ALEXANDER & BALDWIN, INC. 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, 2019 ("2019 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 that involve a number of risks and uncertainties that could cause actual results to differ materially from those contemplated by the relevant forward-looking statements. These forward-looking statements include, but are not limited to, statements regarding possible or assumed future results of operations, business strategies, growth opportunities and competitive positions, as well as the rapidly changing challenges with, and the Company's plans and responses to, the recent novel coronavirus ("COVID-19") pandemic 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 Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is a supplement to the accompanying condensed consolidated financial statements and provides additional information about the Company's business, recent developments, financial condition, liquidity and capital resources, cash flows, results of operations and how certain accounting principles, policies and estimates affect the Company's 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 we believe 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, 2020 . •Analysis of Operating Revenue and Profit by Segment: This section provides an analysis of the Company's results of operations by business segment. •Liquidity and Capital Resources: This section provides a discussion of the Company's financial condition and an analysis of the Company's cash flows for the nine months endedSeptember 30, 2020 and 2019, as well as a discussion of the Company's ability to fund its future commitments and ongoing operating activities through internal and external sources of capital. •Other Matters: This section identifies and summarizes other matters to be discussed in Item 2 of this Form 10-Q including commitments, contingencies and off-balance sheet arrangements; accounting policies that significantly impact the Company's reported results of operations and financial condition and require significant judgment or estimates on the part of management in their application; 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. 27 -------------------------------------------------------------------------------- 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") functions as a vertically integrated real estate investment company with core competencies in investments and acquisitions (i.e., raising capital, 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); 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); and asset management (i.e., maintaining, upgrading and enhancing its portfolio of high-quality improved properties). The segment'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 citizens. Through its core competencies and with its experience and relationships in Hawai'i, the Company seeks to create special places and experiences for Hawai'i residents and attempts to provide venues and opportunities for tenants to thrive. Income from this segment is principally generated by owning, operating and leasing real estate assets. •Land Operations involves the monetization and management of the Company's landholdings and land-related assets, pursuant to which primary activities of the segment include the following: planning and entitlement of real property to facilitate sales; selling undeveloped land; and other operationally-diverse legacy business activities to employ its landholdings at their highest and best use. Financial results from this segment are principally derived from real estate development sales, land parcel sales, income/loss from real estate joint ventures, renewable energy, trucking services and other legacy business activities. •Materials & Construction ("M&C") operates as Hawai'i's largest asphalt paving contractor and is one of the state's largest natural materials and infrastructure construction companies. Such activities are primarily conducted through the Company's wholly-owned subsidiary,Grace Pacific LLC ("Grace Pacific"), a materials and construction company in Hawai'i. Simplification strategy As a result of its conversion to a REIT and consequent de-emphasis of non-REIT operating businesses, the Company has established a strategy to simplify its business, which includes ongoing efforts to accelerate the monetization of land and related assets and also includes evaluating strategic options for the eventual monetization of some or all of its Materials & Construction businesses. While the Company continues to evaluate options for the Grace Pacific paving business, at the close of the quarter endedJune 30, 2020 , the Company consummated the sale of one of Grace Pacific's subsidiary operations,GP/RM Prestress, LLC ("GPRM"), a provider of precast/prestressed concrete products and services (which the Company historically consolidated through the disposal date due to holding a controlling financial interest through its majority voting interests). In connection with this sale and disposal, the Company recognized a write-down of$5.6 million (based on fair value less cost to sell) related to GPRM which was included in Impairment of assets related to Materials & Construction in the condensed consolidated statements of operations in the nine months endedSeptember 30, 2020 . Related to the Land Operations segment, during the quarter endedSeptember 30, 2020 , the Company executed a purchase and sale agreement and consummated the sale of assets related to its solar power facility in Port Allen onKauai for purchase consideration (measured at the date of disposal) of approximately$17.1 million . In connection with the sale, the Company recorded a gain on disposal of approximately$8.9 million which was included in Gain (loss) on disposal of non-core assets, net in the condensed consolidated statements of operations. Moreover, 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 or, in conjunction with the joint venture partners, its evaluation of a range of alternative strategies to accelerate the monetization of the land in the joint venture projects. 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. Accordingly, there can be no assurance that any of the options evaluated will be pursued or completed. Further, there can be no 28 -------------------------------------------------------------------------------- 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. Coronavirus outbreak 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 has contributed to significant volatility in financial markets. Considerable uncertainty surrounds COVID-19 and its effects on the population, as well as the effectiveness of any responses taken by government authorities. The pandemic resulted in a significant decline in Hawai'i tourism and increase in business closures during the three and nine months endedSeptember 30, 2020 ; it has significantly impacted the Company's business due largely to the extreme hardships facing its retail tenants. The ultimate extent of the impact that the COVID-19 pandemic 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 duration and spread of the outbreak, the severity of economic disruptions and resulting impact on economic growth/recession, the response by all levels of government in their efforts to contain the outbreak and to mitigate the economic disruptions, the impact on travel and tourism behavior and the impact on consumer confidence and spending, all of which are highly uncertain and cannot be reasonably predicted. As ofOctober 23, 2020 , all of the Company's properties within its CRE portfolio remain open and the Company has estimated that approximately 95% of its tenants (based on total lease billings inOctober 2020 ) remain open and operating in some capacity. Further as of this date, the CRE portfolio tenants have paid approximately 81% of their third quarter billings and 75% of their October lease billings (which includes base rents and recoveries from tenants). Within this population, the Company's grocer tenants (designated as essential businesses and located within its grocery-anchored neighborhood shopping centers), have paid approximately 90% of their third quarter billings and approximately 85% of their October lease billings. As a result of COVID-19, certain tenants experiencing economic difficulties have sought and may continue to seek current and future rent relief, which may be provided in the form of rent deferrals or other relief modifications that result in changes to fixed contractual lease payments for specific months, among other possible arrangements. During the quarter endedJune 30, 2020 , rent assistance provided to certain tenants primarily consisted of rent deferrals which varied in terms of months covered and the repayment period (e.g., on a short-term basis to be repaid over the second half of 2020 or on a long-term basis to be repaid over 2021). During the quarter endedSeptember 30, 2020 , rent assistance arrangements involved additional deferrals as well as 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. As ofSeptember 30, 2020 , rent assistance arrangements offered and agreed to with tenants as a result of COVID-19 were as follows (dollars in millions): Total impacted lease Number of tenants billings Rent deferrals 199 $ 4.5 Other relief modifications1 81 $ 2.6
