Form 10-Q Alexander & Baldwin, For: Sep 30
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended September 30, 2022
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from ______________________ to _________________
Commission file number 001-35492
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||||||||
| (Address of principal executive offices) | (Zip Code) | ||||||||||
(808 ) 525-6611
(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 | ||||||
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. Yes ☒ 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). Yes ☒ 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.
| ☒ | Accelerated filer | ☐ | |||||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | |||||||||||||||
| Emerging growth company | |||||||||||||||||
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 ☐ No ☒
Number of shares of common stock outstanding as of September 30, 2022: 72,544,235
1
ALEXANDER & BALDWIN, INC.
FORM 10-Q
For the Quarterly Period Ended September 30, 2022
TABLE OF CONTENTS
| Page | ||||||||||||||
| PART I. FINANCIAL INFORMATION | ||||||||||||||
| Item 1. | ||||||||||||||
Condensed Consolidated Balance Sheets - As of September 30, 2022 and December 31, 2021 | ||||||||||||||
Condensed Consolidated Statements of Operations - Three and Nine Months Ended September 30, 2022 and 2021 | ||||||||||||||
Condensed Consolidated Statements of Comprehensive Income (Loss) - Three and Nine Months Ended September 30, 2022 and 2021 | ||||||||||||||
Condensed Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2022 and 2021 | ||||||||||||||
Condensed Consolidated Statements of Equity and Redeemable Noncontrolling Interest - Three and Nine Months Ended September 30, 2022 and 2021 | ||||||||||||||
| Item 2. | ||||||||||||||
| Item 3. | ||||||||||||||
| Item 4. | ||||||||||||||
| PART II. OTHER INFORMATION | ||||||||||||||
| Item 1. | ||||||||||||||
| Item 1A. | ||||||||||||||
| Item 2. | ||||||||||||||
| Item 4. | ||||||||||||||
| Item 6. | ||||||||||||||
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALEXANDER & BALDWIN, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in millions; unaudited)
| September 30, | December 31, | |||||||||||||
| 2022 | 2021 | |||||||||||||
| ASSETS | ||||||||||||||
| Real estate investments | ||||||||||||||
| Real estate property | $ | $ | ||||||||||||
| Accumulated depreciation | ( | ( | ||||||||||||
| Real estate property, net | ||||||||||||||
| Real estate developments | ||||||||||||||
| Investments in real estate joint ventures and partnerships | ||||||||||||||
| Real estate intangible assets, net | ||||||||||||||
| Real estate investments, net | ||||||||||||||
| Cash and cash equivalents | ||||||||||||||
| Restricted cash | ||||||||||||||
Accounts receivable and retention, net of allowance for credit losses and allowance for doubtful accounts of $ | ||||||||||||||
| Inventories | ||||||||||||||
| Other property, net | ||||||||||||||
| Operating lease right-of-use assets | ||||||||||||||
| Goodwill | ||||||||||||||
Other receivables, net of allowance for credit losses and allowance for doubtful accounts of $ | ||||||||||||||
| Prepaid expenses and other assets | ||||||||||||||
| Total assets | $ | $ | ||||||||||||
| LIABILITIES AND EQUITY | ||||||||||||||
| Liabilities: | ||||||||||||||
| Notes payable and other debt | $ | $ | ||||||||||||
| Accounts payable | ||||||||||||||
| Operating lease liabilities | ||||||||||||||
| Accrued pension and post-retirement benefits | ||||||||||||||
| Deferred revenue | ||||||||||||||
| Accrued and other liabilities | ||||||||||||||
| Total liabilities | ||||||||||||||
Commitments and Contingencies (Note 8) | ||||||||||||||
| Redeemable Noncontrolling Interest | ||||||||||||||
| Equity: | ||||||||||||||
Common stock - no par value; authorized, | ||||||||||||||
| Accumulated other comprehensive income (loss) | ( | |||||||||||||
| Distributions in excess of accumulated earnings | ( | ( | ||||||||||||
| Total equity | ||||||||||||||
| Total liabilities and equity | $ | $ | ||||||||||||
See Notes to Condensed Consolidated Financial Statements.
1
ALEXANDER & BALDWIN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in millions, except per share data; unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| Operating Revenue: | ||||||||||||||||||||||||||
| Commercial Real Estate | $ | $ | $ | $ | ||||||||||||||||||||||
| Land Operations | ||||||||||||||||||||||||||
| Materials & Construction | ||||||||||||||||||||||||||
| Total operating revenue | ||||||||||||||||||||||||||
| Operating Costs and Expenses: | ||||||||||||||||||||||||||
| Cost of Commercial Real Estate | ||||||||||||||||||||||||||
| Cost of Land Operations | ||||||||||||||||||||||||||
| Cost of Materials & Construction | ||||||||||||||||||||||||||
| Selling, general and administrative | ||||||||||||||||||||||||||
| Total operating costs and expenses | ||||||||||||||||||||||||||
| Gain (loss) on disposal of commercial real estate properties, net | ||||||||||||||||||||||||||
| Gain (loss) on disposal of non-core assets, net | ||||||||||||||||||||||||||
| Total gain (loss) on disposal of assets, net | ||||||||||||||||||||||||||
| Operating Income (Loss) | ||||||||||||||||||||||||||
| Other Income and (Expenses): | ||||||||||||||||||||||||||
| Income (loss) related to joint ventures | ||||||||||||||||||||||||||
| Pension termination | ( | |||||||||||||||||||||||||
Interest and other income (expense), net (Note 2) | ( | ( | ( | |||||||||||||||||||||||
| Interest expense | ( | ( | ( | ( | ||||||||||||||||||||||
| Income (Loss) from Continuing Operations Before Income Taxes | ||||||||||||||||||||||||||
| Income tax benefit (expense) | ( | |||||||||||||||||||||||||
| Income (Loss) from Continuing Operations | ||||||||||||||||||||||||||
| Income (loss) from discontinued operations, net of income taxes | ( | ( | ( | |||||||||||||||||||||||
| Net Income (Loss) | ||||||||||||||||||||||||||
| Loss (income) attributable to noncontrolling interest | ( | ( | ( | ( | ||||||||||||||||||||||
| Net Income (Loss) Attributable to A&B Shareholders | $ | $ | $ | $ | ||||||||||||||||||||||
| Earnings (Loss) Per Share Available to A&B Shareholders: | ||||||||||||||||||||||||||
| Basic Earnings (Loss) Per Share of Common Stock: | ||||||||||||||||||||||||||
| Continuing operations available to A&B shareholders | $ | $ | $ | $ | ||||||||||||||||||||||
| Discontinued operations available to A&B shareholders | ( | ( | ||||||||||||||||||||||||
| Net income (loss) available to A&B shareholders | $ | $ | $ | $ | ||||||||||||||||||||||
| Diluted Earnings (Loss) Per Share of Common Stock: | ||||||||||||||||||||||||||
| Continuing operations available to A&B shareholders | $ | $ | $ | $ | ||||||||||||||||||||||
| Discontinued operations available to A&B shareholders | ( | ( | ||||||||||||||||||||||||
| Net income (loss) available to A&B shareholders | $ | $ | $ | $ | ||||||||||||||||||||||
| Weighted-Average Number of Shares Outstanding: | ||||||||||||||||||||||||||
| Basic | ||||||||||||||||||||||||||
| Diluted | ||||||||||||||||||||||||||
Amounts Available to A&B Common Shareholders (Note 15): | ||||||||||||||||||||||||||
| Continuing operations available to A&B common shareholders | $ | $ | $ | $ | ||||||||||||||||||||||
| Discontinued operations available to A&B common shareholders | ( | ( | ( | |||||||||||||||||||||||
| Net income (loss) available to A&B common shareholders | $ | $ | $ | $ | ||||||||||||||||||||||
See Notes to Condensed Consolidated Financial Statements.
2
ALEXANDER & BALDWIN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(amounts in millions; unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| Net Income (Loss) | $ | $ | $ | $ | ||||||||||||||||||||||
| Other Comprehensive Income (Loss), net of tax: | ||||||||||||||||||||||||||
| Cash flow hedges: | ||||||||||||||||||||||||||
| Unrealized interest rate hedging gain (loss) | ||||||||||||||||||||||||||
| Impact of reclassification adjustment to interest expense included in Net Income (Loss) | ( | |||||||||||||||||||||||||
| Realized interest rate hedging gain (loss) | ( | |||||||||||||||||||||||||
| Employee benefit plans: | ||||||||||||||||||||||||||
| Actuarial gain (loss) | ( | ( | ||||||||||||||||||||||||
| Amortization of net loss included in net periodic benefit cost | ||||||||||||||||||||||||||
| Amortization of prior service cost included in net periodic benefit cost | ||||||||||||||||||||||||||
| Pension termination | ||||||||||||||||||||||||||
| Income taxes related to other comprehensive income (loss) | ( | |||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | ( | |||||||||||||||||||||||||
| Comprehensive Income (Loss) | ||||||||||||||||||||||||||
| Comprehensive (income) loss attributable to noncontrolling interest | ( | ( | ( | ( | ||||||||||||||||||||||
| Comprehensive Income (Loss) Attributable to A&B Shareholders | $ | $ | $ | $ | ||||||||||||||||||||||
See Notes to Condensed Consolidated Financial Statements.
3
ALEXANDER & BALDWIN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in millions; unaudited)
| Nine Months Ended September 30, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| Cash Flows from Operating Activities: | ||||||||||||||
| Net income (loss) | $ | $ | ||||||||||||
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operations: | ||||||||||||||
| Depreciation and amortization | ||||||||||||||
| Income tax benefit related to pension termination and other, net | ( | |||||||||||||
| Loss (gain) from disposals and asset transactions, net | ( | ( | ||||||||||||
| Share-based compensation expense | ||||||||||||||
| Equity in (income) loss from affiliates, net of operating cash distributions | ( | ( | ||||||||||||
| Pension termination | ||||||||||||||
| Changes in operating assets and liabilities: | ||||||||||||||
| Trade, contracts retention, and other contract receivables | ( | |||||||||||||
| Inventories | ( | ( | ||||||||||||
| Prepaid expenses, income tax receivable and other assets | ( | |||||||||||||
| Development/other property inventory | ||||||||||||||
| Accrued pension and post-retirement benefits | ( | ( | ||||||||||||
| Accounts payable | ||||||||||||||
| Accrued and other liabilities | ( | |||||||||||||
| Net cash provided by (used in) operations | ||||||||||||||
| Cash Flows from Investing Activities: | ||||||||||||||
| Capital expenditures for property, plant and equipment | ( | ( | ||||||||||||
| Proceeds from disposal of assets | ||||||||||||||
| Payments for purchases of investments in affiliates and other investments | ( | ( | ||||||||||||
| Distributions of capital and other receipts from investments in affiliates and other investments | ||||||||||||||
| Net cash provided by (used in) investing activities | ||||||||||||||
| Cash Flows from Financing Activities: | ||||||||||||||
| Proceeds from issuance of notes payable and other debt | ||||||||||||||
| Payments of notes payable and other debt and deferred financing costs | ( | ( | ||||||||||||
| Borrowings (payments) on line-of-credit agreement, net | ( | |||||||||||||
| Cash dividends paid | ( | ( | ||||||||||||
| Repurchases of common stock and other payments | ( | ( | ||||||||||||
| Net cash provided by (used in) financing activities | ( | ( | ||||||||||||
| Cash, Cash Equivalents and Restricted Cash | ||||||||||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash | ( | ( | ||||||||||||
| Balance, beginning of period | ||||||||||||||
| Balance, end of period | $ | $ | ||||||||||||
4
| Other Cash Flow Information: | ||||||||||||||
| Interest paid, net of capitalized interest | $ | ( | $ | ( | ||||||||||
| Income tax (payments)/refunds, net | $ | $ | ||||||||||||
| Noncash Investing and Financing Activities: | ||||||||||||||
| Capital expenditures included in accounts payable and accrued and other liabilities | $ | $ | ||||||||||||
| Operating lease liabilities arising from obtaining ROU assets | $ | $ | ||||||||||||
| Finance lease liabilities arising from obtaining ROU assets | $ | $ | ||||||||||||
| Dividends declared but unpaid at end of period | $ | $ | ||||||||||||
| Repurchases of capital stock in accrued and other liabilities | $ | $ | ||||||||||||
| Escrow receivable from disposal of assets | $ | $ | ||||||||||||
| Reconciliation of cash, cash equivalents and restricted cash: | ||||||||||||||
| Beginning of the period: | ||||||||||||||
| Cash and cash equivalents | $ | $ | ||||||||||||
| Restricted cash | ||||||||||||||
| Cash, cash equivalents and restricted cash | $ | $ | ||||||||||||
| End of the period: | ||||||||||||||
| Cash and cash equivalents | $ | $ | ||||||||||||
| Restricted cash | ||||||||||||||
| Cash, cash equivalents and restricted cash | $ | $ | ||||||||||||
See Notes to Condensed Consolidated Financial Statements.
5
ALEXANDER & BALDWIN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY AND
REDEEMABLE NONCONTROLLING INTEREST
For the Three Months Ended September 30, 2022 and 2021
(amounts in millions, except per share data; unaudited)
| Total Equity | ||||||||||||||||||||||||||||||||||||||
| Common Stock | Accumulated Other Compre- hensive Income (Loss) | (Distribution in Excess of Accumulated Earnings) Earnings Surplus | Total | Redeemable Non- Controlling Interest | ||||||||||||||||||||||||||||||||||
| Shares | Stated Value | |||||||||||||||||||||||||||||||||||||
| Balance, July 1, 2021 | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | |||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | — | — | ( | — | ( | — | ||||||||||||||||||||||||||||||||
Dividend on common stock ($ | — | — | — | ( | ( | — | ||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Shares issued (repurchased), net | — | ( | — | — | ( | — | ||||||||||||||||||||||||||||||||
| Balance, September 30, 2021 | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||
| Total Equity | ||||||||||||||||||||||||||||||||||||||
| Common Stock | Accumulated Other Compre- hensive Income (Loss) | (Distribution in Excess of Accumulated Earnings) Earnings Surplus | Total | Redeemable Non- Controlling Interest | ||||||||||||||||||||||||||||||||||
| Shares | Stated Value | |||||||||||||||||||||||||||||||||||||
| Balance, July 1, 2022 | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | |||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | — | — | — | — | ||||||||||||||||||||||||||||||||||
Dividend on common stock ($ | — | — | — | ( | ( | — | ||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Shares issued (repurchased), net | ( | ( | — | ( | — | |||||||||||||||||||||||||||||||||
| Balance, September 30, 2022 | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||
See Notes to Condensed Consolidated Financial Statements
6
ALEXANDER & BALDWIN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY AND
REDEEMABLE NONCONTROLLING INTEREST
For the Nine Months Ended September 30, 2022 and 2021
(amounts in millions, except per share data; unaudited)
| Total Equity | ||||||||||||||||||||||||||||||||||||||
| Common Stock | Accumulated Other Compre- hensive Income (Loss) | (Distribution in Excess of Accumulated Earnings) Earnings Surplus | Total | Redeemable Non- Controlling Interest | ||||||||||||||||||||||||||||||||||
| Shares | Stated Value | |||||||||||||||||||||||||||||||||||||
| Balance, January 1, 2021 | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | |||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | — | — | — | — | ||||||||||||||||||||||||||||||||||
Dividend on common stock ($ | — | — | — | ( | ( | — | ||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Shares issued (repurchased), net | ( | — | — | ( | — | |||||||||||||||||||||||||||||||||
| Balance, September 30, 2021 | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||
| Total Equity | ||||||||||||||||||||||||||||||||||||||
| Common Stock | Accumulated Other Compre- hensive Income (Loss) | (Distribution in Excess of Accumulated Earnings) Earnings Surplus | Total | Redeemable Non- Controlling Interest | ||||||||||||||||||||||||||||||||||
| Shares | Stated Value | |||||||||||||||||||||||||||||||||||||
| Balance, January 1, 2022 | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | |||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | — | — | — | — | ||||||||||||||||||||||||||||||||||
Dividend on common stock ($ | — | — | — | ( | ( | — | ||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Shares issued (repurchased), net | ( | — | ( | — | ||||||||||||||||||||||||||||||||||
| Balance, September 30, 2022 | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||
See Notes to Condensed Consolidated Financial Statements
7
Alexander & Baldwin, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
1. BACKGROUND AND BASIS OF PRESENTATION
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 in three 22 retail centers, 12 industrial assets, and four office properties, representing a total of 3.9 million square feet of gross leasable area, as well as a portfolio of ground leases in Hawai‘i representing 140.8 acres. Throughout this quarterly report on Form 10-Q, references to "we," "our," "us" and "our Company" refer to Alexander & Baldwin, Inc., together with its consolidated subsidiaries.
