Alexander & Baldwin, Inc. is a multi-industry corporation with most of its operations centered in Hawaii. It was founded in 1870 and incorporated in 1900. Ocean transportation operations, related shoreside operations in Hawaii, and intermodal and truck brokerage and logistics services are conducted by a wholly-owned subsidiary, Matson Navigation Company, Inc. (“Matson”) and two Matson subsidiaries. Real estate activities are conducted by A&B Properties, Inc. and agribusiness operations are conducted by a division and certain other subsidiaries of A&B.
Alexander & Baldwin, Inc.
Overview of Real Estate Leasing Segment
The real estate leasing portfolio comprised approximately 7 percent and 24 percent of the Company’s consolidated revenue and operating profit (before subtracting amounts treated as discontinued operations), respectively, for the six months ended June 30, 2007.
The Company’s real estate leasing portfolio consists of improved properties in Hawaii and on the U.S. mainland, as well as unimproved properties in Hawaii. A brief description of each follows:
Hawaii Improved Properties - A&B’s Hawaii improved property portfolio consists of retail, office and industrial properties, comprising approximately 1.5 million square feet of leasable space as of June 30, 2007. The majority of the commercial properties are located on Maui and Oahu, with smaller holdings in the area of Port Allen, on the island of Kauai.
Hawaii Unimproved Properties – As of December 31, 2006, the Company owned approximately 89,440 acres of land, consisting of 89,195 acres in Hawaii and approximately 245 acres on the U.S. mainland. The vast majority of the lands held by the Company, approximately 88,590 acres in Hawaii, are designated for conservation or agricultural uses. The Company leases and licenses a relatively small portion of its lands to third parties. These leases and licenses consist of a wide variety of ground leases and licenses of urban and agricultural lands, ranging from ground leases covering the fee interest in land underlying commercial properties, to farming and pasture leases, to licenses of remnant parcels and easement areas, to sand and aggregate quarry leases whose lease or royalty payments are based on extraction rates. Accordingly, both period-to-period results and rental revenue per land unit may be highly variable.
Mainland Improved Properties - On the U.S. mainland, A&B owns a portfolio of improved properties acquired primarily by way of tax-deferred exchanges under Internal Revenue Code Section 1031. The Company’s mainland portfolio consists of retail, office and industrial properties, comprising approximately 3.9 million square feet of leasable space as of June 30, 2007.
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Real Estate Leasing Segment Strategy
A core business objective of the Real Estate Leasing Segment is to generate the highest shareholder returns possible from its portfolio of income properties in Hawaii and on the U.S. mainland. This is accomplished through an integrated program of maximizing property values through effective property and asset management, monetizing those values through the selective sale of properties at or near peak values, and recycling the proceeds from those sales into tax-advantaged 1031 acquisitions of properties with higher growth potential.
Leasing Operations – The Company’s property and asset management program focuses on maximizing the cash flows and market value of its leased portfolio by strategically positioning each property with competitive lease rates and synergistic tenant mixes, while minimizing operating and tenant improvement costs.
Leasing Dispositions – The Company regularly sells selected assets from its portfolio when it believes the value of that asset has been maximized and the full fair market value for that asset can be realized. This allows the Company to capture embedded value created by its property and asset management efforts, and provides investment capital for redeployment through tax-deferred 1031 exchanges into other asset classes or locations where it believes higher returns may be realized. It is important to note, however, that the gains from these dispositions are reported as income within the Real Estate Sales segment and not the Real Estate Leasing segment.
Leasing Acquisitions – The Company recycles proceeds from the sale of properties by acquiring replacement properties through tax-deferred exchanges under section 1031 of the Internal Revenue Code. The use of 1031 exchange transactions allows the Company to redeploy, on an “interest-free” basis, the taxes that would otherwise be paid on the sale, resulting in higher after-tax internal rates of return on the investment in the replacement property. The Company also seeks to further enhance investment returns by acquiring properties in strengthening, secondary markets bearing higher return characteristics. Recently the Company has found a number of such opportunities in the Western United States, but continues to evaluate property acquisitions in Hawaii.