1 Certain tenants that were provided other relief modifications may have also been subject to rent deferrals.
Additionally, during the three and nine months ended
29
--------------------------------------------------------------------------------assessments were as follows (in millions):
Three Months Ended Nine Months Ended September
September 30, 2020 30, 2020
Impact to billed accounts receivable $ 4.0 $ 8.4
Impact to straight-line lease receivables 1.6 3.8
Total revenue reductions - tenant collectability 5.6 12.2
assessments
Provision for allowance for doubtful accounts1 0.7 3.4 Total revenue reductions $ 6.3 $ 15.6
1 Related to other impacted operating lease receivables.
The Company's financial results for the three and nine months endedSeptember 30, 2020 have been significantly impacted by the COVID-19 pandemic resulting in reductions in operating profit and its non-GAAP performance measures. As such, the comparability of the Company's results of operations for the three and nine months endedSeptember 30, 2020 to future periods may be significantly impacted by the effects of the outbreak of the COVID-19 pandemic. 30 -------------------------------------------------------------------------------- CONSOLIDATED RESULTS OF OPERATIONS The following analysis of the consolidated financial condition and results of operations ofAlexander & Baldwin, Inc. and its subsidiaries should be read in conjunction with the condensed consolidated financial statements and related notes thereto. Amounts in this narrative are rounded to the nearest tenth of a million, but per-share calculations and percentages were calculated based on thousands. Accordingly, a recalculation of some per-share amounts and percentages, if based on the reported data, may be slightly different than the amounts presented herein. The financial information included in the following table and narrative reflects the presentation of the Company's former sugar operations as discontinued operations for all periods presented. 31 --------------------------------------------------------------------------------
Consolidated - Third quarter of 2020 compared with 2019
Three Months Ended September
(amounts in millions, except percentage data and 30, per share data; unaudited) 2020 2019 $ Change Change Operating revenue$ 77.8 $ 89.1 $ (11.3) (12.7) % Cost of operations (66.6) (71.7) 5.1 (7.1) % Selling, general and administrative (11.7) (13.3) 1.6 (12.0) % Impairment of assets related to Materials & - (49.7) 49.7 NM
Construction
Gain (loss) on disposal of assets, net 9.0 - 9.0 NM Operating income (loss) 8.5 (45.6) 54.1 (118.6) % Income (loss) related to joint ventures 2.2 2.4 (0.2) (8.3) % Interest and other income (expense), net (0.4) 0.6 (1.0) (166.7) % Interest expense (7.1) (8.2) 1.1 (13.4) % Income (loss) from continuing operations 3.2 (50.8) 54.0 (106.3) % Discontinued operations (net of income taxes) - (0.1) 0.1 (100.0) % Net income (loss) 3.2 (50.9) 54.1 (106.3) % (Income) loss attributable to noncontrolling (0.2) 1.1 (1.3) (118.2) %
interest
Net income (loss) attributable to A&B$ 3.0 $ (49.8) $ 52.8 (106.0) % Basic Earnings (Loss) Per Share of Common Stock: Basic earnings (loss) per share - continuing$ 0.04 $ (0.69) $ 0.73 (105.8) %
operations
Basic earnings (loss) per share - discontinued - - - NM
operations
Net income (loss) available to A&B shareholders
(105.8) %
Diluted Earnings (Loss) Per Share of Common
Stock:
Diluted earnings (loss) per share - continuing $ 0.04 $ (0.69) $ 0.73 (105.8) %
operations
Diluted earnings (loss) per share - discontinued - - - NM
operations
Net income (loss) available to A&B shareholders
(105.8) %
Continuing operations available to A&B common
(106.0) %
shareholders
Discontinued operations available to A&B common - (0.1) 0.1 (100.0) %
shareholders
Net income (loss) available to A&B common$ 3.0 $ (49.8) $ 52.8 (106.0) %
shareholders
Funds From Operations ("FFO")1 $ 12.5 $ (40.0) $ 52.5 (131.3) %
Core FFO1 $ 11.6 $ 18.5 $ (6.9) (37.3) %
FFO per diluted share $ 0.17 $ (0.55) $ 0.72 (130.9) %
Core FFO per diluted share $ 0.16 $ 0.25 $ (0.09) (36.0) %
Weighted average diluted shares outstanding 72.4 72.6
(FFO/Core FFO)
1 Refer to page 42 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. The causes of material changes in the condensed consolidated statements of operations for the three months endedSeptember 30, 2020 as compared to the three months endedSeptember 30, 2019 are described below or in the Analysis of Operating Revenue and Profit by Segment sections below. Operating revenue for the third quarter endedSeptember 30, 2020 decreased 12.7%, or$11.3 million , to$77.8 million , primarily due to lower revenue from each of theCommercial Real Estate , Land Operations and Materials & Construction segments. 32 -------------------------------------------------------------------------------- Cost of operations for the third quarter endedSeptember 30, 2020 decreased 7.1% or$5.1 million , to$66.6 million , primarily due to decreases in costs incurred by the Materials & Construction andCommercial Real Estate segment partially offset by an increase in costs incurred by the Land Operations segment. Selling, general and administrative for the third quarter endedSeptember 30, 2020 decreased 12.0%, or$1.6 million , to$11.7 million , primarily due to lower corporate overhead costs, as well as lower costs incurred in each of theCommercial Real Estate , Land Operations and Materials & Construction segments. Such cost reductions were due primarily to lower personnel-related costs. Impairment of assets related to Materials & Construction of$49.7 million for the third quarter endedSeptember 30, 2019 was driven by a non-cash impairment to the carrying value of the Company's goodwill balance. There was no such impairment in the current quarter. Gain (loss) on disposal of assets, net of$9.0 million for the third quarter endedSeptember 30, 2019 was due primarily to the gain of$8.9 million resulting from the sale of the Company's solar power facility in Port Allen onKauai . 33
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Consolidated - First nine months of 2020 compared with 2019
(amounts in millions, except percentage data and Nine Months Ended
2020 2019 $ Change Change
Operating revenue $ 232.5 $ 327.6 $ (95.1) (29.0) %
Cost of operations (179.0) (260.0) 81.0 (31.2) %
Selling, general and administrative (34.5) (45.1) 10.6 (23.5) %
Impairment of assets related to Materials & (5.6) (49.7) 44.1 NM
Construction
Gain (loss) on disposal of assets, net 9.5 - 9.5 NM Operating income (loss) 22.9 (27.2) 50.1 (184.2) % Income (loss) related to joint ventures 5.3 6.1 (0.8) (13.1) % Interest and other income (expense), net (0.6) 2.8 (3.4) (121.4) % Interest expense (22.7) (25.4) 2.7 (10.6) % Income tax benefit (expense) - 1.1 (1.1) (100.0) % Income (loss) from continuing operations 4.9 (42.6) 47.5 (111.5) % Discontinued operations (net of income taxes) (0.8) (0.8) - - % Net income (loss) 4.1 (43.4) 47.5 (109.4) % (Income) loss attributable to noncontrolling 0.4 1.8 (1.4) (77.8) %
