Alexander & Baldwin, Inc.
Q2 2013 Earnings Call Transcript

Published: 9 Aug 2013

[Operator:]

Good day, ladies and gentlemen, and welcome to the Q2 2013 Alexander & Baldwin Earnings Conference Call. My name is Clinton, and I'll be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for training purposes. I'd now like to turn the call over to Suzy Hollinger, Director of Investor Relations. Please proceed.

[Suzy Hollinger:]

Thank you. Aloha, and welcome to Alexander & Baldwin's Second Quarter 2013 Earnings Call. On the call with me today are Stan Kuriyama, A&B's Chairman and CEO; Chris Benjamin, A&B's President and COO; and Paul Ito, A&B's CFO. Also with us today are David Haverly, A&B Property Senior Vice President of Leasing; and George Morvis, A&B Vice President, Corporate Development and Planning, who will participate in the question-and-answer portion of the call. 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 relative forward-looking statements. Factors that also could cause actual results to differ materially from those contemplated in the statements include, without limitation, those described on Pages 18 to 28 of the company's 2012 Form 10-K. 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 for the year. In particular, we will be referring to adjusted net income and diluted earnings per share that exclude the impact of Grace Pacific acquisition costs on 2013 results and separation-related expenses and write-downs on 2012 results. We will also be referring to net operating income, and included in the appendix of today's slide presentation are reconciliations of GAAP to these non-GAAP financial measures and a statement regarding our use of these measures. Slides from this presentation are available for download at our website, www.alexanderbaldwin.com. Slide 3 provides an agenda for today's presentation, after which, we'll take your questions. We'll start with Stan, who will comment on the results and review the second quarter operational highlights.

[Stanley M. Kuriyama:]

Thank you, everyone, for joining us this afternoon. As noted in our press release, the company posted adjusted earnings in the second quarter of $0.15 a share compared to an adjusted $0.13 a share last year. Agribusiness results led in the year-over-year comparison due to increased charter income and molasses margins. Leasing NOI increased 6% compared to last year, although operating profit for the segment was up only slightly. Development and sales posted a small operating loss, reflecting the variable nature of earnings for this segment. Our reported earnings, however, do not tell the full story of the quarter during which we announced or completed a number of significant strategic investments. In May, we acquired Napili Plaza, a 46,000-square-foot grocery-anchored center near Kapalua, Maui for $19 million, reinvesting $16 million of proceeds from the January sale of the Northpoint Industrial complex in Fullerton, California. Also in May, we announced the acquisition of Pearl Highlands Center, a 415,000-square-foot retail power center in West Oahu. We expect to fund this purchase with proceeds from the anticipated sale of a 24-acre parcel adjacent to Maui Business Park, along with proceeds from future sales of Mainland commercial properties. We expect the Pearl Highlands purchase will close late in the third quarter of 2013. In June, we announced the acquisition of Grace Pacific Corporation, Hawaii's leading natural materials and paving company. This acquisition will enhance A&B's ability to leverage Hawaii's improving economy and real estate markets and materially strengthen our financial profile. The transaction is proceeding on schedule. We are very close to final SEC approval of the S-4, and were granted early termination of our Hart-Scott-Rodino waiting period. All previously opened due diligence items have been substantially closed. We expect to announce a date for the Shareholder's Meeting soon and look forward to closing the acquisition early in the fourth quarter. And we continue, of course, to pursue new opportunities to build our real estate development and investment pipeline, as well as migrate our commercial portfolio back to Hawaii. Hawaii's economy continues to perform well. Our visitor industry remains strong, with arrivals and expenditures through June growing by 6% and 7%, respectively, compared to last year. Oahu hotels led the largest 25 U.S. markets for the first 6 months of the year in revenue per available room, rising 16% during the first half of the year compared to last year. Hawaii's unemployment was 4.6% at the end of June compared to 6% a year ago, and bankruptcy filings declined by 17%. Through May, the value of construction permits increased by 15% compared to last year, primarily due to a significant increase in the value of residential permits on Oahu. State economists project solid annual growth in construction jobs of 7% to 11% between 2013 and 2015. Construction revenue is forecasted to be $7.5 billion in 2013, up 8% over 2012 and increase to $8.5 billion in 2014. Oahu's primary housing market also continues its strong performance. Oahu's median single-family home resale price reached $677,000 in June, approaching the market's peak median price of $685,000, which was achieved 6 years ago in June 2007. Single-family sales volumes, while up 10% in June compared to last year, are about 35% below peak volumes obtained in 2004, indicating we still have room for growth in this market. The same story applies to the condo market, where June median condo prices of $330,000 have returned to peak levels, but sales volumes are still 55% below peak year volumes. Oahu's industrial and retail markets remained strong, with a 3.2% industrial vacancy rate and a 4.3% retail vacancy rate. So as you can see, we have continuing good news on the state's economy. And I'd like to now ask Chris to update you on our operations.

