financial measures when discussing results today.
Included in the appendix of today's presentation slides is a statement regarding our use of these non-GAAP financial measures and required reconciliation.
Slides from this presentation are available for download at our website, www.alexanderbaldwin.com.
We will start with <UNK> who will comment on recent performance highlights and provide an update on operations.
<UNK> will follow with a discussion of the quarter financial performance and metrics.
<UNK> will then return for closing remarks and to open it up for your questions.
<UNK>.
Thank you, <UNK>, and good afternoon to our listeners.
On our year-end call in February, I organized my remarks around several value creation priorities and our progress in advancing them.
I would like to provide a further update on our progress today.
The priorities are, first and foremost, to increase the value of our commercial real estate portfolio and the recurring streams of income and cash it produces.
Second, to accelerate monetization of our significant development pipeline; to leverage the tremendous market position assets and backlog of our Materials and Construction segment in order to increase earnings and cash flow; to minimize cost of the cessation of sugar operations and successfully transition those lands to diversified agriculture.
And, finally, to continue to be disciplined about our financial underwriting and balance sheet management.
As I indicated in our earnings release, I am very pleased with the performance of our Leasing segment and the progress we are making in growing it.
The strategic acquisition of the 139,000 square foot Manoa Marketplace in January, not only furthered our migration of assets from the Mainland to Hawaii, where we are able to create more value, but it extended our retail presence on Oahu into Honolulu and adds growth potential via repositioning and expansion opportunities.
Manoa Marketplace is the second-largest grocery and drug-anchored center in urban Honolulu, and it represents 76% of the existing business zone gross leasable space in the attractive submarket of Manoa, home to the University of Hawaii's main campus.
The property is 99% leased and is anchored by Safeway and Longs Drugs/CVS.
Renovations are planned, and we are evaluating repositioning opportunities as well.
The acquisition of Manoa Marketplace helped fuel NOI growth of 7.2% in the first quarter, higher than previously anticipated.
As a result of this stronger than expected performance, full-year 2016 NOI growth will likely hit the high end of our previous 1% to 2% guidance.
Now, as a reminder for those who may have missed our year-end call, our full-year NOI growth projection is much lower than year-to-date growth because we expect to close the sale of three Mainland assets in June to fund the Manoa acquisition and also because we are pursuing some repositioning opportunities that I will discuss in a moment.
Same-store growth in Hawaii, however, is expected to remain quite strong in 2016 at about 5%.
In addition to the continued migration of the portfolio, we are actively pursuing opportunities to generate organic growth and enhance the value of the assets within our Hawaii portfolio.
The Kailua Macy's building was turned over to A&B at the end of the first quarter, and we are proceeding with plans to renovate the existing building and bring new dining and retail options to Kailua.
Preconstruction work has begun at the site, and construction bids are being reviewed.
We plan to invest approximately $21 million in the redevelopment of the space and expect returns on costs of about 9% to 11%.
We anticipate construction to be completed and the building to be operating in the first quarter of 2018.
We are pleased with the strong leasing interest we are seeing with multiple potential tenants negotiating for spaces in the building.
On a much smaller scale, we are investing a little over $2.5 million to transform the old food court at Pearl Highlands Center into a more upscale food hall.
Although the food hall is a small project, returns on costs are expected to be slightly higher than that ---+ than those for the Kailua Macy's project even before factoring in any uplift in traffic and rent at the rest of the center.
Results of leasing efforts for this space also have been strong with signed LOIs for over half of the space at rents substantially above existing rent.
Construction is scheduled to begin in the third quarter, and the food hall is expected to open in the first quarter of 2017.
Over the next several years, we will continue to allocate capital to other repositioning, renovation and redevelopment opportunities with attractive yields within our portfolio.
In addition, we continue to look for acquisitions and are evaluating more build for hold opportunities.
I hope to have more to report on these various initiatives as the year progresses.
Development sales in Q1 were, quite frankly, a miss, but we still feel good about market fundamentals, our inventory, and our prospects for the balance of the year, especially with the scheduled closings of The Collection units in the fourth quarter.
Our various projects remain well-positioned, and we have seen a pickup in buyer interest over the past month or so, following the stock market turmoil earlier in the year.