interest
Net income (loss) attributable to A&B $ 4.5$ (41.6) $ 46.1 (110.8) % Basic Earnings (Loss) Per Share of Common Stock: Basic earnings (loss) per share - continuing$ 0.07 $ (0.57) $ 0.64 (112.3) %
operations
Basic earnings (loss) per share - discontinued (0.01) (0.01) - - %
operations
Net income (loss) available to A&B shareholders
$ (0.58) $ 0.64 (110.3) % Diluted Earnings (Loss) Per Share of Common Stock: Diluted earnings (loss) per share - continuing$ 0.07 $ (0.57) $ 0.64 (112.3) %
operations
Diluted earnings (loss) per share - discontinued (0.01) (0.01) - - %
operations
Net income (loss) available to A&B shareholders
$ (0.58) $ 0.64 (110.3) % Continuing operations available to A&B common $ 5.3$ (40.8) $ 46.1 (113.0) %
shareholders
Discontinued operations available to A&B common (0.8) (0.8) - - %
shareholders
Net income (loss) available to A&B common $ 4.5$ (41.6) $ 46.1 (110.8) %
shareholders
Funds From Operations ("FFO")1 $ 34.3 $ (15.3) $ 49.6 (324.2) %
Core FFO1 $ 43.0 $ 46.6 $ (3.6) (7.7) %
FFO per diluted share $ 0.47 $ - $ (0.21) $ 0.68 (323.8) %
Core FFO per diluted share $ 0.59 $ - $ 0.64 $ (0.05) (7.8) %
Weighted average diluted shares outstanding 72.4 - 72.2
(FFO/Core FFO)
1 Refer to page 42 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.
The causes of material changes in the condensed consolidated statements of
operations for the nine months ended September 30, 2020 as compared to the nine
months ended September 30, 2019 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, 2020 decreased 29.0%,
or $95.1 million , to $232.5 million , primarily due to lower revenue from each of
the Land Operations, Materials & Construction and Commercial Real Estate
segments.
34
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Cost of operations for the nine months ended September 30, 2020 decreased 31.2%
or $81.0 million , to $179.0 million , primarily due to decreases in costs
incurred by each of the Land Operations and Materials & Construction segments
partially offset by an increase in costs incurred by the Commercial Real Estate
segment.
Selling, general and administrative for the nine months ended September 30, 2020
decreased 23.5%, or $10.6 million , to $34.5 million , primarily due to lower
corporate overhead costs, as well as lower costs incurred in the Materials &
Construction and CRE segments. Corporate overhead costs decreased from the prior
period primarily due to lower personnel-related costs.
Impairment of assets related to Materials & Construction of $5.6 million for the
nine months ended September 30, 2020 was related to the sale and disposal of
GPRM at the close of the quarter ended June 30, 2020 as described above.
Gain (loss) on disposal of assets, net of $9.0 million for the nine months ended
September 30, 2020 was primarily driven by the consummation of the sale of
assets related to the Company's solar power facility in Port Allen on Kauai .
35
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ANALYSIS OF OPERATING REVENUE AND PROFIT BY SEGMENT
Commercial Real Estate
Financial Results - Third quarter of 2020 compared with 2019
Operating results for the third quarter ended September 30, 2020 , as compared to
the third quarter ended September 30, 2019 , were as follows:
(amounts in millions, except percentage Three Months Ended September 30,
data and acres; unaudited) 2020 2019 $ Change Change
Commercial Real Estate operating revenue $ 35.7 $ 42.7 $ (7.0) (16.4) %
Commercial Real Estate operating costs and (23.5) (23.8) 0.3 (1.3) %
expenses
Selling, general and administrative (1.7) (2.3) 0.6 (26.1) % Intersegment operating revenue, net1 0.5 0.7 (0.2) (28.6) % Interest and other income (expense), net - 0.7 (0.7) (100.0) % Commercial Real Estate operating profit $ 11.0$ 18.0 $ (7.0) (38.9) %
(loss)
Operating profit (loss) margin 30.8 %
42.2 %
Net Operating Income ("NOI")2 $ 21.6 Same-Store Net Operating Income $ 18.7$ 23.1 ("Same-Store NOI")2 Gross leasable area ("GLA") in square feet 3.9
3.9
("SF") for improved properties at end of
period
Ground leases (acres at end of period) 153.7 154.0
1 Intersegment operating revenue, net forCommercial Real Estate is primarily from the Materials & Construction segment and is eliminated in the consolidated results of operations. 2 Refer to page 42 for a discussion of management's use of a non-GAAP financial measure and the required reconciliation of non-GAAP measures to GAAP measures.Commercial Real Estate operating revenue decreased 16.4% or$7.0 million , to$35.7 million for the third quarter endedSeptember 30, 2020 , as compared to the third quarter endedSeptember 30, 2019 . Operating profit decreased 38.9%, or$7.0 million , to$11.0 million for the third quarter endedSeptember 30, 2020 , as compared to the third quarter endedSeptember 30, 2019 . The decrease in operating revenue and operating profit from the prior year is primarily driven by charges recorded related to the collectability of tenant billings as a result of COVID-19, as well as the impact of other relief modifications and other adjustments provided in the period. During the three months endedSeptember 30, 2020 , the Company recorded reductions in revenue of$5.6 million related to accounts receivable and unbilled straight-line lease receivables for tenants whose future payment of amounts due under leases was no longer considered probable;$2.6 million related to the impact of other relief modifications (e.g., rent forgiveness) and other adjustments provided in the period; and$0.7 million related to the allowance for doubtful accounts for other impacted operating lease receivables. Selling, general and administrative expenses decreased$0.6 million from the prior year's quarter primarily driven by lower personnel cost.Commercial Real Estate interest and other income (expense), net from the prior year was primarily driven by miscellaneous other income recognized in settlements and release of liabilities related to tenants at Ho'okele Shopping Center and The Shops at Kukui'ula. There were no such amounts in the current year. 36 --------------------------------------------------------------------------------
Financial Results - First nine months of 2020 compared with 2019
Operating results for the nine months ended
Nine Months Ended September 30,
(amounts in millions, except percentage 2020 2019 $ Change Change
data; unaudited)
Commercial Real Estate operating revenue $ 113.1 $ 118.6 $ (5.5) (4.6) %
Commercial Real Estate operating costs and (71.8) (64.3) (7.5) 11.7 %
expenses
Selling, general and administrative (5.6) (7.8) 2.2 (28.2) % Intersegment operating revenue, net1 1.9 1.9 - - % Interest and other income (expense), net 0.3 2.2 (1.9) (86.4) % Commercial Real Estate operating profit $ 37.9$ 50.6 $ (12.7) (25.1) %
