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

Good afternoon, ladies and gentlemen. Welcome to the Fourth Quarter 2024 Alexander & Baldwin Earnings Conference Call. [Operator Instructions] This call is being recorded on Thursday, February 27, 2025. I would now like to turn the conference over to Michael Imanaka, Senior Manager on the Development team. Please go ahead.

Thank you, operator. Hello, and welcome to Alexander & Baldwin's Fourth Quarter and Full Year 2024 Earnings Conference Call. My name is Michael Imanaka, and I'm a Senior Manager on the A&B Development team. With me today are A&B's Chief Executive Officer, Lance Parker; and Chief Financial Officer, Clayton Chun. We are also joined by Kit Millan, Senior Vice President of Asset Management, who is available to participate in the Q&A portion of the call. During our call, please refer to our fourth quarter 2024 financial presentation available on our website at investors.alexanderbaldwin.com/events. Before we commence, please note that statements in this presentation that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and 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's business, the evaluation of alternatives by the company related to its noncore assets and the risk factors 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 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. Management will be referring to non-GAAP financial measures during our call today. Please refer to our statement regarding the use of these non-GAAP measures and reconciliations included in our 2024 fourth quarter supplemental information and presentation materials. Lance will start today's presentation with an overview, then hand it off to Clayton for a discussion of financial matters. To close, Lance will return for some final remarks, then we will open it up for your questions. With that, let me turn the call over to Lance.

Thanks, Michael. Great job. To everyone joining us, Aloha. 2024 was my first year as the CEO of A&B, and I can't help but reflect on the performance of the company over the past several years compared to our retail peers. Since becoming a REIT in 2017, our same-store NOI growth has averaged 3.8% per year compared to 2.3% for the NAREIT shopping center subsector. We began presenting FFO in 2020 and achieved a CAGR on CRE and corporate FFO of 20.4% compared to 9.3% for the NAREIT shopping center subsector. We achieved these impressive results, but it really wasn't until last year that we were able to fully concentrate on executing our Hawaii-focused commercial real estate strategy. Throughout 2024, I emphasized our 4 priorities related to this execution, operational excellence, balance sheet strength and flexibility, streamlining our business and cost structure and growth. Over the course of the year, we grew our FFO and NOI and saw strong leasing activity in the portfolio. We improved our capital structure by refinancing $130 million of mortgage debt with unsecured debt at fixed rates, extended the maturity date on our revolving credit facility to 2028 and established a new at-the-market share program. We opportunistically sold more than 400 acres of noncore landholdings, enabling us to reduce carrying costs within the Land Operations segment. And from a growth perspective, thanks to Michael and the rest of our Development team, we began construction of our 30,000 square foot industrial asset on the island of Maui. Importantly, the team has been busy underwriting other development and redevelopment opportunities. This, of course, is in addition to the 81,500 square foot industrial asset we purchased in the third quarter of last year. Operationally, we ended the year on a high note with better-than-expected results in the fourth quarter and for the full year. Same-store NOI grew by 2.4% for the quarter and 2.9% for the year. Excluding the impact of collections of prior year reserves, our same-store NOI growth was 2.9% for the quarter and 3.3% for the year. We executed 47 leases in our improved property portfolio, representing more than 140,000 square feet of GLA and 209 leases or 630,000 square feet of GLA during 2024. Our blended leasing spreads remained strong in the fourth quarter at 14% on a comparable basis and 11.7% for 2024. Our leased occupancy was 94.6%, up 60 basis points sequentially and 10 basis points lower than last year. The sequential improvement was driven by a 230 basis point increase in our retail portfolio due to the backfill of our large vacancy at Waianae Mall. Economic occupancy at quarter end was 92.9%, down 10 basis points from last quarter, as well as the same period last year. These results were driven by the industrial and office vacancies we previously mentioned. We believe that the short-term decline in occupancy will provide long-term opportunity through repositioning. SNO at quarter end was $3.4 million and includes rent for the recently announced Marlin Bar by Tommy Bahama, which we look forward to opening at Queens' Marketplace later this year and about $1 million of ABR related to our build-to-suit at Maui Business Park, which is expected to become economic at the end of 2025. We are committed to driving operational results from our CRE portfolio with the mindset that good day-to-day outcomes are the foundation for long-term shareholder value. Looking ahead to 2025, the team will be focused on the following objectives: improving revenue in our retail assets through timely renewals and new leases; increasing occupancy with our industrial portfolio; developing our existing land bank of industrial assets and sourcing accretive external acquisitions and creative investments. With that, I'll turn the call over to Clayton to discuss our financial results and guidance. Clayton?