Construction at The Collection remains on schedule and is expected to be complete in November.
Last Friday we topped off the tower, and interior work is progressing on schedule.
Presales at the Company's 70-unit Keala o Wailea joint venture project located at the Wailea resort on Maui have been positive.
To date, 38 units have been presold under binding contract at an average price of $1.2 million.
Construction has commenced, and the Company expects to begin delivering units in mid-2017.
Also on Maui, marketing of the first 170 units was launched in late April at Kamalani, a 630-unit master-planned residential community on 95 acres in Kihei.
These homes are affordably priced beginning in the high $200,000 for a two-bedroom home and in the mid-$300,000 for a three-bedroom home.
Presales are, therefore, subject to county income restrictions and will culminate in a lottery process that will take place in July.
Site construction has begun, and the first homes are expected to be delivered in late 2017.
As you can imagine, economic margins on affordable homes are minimal, but they do generate housing credits and will pave the way for the later market priced home.
Turning to Kauai and Kukui'ula, on slide 12, sales of three custom lots and four homes, or seven total sales, have closed since the beginning of the year.
The average price for these custom lots was $1.1 million, while the homes average $2.8 million.
There are six additional units under binding contract that we expect will close this year, and other buyers are showing strong interest.
Homebuilding activity at Kukui'ula continues to be positive.
15 members are building homes, and there are 25 additional developer homes under construction through our various building initiatives.
In our Materials and Construction segment, strong income growth achieved in 2015 continued into the first quarter.
EBITDA rose 9.5% to $10.4 million compared to the first quarter of 2015.
Grace's backlog remains robust at $227 million as of the end of March.
Grace should benefit from significant pending government contracts and an anticipated expansion in private development work.
I am proud to report we remain one of the most active investors in renewable energy in Hawaii.
Following on the success of our 6-megawatt Port Allen Solar facility, we provided the equity for the development of the 12-megawatt KRS II solar farm on Kauai.
These facilities, together with our Wainiha plant produced 15% of Kauai's energy needs and have helped KIUC, the Kauai electric utility, achieve a 25% reduction in greenhouse gas emissions over the last five years.
The two solar facilities alone have helped reduce fossil fuel consumption on Kauai by 2.5 million gallons per year and Kauai's carbon dioxide emissions by over 25,000 tons per year.
They have been a win for the Company as well with attractive after-tax returns and favorable cash flow characteristics.
We continue to pursue opportunities to invest in renewable energy projects in Hawaii.
In March, we agreed to invest at least $13.5 million in Macquarie Infrastructure Corporation's Waihonu solar projects comprising two photovoltaic generating facilities totaling 6.5 megawatts located in Central Oahu.
Although modestly smaller in size than our prior investment, several characteristics make this a great investment for us, including the attractive risk return profile, the tax efficiency of the investment, the ability to diversify our renewable portfolio to Oahu, Hawaii's largest power market, and the ability to invest alongside Macquarie, which is also parent company of Hawaii Gas.
We anticipate the investment will be funded in the late second or early third quarter, and the project will be placed into service by the end of the third quarter of 2016.
As we described on January ---+ on our January 7th investor call, the decision to cease sugar operations and transition to a diversified ag model was a difficult one, but we are progressing with our efforts to implement that change and minimize its financial impacts.
The earnings guidance we provided on that call remains unchanged as the harvest is on schedule, which is good news, but we still have a long way to go.
So we will hold steady on the forecast of $5 million to $15 million loss from operations.
Cessation costs so far this year have tracked below our initial projections, which is good news.
Out of an abundance of caution, however, we are going to stick with our original guidance for the full year and our projection of cash flow neutrality for the entire cessation.
We will look to update those forecasts next quarter if the good news continues.
Let me take a minute to update you on the status of diversified agriculture and our efforts there.
We are exploring and making good progress on a number of fronts.
A grazing trial has been established, and we are evaluating the merits of leasing land for large-scale ranching operations.
There is growing demand for locally raised grass fed beef that we hope to help Maui's ranchers meet, and we hope to help them address their infrastructure needs as they try to expand to meet this market.