2. SUMMARY OF 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 2021 Form 10-K. There have not been any changes to the Company's significant accounting policies as described in the Company's 2021 Form 10-K.
Recently issued accounting pronouncements
In March 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2020-04, Reference Rate Reform, establishing ASC Topic 848, and amended the standard thereafter through ASU No. 2021-01 (collectively, "ASC 848"). ASC 848 provides optional practical expedients and exceptions related to the impacts of reference rate reform that affect certain debt, leases, derivatives and other contracts if certain criteria are met. The amendments apply only to contracts and hedging relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. These amendments are effective immediately and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. Reference rate reform has not had a material impact on any of the Company's existing contracts. Therefore, the Company has not elected to apply any of the optional practical expedients and exceptions under ASC 848 as of the current date. The Company will assess future changes in its contracts and the impact of electing to apply the optional practical expedients and exceptions provided by ASC 848 as they occur, but expects their application will not have a material effect on its financial position or results of operations.
8
Interest and other income (expense), net
Interest and other income (expense), net for the three and nine months ended September 30, 2022 and 2021, included the following (in millions):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| Interest income | $ | $ | $ | $ | ||||||||||||||||||||||
| Pension and post-retirement benefit (expense) | ( | ( | ( | ( | ||||||||||||||||||||||
| Other income (expense), net | ||||||||||||||||||||||||||
| Interest and other income (expense), net | $ | ( | $ | ( | $ | $ | ( | |||||||||||||||||||
3. INVESTMENTS 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.
Operating results presented in the Company's condensed consolidated financial statements include the Company's proportionate share of net income (loss) from its equity method investments. Summarized financial information of entities accounted for by the equity method on a combined basis for the three and nine months ended September 30, 2022 and 2021, is as follows (in millions):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||||||||||||
| Operating costs and expenses | ||||||||||||||||||||||||||
| Gross Profit (Loss) | $ | $ | $ | $ | ||||||||||||||||||||||
Income (Loss) from Continuing Operations1 | $ | $ | $ | ( | $ | |||||||||||||||||||||
Net Income (Loss)1 | $ | $ | ( | $ | $ | |||||||||||||||||||||
1 Includes earnings from equity method investments held by the investee. | ||||||||||||||||||||||||||
During the nine months ended September 30, 2022 and 2021, Income (loss) related to joint ventures was $1.8 million and $12.2 million, respectively, and return on investment operating cash distributions was $0.7 million and $2.1 million, respectively.
4. INVENTORIES
| September 30, | December 31, | |||||||||||||
| 2022 | 2021 | |||||||||||||
| Asphalt | $ | $ | ||||||||||||
| Processed rock and sand | ||||||||||||||
| Retail merchandise | ||||||||||||||
| Parts, materials and supplies inventories | ||||||||||||||
| Total | $ | $ | ||||||||||||
5. FAIR VALUE MEASUREMENTS
The fair value of the Company's cash and cash equivalents, accounts receivable and retention, net and short-term borrowings approximate their carrying values due to the short-term nature of the instruments.
The fair value of the Company's notes receivable approximated the carrying amount of $1.9 million as of September 30, 2022, and $8.4 million as of December 31, 2021. The fair value of these notes is estimated using a discounted
9
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 a Level 3 measurement in the fair value hierarchy.
As of September 30, 2022, the carrying amount of the Company's notes payable and other debt was $469.7 million and the corresponding fair value was $442.3 million. As of December 31, 2021, the carrying amount of the Company's notes payable and other debt was $532.7 million, and the corresponding fair value was $554.3 million. The fair value of debt is calculated by discounting the future cash flows of the debt at market rates for instruments with similar risk, terms and maturities as compared to the Company's existing debt arrangements and classified as a Level 3 measurement in the fair value hierarchy.
The Company records its interest rate swaps at fair value. The fair values of the Company's interest rate swaps 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 (refer to Note 7 for fair value information regarding the Company's derivative instruments). The fair values of the Company's interest rate swaps are classified as a Level 2 measurement in the fair value hierarchy.
6. NOTES PAYABLE AND OTHER DEBT
| Interest Rate (%) | Maturity Date | Principal Outstanding | ||||||||||||||||||||||||
| September 30, 2022 | December 31, 2021 | |||||||||||||||||||||||||
| Secured: | ||||||||||||||||||||||||||
| Heavy Equipment Financing | (1) | (1) | $ | $ | ||||||||||||||||||||||
| Laulani Village | 2024 | |||||||||||||||||||||||||
| Pearl Highlands | 2024 | |||||||||||||||||||||||||
| Photovoltaic Financing | (2) | 2027 | ||||||||||||||||||||||||
| Manoa Marketplace | (3) | 2029 | ||||||||||||||||||||||||
| Subtotal | $ | $ | ||||||||||||||||||||||||
| Unsecured: | ||||||||||||||||||||||||||
| Series A Note | 2024 | $ | $ | |||||||||||||||||||||||
| Series J Note | 2025 | |||||||||||||||||||||||||
| Series B Note | 2026 | |||||||||||||||||||||||||
| Series C Note | 2026 | |||||||||||||||||||||||||
| Series F Note | 2026 | |||||||||||||||||||||||||
| Series H Note | 2026 | |||||||||||||||||||||||||
| Series K Note | 2027 | |||||||||||||||||||||||||
| Series G Note | 2027 | |||||||||||||||||||||||||
| Series L Note | 2028 | |||||||||||||||||||||||||
| Series I Note | 2028 | |||||||||||||||||||||||||
| Term Loan 5 | 2029 | |||||||||||||||||||||||||
| Subtotal | $ | $ | ||||||||||||||||||||||||
| Revolving Credit Facilities: | ||||||||||||||||||||||||||
| GLP Asphalt Wells Fargo revolving credit facility | (4) | 2022 | $ | $ | ||||||||||||||||||||||
| GLP Asphalt FHB revolving credit facility | (5) | 2024 | ||||||||||||||||||||||||
| A&B Revolver | (6) | 2025 | ||||||||||||||||||||||||
| Subtotal | $ | $ | ||||||||||||||||||||||||
| Total debt (contractual) | $ | $ | ||||||||||||||||||||||||
| Unamortized debt issuance costs | ( | ( | ||||||||||||||||||||||||
| Total debt (carrying value) | $ | $ | ||||||||||||||||||||||||
(1) Financing leases have a weighted average stated interest rate of approximately | ||||||||||||||||||||||||||
(2) Financing lease has a discount rate of | ||||||||||||||||||||||||||
(3) Loan has a stated interest rate of LIBOR plus | ||||||||||||||||||||||||||
(4) Loan had a stated interest rate of SOFR plus | ||||||||||||||||||||||||||
(5) Loan has a stated interest rate of BSBY plus | ||||||||||||||||||||||||||
(6) Loan has a stated interest rate of LIBOR plus | ||||||||||||||||||||||||||
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On March 5, 2021, the Financial Conduct Authority announced a timeline for the phase-out of the London Interbank Offered Rate ("LIBOR"). The Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency subsequently issued a joint statement saying that banks should stop entering into new contracts with LIBOR as soon as possible but at least by December 31, 2021. As of January 1, 2022, LIBOR can only be used for legacy LIBOR obligations entered into prior to December 31, 2021. In addition, LIBOR will cease to be available after June 30, 2023. The Secured Overnight Financing Rate ("SOFR") and Bloomberg Short Term Bank Yield Index ("BSBY") have been identified as replacements to LIBOR, with the former being recommended by the Federal Reserve-formed Alternative Reference Rates Committee.
As of March 31, 2022, the GLP Asphalt Wells Fargo Revolving Credit Facility had transitioned from LIBOR to a benchmark based on SOFR. On April 29, 2022, the Company entered into a Sixth Amendment to this credit agreement with Wells Fargo Bank, NA, extending the maturity date by 45 days from May 1, 2022, to June 15, 2022. The credit agreement terminated on June 15, 2022.
7. DERIVATIVE 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-rate 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
As of September 30, 2022, the Company had one interest rate swap agreement designated as a cash flow hedge, while as of December 31, 2021, there were two such swaps, whose key terms are as follows (dollars in millions):
| Effective | Maturity | Fixed Interest | Notional Amount at | Asset (Liability) Fair Value at | ||||||||||||||||||||||||||||
| Date | Date | Rate | September 30, 2022 | September 30, 2022 | December 31, 2021 | |||||||||||||||||||||||||||
| 4/7/2016 | 8/1/2029 | $ | $ | $ | ( | |||||||||||||||||||||||||||
| 2/13/2020 | 2/27/2023 | (1) | $ | $ | $ | ( | ||||||||||||||||||||||||||
(1) $ | ||||||||||||||||||||||||||||||||
The asset related to the interest rate swap as of September 30, 2022, is presented within Prepaid expenses and other assets in the condensed consolidated balance sheet. The liability related to the interest rate swaps as of December 31, 2021, is presented within Accrued and other liabilities. The changes in fair value of the cash flow hedges are recorded in Accumulated other comprehensive income (loss) and subsequently reclassified into interest expense as interest is incurred on the related variable-rate debt.
The following table represents the pre-tax effect of the derivative instruments in the Company's condensed consolidated statement of comprehensive income (loss) during the three and nine months ended September 30, 2022 and 2021, (in millions):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| Derivatives in Designated Cash Flow Hedging Relationships: | ||||||||||||||||||||||||||
| Amount of gain (loss) recognized in OCI on derivatives | $ | $ | $ | $ | ||||||||||||||||||||||
| Impact of reclassification adjustment to interest expense included in Net Income (Loss) | $ | ( | $ | $ | $ | |||||||||||||||||||||
| Realized interest rate hedging gain (loss) | $ | $ | $ | ( | $ | |||||||||||||||||||||
As of September 30, 2022, the Company expects to reclassify $0.3 million of net gains (losses) on derivative instruments from accumulated other comprehensive income to earnings during the next 12 months.
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8. COMMITMENTS AND CONTINGENCIES
Commitments and other financial arrangements
The Company has various financial commitments and other arrangements including standby letters of credit and bonds that are not recorded as liabilities on the Company's condensed consolidated balance sheet as of September 30, 2022:
•Standby letters of credit issued by the Company's lenders under the Company's revolving credit facilities totaled $1.1 million as of September 30, 2022. These letters of credit primarily relate to the Company's workers' compensation plans and construction activities; if drawn upon, the Company would be obligated to reimburse the issuer.
•Bonds related to the Company's construction and real estate activities totaled $332.3 million as of September 30, 2022. Approximately $313.7 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); if 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 September 30, 2022, the Company's maximum remaining exposure, in the event of defaults on all existing contractual construction obligations, was approximately $128.1 million.
The Company also provides certain bond indemnities and guarantees of indebtedness for certain of its unconsolidated affiliates that it accounts for as equity method investments (e.g., real estate joint ventures).
•Bond indemnities are provided for the benefit of the surety in exchange for the issuance of surety bonds and cover joint venture construction activities (such as project amenities, roads, utilities, and other infrastructure). Under such bond indemnities, the Company and the 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 Company may be obligated to complete construction of the joint ventures' construction projects if the joint venture does not perform. 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.
•Guarantees of indebtedness may be provided by the Company for the benefit of financial institutions providing credit to unconsolidated equity method investees. As of September 30, 2022, the Company had one arrangement with third party lenders that provided for a limited guarantee on any outstanding amounts related to an unconsolidated equity method investee's line of credit; related to borrowings on such line of credit by the equity method investee, there was $0.5 million outstanding as of September 30, 2022.
The recorded amounts of the bond indemnities and guarantee of indebtedness were not material individually or in the aggregate. Other than those described above, 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 41,000 acres of agricultural land on Maui to Mahi Pono Holdings, LLC ("Mahi Pono") in December 2018, the Company, through East Maui Irrigation Company, LLC ("EMI"), also owned approximately 16,000 acres of watershed lands in East Maui and held four water licenses to approximately 30,000 acres owned by the State of Hawai‘i in East Maui. The sale to Mahi Pono included the sale of a 50 % interest in EMI (which closed February 1, 2019), and provided for the Company and Mahi Pono, through EMI, to jointly continue the existing process to secure a long-term lease 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 four 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. Three parties (Healoha Carmichael; Lezley Jacintho; and Na Moku Aupuni O Ko‘olau Hui) filed a lawsuit on April 10, 2015, (the "Initial Lawsuit") alleging that the BLNR has been renewing the revocable permits annually rather than keeping them in holdover status. The lawsuit challenged the BLNR’s decision to continue the revocable permits for calendar year 2015 and asked the court to void the revocable permits and to declare that the renewals were illegally issued without preparation of
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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 three parties. In January 2016, the court ruled in the Initial 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 "Initial Ruling"). The Initial Ruling was appealed to the Intermediate Court of Appeals ("ICA") of the State of Hawai‘i.
In May 2016, while the appeal of the Initial Ruling 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 three 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 for calendar years 2017, 2018, and 2019. No extension of Act 126 was approved by the Hawai‘i State Legislature in 2019.
In June 2019, the ICA vacated the Initial Ruling, effectively reversing the determination that the BLNR lacked authority to keep the revocable permits in holdover status beyond one year (the "ICA Ruling"). The ICA remanded the case back 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 filed a motion with the ICA for reconsideration of its decision, which was denied on July 5, 2019. On September 30, 2019, the plaintiffs filed a request with the Supreme Court of Hawai‘i to review and reverse the ICA Ruling. On November 25, 2019, the Supreme Court of Hawai‘i granted the plaintiffs' request to review the ICA Ruling and, on May 5, 2020, oral argument was held.