[Christopher J. Benjamin:]

Thanks, Stan. Those strong Oahu statistics are a great segue into our operating update because we've been quite focused on expanding our Oahu footprint. We remain very active in the primary residential market in urban Honolulu and the suburban Oahu retail markets. All 340 of our Waihonua high-rise condominium units have been sold, with 99% now under binding contracts more than 1.5 years before delivery. As you can see from this picture on Slide 11, structural work has been completed up to the seventh floor of the residential tower. We're pleased with the pace of construction and remain on schedule to deliver units in the first quarter of 2015. On Slide 12, we completed the funding of our full $20 million investment in the ONE Ala Moana luxury condominium tower in May. Construction of the sold-out tower is proceeding on schedule, with steel trusses currently being installed on top level of the existing Nordstrom parking structure. The building is expected to be completed by the end of 2014. And we're quite pleased by our progress at The Collection, our newest high-rise condominium project. Yesterday, the Hawaii Community Development Authority approved our plans for the project, which will allow us to move forward with presales. Our sales office is ready to go, and we've initiated a friends and family presale program. Public marketing of the 397 tower units, which are priced from $380,000 to just over $1 million will begin later this month. Presales of the 70 flats and townhomes will follow later in the year. As we noticed -- as we've noted previously, the urban Honolulu high-rise market has been strong, and we're fortunate to be participating in that market through our Waihonua, ONE Ala Moana and The Collection projects. Moving to the neighbor islands for a moment, we continue to see a general uplift in Hawaii's resort residential market. At Kukui'ula, we had 4 closings in the second quarter

[Paul K. Ito:]

Thanks, Chris. On Slide 22, consolidated net income for the quarter was $5 million or $0.11 per diluted share compared to a net loss of $4.4 million or $0.10 per diluted share last year. Adjusted to exclude the Grace acquisition costs in 2013 and impairment and separation-related costs in 2012, net income was $6.5 million or $0.15 per diluted share in the second quarter of 2013 compared to $5.5 million or $0.13 per diluted share last year. The effective tax rate for the quarter was 45%, which was higher than the 39% statutory rate we anticipated at the beginning of the year due to nondeductible Grace acquisition expenses. As a result, we currently expect that the annual effective tax rate will be in the 42% to 44% range. On Slide 23, we compare our balance sheet at the end of June to the balance sheet at year end. Our debt to debt plus-equity ratio remains low at 25%, which includes the assumption of a $20 million mortgage related to the acquisition of Waianae Mall in January of this year, as well as investments in ONE Ala Moana, Maui Business Park II, Kukui'ula and commercial portfolio capital expenditures. Our debt to debt-plus-equity ratio will move up moderately when the Pearl Highlands acquisition closes and we assume the existing $59 million mortgage. Our balance sheet remains strong, with $291 million of available borrowing capacity at quarter end. Cash flows used in operating activities, excluding capital expenditures for real estate development inventory, was $8 million for the first half of the year, higher than 2012, principally due to seasonal ag working capital needs. The bottom of the slide provides a reconciliation of capital expenditures shown on the cash flow statement to total capital expenditures, including amounts invested in joint venture projects and real estate developments. In the first half of 2013, our capital investments amounted to $73 million, most of which was for growth capital, including $38 million of development capital for active real estate projects, joint ventures and investments, such as the ONE Ala Moana investment, and $49 million for the acquisitions of Waianae Mall and Napili Plaza, net of $25 million funded by 1031 proceeds. [indiscernible] in the 8K filed today describing our planned drawdown of $100 million of long-term debt under our Prudential private shelf facility to take advantage of the still favorable interest rate environment. The debt will be taken in 2 tranches, a $75 million note that bears interest at 3.9% and matures in November 2024, and a $25 million note that bears interest at 4.35% and matures in September 2026. The funds will be received in September and used to pay down our revolving credit line, as well as used for other capital needs. Lender fees for the transaction were 10 basis points. I will now turn the call over to Stan for closing remarks.

