The following analysis of the consolidated financial condition and results of operations ofAlexander & 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 endedDecember 31, 2020 ("2020 Form 10-K") filed with theU.S. Securities and Exchange Commission ("SEC"). Throughout this quarterly report on Form 10-Q, references to "we," "our," "us" and "our Company" refer toAlexander & 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 by the Company's joint venture related to the development of Kukui'ula, and the risk factors discussed in the Company's most recent Form 10-K, Form 10-Q and other filings with theSEC . 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 endedSeptember 30, 2021 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 endedSeptember 30, 2021 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 withU.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 22 -------------------------------------------------------------------------------- external sources of capital, as compared to the end of preceding fiscal year endedDecember 31, 2020 . 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 endedDecember 31, 2020 , 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. •Materials & Construction ("M&C") - This segment operates as one of Hawai'i's largest asphalt paving contractor 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 onMaui , 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, the Company has pursued a strategy to accelerate the monetization of non-core assets and businesses, primarily included in the Land Operations and Materials & Construction segments, in an overall effort to simplify the Company and focus its resources and capital on commercial real estate operations. As the Company evaluates strategic alternatives for the eventual monetization of some or all of its Materials & Construction businesses, any potential transaction related to the Materials & Constructions businesses, either together as a group or individually, would be dependent upon a number of external factors that may be beyond the Company's control, including, among other factors, market conditions, industry trends and the interest of third parties. There can be no assurance that the exploration of strategic alternatives will result in any agreements or transactions, or that, if completed, any agreements or transactions will be successful or on attractive terms. Accordingly, there can be no assurance that any of the options evaluated will be pursued or completed. Further, there can be no assurance that the outcome of the evaluation of strategic alternatives or 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 its unconsolidated equity method investments in joint venture development projects at Kukui'ula, the Company continues its evaluation of opportunities to monetize these investments, as well as in conjunction with the joint venture partners, and has entered into an agreement with a third party regarding the sale of certain assets related to these projects, which is expected to close in the fourth quarter. Any potential transaction related to either the investments or the assets within the joint venture projects would be dependent upon a number of external factors that may be beyond the Company's and/or joint venture projects' control, including, among other factors, market conditions, industry trends and the interest of third parties in the Kukui'ula development projects. In addition, the pending sale of certain project assets is subject to a number of closing conditions. Accordingly, there can be no assurance that any of the options evaluated, including through the pending transaction referred to above will be completed. Further, there can be no assurance that the outcome of the evaluation of strategic alternatives or any potential transaction will result in the Company being able to maintain the carrying value of the Kukui'ula joint venture development projects. Termination of certain employee benefit plans OnFebruary 23, 2021 , the Company's Board of Directors approved a plan to effect the termination of the A&B Retirement Plan for Salaried Employees ofAlexander & Baldwin, LLC and the Pension Plan for Employees of A&B Agricultural Companies (collectively, the "Defined Benefit Plans"), which became effective onMay 31, 2021 . As a result, the Company has proceeded with the following steps in connection with the termination of the tax-qualified Defined Benefit Plans: •InApril 2021 , the Company amended the plan agreements of the Defined Benefit Plans in order to provide for a limited lump-sum window for eligible participants; •The Company filed the Application for Determination Upon Termination with the Internal Revenue Service ("IRS") inApril 2021 , and the Company received a favorable determination notice for federal tax purposes from theIRS inJuly 2021 ; •The Company is preparing the appropriate notices and documents to file related to the termination of the Defined Benefit Plans and wind-down with thePension Benefit Guaranty Corporation (the "PBGC"), theU.S. Department of Labor , the trustee and any other appropriate parties. Except for retirees currently receiving payments under the Defined Benefit Plans, participants will have the choice of receiving a single lump sum payment or an annuity from a highly-rated insurance company that will pay and administer future benefit payments. The amount of any lump sum payment will equal the actuarial-equivalent present value of the participant's accrued benefit under the applicable pension plan as of the distribution date. Annuity payments to current retirees will continue under their current elections, but will be administered by the selected insurance company. The Company will recognize 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 have 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. In 2022, upon receiving approval from theIRS and the PBGC and following completion of the limited lump-sum offering, the Company expects to make an additional