Thanks, Lance, and aloha, everyone. We closed out 2024 strong with fourth quarter FFO of $0.30 per share, reflecting a $0.03 increase as compared to the same quarter last year and AFFO of $0.19 per share, $0.02 higher than last year. The year-over-year FFO and AFFO increase was driven primarily by stronger operating results within our commercial real estate portfolio. For the full year, FFO was $1.37 per share, $0.28 higher than the prior year. The higher year-over-year FFO was primarily attributed to higher land sale margin, stronger commercial real estate performance and improved G&A in 2024. Full year 2024 FFO also reflects certain net favorable noncash swap and financing-related adjustments that occurred in the first quarter. 2024 AFFO was $1.10 per share or $0.23 higher than the prior year due primarily to higher land sale margins, CRE performance and G&A improvements. Each of these metrics benefited from collections of prior year reserves of approximately $1.7 million or $0.02 per share in 2024 versus $2.1 million of collection or $0.03 per share in 2023. During 2024, we continued our efforts to streamline the business and made meaningful progress to improve our cost structure. We decreased G&A expenses by $4.2 million or 12.4% in 2024 as compared to 2023. We also made significant progress in reducing carrying costs for Land Operations during the year. We entered 2024 with a carrying cost run rate of $6 million to $7 million. Based upon activity during the year, however, we simplified our cost structure and ended 2024 incurring carrying costs totaling $5.8 million for the year and a run rate ranging from $4 million to $5 million. We will continue to prioritize simplifying Land Operations, and we'll provide updates as we make progress throughout the year. Turning to our balance sheet. We continue to maintain a strong and flexible balance sheet. And during the fourth quarter, we took additional steps to further enhance it. In October, we recast our revolving credit facility extending the maturity to October of 2028 while maintaining the spread on our borrowings. In December, we also paid off our $73 million mortgage, which was secured by Pearl Highlands Center. As of 2024 year-end, our net debt-to-adjusted EBITDA ratio stood at 3.6x. Approximately 96% of our debt was at fixed rates and our debt maturity profile remains solid with no significant maturities in 2025. With respect to our dividend, we paid a fourth quarter dividend of $0.225 per share on January 8, and our Board declared a first quarter 2025 dividend of $0.225 payable on April 7. Moving on to 2025, we are issuing guidance as follows: we expect same-store NOI growth of 2.4% to 3.2%; FFO between $1.13 and $1.20 per share; and CRE and corporate-related FFO of $1.11 to $1.16 per share. While we are not providing quarterly guidance, it should be noted that our quarterly metrics may vary due to the timing of certain items throughout the year. I'd now like to provide some context and highlight important assumptions related to our guidance. First, our CRE and corporate FFO guidance reflects a 4.1% increase at the midpoint when normalizing 2024 for the $0.02 of FFO attributed to the swap and financing-related adjustments. The increase reflected in the 2025 FFO is primarily driven by core CRE performance. Second, our guidance takes into account the approximately 50,000 square feet of vacancy within our industrial portfolio and 13,000 square feet within our office portfolio that we mentioned last quarter. We have both near-term and long-term opportunities that we're pursuing for these spaces, and we'll provide information in the future. Our FFO guidance also includes $0.01 of contribution related to external acquisitions programmed for the second half of 2025. With respect to G&A, on the heels of achieving a 12.4% reduction in cost in 2024, we will continue to actively pursue opportunities to further simplify our cost structure, but we expect the trajectory of our G&A level to moderate in 2025, ranging from a flat to $0.01 per share improvement from 2024. Finally, our total FFO guidance also assumes contributions from Land Operations ranging from $0.02 to $0.04 per share in 2025, reflecting a modest amount of assumed land sales margin and joint venture income. With that, I will turn the call over to Lance for his closing remarks.

