ALEX - Alexander & Baldwin: Maui Wildfires Create Downside Risk

2023-08-15 00:34:41 ET

Summary

• Alexander & Baldwin is a pure-play Hawaiian operator of commercial real estate properties.
• Though operations are centered on the Island of Oahu, the company's overall concentration on the Hawaiian Island chain exposes them to significant risks resulting from the 2023 Maui Wildfires.
• Rising insurance premiums and disruptions in the ongoing disposition efforts of Grace Pacific are two visible risks.
• While significant risks are present, I am maintaining a "hold" view on shares until further developments are released by the management team.

Alexander & Baldwin ( ALEX ), or A&B as is more commonly known, faces significant downside risk as a result of the 2023 Maui Wildfires.

The company is a pure-play Hawaiian operator of just under 4.0 MSF of commercial space, including retail centers, industrial assets, and acreage for ground leases. A&B is also the state's largest owner of grocery-anchored, neighborhood shopping centers.

The stock is down about 5% from the time the emergency declaration was signed on August 8. But it's possible the downside risk isn't fully priced in yet.

In my view, A&B is exposed the most in their ongoing disposition efforts of Grace Pacific and through insurance premiums, which are bound to head higher in future periods.

How Much Exposure Does A&B Have To Maui?

A&B's Hawaiian roots trace back to the year 1870, where they owned a 571 sugar plantation in Maui. They've evolved since then to the ownership of premier commercial real estate. Today, the company derives the majority of their net operating income ("NOI") from the Island of Oahu. This region represents nearly three quarters of total NOI.

Despite the greater weighting to Oahu, their operations in Maui are not insignificant at about 13% of NOI. Looking at the operating map, it appears most of their properties are on the opposite coastline of the hardest impacted area of Lahaina.

But they do have one property within ten miles of Lahaina, Napili Plaza. And according to recent local news , the plaza appears unaffected by the fires. In fact, it is being used as a key distribution site for food, water, and other supplies. This is certainly promising from both a business and humanitarian aspect.

Their ground leases in Maui also are concentrated on the eastern region of the island.

While A&B does have property exposure to Maui, it doesn't appear the properties will have sustained any significant damages, at least from the most destructive fire.

How May The Maui Wildfires Affect A&B's Portfolio?

Even if their physical portfolio may not have been in the direct path of the wildfires, A&B still faces significant risks from the aftermath. The immediate issue that comes to mind is their disposition efforts of Grace, which I elaborated on in prior coverage .

Currently, the unit is being reported in discontinued operations, though its eventual sale has been named a business priority for A&B. But through Q2, discussions were still ongoing.

And I'd be hard pressed to express confidence of completion of the sale. Any prospective buyer will likely factor in the additional risks of taking on the business in light of the wildfires. Prices may have to adjust accordingly. For investors in A&B, it may not result in the best price, if one at all.

I also expect a significant increase in insurance premiums, which will impact A&B's future earnings potential. In their Q2 release , management raised their full-year guidance due to an improvement in the outlook for their same-store NOI performance.

The new midpoint for core funds from operations ("FFO") now stands at $1.12/share, up slightly from the prior midpoint of $1.105/share. The positive revision will very likely be paired back when the company releases Q3 results.

In a recent company presentation , A&B highlighted improving tourism trends to the state, with domestic arrivals at ten-year highs. International visitation still lagged at the time of their presentation, but the overall trend in recovery was still present, nevertheless.

I expect a reversal in visitation in the coming months, for obvious reasons. In discussing results, the A&B management team often states that their operations are not tourism dependent. And this is true, at least from a direct standpoint.

Rather, their tenant base centers around necessity-based retail that is more dependent on the local economy as opposed to, say, a hotel, that would be directly dependent upon visitation levels.

But from an indirect perspective, tourism does account for a large aspect of the overall Hawaiian economy. Recent estimates peg it at around a fifth of the total state economy. If the trend in inbound travel begins to reverse, it could put pressure on some of their localized retailers.

Additionally, the state may have a more difficult time attracting more nationally recognized retailers to their state. On their Q2 conference call, Piper analyst, Alexander Goldfarb, mentioned that about a quarter of the top 20 to 30 retailers still have no operations in Hawaii. The disaster may further delay new investment into the region.

What To Do With ALEX Stock Following Maui Wildfires?

A&B's operating presence is more significant on the Island of Oahu than it is on Maui. And for those properties that are located in Maui, nearly all are located on the opposite coastline of Lahaina. For the one that is in closer proximity to the worst of the wildfires, recent local reporting notes that it is being used for ongoing humanitarian purposes. This provides a high degree of confidence that A&B's physical portfolio likely avoided any significant structural damage.

Their future operating results, however, will likely be negatively impacted. Higher insurance premiums present the clearest risk. The timetable on the Grace disposition may also be pushed out. Or it may even fall through, leaving A&B with stranded assets on their books.

In addition, since A&B is one of the most well-respected companies on the island chain with a long operating history, they very likely will have an ongoing part in the humanitarian relief efforts. Utilization of the Napili Plaza for these efforts is already one aspect of it.

The A&B team hasn't released a business update, but they are likely to do so at some point prior to their Q3 earnings release. Shares are down about 5% since the recent developments. And they may have further to fall. But I'd be hesitant to mark shares as a "sell" without having all the details directly from the management team. Shares, however, would be best placed on downside watch, with heightened attention, given recent events.

For further details see: