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(Exact name of registrant as specified in its charter)
iHawaii
i45-4849780
(State
or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
iP. O. Box 3440,
iHonolulu,
iHawaii
i96801
(Address
of principal executive offices)
(Zip Code)
(i808) i525-6611
(Registrant's telephone number, including area code)
N/A
(Former
name, former address, and former
fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
iCommon Stock,
without par value
iALEX
iNew York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYes☒No ☐
Indicate by check mark whether the registrant has submitted electronically
every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYes☒No ☐
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer,""accelerated filer,""smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
iLarge accelerated filer
☒
Accelerated
filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging
growth company
i☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes i☐No ☒
Number of shares of common stock outstanding as of June 30,
2019: i72,241,757
Investments
in real estate joint ventures and partnerships
i137.6
i141.0
Real
estate intangible assets, net
i82.3
i59.8
Real
estate investments, net
i1,728.7
i1,542.5
Cash
and cash equivalents
i5.5
i11.4
Restricted
cash
i0.2
i223.5
Accounts
receivable and retention, net
i70.0
i61.2
Inventories
i28.2
i26.5
Other
property, net
i127.3
i135.5
Operating
lease right-of-use assets
i28.5
—
Goodwill
i65.1
i65.1
Other
receivables
i28.4
i56.8
Prepaid
expenses and other assets
i102.6
i102.7
Total
assets
$
i2,184.5
$
i2,225.2
LIABILITIES
AND EQUITY
Liabilities:
Notes payable and other debt
$
i727.7
$
i778.1
Accounts
payable
i19.3
i34.2
Operating
lease liabilities
i28.5
—
Accrued pension and post-retirement benefits
i30.8
i29.4
Indemnity
holdbacks
i14.6
i16.3
Deferred
revenue
i65.9
i63.2
Accrued
and other liabilities
i97.2
i87.8
Total
liabilities
i984.0
i1,009.0
Commitments
and Contingencies
i
i
Redeemable
Noncontrolling Interest
i7.9
i7.9
Equity:
Common
stock - no par value; authorized, 150 million shares; outstanding, 72.2 million and 72.0 million shares at June 30, 2019 and December 31, 2018, respectively
i1,795.9
i1,793.4
Accumulated
other comprehensive income (loss)
(i54.0
)
(i51.9
)
Distributions
in excess of accumulated earnings
(i554.0
)
(i538.9
)
Total
A&B shareholders' equity
i1,187.9
i1,202.6
Noncontrolling
interest
i4.7
i5.7
Total
equity
i1,192.6
i1,208.3
Total
liabilities and equity
$
i2,184.5
$
i2,225.2
See
Notes to Condensed Consolidated Financial Statements.
1
ALEXANDER & BALDWIN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share amounts) (Unaudited)
See
Notes to Condensed Consolidated Financial Statements.
7
Alexander & Baldwin, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1.
i
DESCRIPTION
OF BUSINESS
Alexander & Baldwin, Inc. ("A&B" or the "Company") is a real estate investment trust ("REIT") headquartered in Honolulu, Hawai‘i. The Company operates ithree segments: Commercial Real Estate ("CRE"); Land Operations; and Materials & Construction. As of June 30, 2019,
the Company's CRE improved real estate consisted of itwenty-one retail centers, iten
industrial assets and ifour office properties in Hawai‘i, representing a total of i3.8
million square feet of gross leasable area. The Company also owns a portfolio of ground leases in Hawai'i that comprised i154 acres as of June 30, 2019.
2.
i
BASIS
OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The interim condensed consolidated financial statements are unaudited. Because of the nature of the Company's operations, the results for interim periods are not necessarily indicative of results to be expected for the year. While these condensed consolidated financial statements reflect all normal recurring adjustments that are, in the opinion of management, necessary for fair presentation of the results of the interim period, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America ("GAAP") for complete financial statements. Therefore, the interim condensed consolidated financial statements should be read in conjunction with the consolidated balance sheets as
of December 31, 2018 and 2017, and the related consolidated statements of operations, comprehensive income (loss), equity, and cash flows for each of the three years in the period ended December 31, 2018, 2017 and 2016, respectively, and the notes thereto included in the Company's Annual Report filed on Form 10-K for the year ended December 31, 2018 ("2018 Form 10-K"), and other subsequent filings with the U.S. Securities and Exchange Commission ("SEC").
i
Rounding:
Amounts in the condensed consolidated financial statements and notes are rounded to the nearest tenth of a million. Accordingly, a recalculation of some per-share amounts and percentages, if based on the reported data, may result in differences.
Significant Accounting Policies:The Company's significant accounting policies are described in Note 2 to the consolidated financial statements included in Item 8 of the Company's 2018 Form 10-K. Changes to significant accounting policies are included herein.
Reclassifications
i
Unclassified
Balance Sheet: During the first quarter of 2019, the Company changed the presentation of its balance sheet to be unclassified in order to be comparable with other REIT peers. The change was applied to all periods presented retrospectively.
Gain on Sale of Properties: In November 2018, the SEC finalized the Disclosure Update Simplification Project, which eliminated Rule 3-15(a)(1) reporting of Gain or Loss on Sale of Properties by REITs. To conform with Accounting Standards Codification ("ASC") 360 and the SEC rule change, the Company has classified the gain on dispositions of real estate assets in operating income in the
Company's condensed consolidated statements of operations. The Company reclassified the prior period to conform to the current year presentation. This change resulted in an increase of$i49.8 millionin operating income during thesix months ended June
30, 2018.
/i
Recently adopted accounting pronouncements
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-02, Leases(Topic 842) ("ASU
2016-02"). The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 and should be implemented using a modified retrospective approach, with the option to apply the guidance at the effective date or the beginning of the earliest comparative period. The Company adopted the guidance on January 1, 2019 and elected to use the effective date as the date of initial application. Consequently, financial information was not updated and the disclosures required under the new standard are not provided for dates and periods before January 1, 2019. Additionally, the Company elected the "package
of practical expedients," which permits the Company to not reassess prior conclusions about lease identification, lease classification and initial direct costs.
The new guidance did not have a material impact on the accounting treatment of the Company's triple-net tenant leases, which are the primary source of our CRE revenues. However, starting in the current year there were certain changes to the guidance under ASC 842 which will have an impact on future operating results, including initial direct costs associated with the execution
8
of
lease agreements such as legal fees and certain transaction costs will no longer be capitalizable and instead are expensed in the period incurred.
The Company recorded right-of-use ("ROU") assets and corresponding lease liabilities of approximately $i31.0 million on the condensed consolidated balance sheet for certain
leases in which it is the lessee. The adoption of ASC 842 had no impact on the Company's lease expense.
In August 2017, the FASB issued ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company adopted the guidance on January 1, 2019. The guidance amends the hedge accounting model in ASC 815 to enable entities to better portray the economics of their risk management activities in the financial statements and enhance the transparency and understandability of hedge
results. The amendments expand an entity's ability to hedge nonfinancial and financial risk components and reduce complexity in fair value hedges of interest rate risk. This ASU eliminates the requirement to separately measure and report hedge ineffectiveness and requires the earnings effect of the hedging instrument to be presented in the same income statement line as the hedged item. The adoption of this standard did not have an impact on the Company's financial position or results of operations.
In June 2018, the FASB issued ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The
Company adopted the guidance on January 1, 2019. The guidance expands the scope of ASC 718 to include share-based payment transactions with the exception of specific guidance related to the attribution of compensation cost. The guidance also clarifies that any share-based payment awards granted in conjunction with selling goods or services to customers should be evaluated under ASC 606. The adoption of this standard did not have an impact on the Company's financial position or results of operations.
Recently issued accounting pronouncements
In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments, which requires the measurement and recognition of expected
credit losses for financial assets held at amortized cost. The guidance replaces the existing incurred loss impairment model with an expected loss methodology, which will result in more timely recognition of credit losses. This ASU is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2019. The FASB has subsequently issued other related ASUs, which amend ASU 2016-13 to provide clarification and additional guidance. The Company is currently assessing the impact that adopting this new accounting standard will have on its condensed consolidated financial statements and footnote disclosures.
In August 2018, the FASB issued ASU 2018-13, Changes to the Disclosure Requirements for Fair Value Measurement.
The guidance amends and removes several disclosure requirements including the valuation processes for Level 3 fair value measurements. This ASU also modifies some disclosure requirements and requires additional disclosures for changes in unrealized gains and losses included in other comprehensive income for recurring Level 3 fair value measurements and requires the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. This ASU is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. The Company is currently assessing the impact that adopting this new standard will have on its condensed consolidated financial statements and footnote disclosures.
In August 2018, the FASB issued ASU
2018-14, Changes to the Disclosure Requirements for Defined Benefit Plans. The guidance clarifies current disclosures and removes several disclosure requirements including accumulated other comprehensive income expected to be recognized over the next fiscal year and amount and timing of plan assets expected to be returned to the employer. This ASU also requires additional disclosures as well as explanations for significant gains and losses related to changes in the benefit plan obligation. This ASU is effective for fiscal years beginning after December 15, 2020. The Company is currently assessing the impact that adopting this new standard will have on its condensed consolidated financial statements and footnote disclosures.
