ALEX - Alexander & Baldwin: Positive On Unchanged Guidance And Long-Term Drivers

2023-05-22 09:37:32 ET

Summary

• Alexander & Baldwin has maintained the company's financial guidance for 2023, which is supported by the strength in Hawaii's economy.
• In the intermediate to long term, new tenants and acquisitions are expected to be the key growth drivers for ALEX.
• I keep my Buy rating for Alexander & Baldwin unchanged, as I have a favorable view of ALEX's unchanged 2023 guidance, the company's organic and inorganic growth drivers.

Elevator Pitch

I continue to rate Alexander & Baldwin, Inc.'s ( ALEX ) stock as a Buy.

My earlier write-up for ALEX published on March 7, 2023 touched on Alexander & Baldwin's proposed divestment of its non-core infrastructure business, which I deem to be a positive catalyst for the stock.

With this current update, I focus my attention on Alexander & Baldwin's current full-year management guidance and the key long-term growth drivers for ALEX.

In the near term, the company has managed to keep its 2023 guidance unchanged in tough times like these, thanks to Hawaii's economic resilience. For the long run, there are both organic and inorganic drivers in place to support Alexander & Baldwin's future growth. Specifically, ALEX is trying its best to bring in new tenants, particularly those who still don't have a presence in Hawaii; and Alexander & Baldwin still has room to extend its market leadership in Hawaii's property market through acquisitions, especially the industrial real estate segment.

I see no reasons to change my positive opinion of Alexander & Baldwin, which implies that my Buy rating for ALEX is intact.

ALEX's Full-Year Guidance Was Left Unchanged

In this weak economic environment, many companies have reported below expectations results and cut their respective forward-looking guidance. In that respect, Alexander & Baldwin has been a positive outlier.

ALEX stuck to the company's 2023 normalized same store Net Operating Income growth and core Funds From Operation per share guidance of +5.0%-6.5% and $1.08-$1.13, respectively as indicated at its Q1 2023 earnings briefing . Alexander & Baldwin's full-year guidance points to strong NOI expansion (mid-to-high single digit percentage increase) and a reasonably resilient bottom line (-4% FFO decline in the worst case or flattish FFO in the best case) for the company in the current year.

The company's confidence in its 2023 financial outlook was boosted by better than expected quarterly financial performance. ALEX's actual core FFO per share of $0.29 for Q1 2023 turned out to be +26% higher than the Wall Street analysts' consensus estimate of $0.23 per share . Alexander & Baldwin's retail property portfolio occupancy rate was stable at 93.6% for the first quarter of this year, as compared to retail property occupancy rates of 93.8% and 93.1% for Q4 2022 and Q1 2022, respectively. In addition, ALEX's leasing spread for its retail property portfolio was a decent +6.0% in the most recent quarter.

Local media The Maui News cited research from University of Hawaii Economic Research Organization in a recent May 18, 2023 news article which highlighted that "tourism and construction" will act as "recession buffers" for Hawaii. At the company's first quarter results call, Alexander and Baldwin also highlighted that the strong pipeline "construction projects" and robust "tourism spend" have driven new jobs growth and higher average salaries for Hawaii.

In other words, Hawaii's economic resilience has allowed Alexander & Baldwin to achieve a core FFO beat for Q1 2023 and maintain its full-year 2023 management guidance.

Long Growth Runway For Hawaii's Retail Property Market

Alexander & Baldwin emphasized at its Q1 earnings call that "retail interest in the state (of Hawaii) continues to be high", and stressed that "many of the top-performing retailers in the country don't have physical presence here."

Chick-fil-A and Sonic Drive-In are good examples of well-established restaurant operators which have only just recently opened their first stores in Hawaii (at ALEX's retail properties) as mentioned at Alexander & Baldwin's March 2023 Investor Day presentation .

ICSC Las Vegas 2023 , the yearly flagship event for the International Council of Shopping Centers, is held between May 21 and May 23 this year. ALEX's CEO, COO, and CFO will be attending this event to market the company's retail properties in Hawaii to potential tenants. Potential announcement on new prominent tenants moving into Alexander & Baldwin's properties in the months and years ahead should act as re-rating catalysts for the stock.

Alexander & Baldwin's Inorganic Growth Potential

Apart from organic growth driven by attracting new tenants as discussed in the preceding section, Alexander & Baldwin can also leverage on mergers & acquisitions or M&A to drive future growth.

ALEX has an edge in M&A that makes inorganic growth a very powerful driver for the company. At its Investor Day webcast on March 30, 2023, Alexander & Baldwin revealed that around 9 in 10 of its M&A deals in the last decade have been executed "on an off-market or first-look basis." ALEX's scale and financial strength have allowed it to become the preferred acquiror of assets or properties in most situations. Alexander & Baldwin is the biggest retail landlord in Hawaii, and it has close to half a billion dollars of liquidity as of end-Q1 2023.

There is room for Alexander & Baldwin to be a consolidator in Hawaii's property market. In the industrial property segment in Hawaii, ALEX owns a mere 2% of total industrial assets in terms of square footage as disclosed at its 2023 Investor Day. Even though Alexander & Baldwin is the market leader in the Hawaiian retail property space, the market is fragmented with 78% of retail real estate in the hands of other players.

Closing Thoughts

A review of ALEX's forward-looking guidance and the company's long-term growth drivers leads me to the conclusion that Alexander & Baldwin is an attractive investment candidate. With ALEX's share price declining slightly by -2% (source: Seeking Alpha price data) since my March 7, 2023 initiation article, my existing price target of $23.50 pegged to a P/FFO multiple of 20 times offers a +27% upside as compared with its share price of $18.50 as of May 19, 2023. As such, I continue to award a Buy rating to Alexander & Baldwin.

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