cash contribution in order to fully fund the Defined Benefit Plans on a plan termination basis, followed by the purchase of annuity contracts to transfer its remaining liabilities under the Defined Benefit Plans. These additional cash contributions are expected to range between$32 million and$47 million . However, the actual amount of this cash contribution requirement will depend upon the nature and timing of participant settlements, interest rates, as well as prevailing market conditions. In addition, the Company expects to recognize pre-tax non-cash pension settlement charges in the range of$80 million to$95 million , related to actuarial losses currently in Accumulated other comprehensive income (loss) in the consolidated balance sheets, upon settlement of the obligations of the Defined Benefit Plans. These charges are currently expected to occur in 2022, with the specific timing and final amounts dependent upon completion of the activities enumerated above. Coronavirus disease pandemic InDecember 2019 , COVID-19 was first reported inWuhan, China , and onMarch 11, 2020 , theWorld Health Organization declared COVID-19 a pandemic. The COVID-19 pandemic has adversely impacted the global economy and contributed to significant volatility in financial markets. Uncertainty from COVID-19 remains, including the effects on the population, as well as the effectiveness of any responses taken by government authorities and the availability, efficacy and public acceptance of vaccinations and therapeutic treatments for COVID-19. During 2020, the pandemic caused a significant disruption to the Hawai'i economy and the Company's tenants, which in turn significantly impacted the Company's business. 24 -------------------------------------------------------------------------------- As a result of financial hardships from the COVID-19 pandemic, certain tenants have sought rent relief from the Company, which has been provided in the form of rent deferrals (varying in terms of applicable months covered and the repayment period) or other relief modifications, including modifying the nature of rent payments from fixed to variable (i.e., variable based on a percentage of the tenant's sales, typically subject to a minimum "floor" amount) or, in some cases, payment forgiveness. During the three and nine months endedSeptember 30, 2021 and 2020, the reductions (or increases) to revenue that the Company has recorded as result of other relief modifications and other adjustments, as well as those recorded based on its assessments of uncollectable tenant billings were as follows (in millions): Three Months Ended September Nine Months Ended September 30, 30, 2021 2020 2021 2020 Other relief modifications and other$ 0.5 $ 2.7 $ 5.9 $ 3.5 adjustments1 Tenant collectability assessments and allowance for doubtful accounts Impact to billed accounts receivable$ 0.1 $ 4.0 $ 0.2 $ 8.4 Impact to straight-line lease receivables - 1.6 0.2 3.8 Total revenue reductions (increases) - tenant 0.1 5.6 0.4 12.2 collectability assessments Provision for allowance for doubtful accounts2 (0.2) 0.7 (1.2) 3.4 Total revenue reductions (increases) for$ (0.1) $ 6.3 $ (0.8) $ 15.6 assessments and provisions
Total revenue reductions (increases) related
9.0$ 5.1 $ 19.1 to adjustments, assessments and provisions Total revenue reductions (increases) impacting$ 0.4 $ 7.4 $ 4.9 $ 15.3 billed accounts receivable only3
1 Primarily related to COVID-19, but may include other adjustments (e.g., adjustments due to tenant bankruptcies). 2 Related to other impacted operating lease receivables. 3 Excludes the impact to unbilled straight-line lease receivables.
During the nine months endedSeptember 30, 2021 , government-mandated restrictions in response to the pandemic, including travel restrictions, quarantine requirements, prohibitions on public gatherings and stay-at-home orders have eased relative to those in place during 2020, which resulted in increased tourism in Hawai'i. As the local economy has recovered in 2021, the Company experienced higher levels of rent collections and lower net bad debt and cash basis charges for uncollectible rent in its commercial real estate operations for the three and nine months endedSeptember 30, 2021 in relation to the prior year comparable periods. As ofOctober 15, 2021 , all of the Company's properties within its CRE portfolio remain open and substantially all of its existing tenants remain open and operating in some capacity. Further, as ofOctober 15, 2021 , the CRE portfolio tenants have paid approximately 94% of Q3 2021 contractual rent amounts owed (which includes base rents and recoveries from tenants) and approximately 95% of their year-to-date contractual rent. Despite the improved financial results during the nine months endedSeptember 30, 2021 , the Company's ongoing financial performance, including future rent collections, may be negatively impacted by any surges in COVID-19 and the discovery of new COVID-19 variants or delays in the administration or effectiveness of COVID-19 vaccines. The ultimate extent the recovery will have on the Company and its operations will largely depend on these future developments, including federal, state, and local governments' responses to additional outbreaks and any implementation of additional restrictions on tenant businesses as a result thereof. Should restrictions be reinstated by various levels of government in their efforts to contain any outbreaks, there is uncertainty and unpredictability as to the severity of economic disruption and resulting impact on economic growth/recession, the impact on travel and tourism behavior and the impact on consumer confidence and spending. The Company's financial results for the nine months endedSeptember 30, 2021 were significantly impacted by the COVID-19 pandemic. As such, the comparability of the Company's results of operations for the nine months endedSeptember 30, 2021 to future periods may be limited. 25
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