On October 11, 2019, the BLNR took up the renewal of all the existing water revocable permits in the state, acting under the ICA Ruling, and approved the continuation of the four one-year
On March 2, 2022, the Supreme Court of Hawai’i vacated the ICA’s ruling relating to the BLNR's decision to continue the revocable permits for the calendar year 2015, holding that Hawaii Revised Statutes Chapter 343 (the Hawaii Environmental Policy Act) did apply to the permits. The court remanded the matter back to the Circuit Court to determine if any exceptions would apply and, if not, how HRS Chapter 343 should be applied in light of the steps taken by A&B/EMI toward the long-term water lease. The Supreme Court of Hawai’i also determined that the BLNR had the statutory authority to continue the permits for more than one year, but required BLNR to make findings of fact and conclusions of law determining that the action would serve the best interests of the State. A&B/EMI will continue to defend against the plaintiffs’ claims on remand.
In a separate matter, on December 7, 2018, a contested case request filed by the Sierra Club (contesting the BLNR's November 2018 approval of the 2019 revocable permits) was denied by the BLNR. On January 7, 2019, the 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 2019 and 2020 holdovers of the revocable permits for, among other things, failure to perform an EA. The lawsuit also sought to enjoin A&B/EMI from diverting more than 25 million gallons a day until a permit or lease is properly issued by the BLNR, and for the imposition of certain conditions on the revocable permits by the BLNR. The count seeking to invalidate the revocable permits based on the failure to perform an EA was dismissed by the court, based on the ICA Ruling in the Initial Lawsuit. The Sierra Club’s lawsuit was amended to include a challenge to the BLNR’s renewal of the revocable permits for calendar year 2020. After a full trial on the merits held beginning in August of 2020, the court ruled, on April 6, 2021, against the Sierra Club on its lawsuit challenging the 2019 and 2020 revocable permits. On February 17, 2022, the Sierra Club filed its notice of appeal challenging the decision on the August 2020 trial. The court is separately considering a lawsuit filed by the Sierra Club appealing the BLNR’s decision to deny them a contested case hearing on the 2021 revocable permits, which were granted by the BLNR on or about November 13, 2020. On May 28, 2021, the court issued an interim decision that the Sierra Club’s due process rights were violated and ordered the BLNR to hold a contested case hearing on the 2021 permits, and that the permits should be vacated. On July 30, 2021, the court modified its ruling to say that the permits would not be invalidated, but left in place pending the outcome of the contested case hearing. The contested case hearing was held by the BLNR in December 2021 to address the continuation of the revocable permits for both calendar years 2021 and 2022 and a decision is pending. On December 27, 2021, the court, in the meantime, further modified its ruling to say that the permits will remain in place until the earlier of May 1, 2022, the date on which the BLNR renders a substantive decision on the continuation of the permits for calendar year 2022, or further order of the court. On April 26, 2022, the court granted an extension of the May 1, 2022 deadline to the earlier of June 15, 2022, or the date on which the BLNR renders a substantive decision on the continuation of the permits for calendar year 2022, or as may be further ordered by the court. On June 1, 2022, the court granted an extension of the June 15, 2022 deadline to the earlier of July 15, 2022 or the date on which the BLNR renders a substantive decision on the continuation of the permits for calendar year 2022 or as may be further ordered by the court. On June 30, 2022, the BLNR issued its final decision on the contested case hearing on the permits for calendar years 2021 and 2022, approving the continuation of the permits through the end of calendar year 2022. The Sierra Club has filed a notice of appeal of that decision
13
to the Circuit Court of the First Circuit in Hawai‘i. The BLNR’s decision to continue the permits through the end of calendar year 2022 will stand unless overturned on appeal or the Sierra Club obtains a preliminary injunction to prevent the decision from remaining in place.
In connection with A&B’s obligation to continue the existing process to secure a long-term water lease from the State, A&B and EMI will defend against the remaining claims made by the Sierra Club.
The Company 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 the Company's consolidated financial statements as a whole.
Further note that certain of the Company's properties and assets may become the subject of other types of claims and assessments at various times (e.g., environmental matters based on normal operations of such assets). Depending on the facts and circumstances surrounding such potential claims and assessments, the Company records an accrual if it is deemed probable that a liability has been incurred and the amount of loss can be reasonably estimated/valued as of the date of the financial statements.
9. REVENUE AND CONTRACT BALANCES
The Company generates revenue through its Commercial Real Estate, Land Operations, and Materials & Construction segments. Through its Commercial Real Estate segment, the Company owns and operates a portfolio of commercial real estate properties and generates income (i.e., revenue) as a lessor through leases of such assets. Refer to Note 10 for further discussion of lessor income recognition. The Land Operations and Materials & Construction segments generate revenue from contracts with customers. The Company further disaggregates revenue from contracts with customers by revenue type when appropriate if the Company believes disaggregation best depicts how the nature, amount, timing, and uncertainty of the Company's revenue and cash flows are affected by economic factors. Revenue by type for the three and nine months ended September 30, 2022 and 2021, was as follows (in millions):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| Revenues: | ||||||||||||||||||||||||||
| Commercial Real Estate | $ | $ | $ | $ | ||||||||||||||||||||||
| Land Operations: | ||||||||||||||||||||||||||
| Development sales revenue | ||||||||||||||||||||||||||
| Unimproved/other property sales revenue | ||||||||||||||||||||||||||
| Other operating revenue | ||||||||||||||||||||||||||
| Land Operations | ||||||||||||||||||||||||||
| Materials & Construction | ||||||||||||||||||||||||||
| Total revenues | $ | $ | $ | $ | ||||||||||||||||||||||
Timing of revenue recognition may differ from the timing of invoicing to customers. Certain construction contracts include retainage provisions that are customary in the industry (i.e., are not for financing purposes) and are included in Accounts receivable and contracts retention, net. 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 customers. Within Prepaid expenses and other assets, the Company records assets for "costs and estimated earnings in excess of billings on uncompleted contracts" which 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. Within Accrued and other liabilities, the Company records liabilities for "billings in excess of costs and estimated earnings on uncompleted contracts" which represent 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.
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| September 30, 2022 | December 31, 2021 | |||||||||||||
| Accounts receivable | $ | $ | ||||||||||||
| Contracts retention | ||||||||||||||
| Allowances (credit losses and doubtful accounts) | ( | ( | ||||||||||||
| Accounts receivable and retention, net of allowance for credit losses and allowance for doubtful accounts | $ | $ | ||||||||||||
| Costs and estimated earnings in excess of billings on uncompleted contracts | $ | $ | ||||||||||||
| Billings in excess of costs and estimated earnings on uncompleted contracts | $ | $ | ||||||||||||
Variable consideration1 | $ | $ | ||||||||||||
| Other deferred revenue | $ | $ | ||||||||||||
1 Variable consideration deferred as of the end of the periods related to amounts received in the sale of agricultural land on Maui in 2018 that, under revenue recognition guidance, could not be included in the transaction price. | ||||||||||||||
For the three and nine months ended September 30, 2022, the Company recognized revenue of approximately $0.5 million and $2.9 million, respectively, related to the Company's contract liabilities reported as of January 1, 2022. For the three and nine months ended September 30, 2021, the Company recognized revenue of approximately $0.7 million and $7.2 million, respectively, related to the Company's contract liabilities reported as of January 1, 2021.
Regarding other information related to the Company's contracts with customers, the amount of revenue recognized from performance obligations satisfied in prior periods (e.g., due to changes in transaction price) was not material in any of the periods presented. Further, the total amount of the transaction price allocated to either wholly unsatisfied or partially satisfied performance obligations was $181.1 million and $140.5 million as of September 30, 2022 and December 31, 2021, respectively. Of the amount presented as of September 30, 2022, the Company expects to recognize as revenue approximately 80 % to 85 % of the remaining contract consideration allocated to either wholly unsatisfied or partially satisfied performance obligations over the next twelve months, with the remaining recognized thereafter.
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10. LEASES - THE COMPANY AS LESSOR
The Company leases land and buildings to third parties under operating leases. Such activity is primarily composed of operating leases within its CRE segment.
The historical cost of, and accumulated depreciation on, leased property as of September 30, 2022, and December 31, 2021, were as follows (in millions):
| September 30, 2022 | December 31, 2021 | |||||||||||||
| Leased property - real estate | $ | $ | ||||||||||||
| Less: Accumulated depreciation | ( | ( | ||||||||||||
| Property under operating leases, net | $ | $ | ||||||||||||
Total rental income (i.e., revenue) under these operating leases during the three and nine months ended September 30, 2022 and 2021, relating to lease payments and variable lease payments were as follows (in millions):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| Lease payments | $ | $ | $ | $ | ||||||||||||||||||||||
| Variable lease payments | ||||||||||||||||||||||||||
| Total rental income | $ | $ | $ | $ | ||||||||||||||||||||||
Contractual future lease payments to be received on non-cancelable operating leases as of September 30, 2022, were as follows (in millions):
| September 30, 2022 | ||||||||
| 2022 | $ | |||||||
| 2023 | ||||||||
| 2024 | ||||||||
| 2025 | ||||||||
| 2026 | ||||||||
| 2027 | ||||||||
| Thereafter | ||||||||
| Total future lease payments to be received | $ | |||||||
11. LEASES - THE COMPANY AS LESSEE
There have been no material changes from the Company's leasing activities as a lessee described in Note 15 to the consolidated financial statements included in Item 8 of the Company's 2021 Form 10-K. The following table provides information about the Company's operating lease costs and finance lease costs recognized during the three and nine months ended September 30, 2022 and 2021, (in millions):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| Operating lease cost | $ | $ | $ | $ | ||||||||||||||||||||||
| Finance lease cost | $ | $ | $ | $ | ||||||||||||||||||||||
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12. SHARE-BASED PAYMENT AWARDS
On April 26, 2022, stockholders approved the Alexander & Baldwin, Inc. 2022 Omnibus Incentive Plan ("2022 Plan"). The 2022 Plan serves as the successor to the 2012 Incentive Compensation Plan ("2012 Plan") and allows for the granting of stock options, stock appreciation rights, stock awards, restricted stock units, dividend equivalent rights, and other awards. The 2012 Plan allowed for the granting of stock options, restricted stock units, and common stock. All awards outstanding under the 2012 Plan remain subject to the terms of the 2012 Plan. Effective April 26, 2022, no additional shares will be issued under the 2012 Plan. The shares of common stock authorized to be issued under the 2022 Plan are to be drawn from the shares of the Company's authorized but unissued common stock or from shares of its common stock that the Company acquired, including shares purchased on the open market or private transactions.
During the nine months ended September 30, 2022 and 2021, the Company granted approximately 306,300 and 376,600 of restricted stock unit awards, respectively. The weighted-average grant date fair value of the time-based and market-based performance share units granted under the plans during the nine months ended September 30, 2022 and 2021, was $25.56 and $16.63 , respectively.
The fair value of the Company's time-based awards is determined using the Company's stock price on the date of grant. The 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:
| 2022 Grants | 2021 Grants | |||||||||||||
| Volatility of A&B common stock | ||||||||||||||
| Average volatility of peer companies | ||||||||||||||
| Risk-free interest rate | ||||||||||||||
The Company recognizes compensation cost net of actual forfeitures of time-based or market-based awards. A summary of compensation cost related to share-based payments is as follows (in millions):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| Share-based expense: | ||||||||||||||||||||||||||
| Time-based and market-based restricted stock units | $ | $ | $ | $ | ||||||||||||||||||||||
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13. EMPLOYEE BENEFIT PLANS
On February 23, 2021, the Company’s Board of Directors approved a plan to effect the termination of the A&B Retirement Plan for Salaried Employees of Alexander & Baldwin, LLC and the Pension Plan for Employees of A&B Agricultural Companies (collectively, the “Defined Benefit Plans”), which became effective on May 31, 2021.
The Company recognizes a gain/loss upon settlement of the Defined Benefit Plans when the following three criteria have been met: (1) an irrevocable action to terminate the Defined Benefit Plans has occurred, (2) the Company is relieved of the primary responsibility of the Defined Benefit Plans, and (3) the significant risks related to the obligations of the Defined Benefit Plans and the assets used to effect the settlement is eliminated for the Company.
During the second quarter of 2022, the Company completed the termination of the Defined Benefit Plans. For the three and nine months ended September 30, 2022, the Company contributed cash of $0.9 million and $29.9 million, respectively. For the nine months ended September 30, 2022, the Company recorded a pre-tax settlement charge of $76.9 million within Pension termination in the condensed consolidated statements of operations in connection with the Defined Benefit Plans termination process, which represents the acceleration of deferred charges previously included within accumulated other comprehensive loss and the impact of remeasuring the plan assets and obligations at termination. In addition, the Company recorded an income tax benefit of $18.3 million for the nine months ended September 30, 2022, to reclassify the tax effects in accumulated other comprehensive loss upon completion of the termination of the Defined Benefit Plans. The Company did not record any pension termination charges or associated income tax benefit or expense during the three months ended September 30, 2022.
Components of the net periodic benefit cost for the Company's pension and post-retirement plans for the three and nine months ended September 30, 2022 and 2021, are shown below (in millions):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| Service cost | $ | $ | $ | $ | ||||||||||||||||||||||
| Interest cost | ||||||||||||||||||||||||||
| Expected return on plan assets | ( | ( | ( | |||||||||||||||||||||||
| Amortization of net loss | ||||||||||||||||||||||||||
| Amortization of prior service credit | ||||||||||||||||||||||||||
| Pension termination | ||||||||||||||||||||||||||
| Net periodic benefit cost | $ | $ | $ | $ | ||||||||||||||||||||||
14. 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 nine months ended September 30, 2022, differed from the effective tax rate for the same period in 2021, due primarily to the 2022 tax benefit recognized on the termination of the Company’s Defined Benefit Plans.
As of September 30, 2022, tax years 2018 and later are open to audit by the tax authorities. The Company believes the result of any potential audits will not have a material adverse effect on its results of operations, financial condition, or liquidity.