In October 2018, the
FASB issued ASU 2018-17, Consolidation: Targeted Improvements to Related Party Guidance for Variable Interest Entities. The guidance changes the guidance for determining whether a decision-making fee is a variable interest. Under the new ASU, indirect interests held through related parties under common control will now be considered on a proportional basis when determining whether fees paid to decision makers and service providers are variable interests. Such indirect interests were previously treated the same as direct interests. This ASU is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. The Company is currently assessing the impact that adopting this new standard will have on its consolidated financial statements and footnote
disclosures.
9
Leases
i
Lessee: The Company determines if an arrangement is a lease at inception by considering whether that arrangement conveys the right to use an identified asset for a period of time in exchange for consideration. Operating leases are included in operating lease ROU assets and operating lease liabilities
in the Company's condensed consolidated balance sheets.
ROU assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The
Company uses the implicit rate when readily determinable. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
The Company has also elected, for all classes of underlying assets, to not recognize lease liabilities and lease assets for leases with a term of 12 months or less.
i
Lessor:The Company reviews its contracts to determine if they qualify as a lease. A contract is determined to be a lease when the right to substantially all of the economic benefits and to direct the use of an identified asset is transferred to a customer over a defined period of time for consideration. During this review, the Company evaluates among other items, asset specification, substitution rights, purchase options, operating rights and control over the asset during the contract period.
The
Company has lease agreements with lease and non-lease components, which are generally accounted for separately under ASC 606, Revenue from Contracts with Customers. The Company has elected to not separate non-lease components from lease components for all classes of underlying assets where the component follows the same timing and pattern as the lease component. Non-lease components included in rental revenue primarily consist of tenant reimbursements for common area maintenance and other services paid for by the lessor and utilized by the lessee.
Rental revenue is primarily derived from operating leases and, therefore, is generally recognized on a straight-line basis over the term of the lease. Fixed
contractual payments from the Company's leases are recognized on a straight-line basis over the terms of the respective leases. Straight-line rental revenue commences when the customer assumes control of the leased premises. Accrued straight-line rents receivable represents the amount by which straight-line rental revenue exceeds rents currently billed in accordance with lease agreements. Certain of the Company's lease agreements include terms for contingent rental revenue (e.g. percentage rents based on tenant sales volume) and tenant reimbursed property taxes, which are both accounted for as variable payments.
Certain of the Company's leases include termination and/or
extension options. Termination options allow the customer to terminate the lease prior to the end of the lease term under specific circumstances. The Company's extension options generally require a re-negotiation with the customer at market rates. Initial direct costs, primarily commissions, related to the leasing of properties are capitalized on the balance sheet and amortized over the lease term. All other costs to negotiate or arrange a lease are expensed as incurred.
Accounts receivable related to leases are regularly evaluated for collectability, considering factors including, but not limited to, the credit quality of the customer, historical trends of the customer, and changes in customer payment terms. Upon determination that the collectability of a customer receivable is not probable, the
Company will record an allowance for such receivable and a corresponding reduction to revenue previously recognized. Subsequent revenue is recorded on a cash basis until collectability on related billings becomes probable.
Interest and other income (expense), net
Interest and other income (expense),net for the six months ended June 30, 2019 was primarily composed of a $i2.6
million gain on asset disposal and $i2.0 million of interest income. For the six months ended June 30, 2019 and 2018, other expense was primarily composed of pension and postretirement benefit expense of $i2.3
million and $i1.5 million, respectively.
i
Discontinued operations
In
December 2016, the Company completed its final sugar harvest and ceased its sugar operations. Costs related to the cessation of sugar operations are presented as discontinued operations in the condensed consolidated statements of operations. Liabilities related to the cessation of sugar operations are presented within Accrued and other liabilities in the condensed consolidated balance sheets. For the six months ended June 30, 2019, the Company recorded a loss from discontinued operations
10
of
$i0.7 million primarily related to an increase in cessation related accruals and a reserve for bad debt against outstanding receivables deemed uncollectible in the first quarter of 2019.
3.
i
COMMITMENTS
AND CONTINGENCIES
Commitments, Guarantees and Contingencies: Commitments and financial arrangements not recorded on the Company's condensed consolidated balance sheet included standby letters of credit and bonds. As of June 30, 2019, standby letters of credit issued by the Company's lenders under the Company's revolving credit facilities totaled $i11.3
million. These letters of credit primarily relate to the Company's real estate activities, and if drawn upon the Company would be obligated to reimburse the issuer.
As of June 30, 2019, bonds related to the Company's construction and real estate activities totaled $i473.9
million. Approximately $i454.8 million represents the face value of construction bonds issued by third party sureties (bid, performance and payment bonds), and the remainder is related to commercial bonds issued by third party sureties (permit, subdivision, license and notary bonds). In the event the bonds are drawn upon, the Company
would be obligated to reimburse the surety that issued the bond for the amount of the bond, reduced for the work completed to date. As of June 30, 2019, the Company's estimated remaining exposure, assuming defaults on all existing contractual construction obligations, was approximately $i64.5
million.
Indemnity Agreements: For certain real estate joint ventures, the Company may be obligated under bond indemnities to complete construction of the real estate development if the joint venture does not perform. These indemnities are designed to protect the surety in exchange for the issuance of surety bonds that cover joint venture construction activities, such as project amenities, roads, utilities, and other infrastructure, at its joint ventures. Under the indemnities, the Company and its joint venture partners agree to indemnify the surety bond issuer from all losses and expenses arising from the failure of the joint venture to complete the specified bonded construction. The maximum potential
amount of aggregate future payments is a function of the amount covered by outstanding bonds at the time of default by the joint venture, reduced by the amount of work completed to date. The recorded amounts of the indemnity liabilities were not material individually or in the aggregate.
The Company is a guarantor of indebtedness for certain of its unconsolidated joint ventures' borrowings with third party lenders, relating to the repayment of construction loans and performance of construction for the underlying project. As of June 30, 2019, the Company's limited guarantees on indebtedness related to ione
of its unconsolidated joint ventures totaled $i3.1 million.
Other than obligations described above and those described in the Company's 2018 Form 10-K, obligations of the Company's joint
ventures do not have recourse to the Company and the Company's "at-risk" amounts are limited to its investment.
Legal Proceedings and Other Contingencies: Prior to the sale of approximately i41,000 acres of agricultural land on Maui to Mahi Pono Holdings, LLC ("Mahi Pono") in December
2018, A&B, through East Maui Irrigation Company, LLC ("EMI"), also owned approximately i16,000 acres of watershed lands in East Maui and also held ifour
water licenses to approximately i30,000 acres owned by the State of Hawai‘i in East Maui. The sale to Mahi Pono includes the sale of a i50% interest
in EMI (which closed February 1, 2019), and provides for A&B and Mahi Pono, through EMI, to jointly continue the existing process to secure long-term leases from the State for delivery of irrigation water to Mahi Pono for use in Central Maui.
The last of these water license agreements expired in 1986, and all ifour agreements were then extended as revocable permits that were renewed annually.
In 2001, a request was made to the State Board of Land and Natural Resources (the "BLNR") to replace these revocable permits with a long-term water lease. Pending the completion by the BLNR of a contested case hearing it ordered to be held on the request for the long-term lease, the BLNR has kept the existing permits on a holdover basis. iThree parties filed a lawsuit on April 10,
2015 (the "4/10/15 Lawsuit") alleging that the BLNR has been renewing the revocable permits annually rather than keeping them in holdover status. The lawsuit asked the court to void the revocable permits and to declare that the renewals were illegally issued without preparation of an environmental assessment ("EA"). In December 2015, the BLNR decided to reaffirm its prior decisions to keep the permits in holdover status. This decision by the BLNR was challenged by the ithree parties.
In January 2016, the court ruled in the 4/10/15 Lawsuit that the renewals were not subject to the EA requirement, but that the BLNR lacked legal authority to keep the revocable permits in holdover status beyond one year. The decision was appealed to the Intermediate Court of Appeals ("ICA") of the State of Hawai‘i.
In June 2019, the ICA vacated the lower court’s ruling in the 4/10/15 Lawsuit that the BLNR lacked authority to keep the revocable permits in holdover status beyond one year and remanded the case to the trial court to determine whether the holdover status of the permits was both (a) "temporary" and (b) in the best interest of the State, as required by statute. The plaintiffs have filed a motion with the ICA for reconsideration of its decision, which was denied on July 5, 2019. Plaintiffs have publicly announced, however, that they will request the ICA's
decision to be reviewed by the Hawai‘i Supreme Court.
11
In May 2016, while the appeal of the 4/10/15 Lawsuit was pending, the Hawai‘i State Legislature passed House Bill 2501, which specified that the BLNR has the legal authority to issue holdover revocable permits for the disposition of water rights for a period not to exceed ithree
years. The governor signed this bill into law as Act 126 in June 2016. Pursuant to Act 126, the annual authorization of the existing holdover permits was sought and granted by the BLNR in December 2016, November 2017 and November 2018. No extension of Act 126 was approved by the Hawai‘i State Legislature in 2019.
In a separate matter, on December 7, 2018, a contested case request filed by the Sierra Club was denied by the BLNR. On January 7, 2019, Sierra Club filed a lawsuit in the circuit court of the first circuit in Hawai‘i against BLNR, A&B, and EMI, seeking to invalidate the extension of the revocable permits for, among other things, failure to perform an EA. It also seeks to enjoin the diversion by EMI of more than i25
million gallons a day pending completion of an EA. In connection with A&B’s obligation to continue the existing process to secure long-term water leases from the State, A&B and EMI will defend against the claims made by the Sierra Club.
