2017 ANNUAL REPORT + FORM 10K
Partners
for Hawai‘i
Alexander & Baldwin’s new logo and tagline reinforce the Company’s commitment to our home state and
our strategic focus of investing in Hawai‘i. The logo incorporates a modern rendition of the initials “A&B”
surrounded by imagery illustrating the Company’s heritage in agriculture, shipping and real estate.
The logo reflects our history but shows that we are a progressive company,
keeping ourselves relevant in a changing world.
Our tagline “Partners for Hawai‘i” reflects A&B’s desire to partner with our communities and other
businesses to make Hawai‘i better, and our ability to serve as our investors’ partners in Hawai‘i.
Importantly, it also pays homage to Samuel Alexander and Henry Baldwin,
whose partnership in 1870 set us on the path to where we are today.
Dear
Fellow
Shareholders
STRATEGIC PROGRESS
2017 was a successful and pivotal year for
A&B has made remarkable strategic progress
A&B, and the groundwork laid during the year
in recent years. Just over six years ago, when
will facilitate significant value creation in the
we were geographically and operationally
years ahead. Total shareholder return (TSR)
diverse, our Board and management team
for the year lagged the broad real estate
embraced a vision of Alexander & Baldwin as
investment trust (REIT) index by nearly 900
a focused, Hawai‘i real estate company. Our
bps, largely due to the all-consuming and
transformation since that time is dramatic.
expensive process of converting to a REIT.
With the recently announced acquisition of
When viewed over the two-year period that
three premier, Hawai‘i, grocery-anchored
included the 2016 announcement of our REIT
shopping centers from Terramar Retail Centers,
evaluation, however, our TSR is 24.7 percent,
and the associated sales of our remaining
or 1050 bps above the REIT sector. What I
mainland commercial assets, we take yet
consider most important, now that the REIT
another important step toward our vision.
conversion is complete, is how well positioned
Within months, our entire commercial portfolio
we are to continue expanding our Hawai‘i
will reside in Hawai‘i, managed by an in-house
commercial real estate presence.
team and producing the kinds of synergies and
community benefits we have been seeking.
With our REIT conversion behind us, I want to
commend our employees for completing this
monumental undertaking. It was far more than
just a legal or financial restructuring of A&B. It
set in motion changes in processes, reporting
and systems, and catalyzed the insourcing
of our property management, property
accounting and leasing functions. Our strategic
shift also created uncertainty and stress for
many employees, but they have responded
with professionalism and commitment. These
collective changes already are bringing myriad
benefits to the Company, and I thank our
employees for making them possible.
Becoming a REIT was never our destination; it
was an important step on the journey toward
becoming a focused, Hawai‘i commercial real
estate company, and it will enable us to invest
in our home state and create a platform that
enhances our local communities. Our leasing
Further demonstrating the benefits of our new
structure, we secured the Terramar Hawai‘i
portfolio, and now own exceptional grocery-
anchored centers in Ewa Beach on O‘ahu, Lihue
on Kaua‘i, and Pu‘unene on Maui. These centers
further enhance our ability to attract retailers
seeking to enter the Hawai‘i market with
multiple store locations. More than half of the
$254 million acquisition price will be financed
with sales of seven mainland commercial
assets, completing the tax-efficient repatriation
of more than $500 million of mainland capital
to Hawai‘i and bringing these important Hawai‘i
assets under local ownership.
Beyond expanding our commercial portfolio
through development,
redevelopment and
acquisition, our strategic intent is to continue
simplifying our business model. As we do, we
will make it easier for investors to ascribe full
value to our remarkable asset base and market
position in Hawai‘i. We advanced the process of
building out and monetizing our development
pipeline in 2017, and will continue to do so
in 2018, bringing us closer to our targeted
success in 2017 demonstrates the growing
destination.
strength of our portfolio, as we achieved re-
leasing spreads of 13.9 percent and announced
exciting new retail options for Hawai‘i residents.
Ulta Beauty, the nation’s largest beauty retailer,
will be opening its first two Hawai‘i stores
at Pearl Highlands Center and Kailua Town,
while Dry Bar, a national hair salon franchise,
recently opened its first Hawai‘i store in our
retail space at The Collection. In addition, we
signed important leases with Safeway, Maui
Brewing Company, Chef Roy Yamaguchi and
DEFINING WHO WE ARE
As pleased as I am by the strategic progress we
have made, some of our most important steps
in 2017 related to defining A&B. Destination
is not just about strategy. It is not simply what
we will do. It is also how we will act, how we
define our purpose and how we can create
community and shareholder value at the same
time. It is about the kind of impact we want
to have.
UFC Gym to occupy new spaces currently
A&B has one of the strongest reputations of
under development.
any company in Hawai‘i, but we have changed
dramatically in recent years and should not
assume that people—employees,
investors
and community stakeholders—know what
we stand for today or in the future. We took
the opportunity in 2017 to clarify what we
stand for by articulating vision, mission and
values statements. These statements guide
DRY BAR
A&B is helping new-to-Hawai‘i
tenants, such as Dry Bar and
Ulta Beauty, find homes in the
Hawaiian Islands. Pictured from
left to right are Casey Bell, Dry
Bar manager, Rick Stack, senior
vice president of commercial
real estate development,
Aja Kusao, leasing coordinator,
and Kit Millan, senior vice
president, asset management.
With high-performing retail
locations on all major islands,
A&B is well positioned to be the
landlord of choice for retailers
seeking a presence here, and
to capitalize on the strong
consumer demographics of this
market. We continue to build
relationships with other retailers
looking to expand to Hawai‘i and
hope to be their Partner
for Hawai‘i.
our day-to-day actions. Our vision and mission
Finally, we
increased engagement with
reflect the Company’s commitment to making
investors. Not only do we recognize our duty
Hawai‘i better, based on our values of integrity,
to explain our story to investors, but we
collaboration and accountability, among others.
welcome their perspectives. We held 147
Reiterating these has been a valuable step,
one-on-one meetings with buy-side and
but we recognize that living them requires
sell-side analysts, hosted an investor day with
commitment.
We also undertook a branding survey of our key
external constituents in Hawai‘i, asking them
what the A&B brand meant to them. While we
heard many positives, we also heard confusion.
A comprehensive rebranding effort allowed us
to provide clarity, and led us to adopt the new
tagline “Partners for Hawai‘i” in order to reflect
not only our focus on Hawai‘i, but our intent
to work with local communities to achieve our
mutual goals.
39 firms, and met with ESG (environmental,
social and governance) representatives of firms
comprising 63 percent of our institutionally
owned shares. We have gained clarity regarding
which elements of our business the analysts
find the most compelling and which parts they
find most difficult to understand and value.
We have employed these insights in refining
our strategy and disclosures. And while we are
proud of our track record in environmental,
social and governance practices, we learned
from the ESG meetings that it is not enough
simply to do the right thing, we need to find
ways to tell our story more completely. This will
be a priority in 2018.