15. EARNINGS PER SHARE ("EPS")
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The following table provides a reconciliation of income (loss) from continuing operations to net income (loss) from continuing operations available to A&B common shareholders and net income (loss) available to A&B common shareholders (in millions):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| Income (loss) from continuing operations | $ | $ | $ | $ | ||||||||||||||||||||||
| Exclude: (Income) loss attributable to noncontrolling interest | ( | ( | ( | ( | ||||||||||||||||||||||
| Income (loss) from continuing operations attributable to A&B shareholders | ||||||||||||||||||||||||||
| Distributions and allocations to participating securities | ( | ( | ( | ( | ||||||||||||||||||||||
| Income (loss) from continuing operations available to A&B common shareholders | ||||||||||||||||||||||||||
| Income (loss) from discontinued operations available to A&B common shareholders | ( | ( | ( | |||||||||||||||||||||||
| Net income (loss) available to A&B common shareholders | $ | $ | $ | $ | ||||||||||||||||||||||
The number of shares used to compute basic and diluted earnings per share is as follows (in millions):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| Denominator for basic EPS - weighted average shares outstanding | ||||||||||||||||||||||||||
| Effect of dilutive securities: | ||||||||||||||||||||||||||
| Stock options and restricted stock unit awards | ||||||||||||||||||||||||||
| Denominator for diluted EPS - weighted average shares outstanding | ||||||||||||||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| Number of anti-dilutive securities | ||||||||||||||||||||||||||
16. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) principally includes amortization of deferred pension and post-retirement costs. The components of Accumulated other comprehensive loss, net of taxes, were as follows as of September 30, 2022, and December 31, 2021, (in millions):
| September 30, 2022 | December 31, 2021 | |||||||||||||
| Employee benefit plans: | ||||||||||||||
| Pension plans | $ | $ | ( | |||||||||||
| Post-retirement plans | ( | |||||||||||||
| Non-qualified benefit plans | ( | ( | ||||||||||||
| Total employee benefit plans | ( | ( | ||||||||||||
| Interest rate swap | ( | |||||||||||||
| Accumulated other comprehensive income (loss) | $ | $ | ( | |||||||||||
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The changes in Accumulated other comprehensive income (loss) by component for the nine months ended September 30, 2022, were as follows (in millions, net of taxes):
| Employee Benefit Plans | Interest Rate Swap | Total | ||||||||||||||||||
| Balance, January 1, 2022 | $ | ( | $ | ( | $ | ( | ||||||||||||||
| Other comprehensive income (loss) before reclassifications | ||||||||||||||||||||
Amounts reclassified from accumulated other comprehensive income (loss)1 | ||||||||||||||||||||
| Taxes on other comprehensive income (loss) | ( | ( | ||||||||||||||||||
| Other comprehensive income (loss), net of taxes | ||||||||||||||||||||
| Balance, September 30, 2022 | $ | ( | $ | $ | ||||||||||||||||
1 Amounts reclassified from Accumulated other comprehensive income related to interest rate swap settlements are presented as an adjustment to Interest expense in the condensed consolidated statements of operations. Amounts reclassified from Accumulated other comprehensive income related to employee benefit plan items are presented as part of Interest and other income (expense), net and Pension termination in the condensed consolidated statements of operations.
17. RELATED PARTY TRANSACTIONS
Construction Contracts and Material Sales. The Company entered into contracts in the ordinary course of business, as a supplier, with affiliate entities that require accounting under the equity method due to the Company's financial interests in such entities (refer to Note 3) and also with affiliate parties that are members in entities in which the Company also is a member and holds a controlling financial interest. Related to the periods during which the relationship existed, revenues earned from transactions with such affiliates were $9.0 million and $2.8 million for the three months ended September 30, 2022 and 2021, respectively, and $12.9 million and $7.5 million for the nine months ended September 30, 2022 and 2021, respectively. Expenses recognized from transactions with such affiliates were $1.6 million and $0.3 million for the three months ended September 30, 2022 and 2021, respectively, and $4.0 million and $0.9 million for the nine months ended September 30, 2022 and 2021, respectively. Receivables from these affiliates were $4.5 million and $1.1 million as of September 30, 2022 and December 31, 2021, respectively. Amounts due to these affiliates were $0.7 million and $0.3 million as of September 30, 2022 and December 31, 2021, respectively.
Land Operations. The Company provided materials and services to certain unconsolidated investments in affiliates and recognized interest earned on notes receivable from such related parties. Revenues earned from transactions with these affiliates were zero and $0.3 million for the three months ended September 30, 2022 and 2021, respectively. During the nine months ended September 30, 2022 and 2021, revenues earned from transactions with these affiliates were $0.2 million and $1.8 million, respectively. There were no
20
18. SEGMENT RESULTS
Operating segments are components of an enterprise that engage in business activities from which it may earn revenues and incur expenses, whose operating results are regularly reviewed by the chief operating decision maker (its Chief Executive Officer) to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available. As noted above, the Company operates and reports on three
Reportable segment information for the three and nine months ended September 30, 2022 and 2021, is summarized below (in millions):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| Operating Revenue: | ||||||||||||||||||||||||||
| Commercial Real Estate | $ | $ | $ | $ | ||||||||||||||||||||||
| Land Operations | ||||||||||||||||||||||||||
| Materials & Construction | ||||||||||||||||||||||||||
| Total operating revenue | ||||||||||||||||||||||||||
| Operating Profit (Loss): | ||||||||||||||||||||||||||
Commercial Real Estate1 | ||||||||||||||||||||||||||
Land Operations2,3 | ( | ( | ||||||||||||||||||||||||
| Materials & Construction | ( | ( | ||||||||||||||||||||||||
| Total operating profit (loss) | ||||||||||||||||||||||||||
| Gain (loss) on disposal of commercial real estate properties, net | ||||||||||||||||||||||||||
| Interest expense | ( | ( | ( | ( | ||||||||||||||||||||||
Corporate and other expense4 | ( | ( | ( | ( | ||||||||||||||||||||||
| Income (Loss) from Continuing Operations Before Income Taxes | $ | $ | $ | $ | ||||||||||||||||||||||
1 Commercial Real Estate segment operating profit (loss) includes intersegment operating revenue, primarily from the Materials & Construction segment, and is eliminated in the consolidated results of operations and pension termination charges of | ||||||||||||||||||||||||||
2 Land Operations segment operating profit (loss) includes equity in earnings (losses) from the Company's various equity method investments (primarily real estate joint ventures). | ||||||||||||||||||||||||||
3 Land Operations segment operating profit (loss) includes pension termination charges of | ||||||||||||||||||||||||||
4 Corporate and other expense includes pension termination charges of | ||||||||||||||||||||||||||
19. SALE OF BUSINESS
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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. ("A&B" or the "Company") 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, 2021, ("2021 Form 10-K") filed with the U.S. Securities and Exchange Commission ("SEC").
Throughout this quarterly report on Form 10-Q, references to "we," "our," "us" and "our Company" refer to Alexander & Baldwin, Inc., together with its consolidated subsidiaries.
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 and involve a number of risks and uncertainties that could cause actual results to differ materially from those contemplated by the relevant forward-looking statements. These forward-looking statements include, but are not limited to, statements regarding possible or assumed future results of operations, business strategies, growth opportunities and competitive positions, as well as the rapidly changing challenges with, and the Company's plans and responses to, the coronavirus pandemic ("COVID-19") and related economic disruptions. 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, risks associated with COVID-19 and its impact on the Company's businesses, results of operations, liquidity and financial condition, the evaluation of alternatives by the Company related to its materials and construction business, and the risk factors 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 and Objective
Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") provides additional material information about the Company's business, recent developments and financial condition; its results of operations at a consolidated and segment level; its liquidity and capital resources including an evaluation of the amounts and certainty of cash flows from operations and from outside sources; and how certain accounting principles, policies and estimates affect its financial statements. MD&A is organized as follows:
•Business Overview: This section provides a general description of the Company's business, as well as recent developments that management believes are important in understanding its results of operations and financial condition or in understanding anticipated future trends.
•Consolidated Results of Operations: This section provides an analysis of the Company's consolidated results of operations for the three and nine months ended September 30, 2022, as compared to the corresponding period of the preceding fiscal year.
•Analysis of Operating Revenue and Profit by Segment: This section provides an analysis of the Company's results of operations by business segment for the three and nine months ended September 30, 2022, as compared to the corresponding period of the preceding fiscal year.
•Use of Non-GAAP Financial Measures: This section provides a discussion of the Company's non-GAAP financial measures included in this report and presents quantitative reconciliations between the non-GAAP financial measures and the most directly comparable financial measures calculated and presented in accordance with U.S. GAAP. It also describes why the Company believes that presentation of the non-GAAP financial measure provides useful information to investors regarding the Company's financial condition and results of operations and, to the extent material, describes additional purposes for which the Company uses the non-GAAP financial measures.
•Liquidity and Capital Resources: This section provides a discussion of any material changes in the Company's liquidity, financial condition and cash flows, including a discussion of any material changes in the Company's ability to fund its future commitments and ongoing operating activities in the short-term (i.e., over the next twelve months from the most recent fiscal period end) and in the long-term (i.e., beyond the next twelve months) through internal and
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external sources of capital, as compared to the end of preceding fiscal year ended December 31, 2021. It includes an evaluation of the amounts and certainty of cash flows from operations and from outside sources.
•Other Matters: This section identifies and summarizes other matters to be discussed in Item 2 of this report including any changes in the significant judgments or estimates on the part of management in preparing the Company's consolidated financial statements that may materially impact the Company's reported results of operations and financial condition from the end of the preceding fiscal year ended December 31, 2021, the potential impact of recently issued accounting pronouncements and other miscellaneous matters as needed.
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
Reportable segments
The Company operates three segments: Commercial Real Estate; Land Operations; and Materials & Construction. A description of each of the Company's reporting segments is as follows:
•Commercial Real Estate ("CRE") - This segment functions as a vertically integrated real estate investment company with core competencies in investments and acquisitions (i.e., identifying opportunities and acquiring properties); construction and development (i.e., designing and ground-up development of new properties or repositioning and redevelopment of existing properties); and in-house leasing and property management (i.e., executing new and renegotiating renewal lease arrangements, managing its properties' day-to-day operations and maintaining positive tenant relationships). The Company's preferred asset classes include improved properties in retail and industrial spaces and also urban ground leases. Its focus within improved retail properties, in particular, is on grocery-anchored neighborhood shopping centers that meet the daily needs of Hawai‘i communities. Through its core competencies and with its experience and relationships in Hawai‘i, the Company seeks to create special places that enhance the lives of Hawai‘i residents and to provide venues and opportunities that enable its tenants to thrive. Income from this segment is principally generated by owning, operating and leasing real estate assets.
•Land Operations - This segment includes the Company's legacy assets and landholdings that are subject to the Company's simplification and monetization effort. Financial results from this segment are principally derived from real estate development and land sales, income/loss from real estate joint ventures, hydroelectric energy and other legacy business activities. In June 2022, the Company disposed of its hydroelectric energy assets through the sale of 100% of the Company's ownership interest in McBryde Resources, Inc.
•Materials & Construction ("M&C") - This segment operates one of Hawai‘i's largest asphalt paving contractors and is one of the state's largest natural materials and infrastructure construction companies, primarily conducting business through its wholly-owned subsidiary, Grace Pacific LLC ("Grace Pacific"), a materials and construction company in Hawai‘i. The M&C segment also includes the Company-owned quarry land on Maui, as well as the Company’s unconsolidated joint venture interest in a materials company.
Simplification strategy
As a result of its conversion to a REIT and consequent de-emphasis of non-REIT operating businesses, the Company has pursued the simplification of its business, which includes ongoing efforts to accelerate the monetization of its non-commercial real estate assets, including its Materials & Construction businesses.
In connection with the evaluation of strategic alternatives to monetize and dispose of the remaining Materials & Construction businesses, either together as a group or individually, in July 2022 the Company's Board of Directors authorized a formal marketing process to sell the Grace Pacific business. The outcome, including the timing of the marketing process, is not certain, as any transaction would be dependent upon various external factors beyond the Company's control, including, among others, market conditions, industry trends, interest of third parties, and the availability of financing to potential buyer(s) on reasonable terms. There can be no assurance that the marketing process will result in any agreements or transactions. Further, given the current economic environment, including heightened concerns over recession, there can be no assurance that any potential transaction or transactions will result in the Company being able to recover the carrying value of the Materials & Construction businesses or related disposal group.
23
Related to the Land Operations segment, on June 30, 2022, the Company completed the sale of approximately 18,900 acres of primarily conservation and agricultural land on the island of Kauai and 100% of the Company's ownership interest in McBryde Resources, Inc., the operator of hydroelectric power facilities on Kauai, in exchange for cash proceeds and escrow receivables of $73.9 million and $0.9 million, respectively. The Company recognized a net gain on disposition of assets of $54.0 million during the nine months ended September 30, 2022, in connection with the sale.
Termination of certain employee benefit plans
On February 23, 2021, the Company’s Board of Directors approved a plan to effect the termination of the A&B Retirement Plan for Salaried Employees of Alexander & Baldwin, LLC and the Pension Plan for Employees of A&B Agricultural Companies (collectively, the “Defined Benefit Plans”), which became effective on May 31, 2021.
During the second quarter of 2022, the Company completed the termination of the Defined Benefit Plans. For the three and nine months ended September 30, 2022, the Company contributed cash of $0.9 million and $29.9 million, respectively. For the nine months ended September 30, 2022, the Company recorded a pre-tax settlement charge of $76.9 million within Pension termination in the condensed consolidated statements of operations in connection with the Defined Benefit Plans termination process, which represents the acceleration of deferred charges previously included within accumulated other comprehensive loss and the impact of remeasuring the plan assets and obligations at termination. In addition, the Company recorded an income tax benefit of $18.3 million for the nine months ended September 30, 2022, to reclassify the tax effects in accumulated other comprehensive loss upon completion of the termination of the Defined Benefit Plans. The Company did not record any pension termination charges or associated income tax benefit or expense during the three months ended September 30, 2022.
Recent Developments
Inflationary Trends
The U.S. economy has recently experienced the highest rate of inflation in nearly 40 years, which has impacted a wide variety of industries and sectors through increased commodity prices. Inflation has increased construction costs, including tenant improvements and capital projects, and operating costs. Many of the Company's leases require tenants to pay an allocable portion of operating expenses, including common area maintenance, real estate taxes and insurance, resulting in a mitigating impact on increased costs and operating expenses due to inflation.
Inflation-sensitive inputs are necessary for the Company to provide products and services in the Materials and Construction segment. Increasing inflation has put upward pressure on wages, the cost of raw materials used to produce Hot Mix Asphalt ("HMA"), and other items that are critical to the businesses in this segment, including fuel. To date, the Company has been able to mitigate some of the effects of inflation by increasing prices for products and including the anticipated cost increases in bids on construction projects. However, the Company is limited in its ability to pass through increased costs for projects already in backlog and, under those circumstances, may be unable to recoup losses or diminished profit margins by passing these costs through to customers.
In response to persistent concerns over inflation, the Federal Reserve has increased the federal funds rate five times in 2022 to 3.25%, up from 0.25% at January 1, 2022, and signaled its intent for additional increases for the remainder of 2022 and into 2023. The ultimate extent of the impact that inflation will have on the Company's business, financial condition, results of operations and liquidity and capital resources will largely depend on future developments, including the resulting impact on economic growth/recession, the impact on travel and tourism behavior and the impact on consumer confidence and discretionary and non-discretionary spending, all of which are highly uncertain and cannot be reasonably predicted.
24
Consolidated Results of Operations
The following analysis of the consolidated financial condition and results of operations of the Company and its subsidiaries should be read in conjunction with the condensed consolidated financial statements and related notes thereto.