(loss)
Operating profit (loss) margin 33.5 %
42.7 %
Net Operating Income ("NOI")2 $ 72.7 $ 76.8
Same-Store Net Operating Income $ 62.1 $
69.3
("Same-Store NOI")2
1 Intersegment operating revenue, net forCommercial Real Estate is primarily from the Materials & Construction segment and is eliminated in the consolidated results of operations. 2 Refer to page 42 for a discussion of management's use of a non-GAAP financial measure and the required reconciliation of non-GAAP measures to GAAP measures.Commercial Real Estate operating revenue decreased 4.6% or$5.5 million , to$113.1 million for the nine months endedSeptember 30, 2020 , as compared to the nine months endedSeptember 30, 2019 . Operating profit decreased 25.1%, or$12.7 million , to$37.9 million for the nine months endedSeptember 30, 2020 , as compared to the nine months endedSeptember 30, 2019 . The decrease in each ofCommercial Real Estate operating revenue and operating profit for the nine months endedSeptember 30, 2020 reflects revenue charges of$15.6 million related to the collectability of tenant billings that the Company recorded during the nine months endedSeptember 30, 2020 due primarily to COVID-19, as well as the impact of other relief modifications (e.g., rent forgiveness) and other adjustments provided in the period of$2.6 million (described above). Such impacts were partially offset by the impacts of properties acquired in the first half of 2019 and redevelopment/new development projects commencing operations. Such impacts also drove the increase in operating costs and expenses of 11.7% or$7.5 million to$71.8 million for the nine months endedSeptember 30, 2020 . Selling, general and administrative expenses decreased$2.2 million from the prior year primarily driven by lower personnel cost.Commercial Real Estate interest and other income (expense), net from the prior year was primarily driven by interest income earned on §1031 exchange funds from the sale of agricultural land onMaui in 2018 (which were utilized as of the end of the quarter endedJune 30, 2019 ). Commercial Real Estate Portfolio Acquisitions and Dispositions There were no acquisitions of CRE improved properties or ground lease interests in land during the three or nine months endedSeptember 30, 2020 . During the nine months endedSeptember 30, 2020 , the Company made the following dispositions within one of its commercial real estate properties under a purchase option held and executed by the then-current tenant as follows (dollars in millions): Dispositions Property Location Date Sales Price GLA (SF) (Month/Year) The Collection (Suites 2 & 3) Oahu, HI 2/20 $
6.0 6,100
Leasing Activity During the third quarter endedSeptember 30, 2020 , the Company signed 16 new leases and 54 renewal leases, covering 174,700 square feet of GLA. The 16 new leases comprise 26,400 square feet with an average annual base rent of$21.84 per square foot. Of the signed 16 new leases, three leases with total GLA of 2,900 square feet were considered 37 -------------------------------------------------------------------------------- comparable (i.e., leases executed for units that have been vacated in the previous 12 months for comparable space and comparable lease terms) and, for these three leases, resulted in a 24.5% average base rent decrease over comparable expiring leases. The 54 renewal leases comprise 148,300 square feet with an average annual base rent of$35.17 per square foot. Of the signed 54 renewal leases, 20 were considered comparable and resulted in a 6.8% average base rent increase over comparable expiring leases. Leasing activity summarized by property type for the three and nine months endedSeptember 30, 2020 were as follows: Three Months Ended September 30, 2020 Nine Months Ended September 30, 2020 Leases GLA ABR/SF Rent Spread1 Leases GLA ABR/SF Rent Spread1 Retail 51 114,773$43.11 (3.1)% 102 302,842$33.49 4.2% Industrial 18 58,934$13.86 12.3% 44 225,398$14.30 11.3% Office 1 1,001$26.99 3.0% 9 23,457$35.36 1.6% 1Rent spread is calculated for comparable leases, a subset of the total population of leases for the period presented (described above). Occupancy Occupancy represents the percentage of square footage leased and commenced to gross leasable space at the end of the period reported. The Company's commercial portfolio's occupancy - and occupancy percentage for a category of properties that were owned and operated for the entirety of the prior calendar year ("Same-Store" as more fully described below) - summarized by property type as ofSeptember 30, 2020 and 2019 was as follows: Occupancy As of As of September 30, 2020 September 30, 2019 Percentage Point Change Retail 91.5% 94.9% (3.4) Industrial 97.8% 95.4% 2.4 Office 92.3% 92.6% (0.3) Total Improved Portfolio 93.5% 95.0% (1.5) Same-Store Occupancy As of As of September 30, 2020 September 30, 2019 Percentage Point Change Retail 94.0% 95.1% (1.1) Industrial 97.6% 95.0% 2.6 Office 92.3% 92.6% (0.3) Total Improved Portfolio 95.1% 95.0% 0.1 38
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Land Operations
Financial Results - Third quarter of 2020 compared with 2019
Three Months Ended September 30,
(amounts in millions; unaudited) 2020 2019
Development sales revenue $ 2.0 $ 0.8
Unimproved/other property sales revenue - 1.5
Other operating revenue1 5.7 6.2
Total Land Operations operating revenue 7.7 8.5
Land Operations operating costs and expenses (13.0) (5.9)
Selling, general and administrative (1.2) (1.5)
Gain (loss) on disposal of assets, net 8.9 -
Earnings (loss) from joint ventures 1.3 1.9
Interest and other income (expense), net (0.3) (0.2)
Total Land Operations operating profit (loss) $ 3.4 $ 2.8
1 Other operating revenue includes revenue related to trucking, renewable energy and diversified agriculture. Third quarter of 2020: Land Operations revenue during the quarter endedSeptember 30, 2020 was$7.7 million and included the sales of two development parcels at Maui Business Park II. Revenue also included other operating revenue related to the Company's legacy business activities in the Land Operations segment (e.g., trucking service, renewable energy and diversified agribusiness operations). Land Operations operating costs and expenses of$13.0 million included a charge of$6.7M related to the estimated costs of probable remediation work for reservoirs onKauai . Further, as noted above, during the quarter endedSeptember 30, 2020 , the Company executed a purchase and sale agreement and consummated the sale of assets related to its solar power facility in Port Allen onKauai for purchase consideration (measured at the date of disposal) of approximately$17.1 million . In connection with the sale, the Company recorded a gain on disposal of approximately$8.9 million . Land Operations operating profit