[Stanley M. Kuriyama:]

Thank you, Paul. Last month marked our first full year as a standalone company, and I'm pleased with the progress we've made in building value for our shareholders. Upon the closing of Pearl Highlands, we will have made excellent progress in our Hawaii commercial real estate investment program, with $191 million of acquisitions in 2013. Our development pipeline is full, with major projects on Maui, Kauai and Oahu, and we continue to augment the pipeline with advances in design and permitting on new projects. And last, but not least, we are acquiring a great company in Grace Pacific, which will strengthen us financially and strategically over the years ahead. That concludes our presentation this afternoon, and we would now be happy to answer your questions.

[Operator:]

[Operator Instructions] Your first question comes from the line of Sheila McGrath of Evercore.

[Sheila McGrath:]

First, a couple of questions on the Grace acquisition. Stan, could you give us a little bit more information on what the expected timing is? Is it third quarter or fourth quarter?

[Stanley M. Kuriyama:]

Yes. Sheila, we would expect to call our shareholder -- I mean, assuming the S-4 gets approved in a timely manner, we would expect to call a shareholder meeting sometime in the latter half, late September, and then close it shortly thereafter, so probably would be very early in the fourth quarter.

[Sheila McGrath:]

Okay. And the S-4 that you filed today, what was the difference between -- or what are the major changes in that from the earlier one?

[Paul K. Ito:]

Sheila, this is Paul. Yes, there were no changes to the numbers or projections, but we will be filing a revised S-4 with updated numbers. But the latest S-4 just addressed one of the SEC's comments related to incorporating by reference, past and future filings of A&B and then some other more legal-related type amendments.

[Sheila McGrath:]

Okay. So no numbers were changed?

[Paul K. Ito:]

No, no. No new numbers and no material changes from the prior filing.

[Sheila McGrath:]

Okay. And then on the -- in the S-4, the pro forma corporate expense goes much higher post-acquisition. I just wondered if you could explain that.

[Paul K. Ito:]

In the pro forma, well, essentially, what we're doing is we're adding the Grace G&A to our G&A, so we continue to project that our G&A will be in the $18 million run rate, and then the pro forma just takes their current G&A. Now of course, we are looking at ways or other synergies. We hadn't mulled that into our projections, but obviously, post acquisition, we will be looking for synergies where there's back office or operational-type synergies.

[Sheila McGrath:]

Okay, great. And then just on the land sale, I know it's significant, and so it would change our projections when we're going to time it in the second half of the year. I was wondering if there's any way you could give us more information on timing and sale price, if that's public yet.

[Stanley M. Kuriyama:]

How about yes and no? Yes, on timing, I think you can assume most likely fourth quarter. And as far as sale price, I would just sort of reiterate what we had said last time, which is that it is consistent with sort of the wholesale pricing for retail in that area, and you can look back to probably earlier transactions that we had that might be indicative. But we can't really go any further than that in terms of giving indications of pricing.

[Sheila McGrath:]

Okay. And last question, you did get the approvals yesterday on your next residential projects, which is great news. Just wondering if you had to make any major changes from what you've first presented to get the zoning and approval.

[Stanley M. Kuriyama:]

No, we did not. We were successful in getting the -- actually, quite frankly, very minor modifications or variances that we had sought. They were really fairly minor. They were critical to the project as we had designed it, but we were able to get them approved as is, so the project is as exactly as we had conceived it.

[Operator:]

The next question comes from the line of Ian Zaffino of Oppenheimer.

[Ian A. Zaffino:]

Just as far as you look to deploy more capital on the leasing side of the business, what type of cap rates are you seeing now? Where are multiples -- multiples come up or cap rates come down? If you can kind of help us there.

[Stanley M. Kuriyama:]

I'm going to let David address the cap rate question. The only think I wanted to sort of clarify is that, typically, when we're investing in commercial properties, we're not really deploying more capital, we're typically doing exchanges. And the only extent to which we really put new capital in is if we, for example, have to top off an investment or, in some cases, assume some debt. So I have just a little clarification on that part. But as far as the cap rates, I'll let David Haverly comment.

[David Haverly:]

Ian, for cap rates in Hawaii, we're generally seeing again cap rates that are in the mid-5 or sub-mid-5 rates to about 7 cap. For Mainland, this position is slightly different. We're seeing things in California reaching 5.5 and probably about 8 cap range, depending on product type and locations.