Nearly all of the Company’s mainland income properties have been acquired through 1031 exchanges, and while the Company expects that future acquisitions will be acquired predominantly with 1031 exchange proceeds, the Company is not limited to the use of 1031 proceeds in acquiring properties to enhance and expand its lease portfolio.
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Real Estate Leasing Segment Highlights and Discussion – First Half 2007
Real estate leasing results during the first half of 2007 showed continued steady performance, with occupancies at or near historic levels. Occupancies for the first half of 2007 were 98 percent and 97 percent for the Hawaii and U.S. mainland improved portfolio, respectively.
Real estate leasing revenue and operating profit for the first half of 2007, before subtracting amounts treated as discontinued operations, were $55.2 million and $27.3 million, or 13 percent and 12 percent higher, respectively, than the amounts reported for the first half of 2006. These increases were due principally to the contribution from four new properties acquired during or subsequent to the first half of 2006, higher common area maintenance recoveries, and higher leasing activity at existing properties. These increases were partially offset by the sale of three properties during or subsequent to the first half of 2006; higher operating costs, including depreciation, increases in real property and other non-income related taxes, and utility costs; and higher interest income on tax deferred exchange proceeds in 2006.
The Company continues to seek attractive investment opportunities to expand its leasing portfolio. However, the high pricing of properties has limited the available supply of attractive opportunities that meet the Company’s targeted return benchmarks. During the first half of 2007, the Company purchased Royal MacArthur, a 43,600 square-foot retail center in Las Colinas, Texas for $13.5 million. There were no sales of leased properties in the first half of 2007; however, in the second quarter of 2007, the Company executed a contract to sell a four-acre parcel currently ground leased to a retail tenant in Honolulu. The closing of this transaction, and the associated recognition of revenue and operating profit, is expected to occur in the third or fourth quarter of 2007. Separately, the Company also executed a contract in the second quarter to sell two retail centers on Maui that are expected to close in the fourth quarter of 2007 or early 2008.
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Alexander & Baldwin, Inc.
Real Estate Leasing Segment Portfolio Overview
Property Detail - Hawaii Improved Properties
As of June 30, 2007
Property | Island | Gross Leasable Area (sq. ft.) | Leased1 1st Half 2007 |
| | | |
Industrial: | | | |
P&L Warehouse | Maui | 104,100 | 100% |
Hawaii Business Park | Oahu | 85,200 | 100% |
Wakea Business Center II | Maui | 61,500 | 100% |
Port Allen Center I | Kauai | 28,000 | 96% |
Port Allen Steel Warehouse | Kauai | 22,800 | 100% |
Port Allen Center II | Kauai | 13,600 | 74% |
Subtotal – Industrial | | 315,200 | 99% |
| | | |
Office: | | | |
Pacific Guardian Complex | Oahu | 143,200 | 99% |
Kahului Office Building | Maui | 56,700 | 97% |
Kahului Office Center | Maui | 32,800 | 100% |
Stangenwald Building | Oahu | 27,100 | 98% |
Judd Building | Oahu | 20,200 | 100% |
Lono Center | Maui | 13,100 | 100% |
Old Kahului Railroad Building | Maui | 6,900 | 92% |
Subtotal – Office | | 300,000 | 99% |
| | | |
Retail: | | | |
Maui Mall | Maui | 191,300 | 98% |
Mililani Shopping Center | Oahu | 180,300 | 100% |
Kaneohe Bay Shopping Center | Oahu | 124,500 | 100% |
Kunia Shopping Center | Oahu | 60,600 | 98% |
Kahului Shopping Center | Maui | 56,600 | 98% |
Napili Plaza | Maui | 45,200 | 86% |
Fairway Shops at Kaanapali | Maui | 35,000 | 90% |
Apex Building | Maui | 28,100 | 100% |
Port Allen Marina Center | Kauai | 23,500 | 84% |
Old Kahului Store | Maui | 17,000 | 100% |
Acura Buildings | Maui | 16,600 | 100% |
Kele Center | Maui | 14,600 | 100% |
BMW Building | Maui | 6,100 | 100% |
Subtotal – Retail | | 799,400 | 98% |
| | | |
Residential: | | | |
Kahului Town Terrace | Maui | 56,700 | 96% |
| | | |
TOTAL HAWAII | | 1,471,300 | 98% |
1 Represents the average percentage of space leased during the period. Space is considered leased when a tenancy agreement has been fully executed or the space is revenue-producing.