of$3.4 million during the third quarter endedSeptember 30, 2020 was due primarily to the impact of these aforementioned events (including margins realized for the sales activity), as well as profits generated from the operations of the segment's other legacy business activities. Third quarter of 2019: Land Operations revenue was$8.5 million and included the impact of sales of 0.5 acres at Maui Business Park II and a 1-acre unimproved parcel on the island ofKauai . Revenue also included other operating revenues related to the Company's trucking service, renewable energy, and diversified agribusiness operations. Land Operations operating profit of$2.8 million during the third quarter endedSeptember 30, 2019 was composed of the margins on the Maui Business Park II development lot andKauai unimproved property, as well as income from the operations of the Company's trucking service and renewable energy business. The Land Operations segment results also included$0.2 million of other net expense primarily consisting of other pension expense. 39 --------------------------------------------------------------------------------
Financial Results - First nine months of 2020 compared with 2019
Nine Months Ended September 30,
(amounts in millions; unaudited) 2020 2019
Development sales revenue $ 7.9 $ 31.2
Unimproved/other property sales revenue 3.7 32.4
Other operating revenue1 17.4 18.8
Total Land Operations operating revenue 29.0 82.4
Land Operations operating costs and expenses (24.0) (68.5)
Selling, general and administrative (3.6) (4.1)
Gain (loss) on disposal of assets, net 8.9 -
Earnings (loss) from joint ventures 3.6 5.3
Interest and other income (expense), net (0.8) 0.8
Total Land Operations operating profit (loss) $
13.1
1 Other operating revenue includes revenue related to trucking, renewable energy and diversified agriculture. First nine months of 2020: Land Operations revenue during the nine months endedSeptember 30, 2020 was$29.0 million and included the sales of development parcels at Maui Business Park II and unimproved land sales on the island ofKauai andMaui . Revenue also included other operating revenue related to the Company's legacy business activities in the Land Operations segment (e.g., trucking service, renewable energy, and diversified agribusiness operations). Land Operations operating profit of$13.1 million during the nine months endedSeptember 30, 2020 was composed of the margins on the sales noted above, as well as profits generated from the operations of the segment's other legacy business activities. Other primary drivers of operating profit during the nine months endedSeptember 30, 2020 included the gain of$8.9 million realized on the sale of the Company's solar power facility in Port Allen during the third quarter, a charge of$6.7M related to the estimated costs of probable remediation work for reservoirs onKauai , as well as the impact of a favorable resolution of certain contingent liabilities during the nine months endedSeptember 30, 2020 related to the sale of agricultural land onMaui in 2018. First nine months of 2019: Land Operations revenue was$82.4 million and included the impact of the sales of 42 acres of land and related improvements in Wailea, the remaining 44 units in Increment 1 of the Kamalani planned community, two Kahala lots, approximately 800 acres of agricultural land onMaui , twoMaui Business Park lots and a 1-acre parcel on the island ofKauai . Revenue also included other operating revenue related to the Company's trucking service, renewable energy, and diversified agribusiness operations. Operating profit for the nine months endedSeptember 30, 2019 of$15.9 million was primarily driven by the sales of land and related improvements mentioned above and also included real estate development joint venture earnings of$5.3 million , a gain of$2.6 million related to the sale of 50% interest in EMI and$2.2 million in pension related expenses Known Trends, Events and Uncertainties The asset class mix of real estate sales in any given year or quarter can be diverse and may include developed residential real estate, developable subdivision lots, undeveloped land, or property sold under threat of condemnation. Further, the timing of property or parcel sales can significantly affect operating results in a given period. Additionally, the operating profit reported in each quarter does not necessarily follow a percentage of sales trend because the cost basis of property sold can differ significantly between transactions. For example, the sale of undeveloped land and vacant parcels in Hawai'i generally provides higher margins than does the sale of developed property, due to the low historical cost basis of the Company's land owned in Hawai'i. As a result, direct year-over-year comparison of the Land Operations segment results may not provide a consistent, measurable indicator of future performance. Further, Land Operations revenue trends, cash flows from the sales of real estate, and the amount of real estate held for sale on the Company's balance sheet do not necessarily indicate future profitability trends for this segment. 40 --------------------------------------------------------------------------------
Materials & Construction Financial Results - Third quarter of 2020 compared with 2019 (dollars in millions, tons delivered in
Three Months Ended September 30,
thousands; unaudited) 2020 2019 $ Change Change
Materials & Construction
Operating revenue $ 34.4 $ 37.9 $ (3.5) (9.2)%
Operating costs and expenses (30.2) (42.0) 11.8 (28.1)%
Selling, general and administrative (3.6) (4.1) 0.5 (12.2)%
Intersegment operating charges, net1 (0.3) (0.6) 0.3 (50.0)%
Impairment of assets - (49.7) 49.7 (100.0)%
Gain (loss) on disposal of assets, net 0.1 - 0.1 NM
Income (loss) related to joint ventures 0.8 0.5 0.3 60.0%
Interest and other income (expense), net 0.1 0.1 - -%
Materials & Construction operating profit $ 1.3 $ (57.9) $ 59.2 (102.2)%
(loss)
Operating margin percentage 3.8 % (152.8) %
Depreciation and amortization $ 2.7 $ 2.7 $ - -%
Aggregate tons delivered 176.6 209.9 (33.3) (15.9)%
Asphalt tons delivered 51.3 68.3 (17.0) (24.9)%
Backlog at period end2 $ 114.0 $ 93.9 $ 20.1 21.4%
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 and Maui
Paving, LLC , a 50-percent-owned unconsolidated affiliate, expect to realize on
contracts awarded. Backlog primarily consists of asphalt paving and, to a lesser
extent, Grace Pacific's consolidated revenue from its construction-and traffic
control-related products. Backlog includes estimated revenue from the remaining
portion of contracts not yet completed, as well as revenue from approved change
orders. The length of time that projects remain in backlog can span from a few
days for a small volume of work to 36 months for large paving contracts and
contracts performed in phases. As of September 30, 2020 and 2019, these amounts
