Alexander & Baldwin, Inc. Q2 FY2025 earnings call

Management Statement and Operational Highlights

• Lance noted the portfolio delivered strong results in the second quarter and progress on 2025 priorities: improving CRE portfolio performance, internal and external growth, and streamlining business and cost structure. Achieved same-store NOI growth, continued construction on build-to-suits, saw exciting acquisition opportunities, and resolved legacy operations/obligations in the Land Operations segment.
• Clayton discussed the strong portfolio performance leading to FFO results, balance sheet and liquidity, the decrease in G&A, and raised guidance.
• Lance closed by highlighting the portfolio's performance, future outlook, healthy demand for the existing portfolio, active additions to the industrial asset base, and optimism about future acquisitions.

Segment Performance

• CRE Portfolio: The second quarter CRE generated $33.6 million of NOI, growing 6.3% over the same period last year. Q2 CRE and Corporate-related FFO per share was $0.29, a 3.6% increase from the same quarter last year. FFO for the total company was $0.48 per share for the second quarter, with $0.19 from land operations. The annual run-rate of carrying costs in Land Operations decreased from a range of $4 million to $5 million to $3.75 million to $4.5 million. G&A was approximately $7 million for the quarter, a 3.3% decrease compared to the same period last year.
• Specific CRE Highlights: Executed 52 leases in the improved property portfolio, representing approximately 184,000 square feet of GLA and $6.1 million of ABR. Blended leasing spreads were strong at 6.8% on a comparable basis. Leased occupancy was 95.8%, up 40 basis points sequentially and 190 basis points compared to the second quarter of last year. Economic occupancy at quarter end was 94.8%, up 90 basis points from last quarter and 200 basis points from the same period last year. SNO at quarter end was $5.8 million, including $3.1 million related to two build-to-suit projects and over $700,000 for the ground lease at Maui Business Park. Construction continued at the build-to-suit on Maui with an anticipated completion in the first quarter of 2026, expecting an annual NOI uplift of $1 million. Another build-to-suit at Komohana Industrial Park on West Oahu had preconstruction work begun, expected to place buildings into service in the fourth quarter of 2026 and achieve $2.8 million annual NOI when stabilized in the first quarter of 2027.

Guidance

• Raised same-store NOI guidance to be within the range of 3.4% to 3.8%, an increase of 80 basis points at the midpoint compared to the previous guidance range. CRE and Corporate FFO is expected to be within the range of $1.12 per share to $1.16 per share. Total FFO is expected to be $1.35 to $1.40 per share, up about $0.18 per share at the midpoint from the previous guidance. Anticipates a lower same-store NOI growth rate in the third quarter due to strong Q3 results in 2024.

Risks

• Forward-looking statements are subject to a number of risks, uncertainties, assumptions and other factors that could cause actual results and timing of certain events to differ materially from those expressed and implied by the forward-looking statements. These factors include prevailing market conditions, other factors related to the company's REIT status and the company's business, the evaluation of alternatives by the company related to its remaining legacy assets and the risk factors discussed in Part I, Item 1A of the company's most recent Form 10-K under the heading 'Risk Factors', Form 10-Q and other filings with the Securities and Exchange Commission.

Question and Answer

• Q: Gaurav Mehta asked about improvement in the transaction market and where opportunities are seen.

A: Lance said the market is starting to open up, with more opportunities at the top of the funnel across asset classes, and is optimistic about placing additional capital but expects no material earnings impact for 2025.

• Q: Gaurav Mehta asked about comparable leasing spreads of 6.8% being lower than recent quarters.

A: Lance said there was strong lease activity, GLA was slightly lower but ABR was strong, with no major outliers, and remains optimistic about leasing performance.

• Q: Robert Chapman Stevenson asked about below market lease expirations over the next 6 to 12 months.

A: Lance said the growth is ascribed to market fundamentals like retail performance, job growth, strong sales, and foot traffic, with some individual opportunities in the portfolio but not driving the spreads.

• Q: Robert Chapman Stevenson asked about ABR from signed not open leases and how much is expected over the back half of 2025 vs 2026-2027.

A: Lance mentioned build-to-suits like the 30,000 square foot at Maui Business Park won't impact 2025, and the Lowe's build-to-suit likely won't impact 2025, with Clayton stating the SNO pipeline is expected to make its way into NOI and FFO over the next 12 to 18 months.

• Q: Robert Chapman Stevenson asked about the Sam's Club TI and its impact on second half AFFO.

A: Clayton said the $20 million TI is expected in the third quarter, not considered recurring maintenance CapEx, and thus not factored into AFFO calculation.

• Q: Mitch Germain asked about legacy issues continuing and the competitive landscape in investment sales.

A: Lance said the Mahi Pono termination was a good outcome, the balance sheet is fully reserved for legacy obligations, there are active capital looking for opportunities in Hawaii real estate, and the company's platform and balance sheet strength give advantages in smaller deals, local knowledge in larger deals, and less competition in the middle range.

• Q: Alexander Goldfarb asked about excluding the Sam's Club TI from AFFO.

A: Clayton said it was deemed nonrecurring in nature for AFFO computation, and Lance acknowledged the business perspective but stated that's how they view it.

• Q: Unidentified Analyst asked about debt paydown and target debt-to-EBITDA ratio.

A: Clayton said the target leverage range is 5x to 6x net debt to adjusted EBITDA, currently at 3.3x, and the goal is to deploy cash proceeds for growth capital purposes, looking at the totality of opportunities for debt paydown.

• Q: Unidentified Analyst asked about doubt on tenant health.

A: Kit Millan said they are paying close attention to tenant health, with no signs of slowing as parking lots are full, customer traffic up, strong tenant sales, and consistent collections.

• Q: Unidentified Analyst asked about tariffs impact on construction costs.

A: Lance said inflation has impacted construction costs, mitigated through forward pricing materials, conservative underwriting, larger contingency, and speed to execution.