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Alexander & Baldwin, Inc.
Real Estate Leasing Segment Portfolio Overview
Property Detail - Mainland Improved Properties
As of June 30, 2007
Property | Location | Gross Leasable Area (sq. ft.) | Leased1 1st Half 2007 |
| | | |
Industrial: | | | |
Ontario Distribution Center | Ontario, CA | 898,400 | 100% |
Sparks Business Center | Sparks, NV | 396,100 | 100% |
Centennial Plaza | Salt Lake City, UT | 244,000 | 100% |
Valley Freeway Corporate Park | Kent, WA | 228,200 | 88% |
San Jose Avenue Warehouse | City of Industry, CA | 126,000 | 100% |
Vista Controls Building | Valencia, CA | 51,100 | 100% |
Subtotal – Industrial | | 1,943,800 | 99% |
| | | |
Office: | | | |
1800 and 1820 Preston Park | Plano, TX | 198,500 | 92% |
Ninigret Office Park X and XI | Salt Lake City, UT | 185,200 | 100% |
San Pedro Plaza | San Antonio, TX | 163,700 | 99% |
2868 Prospect Park | Sacramento, CA | 162,900 | 100% |
Concorde Commerce Center | Phoenix, AZ | 138,500 | 76% |
Deer Valley Financial Center | Phoenix, AZ | 126,600 | 96% |
Southbank II | Phoenix, AZ | 120,800 | 100% |
2450 Venture Oaks | Sacramento, CA | 100,000 | 100% |
2890 Gateway Oaks | Sacramento, CA | 58,700 | 86% |
Subtotal – Office | | 1,254,900 | 95% |
| | | |
Retail: | | | |
Boardwalk Shopping Center | Round Rock, TX | 184,600 | 97% |
Arbor Park Shopping Center | San Antonio, TX | 139,500 | 99% |
Village at Indian Wells | Indian Wells, CA | 104,600 | 100% |
Broadlands Marketplace | Broomfield, CO | 97,900 | 90% |
Marina Shores Shopping Center | Long Beach, CA | 67,700 | 98% |
Wilshire Center | Greeley, CO | 46,500 | 88% |
Royal MacArthur Center | Dallas TX | 43,600 | 100% |
San Pedro Retail | San Antonio, TX | 8,100 | 100% |
Subtotal – Retail | | 692,500 | 97% |
| | | |
TOTAL MAINLAND | | 3,891,200 | 97% |
| | | |
1 Represents the average percentage of space leased during the period. Space is considered leased when a tenancy agreement has been fully executed or the space is revenue-producing.
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Alexander & Baldwin, Inc.
Real Estate Leasing Segment Portfolio Overview
Property Summary – Comparable Occupancy Data by Geographic Region
As of June 30, 2007 and 2006
| Gross Leasable Area | Leased1 | Gross Leasable Area | Leased1 |
| June 30, 2007 | 1st Half 2007 | June 30, 2006 | 1st Half 2006 |
| | | | |
Hawaii – Improved | 1,471,300 | 98% | 1,541,700 | 98% |
Mainland – Improved | 3,891,200 | 97% | 3,708,200 | 97% |
TOTAL | 5,362,500 | 97% | 5,249,900 | 97% |
1 Represents the average percentage of space leased during the period. Space is considered leased when a tenancy agreement has been fully executed or the space is revenue-producing.
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Alexander & Baldwin, Inc.