REFLECTIONS
We have set high standards for ourselves
as we’ve established our strategic direction,
reiterated our vision, mission and values, and
We have a remarkable team implementing our u
introduced our new logo and tagline. Perfection
y we have
strategy, and I am proud of the way we haveve
is not possible, and so we must acknowledge
s over
collaborated with our Board of Directors over
when we fall short, and strive to do better.
the past several years in charting and executing gti g
Our internal work culture remains a work in
this dramatic course. Our strategic shift from
progress; there will be twists and turns in our
a diverse company to a Hawai‘i-focused
relationships with local communities; and we
commercial real estate company has involved
will need to keep telling our story to a largely
many difficult decisions, but the Board has
new investor base in order to realize full value
provided wise counsel and steadfast support
for our remarkable assets and businesses.
throughout. Our directors’ and employees’
We embrace the challenges that go with
commitment to the process is a testament to
being Partners for Hawai‘i and believe that in
their belief in A&B, its history and its potential.
doing so we ultimately will benefit all of our
I thank you, our shareholders, for your belief in
stakeholders.
the Company also.
Christopher J. Benjamin
President & Chief Executive Officer
MANOA PARTNERSHIP
Beautiful monkey pod trees
lining the parking lot of the
Manoa Marketplace were
uprooting pavement, causing
a safety hazard for tenants and
customers of the center. Dana
Gusman, manager, government
and community relations and
Darren Pai, director of corporate
communications, (pictured)
involved the community and
experts to find a solution that
addressed the safety issues
and retained all of the trees.
The several-month process
took twists and turns, but
the willingness of both A&B
and the community to remain
open-minded throughout the
process ultimately resulted in a
“win-win” solution. This is how
we partner with Hawai‘i.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from [_______ to _______]
Commission file number 001-35492
Alexander & Baldwin, Inc.
(Exact name of registrant as specified in its charter)
Hawai`i
(State or other jurisdiction of
incorporation or organization)
45-4849780
(I.R.S. Employer
Identification No.)
822 Bishop Street
Post Office Box 3440, Honolulu, Hawai`i 96801
(Address of principal executive offices and zip code)
808-525-6611
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, without par value
Name of each exchange
on which registered
NYSE
Securities registered pursuant to Section 12(g) of the Act:
None
Number of shares of Common Stock outstanding at February 15, 2018:
71,952,944
Aggregate market value of Common Stock held by non-affiliates at June 30, 2017:
$1,915,753,183.86
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days. Yes
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and
post such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of
“large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting company)
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised
financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
No
Documents Incorporated By Reference
Portions of Registrant’s Proxy Statement for the 2018 Annual Meeting of Shareholders (Part III of Form 10-K)
TABLE OF CONTENTS
PART I
Items 1 & 2.
Business and Properties by Business Segments......................................................
A.
B.
Commercial Real Estate..........................................................................................
Land Operations ......................................................................................................
Landholdings.............................................................................................
(1)
Development-for-sale Projects..................................................................
(2)
Renewable Energy ....................................................................................
(3)
Page
1
4
9
11
12
C.
Materials & Construction........................................................................................
12
Employees and Labor Relations .............................................................................
13
Available Information .............................................................................................
13
Item 1A.
Risk Factors.............................................................................................................
13
Item 1B.
Unresolved Staff Comments ...................................................................................
29
Item 3.
Legal Proceedings ...................................................................................................
29
Item 4.
Mine Safety Disclosures .........................................................................................
30
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities .....................................................................
PART II
Item 6.
Selected Financial Data...........................................................................................
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations ...............................................................................................................
Items 7A.
Quantitative and Qualitative Disclosures About Market Risk ................................
Item 8.
Financial Statements and Supplementary Data.......................................................
31
34
36
53
54
i
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure................................................................................................................
Page
107
Item 9A.
Controls and Procedures .........................................................................................
107
A.
B.
Disclosure Controls and Procedures .......................................................................
107
Internal Control over Financial Reporting ..............................................................
107
Item 9B.
Other Information ...................................................................................................
109
Item 10.
Directors, Executive Officers and Corporate Governance......................................
109
PART III
A.
B.
C.
D.
Directors..................................................................................................................
109
Executive Officers...................................................................................................
109
Corporate Governance ............................................................................................
110
Code of Ethics .........................................................................................................
110
Item 11.
Executive Compensation.........................................................................................
110
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters ................................................................................................
110
Item 13.
Certain Relationships and Related Transactions, and Director Independence........
110
Item 14.
Principal Accounting Fees and Services .................................................................
110
Item 15.
Exhibits and Financial Statement Schedules ..........................................................
110
PART IV
A.
B.
C.
Financial Statements ...............................................................................................
110
Financial Statement Schedules................................................................................
111
Exhibits Required by Item 601 of Regulation S-K .................................................
114
Item 16.
Form 10-K Summary ..............................................................................................
118
Signatures ............................................................................................................................................
119
ii
ALEXANDER & BALDWIN, INC.
FORM 10-K
Annual Report for the Fiscal Year
Ended December 31, 2017
PART I
ITEM 1. BUSINESS
Business and Strategy
Alexander & Baldwin, Inc. (“A&B” or the “Company”) is a fully integrated real estate company that plans to elect to
be taxed as a real estate investment trust, or REIT, for US federal income tax purposes commencing with our taxable year
ended December 31, 2017. A&B’s history in Hawai`i dates back to 1870. Over time, we have evolved from a 571-acre sugar
plantation on Maui to become one of Hawai`i's premier real estate companies and the owner of the largest anchored strip retail
center portfolio in the state. Following our separation from Matson, Inc. (NYSE: MATX) in mid-2012, we implemented a
focused strategy to concentrate the Company’s assets and operations in Hawai`i, where our management team is best able to
employ extensive local market knowledge and real estate expertise to create value for both shareholders and the community.
Since 2012, the Company has made significant progress in concentrating our commercial portfolio in Hawai`i ("Migration
Strategy") such that the share of cash net operating income ("NOI") generated by Hawai`i commercial assets has grown from
about 43 percent in 2012 to 87 percent in 2017. In addition to our 15 retail centers in Hawai`i, the Company owns eight
industrial assets, six office properties and a portfolio of urban ground leases comprising 117 acres in Hawai`i. As a result of
A&B's agricultural history, the Company's assets include over 86,000 acres in Hawai`i, making it the state's fourth largest
private landowner (by acreage). On the U.S. Mainland, the Company owns six remaining commercial assets as of December
31, 2017. Total portfolio gross leasable area (GLA) was 4.0 million square feet at the end of 2017.
The Company started a real estate development company in 1949 to develop the master-planned community of
Kahului, Maui, providing homes for sale to its plantation employees. Today, we are emphasizing a capital-light approach to
residential real estate development with a strategic preference to monetize land assets earlier in the development cycle and
continuing our strategic focus of investing capital into income producing commercial real estate in Hawai`i. In addition,
through our wholly owned subsidiary, Grace Pacific LLC (“Grace”), the Company operates the largest materials and paving
company in Hawai`i.
