The following analysis of the consolidated financial condition and results of
operations of Alexander & Baldwin, Inc. ("A&B" or the "Company") and its
subsidiaries should be read in conjunction with the condensed consolidated
financial statements and related notes thereto included in Item 1 of this Form
10-Q and the Company's Annual Report on Form 10-K for the year ended
December 31, 2020 ("2020 Form 10-K") filed with the U.S. Securities and Exchange
Commission ("SEC").
Throughout this quarterly report on Form 10-Q, references to "we," "our," "us"
and "our Company" refer to Alexander & Baldwin, Inc., together with its
consolidated subsidiaries.
Forward-Looking Statements
Statements in this Form 10-Q that are not historical facts are forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 and involve a number of risks and uncertainties that could cause actual
results to differ materially from those contemplated by the relevant
forward-looking statements. These forward-looking statements include, but are
not limited to, statements regarding possible or assumed future results of
operations, business strategies, growth opportunities and competitive positions,
as well as the rapidly changing challenges with, and the Company's plans and
responses to, the coronavirus pandemic ("COVID-19") and related economic
disruptions. Such forward-looking statements speak only as of the date the
statements were made and are not guarantees of future performance.
Forward-looking statements are subject to a number of risks, uncertainties,
assumptions and other factors that could cause actual results and the timing of
certain events to differ materially from those expressed in or implied by the
forward-looking statements. These factors include, but are not limited to,
prevailing market conditions and other factors related to the Company's REIT
status and the Company's business, risks associated with COVID-19 and its impact
on the Company's businesses, results of operations, liquidity and financial
condition, the evaluation of alternatives by the Company related to its
materials and construction business and 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 the SEC. The information
in this Form 10-Q should be evaluated in light of these important risk factors.
We do not undertake any obligation to update the Company's forward-looking
statements.
Introduction and Objective
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") provides additional material information about the Company's
business, recent developments and financial condition; its results of operations
at a consolidated and segment level; its liquidity and capital resources
including an evaluation of the amounts and certainty of cash flows from
operations and from outside sources; and how certain accounting principles,
policies and estimates affect its financial statements. MD&A is organized as
follows:
•Business Overview: This section provides a general description of the Company's
business, as well as recent developments that management believes are important
in understanding its results of operations and financial condition or in
understanding anticipated future trends.
•Consolidated Results of Operations: This section provides an analysis of the
Company's consolidated results of operations for the three and six months ended
June 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 six months ended June 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 with U.S. GAAP. It also describes why the Company believes that
presentation of the non-GAAP financial measure provides useful information to
investors regarding the Company's financial condition and results of operations
and, to the extent material, describes additional purposes for which the Company
uses the non-GAAP financial measures.
•Liquidity and Capital Resources: This section provides a discussion of any
material changes in the Company's liquidity, financial condition and cash flows,
including a discussion of any material changes in the Company's ability to fund
its future commitments and ongoing operating activities in the short-term (i.e.,
over the next twelve months from the most recent fiscal period end) and in the
long-term (i.e., beyond the next twelve months) through internal and
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external sources of capital, as compared to the end of preceding fiscal year
ended December 31, 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 ended December 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 on Maui, as well as the Company's
unconsolidated joint venture interest in a materials company.
Simplification strategy
As a result of its conversion to a REIT, 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.
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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, 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 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
On February 23, 2021, the Company's Board of Directors approved a plan to effect
the termination of the A&B Retirement Plan for Salaried Employees of Alexander &
Baldwin, LLC and the Pension Plan for Employees of A&B Agricultural Companies
(collectively, the "Defined Benefit Plans"). On April 13, 2021, the Company
executed the necessary amendments to terminate the Defined Benefit Plans and
they were terminated effective May 31, 2021. Additionally, on April 23, 2021,
the Company filed the Application for Determination Upon Termination with the
Internal Revenue Service ("IRS") and the Company received a favorable
determination notice for federal tax purposes from the IRS dated July 9, 2021.
Further note that the Company is preparing the appropriate notices and documents
to file related to the termination of the Defined Benefit Plans and wind-down
with the Pension Benefit Guaranty Corporation (the "PBGC"), the U.S. Department
of Labor, the trustee and any other appropriate parties. The Company will
recognize a gain or loss upon settlement of the Defined Benefit Plans at the
time when an irrevocable action to terminate the Defined Benefit Plan has
occurred, the Company is relieved of the primary responsibility of the Defined
Benefit Plan and the significant risks related to the Defined Benefit Plan
obligation and the assets uses to effect the settlement is eliminated for the
Company, but only when all three of the criteria are met.
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.
In 2022, upon receiving approval from the IRS 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 $25 million and $40
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 a pre-tax non-cash pension settlement charges totaling between $80
million and $90 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
In December 2019, COVID-19 was first reported in Wuhan, China, and on March 11,
2020, the World 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 continues
to surround COVID-19 and its 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.
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.
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As of June 30, 2021, the Company agreed to rent deferrals with tenants which has
impacted total billings of $7.3 million (net of amounts subsequently forgiven
under other relief modifications). The Company collected $4.5 million of these
amounts from tenants as of July 21, 2021. The remaining, unpaid rent deferral
balance of $2.8 million has been subject to the Company's ongoing assessments of
uncollectable tenant billings, pursuant to which the Company records adjustments
to revenue based on changes in the assessments during the period (further
described below).
During the three and six months ended June 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 June 30,             Six Months Ended June 30,
                                                         2021               2020                 2021                 2020
Other relief modifications and other                 $      2.9          $    0.7          $          5.4          $   0.8
adjustments1

Tenant collectability assessments and
allowance for doubtful accounts
Impact to billed accounts receivable                 $     (1.2)         $    3.6          $          0.1          $   4.3
Impact to straight-line lease receivables                  (0.1)              2.4                     0.2              2.3
Total revenue reductions (increases) - tenant              (1.3)              6.0                     0.3              6.6
collectability assessments
Provision for allowance for doubtful accounts2             (1.2)              2.9                    (1.0)             2.8
Total revenue reductions (increases) for             $     (2.5)         $    8.9          $         (0.7)         $   9.4
assessments and provisions

Total revenue reductions (increases) related $ 0.4 $ 

   9.6          $          4.7          $  10.2
to adjustments, assessments and provisions
Total revenue reductions (increases) impacting       $      0.5          $    7.2          $          4.5          $   7.9
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 six months ended June 30, 2021, government-mandated restrictions in
response to the pandemic, including travel restrictions, quarantine
requirements, prohibitions on public gatherings, stay-at-home orders have eased,
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 levels of cash basis and bad debt reserves in its commercial real estate
operations for the three and six months ended June 30, 2021 in relation to the
prior year comparable periods. As of July 21, 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 of
July 21, 2021, the CRE portfolio tenants have paid approximately 93% of Q2 2021
contractual rent amounts owed (which includes base rents and recoveries from
tenants) and approximately 93% of their year-to-date contractual rent.

Despite the improved financial results during the six months ended June 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 three and six months ended June 30, 2021
were significantly impacted by the COVID-19 pandemic. As such, the comparability
of the Company's results of operations for the three and six months ended June
30, 2021 to future periods may be limited.

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