Additionally, we are conducting energy crop trials that could ultimately serve as feedstock for biofuel, biogas, and biodiesel crop to energy processes, replacing imported fossil fuels with Hawaii grown renewable fuel sources.
Discussions continue on a potential partnership to grow oilseed crops as feedstock for biodiesel production, and we are working with the leading global anaerobic digestion firm on a feasibility study for large-scale biomass digester operations.
In the end, it is unlikely that we will pursue any of these opportunities as a standalone operation.
Rather, we will utilize a combination of contract growing joint ventures and third-party lease arrangements to minimize the use of our capital and, of course, our exposure to the volatility inherent in farming businesses.
Although we are not actively marketing any of the sugar lands for sale at this time, it is quite possible that some of these opportunities are best pursued through the sale of certain parcels.
Finally, on the financial management front, we continue to look for ways to reduce our cost of capital, and recently we entered into a forward swap to lock in an attractive rate of 3.135% on $60 million of future financing.
The $60 million of financing is currently being negotiated, and proceeds are expected to be drawn in the third quarter of 2016.
Proceeds from the financing are expected to be used for general corporate purposes, including paying down the Company's revolving credit facility.
Together, the forward swap and future financing will reduce the Company's floating rate exposure and provide low-cost, long-term capital.
With that, let me now turn the call over to <UNK> to discuss our financial performance.
Thank you, <UNK>.
On slide 18, we have a snapshot of first-quarter results.
The Company reported a net loss of $7.5 million or $0.15 per diluted share.
These results include a $10.3 million after-tax loss or $0.21 per diluted share for the Agribusiness segment, reflecting the cessation costs at HC&S.
Excluding the agribusiness impact, the largest negative variance in the quarter over quarter comparison relates to the 2015 first-quarter closing of 328 Waihonua units.
Our Leasing and Materials and Construction segments' operating profit and cash flow performances were particularly strong in the quarter.
Leasing operating profit for the first quarter was $14.1 million, a 6.8% increase compared to the first quarter of 2015, and NOI was $22.4 million, a 7.2% increase.
The improvement in operating profit and NOI was principally attributable to the addition of Manoa Marketplace.
However, same-store performance was also a significant contributor with Hawaii same-store NOI up 5%.
Occupancy remains stable at 94% quarter to quarter and quarter over quarter.
Materials and Construction operating profit for the first quarter was $8 million, up 11.1% compared to the first quarter 2015, and EBITDA was $10.4 million, a 9.5% increase over the first quarter of 2015.
The improved performance was due principally to increased construction material sales, increased tons paid and quarry efficiency gains.
Development and Sales reported an operating loss of $3.8 million in the quarter as sales of five joint venture units on Kauai were more than offset by Manoa Marketplace acquisition costs and joint venture and other segment operating expenses.
Operating profit from Development and Sales in the first quarter of 2015 was $32 million and primarily included 328 Waihonua condominium unit joint venture closing.
The Agribusiness segment reported a pretax operating loss for the first quarter of $14.3 million, which includes the $15.5 million of sugar cessation related expenses.
These results compare to Agribusiness operating profit of $1.9 million in the first quarter of 2015.
First-quarter 2016 Agribusiness losses were lower than projected, due primarily to the timing of some cost accruals and lower than expected costs for certain cessation-related activities.
On slide 20, we have our balance sheet at the end of the quarter and at the end of 2015.
Our debt to debt plus equity ratio increased by 4 percentage points in the quarter, primarily due to the acquisition of Manoa Marketplace.
Under a reverse 1031 exchange for Manoa, the proceeds from the pending sales of the three Mainland properties in June will be used to reduce our debt levels.
Moving on to slide 21, we invested $97 million of gross capital in the first quarter, of which $82 million was for the Manoa Marketplace acquisition.
Additionally, $7 million went to investment capital, including active real estate projects and joint ventures and repositioning opportunities in the portfolio.
Another $8 million was for maintenance capital.
For the balance of the year, we are projecting an additional $186 million in gross capital expenditures, primarily for investment in the Oahu solar farms, upgrades to an existing hydroelectric facility, ongoing repositioning and development projects, and undesignated investment in new projects.