Financial results - Third quarter of 2022 compared with 2021
| (amounts in millions, except percentage data and per share data; unaudited) | Three Months Ended September 30, | 2022 vs 2021 | ||||||||||||||||||||||||
| 2022 | 2021 | $ | % | |||||||||||||||||||||||
| Operating revenue | $ | 97.2 | $ | 84.3 | $ | 12.9 | 15.3 | % | ||||||||||||||||||
| Cost of operations | (72.5) | (60.6) | (11.9) | 19.6 | % | |||||||||||||||||||||
| Selling, general and administrative | (12.7) | (12.6) | (0.1) | 0.8 | % | |||||||||||||||||||||
| Operating income (loss) | 12.0 | 11.1 | 0.9 | 8.1 | % | |||||||||||||||||||||
| Income (loss) related to joint ventures | 0.4 | 2.7 | (2.3) | (85.2) | % | |||||||||||||||||||||
| Interest and other income (expense), net | (0.1) | (0.2) | 0.1 | (50.0) | % | |||||||||||||||||||||
| Interest expense | (5.5) | (6.5) | 1.0 | (15.4) | % | |||||||||||||||||||||
| Income (loss) from continuing operations | 6.8 | 7.1 | (0.3) | (4.2) | % | |||||||||||||||||||||
| Discontinued operations (net of income taxes) | — | (0.6) | 0.6 | (100.0) | % | |||||||||||||||||||||
| Net income (loss) | 6.8 | 6.5 | 0.3 | 4.6 | % | |||||||||||||||||||||
| (Income) loss attributable to noncontrolling interest | (0.4) | (0.1) | (0.3) | 300.0 | % | |||||||||||||||||||||
| Net income (loss) attributable to A&B | $ | 6.4 | $ | 6.4 | $ | — | — | % | ||||||||||||||||||
| Basic Earnings (Loss) Per Share of Common Stock: | ||||||||||||||||||||||||||
| Basic earnings (loss) per share - continuing operations | $ | 0.09 | $ | 0.10 | $ | (0.01) | (10.0) | % | ||||||||||||||||||
| Basic earnings (loss) per share - discontinued operations | — | (0.01) | 0.01 | (100.0) | % | |||||||||||||||||||||
| $ | 0.09 | $ | 0.09 | $ | — | — | % | |||||||||||||||||||
| Diluted Earnings (Loss) Per Share of Common Stock: | ||||||||||||||||||||||||||
| Diluted earnings (loss) per share - continuing operations | $ | 0.09 | $ | 0.10 | $ | (0.01) | (10.0) | % | ||||||||||||||||||
| Diluted earnings (loss) per share - discontinued operations | — | (0.01) | 0.01 | (100.0) | % | |||||||||||||||||||||
| $ | 0.09 | $ | 0.09 | $ | — | — | % | |||||||||||||||||||
| Continuing operations available to A&B common shareholders | $ | 6.3 | $ | 6.9 | $ | (0.6) | (8.7) | % | ||||||||||||||||||
| Discontinued operations available to A&B common shareholders | — | (0.6) | 0.6 | (100.0) | % | |||||||||||||||||||||
| Net income (loss) available to A&B common shareholders | $ | 6.3 | $ | 6.3 | $ | — | — | % | ||||||||||||||||||
Funds From Operations ("FFO")1 | $ | 15.3 | $ | 15.5 | $ | (0.2) | (1.3) | % | ||||||||||||||||||
Core FFO1 | $ | 18.9 | $ | 17.9 | $ | 1.0 | 5.6 | % | ||||||||||||||||||
| FFO per diluted share | $ | 0.21 | $ | 0.21 | $ | — | — | % | ||||||||||||||||||
| Core FFO per diluted share | $ | 0.26 | $ | 0.25 | $ | 0.01 | 4.0 | % | ||||||||||||||||||
Weighted average diluted shares outstanding (FFO/Core FFO)2 | 72.8 | 72.7 | ||||||||||||||||||||||||
1 For definitions of capitalized terms and a discussion of management's use of a non-GAAP financial measure and the required reconciliation of non-GAAP measures to GAAP measures, refer to page 36. | ||||||||||||||||||||||||||
2 May differ from figure used in the consolidated statements of operations based on differing dilutive effects for net income (loss) versus FFO/Core FFO. | ||||||||||||||||||||||||||
The causes of material changes in the condensed consolidated statements of operations for the three months ended September 30, 2022, as compared to the three months ended September 30, 2021, are described below or in the Analysis of Operating Revenue and Profit by Segment sections below.
Operating revenue during the third quarter ended September 30, 2022, increased 15.3%, or $12.9 million, to $97.2 million, due primarily to higher revenues from the Materials & Construction and Commercial Real Estate operating segments, partially offset by lower legacy business activities revenue (primarily McBryde's legacy leasing revenue and energy generation
25
due to its sale in the second quarter of 2022) and unimproved property sales revenue from the Company's Land Operations operating segment.
Cost of operations during the third quarter ended September 30, 2022, increased 19.6%, or $11.9 million, to $72.5 million, due primarily to higher costs incurred by the Company's Materials & Construction operating segment.
Selling, general and administrative during the third quarter ended September 30, 2022, increased 0.8%, or $0.1 million, to $12.7 million, due primarily to higher personnel-related costs in the current period.
Income (loss) related to joint ventures during the third quarter ended September 30, 2022, decreased 85.2%, or $2.3 million, to $0.4 million, due primarily to the impact of the Kukui`ula joint venture project that was sold in November 2021.
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Financial results - First Nine Months of 2022 compared with 2021
| (amounts in millions, except percentage data and per share data; unaudited) | Nine Months Ended September 30, | 2022 vs 2021 | ||||||||||||||||||||||||
| 2022 | 2021 | $ | % | |||||||||||||||||||||||
| Operating revenue | $ | 283.5 | $ | 254.6 | $ | 28.9 | 11.4 | % | ||||||||||||||||||
| Cost of operations | (203.8) | (178.6) | (25.2) | 14.1 | % | |||||||||||||||||||||
| Selling, general and administrative | (38.3) | (37.2) | (1.1) | 3.0 | % | |||||||||||||||||||||
| Gain (loss) on disposal of assets, net | 54.0 | 0.4 | 53.6 | NM | ||||||||||||||||||||||
| Operating income (loss) | 95.4 | 39.2 | 56.2 | 143.4 | % | |||||||||||||||||||||
| Income (loss) related to joint ventures | 1.8 | 12.2 | (10.4) | (85.2) | % | |||||||||||||||||||||
| Pension termination | (76.9) | — | (76.9) | NM | ||||||||||||||||||||||
| Interest and other income (expense), net | 0.7 | (1.0) | 1.7 | (170.0) | % | |||||||||||||||||||||
| Interest expense | (16.8) | (20.2) | 3.4 | (16.8) | % | |||||||||||||||||||||
| Income tax benefit (expense) | 18.1 | (0.1) | 18.2 | NM | ||||||||||||||||||||||
| Income (loss) from continuing operations | 22.3 | 30.1 | (7.8) | (25.9) | % | |||||||||||||||||||||
| Discontinued operations (net of income taxes) | (0.1) | (0.7) | 0.6 | (85.7) | % | |||||||||||||||||||||
| Net income (loss) | 22.2 | 29.4 | (7.2) | (24.5) | % | |||||||||||||||||||||
| (Income) loss attributable to noncontrolling interest | (1.2) | (0.3) | (0.9) | 300.0 | % | |||||||||||||||||||||
| Net income (loss) attributable to A&B | $ | 21.0 | $ | 29.1 | $ | (8.1) | (27.8) | % | ||||||||||||||||||
| Basic Earnings (Loss) Per Share of Common Stock: | ||||||||||||||||||||||||||
| Basic earnings (loss) per share - continuing operations | $ | 0.29 | $ | 0.41 | $ | (0.12) | (29.3) | % | ||||||||||||||||||
| Basic earnings (loss) per share - discontinued operations | — | (0.01) | 0.01 | (100.0) | % | |||||||||||||||||||||
| $ | 0.29 | $ | 0.40 | $ | (0.11) | (27.5) | % | |||||||||||||||||||
| Diluted Earnings (Loss) Per Share of Common Stock: | ||||||||||||||||||||||||||
| Diluted earnings (loss) per share - continuing operations | $ | 0.29 | $ | 0.41 | $ | (0.12) | (29.3) | % | ||||||||||||||||||
| Diluted earnings (loss) per share - discontinued operations | — | (0.01) | 0.01 | (100.0) | % | |||||||||||||||||||||
| $ | 0.29 | $ | 0.40 | $ | (0.11) | (27.5) | % | |||||||||||||||||||
| Continuing operations available to A&B common shareholders | $ | 20.9 | $ | 29.7 | $ | (8.8) | (29.6) | % | ||||||||||||||||||
| Discontinued operations available to A&B common shareholders | (0.1) | (0.7) | 0.6 | (85.7) | % | |||||||||||||||||||||
| Net income (loss) available to A&B common shareholders | $ | 20.8 | $ | 29.0 | $ | (8.2) | (28.3) | % | ||||||||||||||||||
Funds From Operations ("FFO")1 | $ | 48.2 | $ | 57.0 | $ | (8.8) | (15.4) | % | ||||||||||||||||||
Core FFO1 | $ | 60.0 | $ | 51.9 | $ | 8.1 | 15.6 | % | ||||||||||||||||||
| FFO per diluted share | $ | 0.66 | $ | 0.79 | $ | (0.13) | (16.5) | % | ||||||||||||||||||
| Core FFO per diluted share | $ | 0.82 | $ | 0.71 | $ | 0.11 | 15.5 | % | ||||||||||||||||||
Weighted average diluted shares outstanding (FFO/Core FFO)2 | 72.8 | 72.6 | ||||||||||||||||||||||||
1 For definitions of capitalized terms and a discussion of management's use of a non-GAAP financial measure and the required reconciliation of non-GAAP measures to GAAP measures, refer to page 36. | ||||||||||||||||||||||||||
2 May differ from figure used in the consolidated statements of operations based on differing dilutive effects for net income (loss) versus FFO/Core FFO. | ||||||||||||||||||||||||||
The causes of material changes in the condensed consolidated statements of operations for the nine months ended September 30, 2022, as compared to the nine months ended September 30, 2021 are described below or in the Analysis of Operating Revenue and Profit by Segment sections below.
Operating revenue for the nine months ended September 30, 2022 increased 11.4%, or $28.9 million, to $283.5 million, primarily due to higher revenues from the Materials & Construction and Commercial Real Estate segments, partially offset by lower revenue from the Land Operations segment.
27
Cost of operations for the nine months ended September 30, 2022, increased 14.1% or $25.2 million, to $203.8 million, primarily due to increases in costs incurred by the Materials & Construction and Commercial Real Estate segments, partially offset by a decrease in costs incurred by the Land Operations segment.
Selling, general and administrative for the nine months ended September 30, 2022 increased 3.0%, or $1.1 million, to $38.3 million, due primarily to higher pension service expense and consulting costs in the current period.
Gain (loss) on disposal of assets, net of $54.0 million for the nine months ended September 30, 2022 was due to the sale of approximately 18,900 acres of primarily agricultural and conservation land on the island of Kauai and 100% of the Company's ownership interest in McBryde Resources, Inc., the operator of hydroelectric power facilities on Kauai. Gain (loss) on disposal of assets, net of $0.4 million for the nine months ended September 30, 2021, related to the sale of residual, non-core land parcels on Maui and asset disposals in the Land Operations and Materials and Construction segments.
Income (loss) related to joint ventures for the nine months ended September 30, 2022, decreased 85.2%, or $10.4 million, to $1.8 million, due primarily to the Kukui`ula joint ventures' sale of substantially all of their assets in November 2021, resulting in limited joint venture earnings from the Company's other remaining joint ventures.
Pension termination loss of $76.9 million for the nine months ended September 30, 2022, resulted from the termination of the Defined Benefit Plans and represents the acceleration of deferred charges previously included within Accumulated Other Comprehensive Loss in the Company's balance sheet and the impact of remeasuring the plan assets and obligations at termination.
Interest expense for the nine months ended September 30, 2022, decreased 16.8%, or $3.4 million, to $16.8 million, due to lower average notes payable and other debt balances.
Income tax benefit (expense) of $18.1 million for the nine months ended September 30, 2022, was due primarily to the termination of the Company’s Defined Benefit Plans.
28
Analysis of Operating Revenue and Profit by Segment
The following analysis should be read in conjunction with the consolidated financial statements and related notes thereto.
Commercial Real Estate
Financial results - Third quarter of 2022 compared with 2021
Results of operations for the third quarter ended September 30, 2022 and 2021, were as follows:
| (amounts in millions, except percentage data and acres; unaudited) | Three Months Ended September 30, | 2022 vs 2021 | ||||||||||||||||||||||||
| 2022 | 2021 | $ | %1 | |||||||||||||||||||||||
| Commercial Real Estate operating revenue | $ | 46.2 | $ | 44.0 | $ | 2.2 | 5.0 | % | ||||||||||||||||||
| Commercial Real Estate operating costs and expenses | (25.0) | (24.1) | (0.9) | 3.7 | % | |||||||||||||||||||||
| Selling, general and administrative | (1.8) | (1.6) | (0.2) | 12.5 | % | |||||||||||||||||||||
Intersegment operating revenue, net2 | 0.3 | 0.3 | — | — | % | |||||||||||||||||||||
| Interest and other income (expense), net | 0.6 | 0.4 | 0.2 | 50.0 | % | |||||||||||||||||||||
| Commercial Real Estate operating profit (loss) | $ | 20.3 | $ | 19.0 | $ | 1.3 | 6.8 | % | ||||||||||||||||||
| Operating profit (loss) margin | 43.9 | % | 43.2 | % | ||||||||||||||||||||||
Net Operating Income ("NOI")3 | $ | 29.0 | $ | 28.1 | $ | 0.9 | 3.3 | % | ||||||||||||||||||
Same-Store Net Operating Income ("Same-Store NOI")3 | $ | 28.9 | $ | 28.1 | $ | 0.8 | 2.8 | % | ||||||||||||||||||
| Gross leasable area ("GLA") in square feet ("SF") for improved properties at end of period | 3.9 | 3.9 | — | — | % | |||||||||||||||||||||
| Ground leases (acres at end of period) | 140.8 | 146.0 | (5.2) | (3.6) | % | |||||||||||||||||||||
1 Amounts in this table are rounded to the nearest tenth of a million, but percentages were calculated based on thousands. Accordingly, a recalculation of some percentages, if based on the reported data, may be slightly different. | ||||||||||||||||||||||||||
2 Intersegment operating revenue, net for Commercial Real Estate is primarily from the Materials & Construction segment and is eliminated in the consolidated results of operations. | ||||||||||||||||||||||||||
3 For a discussion of management's use of a non-GAAP financial measures and the required reconciliation of non-GAAP measures to GAAP measures, refer to page 36. | ||||||||||||||||||||||||||
Commercial Real Estate operating revenue increased 5.0% or $2.2 million, to $46.2 million for the third quarter ended September 30, 2022, as compared to the third quarter ended September 30, 2021. Operating profit increased 6.8%, or $1.3 million, to $20.3 million for the third quarter ended September 30, 2022, as compared to the third quarter ended September 30, 2021. The increase in operating revenue and operating profit from the prior year was due primarily to higher base rents. Operating costs and expenses for the quarter ended September 30, 2022, increased by $0.9 million as compared to the prior year due primarily to higher utilities and other property operating costs.
