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Alexander & Baldwin details farmland sale, warns of Q4 impairments

Alexander & Baldwin Inc.'s CEO called the planned sale of roughly 41,000 acres of Hawaiian farmland an important step in the company's shift to focus on commercial real estate but said it plans to recognize sizeable impairments related to two other assets it has not yet sold.

The company's Hawaii commercial real estate portfolio has performed "extremely well" since Alexander & Baldwin converted to real estate investment trust status in 2017, but "that good news often seems to be overshadowed by questions about our noncommercial real estate elements," President and CEO Christopher Benjamin said in a conference call. As a result, he added, the company intends to further simplify its story, unlock value from noncommercial real estate assets, reduce leverage and generate capital for growth in commercial real estate.

Alexander & Baldwin intends to reinvest proceeds from the farmland sale in Hawaiian commercial real estate assets by mid-2019, and expects to generate initial net operating income of roughly $12 million annually once those investments are complete, assuming a conservative 4.5% capitalization rate on the transactions, Benjamin said.

Still, Benjamin said, some steps remain, including the eventual monetization of Grace Pacific Corp., a construction company and asphalt paving contractor that the company acquired in 2013, and Kukui'ula, a 1,000-acre master-planned resort residential community.

"I do acknowledge that these assets ultimately will be in better hands with a different owner, and our story will be simpler and our company easier to manage in value," Benjamin said, though he cautioned that a transition will not necessarily be simple or immediate.

While the company has not made a decision about Grace Pacific's future, it expects to retain an adviser to prepare for a possible marketing process. Efforts to improve the unit's performance "have not yet borne fruit," and Alexander & Baldwin's investor base "struggles to embrace the business or embrace us as its owners," Benjamin said. The company plans to record an impairment of $70 million to $80 million on Grace Pacific's balance sheet in the fourth quarter.

The company is also likely to record a "significant impairment" of its $315 million carrying value in the joint venture that owns Kukui'ula, Benjamin added. The company has explored the possibility of selling the property to a developer or financial sponsor, and it solicited interest but was not satisfied with the results of the process and is pulling back, he said.

While the project is performing well at the moment, "we believe the full recoverability of our investment is doubtful," Benjamin said. The company expects to complete an analysis of the investment in time for recognition in the fourth quarter and plans to provide further details in its February earnings conference call.