Alexander & Baldwin, Inc. (NYSE: ALEX) is a fully integrated real estate investment trust (REIT) headquartered in Honolulu, Hawaii. The company's history in the state dates back to 1870, when it began as a 571-acre sugar plantation on Maui. Over time, Alexander & Baldwin has evolved into one of Hawaii's premier commercial real estate companies and the owner of the largest grocery-anchored, neighborhood shopping center portfolio in the state.

Business Segments

The company's business operations are divided into two segments: Commercial Real Estate (CRE) and Land Operations. The CRE segment is the core focus of Alexander & Baldwin's business, accounting for the majority of its revenue and operating profit. This segment owns and operates a portfolio of 22 retail centers, 14 industrial assets, and four office properties, totaling over 4 million square feet of gross leasable area (GLA) across Hawaii. Additionally, the company owns 142 acres of commercial land, the majority of which is leased under long-term urban ground leases.

The CRE segment functions as a vertically integrated real estate investment company with core competencies in property management, leasing, investments and acquisitions, and construction and development. The segment's preferred asset classes include improved properties in retail and industrial spaces, as well as urban ground leases. The company's focus within improved retail properties is on grocery-anchored neighborhood shopping centers that serve the daily needs of Hawaii communities.

The Land Operations segment includes the company's legacy landholdings, assets, and liabilities that are subject to a simplification and monetization effort. Financial results from this segment are primarily derived from real estate development and land sales, as well as joint venture activity.

Historical Evolution

Alexander & Baldwin's journey from its agricultural roots to becoming a major player in Hawaii's commercial real estate market has been marked by strategic shifts and adaptability. In the 1960s, the company made its first foray into commercial real estate by developing its first shopping center, recognizing the need to diversify beyond its traditional sugar plantation operations. This move proved to be prescient, as it allowed the company to capitalize on Hawaii's growing economy and population in the following decades.

The company's transformation accelerated in the late 20th century as Hawaii's sugar industry declined. In response, Alexander & Baldwin made the strategic decision to divest its agricultural assets and focus solely on owning, operating, and developing high-quality commercial properties. This simplification strategy has enabled the company to streamline its operations and allocate capital resources more effectively to its core commercial real estate segment.

Market Positioning

Alexander & Baldwin's focus on Hawaii's commercial real estate market has proven to be a strategic advantage. The state's economy has remained resilient, with personal income growth of 5.5% and an unemployment rate of 2.9% as of the end of August 2024, compared to the national average of 4.2%. Moreover, Hawaii's GDP growth is forecasted to be 2% in 2025, outpacing the U.S. average of 1.8%. The company's well-positioned portfolio of grocery-anchored retail centers and industrial assets has allowed it to capitalize on these favorable economic trends.

Financials

Financially, Alexander & Baldwin has demonstrated a strong balance sheet and liquidity position. As of September 30, 2024, the company had $472 million in total debt outstanding, with 96.8% of that debt at fixed rates and a weighted average interest rate of 4.58%. The company's net debt to adjusted EBITDA ratio stood at 3.6x, down from 4.2x at the end of 2023, reflecting higher operating profit in the Land Operations segment and lower general and administrative (G&A) expenses.

In terms of recent performance, Alexander & Baldwin reported strong results for the third quarter of 2024. Funds from Operations (FFO), a key metric for REITs, increased to $28.2 million, or $0.39 per diluted share, up from $21.2 million, or $0.29 per diluted share, in the same period last year. Adjusted FFO (AFFO), which excludes certain non-recurring items, rose to $23.4 million, or $0.32 per diluted share, compared to $17.4 million, or $0.24 per diluted share, in the prior-year quarter.

The company's CRE segment continued to perform well, with same-store net operating income (NOI) growth of 4.1% year-over-year, or 4.7% excluding the impact of collections of prior-year reserves. Leased occupancy in the CRE portfolio remained strong at 94.0% as of September 30, 2024.

During the third quarter of 2024, the CRE segment's operating revenue increased 2.4% to $49.38 million, compared to the prior year period. Operating profit for the CRE segment increased 10.6% to $22.83 million, driven by higher rental and recovery revenues as well as lower selling, general, and administrative expenses. For the first nine months of 2024, CRE operating revenue increased 1.3% to $147.48 million, while operating profit increased 5.0% to $67.42 million, again due to higher revenues and lower expenses.

The Land Operations segment also contributed to the company's strong quarterly results, with the sale of 81 acres of land and higher earnings from a legacy joint venture. During the third quarter of 2024, the Land Operations segment generated $12.56 million in operating revenue, primarily from unimproved land sales on Maui as well as the sale of a development lot at Maui Business Park. Segment operating profit was $7.88 million for the quarter. For the first nine months of 2024, Land Operations revenue was $26.72 million, and operating profit was $15.98 million. The higher revenue and profitability was driven by increased unimproved land and development lot sales compared to the prior year period.

Alexander & Baldwin has been actively monetizing its non-core assets as part of its simplification strategy, which has provided additional liquidity to fund growth opportunities in its core CRE business.

For the most recent fiscal year (2023), the company reported revenue of $208.90 million, net income of $29.80 million, operating cash flow of $67.10 million, and free cash flow of $45.40 million. In the most recent quarter (Q3 2024), revenue increased to $61.94 million, net income rose to $19.00 million, operating cash flow was $35.31 million, and free cash flow was $1.62 million. Year-over-year growth showed revenue increasing 18.0% and net income increasing 19.5% compared to Q3 2023. The increase in revenue was primarily driven by higher revenues from the Land Operations segment's unimproved and other land sales, while the increase in net income was due to the higher revenues as well as lower SG&A expenses.

Liquidity

Looking ahead, Alexander & Baldwin has taken steps to enhance its financial flexibility and support future growth. In October 2024, the company entered into a new $450 million revolving credit facility, extending the maturity to 2028 and providing ample liquidity to fund both internal and external growth initiatives. As of September 30, 2024, $428 million of this facility was available.

The company's debt-to-equity ratio stood at 0.55 as of September 30, 2024, with cash reserves of $17.92 million. The current ratio was 0.28, and the quick ratio was 0.08, indicating a relatively tight liquidity position in the short term, but balanced by the substantial available credit line.

Outlook

Despite the challenges faced by the broader real estate industry, Alexander & Baldwin has navigated the market effectively, leveraging its expertise in Hawaii's commercial real estate market and its strong balance sheet to deliver consistent financial performance. The company's focus on grocery-anchored retail and industrial assets, combined with its strategic simplification efforts, position it well to continue capitalizing on Hawaii's favorable economic trends and growing demand for commercial real estate.

The company's performance is closely tied to Hawaii's economic conditions, with visitor arrivals reaching 88% of 2019 levels as of August 2024, indicating a strong recovery in the tourism sector. This recovery, coupled with the projected GDP growth outpacing the national average, provides a positive backdrop for Alexander & Baldwin's continued growth and success in the Hawaiian real estate market.