29
Financial results - First Nine Months of 2022 compared with 2021
Operating results for the nine months ended September 30, 2022, as compared to the nine months ended September 30, 2021, were as follows:
| Nine Months Ended September 30, | 2022 vs. 2021 | |||||||||||||||||||||||||
| (amounts in millions, except percentage data; unaudited) | 2022 | 2021 | $ | %1 | ||||||||||||||||||||||
| Commercial Real Estate operating revenue | $ | 138.1 | $ | 127.2 | $ | 10.9 | 8.6 | % | ||||||||||||||||||
| Commercial Real Estate operating costs and expenses | (73.2) | (71.0) | (2.2) | 3.1 | % | |||||||||||||||||||||
| Selling, general and administrative | (5.2) | (4.8) | (0.4) | 8.3 | % | |||||||||||||||||||||
Intersegment operating revenue, net2 | 0.9 | 1.0 | (0.1) | (10.0) | % | |||||||||||||||||||||
| Pension termination | (0.7) | — | (0.7) | NM | ||||||||||||||||||||||
| Interest and other income (expense), net | 0.4 | 0.6 | (0.2) | (33.3) | % | |||||||||||||||||||||
| Commercial Real Estate operating profit (loss) | $ | 60.3 | $ | 53.0 | $ | 7.3 | 13.8 | % | ||||||||||||||||||
| Operating profit (loss) margin | 43.7 | % | 41.7 | % | ||||||||||||||||||||||
Net Operating Income ("NOI")3 | $ | 88.6 | $ | 81.9 | $ | 6.7 | 8.1 | % | ||||||||||||||||||
Same-Store Net Operating Income ("Same-Store NOI")3 | $ | 88.2 | $ | 81.8 | $ | 6.4 | 7.7 | % | ||||||||||||||||||
1 Amounts in this table are rounded to the nearest tenth of a million, but percentages were calculated based on thousands. Accordingly, a recalculation of some percentages, if based on the reported data, may be slightly different. | ||||||||||||||||||||||||||
2 Intersegment operating revenue, net for Commercial Real Estate is primarily from the Materials & Construction segment and is eliminated in the consolidated results of operations. | ||||||||||||||||||||||||||
3 For a discussion of management's use of a non-GAAP financial measure and the required reconciliation of non-GAAP measures to GAAP measures, refer to page 36. | ||||||||||||||||||||||||||
Commercial Real Estate operating revenue increased 8.6% or $10.9 million, to $138.1 million for the nine months ended September 30, 2022, as compared to the nine months ended September 30, 2021. Operating profit increased 13.8%, or $7.3 million, to $60.3 million for the nine months ended September 30, 2022, as compared to the nine months ended September 30, 2021. The increase in operating revenue and operating profit from the prior year was primarily driven by higher base rents and higher tenant chargebacks. Operating costs and expenses for the nine months ended September 30, 2022, increased by $2.2 million due primarily to higher utilities and other property operating costs, partially offset by lower property taxes and depreciation and amortization.
Commercial Real Estate portfolio additions and dispositions
The Company transferred an industrial building representing 8,400 square feet of GLA from the Materials & Construction segment to the Commercial Real Estate segment in June 2022. The building is currently occupied and utilized by Grace Pacific's GP Roadway Solutions division that is included in the Materials & Construction segment. There were no other acquisitions or dispositions of CRE improved properties or ground lease interests in land during the three and nine months ended September 30, 2022.
Leasing activity
During the third quarter ended September 30, 2022, the Company signed 18 new leases and 32 renewal leases for its improved properties across its retail, industrial, and office asset classes, covering 104,900 square feet of GLA. The 18 new leases consist of 29,500 square feet with an average annual base rent of $29.57 per-square-foot. Of the 18 new leases, six leases with a total GLA of 10,100 square feet were considered comparable (i.e., renewals, for the same units, or new leases executed for units that have been vacated in the previous 12 months for comparable space and comparable lease terms) and, for these six leases, resulted in an 6.4% average base rent increase over comparable expiring leases. The 32 renewal leases consist of 75,400 square feet with an average annual base rent of $28.93 per square foot. Of the 32 renewal leases, 21 leases with a total GLA of 59,600 square feet were considered comparable and resulted in a 3.9% average base rent increase over comparable expiring leases.
Leasing activity summarized by asset class for the three and nine months ended September 30, 2022, were as follows:
30
| Three Months Ended September 30, 2022 | Nine Months Ended September 30, 2022 | ||||||||||||||||||||||||||||
| Leases | GLA (SF) | ABR/SF | Rent Spread1 | Leases | GLA (SF) | ABR/SF | Rent Spread1 | ||||||||||||||||||||||
| Retail | 37 | 83,646 | $31.98 | 4.6% | 142 | 438,064 | $31.10 | 3.7% | |||||||||||||||||||||
| Industrial | 11 | 18,660 | $14.55 | 1.3% | 46 | 190,209 | $13.81 | 5.3% | |||||||||||||||||||||
| Office | 2 | 2,569 | $41.33 | 2.7% | 12 | 19,967 | $34.43 | 8.4% | |||||||||||||||||||||
1 Rent spread is calculated as percentage change in ABR in the first year of a signed lease relative to the ABR in the last year of the prior lease for comparable leases, a subset of the total population of leases for the period presented (described above). | |||||||||||||||||||||||||||||
Occupancy
The Company reports three types of occupancy: "Leased Occupancy," "Physical Occupancy," and "Economic Occupancy."
The Leased Occupancy percentage calculates the square footage leased (i.e., the space has been committed to by a lessee under a signed lease agreement) as a percentage of total available improved property square footage as of the end of the period reported.
The Physical Occupancy percentage calculates the square footage leased and commenced (i.e., measured when the lessee has physical access to the space) as a percentage of total available improved property space at the end of the period reported.
The Economic Occupancy percentage calculates the square footage under leases for which the lessee is contractually obligated to make lease-related payments (i.e., subsequent to the rent commencement date) to total available improved property square footage as of the end of the period reported.
The Company's improved portfolio occupancy metrics as of September 30, 2022 and 2021, were as follows:
| As of | As of | Basis Point Change | ||||||||||||||||||
| September 30, 2022 | September 30, 2021 | |||||||||||||||||||
| Leased Occupancy | 94.6% | 94.6% | — | |||||||||||||||||
| Physical Occupancy | 93.8% | 94.0% | (20) | |||||||||||||||||
| Economic Occupancy | 93.1% | 92.0% | 110 | |||||||||||||||||
31
For further context, the Company's Leased Occupancy and Economic Occupancy metrics for its improved portfolio summarized by asset class – and the corresponding occupancy metrics for a category of properties that were owned and operated for the entirety of the prior calendar year and current period, to date ("Same-Store" as more fully described below) – as of September 30, 2022 and 2021, were as follows:
| Leased Occupancy | ||||||||||||||||||||
| As of | As of | Basis Point Change | ||||||||||||||||||
| September 30, 2022 | September 30, 2021 | |||||||||||||||||||
| Retail | 93.3% | 93.2% | 10 | |||||||||||||||||
| Industrial | 98.0% | 98.0% | — | |||||||||||||||||
| Office | 89.1% | 90.2% | (110) | |||||||||||||||||
| Total Leased Occupancy | 94.6% | 94.6% | — | |||||||||||||||||
| Economic Occupancy | ||||||||||||||||||||
| As of | As of | Basis Point Change | ||||||||||||||||||
| September 30, 2022 | September 30, 2021 | |||||||||||||||||||
| Retail | 91.3% | 89.5% | 180 | |||||||||||||||||
| Industrial | 97.6% | 97.4% | 20 | |||||||||||||||||
| Office | 85.7% | 89.3% | (360) | |||||||||||||||||
| Total Economic Occupancy | 93.1% | 92.0% | 110 | |||||||||||||||||
| Same-Store Leased Occupancy | ||||||||||||||||||||
| As of | As of | Basis Point Change | ||||||||||||||||||
| September 30, 2022 | September 30, 2021 | |||||||||||||||||||
| Retail | 93.3% | 93.2% | 10 | |||||||||||||||||
| Industrial | 97.9% | 98.0% | (10) | |||||||||||||||||
| Office | 89.1% | 90.2% | (110) | |||||||||||||||||
| Total Same-Store Leased Occupancy | 94.6% | 94.6% | — | |||||||||||||||||
| Same-Store Economic Occupancy | ||||||||||||||||||||
| As of | As of | Basis Point Change | ||||||||||||||||||
| September 30, 2022 | September 30, 2021 | |||||||||||||||||||
| Retail | 91.3% | 89.5% | 180 | |||||||||||||||||
| Industrial | 97.5% | 97.4% | 10 | |||||||||||||||||
| Office | 85.7% | 89.3% | (360) | |||||||||||||||||
| Total Same-Store Economic Occupancy | 93.0% | 92.0% | 100 | |||||||||||||||||
Land Operations
Trends, events and uncertainties
The composition of real estate sales in any given period can be diverse and has historically included developed residential real estate, developable subdivision lots, undeveloped land, and/or property sold under threat of condemnation. Further, the timing of property or parcel sales has affected and can significantly affect operating results in a given period.
Additionally, the operating profit reported in each period 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 may result in higher margins than the sale of developed property due to the low historical cost basis of the Company's land owned in Hawai‘i.
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 amounts of real estate developments for sale on the Company's condensed consolidated balance sheet do not necessarily indicate future profitability trends for this segment.
32
Financial results - Third quarter of 2022 compared with 2021
Results of operations for the third quarter ended September 30, 2022 and 2021, were as follows:
| Three Months Ended September 30, | ||||||||||||||
| (amounts in millions; unaudited) | 2022 | 2021 | ||||||||||||
| Unimproved/other property sales revenue | — | 0.6 | ||||||||||||
Other operating revenue1 | 2.9 | 4.8 | ||||||||||||
| Total Land Operations operating revenue | 2.9 | 5.4 | ||||||||||||
Land Operations operating costs and expenses2 | (4.6) | (4.7) | ||||||||||||
| Selling, general and administrative | (0.6) | (0.9) | ||||||||||||
Intersegment operating charges, net2 | 0.2 | (0.1) | ||||||||||||
| Earnings (loss) from joint ventures | — | 2.4 | ||||||||||||
| Interest and other income (expense), net | (0.1) | (0.4) | ||||||||||||
| Total Land Operations operating profit (loss) | $ | (2.2) | $ | 1.7 | ||||||||||
1 Other operating revenue includes legacy land licensing and leasing, trucking service, and renewable energy. | ||||||||||||||
2 Intersegment operating charges primarily from CRE that are eliminated in the consolidated results of operations. | ||||||||||||||
Third quarter of 2022: Land Operations revenue during the third quarter ended September 30, 2022, was $2.9 million, primarily consisting of revenue related to the Company's legacy business activities in the Land Operations segment (primarily trucking services and licensing and leasing of non-core legacy lands).
Land Operations operating loss of $2.2 million during the third quarter ended September 30, 2022, was due primarily to costs related to the Company's non-core legacy lands, partially offset by the margins from the operations of the segment's other legacy business activities.
Third quarter of 2021: Operating revenue of $5.4 million primarily consisted of revenue related to the Company's legacy business activities in the Land Operations segment (primarily licensing and leasing of non-core legacy land, trucking services, and renewable energy), as well as sales of unimproved land parcels on the islands of Kauai and Maui.
Land Operations operating profit of $1.7 million during the third quarter ended September 30, 2021, was due primarily to the margins realized from legacy business activities (primarily licensing and leasing of non-core legacy land, trucking services, and renewable energy) and joint venture projects. Earnings from joint ventures of $2.4 million during the third quarter ended September 30, 2021, was primarily driven by profitable unit sales at the Kukui‘ula joint ventures' projects.
33
Financial Results - First Nine Months of 2022 compared with 2021
| Nine Months Ended September 30, | ||||||||||||||
| (amounts in millions; unaudited) | 2022 | 2021 | ||||||||||||
| Development sales revenue | $ | 6.3 | $ | 11.2 | ||||||||||
| Unimproved/other property sales revenue | 2.0 | 11.9 | ||||||||||||
Other operating revenue1 | 12.6 | 15.4 | ||||||||||||
| Total Land Operations operating revenue | 20.9 | 38.5 | ||||||||||||
| Land Operations operating costs and expenses | (19.1) | (23.4) | ||||||||||||
| Selling, general and administrative | (3.0) | (2.8) | ||||||||||||
Intersegment operating charges, net2 | (0.2) | (0.2) | ||||||||||||
| Gain (loss) on disposal of assets, net | 54.0 | 0.1 | ||||||||||||
| Earnings (loss) from joint ventures | (0.3) | 11.3 | ||||||||||||
| Pension termination | (62.2) | — | ||||||||||||
| Interest and other income (expense), net | (0.1) | (1.2) | ||||||||||||
| Total Land Operations operating profit (loss) | $ | (10.0) | $ | 22.3 | ||||||||||
1 Other operating revenue includes legacy land licensing and leasing, trucking service, and renewable energy. | ||||||||||||||
2 Intersegment operating charges primarily from CRE that are eliminated in the consolidated results of operations. | ||||||||||||||
First Nine Months of 2022: Land Operations revenue during the nine months ended September 30, 2022, was $20.9 million and included the sales of development parcels at Maui Business Park, as well as unimproved and other land sales on the islands of Kauai and Maui. Revenue also included other operating revenue related to the Company's legacy business activities in the Land Operations segment (primarily licensing and leasing of non-core legacy agricultural lands, trucking service, and renewable energy).
During the second quarter ended June 30, 2022, the Company completed the sale of approximately 18,900 acres of primarily agricultural and conservation land on the island of Kauai and 100% of the Company's ownership interest in McBryde Resources, Inc., the operator of hydroelectric power facilities on Kauai, which resulted in a gain on disposal of approximately $54.0 million. Additionally, during the nine months ended September 30, 2022, the segment incurred a settlement charge of $62.2 million in connection with the termination of the Defined Benefit Plans.
First Nine Months of 2021: Land Operations revenue was $38.5 million and included the sales of development parcels at Maui Business Park and unimproved land on the islands of Kauai and Maui. Revenue also included other operating revenues related to the Company's legacy business activities in the Land Operations segment (primarily licensing and leasing of non-core legacy agricultural lands, trucking service, and renewable energy).
Operating profit of $22.3 million during the nine months ended September 30, 2021, was composed of the margins resulting from the real estate sales activity noted above, as well as profits generated from the operations of the segment's other legacy business activities. Earnings from joint ventures of $11.3 million during the nine months ended September 30, 2021, was primarily driven by profitable unit sales at the Kukui'ula joint ventures' projects.