We also have a $25 million placeholder for commercial property acquisitions, which we anticipate will be funded through tax-deferred exchanges.
As in past years, our budget includes capital for opportunistic investments the size and timing of which, of course, is unpredictable.
With that, let me turn the call back to <UNK> for closing remarks.
Thanks, <UNK>.
So, in summary, Hawaii's economy remains strong, and I believe we are focused on the right areas to capitalize on that strength.
I acknowledge the sales hiccup we experienced in the first quarter, but believe we are making good progress in every other area, and the sales outlook for the balance of the year is certainly more favorable.
We have included a number of slides in the appendix to this presentation that document the strong performance of the Hawaii economy and suggest a continued favorable environment for our businesses.
We remain focused on the priorities I summarized at the beginning of the call, particularly increasing the value of our commercial real estate portfolio and the recurring streams of income and cash it produces.
That concludes our presentation this afternoon.
But before I turn it over for questions, I do want to say happy birthday to my mom because I know she is listening and happy birthday to <UNK>'s mom on Saturday and happy Mother's Day to all the mothers that are either listening or out there somewhere.
Thanks very much, and we will be happy to take questions now.
Sure, <UNK>.
Thanks for the question.
I will actually turn that over to <UNK>.
I will say that we are actively looking at opportunities in Hawaii and, as you point out, we do have the resources on the Mainland ---+ the assets on the Mainland to continue monetizing to fund those, and <UNK> can give you a little overview of how many assets remain and maybe a little bit sense of what we're looking at here in Hawaii.
Sure.
This is <UNK>.
As <UNK> indicated, we still remain very active in looking for new opportunities, and I think of them within the context of the strategic priorities that he laid out earlier in the presentation.
So, first and foremost, looking at similar opportunities on the commercial acquisition front to what we did with Manoa Marketplace to augment our existing grocery-anchored portfolio here in the islands.
As far as Mainland dispositions, we have currently 10 properties left.
To the extent that we are successful in selling the three that we mentioned, we would be down to seven.
We've never really put a value on that, but needless to say, that remains a high priority for us to the extent that we can find opportunities here to monetize those either in exchanges or reverse exchange opportunities.
Sure.
So Kahala, of course, we closed on Kahala in late 2013.
So we are about to ---+ a little over two years, two and a half years into the project.
We have sold now, I believe, 21 of 30 properties.
So absorption and price points exceeded our expectations early on.
We did always expect that some of the larger oceanfront properties, which, of course, have much higher price points, would be a little bit slower to absorb.
We have sold a number of them.
We do have a handful remaining and then a few mountainside lots remaining.
As with the lull that I referenced in development sales, we did have a bit of a slowdown in Kahala.
We do still have buyers that are looking and are interested, but it has been a little slower.
<UNK> is on the front line there.
Do you want to add anything in terms of ---+ on kind of our outlook there.
No, I would just say ---+ so, as <UNK> indicated, four of the remaining nine lots are the larger, more expensive oceanfront parcels where we do acknowledge that the buyer pool is more shallow than other segments in the market.
And so, consistent with that, we see the majority of our activity on the lower-priced parcels.
I would say the good news, with the majority of our investment already returned from previously reported sales, we are confident that, over time, we would be able to extract remaining value out of those nine parcels.
Yes, thanks.
I will have <UNK> address that question.
In terms of the quarter over quarter, we did have a little bit of benefit in the quarter from aggregate sales related to the horizontal site work at one of those referenced projects.
It was not a major driver in the quarter.
So I hesitate to say that that is really what impacted things, but we did see some additional volume from aggregate sales there.
In terms of the drivers of the quarter, I think you are seeing a couple of things that are happening.
I think you are seeing some benefits of throughput and core efficiency primarily as a result of greater volume, but also as a result of the multi-year quarry improvement plan that was started under prior management, and we completed and just got into service fully towards the tail end of last year.
And so I think that is a positive as well.
I tend to focus on Grace margins from a trailing 12-month basis in terms of the EBITDA margin, and we are at a very high level there where we are reaching margins of in excess of 19.5% on an EBITDA basis on trailing 12 months.
And so we are starting to see some of the benefits of that.