Real Estate Leasing Segment
Real Estate Leasing Net Operating Income (“NOI”) 1
| Six Months Ended June 30, 2007 (in millions) | | | | | |
| | Total NOI | | | | Percentage of Total | | | Comparable NOI2 | | | | Percentage of Total | | | | Book Basis3 | |
Hawaii – Improved | $ | 13.1 | | | | 35 | % | | $ | 12.7 | | | | 40 | % | | $ | 159.9 | |
Hawaii – Unimproved | | 6.3 | | | | 17 | % | | | 4.6 | | | | 15 | % | | | 40.0 | |
Mainland – Improved | | 18.2 | | | | 48 | % | | | 14.4 | | | | 45 | % | | | 337.8 | |
TOTAL | $ | 37.6 | | | | 100 | % | | $ | 31.7 | | | | 100 | % | | $ | 537.7 | |
| Six Months Ended June 30, 2006 (in millions) | |
| | Total NOI | | | | Percentage of Total | | | Comparable NOI2 | | | | Percentage of Total | |
Hawaii – Improved | $ | 12.8 | | | | 38 | % | | $ | 11.7 | | | | 39 | % |
Hawaii – Unimproved | | 4.9 | | | | 15 | % | | | 4.9 | | | | 16 | % |
Mainland – Improved | | 15.6 | | | | 47 | % | | | 13.5 | | | | 45 | % |
TOTAL | $ | 33.3 | | | | 100 | % | | $ | 30.1 | | | | 100 | % |
1 | Net operating income (“NOI”) is a non-GAAP measure derived from real estate revenues (determined in accordance with GAAP) minus property operating expenses (determined in accordance with GAAP). NOI does not have any standardized meaning prescribed by GAAP, and therefore, may differ from definitions of NOI used by other companies. NOI should not be considered as an alternative to net income (determined in accordance with GAAP) as an indicator of the Company’s financial performance, or as an alternative to cash flow from operating activities as a measure of the Company’s liquidity. NOI is commonly used as a measure of operating performance because it is an indicator of the return on property investment, and provides a method of comparing property performance over time. NOI excludes general and administrative expenses, interest income, interest expense, depreciation and amortization, and gains on sales of interests in real estate. The Company believes that the Real Estate Leasing segment’s operating profit after discontinued operations is the most directly comparable GAAP measurement to NOI. A required reconciliation of Real Estate Leasing operating profit to Real Estate Leasing Segment Comparable NOI is as follows: |
Required Reconciliation of Real Estate Leasing Operating Profit to Real Estate Leasing Comparable NOI (non-GAAP) (in millions) | | Six Months Ended June 30, 2007 | | | Six Months Ended June 30, 2006 | |
| | | | | | | | |
Real Estate Leasing Segment Operating Profit before Discontinued Operations | | $ | 27.3 | | | $ | 24.3 | |
Less amounts reported in discontinued operations | | | (2.1 | ) | | | (3.8 | ) |
Real Estate Leasing Segment Operating Profit after Subtracting Discontinued Operations | | | 25.2 | | | | 20.5 | |
Adjustments: | | | | | | | | |
Depreciation and amortization | | | 7.8 | | | | 7.1 | |
General and administrative expense | | | 2.3 | | | | 1.8 | |
Discontinued operations | | | 2.1 | | | | 3.8 | |
Bad debt expense | | | 0.2 | | | | 0.1 | |
Real Estate Leasing Total NOI | | | 37.6 | | | | 33.3 | |
Acquisition Adjustments | | | (4.1 | ) | | | (0.9 | ) |
Disposition Adjustments/Other | | | (1.8 | ) | | | (2.3 | ) |
Real Estate Leasing Segment Comparable NOI3 | | $ | 31.7 | | | $ | 30.1 | |
2 | “Comparable NOI” is defined as including only NOI related to properties that were operated throughout the duration of both periods under comparison. As a result, it excludes properties acquired or disposed of during or subsequent to the first half of 2006 that were not operated throughout the entire duration of both periods under comparison. In addition, “comparable NOI” excludes other non-recurring items. For the six-month period ended June 30, 2007, Comparable NOI for Hawaii-unimproved excludes $1.7 million of non-recurring items. |
3 | Represents the book basis of properties owned as of June 30, 2007. The tax bases of certain properties may be significantly lower than their fair values (and book bases) due to the deferral of gains allowed under section 1031/1033 of the Internal Revenue Code. Additionally, a large portion of the Company’s undeveloped lands on Maui and Kauai, excluding the Company’s Wailea holdings, has a cost basis of roughly $150 per acre, which may be significantly less than fair value. |
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Alexander & Baldwin, Inc.