34
Materials & Construction
Financial results - Third quarter of 2022 compared with 2021
Results of operations for the third quarter ended September 30, 2022 and 2021, were as follows:
| (dollars in millions; unaudited) | Three Months Ended September 30, | 2022 vs 2021 | ||||||||||||||||||||||||
| 2022 | 2021 | $ | % | |||||||||||||||||||||||
| Materials & Construction | ||||||||||||||||||||||||||
| Operating revenue | $ | 48.1 | $ | 34.9 | $ | 13.2 | 37.8% | |||||||||||||||||||
| Operating costs and expenses | (43.3) | (31.8) | (11.5) | 36.2% | ||||||||||||||||||||||
| Selling, general and administrative | (3.1) | (3.5) | 0.4 | (11.4)% | ||||||||||||||||||||||
Intersegment operating charges, net1 | (0.7) | (0.1) | (0.6) | 600.0% | ||||||||||||||||||||||
| Income (loss) related to joint ventures | 0.4 | 0.2 | 0.2 | 100.0% | ||||||||||||||||||||||
| Interest and other income (expense), net | 0.4 | — | 0.4 | NM | ||||||||||||||||||||||
| Materials & Construction operating profit (loss) | $ | 1.8 | $ | (0.3) | $ | 2.1 | (700.0)% | |||||||||||||||||||
| Gross margin percentage | 10.0 | % | 8.9 | % | ||||||||||||||||||||||
| Depreciation and amortization | $ | 1.3 | $ | 2.6 | $ | (1.3) | (50.0)% | |||||||||||||||||||
Backlog at period end2 | $ | 216.9 | $ | 193.5 | $ | 23.4 | 12.1% | |||||||||||||||||||
1 Intersegment operating charges, net for Materials & Construction represent amounts primarily from the Commercial Real Estate segment and are eliminated in the consolidated results of operations. | ||||||||||||||||||||||||||
2 Backlog represents the total amount of revenue that Grace Pacific, Maui Paving, LLC (“Maui Paving”) and Goodfellow Grace Pacific A J.V. (“Goodfellow Grace Pacific”) expect to realize on contracts awarded. Both Maui Paving and Goodfellow Grace Pacific are 50-percent-owned unconsolidated affiliates. Backlog primarily consists of asphalt paving and, to a lesser extent, Grace Pacific’s consolidated revenue from its construction-and traffic control-related products and services. 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, or longer, for large paving contracts and contracts performed in phases. This amount includes opportunity backlog consisting of contracts in which Grace Pacific has been confirmed to be the lowest bidder at the time of this disclosure (such amounts were $58.7 million and $85.2 million as of September 30, 2022 and 2021, respectively). Circumstances outside the Company's control such as procurement or technical protests, and/or changes in the availability of project funding, among others, may arise that prevent the finalization of such contracts. Maui Paving's backlog as of September 30, 2022 and 2021 was $25.2 million and $12.8 million, respectively. Goodfellow Grace Pacific's backlog as of September 30, 2022 was $10.6 million. There was $24.2 million backlog related to Goodfellow Grace Pacific as of September 30, 2021. | ||||||||||||||||||||||||||
Materials & Construction revenue was $48.1 million for the third quarter ended September 30, 2022, compared to $34.9 million for the third quarter ended September 30, 2021. Operating profit was $1.8 million for the third quarter ended September 30, 2022, compared to operating loss of $0.3 million for the third quarter ended September 30, 2021. During the quarter ended September 30, 2022, the segment operating profit was driven primarily by higher paving volumes and liquid asphalt sales product mix. During the quarter ended September 30, 2021, the segment operating loss was primarily driven by low paving volumes and margins, partially offset by higher quarry volumes and margins.
The Company is continually monitoring the performance of the M&C segment in the context of the overall industry and economy. However, based on the inherent uncertainty in the general economic environment, there can be no assurance that the carrying values associated with the long-lived assets will be recoverable and impairments on such long-lived assets may be required.
As of September 30, 2022 and 2021, backlog was $216.9 million and $193.5 million, respectively. The increase in backlog from September 30, 2021 to September 30, 2022, was primarily driven by an increase in the amount of marketed bid opportunities won by Grace Pacific and Maui Paving.
35
Financial Results - First Nine Months of 2022 compared with 2021
| (dollars in millions, tons delivered in thousands; unaudited) | Nine Months Ended September 30, | 2022 vs 2021 | ||||||||||||||||||||||||
| 2022 | 2021 | $ Change | Change | |||||||||||||||||||||||
| Materials & Construction | ||||||||||||||||||||||||||
| Operating revenue | $ | 124.5 | $ | 88.9 | $ | 35.6 | 40.0% | |||||||||||||||||||
| Operating costs and expenses | (111.5) | (84.2) | (27.3) | 32.4% | ||||||||||||||||||||||
| Selling, general and administrative | (10.6) | (11.3) | 0.7 | (6.2)% | ||||||||||||||||||||||
Intersegment operating charges, net1 | (0.8) | (0.7) | (0.1) | 14.3% | ||||||||||||||||||||||
| Gain (loss) on disposal of assets, net | — | 0.1 | (0.1) | (100.0)% | ||||||||||||||||||||||
| Income (loss) related to joint ventures | 2.1 | 0.9 | 1.2 | 133.3% | ||||||||||||||||||||||
| Interest and other income (expense), net | 0.7 | 0.1 | 0.6 | 600.0% | ||||||||||||||||||||||
| Materials & Construction operating profit (loss) | $ | 4.4 | $ | (6.2) | $ | 10.6 | (171.0)% | |||||||||||||||||||
| Gross margin percentage | 10.4 | % | 5.3 | % | ||||||||||||||||||||||
| Depreciation and amortization | $ | 4.3 | $ | 8.1 | $ | (3.8) | (46.9)% | |||||||||||||||||||
Backlog at period end2 | 216.9 | 193.5 | 23.4 | 12.1% | ||||||||||||||||||||||
1 Intersegment operating charges, net for Materials & Construction is primarily from the Commercial Real Estate segment and are eliminated in the consolidated results of operations. | ||||||||||||||||||||||||||
2 Backlog represents the total amount of revenue that Grace Pacific, Maui Paving, LLC (“Maui Paving”), and Goodfellow Grace Pacific A J.V. (“Goodfellow Grace Pacific”) expect to realize on contracts awarded. Both Maui Paving and Goodfellow Grace Pacific are 50-percent-owned unconsolidated affiliates. Backlog primarily consists of asphalt paving and, to a lesser extent, Grace Pacific’s consolidated revenue from its construction-and traffic control-related products and services. 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, or longer, for large paving contracts and contracts performed in phases. This amount includes opportunity backlog consisting of contracts in which Grace Pacific has been confirmed to be the lowest bidder at the time of this disclosure (such amounts were $58.7 million and $85.2 million as of September 30,2022 and 2021, respectively). Circumstances outside the Company's control such as procurement or technical protests, and/or changes in the availability of project funding, among others, may arise that prevent the finalization of such contracts. Maui Paving's backlog as of September 30,2022 and 2021, was $25.2 million and $12.8 million, respectively. Goodfellow Grace Pacific's backlog as of September 30,2022 and 2021, was $10.6 million and $24.2 million, respectively. | ||||||||||||||||||||||||||
Materials & Construction revenue was $124.5 million for the nine months ended September 30, 2022, compared to $88.9 million for the nine months ended September 30, 2021. Operating profit was $4.4 million for the nine months ended September 30, 2022, compared to operating loss of $6.2 million for the nine months ended September 30, 2021. During the nine months ended September 30, 2022, the segment operating profit was primarily driven by joint venture earnings from the Company's interest in a materials company and royalties on the Company-owned quarry land on Maui, in addition to higher paving volumes and liquid asphalt sales product mix. During the nine months ended September 30, 2021, the segment operating loss of $6.2 million was primarily driven by low paving volumes due to project delays and government agency contracting decisions.
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. The non-GAAP financial information presented herein should be considered supplemental to, and not as a substitute for or superior to, financial measures calculated in accordance with GAAP.
FFO is presented by the Company as a widely used non-GAAP measure of operating performance for real estate companies. FFO is defined by the National Association of Real Estate Investment Trusts ("Nareit") December 2018 Financial Standards White Paper as follows: net income (calculated in accordance with GAAP), excluding (1) depreciation and amortization related to real estate, (2) gains and losses from the sale of certain real estate assets, (3) gains and losses from change in control and (4) impairment write-downs of certain real estate assets and investments in entities when the impairment is directly attributable to decreases in the value of depreciable real estate held by the entity.
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The Company believes that, subject to the following limitations, FFO provides a supplemental measure to net income (calculated in accordance with GAAP) for comparing its performance and operations to those of other REITs. FFO does not represent an alternative to net income calculated in accordance with GAAP. In addition, FFO does not represent cash generated from operating activities in accordance with GAAP, nor does it represent cash available to pay distributions and should not be considered as an alternative to cash flow from operating activities, determined in accordance with GAAP, as a measure of the Company’s liquidity. The Company presents different forms of FFO:
•"Core FFO" represents a non-GAAP measure relevant to the operating performance of the Company's commercial real estate business (i.e., its core business). Core FFO is calculated by adjusting CRE operating profit to exclude items noted above (i.e., depreciation and amortization related to real estate included in CRE operating profit) and to make further adjustments to include expenses not included in CRE operating profit but that are necessary to accurately reflect the operating performance of its core business (i.e., corporate expenses and interest expense attributable to this core business) or to exclude items that are non-recurring, infrequent, unusual and unrelated to the core business operating performance (i.e., not likely to recur within two years or has not occurred within the prior two years). The Company believes such adjustments facilitate the comparable measurement of the Company's core operating performance over time. The Company believes that Core FFO, which is a supplemental non-GAAP financial measure, provides an additional and useful means to assess and compare the operating performance of REITs.
•FFO represents the Nareit-defined non-GAAP measure for the operating performance of the Company as a whole. The Company's calculation refers to net income (loss) available to A&B common shareholders as its starting point in the calculation of FFO.
The Company presents both non-GAAP measures and reconciles each to the most directly-comparable GAAP measure as well as reconciling FFO to Core FFO. The Company's FFO and Core FFO may not be comparable to FFO non-GAAP measures reported by other REITs. These other REITs may not define the term in accordance with the current Nareit definition or may interpret the current Nareit definition differently.
NOI is a non-GAAP measure used internally in evaluating the unlevered performance of the Company's Commercial Real Estate portfolio. The Company believes NOI provides useful information to investors regarding the Company's financial condition and results of operations because it reflects only the contract-based income and cash-based expense items that are incurred at the property level. When compared across periods, NOI can be used to determine trends in earnings of the Company's properties as this measure is not affected by non-contract-based revenue (e.g., straight-line lease adjustments required under GAAP); by non-cash expense recognition items (e.g., the impact of depreciation and amortization expense or impairments); or by other expenses or gains or losses that do not directly relate to the Company's ownership and operations of the properties (e.g., indirect selling, general, administrative and other expenses, as well as lease termination income). The Company believes the exclusion of these items from operating profit (loss) is useful because the resulting measure captures the contract-based revenue that is realizable (i.e., assuming collectability is deemed probable) and the direct property-related expenses paid or payable in cash that are incurred in operating the Company's Commercial Real Estate portfolio, as well as trends in occupancy rates, rental rates and operating costs. NOI should not be viewed as a substitute for, or superior to, financial measures calculated in accordance with GAAP.
NOI represents total Commercial Real Estate contract-based operating revenue that is realizable (i.e., assuming collectability is deemed probable) less the direct property-related operating expenses paid or payable in cash. The calculation of NOI excludes the impact of depreciation and amortization (e.g., depreciation related to capitalized costs for improved properties, other capital expenditures for building/area improvements and tenant space improvements, as well as amortization of leasing commissions); straight-line lease adjustments (including amortization of lease incentives); amortization of favorable/unfavorable lease assets/liabilities; lease termination income; interest and other income (expense), net; selling, general, administrative and other expenses (not directly associated with the property); and impairment of commercial real estate assets.
The Company reports NOI and Occupancy on a Same-Store basis, which includes the results of properties that were owned and operated for the entirety of the prior calendar year and current reporting period, year-to-date. The Same-Store pool excludes properties under development or redevelopment and also excludes properties acquired or sold during either of the comparable reporting periods. While there is management judgment involved in classifications, new developments and redevelopments are moved into the Same-Store pool after one full calendar year of stabilized operation. Properties included in held for sale are excluded from Same-Store.
The Company believes that reporting on a Same-Store basis provides investors with additional information regarding the operating performance of comparable assets separate from other factors (such as the effect of developments, redevelopments, acquisitions or dispositions).
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To emphasize, 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.
Reconciliations of net income (loss) available to A&B common shareholders to FFO and Core FFO for the three and nine months ended September 30, 2022 and 2021, are as follows (in millions):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| Net income (loss) available to A&B common shareholders | $ | 6.3 | $ | 6.3 | $ | 20.8 | $ | 29.0 | ||||||||||||||||||
| Depreciation and amortization of commercial real estate properties | 9.0 | 9.2 | 27.4 | 28.2 | ||||||||||||||||||||||
| Gain on the disposal of commercial real estate properties, net | — | — | — | (0.2) | ||||||||||||||||||||||
| FFO | $ | 15.3 | $ | 15.5 | $ | 48.2 | $ | 57.0 | ||||||||||||||||||
| Exclude items not related to core business: | ||||||||||||||||||||||||||
| Land Operations Operating (Profit) Loss | 2.2 | (1.7) | 10.0 | (22.3) | ||||||||||||||||||||||
| Materials & Construction Operating (Profit) Loss | (1.8) | 0.3 | (4.4) | 6.2 | ||||||||||||||||||||||
| Loss from discontinued operations | — | 0.6 | 0.1 | 0.7 | ||||||||||||||||||||||
| Income (loss) attributable to noncontrolling interest | 0.4 | 0.1 | 1.2 | 0.3 | ||||||||||||||||||||||
| Income tax expense (benefit) | — | — | (18.1) | 0.1 | ||||||||||||||||||||||
| Non-core business interest expense | 2.8 | 3.1 | 8.3 | 9.9 | ||||||||||||||||||||||
| Pension termination - CRE and Corporate | — | — | 14.7 | — | ||||||||||||||||||||||
| Core FFO | $ | 18.9 | $ | 17.9 | $ | 60.0 | $ | 51.9 | ||||||||||||||||||
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Reconciliations of Core FFO starting from Commercial Real Estate operating profit (loss) for the three and nine months ended September 30, 2022 and 2021, are as follows (in millions):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| Commercial Real Estate Operating Profit (Loss) | $ | 20.3 | $ | 19.0 | $ | 60.3 | $ | 53.0 | ||||||||||||||||||
| Depreciation and amortization of commercial real estate properties | 9.0 | 9.2 | 27.4 | 28.2 | ||||||||||||||||||||||
| Corporate and other expense | (7.6) | (6.8) | (33.7) | (18.9) | ||||||||||||||||||||||
| Pension termination - CRE and Corporate | — | — | 14.7 | — | ||||||||||||||||||||||
| Distributions to participating securities | (0.1) | — | (0.2) | — | ||||||||||||||||||||||
| Core business interest expense | (2.7) | (3.5) | (8.5) | (10.4) | ||||||||||||||||||||||
| Core FFO | $ | 18.9 | $ | 17.9 | $ | 60.0 | $ | 51.9 | ||||||||||||||||||
Reconciliations of Commercial Real Estate operating profit to Commercial Real Estate NOI for the three and nine months ended September 30, 2022 and 2021, are as follows (in millions):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| Commercial Real Estate Operating Profit (Loss) | $ | 20.3 | $ | 19.0 | $ | 60.3 | $ | 53.0 | ||||||||||||||||||
| Plus: Depreciation and amortization | 9.0 | 9.2 | 27.4 | 28.2 | ||||||||||||||||||||||
| Less: Straight-line lease adjustments | (1.2) | (1.1) | (3.7) | (2.9) | ||||||||||||||||||||||
| Less: Favorable/(unfavorable) lease amortization | (0.2) | (0.1) | (0.8) | (0.5) | ||||||||||||||||||||||
| Less: Termination income | (0.1) | (0.1) | (0.1) | (0.1) | ||||||||||||||||||||||
| Plus: Other (income)/expense, net | (0.6) | (0.4) | 0.3 | (0.6) | ||||||||||||||||||||||
| Plus: Selling, general, administrative and other expenses | 1.8 | 1.6 | 5.2 | 4.8 | ||||||||||||||||||||||
| Commercial Real Estate NOI | 29.0 | 28.1 | 88.6 | 81.9 | ||||||||||||||||||||||
| Less: NOI from acquisitions, dispositions, and other adjustments | (0.1) | — | (0.4) | (0.1) | ||||||||||||||||||||||
| Commercial Real Estate Same-Store NOI | $ | 28.9 | $ | 28.1 | $ | 88.2 | $ | 81.8 | ||||||||||||||||||
Liquidity and Capital Resources
Overview
The Company's principal sources of liquidity to meet its business requirements and plans both in the short-term (i.e., the next twelve months from September 30, 2022) and long-term (i.e., beyond the next twelve months) have generally been cash provided by operating activities; available cash and cash equivalents; and borrowing capacity under its various credit facilities. The Company's primary liquidity needs for its business requirements and plans have generally been supporting its known contractual obligations and also funding capital expenditures; shareholder distributions; and working capital needs.