The Company has completed a conversion process to comply with the requirements to be treated as a REIT
commencing with the taxable year ended December 31, 2017. In connection with our conversion to a REIT, the Company
completed a holding company merger ("Holding Company Merger") in order to facilitate the Company's ongoing REIT
compliance. Pursuant to the Holding Company Merger, the then-existing Alexander & Baldwin, Inc. ("A&B Predecessor"),
Alexander & Baldwin REIT Holdings, Inc., a Hawai`i corporation and a direct, wholly owned subsidiary of A&B Predecessor
(“A&B REIT Holdings”), and A&B REIT Merger Corporation, a Hawai`i corporation and a direct, wholly owned subsidiary of
A&B REIT Holdings (“Merger Sub”) completed a merger through which Merger Sub was merged with and into A&B
Predecessor, with A&B Predecessor continuing as the surviving corporation and being renamed "Alexander & Baldwin
Investments, LLC." Additionally, as a result of the Holding Company Merger, A&B REIT Holdings replaced A&B Predecessor
as the Hawai`i-based, publicly held corporation through which the Company’s operations are conducted, and all shares of
common stock, including the reserve of common stock issuable under the outstanding awards and equity incentive
compensation plans, of A&B Predecessor were converted into shares of A&B REIT Holdings common stock on a one-for-one
basis. Promptly following the merger, A&B REIT Holdings was renamed “Alexander & Baldwin, Inc.”
In this Annual Report, unless the context requires otherwise, references to A&B or the Company refer to Alexander &
Baldwin, Inc. prior to the consummation of the Holding Company Merger (subsequently renamed Alexander & Baldwin
Investments, LLC) and to A&B REIT Holdings following consummation of the Holding Company Merger (subsequently
renamed Alexander & Baldwin, Inc.).
Our Company is in many ways part of the fabric of Hawai`i: in order to maximize our value to shareholders, we are
committed to being partners with Hawai`i and emphasize investments and activities that enhance the quality of life within our
Hawaiian communities. Through this commitment and the underpinning of our vision, mission and values, which emphasize
integrity and community, we have excelled throughout our 147-year history and have the opportunity to deliver outperformance
to our shareholders.
1
The Company operates three segments: Commercial Real Estate; Land Operations; and Materials & Construction. A
description of each of the Company's reporting segments follows:
• Commercial Real Estate ("CRE"): includes leasing, property management, redevelopment and development-for-hold
activities. Significant assets include improved commercial real estate and urban ground leases. Income from this
segment is principally generated by leasing and operating real estate assets.
•
Land Operations: includes planning, zoning, financing, constructing, purchasing, managing, selling, and investing in
real property; leasing agricultural land; renewable energy; and diversified agribusiness. Primary assets include
landholdings, renewable energy assets (investments in hydroelectric and solar facilities and power purchase
agreements) and development projects. Income from this segment is principally generated by renewable energy
operations, agricultural leases, select farming operations, development sales and fees, and parcel sales.
• Materials & Construction ("M&C"): performs asphalt paving as prime contractor and subcontractor; imports and sells
liquid asphalt; mines, processes and sells basalt aggregate; produces and sells asphaltic concrete; provides and sells
various construction- and traffic-control-related products; and manufactures and sells precast concrete products.
Assets include two grade A (prime) rock quarries, an asphalt storage terminal, hot mix asphalt plants and quarry and
paving equipment. Income is generated principally by materials supply and paving construction.
Proportionately, the Commercial Real Estate segment represents 53% percent of the Company's business, Land
Operations represents 29% percent and Materials & Construction represents 18% percent (determined by its share of 2017
identifiable assets from the three segments). Additional information about our business segments is provided in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and the "Notes to Consolidated Financial
Statements," which are included elsewhere in this Form 10-K.
Strategically, the Company remains principally focused on:
• Growing recurring income streams from its commercial real estate portfolio;
• Employing landholdings at their highest and best use, including for diversified agribusiness purposes;
• Entitling, planning, developing and selling real estate;
• Leveraging its strong Materials & Construction's market position and vertical integration to increase earnings and
cash flow; and
• Continuing to practice disciplined and prudent financial management to maintain balance sheet strength and
financial flexibility.
Key strategic activities and initiatives by segment are discussed below.
Commercial Real Estate Strategy
Our commercial real estate strategy focuses on Hawai`i, where we benefit from the Company’s deep relationships
built over 147 years of operation in the islands, as well as a market positioned for stability and growth given the state’s lack of
commercially-entitled lands and robust economic performance. With a median household income nearly 30% above the U.S.
national average, the lowest unemployment rate in the nation at 2.0%, solid personal income growth exceeding 3% per annum,
and a low 12.1 square feet of strip retail GLA per capita on Oahu, the Hawai`i retail market compares favorably with other top-
tier retail markets in the U.S. Similarly, given the severe shortage of industrial supply in Hawai`i, industrial market rents and
per square foot values exceed those achieved in other U.S. markets, making Hawai`i a high-performing industrial market
despite its geographic isolation. In addition to strong resident demographics and market fundamentals, the Hawai`i commercial
real estate market is supported by a growing and resilient tourism industry as well as consistently high levels of government
spending due to Hawai`i’s strategic defense location between the U.S. and Asia. Therefore, as a result of the Company's
Migration Strategy, not only have our assets been concentrated where management is best able to enhance portfolio
performance, but the overall asset quality of our portfolio has significantly improved.
To further enhance asset quality and increase the recurring income stream from our commercial portfolio, the
Company intends to:
• Grow income and optimize returns on A&B’s commercial portfolio by:
Developing new properties for hold and redevelop properties that provide an appropriate risk adjusted return on
capital invested and are accretive to the Company’s value;
2
Being the landlord of choice by providing desirable locations, quality properties, landlord services and
community amenities;
Leveraging internal property management to efficiently manage operations and maximize cash returns;
Executing effective marketing and leasing strategies that attract quality tenants in the marketplace and new
tenants to Hawai`i by leveraging our position as the largest owner of grocery/drug anchored shopping centers in
Hawai`i; and
Selectively acquire retail and industrial properties within desirable Hawaiian markets at returns that exceed the
Company’s risk adjusted cost of capital.
• Evaluate other commercial property investment opportunities, such as leased fee assets or other commercial real estate
types, when the acquisitions are strategically consistent with the value creation objectives of the Company.
• Complete the Migration Strategy primarily through the sale of mainland assets and tax efficient reinvestment of
proceeds into strategically appropriate commercial real estate assets in Hawai`i.
