ALEX - Alexander & Baldwin: Positive On Corporate Restructuring And 2023 Outlook

2023-03-07 10:29:50 ET

Summary

• Alexander & Baldwin, Inc.'s Q4 2022 core FFO was ahead of expectations thanks to lower general & administrative costs and the good performance of its commercial properties.
• Alexander & Baldwin's 2023 guidance is favorable, and ALEX is transforming into a real proxy for Hawaii real estate with the planned sale of its infrastructure business.
• I have a Buy rating for Alexander & Baldwin, as I think that it can command a higher valuation multiple considering its 2023 outlook and its non-core asset divestment plans.

Elevator Pitch

I have a Buy investment rating assigned to Alexander & Baldwin, Inc. ( ALEX ) shares. I have a positive view of ALEX's corporate restructuring activities and its 2023 financial guidance. My price target for ALEX based on a forward price-to-FFO (Funds From Operations) multiple of 20 times translates into an upside of +24%, which warrants a Buy rating.

Company Description

In its press releases , Alexander & Baldwin, Inc. describes itself as the sole listed real estate investment trust ("REIT") that is a pure play on "Hawai'i commercial real estate" and the state's "largest owner of grocery-anchored, neighborhood shopping centers." Alexander & Baldwin also highlighted in its most recent 10-K filing that it owns approximately "3.9 million square feet" of retail, office, and industrial space in Hawai'i as of end-2022.

Q4 2022 Financial Results Exceeded The Market's Expectations

Core FFO for Alexander & Baldwin grew by +27% YoY from $17.5 million in the fourth quarter of 2021 to $22.2 million for the final quarter of the prior year. As indicated in its Q4 2022 results presentation , ALEX's Q4 2022 core FFO per share was $0.31 which turned out to be +29% higher than the analysts' consensus projection of $0.24 per share.

Alexander & Baldwin's above-expectations core FFO per share for Q4 2022 was mainly driven by a significant reduction in expenses and the decent performance of its commercial real estate portfolio.

General & administrative costs for ALEX decreased substantially by -23% YoY from $10.7 million for Q4 2021 to $8.2 million in Q4 2022. At the company's prior Q3 2022 earnings call on November 6, 2022, Alexander & Baldwin noted that "eliminating unprofitable or non-income producing assets" has enabled ALEX to "meaningfully reduce leverage and G&A (General & Administrative)," and this is reflected in the decline in its fourth quarter G&A expenses.

ALEX's Commercial Real Estate or CRE revenue also increased by a reasonably good +4.8% YoY, from $46.2 million in Q4 2022 to $48.4 million for the most recent quarter. Alexander & Baldwin specifically highlighted at its Q4 2022 investor briefing that its properties in Hawai'i are "experiencing elevated foot traffic" and delivering an increase in both "percentage rents (that vary with tenants' sales)" and "base rents" for the company.

Good 2023 Financial Guidance

Alexander & Baldwin issued its management guidance for the current fiscal year when it reported its Q4 2022 results.

Based on the mid-point of the company's financial guidance, ALEX is expecting to register a core FFO per share of $1.105 and to deliver a decent same-store commercial real estate net operating income (CRE NOI) growth of +5.75% (adjusted for the reversal of reserves in past financial periods) for full-year fiscal 2023.

Prior to the company's most recent quarterly financial performance disclosure, the consensus FY 2023 FFO per share forecast was relatively lower at $0.99 as per S&P Capital IQ . This implies that Alexander & Baldwin's FY 2023 core FFO per share guidance had surpassed the analysts' expectations.

It is important to note that ALEX's 2023 financial guidance includes $2 million of non-recurring general & administrative costs relating to changes in the company's management team . In July this year, Alexander & Baldwin's current CEO will retire and be succeeded by the current COO. As per management commentary at the most recent quarterly earnings call , the mid-point of ALEX's core FFO per share and same-store CRE NOI growth guidance would have been $1.175 and 2.5 percentage points higher, respectively, excluding the effects of management changes and additional G&A expenses.

Planned Infrastructure Business Divestment Should Drive Positive Valuation Re-rating

In its Q4 2022 earnings media release , Alexander & Baldwin revealed that it is "committing to a plan to sell and classifying the (infrastructure) business (known as Grace Pacific) as a discontinued operation." Notably, ALEX had referred to the proposed "sale of Grace" as "the final major step in our strategic simplification" and efforts to "focus on our core business" at its earlier Q3 2022 results briefing.

The market currently values Alexander & Baldwin at 18.1 times consensus forward next twelve months' price-to-FFO, according to valuation data taken from S&P Capital IQ . With ALEX shedding non-core assets, I believe that it can trade at a higher valuation multiple going forward.

My target price for ALEX is $23.50 based on a 20 times price-to-FFO multiple applied to the mid-point of the company's adjusted FY 2023 FFO guidance of $1.175 per share. This suggest that Alexander & Baldwin's shares have a capital appreciation potential of approximately +24% as compared to its last closing stock price of $19.02 as of March 6, 2023.

Bottom Line

Alexander & Baldwin, Inc. is coming close to completing its corporate restructuring plans, which will see it become a proxy for Hawai'i's real estate market. In addition, the company's 2023 FFO guidance turned out to be better than what analysts were anticipating. As such, I am bullish on Alexander & Baldwin, Inc.'s prospects and have decided to award a Buy rating to the stock.

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