A&B is a party to, or may be contingently liable in connection with, other legal actions arising in the normal conduct of its businesses, the outcomes of which, in the opinion of management after consultation with counsel, would not have a material effect on A&B's consolidated financial statements as a whole.
4.
i
EARNINGS
PER SHARE ("EPS")
Basic earnings per common share excludes dilution and is calculated by dividing net earnings allocated to common shares by the weighted-average number of common shares outstanding for the period. Diluted earnings per common share is calculated by dividing net earnings allocated to common shares by the weighted-average number of common shares outstanding for the period, as adjusted for the potential dilutive effect of non-participating share-based awards as well as adjusted by the number of additional shares, if any, that would have been outstanding had the potentially dilutive common shares been issued.
i
The
following table provides a reconciliation of income (loss) from continuing operations to income (loss) from continuing operations available to A&B shareholders and net income (loss) available to A&B shareholders (in millions):
Denominator
for basic EPS - weighted average shares outstanding
i72.2
i72.0
i72.1
i69.2
Effect
of dilutive securities:
Non-participating stock options and restricted stock unit awards
i—
i0.3
i0.4
i0.4
Special
Distribution
i—
i—
i—
i2.7
Denominator
for diluted EPS - weighted average shares outstanding
i72.2
i72.3
i72.5
i72.3
/
There
were i0.4 million and i0.1
million shares of anti-dilutive securities outstanding during the three and six months ended June 30, 2019, respectively. There were i0.2 million shares of anti-dilutive securities outstanding during the three and six months ended June 30, 2018.
12
5.
i
FAIR
VALUE OF FINANCIAL INSTRUMENTS
The fair value of the Company's cash and cash equivalents, accounts receivable, and notes receivable with remaining terms less than 12 months approximate their carrying values due to the short-term nature of the instruments. The fair value of the Company's notes receivable with remaining terms greater than 12 months is estimated using a discounted cash flow analysis in which the Company uses unobservable inputs such as market interest rates determined by the loan to value and market capitalization rates related to the underlying collateral at which management believes similar loans would be made and classified as
Level 3 in the fair value hierarchy. The fair value of these notes approximates the carrying amount of $i16.4 million at June 30, 2019. The fair value and carrying value of these notes was $i16.3
million at December 31, 2018.
The carrying amount and fair value of the Company's debt at June 30, 2019 was $i727.7 million
and $i738.9 million, respectively, and $i778.1
million and $i758.0 million at December 31, 2018, respectively. The fair value of debt is calculated by discounting the future cash flows of the debt at rates based on instruments with similar risk, terms and maturities as compared to the Company's existing
debt arrangements (Level 2).
The Company carries its interest rate swaps at fair value. See Note 15 for fair value information regarding the Company's derivative instruments.
6.
i
INVENTORIES
i
Inventories are stated at the lower of cost (principally first-in, first-out basis) or net realizable value. Inventories as of June 30, 2019 and December 31, 2018 were as follows (in millions):
The 2012 Incentive Compensation Plan ("2012 Plan") allows for the granting of stock options, restricted stock units and common stock. The shares of common stock authorized to be issued under the 2012 Plan may be drawn from the shares of the Company's authorized but unissued common stock or from shares of its common stock that the Company acquires, including shares purchased on the open market or private transactions.
i
The
following table summarizes the Company's stock option activity for the six months ended June 30, 2019 (in thousands, except weighted-average exercise price and weighted-average contractual life):
The
following table summarizes non-vested restricted stock unit activity for the six months ended June 30, 2019 (in thousands, except weighted-average grant-date fair value amounts):
The
time-based restricted stock units granted to employees vest ratably over a period of ithree years. The time-based restricted stock units granted to non-employee directors prior to 2018 vest ratably over a period of ithree
years, and commencing in 2018, the time-based restricted stock units granted to non-employee directors vest over ione year. The market-based performance share units cliff vest over ithree
years, provided that the total shareholder return of the Company's common stock over the relevant period meets or exceeds pre-defined levels of total shareholder returns relative to indices, as defined.
The fair value of the Company's time-based awards is determined using the Company's stock price on the date of grant. iThe
fair value of the Company's market-based awards is estimated using the Company's stock price on the date of grant and the probability of vesting using a Monte Carlo simulation with the following weighted-average assumptions:
2019 Grants
2018 Grants
Volatility
of A&B common stock
i23.6
%
i22.7
%
Average
volatility of peer companies
i24.3
%
i21.6
%
Risk-free
interest rate
i2.6
%
i2.3
%
The
Company recognizes compensation cost net of actual forfeitures of time-based or market-based awards. iA summary of compensation cost related to share-based payments is as follows (in millions):
Time-based and market-based restricted stock units
$
i1.3
$
i1.4
$
i2.7
$
i2.7
Total
share-based expense
i1.3
i1.4
i2.7
i2.7
Total
recognized tax benefit
i—
(i0.2
)
i—
(i0.3
)
Share-based
expense (net of tax)
$
i1.3
$
i1.2
$
i2.7
$
i2.4
8.
i
RELATED
PARTY TRANSACTIONS
Construction Contracts and Material Sales.The Company entered into contracts in the ordinary course of business, as a supplier, with affiliates that are members in entities in which the Company also is a member. Revenues earned from transactions with affiliates were $i4.2
million and $i1.8 million for the three months ended June 30, 2019 and 2018, respectively. Revenues earned from transactions with affiliates were $i6.8
million and $i6.3 million for the six months ended June 30, 2019 and 2018, respectively. Receivables from these affiliates were $i1.9
million and $i2.2 millionas of June 30, 2019 and December 31, 2018, respectively. Amounts due to these affiliates were
less than $i0.1 million and $i0.6
millionas of June 30, 2019 and December 31, 2018, respectively.
Commercial Real Estate. The Company entered into contracts in the ordinary course of business, as a lessor of property, with unconsolidated affiliates in which the Company has an interest, as well as with certain entities that are partially owned by a former director of the Company.
There was ino recorded revenue earned from transactions with affiliates for the three months
14
ended
June 30, 2019. For the three months ended June 30, 2018, revenues earned from transactions with affiliates were $i0.8 million. Revenues earned from transactions with affiliates
were $i1.3 million and $i2.3
million for the six months ended June 30, 2019 and 2018, respectively. Receivables from these affiliates were less than $i0.1 million as of June 30,
2019 and December 31, 2018.
Land Operations. During the three months ended June 30, 2019 and 2018, the Company recognized $i0.3
million and less than $i0.1 million, respectively, related to management and administrative services provided to certain unconsolidated investments in affiliates and interest earned on notes receivable from related parties. Service revenues and interest recorded in 2019
were $i0.6 million. Receivables from these affiliates were less than $i0.1
million as of June 30, 2019 and December 31, 2018.
During the year ended December 31, 2017, the Company extended a five-year construction loan secured by a mortgage on real property to one of its joint ventures. Receivables from this affiliate were $i13.6
million and $i13.5 million as of June 30, 2019 and December 31, 2018, respectively.
9.
i
EMPLOYEE
BENEFIT PLANS
i
Components of the net periodic benefit cost for the Company's pension and post-retirement plans for the three and six months ended June 30, 2019 and 2018 are shown below (in millions):
During the six months ended June 30, 2019, the Company acquired ifive commercial real estate assets for $i218.4
million.
i
The allocation of purchase price to assets acquired and liabilities assumed is as follows (in millions):
Fair value of assets acquired and liabilities assumed
Assets
acquired:
Land
$
i106.9
Property and improvements
i91.3
In-place
leases
i23.2
Favorable leases
i4.3
Total
assets acquired
$
i225.7
Liabilities assumed:
Unfavorable
leases
$
i7.3
Total liabilities assumed
i7.3
Net
assets acquired
$
i218.4
/
As of the acquisition date, the weighted-average
amortization period of the in-place/favorable leases was approximately i7.0 years. The weighted-average amortization period of the unfavorable leases was approximately i18.6
years.
15
11.
i
ACCUMULATED
OTHER COMPREHENSIVE INCOME (LOSS)
i
The changes in accumulated other comprehensive income (loss) by component for the six months ended June 30, 2019 were as follows (in millions):
The
reclassifications of other comprehensive income (loss) components out of accumulated other comprehensive income (loss) for the three and six months ended June 30, 2019 and 2018, respectively, were as follows (in millions):
Details about Other Comprehensive Income (Loss)
Components:
Reclassification
adjustment for interest expense included in net income (loss)
(i0.2
)
i—
(i0.3
)
i—
Amortization
of defined benefit pension items reclassified to net periodic pension cost:
Net loss1
i1.0
i1.2
i2.0
i2.2
Prior
service credit1
(i0.2
)
(i0.1
)
(i0.3
)
(i0.3
)
Curtailment
(gain)/loss
i—
(i0.4
)
i—
(i0.4
)
Total
before income tax
(i1.4
)
i1.3
(i2.1
)
i3.9
Income
taxes
i—
(i0.3
)
i—
(i1.0
)
Other
comprehensive income (loss), net of tax
$
(i1.4
)
$
i1.0
$
(i2.1
)
$
i2.9
1
This accumulated other comprehensive income (loss) component is included in the computation of net periodic pension cost (see Note 9 for additional details).
/
12.
i
INCOME
TAXES
The Company has been organized and operates in a manner that enables it to qualify, and believes it will continue to qualify, as a REIT for federal income tax purposes. The Company’s effective tax rate for the three and six months ended June 30, 2019 differed from the effective tax rate for the same periods in 2018, primarily due to the full valuation allowance recorded on the net deferred tax assets at the end of 2018.