include $57.4 million and $21.0 million of opportunity backlog consisting of
government contracts in which Grace Pacific has been confirmed to be the lowest
bidder and formal communication of the award is perfunctory at the time of this
disclosure. Circumstances outside the Company's control such as procurement or
technical protests may arise that prevent the finalization of such contracts.
Maui Paving's backlog at September 30, 2020 and 2019 was $7.3 million and $7.2
million , respectively.
Materials & Construction revenue was $34.4 million for the third quarter ended
September 30, 2020 , compared to $37.9 million for the third quarter ended
September 30, 2019 . Operating profit was $1.3 million for the third quarter
ended September 30, 2020 , compared to operating loss of $57.9 million for the
third quarter ended September 30, 2019 . During the quarter ended September 30,
2020 , the segment operating profit was primarily driven by improved results from
Grace paving and quarry operations during the third quarter ended September 30,
2020 . During the quarter ended September 30, 2019 , the segment operating loss
was primarily driven by the $49.7 million non-cash impairment to the carrying
value of the Company's goodwill balance.
Backlog at September 30, 2020 was $114.0 million (as a result of the disposal of
GPRM at the end of the second quarter ended June 30, 2020 , this metric excludes
backlog related to GPRM). On a comparable basis (i.e., adjusted to exclude GPRM
backlog of $24.5 million as of September 30, 2019 ), backlog increased from $93.9
million at September 30, 2019 . The increase in backlog was primarily driven by
an increase in the amount of marketed bid opportunities and an improvement in
the rate of bids won by the Company.
Related to the calculation of the backlog metric, as noted in prior periods,
certain agencies award "maintenance contracts" under which a contractor can
secure all paving work within a certain geographic area, but jobs are not
identified in advance (and, therefore, will not meet the requirement for
inclusion in backlog). Under this maintenance contract system, during the nine
months ended September 30, 2020 , the Company also secured significant
maintenance contract awards, including the Oahu State Pavement Preservation
maintenance contracts for the entire island of Oahu . Procedurally, the Company
must receive specific work orders that would meet the definition of backlog and
provide actionable scopes of work, including quantities, location, materials and
project economics.
41
--------------------------------------------------------------------------------Financial Results - First nine months of 2020 compared with 2019 (dollars in millions, tons delivered in
Nine Months Ended September 30,
thousands; unaudited) 2020 2019 $ Change Change
Materials & Construction
Operating revenue $ 90.4 $ 126.6 $ (36.2) (28.6)%
Operating costs and expenses (83.4) (127.2) 43.8 (34.4)%
Selling, general and administrative (12.0) (15.8) 3.8 (24.1)%
Intersegment operating charges, net1 (1.6) (1.5) (0.1) 6.7%
Impairment of assets (5.6) (49.7) 44.1 (88.7)%
Gain (loss) on disposal of assets, net 0.1 - 0.1 NM
Income (loss) related to joint ventures 1.7 0.8 0.9 112.5%
Interest and other income (expense), net 0.3 0.1 0.2 200.0%
Materials & Construction operating profit
(66.7)$ 56.6 (84.9)% (loss) Operating margin percentage (11.2) % (52.7) % Depreciation and amortization $ 8.2$ 8.5 $ (0.3) (3.5)% Aggregate tons delivered 485.0 620.5 (135.5) (21.8)% Asphalt tons delivered 123.7 238.0 (114.3) (48.0)% 1 Intersegment operating charges, net for Materials & Construction is primarily from theCommercial Real Estate segment and are eliminated in the consolidated results of operations. Materials & Construction revenue was$90.4 million for the nine months endedSeptember 30, 2020 , compared to$126.6 million for the nine months endedSeptember 30, 2019 . Operating loss was$10.1 million for the nine months endedSeptember 30, 2020 , compared to operating loss of$66.7 million for the nine months endedSeptember 30, 2019 . During the nine months endedSeptember 30, 2020 , the segment operating loss was primarily driven by the write-down of$5.6 million (based on fair value less cost to sell) related to GPRM that was recorded in advance of the sale and disposal consummated at the close of the quarter endedJune 30, 2020 . During the nine months endedSeptember 30, 2019 , the segment operating loss of$66.7 million was primarily driven by the$49.7 million non-cash impairment to the carrying value of the Company's goodwill balance. The remaining operating loss during the nine months endedSeptember 30, 2020 was due primarily to the impact of low paving volumes due in part to government agency-imposed delays and the impact of COVID-19 (including travel restrictions and resource availability for projects on neighbor islands) during the second quarter; these losses were only partially offset by the operating profit generated in the third quarter (described above). The Company is continuing to monitor the performance of the M&C segment in the context of the COVID-19 pandemic. 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 and goodwill will be recoverable and impairments on such long-lived assets and goodwill may be required. 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 theNational 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. 42 -------------------------------------------------------------------------------- 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 our 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). 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'sCommercial 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 those cash income and expense items that are incurred at the property level, and when compared across periods, can be used to determine trends in earnings of the Company's properties as this measure is not affected by non-cash revenue and expense recognition items, the impact of depreciation and amortization expenses or other gains or losses that relate to the Company's ownership of properties. The Company believes the exclusion of these items from operating profit (loss) is useful because the resulting measure captures the actual revenue generated and actual expenses incurred in operating the Company'sCommercial 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 totalCommercial Real Estate cash-based operating revenues (i.e., billings for which collectability is deemed probable), less direct property-related operating expenses. The calculation of NOI excludes the impact of depreciation and amortization (including amortization of maintenance capital, tenant improvements and leasing commissions); straight-line lease adjustments (including amortization of lease incentives); amortization of favorable/unfavorable lease assets/liabilities; lease termination income; other income and expense, net; selling, general, administrative and other expenses; 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. New developments and redevelopments are generally considered stabilized upon the initial attainment of 90% occupancy. 