Land Operations Strategy
A&B strives to maximize value in its landholdings by employing land at its highest and best use to the benefit of
shareholders, employees, its communities and other key stakeholder groups. Certain lands owned by the Company are
designated for urban uses or for future urban uses and are in various stages of entitlement. For those lands, we intend to
continue the entitlement processes and pursue either development of commercial real estate assets for our own portfolio, or
monetization over time through sales of land or developed properties. In pursuit of these objectives, the Company intends to:
• Actively market and sell available development inventory;
• Entitle certain Hawai`i lands to respond to market demand while meeting community needs;
• Monetize development assets when appropriate to manage risk and return;
• Undertake opportunistic development of fully entitled land while limiting investment risk and capital commitment
through joint venture structures and selective monetization;
• Emphasize short-term developments as compared with the Company’s historical long-term, master-planned
community approach; and
• Maintain a disciplined approach to risk management that includes careful assessment of market conditions/risks,
prudent structuring of transactions, and maintaining fiscal discipline.
For a significant portion of A&B’s substantial Hawai`i landholdings, the Company employs a wide spectrum of non-
development uses, ranging from conservation/watershed to pasture to active farming. While a majority of A&B’s landholdings
has limited or no long-term urban development potential, these landholdings remain valuable for farming and other uses, such
as providing access to natural resources or hydro-electric generation capability. To employ these landholdings at their highest
and best use, the Company intends to:
• Operate and maintain infrastructure, including roads, irrigation ditches and power distribution systems, among others;
•
Pursue select diversified agricultural operations;
• Lease land to diversified agricultural producers;
• Advance crop, livestock and bioenergy initiatives through trials to commercial operations, as merited; and
• Maintain access to irrigation water to support current and future diversified agriculture activities.
Materials & Construction Strategy
The Materials & Construction segment of A&B is principally comprised of its subsidiary Grace Pacific, LLC (“GP”).
GP is a diversified and vertically integrated construction materials and hot mix asphalt paving contractor based in Kapolei,
Hawai`i with operations throughout the Hawaiian Islands. The majority of GP’s paving operations serves public sector clients
at the Federal, State and County/Municipal levels. GP owns six hot-mix asphalt plants throughout the state that primarily
support its internal paving operations, and third-party customers. GP also owns and operates a rock quarry and processing plant
in Makakilo, Hawai`i that is strategically located on the west side of Oahu. Due to the high cost of transporting aggregate and
the limited shelf life of asphaltic concrete once it is produced, GP’s Makakilo quarry and hot mix plant are ideally located to
service Oahu’s growth areas.
GP’s vertically integrated production model includes ownership of an import terminal for liquid asphalt and sand.
These additional resources ensure GP’s access to raw materials and enable it to compete cost effectively. In addition, GP offers
a variety of related for-sale and for-rent services including temporary and permanent roadway traffic control (GP Roadway
3
Solutions), Microguard HVAC and tile coatings (GP Maintenance Solutions), custom signage (Peterson Sign Company),
unistrut (Unistrut Hawai`i), and structural precast/prestressed concrete (GPRM Prestress). GP is a 50% owner of Maui Paving,
LLC which operates primarily on the island of Maui.
GP has undergone a review of operations over the past year, and certain improvements were identified that are to be
implemented in 2018.
Major initiatives for GP include the following:
• Enhancing sales efforts to increase the volume of third party aggregate sales, taking advantage of the availability of
high quality materials and the strategic location of the quarry;
• Optimizing labor management to reduce the variable costs of paving operations;
•
•
Implementing state of the art information systems to improve cost management and contract bidding; and
Positioning the Company for the anticipated increases in State and Federal contracts later in 2018.
Financial Strategy
The Company values a strong balance sheet with levels of debt and repayment schedules that would enable it to
protect its ownership of assets through market cycles and to provide capital for opportunities to invest at attractive risk-adjusted
returns.
To maintain this desired balance sheet posture, the Company intends to:
• Target a 5x to 6x net debt to EBITDA ratio;
• Ensure well-laddered debt maturities and minimize near term maturing debt;
• Maintain a high proportion of fixed-rate debt and longer weighted-average maturity;
• Maintain a large unencumbered portfolio of assets; and
• Maintain a disciplined capital allocation strategy with a focus on investments that have attractive risk-adjusted returns
relative to the Company’s internal cost of capital.
ITEM 2. PROPERTIES BY BUSINESS SEGMENTS
A.
Commercial Real Estate Segment
A summary of GLA and Cash NOI percentage by geographic location and property type as of December 31, 2017 is as
follows:
Retail
Industrial
Office
Total
Current GLA (sq. ft.)
Hawai`i
Mainland
Total
1,814,800
961,500
190,900
186,400
396,100
464,100
2,001,200
1,357,600
655,000
2,967,200
1,046,600
4,013,800
($ in thousands)
Cash NOI by Geography and Type1
Cash NOI as a % of Total Cash NOI1
Retail
Industrial
Office
Ground
Hawai`i
Mainland
Total
Hawai`i
Mainland
$
45,729
$
2,255
$
47,984
12,032
4,368
11,835
4,455
4,142
—
16,487
8,510
11,835
53.9%
14.2%
5.1%
14.0%
2.7%
5.2%
4.9%
—%
Total
56.6%
19.4%
10.0%
14.0%
Total
1 Refer to page 45 for a discussion of management's use of a non-GAAP financial measure and the required reconciliation of non-GAAP
12.8%
10,852
73,964
87.2%
84,816
$
$
$
100.0%
measures to GAAP measures.
4
(1)
Hawai`i Commercial Properties
A&B’s Hawai`i commercial real estate portfolio consists of retail, industrial and office properties, comprising
approximately 3.0 million square feet of GLA as of December 31, 2017. Most of the commercial properties are located on
Oahu and Maui, with smaller holdings on Kauai and the Island of Hawai`i. The occupancy for the Hawai`i portfolio was 93.5
percent and 93.4 percent as of December 31, 2017 and 2016, respectively.
The Hawai`i commercial properties owned as of December 31, 2017 were as follows:
Property
Retail:
1
Pearl Highlands Center
2 Kailua Retail
3 Waianae Mall
4 Manoa Marketplace
5 Kaneohe Bay Shopping Center
(Leasehold)
6 Waipio Shopping Center
7 Aikahi Park Shopping Center
8
9
The Shops at Kukui'ula
Lanihau Marketplace
10 Kunia Shopping Center
11 Kahului Shopping Center
12 Napili Plaza
13 Lahaina Square
14 Gateway at Mililani Mauka
15 Port Allen Marina Center
Subtotal – Retail
Industrial:
16 Komohana Industrial Park
17 Kaka'ako Commerce Center
18 Waipio Industrial
19 P&L Warehouse
20 Honokohau Industrial
21 Kailua Industrial/Other
22 Port Allen
23 Harbor Industrial
Subtotal – Industrial
Office:
24 Kahului Office Building
25 Gateway at Mililani Mauka South
26 Kahului Office Center
27 Stangenwald Building
28
Judd Building
29 Lono Center
Subtotal – Office
Total – Hawai`i Portfolio
* Included in Same-Store portfolio.
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
Oahu
Oahu
Oahu
Oahu
Oahu
Oahu
Oahu
Kauai
Hawai`i
Island
Oahu
Maui
Maui
Maui
Oahu
Kauai
Oahu
Oahu
Oahu
Maui
Hawai`i
Island
Oahu
Kauai
Maui
Maui
Oahu
Maui
Oahu
Oahu
Maui
Island
Year Built/
Renovated
Current
GLA
(sq. ft.)