[Ian A. Zaffino:]

Okay. And on Hawaii in particular, how does that vary now between, let's say, retail or the other segments?

[David Haverly:]

There is definitely a demand for retail segments -- retail properties in the market. And again, there's very limited properties available for acquisition. So you're seeing cap rates probably on the lower side for products that have transacted this year. But you'll see probably a higher demand for retail and office and a lesser demand for -- I'm sorry, retail and industrial and a lesser demand for office product right now.

[Operator:]

[Operator Instructions] The next question comes from the line of Young Ku of Wells Fargo.

[Young Ku:]

[indiscernible] cap rates, but you're buying Pearl Highlands at a little over 6. So what's the disconnect there, and was it property marketed?

[Christopher J. Benjamin:]

Young, this is Chris. We didn't hear the first part of your question. Could you repeat the whole thing?

[Young Ku:]

Yes. You said that cap rates were in the mid-5s, but you're buying Pearl Highlands a little over 6, so I was just trying to reconcile what the difference is?

[Christopher J. Benjamin:]

We actually haven't disclosed what the cap rate is for Highlands. We don't disclose the acquisitions until we've completed them. So much if there's a further question to that?

[Young Ku:]

Okay. So we can assume that Pearl Highlands would be kind of at market pricing?

[Christopher J. Benjamin:]

Pearl Highlands, well, the property itself was in market for sale to private transaction. I think you can assume that it would be market pricing for retail asset and volume.

[Young Ku:]

Okay, got it. And maybe this is for Chris, but the same-store NOI for the leasing portfolio was down about 2% on a sequential basis. Just wondering what caused that to go down, and how should we expect that going forward?

[David Haverly:]

Young, this is David again. Generally, for us, our first 2 quarters of each year, we show stronger NOI growth and increases as we have camera [ph] reconciliations in the first 2 quarters. So you'll see by the second quarter, that'll drop off a little, but we continue to expect that our NOI growth will remain stable and grow through the balance of the year.

[Young Ku:]

Okay, got it. And going back to the Grace acquisition, will there be any additional acquisition costs for the rest of the year that's going to be recorded on the income statement?

[Paul K. Ito:]

Yes, this is Paul. There will be additional legal fees, for example, as we wrap up the S-4 process, and we also do the shareholder meeting and proxy and mailing, et cetera. We continue to project that the cost will be -- the total cost will be 2% to 3% of the transaction price.

[Young Ku:]

Okay, that's helpful. And one last question regarding the pricing on the Grace acquisition. When you guys made the announcement, your stock price was around $35. Now your stock price is well above the collar. So how do you think about kind of pricing today versus where it was back then?

[Stanley M. Kuriyama:]

Well, you're certainly right, Young. When we announced the transaction, the day we announced the transaction, I think our price was a little under $36. I think it's fair to say that a lot of the increase that subsequently occurred was due to the Grace acquisition. I think the market recognize that Grace was providing a lot of value to the company. At the same time, we're aware of the walkaway collar. We have discussed it with the special committee of our Board of Directors. So we're keeping our options open, but it's still a ways to go. There's still some time between now and the time we have to price that collar. So we will consider our options. I don't think it's -- it would be premature for us to talk about it at this time. And we're still -- for negotiating purposes, we don't want to talk about our options publicly. But suffice to say that we're aware of the situation, and we'll continue to evaluate our options.

[Operator:]

The next question comes from the line of Sheila McGrath of Evercore.

[Sheila McGrath:]

Stan, I know that there was a portfolio in the market in Hawaii, I think back in May, Kaneohe Ranch. And I'm just wondering if that's still out there or if somebody contracted to where -- if you're aware of any change in status.

[Christopher J. Benjamin:]

Sheila, it's Chris. Yes, as far as we know, that process is proceeding. I don't know that they have reached an agreement with any party at this point. And we had expressed earlier that it was an asset that we would look at, but we haven't commented and won't comment any further in terms of whether we will or will not bid on that asset.

[Operator:]

I would now like to hand the call back over to Suzy Hollinger for closing remarks.

[Suzy Hollinger:]

Thanks, everyone, for being on the call today. If you have further questions, please call me at [phone]. Thank you.

[Operator:]

Thank you. Ladies and gentlemen, that concludes your conference call for today. You may now disconnect. Thank you for joining, and have a very good day.