(1) Loan has a stated interest rate of LIBOR plus 1.50%, but is swapped through maturity to a 5.95% fixed rate.
(2) Loan has a stated interest rate of LIBOR plus 1.35%, but is swapped through maturity to a 3.14% fixed rate.
(3) Loans have stated rates ranging from 4.08% to 5.00%.
(4)
Loan has a stated interest rate of LIBOR plus 2.00%, and is secured by a letter of credit.
(5) Loan has a stated interest rate of LIBOR plus 1.60%, based on pricing grid.
(6) Loan has a stated interest rate of LIBOR plus 1.25%.
(7) Loan has a stated interest rate of LIBOR plus 1.65%, based on pricing grid.
/
The Company believes that funds generated from results of operations, available cash and
cash equivalents, and available borrowings under credit facilities will be sufficient to satisfy any maturities of debt due in the next twelve months.
Interest costs are capitalized for certain development and redevelopment projects that have not yet been placed into service. Capitalization of interest commences when development activities and expenditures begin and end upon completion, which is when the asset is ready for its intended use. Capitalized interest costs related to development activities were $i0.6 million
for the six months ended June 30, 2019. There were $i0.2 million of capitalized interest costs for the six months ended June 30, 2018.
17
14. iINVESTMENTS
IN AFFILIATES
The Company's investments in affiliates principally consist of equity investments in limited liability companies in which the Company has the ability to exercise significant influence over the operating and financial policies of these investments. Accordingly, the Company accounts for its investments using the equity method of accounting. As of June 30, 2019, the Company has an investment that was determined to be a variable interest entity that was not consolidated,
as the Company determined that it was not the primary beneficiary. The Company's maximum risk of loss was limited to its investment ($i2.7 million as of June 30, 2019), plus the
Company's portion of future contributions.
Operating results include the Company's proportionate share of net income (loss) from its equity method investments. iA summary of combined financial information related to the Company's equity method investments for the three and six months ended June 30, 2019
and 2018 is as follows (in millions):
1 Includes
earnings from equity method investments held by the investee.
15. iDERIVATIVE INSTRUMENTS
The Company is exposed to interest rate risk related to its variable rate interest debt. The
Company balances its cost of debt and exposure to interest rates primarily through its mix of fixed and variable rate debt. From time to time, the Company may use interest rate swaps to manage its exposure to interest rate risk.
Cash Flow Hedges of Interest Rate Risk
During 2016, the Company entered into an interest rate swap agreement with a notional amount of $i60.0
million which was designated as a cash flow hedge. The Company structured the interest rate swap agreement to hedge the variability of future interest payments due to changes in interest rates with regards to the Company's long-term debt. iA summary of the key terms related to the Company's
outstanding cash flow hedge as of June 30, 2019, is as follows (dollars in millions):
The changes in fair value of the cash flow hedge is recorded in accumulated other comprehensive income (loss) and subsequently reclassified into interest expense as interest is incurred on the related-variable rate debt.
Non-designated Hedges
As of June 30, 2019, the Company has ione
interest rate swap that has not been designated as a cash flow hedge whose key terms are as follows (dollars in millions):
The following table represents the pre-tax effect of the derivative instruments in the Company's condensed consolidated statement
of comprehensive income (loss) (in millions):
Derivatives
in Designated Cash Flow Hedging Relationships:
Amount of (gain) loss recognized in OCI on derivatives
$
i2.0
$
(i0.6
)
$
i3.5
$
(i2.4
)
Amounts
of (gain) loss reclassified from accumulated OCI into earnings under Interest expense
$
i0.2
$
i—
$
i0.3
$
i—
/
The
Company records gains or losses related to interest rate swaps that have not been designated as cash flow hedges in Interest and other income in its condensed consolidated statements of operations, and the amounts were immaterial during the three and six months ended June 30, 2019 and 2018.
The Company measures all of its interest rate swaps at fair value. The fair values of the Company's interest rate swaps (Level 2) are based on the estimated amounts that the
Company would receive or pay to terminate the contracts at the reporting date and are determined using interest rate pricing models and interest rate related observable inputs.
16. iSEGMENT RESULTS
i
Operating
segment information for the three and six months ended June 30, 2019 and 2018 is summarized below (in millions):
Gain
(loss) on the sale of commercial real estate properties
i—
i0.2
i—
i49.8
Interest
expense
(i8.1
)
(i8.9
)
(i17.2
)
(i17.3
)
General
corporate expenses
(i6.4
)
(i7.3
)
(i12.6
)
(i14.0
)
Income
(Loss) from Continuing Operations Before Income Taxes
$
(i1.3
)
$
i2.8
$
i7.1
$
i47.6
1
Commercial Real Estate segment operating profit (loss) includes intersegment operating revenue, primarily from the Materials & Construction segment, and is eliminated in the condensed consolidated results of operations.
2 Land Operations segment operating profit (loss) includes equity in earnings (losses) from the Company's various real estate joint ventures and non-cash reductions related to the Company's solar tax equity investments.
The Company disaggregates revenue from contracts with customers by revenue type as the Company believes it best depicts how the nature, amount, timing and uncertainty of the
Company's revenue and cash flows are affected by economic factors.
The
total amount of contract consideration allocated to either wholly unsatisfied or partially satisfied performance obligations was $i103.3 million as of June 30, 2019. The Company expects to recognize as revenue approximately i45%
- i50% of the remaining contract consideration allocated to either wholly unsatisfied or partially satisfied
performance obligations in 2019, with the remaining recognized thereafter.
Certain construction contracts include retainage provisions that are included in Accounts receivable and retention, net in the condensed consolidated balance sheets. The balances billed but not paid by customers pursuant to these provisions generally become due upon completion and acceptance of the project work or products by the owners.
Costs and estimated earnings in excess of billings represent amounts earned and reimbursable under contracts but have a conditional right for billing and payment such as achievement of milestones or completion of the project. When events or conditions
indicate that it is probable that the amounts outstanding become unbillable, the transaction price and associated contract asset is reduced. Costs and estimated earnings in excess of billings are presented within Prepaid expenses and other assets in the condensed consolidated balance sheets.
Billings in excess of costs and estimated earnings are billings to customers on contracts in advance of work performed, including advance payments negotiated as a contract condition. Generally, unearned project-related costs will be earned over the next twelve months. Billings in excess of costs and estimated earnings are
presented within Accrued and other liabilities in the condensed consolidated balance sheets.
The
Company as Lessee: Principal non-cancelable operating leases include land, office space, harbors and equipment leased for periods that expire through 2031. Management expects that in the normal course of business, most operating leases will be renewed or replaced by other similar leases.
20
i
Lease expense for operating leases that provide
for future escalations are accounted for on a straight-line basis. For the three and six months ended June 30, 2019, lease expense under operating leases was as follows (in millions):
The
Company has equipment under finance leases with periods that expire through 2023. The weighted-average remaining lease term and discount rate of these leases was i2.9 years and i4.62%,
respectively, as of June 30, 2019. ROU assets and lease liabilities related to these finance leases are presented within Other property, net and Notes payable and other debt, respectively, in the condensed consolidated balance sheets. Lease expense for finance leases included $i0.1 million and $i0.2
million of amortization and interest for the three and six months ended June 30, 2019, respectively.
The Company as Lessor: The Company leases to third-parties land and buildings under operating leases. The historical cost of, and accumulated depreciation on, leased property as of June 30, 2019 and December 31, 2018 were as follows (in millions):
The
Company's leases have remaining lease terms of i1 year to i45 years, some of which include options to extend the leases for up to i10
years, and some of which include options to terminate the leases within i1 year.
19. iSUBSEQUENT
EVENTS
On August 1, 2019, the Company's Board of Directors declared a cash dividend of $i0.19 per share of outstanding common stock, payable on September 5, 2019 to shareholders
of record as of the close of business on August 12, 2019.
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following analysis of the consolidated financial condition and results of operations of Alexander & Baldwin, Inc. and its subsidiaries should be
read in conjunction with the condensed consolidated financial statements and related notes thereto included in Item 1 of this Form 10-Q and the Company's Annual Report on Form 10-K for the year ended December 31, 2018 filed with the U.S. Securities and Exchange Commission ("SEC").
FORWARD-LOOKING STATEMENTS
Statements in this Form 10-Q 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 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,
as well as the evaluation of alternatives by the Company related to its materials and construction business and by the Company's joint venture related to the development of Kukui‘ula, generally discussed in the Company's most recent Form 10-K, Form 10-Q and other filings with the SEC. The information in this Form 10-Q should be evaluated in light of these important risk factors. We do not undertake any obligation to update the Company's forward-looking statements.
INTRODUCTION
Management's
Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is a supplement to the accompanying condensed consolidated financial statements and provides additional information about A&B's business, recent developments, financial condition, liquidity and capital resources, cash flows, results of operations and how certain accounting principles, policies and estimates affect A&B’s financial statements. MD&A is organized as follows:
•
Business Overview: This section provides a general description of A&B's business, as well as recent developments that A&B believes are important in understanding its results of operations and financial condition or in understanding anticipated future trends.
•
ConsolidatedResults of Operations: This section provides an analysis of A&B's consolidated results of operations for the three and six months ended June 30, 2019.
