Alexander & Baldwin, Inc. (ALEX) Earnings Call Transcript & Summary

Good morning and welcome to the 10:30 session at Citi's Global Property CEO Conference. I'm Katy McConnell with Citi Research. And we're pleased to have with us today Alexander & Baldwin. Before we get started, this session is for Citi investing clients only. So if media or any other individuals are on the line, please disconnect now. Disclosures are available on the webcast. For those joining us here today, you can ask questions by stepping up to the microphone or submitting them via the webcast question box, and we'll do our best to ask them during the session. And now, Chris, I'll turn it over to you to introduce the team and the company with some opening remarks.

Thanks very much, Katy. So it's great to be back here. We're excited to be back meeting with investors face-to-face. We've heard a lot of people saying it's great to meet you in person this week because so many of our interactions over the last few years have been over Zoom. I'm Chris Benjamin, I'm CEO of Alexander & Baldwin; and I'm joined today by Lance Parker, our Chief Operating Officer; and Brett Brown, our Chief Financial Officer. And again, we're all very glad to be here. So by way of overview, A&B is a geographically focused REIT with 100% of our portfolio in Hawaii. We have a 150-year history in Hawaii, and that's where our relationships and our reputation give us the opportunity to be very effective in owning and managing and acquiring and developing commercial real estate. About 2/3 of our portfolio is grocery-anchored shopping centers, which serve our local communities. The rest is primarily in light industrial and ground leases. So while Hawaii is heavily tourism-driven, our portfolio is not heavily dependent on direct tourist spending, which has been very helpful, of course, through the pandemic. This gives us a degree in all markets of insulation from tourism swings. And -- but of course, we benefit from tourism overall. And so we've been happy to have the economy recovering. We've historically been a very diversified company. Again, as I said, we're over 150 years old. But we've made tremendous progress in simplifying our business model, and we're now 85% commercial real estate on a gross asset basis. We sold more than $200 million of our noncore assets last year, and we continue to look to simplify the company in the coming year. And as a result of that, we've significantly strengthened our balance sheet. I'll dig into that a little bit more in a moment and some of the implications of that. But we're very pleased to have a much more full quiver of tools of arrows to use in our growth efforts. So 2021 was an exceptional year for A&B. When we spoke at the virtual conference last year, Katy, I predicted a very strong rebound in our commercial real estate NOI and strong progress in monetizing noncore assets, and both of those became reality, which have helped us significantly in positioning us for 2022. Last year, we had 15% growth in revenue, 17% growth in same-store NOI, 26% growth in core FFO. We produced record leasing volume over 270 leases signed, representing over 650,000 square feet of lease space at 4.6% leasing spreads. And we ended 2021 at 94.3% occupancy, and that's really reflective of the very, I think, long-term view we took during the pandemic of working with our tenants, making sure that we kept tenants in place and didn't have to significantly re-tenant spaces after the pandemic. And that paid off not only in occupancy but in rent collections last year. As I mentioned, we sold over $200 million of noncore assets last year and finished the year with leverage at 3.3x net debt to EBITDA and over $500 million of total liquidity. That enables us to pivot back to what we want to do most, which is grow our portfolio, invest in Hawaii properties, both through acquisitions and through development and redevelopment. And over the last couple of years, our investments team was largely focused on selling noncore assets, but now we've been able to pivot them back to acquisitions, and we'll talk more about that later. But it's important to note that the whole premise of our Hawaii focus and our conversion to a real estate investment trust that is focused exclusively on Hawaii was the notion of being the local sharpshooter having the relationships and the reputation and the ability to execute in the market knowledge to execute in Hawaii. And we've proven over the years that we can invest incredibly effectively in Hawaii, but we were hampered by a high degree of leverage following the special distribution that we did back in 2018. Now that we've successfully monetized the assets that I've referenced a couple of times and improved our leverage, we now have the ability to grow, and so our team is heavily focused on that. We're targeting about $75 million of investments in Hawaii this year, but I will tell you that we would love to do more than that. We think that we've got very good prospects for achieving that between investments in new properties as well as investments in redevelopment projects. But our hope would be, frankly, to do multiples of that if we can find the opportunities and the team is working on that. So just to close my opening remarks, we're excited about Hawaii, the recovery in the economy, the recovery of tourism, the recovery of our portfolio and once again, the positioning that we have to grow the portfolio coming out of COVID.