Occupancy
ABR
($ in 000s)
ABR
PSF
$
8,769 $
23.98
1992-1994
1947-2014
1975
1977
1971
411,300
319,000
170,300
140,200
90.2%
97.7%
85.5%
94.9%
125,400
100.0%
1986, 2004
113,800
9,875
2,869
4,607
2,953
3,207
1,305
4,247
1,887
2,059
458
1,173
662
1,675
534
32.24
19.70
34.84
23.55
28.66
16.90
51.32
21.37
39.33
10.39
29.75
17.90
52.39
24.64
46,280 $
27.85
2,833 $
11.89
2,444
2,441
1,340
992
952
674
156
14.53
15.49
13.69
13.77
14.80
10.56
11.92
11,832 $
13.52
1,429 $
29.06
1,605
709
446
323
313
43.21
25.99
19.24
18.49
24.17
4,825 $
28.86
62,937 $
23.27
98.3%
78.8%
96.9%
100.0%
94.1%
96.6%
88.4%
82.6%
97.7%
92.0%
98,000
89,100
88,300
60,600
49,900
45,600
44,800
34,900
23,600
1,814,800
93.1%
238,300
100.0%
197,400
158,400
104,100
77,300
68,800
63,800
53,400
961,500
59,400
37,100
33,400
27,100
20,200
13,700
190,900
2,967,200
85.2%
99.5%
94.0%
93.2%
96.3%
100.0%
94.1%
95.1%
86.8%
100.0%
81.6%
87.7%
86.4%
94.8%
89.1%
93.5%
$
$
$
$
$
$
1971
2009
1987
2004
1951
1991
1973
2008, 2013
2002
1990
1969
1988-1989
1970
2004-2006,
2008
1951-1974
1983, 1993
1930
1974
1992, 2006
1991
1901, 1980
1898, 1979
1973
5
A&B also has a portfolio of commercial ground leases as of December 31, 2017, as follows:
Ground
Leases (a)
Location
(City, Island)
Acres
Property Type
Exp. Year Next Rent Step
Step Type
ABR
($ in 000s)
FMV Reset
$ 2,800
FMV Reset
1,344
#1
#2
#3
#4
#5
#6
#7
#8
#9
#10
#11
#12
#13
#14
#15
#16
#17
#18
#19
#20
*
*
Kaneohe, Oahu
15.4 Grocery-Anchored Retail
Honolulu, Oahu
2.8
Grocery-Anchored Retail
* Wailuku, Maui
5.3 Medical Office
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
Kailua, Oahu
3.4
Grocery-Anchored Retail
Puunene, Maui
52.0 Heavy Industrial
Kaneohe, Oahu
Kailua, Oahu
Kailua, Oahu
Honolulu, Oahu
Honolulu, Oahu
Kailua, Oahu
Kahului, Maui
Kahului, Maui
Kailua, Oahu
Kahului, Maui
Kailua, Oahu
Kahului, Maui
Kahului, Maui
Kailua, Oahu
Kailua, Oahu
3.7
1.6
2.2
0.5
0.5
1.2
0.8
0.4
3.3
0.8
0.9
0.5
0.4
0.4
1.7
Retail
Retail
Retail
Parking
Retail
Retail
Retail
Office
Office
Industrial
Retail
Retail
Retail
Retail
Retail
2035
2040
2021
2062
2034
2020
2062
2018
2028
2022
2026
2020
2037
2020
2033
2029
2027
2022
2019
2023
2020
2022
2019
Fixed Step
Fixed Step
Option
FMV Reset
Month-to-Month
2022
Fixed Step
2018
Fixed Step
2018
2018
2022
2018
2019
2018
2022
2018
Fixed Step
Fixed Step
FMV Reset
Fixed Step
FMV Reset
Fixed Step
Fixed Step
Fixed Step
819
753
751
694
565
485
270
252
237
228
201
200
183
181
163
158
130
130
Remainder *
Various
19.0 Various
Various
Various
Various
Total - Hawai`i Ground Leases
116.8
1,441
$ 11,985
(a) Excludes intersegment ground leases, primarily from our Materials & Construction segment, which are eliminated in our
consolidated results of operations.
* Included in Same-Store portfolio.
6
(2)
U.S. Mainland Commercial Properties
On the Mainland, A&B owns a portfolio of six commercial properties, acquired primarily by way of tax-deferred,
§1031 exchanges and consisting of retail, industrial and office properties, comprising approximately 1.0 million square feet of
leasable space as of December 31, 2017. The occupancy for the Mainland portfolio was 94.1 percent and 90.4 percent as of
December 31, 2017 and 2016, respectively.
A&B’s Mainland commercial properties owned as of December 31, 2017 were as follows:
Property
Retail:
City/State
Year Built/
Renovated
Current
GLA
(sq. ft.)
Occupancy
ABR
($ in 000s)
ABR
PSF
1
Little Cottonwood Center
2 Royal MacArthur Center
*
*
Sandy, UT
1998, 2008
141,500
95.9%
Dallas, TX
2006
44,900
100.0%
Subtotal – Retail
Industrial:
186,400
96.9%
$
$
1,591 $
1,109
2,700 $
11.73
25.61
15.09
3
Sparks Business Center
*
Sparks, NV
1996-1998
396,100
100.0%
2,320
Subtotal – Industrial
Office:
4
1800 and 1820 Preston Park
5 Concorde Commerce Center (a)
6 Deer Valley Financial Center (b)
*
*
*
Plano, TX
1997-1998
Phoenix, AZ
Phoenix, AZ
1998
2001
Subtotal – Office
Total - Mainland Portfolio
(a) This property was subsequently sold in January 2018 for $9.5 million.
(b) This property was subsequently sold in February 2018 for $15.0 million.
* Included in Same-Store portfolio
396,100
100.0% $
2,320 $
198,800
138,700
126,600
464,100
1,046,600
88.0%
91.1%
84.6%
88.0%
94.1%
$
3,483 $
2,641
1,434
7,558
$
12,578 $
6.00
6.00
20.20
20.96
18.75
20.16
13.38
(3)
Tenant Concentrations
A&B’s top ten tenants as of December 31, 2017 (ranked by ABR) were as follows:
Tenant (a)
Sam's Club
$
CVS Corporation (including Longs Drugs)
United Healthcare Services
Foodland Supermarket & related companies
24 Hour Fitness USA
Albertsons Companies (including Safeway)
Whole Foods Market
Office Depot
Ross Dress for Less
Liberty Dialysis Hawai`i
Total
ABR
($ in 000s)
% of Total
Portfolio
ABR
GLA
(sq. ft.)