•
Analysis of Operating Revenue and Profit by Segment: This section provides an analysis of A&B's results of operations by business segment.
•
Liquidity and Capital Resources:
This section provides a discussion of A&B's financial condition and an analysis of A&B’s cash flows for the six months ended June 30, 2019 and 2018, as well as a discussion of A&B's ability to fund its future commitments and ongoing operating activities through internal and external sources of capital.
•
Critical Accounting Estimates: This section identifies and summarizes those accounting policies that significantly impact A&B's reported results of operations and financial condition and require significant judgment or estimates on the part of management in their
application.
•
Rounding: Amounts in the MD&A are rounded to the nearest tenth of a million. Accordingly, a recalculation of totals and percentages, if based on the reported data, may be slightly different.
BUSINESS OVERVIEW
A&B, whose history dates back to 1870, is a REIT headquartered in Honolulu, Hawai'i and operates through three reportable segments: Commercial Real Estate; Land Operations; and Materials & Construction.
23
Commercial
Real Estate
Commercial Real Estate ("CRE"): includes leasing, property management, redevelopment and development-for-hold activities. Significant assets include improved commercial real estate and urban ground leases. Income from this segment is principally generated by leasing and operating real estate assets.
Land Operations
Land Operations: involves the management and optimization of A&B's land and related assets primarily through the following activities: developing land for sale; leasing agricultural land; and renewable energy. Primary assets include landholdings, renewable energy assets (investments in hydroelectric and solar facilities and power purchase agreements) and development-for-sale projects and investments. Financial results from this segment are principally derived
from renewable energy operations, income/loss from real estate joint ventures, real estate development sales and fees, and land parcel sales.
Materials & Construction
Materials & Construction ("M&C"): performs asphalt paving as prime contractor and subcontractor; imports and sells liquid asphalt; mines, processes and sells basalt aggregate; produces and sells asphaltic concrete; provides and sells various construction- and traffic-control-related products and services; and manufactures and sells precast concrete products. Assets include two grade A (prime) rock quarries, a liquid asphalt storage terminal, hot mix asphalt plants, and quarry and paving equipment. Income is generated principally by materials supply and paving construction.
As a result of its conversion to a REIT and consequent de-emphasis
of non-REIT operating businesses, the Company is evaluating strategic options for the eventual monetization of some or all of its Materials & Construction businesses.
During the fourth quarter of 2018, the Company concluded that carrying values of certain long-lived assets and goodwill relating to M&C were not recoverable due primarily to persisting, competitive market pressures that negatively affected sales and margins and recorded impairment charges to reduce the carrying amounts to the estimated fair value. In conjunction with its process of evaluating strategic options discussed above, the Company undertook a review of operations and certain improvements
were identified that have been and continue to be implemented in 2019.
During the six months ended June 30, 2019, the M&C segment recognized further operating losses of $8.8 million (the reasons for segment-specific fluctuations are discussed below in the Analysis of Operating Revenue and Profit by Segment). The Company is continuing to monitor the performance of the M&C segment and will continue to implement the operational improvements identified during the process discussed above. However, if such initiatives fail to produce the intended improvements in the results of operations in the second half of 2019, there can be no assurance that the carrying
values associated with the long-lived assets and goodwill will be recoverable and additional impairments on such long-lived assets and goodwill may be required.
24
CONSOLIDATED RESULTS OF OPERATIONS
The following analysis of the consolidated financial condition and results of operations of Alexander & Baldwin, Inc. and its subsidiaries should be read in conjunction with the condensed consolidated financial statements and related notes thereto. Amounts
in this narrative are rounded to millions, but per-share calculations and percentages were calculated based on thousands. Accordingly, a recalculation of some per-share amounts and percentages, if based on the reported data, may be slightly different than the amounts included herein. The financial information included in the following table and narrative reflects the presentation of the Company's former sugar operations as discontinued operations for all periods presented.
Consolidated - Second quarter of 2019 compared with 2018
Three
Months Ended June 30,
(dollars in millions, except per share amounts, unaudited)
2019
2018
$ Change
Change
Operating
revenue
$
109.1
$
112.1
(3.0
)
(2.7
)%
Cost of operations
(87.7
)
(89.1
)
1.4
1.6
%
Selling,
general and administrative
(16.2
)
(15.1
)
(1.1
)
(7.3
)%
Gain (loss) on the sale of commercial real estate properties
—
0.2
(0.2
)
(100.0
)%
Operating
income (loss)
5.2
8.1
(2.9
)
(35.8
)%
Income (loss) related to joint ventures
1.0
4.4
(3.4
)
(77.3
)%
Other
income (expense), net
(7.5
)
(9.7
)
2.2
22.7
%
Income tax benefit (expense)
—
0.1
(0.1
)
(100.0
)%
Income
(loss) from continuing operations
(1.3
)
2.9
(4.2
)
NM
Discontinued operations (net of income taxes)
0.1
0.1
—
—
%
Net
income (loss)
(1.2
)
3.0
(4.2
)
NM
(Income) loss attributable to noncontrolling interest
0.4
(0.5
)
0.9
NM
Net
income (loss) attributable to A&B
$
(0.8
)
$
2.5
(3.3
)
NM
Basic
earnings (loss) per share - continuing operations
$
(0.01
)
$
0.03
(0.04
)
NM
Basic
earnings (loss) per share - discontinued operations
—
—
—
—
%
Net income (loss) available to A&B shareholders
$
(0.01
)
$
0.03
(0.04
)
NM
Diluted
earnings (loss) per share - continuing operations
$
(0.01
)
$
0.03
(0.04
)
NM
Diluted
earnings (loss) per share - discontinued operations
—
—
—
—
%
Net income (loss) available to A&B shareholders
$
(0.01
)
$
0.03
(0.04
)
NM
Operating
revenuefor the second quarter ended June 30, 2019decreased2.7%, or $3.0 million, to $109.1 million, primarily due to lower revenue from the Materials & Construction segment partially offset by higher revenue from each of the Commercial Real Estate and Land Operations segments. The reasons for business and segment-specific fluctuations in revenue are further described below in the Analysis of Operating Revenue and Profit by Segment.
Cost of operationsfor the second quarter
ended June 30, 2019decreased1.6%, or $1.4 million, to $87.7 million, primarily due to lower costs in the Materials & Construction segment partially offset by higher costs in each of the Commercial Real Estate and Land Operations segments. The reasons for the cost of operations changes are described below, by business segment, in the Analysis of Operating Revenue and Profit by Segment.
Selling, general and administrativefor the second quarter ended June 30, 2019increased7.3%, or $1.1 million, to $16.2 million, primarily due to an increase in each of the Commercial Real Estate and Materials and Construction segments. The reasons for business and segment-specific fluctuations in selling, general and administrative expenses are further described below in the Analysis of Operating Revenue and Profit by Segment.
Income (loss) related to joint ventures for the second quarter ended June 30, 2019decreased$3.4 million, to $1.0 million,
due primarily to lower income related to real estate development joint ventures, as compared to the second quarter of 2018. Additional discussion of business and segment-specific fluctuations related to income (loss) related to joint ventures is further described in the Analysis of Operating Revenue and Profit by Segment.
25
Other income (expense), net was a net expense of $7.5 million in the second quarter ended June 30, 2019 compared to a net expense
of $9.7 million in the second quarter ended June 30, 2018. The change from the prior year was primarily due to a decrease in interest expense on the Company's outstanding debt due to lower average debt levels during the period.
Discontinued operations (net of income taxes) was a net benefit of $0.1 million in the second quarter ended June 30, 2019 compared to a net benefit
of $0.1 million in the second quarter ended June 30, 2018.
(Income) Loss attributable to noncontrolling interestdecreased$0.9 million in the second quarter ended June 30, 2019 compared to the second quarter ended June 30, 2018. The noncontrolling interest represents third-party noncontrolling interests in two entities consolidated within the Materials
& Construction segment, and in which Grace Pacific owns a 70 percent and 51 percent share in each.
Consolidated - First half of 2019 compared with 2018
Six Months Ended June 30,
(dollars
in millions, except per share amounts, unaudited)
2019
2018
$ Change
Change
Operating revenue
$
238.5
$
225.4
13.1
5.8
%
Cost
of operations
(188.3
)
(180.4
)
(7.9
)
(4.4
)%
Selling, general and administrative
(31.8
)
(30.1
)
(1.7
)
(5.6
)%
Gain
(loss) on the sale of commercial real estate properties
—
49.8
(49.8
)
(100.0
)%
Operating income (loss)
18.4
64.7
(46.3
)
(71.6
)%
Income
(loss) related to joint ventures
3.7
1.8
1.9
105.6
%
Other income (expense), net
(15.0
)
(18.9
)
3.9
20.6
%
Income
tax benefit (expense)
1.1
2.8
(1.7
)
(60.7
)%
Income (loss) from continuing operations
8.2
50.4
(42.2
)
(83.7
)%
Discontinued
operations (net of income taxes)
(0.7
)
—
(0.7
)
—
%
Net income (loss)
7.5
50.4
(42.9
)
(85.1
)%
(Income)
loss attributable to noncontrolling interest
0.7
(0.6
)
1.3
NM
Net income (loss) attributable to A&B
$
8.2
$
49.8
(41.6
)
(83.5
)%
Basic
earnings (loss) per share - continuing operations
$
0.12
$
0.72
(0.60
)
(83.3
)%
Basic
earnings (loss) per share - discontinued operations
(0.01
)
—
(0.01
)
—
%
Net income (loss) available to A&B shareholders
$
0.11
$
0.72
(0.61
)
(84.7
)%
Diluted
earnings (loss) per share - continuing operations
$
0.12
$
0.69
(0.57
)
(82.6
)%
Diluted
earnings (loss) per share - discontinued operations
(0.01
)
—
(0.01
)
—
%
Net income (loss) available to A&B shareholders
$
0.11
$
0.69
(0.58
)
(84.1
)%
Operating
revenuefor the six months ended June 30, 2019increased5.8%, or $13.1 million, to $238.5 million, primarily due to higher revenue from the Land Operations and Materials & Construction segments. The reasons for business and segment-specific fluctuations in revenue are further described below in the Analysis of Operating Revenue and Profit by Segment.