Great. Thanks for that. So we're opening each of these sessions with the same question, which is what are the top 3 reasons why investors should buy your stock today over other property REITs?

So I think, first of all, it's just the results we've produced over the last couple of years, and I'll just point to our 2021 performance, again, the fact that we've demonstrated effectiveness at managing the portfolio through a very challenging time and had such outstanding performance last year. Second is the prospect that we have for outstanding performance in 2022. We expect and have articulated our expectations for solid continued growth going forward and for the Hawaii economy to continue to improve. One of the things we -- I didn't talk about yet, but it's the fact that we still don't have international tourists back in Hawaii, yet the economy is doing very well just on the strength of domestic tourism, and we think that there's a lot more upside in the economy. And then the last thing is what I've already articulated with respect to our pivot back to growth. I believe that we will be demonstrating the strength of our Hawaii platform and our ability to invest in it and grow the portfolio over the next couple of years.

And as you look at stock valuation versus where you think you should be trading, what do you think the market might be missing about your story? And what can you do? What steps can you take to try to help narrow the gap?

I think the most important thing is that the market has been waiting for us to be a pure commercial real estate company. And we are not yet there in the sense that we still own a Materials & Construction business that I think creates some noise or some confusion for investors. The reality though is even though we still own that business, and we're going to be looking to monetize it this year. The reality is that, that's not holding us back from achieving our commercial real estate goals. Witnessed the performance in the core portfolio this past year and the fact that we have pivoted our team back to growth, I think that if we can demonstrate this year success in acquiring Hawaii commercial properties, continued success in growing commercial real estate NOI and hopefully sell the Materials & Construction business, those are going to really open us -- it's going to open us up to a broader investor base, as I think a lot of the REIT dedicated have not yet jumped into our stock because of that. Even though I would argue that, that shouldn't be an impediment because it's not holding us back, I do think that the optics of it creates some barrier for a lot of investors.

Can you talk about what you're seeing in a little more detail just in terms of the Hawaii economy right now? And what your outlook is for the rest of this year, particularly if we do see more international tourism come back?

Yes, I'd be happy to. I always like to preface the questions about the Hawaii economy with a reminder that we aren't directly dependent on significant tourist spend, because I think everybody equates Hawaii economy and tourism. And if tourism isn't 100% back, then how can the economy be 100% back. But I think it's important to note that as a company that serves primarily local markets, local grocery-anchored community shopping centers, industrial and light industrial that serves the local market far more than it serves the tourist market, we don't necessarily need tourism to be back at pre-pandemic levels for our assets to be performing extremely well. They are performing extremely well. Now having said that, we do expect continued growth in the economy this year as more and more tourists come back. Last year without the benefit of any international tourism -- I shouldn't say any, there's probably a little bit, but certainly not significant because of all the international travel restrictions, both by the U.S. and for the international visitors when they return home, we saw very low levels of international tourism, yet our overall tourism numbers in the summer last year were at 90% of pre-pandemic levels. So when we get the international travelers back, and Japan alone has typically accounted for about 20% of Hawaii's tourism numbers. When they come back, I think the sky is the limit in terms of Hawaii's economy. So we do expect a favorable outlook for Hawaii. We've been asked the question about what do rising fuel prices imply for people's propensity to travel to Hawaii. Our belief is that while it may increase airfares a bit, which, by the way, right now are pretty cheap, it may impact airfares. But at the same time, international turmoil and uncertainty and the difficulty of traveling internationally really helps Hawaii because we are a safe exotic yet domestic location. And so we've found that through the pandemic, we've been one of the most popular destinations because people haven't been able to travel internationally. And I think that, that's going to continue to support the Hawaii economy.

Can you discuss the health of your tenant base? And have any of your tenants in particular have been more impacted by supply chain disruptions and labor shortages?

Yes. Let me -- I'm going to kick this to Lance. I'll say, overall, we've been very pleased with the resilience and the survival rate of our tenants. And I think that's due in large part to the way we've worked with them. But also the recovery -- the relatively quick recovery of the economy. Lance, do you want to take that?