% of Total
Portfolio
GLA
3,308
2,623
2,270
1,858
1,375
1,316
1,210
1,138
890
842
4.4%
3.5%
3.0%
2.5%
1.8%
1.7%
1.6%
1.5%
1.2%
1.1%
180,908
150,411
108,100
112,929
45,870
168,621
31,647
75,824
35,308
23,271
4.5%
3.7%
2.7%
2.8%
1.1%
4.2%
0.8%
1.9%
0.9%
0.6%
$
16,830
22.3%
932,889
23.2%
(a) Excludes intersegment ground leases, primarily from our Materials & Construction segment, which are eliminated in our
consolidated results of operations.
7
(4)
Lease Expirations
The Company’s schedule of lease expirations for its total portfolio is as follows:
Expiration Year
Number
of Leases
Square
Footage of
Expiring
Leases
% of Total
Portfolio
Leased GLA
ABR
Expiring
($ in 000s)
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
Thereafter
Month-to-month
Total
154
152
143
101
102
44
16
20
13
13
19
131
908
$
530,808
634,441
493,356
477,561
333,549
225,549
180,876
58,050
43,546
135,756
273,323
371,021
14.1%
16.9%
13.2%
12.7%
8.9%
6.0%
4.8%
1.5%
1.2%
3.6%
7.2%
9.9%
9,523
12,279
11,297
11,196
9,498
4,796
4,617
2,263
1,918
3,370
5,574
5,847
% of Total
Portfolio
Expiring
ABR
11.6%
14.9%
13.7%
13.6%
11.6%
5.8%
5.6%
2.8%
2.3%
4.1%
6.9%
7.1%
3,757,836
100.0%
$
82,178
100.0%
B.
Land Operations Segment
A&B's Land Operations segment creates value through actively managing and deploying the Company's land and real
estate-related assets to their highest and best use. Primary activities of the Land Operations segment include leasing agricultural
land, planning, zoning, financing, constructing, purchasing, managing, selling, and investing in real property; renewable energy;
and diversified agribusiness.
8
(1)
Landholdings
As of December 31, 2017, A&B and its subsidiaries owned 86,315 acres, consisting of 86,234 acres in Hawai`i and 81
acres on the U.S. Mainland as follows:
Type
Segment
Maui
Kauai
Oahu
Molokai
Hawai`i
Island
Total
Hawai`i
Acres Mainland
Total
Acres
Land under commercial properties/
urban ground leases
CRE
Land in active development
Development for sale
Development for hold
Other
Subtotal - Land in active
development
Land Operations
CRE
Land Operations
Land used in other operations
Land Operations
Urban land, not in active
development/use
Developable, with full or partial
infrastructure
Land Operations
Developable, with limited or no
infrastructure
Other
Land Operations
Land Operations
Subtotal - Urban land, not in
active development
Agriculture-related
Agriculture
Land Operations
47,769
In urban entitlement process
Land Operations
Conservation & preservation
Land Operations
Subtotal - Agriculture-related
Materials & Construction
M&C
357
15,845
63,971
1
96
106
9
81
196
22
149
186
13
348
19
—
—
—
—
20
7
28
7
42
6,358
260
13,309
19,927
—
184
4
—
—
4
—
—
—
—
—
75
—
509
584
541
Total Landholdings
64,634
20,008
1,313
—
—
—
—
—
—
—
—
—
—
—
—
—
—
264
264
15
—
—
—
—
—
—
—
—
—
—
—
—
—
—
15
314
110
9
81
200
42
156
214
20
390
54,202
617
29,663
84,482
806
86,234
81
—
—
—
—
—
—
—
—
—
—
—
—
—
—
81
395
110
9
81
200
42
156
214
20
390
54,202
617
29,663
84,482
806
86,315
The table above does not include 985 acres under joint venture development that are shown below:
Joint Venture Projects
Kukui'ula (Kauai, HI)
California joint ventures
Ka Milo (Big Island, HI)
Keala o Wailea (Maui, HI)
The Collection (Oahu, HI)
Total
Original Acres
Acres at
December 31,
2017
1,010
75
31
7
3
1,126
895
75
8
7
—
985
An additional 1,068 acres on Maui, Kauai and Oahu are leased from third parties and are not included in any of the
tables.
9
Land Designation and Water:
On Maui, the Company owns over 47,000 acres of agricultural land. Nearly 32,000 acres of these working lands,
formerly farmed in sugar, have been classified by the Company as core agricultural landholdings and are being transitioned to
diversified agricultural uses. This transition is expected to occur over a multi-year period.
On Kauai, approximately 3,000 acres are cultivated in coffee by Massimo Zanetti Beverage USA, Inc. on land leased
from A&B. Additional acreage is leased to third-party operators, with uses ranging from seed corn cultivation to pasture land
and includes sites for renewable energy generating facilities.
The Hawai`i Legislature, in 2005, passed Important Agricultural Lands (“IAL”) legislation to fulfill the State's
constitutional mandate to protect agricultural lands, promote diversified agriculture, increase the state’s agricultural self-
sufficiency, and assure the long-term availability of agriculturally suitable lands. In 2008, the Legislature passed a package of
incentives, which was necessary to trigger the IAL system of land designation. In 2009, A&B received approval from the State
Land Use Commission for the designation of over 27,000 acres on Maui and over 3,700 acres on Kauai as IAL. These
designations were the result of voluntary petitions filed by A&B.
A&B holds rights to an irrigation system in West Maui, which provided approximately 13 percent of the irrigation
water used by HC&S during the last ten years of its operations. A&B also owns approximately 15,000 acres of watershed lands
in East Maui, which supply a portion of the irrigation water used to irrigate the core agricultural lands owned by the Company
in central Maui. A&B also held four water licenses to another 30,000 acres owned by the State of Hawai`i in East Maui which,
during the last ten years of its operations, have supplied approximately 56 percent of the irrigation water used by HC&S. The
last of these water license agreements expired in 1986, and all four agreements were then extended as revocable permits that
were renewed annually. For information regarding legal proceedings involving A&B’s irrigation systems, see “Legal
Proceedings” below.
Planning and Zoning:
The entitlement process for development of property in Hawai`i is complex (involving numerous State and County
regulatory approvals), lengthy (spanning multiple years) and costly (requiring significant expenditures for the preparation of
studies and applications for approval). For example, conversion of an agriculturally-zoned parcel usually requires the following
approvals:
• County amendment of the County Community/General Plan to reflect intended use;
•
State Land Use Commission approval to reclassify the parcel from the Agricultural district to the Urban district;
• County approval to rezone the property to the precise land use desired.
The entitlement process is complicated by the conditions, restrictions and exactions that are placed on these approvals,
including, among others, requirements to construct infrastructure improvements, payment of impact fees, restrictions on the
permitted uses of the land, requirements to provide affordable housing and required phased development of projects.
A&B actively works with regulatory agencies, commissions and legislative bodies at various levels of government to
obtain zoning reclassification of land to its highest and best use for both investment and development. A&B designates a parcel
as “fully entitled” or “fully zoned” when all of the above-mentioned land use approvals have been obtained.