We also are seeing some margin benefits, of course, from lower petroleum prices, which petroleum is a major component of asphalt.
And so, obviously, that has some benefits as well.
But we feel pretty good about where that business is and where it is headed, and we feel pretty good about the opportunities ahead.
Steve O'Hara, Sidoti & Company.
Just sticking with Grace, the revenue is down.
And can you just remind me, that was more ---+ is that more just because of the pricing on the inventory is lower because of the decline in energy prices.
I think we feel that we are seeing, in terms of some of the gaps between contract opening and awarding and notice to proceed, we are still seeing some delays there.
Quite frankly, I think it is fair to say that some of that stuff never happens as quickly as you want, and that is just part of the life of this business.
I do think we do see some additional bidding opportunities come up that we feel pretty good about.
And, as I said before, we just feel very, very strongly that that business is in a good position right now with everything that is going on in the sector ---+ in the construction sector in general and in West Oahu where our quarry is located in particular.
Steve, I will take first shot at that, and then <UNK> can jump in here, if you would like.
Essentially, what we are saying, of course, Manoa Marketplace contributes significantly to our NOI.
Very attractive asset.
It is performing well.
Yes, we do expect some growth in NOI from that asset over time as we reposition it and all that, but it is already performing extremely well.
The reason that our full-year growth will be lower than our year-to-date growth is essentially, because we are doing a reverse 1031, we still own three of the assets that we are using to fund the acquisition.
But we are already getting the NOI from the new asset.
So it is really just a result of the fact that, when we sell those three assets, that NOI will go away.
Now, separate from that, we have also indicated that, because Macy's has come off-line, the Pearl Highlands food court is coming off-line, we have got some things that are we are repositioning in the portfolio that are modestly reducing our NOI as we reposition them.
But then, of course, we will get that and more back once they come back online.
So it is really a combination of those things.
Well, I think that our highest priority is going to be looking for opportunities to expand the recurring income streams in the commercial portfolio.
But we are also very focused on advancing the existing pipeline projects that we have and the development projects that we have in our pipeline.
So the Wailea project, Kamalani, Maui Business Park, Kukui'ula, we are still putting capital into those.
I would say that a tertiary objective and probably a little bit less likely, although we haven't closed the door on it, would be any new development projects that we might invest in.
We are still looking at those opportunities, but I think our primary focus is on growing the portfolio ---+ the commercial portfolio, building out our existing development pipeline, and then, again, as I said, a third priority would be any new development projects.
So the preferred capital stock for the reverse on Manoa Marketplace would include proceeds from the three Mainland sales, as well as some additional non-core land sales that we sold earlier this year and late last year that have been queued up and waiting for redeployment into the asset.
As far as timing, I think late second quarter, early third quarter is sort of what we are shooting for.
And then, in addition to that, if you recall, we did have a sale of a commercial asset last year in December, our Union Bank building up in Everett, Washington.
So that will also partially fund the Manoa acquisition.
Yes.
Yes.
I will start and then, again, let <UNK> jump in here.
Yes, Maui Business Park had a phenomenal year last year and really for the last few years.
And the big sale last year, of course, was Lowe's, and I think we are very much looking forward to the buildout of Lowe's.
Some of the car dealers that bought parcels last year.
And I think that will really continue to energize the project.
We have had some good interest.
We actually ---+ I think I referred earlier to the stock market turmoil.
I think that we did have one contract that we may have lost as a result of the buyer getting a little concerned in the wake of that.
But I would say that, in general, I think it is still very well positioned and good general interest.
We don't comment too much on any specific activity until it goes binding, but is there any other context you want to provide.
No.
I would just say, part of the great success we have had to date were with some of the larger sales.
So with the opening of Target and the groundbreaking just recently of Lowe's, we have done a very good job in anchoring the center.
And as we fill in some of the smaller users between these anchors, it will take a little bit of time for that interest to materialize.
We are also ---+ and I think this will be good news to you, <UNK>.
We are also beginning to evaluate some opportunities potentially build for hold at Maui Business Park.
I don't want to get ahead of ourselves in terms of whether we will be able to pursue those, but we are beginning to explore potential tenants and potential opportunities to do that as well.