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). 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. 43 -------------------------------------------------------------------------------- Reconciliations of net income (loss) available to A&B common shareholders to FFO and Core FFO for the three and nine months endedSeptember 30, 2020 and 2019 are as follows (in millions): Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Net income (loss) available to A&B common shareholders $ 3.0$ (49.8) $ 4.5$ (41.6) Depreciation and amortization of commercial real estate properties 9.5 9.8 30.3 26.3 Gain on the disposal of commercial real estate properties, net - - (0.5) - FFO $ 12.5$ (40.0) $ 34.3$ (15.3) Exclude items not related to core business: Land Operations Operating Profit (3.4) (2.8) (13.1) (15.9) Materials & Construction Operating (Profit) Loss (1.3) 57.9 10.1 66.7 Loss from discontinued operations - 0.1 0.8 0.8 Income (loss) attributable to noncontrolling interest 0.2 (1.1) (0.4) (1.8) Income tax expense (benefit) - - - (1.1) Non-core business interest expense 3.6 4.4 11.3 13.2 Core FFO $ 11.6$ 18.5 $ 43.0$ 46.6
Reconciliations of Core FFO starting from CRE operating profit for the three and
nine months ended
Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
CRE Operating Profit $ 11.0 $ 18.0 $ 37.9 $ 50.6
Depreciation and amortization of
commercial real estate properties 9.5 9.8 30.3 26.3
Corporate and other expense (5.4) (5.5) (13.8) (18.1)
Core business interest expense (3.5) (3.8) (11.4) (12.2)
Core FFO $ 11.6 $ 18.5 $ 43.0 $ 46.6
Reconciliations of Commercial Real Estate operating profit to Commercial Real
Estate NOI for the three and nine months ended September 30, 2020 and 2019 are
as follows (in millions):
Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
Commercial Real Estate Operating Profit
(Loss) $ 11.0 $ 18.0 $ 37.9 $ 50.6
Plus: Depreciation and amortization 9.5 9.8 30.3 26.3
Less: Straight-line lease adjustments 0.6 (1.9) 1.1 (4.6)
Less: Favorable/(unfavorable) lease
amortization (0.1) (0.1) (0.8) (1.1)
Plus: Other (income)/expense, net - (0.7) (0.3) (2.2)
Plus: Selling, general, administrative and
other expenses 1.7 2.3 5.6 7.8
Commercial Real Estate NOI 21.6 27.3 72.7 76.7
Less: NOI from acquisitions, dispositions,
and other adjustments (2.9) (4.2) (10.6) (7.4)
Same-Store NOI $ 18.7 $ 23.1 $ 62.1 $ 69.3
44-------------------------------------------------------------------------------- LIQUIDITY AND CAPITAL RESOURCES Overview The Company's primary liquidity needs have historically been to support and fund shareholder distributions; satisfaction of its regular debt service requirements and maturities under its notes payable and other debt arrangements; working capital requirements; and capital expenditures, commercial real estate acquisitions and real estate developments. The Company's principal sources of liquidity have been available cash and cash equivalent balances; cash flows provided by operating activities; and borrowing capacity under its various credit facilities. The Company's operating income (loss) is generated by its subsidiaries. There are no material restrictions on the ability of the Company's wholly owned subsidiaries to pay dividends or make other distributions to the Company. The Company regularly evaluates investment opportunities, including development-for-hold projects, commercial real estate acquisitions, joint venture investments, share repurchases, business acquisitions and other strategic transactions to increase shareholder value. The Company cannot predict whether or when it may make investments or what impact any such transactions could have on the Company's results of operations, cash flows or financial condition. As noted above, the COVID-19 pandemic has adversely impacted global commercial activity; has contributed to significant volatility in financial markets; and both its near-term and long-term economic impacts remain uncertain. As a result, the Company proactively drew$120 million on its credit facility at the end of the first quarter endedMarch 31, 2020 to ensure it had ample access to capital and increase flexibility (and, at the end of the second quarter endedJune 30, 2020 , elected to repay$50 million of the amounts outstanding, in part, with proceeds from asset monetization efforts in the quarter). Additionally, the Company announced in the second quarter endedJune 30, 2020 that it has temporarily suspended quarterly dividend distributions. The Company will continue to monitor its financial performance and economic outlook each quarter with the intention of paying 100% of REIT taxable income, and ensuring compliance with REIT taxable income distribution requirements for the full year. Cash Flows Cash flows provided by operations were$37.2 million and$104.0 million for the nine months endedSeptember 30, 2020 and 2019, respectively. Cash flows from operating activities for the nine months endedSeptember 30, 2020 were primarily driven by the cash generated from the CRE segment, which represents the Company's core business. Cash flows from the Land Operations segment has decreased as compared to the prior year comparable period due to Land Operations successfully closing out of two development-for-sale projects in 2019 (resulting in a lower volume of comparable development-for-sale projects in the current period). Cash flows provided by investing activities was$20.5 million for the nine months endedSeptember 30, 2020 as compared to cash flows used in investing activities of$238.3 million for the nine months endedSeptember 30, 2019 . The nine months endedSeptember 30, 2020 included cash proceeds from the disposal of property, investments and other assets of$27.1 million (which was primarily driven by the consummation of sales related to the Company's solar power facility in Port Allen onKauai and also its former GPRM subsidiary described above), cash outlays of$17.7 million related to capital expenditures and cash returns of$11.1 million received from investments in affiliates and other investments as cash distributions. The nine months endedSeptember 30, 2019 included cash outlays of$250.2 million related to capital expenditures which was largely driven by$218.4 million related to the Company's acquisition of five commercial real estate assets. As it relates to the CRE segment, the Company differentiates capital expenditures as follows: •Growth Capital Expenditures: Property acquisition, development and redevelopment activity to generate income and cash flow growth.