10
(2)
Development-for-sale Projects
The Company has an active development pipeline encompassing primary residential, resort residential and industrial
lots for sale across the State of Hawai`i. The following is a summary of the Company’s real estate development-for-sale
portfolio as of December 31, 2017:
Project
Location
Kahala Avenue
Portfolio
The Collection
Keala o Wailea
(MF-11)
Kamalani
(Increment 1)
Ka Milo at
Mauna Lani
The Ridge at Wailea
(MF-19)
Maui Business Park
(Phase II)
Kukui'ula (e)
Honolulu,
Oahu
Honolulu,
Oahu
Wailea,
Maui
Kihei,
Maui
Kona,
Hawai`i
Island
Wailea,
Maui
Kahului,
Maui
Poipu,
Kauai
Product
Type
Est.
Economic
Interest
(a)
Residential
100%
Primary
residential
Resort
residential
Primary
residential
Resort
residential
Resort
residential
Light
industrial
lots
Resort
residential
90%
+/-5%
65%
+/-5%
100%
50%
100%
100%
85%
+/- 5%
Planned
Units or
Saleable
Acres
Units/
Acres
Closed
Target
Sales Price
Range
(PSF)
($ in millions)
A&B
Projected
Capital
Commitment
(JVs Only)
A&B
Gross
Investment
(Life to
Date)
(c)
(d)
Est.
Total
Project
Cost
(b)
135
N/A $
134
17
acres
465
units
70
units
170
units
137
units
5
acres
125
acres
640
acres
13.3
acres
460
units
1
unit
35
units
99
units
1
acre
34
acres
115
acres
$150-$385
$785
$
$
285 $
$600-$1,000 $
67 $
54 $
9 $
64
N/A $
131 $
17 $
10
77
N/A $
N/A $
$400
$530-$800
$60-$100
$38-$60
$40-$110
$
$
$
$
$
54
9
39
17
9
59
854 $
318 $
313
(a) Estimated economic interest represents the Company's estimated share of distributions after return of capital contributions based on current forecasts of
sales activity. Actual results could differ materially from projected results due to the timing of expected sales, increases or decreases in estimated sales
prices or costs and other factors. As a result, estimated economic interests are subject to change. Further, as it relates to certain of our joint venture
projects, information disclosed herein is obtained from our joint venture partners, who maintain the books and records of the related ventures.
(b) Includes land cost at book value, including capitalized interest, but excluding sales commissions and closing costs.
(c) Includes land cost at contribution value and total expected A&B capital to be contributed. The estimate includes due diligence costs and capitalized
interest, but excludes capital projected to be contributed by equity partners, third-party debt, and amounts expected to be funded from project cash flows
and/or buyer deposits.
(d) The book value of active development projects includes land stated at its acquisition value. In the case of development projects on A&B's historical
landholdings, such as Kamalani and Maui Business Park, the value of land would be approximately $150 per acre.
(e) In addition to the main Kukui'ula project included herein, with a book value of $303 million, the Company has investments in three other Kukui'ula-
related joint ventures with a combined book value of $26 million.
Kukui'ula: A&B’s largest active development project is Kukui'ula, a fully amenitized luxury resort residential master
planned community in Poipu, Kauai. In April 2002, A&B entered into a joint venture with DMB Communities II (“DMBC”),
an affiliate of DMB Associates, Inc. ("DMB"), an Arizona-based developer of master-planned communities, for the
development of Kukui'ula on acreage that consisted of historical A&B landholdings. As of December 31, 2017, total capital
contributed to the project was approximately $318 million, which included $30 million representing the value of land initially
contributed by the Company. As of December 31, 2017, DMB has contributed approximately $195 million.
Various vertical construction programs are being pursued at Kukui'ula in joint ventures with five third-party
developers. In 2017, the joint venture recorded 15 sales of lots or homes.
Maui Business Park: Maui Business Park II (“MBP II”) represents the second phase of the Company's Maui Business
Park project in Kahului, Maui. MBP II is zoned for light industrial, retail and office use. As of December 31, 2017,
approximately 91 saleable acres remain available.
Wailea: The Company's landholdings related to active, development-for-sale projects in Wailea, Maui, include the
following projects:
• At the Keala o Wailea (MF-11) project, A&B’s 70 multi-family unit joint venture development with Armstrong
Builders, sitework construction commenced in December 2015. As of December 31, 2017, 66 units were under
binding contracts and closings commenced in the fourth quarter of 2017.
11
• At the Ridge at Wailea (MF-19) project, 4 acres remain available for sale.
Kamalani: A&B’s Kamalani project is a 630-unit residential project on 95 acres in Kihei, Maui. Preliminary
subdivision approval was secured in April 2015. Grading and site-work on the 170-unit Increment 1 commenced in 2016. As of
December 31, 2017, 35 units were closed, and 44 units were under binding contract.
Kahala Avenue Portfolio: The Kahala Avenue Portfolio, on Oahu, was acquired for $128 million in September and
December 2013, primarily consisting of 30 properties totaling 17 acres in the prestigious Kahala neighborhood of East
Honolulu. Through December 31, 2017, revenue from sales totaled $146.6 million. As of December 31, 2017, 13.3 acres were
sold, and 3.7 acres remain available. The six available properties include three higher-value oceanfront properties representing
approximately 127,000 square feet or 78% of the total square footage available for purchase.
(3)
Renewable Energy
A&B has renewable hydroelectric and solar facilities on the island of Kauai, operated by McBryde Resources, Inc.
(“McBryde”), and has two financial investments in solar projects on Kauai and Oahu.
In 2017, McBryde produced 27,019 MWH of hydroelectric power (compared with 28,099 MWH in 2016) and 11,056
MWH of solar power from its Port Allen Solar Facility (compared with 10,700 MWH in 2016). To the extent it is not used in
A&B-related operations, McBryde sells electricity to Kauai Island Utility Cooperative (“KIUC”). Power sales in 2017
amounted to 30,861 MWH (compared with 30,783 MWH in 2016).
In 2017, the Company generated a limited amount of hydroelectric power in connection with irrigation operations to
support diversified agricultural activities on Maui. The power was used in A&B-related operations. No power was sold to Maui
Electric Company in 2017, as the Company's previously-existing power purchase agreement was terminated in conjunction
with the cessation of sugar operations at HC&S.
C.
(1)
Materials & Construction
Quarries and Quarry Facilities
Grace owns 541 acres in Makakilo, Oahu, approximately 200 acres of which are used for its quarrying operations.
Approximately 750,000 tons of rock were mined and processed by Grace in 2017. The operation of the quarry is governed by
special and conditional use permits, which allow Grace to extract aggregate through 2032. Grace also owns approximately 264
acres on Molokai, which are licensed to a third-party operator for quarrying operations.