Thank you, Clayton. I'm pleased with the strategic accomplishments and operating results we achieved last year. I'm also excited about the prospects for 2025 and I'm confident in our ability to continue executing on our strategy to ultimately drive consistent growth and returns for our shareholders. For the remainder of this year, I will report on our progress in the context of the following 3 priorities: improving our CRE portfolio performance; internal and external growth; and streamlining our business and cost structure. And with that, we'll conclude our formal remarks and open the call up to questions.

[Operator Instructions] Your first question comes from Gaurav Mehta of Alliance Global Partners.

I wanted to go back to your comments about your 2025 priorities around external growth. I think you mentioned that you're looking at underwriting more development and redevelopment opportunities within your portfolio. I was hoping to get some more color on what you guys are looking at.

Gaurav, it's Lance. Nice to hear from you. Thanks for the question. I've started to, I would say, be a little bit more optimistic in my remarks over the last couple of quarters with regards to -- certainly with regards to external growth. And I would say as we look ahead to 2025, that continues to be consistent. Pricing remains challenging, but we are seeing opportunities in the marketplace. And so, I am encouraged by that. But specific to your question, we will continue to look and mind opportunities on internal growth. And so, specifically on the development front, we talked about the build-to-suit at Maui Business Park, and that's going to contribute about $1 million to our SNO pipeline. So something like that, we're seeing similar opportunities within the Maui Business Park for potential build-to-suits, potentially even some speculative development. The industrial market here in Hawaii remains very strong. And I would say similarly to some of our land bank with industrial properties on Oahu, we started to see some interest there as well. So I'm hopeful that we'll be able to make some announcements later in the year with regard to those initiatives. And then, I guess, I would just add, this really is sort of the first time we're being transparent about the fact that we are carrying $0.01 of FFO in our guidance for the full year, and that would be for growth initiatives.

Okay. Second question on your lease expirations for 2025. Do you have any known move-outs for the leases that are expiring this year?

Do we have any known move-outs? I just want to make sure I understand the question.

Yes. Are you expecting like any move-outs within the expirations that you have this year?

Yes, Kit, do you want to take a stab at that?

Sure. Last quarter, we signaled that there was about 50,000 square feet of industrial move-outs for -- that was going to occur in the fourth quarter. We are pleased that 33,000 square feet of that actually stayed in and is actually still there, and we do have backfill opportunities for that, that we're actively pursuing. We did have 1 tenant bankruptcy, and that was Liberated Brands. Very low exposure overall, about $450,000 of ABR and only about 7,000 square feet in total between 1 retail asset and 1 industrial asset.

And then I would just add, Gaurav, for some additional color, we do provide our lease expiration schedule in our supplement. And given our WALT on -- in any given year, I would expect to see somewhere in the low double digits, low-teens in terms of role. Our role on an ABR basis for 2025 is just over 8%. So kudos to our leasing team for really getting ahead of a lot of the renewals and mitigating that risk for us this year.

Your next question comes from Rob Stevenson of Janney.

Rob, are you there? Operator, can you check Rob may not -- I'm not sure if his volume is working. If not, maybe we can put him back in the queue and tee up somebody else.

You guys hear me? Okay, finally unmuted me. The bankrupt tenant, Liberated Brands you said, do you have that space back? Or is that still in the bankruptcy process?

Kit?

We do not have the space back. They're actually still open and operating and doing their liquidation sale.

Okay. Do you have any expected timing? Is that sort of midyear, late year, 2026 before you get that space back? I know it's not a lot of ABR or space, but just curious as to your ability to start marketing that space to another tenant in the interim.

So we expect it around midyear, and the good news is that, we actually already have some prospects for the space at Queens' Marketplace.