Real Estate Leasing Segment
Year-to-Date Improved Property Portfolio Acquisition/Disposition Summary as of June 30, 2007
(Dollars in millions)
There were no improved property dispositions during the first half of 2007. Property acquisitions during the first half of 2007 were as follows:
Property acquired January 1, 2007 through June 30, 2007 | Acquisition Date | Acquisition Price | Gross Leasable Area (sq. feet) | Leased Percentage at Acquisition |
| | | | |
Royal MacArthur Center | 3/1/07 | $13.5 | 43,600 | 100% |
Alexander & Baldwin, Inc.
Real Estate Leasing Segment
Full-Year 2006 Improved Property Portfolio Acquisition/Disposition Summary
(Dollars in millions)
Property acquired January 1, 2006 through December 31, 2006 | Acquisition Date | Acquisition Price | Gross Leasable Area (sq. feet) | Leased Percentage at Acquisition |
Ninigret Office Park | 1/26/06 | $21.3 | 185,200 | 100% |
Gateway Oaks | 6/14/06 | $12.3 | 58,700 | 82% |
Preston Park | 6/30/06 | $24.3 | 198,500 | 92% |
Acura Buildings (1) | (1) | (1) | 16,600 | 100% |
Concorde Commerce Center | 12/22/06 | $24.7 | 138,500 | 93% |
Property disposed of January 1, 2006 through December 31, 2006 | Disposition Date | Disposition Price | Gross Leasable Area (sq. feet) | Leased Percentage at Disposition |
One Main Plaza | 3/3/06 | $16.0 | 82,000 | 83% |
Carefree Market Place | 6/28/06 | (2) | 85,000 | 91% |
Mesa South Shopping Center | 6/28/06 | (2) | 133,700 | 95% |
Lanihau Shopping Center | 12/05/06 | $28.0 | 88,200 | 100% |
(1) | The Acura Buildings are newly constructed facilities that are located within the Triangle Square property located in Kahului, Maui. The new facilities consist of an Acura Dealership facility and an Auto Value Center. The Company completed construction of the Dealership building on October 15, 2006, at a net cost of $1.3 million and the Auto Value Center on November 15, 2006, at a net cost of $0.9 million. |
(2) | Carefree Market Place and Mesa South Shopping Center were sold together for an aggregate disposition price of $35.6 million. |
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Alexander & Baldwin, Inc.
Real Estate Leasing Segment
Lease Expirations of Improved Properties1
As of June 30, 2007
Year of expiration | Gross Leasable Area (sq. feet) of Expiring Leases | Percentage of Gross Leased Area |
| | |
2007 | 234,000 | 4.7% |
2008 | 554,000 | 11.0% |
2009 | 1,611,000 | 32.1% |
2010 | 686,000 | 13.7% |
2011 | 729,000 | 14.6% |
2012 | 256,000 | 5.1% |
2013 | 302,000 | 6.0% |
2014 | 326,000 | 6.5% |
2015 | 46,000 | 0.9% |
2016 | 51,000 | 1.0% |
2017 | 42,000 | 0.9% |
Thereafter | 177,000 | 3.5% |
Total | 5,014,000 | 100.0% |
1 Excludes leases on a month-to-month tenancy.
Tenants that provide more than 10% of annualized straight-line lease income as of June 30, 2007: None
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