Getting out of the farming business on Maui was a big move for Alexander &Baldwin Inc. in December, yet the kamaaina company likely isn’t done selling pieces of itself.
A&B has been exploring sale opportunities for three other major operations: resort housing development projects on Kauai and Maui along with rock quarry and road paving subsidiary Grace Pacific.
Honolulu-based A&B recently said on a conference call with stock analysts that selling the Kauai project, Kukui‘ula, and Grace would help it become a simpler company wholly focused on generating income from shopping centers and other commercial real estate it owns in Hawaii.
“While I have not been quite so blunt in the past, I do acknowledge that these assets would be in better hands with a different owner, and our story will be simpler and our company easier to manage and value,” Chris Benjamin, A&B president and CEO, said on the call.
Benjamin said the company is focused on achieving such a change but that results won’t be immediate.
He also mentioned that A&B is having discussions with potential buyers of
its resort property in Wailea where the company has been developing and
selling homes.
Making A&B a company that only owns Hawaii commercial property such as retail centers and warehouses that generate income from rent could boost the value of its stock by attracting more investors specializing in such companies.
A&B also aims to increase profits by using proceeds from the sale of noncore pieces of its business to buy more commercial real estate.
That’s what A&B said it intends to achieve through its recent sale of 41,000 acres of Maui farmland where the company had been trying to expand diversified agriculture after shutting down the state’s last sugar cane plantation at the end of 2016.
A&B sold the land for $262 million to a company formed by a California farm investment firm and a Canadian pension funds manager.
A&B estimates that annual earnings before interest, depreciation, tax and amortization expenses should rise by $20 million after proceeds from the farmland sale are plowed into more Hawaii commercial property. Part of that estimate is based on it costing A&B $8 million a year to own the farmland and the expectation of generating $12 million in net operating income from commercial property acquired with sale proceeds.
Stock analyst Sheila McGrath with Evercore ISI called A&B’s farmland an “income draining asset” and said the sale was a big move for the company.
Kukui‘ula and Grace also have been financial drags on A&B.
A&B plans to cut its value of Grace by $70 million to
$80 million in an upcoming financial report covering the 2018 fourth quarter. Grace, which A&B bought in 2013 for $277 million, has produced lower operating income recently and not performed to A&B expectations.
Benjamin said A&B anticipates retaining an adviser to lay groundwork for possibly marketing Grace and is also working to improve the business.
With Kukui‘ula, Benjamin said the company previously explored selling the project but received unattractive results.
Though A&B pulled back from this sale effort, Benjamin said A&B is open to a sale at an appropriate time to an appropriate buyer.
Benjamin said A&B doesn’t expect to recover its full investment in Kukui‘ula, so the value of this business is to be reduced by an as-yet unspecified amount in the 2018 fourth-quarter financial report.
Motivation to shed A&B’s Maui farmland, Grace, Kukui‘ula and Wailea assets stems from the company converting itself from a traditional corporation to a real estate investment trust at the end of 2017.
As a REIT, A&B is allowed to shift the tax burden for profits to shareholders because nearly all profit must be passed to shareholders through dividends. The tax treatment, however, generally is limited to rental income. A&B’s real estate development and Grace businesses operate as “taxable REIT subsidiaries.”
A&B positioned itself to become a Hawaii-focused REIT after splitting ocean cargo transportation firm Matson into a separate company in 2012 and selling off mainland commercial real estate in favor of buying primarily Hawaii shopping centers anchored by grocery and drug stores.
The shift made A&B the second-largest retail property owner in Hawaii. Yet REIT investors didn’t quite embrace A&B as company officials had hoped.
During REIT conversion work in 2017, A&B stock rose to about $30 a share. With A&B as a REIT last year, its shares averaged $22.75.
“Since we completed our conversion to a REIT in 2017, our core commercial real estate, or CRE, portfolio has continually performed extremely well,” Benjamin told the stock analysts. “But that good news often seems to be overshadowed by questions about our noncommercial real estate elements. For that reason we’ve remained focused on further simplification of our story, reducing leverage and generating capital for continued CRE growth.”