Yes. So broad brush, I'd say our -- we feel very good about the health of our tenants. If you look at net operating income across the portfolio, for example, as a metric, we surpassed our 2019 NOI last year in 2021, both on a total NOI basis and also on a same-store basis. The other metrics we look at tenant sales. We had strong sales recorded from our tenants through the holidays. We saw a little bit of a dip in January, I don't think that was too unusual, given maybe Omicron surges, but pick up in February, we expect that to continue. And so feeling good about their performance and importantly, the performance for them to continue improving going forward. In terms of labor shortages and also supply chain issues, we are not immune in Hawaii. I will say we are, maybe on the supply chain side, a little more unique in that we're a 2,500 miles from the West Coast and actually the most isolated geographic location in the world. But we do have unique things that I think work to our advantage. So any goods that come from China, a lot of that is inbound to Hawaii goes to the West Coast and the shippers that serve Hawaii have dedicated terminals there. So when we think about some of the impacts with shipping that have plagued a lot of places, we actually don't see that as much from a shipping standpoint, although some goods on -- just in terms of availability have been impacted, it's like a lot of other markets.

What is the backfill leasing environment like in Hawaii? And can you talk about the -- your leasing pipeline now? And where you stand in terms of backfilling vacancy that was driven by the pandemic?

So leasing for us, we feel very positive about the go-forward prospects. Our leasing spreads last year where, as Chris indicated, well, in the fourth quarter, it was 5.1% and 4.3% on the trailing 12. We had strong leasing numbers in terms of volume in 2021, and we expect that to continue. We -- in terms of opportunity, we're at 93 -- I'm sorry, 94.3% on vacancy. And so we do have some opportunity, primarily on the retail side. Our industrial portfolio is at 97% occupancy. And so a little bit of opportunity to backfill some vacant spaces, but not much there. On the retail side, we really haven't had a lot of COVID-driven vacancy. I think the opportunity for us right now is more on lease spread as well as improving tenant mix. And so we've got about 12% of roll in our portfolio this year, which is a little less than an average year for us. And so feeling positive about the prospects either for retention of existing tenants or as I said, to increase our -- or improve our tenant mix.

And when you look across your portfolio, where would you say our in-place rents relative to market levels?

I'd point back to our spreads. [ So 5.1% on Q4, about 10.1% for new leases, and 3.7% to 3.8% ] on renewals. So I think that's a good indication of mark-to-market opportunities within the portfolio.

And when you think about occupancy, do you have a rough sense for timing as far as when you could get back to that pre-pandemic level?

So we -- as Chris indicated, really haven't dropped much from pre-pandemic level, and that was intentional. As we work with our tenants proactively occupancy was the metric that we focused a lot on as opposed to immediate rent payment. And so we were early on to grant deferrals and in some cases abatement. But we will definitely either match or surpass pre-pandemic levels this year in terms of expectations.

And then if we look at your guidance for this year, can you walk us through -- what has to happen for you to get to the higher the low end of that range?

Sure. I'll take that. So at the low end, I'd say if it was delayed tenant occupancy, if we had higher bad debt, lower reserve reversals, no acquisitions, things like that would push it to the low end. To the high end, obviously, it would be earlier tenant occupancy, lower bad debt, more reserve reversals, et cetera, and then more or earlier acquisitions.

And can you update us on the performance of Grace? And are you expecting it to generate positive EBITDA for this year?

Yes, we're definitely expecting positive EBITDA this year. The business has performed a lot in terms of the underlying fundamentals that includes everything from just operating efficiencies, G&A levels and management of bidding processes and myriad fundamental improvements that have been made, that hasn't yet to date translated into bottom line financial performance, but we absolutely expect it to in 2022. So we would expect reasonably strong EBITDA growth this year. And that is because -- not only because of some of the fundamental operating efficiencies that I just referenced but also the fact that going into 2022, we have the vast majority of the work that we need to perform in order to hit our revenue goals already under contract, which is a drastic contrast to going into 2021. We thought that we had a pretty good book of business going into 2021, but we found difficulties in actually getting some of that work contracted with the government agencies. And so the fact that we now have most of the work we need already under contract gives us a lot more confidence in the performance of the business this year.