Okay. That's great. And then in the supplemental, there was a big jump quarter-over-quarter in the leased occupancy in the retail portfolio. I think it was like 230 basis points. What drove that?

Sure. So the primary driver is actually really good news. It was backfill of the Waianae Mall anchor space that we talked about that terminated in January of last year. So the tenant that we did put in there is a community use. The lease is relatively short term, which provides us with future optionality, and it was really capital efficient. It didn't require very little capital outlay. So the good news overall is that, we backfilled it very quickly.

Okay. And then last one for me. Clayton, beyond the sort of $0.02 to $0.04 of Land Operations, what's the biggest lever that causes you to go to either the low end or the high end of the guidance? What's the biggest swing factors in the guidance range for '25 at this point in the year for you?

Yes. Rob, so for us, I would say that the low end, it's going to involve delayed tenant occupancy or unplanned vacancies. I think bad debt could also come into play in terms of the low end of it. And then in terms of the high end of our guidance, it's effectively the inverse of that. So to the extent that we're able to have our tenants take possession of spaces earlier, then that could certainly be helpful for our FFO. And the same could be said with respect to bad debt to the extent that we have stronger bad debt collections and just overall tenant health continues to improve, then that would be accretive from us -- for us from an FFO perspective.

Your next question comes from Alexander Goldfarb of Piper Sandler.

So a few questions. Just following up on Rob's tenant credit question. Your bankruptcies are obviously very low and credit for you guys tends to be good. Are you expecting that to continue this year? So one, curious for bad debt reserve? And 2, is there something specific about the retailers on Hawaii such that maybe when there are tenant credit issues, sort of the Hawaiian outposts are sort of the last to be affected? Just sort of curious about the tenant health out in Hawaii versus the sister locations on the Mainland.

But what I'll tell you is that -- so collections have remained really strong. We're not seeing any signs of overall trouble. Customer traffic on Oahu was actually up year-over-year, and that's where we have most of our centers, even though it was flat elsewhere in the portfolio and tenant sales have remained strong. We exceeded our percentage rental for the quarter and the year. Now, in terms of bad debt itself, the opportunity set for prior year reserve recoveries has decreased dramatically. In fact, it was down about 40% in Q4 2024 versus 2023. So, obviously, that opportunity set going down is a good thing. It means that we're seeing less and less bad debt as we go forward. We don't have a lot of exposure to Green Street's tenant watch list, and we have no real exposure to big bankrupt tenants other than the Liberated Brands that we just mentioned. And in terms of your question about retailers, one of the -- I think pharmacy is on everybody's mind right now, and I'll give the example of Longs. So Longs is a CVS tenant. And in Hawaii, that Longs banner is more seen like a local retailer. And all of those stores are very strong. And in fact, we just renewed one of those stores at Manoa Marketplace because the sales are so high there. So I think there's a little bit of insulation for some of the national brands overall.

Okay. That's helpful. And then the second question is legacy overhead from the land business. Maybe it was a year or 2 ago, you guys discussed as you exit the land business, there were certain costs I think they are more pension related and sort of disconnected from the actual business, but that were harder to reduce over time. When I look in your presentation, you talked about pretty healthy reduction both in corporate and in the land business on overhead expense. So I just want to revisit some of these stickier legacy land costs. Are you able to accelerate the unwind of some of these legacy pension costs? Or there's a certain level that's always going to be there even after you sell the last acreage of land?

Alex, it's Clayton. So yes, with respect to the holding costs for Land Operations, we have made quite a bit of progress in simplifying the cost structure there, and that's really corresponded with our ability to just simplify that segment overall. The composition of the remaining cost, it is a combination of you have personnel costs, as well as just what I'd characterize as stewardship. So with the land that we have there, there's just natural costs that are associated with owning the land. And so, to the extent that we're able to monetize the remaining noncore lands, there will be variable costs that come out of the system by virtue of that. It should be noted, though, that within Land Operations, we do have some aspects of what we deem to be core land holdings. And so, that would be namely Maui Business Park. And so, we expect to keep a hold of those assets for a longer period of time. So, I think it's important to point that out.