Cost of operations for the six months ended June 30, 2019increased4.4%, or $7.9 million, to $188.3 million, primarily due to increases in costs incurred by the Land Operations and Materials & Construction segments. The reasons for the cost of operations changes are described below, by business segment, in the Analysis of Operating Revenue and Profit by Segment.
Selling, general and administrative for the six months ended June 30, 2019increased5.6%, or $1.7 million, to $31.8
million, primarily due to an increase in each of the Commercial Real Estate and Materials and Construction segments. The reasons for business and segment-specific fluctuations in selling, general and administrative expenses are further described below in the Analysis of Operating Revenue and Profit by Segment.
Gain (loss) on the sale of commercial real estate propertiesduring the six months ended June 30, 2018 was $49.8 million due to the aggregate gain realized on the sales of six mainland properties (Concorde Commerce Center, Deer Valley Financial Center, 1800 and 1820 Preston Park, Little Cottonwood Center, Royal MacArthur Center, and Sparks Business Center) and three
26
Hawai‘i assets (Stangenwald Building, Judd Building and land underlying a ground lease). There were no Sales of commercial real estate assets during the six months ended June 30, 2019.
Other income (expense), net was a net expense of $15.0 million in the six months ended June 30, 2019 compared to a net expense
of $18.9 million in the six months ended June 30, 2018. The change from the prior year was primarily due to a gain of $2.6 million related to the sale of 50% interest in EMI.
Income tax benefit (expense)was a benefit of $1.1 million during the six months ended June 30, 2019 due to a tax benefit related to interest income on IRS tax refunds. Income tax benefit (expense) was a benefit of $2.8 million during the six months
ended June 30, 2018, due to a taxable loss incurred in the operations of the Company's taxable REIT subsidiary.
Discontinued operations (net of income taxes) was a net expense of $0.7 million during the six months ended June 30, 2019 and was not significant during the six months ended June 30, 2018.
(Income) Loss attributable to noncontrolling interest
during the six months ended June 30, 2019 was a loss of $0.7 million as compared to a gain of $0.6 million during the six months ended June 30, 2018. The noncontrolling interest represents third-party noncontrolling interests in two entities consolidated within the Materials & Construction segment, and in which Grace Pacific owns a 70 percent and 51 percent share in each.
27
ANALYSIS
OF OPERATING REVENUE AND PROFIT BY SEGMENT
Commercial Real Estate - Second quarter of 2019 compared with 2018
Three Months Ended June 30,
(dollars
in millions, unaudited)
2019
2018
$ Change
Change
Commercial Real Estate operating revenue
$
39.1
$
33.8
$
5.3
15.7
%
Commercial
Real Estate operating costs and expenses
(21.3
)
(19.2
)
(2.1
)
(10.9
)%
Selling, general and administrative
(3.0
)
(1.6
)
(1.4
)
(87.5
)%
Intersegment
operating revenue, net1
0.6
0.7
(0.1
)
(14.3
)%
Other income/(expense), net
1.6
(0.1
)
1.7
1,700.0
%
Commercial
Real Estate operating profit (loss)
$
17.0
$
13.6
$
3.4
25.0
%
Operating
profit (loss) margin
43.5
%
40.2
%
Cash
Net Operating Income ("Cash NOI")2
Hawai‘i
$
25.3
$
20.9
Mainland
—
0.1
Total
$
25.3
$
21.0
Same-Store
Cash Net Operating Income ("Same-Store Cash NOI")2
$
19.6
$
18.5
Gross Leasable Area ("GLA") (million sq.
ft.) - Improved (end of period)
3.8
3.3
Ground leases (acres at end of period)
154
109
1
Intersegment operating revenue, net for Commercial Real Estate is primarily from the Materials & Construction segment and is eliminated in the consolidated results of operations.
2 Refer to page 30 for a discussion of management's use of a non-GAAP financial measure and the required reconciliation of non-GAAP measures to GAAP measures.
Commercial Real Estate operating revenue increased15.7%, or $5.3 million, to $39.1 million for the second quarter ended June 30, 2019, as compared
to the second quarter ended June 30, 2018. Operating profit increased25.0%, or $3.4 million, to $17.0 million for the second quarter ended June 30, 2019, as compared to the second quarter ended June 30, 2018. The variance in operating profit from the prior year quarter is due primarily to the impact of acquired properties and new tenant leases, as well as an increase
in same-store rents, partially offset by higher general and administrative expense principally related to personnel costs. "Same-store" refers to properties that were owned and operated for the entirety of the prior calendar year. The same-store pool excludes properties under development or redevelopment, properties held for sale and also excludes properties acquired or sold during the comparable reporting periods, including stabilized properties. New developments and redevelopments are moved into the same-store pool upon one full calendar year of stabilized operation. New developments and redevelopments are generally considered stabilized upon the initial attainment of 90% occupancy.
Occupancy represents the percentage of square footage leased and commenced to gross leasable space at the end of the period reported. The Company's
commercial portfolio's occupancy and same-store occupancy percentage summarized by property type as of June 30, 2019 and 2018 was as follows:
GLA
related to improved properties was 3.8 million square feet at June 30, 2019 and 3.5 million square feet at December 31, 2018. The fluctuation in GLA from December 31, 2018 was due primarily to the following current year asset acquisitions (excluding ground leases, which have no impact on GLA):
Acquisitions
Date
Property
GLA
(SF)
5/19
Queens' Marketplace
135,000
5/19
Waipouli Town Center
56,500
4/19
Kapolei
Enterprise Center
93,000
Total improved acquisitions
284,500
Commercial Real Estate - First half of 2019 compared with 2018
Six
Months Ended June 30,
(dollars in millions, unaudited)
2019
2018
$ Change
Change
Commercial
Real Estate operating revenue
$
75.9
$
69.0
$
6.9
10.0
%
Commercial
Real Estate operating costs and expenses
(40.5
)
(37.8
)
2.7
(7.1
)%
Selling, general and administrative
(5.5
)
(3.3
)
(2.2
)
(66.7
)%
Intersegment
operating revenue, net1
1.2
1.3
(0.1
)
(7.7
)%
Other income/(expense), net
1.5
(0.1
)
1.6
1,600.0
%
Commercial
Real Estate operating profit (loss)
$
32.6
$
29.1
$
3.5
12.0
%
Operating
profit (loss) margin
43.0
%
42.2
%
Cash
Net Operating Income ("Cash NOI")2
Hawai‘i
$
49.5
$
41.2
Mainland
—
1.5
Total
$
49.5
$
42.7
Same-Store
Cash Net Operating Income ("Same-Store Cash NOI")2
$
39.8
$
37.3
1 Intersegment
operating revenue, net for Commercial Real Estate is primarily from the Materials & Construction segment and is eliminated in the condensed consolidated results of operations.
2 Refer to page 30 for a discussion of management's use of a non-GAAP financial measure and the required reconciliation of non-GAAP measures to GAAP measures.
Commercial Real Estate operating revenue increased10.0%, or $6.9 million, to $75.9 million for the six months ended June 30, 2019 as compared to the six months
ended June 30, 2018. Operating profit increased12.0%, or $3.5 million, to $32.6 million for the six months ended June 30, 2019 as compared to the six months ended June 30, 2018. The variance in operating profit from the prior year quarter is due primarily to the impact of acquired properties and new tenant leases, as well as an increase in same-store rents, partially offset by higher general and administrative expense
principally related to personnel costs. "Same-store" refers to properties that were owned and operated for the entirety of the prior calendar year. The same-store pool excludes properties under development or redevelopment, properties held for sale and also excludes properties acquired or sold during the comparable reporting periods, including stabilized properties. New developments and redevelopments are moved into the same-store pool upon one full calendar year of stabilized operation. New developments and redevelopments are generally considered stabilized upon the initial attainment of 90% occupancy.
29
Use of Non-GAAP Financial
Measures
The Company uses non-GAAP measures when evaluating operating performance because management believes that they provide additional insight into the Company's and segments' core operating results, and/or the underlying business trends affecting performance on a consistent and comparable basis from period to period. These measures generally are provided to investors as an additional means of evaluating the performance of ongoing core operations.
Cash Net Operating Income ("Cash NOI") is a non-GAAP measure used internally in evaluating the unlevered performance of the Company's Commercial Real Estate portfolio.