•Maintenance Capital Expenditures: Activity necessary to maintain building value, the current income stream and position in the market.
Capital expenditures for the respective periods were as follows:
45
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Nine Months Ended September 30,
(dollars in millions; unaudited) 2020 2019 Change
CRE property acquisitions, development and
redevelopment $ 8.1 $ 237.0 (96.6)%
Building/area improvements (Maintenance Capital
Expenditures) 3.8 5.7 (33.3)%
Tenant space improvements (Maintenance Capital
Expenditures) 2.1 2.6 (19.2)%
Quarrying and paving 2.6 3.6 (27.8)%
Agribusiness and other 1.1 1.3 (15.4)%
Total capital expenditures¹ $ 17.7 $ 250.2 (92.9)%
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.
Given the uncertainty around the duration and economic impact of the COVID-19
pandemic, the Company is not able to project capital expenditures in 2020
related to any of its segments. However, for 2020, the Company anticipates
activity related to property acquisitions, development and redevelopment will
decline over the prior year, and the Company expects building/area improvements
and tenant space improvements to be consistent or lower than 2019 expenditures.
Net cash flows provided by financing activities was $44.2 million for the nine
months ended September 30, 2020 , as compared to net cash used in financing
activities for the nine months ended September 30, 2019 of $93.2 million . The
change in cash flows from financing activities in 2020 as compared to 2019 was
due primarily to the Company drawing $120 million on its credit facility as a
safeguard due to uncertainty caused by the COVID-19 pandemic during the first
quarter ended March 31, 2020 (offset by the subsequent election to repay $50
million in the second quarter ended June 30, 2020 ).
Other Sources of Liquidity
In addition to cash and cash equivalents of $117.1 million as of September 30,
2020 , other sources of liquidity for the Company include trade receivables,
contracts retention, and inventories (excluding parts, materials and supplies),
totaling $76.2 million at September 30, 2020 . Further, the Company's revolving
credit and term facilities provide additional sources of liquidity for working
capital requirements or investment opportunities on a short-term as well as
longer-term basis. With respect to the revolving credit facility, as of
September 30, 2020 , the Company had $181.0 million of borrowings outstanding,
$1.1 million letters of credit issued against and $267.9 million of available
capacity on such revolving credit facility.
Known Trends, Events and Uncertainties
As noted above, the COVID-19 pandemic has adversely impacted the global economy;
has contributed to significant volatility in financial markets; and both its
near-term and long-term economic impacts remain uncertain. This uncertainty
includes the potential need for additional capital resources to maintain the
Company's business and operations during a period of potential declining or
delayed rent payments from CRE tenants and/or potential declining revenue from
its other businesses.
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, 2020 . However, as a result of the various uncertainties and
factors surrounding COVID-19, the Company may be unable to continue to maintain
compliance with certain of its financial covenants. Failure to maintain
compliance with its financial covenants or obtain waivers or agree to
modifications with its lenders would have a material adverse impact on the
Company's financial condition. The Company intends to closely monitor the impact
of COVID-19 on its business and intends to operate in compliance with these
covenants or seek to obtain waivers or modifications to these financial
covenants to enable the Company to maintain compliance.
As of September 30, 2020 , the Company had $14.5 million of future payments
related to notes payable and other debt maturing/coming due in the next twelve
months (based on the filing date of this report) and $14.7 million of future
payments related to notes payable and other debt maturing/coming due in 2021.
Based on its current outlook, the Company believes that funds generated from
results of operations; available cash and cash equivalents; and available
borrowings under credit facilities will be sufficient to finance the Company's
business requirements for the next twelve months, including debt service and
maturities under its notes payable and other debt arrangements; working capital;
capital expenditures; and distributions to shareholders. However, 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.
46
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Tax-Deferred Real Estate Exchanges
Sales: During the third quarter ended September 30, 2020 , there were no cash
proceeds from sales activity that qualified for potential tax-deferral treatment
under Internal Revenue Code §1031 or §1033.
Purchases: During the third quarter ended September 30, 2020 , there were no
acquisitions utilizing proceeds from tax-deferred sales or condemnations.
Proceeds from §1031 tax-deferred sales are held in escrow pending future use to
purchase new real estate assets. The proceeds from §1033 condemnations are held
by the Company until the funds are redeployed. As of September 30, 2020 , there
are no cash proceeds from tax-deferred sales and approximately $14.3
million from tax-deferred condemnations that had not yet been reinvested.
OTHER MATTERS
Commitments, Contingencies and Off-balance Sheet Arrangements: A description of
other commitments, contingencies, and off-balance sheet arrangements at
September 30, 2020 , and herein incorporated by reference, is included in Note 10
to the condensed consolidated financial statements of Item 1 in this Form 10-Q.
Critical Accounting Estimates: The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America , upon which the Management's Discussion and Analysis is based, requires
that management exercise judgment when making estimates and assumptions about
future events that may affect the amounts reported in the financial statements
and accompanying notes. Future events and their effects cannot be determined
with absolute certainty and actual results will, inevitably, differ from those
critical accounting estimates. These differences could be material. The most
significant accounting estimates inherent in the preparation of 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 2019
Form 10-K.
47--------------------------------------------------------------------------------
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