Known contractual obligations
A description of material contractual commitments is contained in the Notes to Consolidated Financial Statements included in Part II, Item 8 of the 2021 Form 10-K, and relates to the Company's Notes payable and other debt, Operating lease liabilities and Accrued pension and post-retirement benefits. In addition, a description of other material cash requirements, including capital expenditures, is provided in Management's Discussion and Analysis of Financial Condition and Results of Operations included in Part II, Item 7 of the 2021 Form 10-K, and includes contractual interest payments for Notes payable and other debt as well as amounts to be spent on contractual non-cancellable purchase obligations (that specifies all significant terms, including fixed or minimum quantities to be purchased, pricing structure and approximate timing of the transaction that are not recorded as liabilities in the consolidated balance sheet).
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During the second quarter of 2022, the Company completed the termination of the Defined Benefit Plans, pursuant to which the Company (1) was relieved of the primary responsibility for the plans and (2) eliminated significant risk related to the obligations and assets of the Defined Benefit Plans. As of September 30, 2022, there were no other material changes in the Company's known contractual obligations from the end of the preceding fiscal year ended December 31, 2021. Refer to Note 6, Note 11 and Note 13 in this report for further discussion.
Further, a description of other commitments, contingencies and off-balance sheet arrangements is contained in the Notes to Consolidated Financial Statements included in Part II, Item 8 of the 2021 Form 10-K. As of September 30, 2022, there have been no material changes in the Company's other commitments, contingencies and off-balance sheet arrangements from the end of the preceding fiscal year ended December 31, 2021. Refer to Note 8 in this report for further discussion.
Sources of liquidity
As noted above, one of the Company's principal sources of liquidity has been cash flows provided by operations, primarily from the Commercial Real Estate segment (the Company's core business). During the nine months ended September 30, 2022, cash flows provided by operations was $9.0 million, a decrease as compared to the prior year comparable period ($67.2 million for the nine months ended September 30, 2021) due primarily to the cash contributions of $29.9 million to the Defined Benefit Plans related to the termination of the Company's pension plans, as well as lower cash flows related to Materials & Constructions segment. Total cash flows in future periods, may be subject to variation from the Land Operations segment due to the varying activity in completing sales on remaining non-core assets as part of the Company's continued execution on its simplification strategy.
The Company's other primary sources of liquidity include its cash on-hand of $7.3 million as of September 30, 2022, and the Company's revolving credit and term facilities, which provide liquidity and flexibility on a short-term (i.e., the next twelve months from September 30, 2022), as well as long-term basis. With respect to the revolving credit facility for general A&B purposes, as of September 30, 2022, the Company had no borrowings outstanding, $1.1 million letters of credit issued against, and $498.9 million of available capacity on such revolving credit facility (which currently has a term through August 29, 2025, plus two six-month optional extensions).
On August 13, 2021, the Company entered into an equity distribution agreement, or ATM Agreement, pursuant to which we may sell, from time to time, up to an aggregate sales price of $150.0 million of our common stock. Sales of common stock, if any, made pursuant to the ATM Agreement may be sold in negotiated transactions or transactions that are deemed to be “at the market” offerings, as defined in Rule 415 of the Securities Act of 1933, as amended. Actual sales will depend on a variety of factors including market conditions, the trading price of our common stock, our capital needs, and our determination of the appropriate sources of funding to meet such needs. As of September 30, 2022, the Company has not sold any shares under the at-the-market offering program, nor has any obligation to sell shares under the at-the-market offering program.
Other sources of liquidity for the Company include trade receivables, contracts retention, and inventories (excluding parts, materials and supplies), totaling $59.8 million at September 30, 2022. As of September 30, 2022, there were no material changes to the Company's other primary sources of liquidity from the end of the preceding fiscal year ended December 31, 2021.
Other uses (or sources) of liquidity
The Company may use (or, in some periods, generate) cash through various investing activities or financing activities. Net cash provided by investing activities was $56.0 million for the nine months ended September 30, 2022, as compared to $13.9 million for the nine months ended September 30, 2021. Net cash provided by investing activities during the nine months ended September 30, 2022, was primarily driven by the Company's sale of approximately 18,900 acres of primarily agricultural and conservation land on the island of Kauai and 100% of the Company's ownership interest in McBryde Resources, Inc., the operator of hydroelectric power facilities on Kauai, in exchange for cash consideration of approximately $73.9 million. This was partially offset by $15.7 million in capital expenditures during the nine months ended September 30, 2022. Cash provided by investing activities during the nine months ended September 30, 2021, was primarily driven by distributions from the Company's land development joint ventures (primarily at its Kukui‘ula joint venture projects), partially offset by cash used in capital expenditures.
As it relates to the CRE segment (i.e., its core business), the Company differentiates capital expenditures as follows (based on management's perspective on discretionary versus non-discretionary areas of spending for its CRE business):
•Growth Capital Expenditures: Property acquisition, development and redevelopment activity to generate income and cash flow growth.
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•Maintenance Capital Expenditures: Activity necessary to maintain building value, the current income stream and position in the market.
Capital expenditures for the respective periods for all segments were as follows:
| Nine Months Ended September 30, | ||||||||||||||||||||
| (dollars in millions; unaudited) | 2022 | 2021 | Change | |||||||||||||||||
| CRE property acquisitions, development and redevelopment | $ | 4.8 | $ | 14.3 | (66.4)% | |||||||||||||||
| CRE building/area improvements (Maintenance Capital Expenditures) | 3.5 | 5.2 | (32.7)% | |||||||||||||||||
| CRE tenant space improvements (Maintenance Capital Expenditures) | 2.4 | 1.9 | 26.3% | |||||||||||||||||
| Materials & Construction | 4.7 | 2.8 | 67.9% | |||||||||||||||||
| Land Operations and Corporate | 0.3 | 1.9 | (84.2)% | |||||||||||||||||
Total capital expenditures1 | $ | 15.7 | $ | 26.1 | (39.8)% | |||||||||||||||
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 $128.5 million for the nine months ended September 30, 2022, as compared to $111.8 million for the nine months ended September 30, 2021. During the nine months ended September 30, 2022, the Company's net cash outlays related to financing activities were due primarily to net payments on line-of credit agreements and repayments of notes payable and other debt and deferred financing costs of $65.8 million, as well as cash dividend payments totaling $57.7 million. During the nine months ended September 30, 2021, the Company's net cash outlays related to financing activities were due primarily to its net repayments of notes payable and other debt and deferred financing costs and line-of-credit agreement of $64.2 million, as well as cash dividend payments totaling $46.5 million.
In February 2020, the Company's Board of Directors authorized the Company to repurchase up to $150.0 million of its common stock beginning on February 25, 2020, and ending on December 31, 2021. In October 2021, the Company's Board of Directors reauthorized the Company to repurchase up to $150.0 million of its common stock beginning on January 1, 2022, and ending on December 31, 2023. In September 2022, the Company authorized a third-party to repurchase on behalf of the Company up to $10.0 million of the Company's common stock on the open market through December 31, 2022. During the quarter ended September 30, 2022, the third-party, acting on behalf of the Company, repurchased 196,050 shares on the open market for an aggregate purchase price, including commissions, of $3.2 million. Of this amount, $0.9 million was included in accrued and other liabilities as of September 30, 2022. The Company retired the shares upon repurchase. As of September 30, 2022, the third-party is authorized to purchase an additional $6.8 million, and $146.8 million remains available under the stock repurchase program.
Other capital resource matters
The Company frequently utilizes §1031 and §1033 of the Internal Revenue Code of 1986, as amended (the "Code"), to obtain tax-deferral treatment when qualifying real estate assets are sold or become subject to involuntary conversion and the resulting proceeds are reinvested in replacement properties within the required time period. Proceeds from potential tax-deferred sales under §1031 of the Code are held in escrow (and presented as part of Restricted cash on the consolidated balance sheets) pending future reinvestment or are returned to the Company for general use if eligibility for tax-deferral treatment based on the required time period lapses. The proceeds from involuntary conversions under §1033 of the Code are held by the Company until the funds are redeployed.
During the nine months ended September 30, 2022, the Company did not complete any transactions that would give rise to cash proceeds from sales or involuntary conversion activity that qualified under §1031 or §1033 of the Code. Further, during the nine months ended September 30, 2022, there were no acquisitions utilizing eligible/available proceeds from tax-deferred sales or involuntary conversions.
As of September 30, 2022, no funds from tax-deferred sales were available for use and had not been reinvested under §1031 of the Code. Also as of September 30, 2022, the Company held $3.1 million from tax-deferred involuntary conversions that had not yet been reinvested under §1033 of the Code.
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Trends, events and uncertainties
Economic uncertainty and volatility remain, including high inflation, depressed international tourism, global supply chain disruptions, labor shortages and turnover. In response to persistent concerns over inflation, the Federal Reserve has increased the federal funds rate five times in 2022 to 3.25%, up from 0.25% at January 1, 2022, and signaled its intent for additional increases for the remainder of 2022 and into 2023, as well as heightened concerns over recession. As of September 30, 2022, the Company had $6.8 million outstanding in variable-rate debt under its GLP Asphalt revolving credit facility and no amount outstanding in variable-rate debt under the unsecured A&B revolving credit facility. The Company's variable-rate debt under secured notes payable was effectively zero as of September 30, 2022, due to an interest rate swap on the Manoa Marketplace secured note payable, which is swapped through maturity. Other than in default, the Company does not have an obligation, nor the option in some cases, to prepay its fixed-rate debt prior to maturity and, as a result, interest rate fluctuations and the resulting changes in fair value would have little impact on the Company’s financial condition or results of operations unless the Company was required to refinance such debt.
The Company's ability to retain outstanding borrowings and utilize remaining amounts available under its revolving credit facility will depend on its continued compliance with the applicable financial covenants and other terms of the Company's notes payable and other debt arrangements. The Company was in compliance with its financial covenants for all outstanding balances as of September 30, 2022.
Based on its current outlook, the Company believes that funds generated from cash provided by operating activities; available cash and cash equivalent balances; and borrowing capacity under its various credit facilities will be sufficient to meet the needs of the Company's business requirements and plans both in the short-term (i.e., the next twelve months from September 30, 2022) and long-term (i.e., beyond the next twelve months). 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. As the circumstances underlying its current outlook may change, the Company will continue to actively monitor the situation and may take further actions that it determines is in the best interest of its business, financial condition and liquidity and capital resources.
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 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 the Company's financial statements were described in Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Company's 2021 Form 10-K.
New accounting pronouncements
Refer to Notes to Consolidated Financial Statements, included in Part 1, Item 1 of this report, for a full description of the impact of recently issued accounting standards, which is incorporated herein by reference, including the expected dates of adoption and estimated effects on the Company's results of operations and financial condition.
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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, 2021. There have been no material changes in the quantitative and qualitative disclosures about market risk since December 31, 2021.
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 September 30, 2022, 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 third quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information set forth under the "Legal Proceedings and Other Contingencies" section in Note 8 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
There were no equity securities sold by the Company during the period covered by this report that were not registered under the Securities Act.
In February 2020, the Company's Board of Directors authorized the Company to repurchase up to $150.0 million of its common stock beginning on February 25, 2020, and ending on December 31, 2021. In October 2021, the Company's Board of Directors reauthorized the Company to repurchase up to $150.0 million of its common stock beginning on January 1, 2022, and ending on December 31, 2023.
During the quarter ended September 30, 2022, the Company repurchased 196,050 shares of our common stock in the open market for an aggregate purchase price, including commissions, of $3.2 million. These shares were retired upon repurchase. As of September 30, 2022, $146.8 million remains available under the stock repurchase program.
| Issuer Purchases of Equity Securities | |||||||||||||||||
| Period | Total Number of Shares Purchased | Average Price Paid per Share¹ | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | |||||||||||||
| (in thousands) | |||||||||||||||||
| July 1-31, 2022 | — | $ | — | — | $ | — | |||||||||||
| August 1-31, 2022 | — | $ | — | — | $ | — | |||||||||||
| September 1-30, 2022 | 196,050 | $ | 16.46 | 196,050 | $ | 146,772 | |||||||||||
1The average price paid per share includes $0.02 commission fee per share.
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.
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ITEM 6. EXHIBITS
EXHIBIT INDEX
10. Material Contracts
10.b.(xlviii) Form of Notice of Time-Based Restricted Stock Unit Grant (Exhibit 10.b.1(xlviii) to Form 10-Q for the quarter ended September 30, 2022).
101 The following information from Alexander & Baldwin, Inc.'s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2022, formatted in Inline XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021; (ii) Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2022 and 2021; (iii) Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2022 and 2021; (iv) Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and 2021; (v) Condensed Consolidated Statements of Equity and Redeemable Noncontrolling Interest for the three and nine months ended September 30, 2022 and 2021; and (vi) Notes to Condensed Consolidated Financial Statements.
104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
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SIGNATURES
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. | ||||||||
| ALEXANDER & BALDWIN, INC. | ||||||||
| November 4, 2022 | By: /s/ Brett A. Brown | |||||||
| Brett A. Brown | ||||||||
| Executive Vice President and Chief Financial Officer | ||||||||
| November 4, 2022 | By: /s/ Clayton K.Y. Chun | |||||||
| Clayton K.Y. Chun | ||||||||
| Senior Vice President and Chief Accounting Officer | ||||||||
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ATTACHMENTS / EXHIBITS
XBRL TAXONOMY EXTENSION SCHEMA DOCUMENT
XBRL TAXONOMY EXTENSION CALCULATION LINKBASE DOCUMENT
XBRL TAXONOMY EXTENSION DEFINITION LINKBASE DOCUMENT
XBRL TAXONOMY EXTENSION LABEL LINKBASE DOCUMENT
XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE DOCUMENT