The Company believes Cash NOI provides useful information to investors regarding the Company's financial condition and results of operations because it reflects only those cash income and expense items that are incurred at the property level, and when compared across periods, can be used to determine trends in earnings of the Company's properties as this measure is not affected by non-cash revenue and expense recognition items, the impact of depreciation and amortization expenses or other gains or losses that relate to the Company's ownership of properties. The
Company believes the exclusion of these items from operating profit (loss) is useful because the resulting measure captures the actual revenue generated and actual expenses incurred in operating the Company's Commercial Real Estate portfolio as well as trends in occupancy rates, rental rates, and operating costs. Cash NOI should not be viewed as a substitute for, or superior to, financial measures calculated in accordance with GAAP.
Cash NOI is calculated as total Commercial Real Estate operating revenues less direct property-related operating expenses. Cash NOI excludes straight-line lease adjustments, amortization of favorable/unfavorable leases, amortization of lease incentives, selling, general and administrative expenses, impairment of commercial real estate assets, lease termination income, other income and expense, net, and depreciation
and amortization (including amortization of maintenance capital, tenant improvements and leasing commissions).
The Company's methods of calculating non-GAAP measures may differ from methods employed by other companies and thus may not be comparable to such other companies.
A reconciliation of Commercial Real Estate operating profit (loss) to Commercial Real Estate Cash NOI for the three and six months ended June 30, 2019 and 2018 are as follows (in millions):
Three
Months Ended June 30,
Six Months Ended June 30,
(in millions, unaudited)
2019
2018
2019
2018
Commercial Real Estate Operating Profit (Loss)
$
17.0
$
13.6
$
32.6
$
29.1
Plus:
Depreciation and amortization
9.1
7.0
16.5
13.3
Less: Straight-line lease adjustments
(1.7
)
(0.6
)
(2.7
)
(0.7
)
Less:
Favorable/(unfavorable) lease amortization
(0.5
)
(0.5
)
(0.9
)
(1.0
)
Less: Termination income
—
—
—
(1.1
)
Plus:
Other (income)/expense, net
(1.6
)
0.1
(1.5
)
0.1
Plus: Selling, general, administrative and other expenses
3.0
1.6
5.5
3.3
Less:
Impact of adoption of ASU 2016-021
—
(0.2
)
—
(0.3
)
Commercial Real Estate Cash NOI
$
25.3
$
21.0
$
49.5
$
42.7
1 Represents
legal costs related to leasing activity that were previously capitalized when incurred and recognized as amortization expense over the term of the lease contract. Upon the Company's adoption of ASU 2016-02, Leases, on January 1, 2019, such legal costs are directly expensed as operating costs and are included in Cash NOI. For comparability purposes, Cash NOI for the 2018 periods presented have been adjusted to include legal fees in conformity with Cash NOI for the 2019 periods presented.
Land Operations
- Second quarter of 2019 compared with 2018
The asset class mix of real estate sales in any given year or quarter can be diverse and may include developed residential real estate, developable subdivision lots, undeveloped land, or property sold under threat of condemnation. Further, the timing of property or parcel sales can significantly affect operating results in a given period.
Additionally, the operating profit reported in each quarter does not necessarily follow a percentage of sales trend because the cost basis of property sold can differ significantly between transactions. For example, the sale of undeveloped land and vacant parcels in Hawai‘i generally provides higher margins than does the sale of developed property, due to the low historical cost basis of the
Company's land owned in Hawai‘i.
30
As a result, direct year-over-year comparison of the Land Operations segment results may not provide a consistent, measurable indicator of future performance. Further, Land Operations revenue trends, cash flows from the sales of real estate, and the amount of real estate held for sale on the Company's balance sheet do not necessarily indicate future profitability trends for this segment.
Three
Months Ended June 30,
(in millions, unaudited)
2019
2018
Development sales revenue
$
18.1
$
10.8
Unimproved/other
property sales revenue
0.4
2.1
Other operating revenue1
6.4
6.4
Total Land Operations
operating revenue
24.9
19.3
Land Operations costs and operating expenses
(24.4
)
(20.9
)
Earnings (loss) from joint ventures
0.8
4.1
Interest
and other income (expense), net
(0.8
)
(0.9
)
Land Operations operating profit (loss)
$
0.5
$
1.6
1
Other operating revenue includes revenue related to trucking, renewable energy and diversified agriculture.
Second quarter of 2019: Land Operationsrevenue was $24.9 million and included sales of the 22 remaining units from the Company's Kamalani real estate development project in Kihei, Maui, one Kahala Avenue parcel, and one parcel at Maui Business Park. Revenue also included other operating revenues related to the Company's trucking service, renewable energy, and diversified agribusiness operations.
Land
Operations operating profit of $0.5 million during the second quarter ended June 30, 2019 principally resulted from lower earnings in income from joint ventures due to the absence of larger activity that occurred in the prior year. The Land Operations segment results also included $0.8 million of other net expense primarily consisting of other pension expense.
Second quarter of 2018: Land Operations revenue was $19.3 million and included sales of 30 units at the Company's Kamalani project in Kihei, Maui, along with
revenue related to the Company's trucking service, renewable energy, and diversified agribusiness operations.
The Land Operations segment incurred an operating profit of $1.6 million during the second quarter ended June 30, 2018 that principally resulted from an increase in income from joint ventures. The Land Operations segment results also included a $0.2 million non-cash reduction in the carrying value of the Company's Solar Investment and $0.7 million of other net expense primarily consisting of other pension expense.
Land
Operations - First half of 2019 compared with 2018
Six Months Ended June 30,
(in millions, unaudited)
2019
2018
Development sales revenue
$
30.4
$
33.8
Unimproved/other
property sales revenue
30.9
2.4
Other operating revenue1
12.6
12.4
Total Land Operations
operating revenue
73.9
48.6
Land Operations costs and operating expenses
(65.2
)
(52.5
)
Earnings (loss) from joint ventures
3.4
1.5
Interest
and other income (expense), net
1.0
(1.4
)
Land Operations operating profit (loss)
$
13.1
$
(3.8
)
1Other
operating revenue includes revenue related to trucking, renewable energy and diversified agriculture.
First half of 2019: Land Operations revenue was $73.9 million and included the impact of the sales of 42 acres of land and related improvements in Wailea, the remaining 44 units in Increment 1 of the Kamalani planned community, two Kahala lots, approximately 800 acres of agricultural land on Maui and one Maui Business Park lot.
31
Operating profit for the six months ended June 30,
2019 of $13.1 million was primarily driven by the sales of land and related improvements mentioned above and also included real estate development joint venture earnings of $3.4 million, a gain of $2.6 million related to the sale of 50% interest in EMI, and $0.9 million in pension related expenses.
First half of 2018: Land Operations operating revenue was $48.6 million and included sales of one Kahala Avenue parcel and 46 units for the Company's Kamalani project in Kihei, Maui, along with trucking service and power sales revenues. The Land Operations segment incurred an operating loss of $3.8 million during the six months ended June
30, 2018 primarily driven by an equity method investment loss in the first quarter of 2018 due to remediation costs incurred for construction-related defects that were isolated to a residential development project. The Land Operations segment results also included a $0.3 million non-cash reduction in the carrying value of the Company's Solar Investment and $1.1 million of other net expense primarily consisting of other pension expense.
Materials & Construction - Second quarter of 2019 compared with 2018
Three
Months Ended June 30,
(in millions, unaudited)
2019
2018
$ Change
Change
Materials
& Construction operating revenue
$
45.1
$
59.0
$
(13.9
)
(23.6)%
Operating
Profit (Loss)
$
(4.3
)
$
3.6
$
(7.9
)
NM
Operating margin percentage
(9.5
)%
6.1
%
Depreciation
and amortization
$
3.0
$
3.1
$
(0.1
)
(3.2)%
Aggregate tons delivered
(tons in thousands)
209.6
183.5
26.1
14.2%
Asphalt tons delivered (tons in thousands)
92.7
151.6
(58.9
)
(38.9)%
Backlog1,2 at
period end
$
105.2
$
174.4
$
(69.2
)
(39.7)%
1
Backlog represents the total amount of revenue that Grace Pacific and Maui Paving, LLC, a 50-percent-owned unconsolidated affiliate, expect to realize on contracts awarded. Backlog primarily consists of asphalt paving and, to a lesser extent, Grace Pacific’s consolidated revenue from its Prestress and construction-and traffic control-related products. Backlog includes estimated revenue from the remaining portion of contracts not yet completed, as well as revenue from approved change orders. The length of time that projects remain in backlog can span from a few days for a small volume of work to 36 months for large paving contracts and contracts
performed in phases. As of June 30, 2019 and 2018, these amounts include $15.9 million and $19.0 million of opportunity backlog consisting of government contracts in which Grace Pacific has been confirmed to be the lowest bidder and formal communication of the award is perfunctory at the time of this disclosure. Circumstances outside the Company's control such as procurement or technical protests may arise that prevent the finalization of such contracts.
Maui Paving's backlog at June 30, 2019 and 2018 was $1.9 million and $7.4 million, respectively.
2 As of June 30, 2019 and 2018, the backlog included contractual revenue with related parties of $2.0 million and $2.8 million, respectively.
Materials & Construction
revenue was $45.1 million for the second quarter ended June 30, 2019, compared to $59.0 million for the second quarter ended June 30, 2018. Operating loss was $4.3 million for the second quarter ended June 30, 2019, compared to operating profit of $3.6 million for the second quarter ended June 30,
2018. The decline in the segment results of operations from the second quarter of 2018 to the second quarter of 2019 was due primarily to lower paving volume and margins, project delays in the prestress operations, and higher general and administrative expenses resulting from reorganization-related activities. Earnings from joint venture investments are not included in segment revenue but are included in operating profit (loss).
Backlog at the end of June 30, 2019 was $105.2 million, compared to $174.4 million as of June 30, 2018 and $128.7 million as of December 31,
2018. The decrease in backlog from the comparable prior year period reflects both a decline in recent government contracts that have been put out to bid, as well as a change in the nature of government contracting that precludes certain contracts from being included in backlog. Certain agencies are now awarding "maintenance contracts" under which a contractor can secure all paving work within a certain geographic area, but jobs are not identified in advance, meeting the requirement for inclusion in backlog.
32
Materials
& Construction - First half of 2019 compared with 2018
Six Months Ended June 30,
(in
millions, unaudited)
2019
2018
$ Change
Change
Materials & Construction operating revenue
$
88.7
$
107.8
$
(19.1
)
(17.7)%
Operating
Profit (Loss)
$
(8.8
)
$
3.8
$
(12.6
)
NM
Operating margin percentage
(9.9
)%
3.5
%
Depreciation
and amortization
$
5.8
$
6.1
$
(0.3
)
(4.9)%
Aggregate tons delivered
(tons in thousands)
410.6
350.8
59.8
17.0%
Asphalt tons delivered (tons in thousands)
169.7
260.3
(90.6
)
(34.8)%
Materials
& Construction revenue was $88.7 million for the six months ended June 30, 2019, compared to $107.8 million for the six months ended June 30, 2018.
Operating loss was $8.8 million for the six months ended June 30, 2019, compared to operating profit of $3.8 million for the six months
ended June 30, 2018. The decline in the segment results of operations from the six months of 2018 to the six months of 2019 was due primarily to lower paving volume and margins, project delays related to the prestress operations, and higher general and administrative expenses resulting from reorganization-related activities. Earnings from joint venture investments are not included in segment revenue but are included in operating loss.
LIQUIDITY AND CAPITAL RESOURCES
Overview: A&B's primary liquidity needs have historically been to support working capital requirements and fund capital expenditures, commercial real estate acquisitions and real
estate developments. A&B's principal sources of liquidity have been cash flows provided by operating activities, available cash and cash equivalent balances, and borrowing capacity under its various credit facilities.
A&B's operating income (loss) is generated by its subsidiaries. There are no material restrictions on the ability of A&B's wholly owned subsidiaries to pay dividends or make other distributions to A&B. A&B regularly evaluates investment opportunities, including development-for-hold projects, commercial real estate acquisitions, joint venture investments, share repurchases, business acquisitions and other strategic transactions to increase shareholder value. A&B cannot predict whether or when it may make investments
or what impact any such transactions could have on A&B's results of operations, cash flows or financial condition.
Cash Flows: Cash flows from operations were $81.1 million and $26.8 million for the six months ended June 30, 2019 and 2018, respectively. The change in cash flows from operating activities is primarily attributable to an increase in cash generated from the Company's CRE segment and Land Operations segment as compared to the prior year's six months ended June 30,
2018.
Cash flows used in investing activities was $235.5 million and $60.2 million for the six months ended June 30, 2019 and 2018, respectively. During the six months ended June 30, 2019, the net cash used in investing activities included cash outlays of $245.8 million related to capital expenditures, which included cash outflows of $218.4 million related to the
Company's acquisitions of five commercial real estate assets. Cash used in investing activities during the six months ended June 30, 2019 also included $3.3 million related to capital contributions with respect to its investments in unconsolidated affiliates. Cash flows from investing activities during the six months ended June 30, 2019 included $10.6 million related to distributions from joint ventures and other investments and $3.0 million primarily related to the sale of 50% of the Company's interests in a joint venture.
33
Net
cash flows used in investing activities for capital expenditures were as follows:
Three Months Ended June 30,
(in millions, unaudited)
2019
2018
Change
Commercial
real estate property acquisitions/improvements
$
183.8
$
7.6
23X
Tenant improvements
0.5
1.6
(68.8)%
Quarrying
and paving
2.0
2.8
(28.6)%
Agribusiness and other
0.5
0.6
(16.7)%
Total
capital expenditures¹
$
186.8
$
12.6
14X
Six
Months Ended June 30,
(in millions, unaudited)
2019
2018
Change
Commercial real estate property acquisitions/improvements
$
240.0
$
210.0
14.3%
Tenant
improvements
1.4
4.8
(70.8)%
Quarrying and paving
3.5
4.1
(14.6)%
Agribusiness
and other
0.9
1.1
(18.2)%
Total capital expenditures¹
$
245.8
$
220.0
11.7%
1
Excludes capital expenditures for real estate developments to be held and sold as real estate development inventory, which are classified in the condensed consolidated statement of cash flows as operating activities and are excluded from the tables above.
Net cash flows used in financing activities was $74.8 million for the six months ended June 30, 2019, as compared to net cash used in financing activities for the six months ended June 30, 2018
of $60.1 million. The change in cash flows used in financing activities in 2019 as compared to 2018 was due primarily to the higher net payments on debt (i.e., debt payments net of additional borrowings) as compared to net borrowings in the prior period and also lower cash dividend payments as compared to the prior period.
The Company believes that funds generated from results of operations, available cash and cash equivalents, and available borrowings under credit facilities will be sufficient to finance the Company's business requirements for the next fiscal year, including working capital, capital expenditures, potential
acquisitions and stock repurchases. There can be no assurance, however, that the Company will continue to generate cash flows at or above current levels or that it will be able to maintain its ability to borrow under its available credit facilities.
Other Sources of Liquidity: Additional sources of liquidity for the Company include trade receivables, contracts retention, and inventories, totaling $97.5 million at June 30, 2019, a decrease of $14.0
million from December 31, 2018.
The Company also has revolving credit and term facilities that provide additional sources of liquidity for working capital requirements or investment opportunities on a short-term as well as longer-term basis. At June 30, 2019, the Company had $98.6 million of revolving credit borrowings outstanding, $11.3 million in letters of credit had been issued against the facility, and $340.1 million
remained unused.
Tax-Deferred Real Estate Exchanges:
Sales: During the second quarter ended June 30, 2019, there were no cash proceeds from sales activity that qualified for potential tax-deferral treatment under Internal Revenue Code §1031 or §1033.
Purchases: During the second quarter ended June 30, 2019, the Company utilized $176.6
million of funds from tax-deferred sales or condemnations and $11.0 million expired without being reinvested.
Proceeds from §1031 tax-deferred sales are held in escrow pending future use to purchase new real estate assets. The proceeds from §1033 condemnations are held by the Company until the funds are redeployed. As of June 30, 2019, there were no cash proceeds from tax-deferred sales and approximately $14.5 million from tax-deferred condemnations that had not yet been reinvested.
Commitments, Contingencies and Off-balance Sheet Arrangements:
A description of other commitments, contingencies, and off-balance sheet arrangements at June 30, 2019, and herein incorporated by reference, is included in Note 3 to the condensed consolidated financial statements of Item 1 in this Form 10-Q.
34
OTHER MATTERS
Critical Accounting Estimates:The preparation of financial statements in conformity with accounting principles generally accepted in the United
States of America, upon which the Management's Discussion and Analysis is based, requires that management exercise judgment when making estimates and assumptions about future events that may affect the amounts reported in the financial statements and accompanying notes. Future events and their effects cannot be determined with absolute certainty and actual results will, inevitably, differ from those critical accounting estimates. These differences could be material. The most significant accounting estimates inherent in the preparation of A&B's financial statements were described in Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Company's 2018 Form 10-K.
35
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information concerning market risk is incorporated herein by reference to Item 7A of the Company's Form 10-K for the fiscal year ended December 31, 2018. There has been no material change in the quantitative and qualitative disclosures about market risk since December 31, 2018.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on such evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that, as of June 30, 2019, the
Company’s disclosure controls and procedures were effective.
Internal Control Over Financial Reporting
There have not been any changes in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the Company's fiscal second quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
36
PART
II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information set forth under the "Legal Proceedings and Other Contingencies" section in Note 3 of Notes to Condensed Consolidated Financial Statements, included in Part I, Item 1 of this report, is incorporated herein by reference.
ITEM 1A. RISK FACTORS
There have been no material changes to the risk factors previously disclosed in Item 1A. "Risk Factors" in the
Company's most recent annual report on Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
Period
Total Number of Shares Purchased¹
Average Price Paid per Share
Total
Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
April 1-30, 2019
—
$
—
—
—
May 1-31, 2019
—
$
—
—
—
June
1-30, 2019
—
$
—
—
—
1Represents shares accepted in satisfaction of tax withholding obligations arising upon the vesting of restricted stock unit awards.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM
4. MINE SAFETY DISCLOSURES
The information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulations S-K (17 CFR 229.104) is included in Exhibit 95 to this periodic report on Form 10-Q.
The following information from Alexander & Baldwin, Inc.'s Quarterly Report on Form 10-Q for the quarter ended
June 30, 2019, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2019 and 2018, (ii) Condensed Consolidated Statement of Comprehensive Income (Loss) for the three and six months ended June 30, 2019 and 2018, (iii) Condensed Consolidated Balance Sheets as of June 30, 2019 and December 31,
2018, (iv) Condensed Consolidated Statement of Cash Flows for the six months ended June 30, 2019 and 2018, (v) Condensed Consolidated Statements of Equity for the three and six months ended June 30, 2019 and 2018, and (vi) the Notes to the Condensed Consolidated Financial Statements.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.