(2)
Equipment
Grace owns approximately 525 pieces of on- and off-highway rolling stock, which consist of heavy duty trucks,
passenger vehicles and various road paving, quarrying and operations equipment. Additionally, Grace owns approximately 560
pieces of non-rolling stock items used in its operations, such as generators, transit tankers, light towers, message boards and
nuclear gauges. The Materials & Construction segment has six rock crushing plants and seven asphaltic concrete plants (three
on Oahu, one on Maui, one on Kauai, one on the Island of Hawai`i, and one on Molokai).
(3)
Backlog
As of December 31, 2017, total backlog, including the backlog of Grace, GPRS, GP/RM and Maui Paving, LLC, a 50-
percent-owned unconsolidated affiliate, was approximately $202.1 million, compared to $242.9 million at December 31, 2016.
For purposes of calculating backlog, the entire estimated revenue attributable to Grace's consolidated subsidiaries and the entire
backlog of Maui Paving, which was approximately $10.6 million and $15.0 million at December 31, 2017 and 2016,
respectively, was included. Backlog represents the amount of revenue that Grace and Maui Paving expect to realize on
contracts awarded or government contracts in which Grace Pacific has been confirmed to be the lowest bidder and formal
communication of the award is deemed to be perfunctory.
The length of time that projects remain in backlog can span from a few days for a small volume of work to
approximately 36 months for large paving contracts and contracts performed in phases. Backlog includes estimated revenue
from the remaining portion of contracts not yet completed, as well as revenue from approved change orders.
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Employees and Labor Relations
As of December 31, 2017, A&B and its subsidiaries had 836 regular full-time employees, as compared to 808 regular
full-time employees in the prior year. At the end of 2017, the Company's Materials & Construction segment employed 591
regular full-time employees. Approximately 53 percent of A&B's employees are covered by collective bargaining agreements
with unions.
The 19 bargaining unit employees at KT&S are covered by a collective bargaining agreement with the ILWU that
expires on March 31, 2018. There are two collective bargaining agreements with 18 A&B Fleet Services employees on the Big
Island and Kauai, represented by the ILWU. Both the Kauai and Big Island agreements expire on August 31, 2020.
A collective bargaining agreement with the International Union of Operating Engineers AFL-CIO, Local Union 3
(“IUOE”) covers 197 of Grace’s employees, who are primarily classified as heavy-duty equipment operators, paving
construction site workers, quarry workers, truck drivers and mechanics. The agreement expires on September 2, 2019.
Collective bargaining agreements with Laborers International Union of North America Local 368 (“Laborers”) cover
201 Grace employees. The traffic and rentals Laborers’ agreement expires on August 31, 2018; the precast/prestress concrete
Laborers’ agreement expires on August 31, 2019; and the Laborers' agreement with fence, guardrail and sign installation
workers expires on September 30, 2019.
A collective bargaining agreement with the Hawai`i Regional Council of Carpenters, United Brotherhood of
Carpenters and Joiners of America, and its Affiliated Local Unions and General Contractors Labor Association and the Building
Industry Labor Association of Hawai`i (“Carpenters”) cover six Grace employees. The Carpenters agreement expires on
August 31, 2019.
Available Information
A&B files reports with the Securities and Exchange Commission (the “SEC”). The reports and other information filed
include: annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other reports and
information filed under the Securities Exchange Act of 1934 (the “Exchange Act”).
The public may read and copy any materials A&B files with the SEC at the SEC’s Public Reference Room at 100
F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by
calling the SEC at 1-800-SEC-0330. The SEC maintains a website at www.sec.gov, which contains reports, proxy and
information statements, and other information regarding A&B and other issuers that file electronically with the SEC.
A&B makes available, free of charge on or through its Internet website, A&B’s annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after it electronically files such material with, or
furnishes it to, the SEC. A&B’s website address is www.alexanderbaldwin.com.
ITEM 1A. RISK FACTORS
A&B’s business and its common stock are subject to a number of risks and uncertainties. You should carefully consider
the risks and uncertainties described below, together with all of the other information in this Form 10-K and the Company’s
filings with the U.S. Securities and Exchange Commission. Based on information currently known, A&B believes that the
following information identifies the most significant risk factors affecting A&B’s business and its common stock. However, the
risks and uncertainties faced by A&B are not limited to those described below, nor are they listed in order of significance.
Additional risks and uncertainties not presently known to A&B or that it currently believes to be immaterial may also
materially adversely affect A&B’s business, liquidity, financial condition, results of operation and cash flows. This Form 10-K
also contains forward-looking statements that involve risks and uncertainties.
If any of the following events occur, A&B’s business, liquidity, financial condition, results of operations and cash flows
could be materially adversely affected, and the trading price of A&B common stock could materially decline.
Risks Related to REIT Status
Qualification as a REIT involves highly technical and complex provisions of the Internal Revenue Code of 1986 (“Code”).
Qualification as a REIT involves the application of highly technical and complex Code provisions to our
operations, as well as various factual determinations concerning matters and circumstances not entirely within our control.
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There are only limited judicial and administrative interpretations of these provisions. Even a technical or inadvertent
violation could jeopardize our REIT qualification.
If we fail to remain qualified as a REIT, we would be subject to U.S. federal income tax as a regular corporation and
could face a substantial tax liability, which would reduce the amount of cash available for distribution to our
shareholders.
We have determined that we operated in compliance with the REIT requirements commencing with the taxable
year ended December 31, 2017. Our qualification and taxation as a REIT depends on our ability to meet, on a continuing
basis, various requirements concerning, among other things, the sources of our income, the nature of our assets, the
diversity of our share ownership and the amounts we distribute to our shareholders. Our ability to satisfy the asset tests
depends upon our analysis of the characterization and fair market values of our assets, some of which are not susceptible to
a precise determination, and for which we will not obtain independent appraisals. Although we intend to operate in a
manner consistent with the REIT requirements, we cannot assure you that we will remain so qualified.
If, in any taxable year, we fail to qualify as a REIT, we would be subject to U.S. federal and state income tax
(including, for the 2017 taxable year, any applicable alternative minimum tax) on our taxable income at regular corporate
rates, and we would not be allowed a deduction for distributions to shareholders in computing our taxable income. Any
resulting corporate tax liability could be substantial and would reduce the amount of cash available for distribution to our
shareholders, which, in turn, could have an adverse impact on the value of our common stock. In addition, unless we are
entitled to relief under certain Code provisions, we also would be disqualified from re-electing REIT status for the four
taxable years following the year in which we failed to qualify as a REIT. However, for taxable years that begin after
December 31, 2017 and before January 1, 2026, shareholders that are individuals, trusts or estates are generally entitled to a
deduction equal to 20% of the aggregate amount of ordinary income dividends received from a REIT, subject to certain
limitations.
Our significant use of taxable REIT subsidiaries (“TRSs”) may cause us to fail to qualify as a REIT.
The net income of our TRSs is not required to be transferred to us, and such TRS income that is not transferred to
us is generally not subject to our REIT distribution requirements. However, if the accumulation of cash or reinvestment of
significant earnings in our TRSs causes the fair market value of our securities in those entities, taken together with other
non-qualifying assets, to represent more than 25% of the fair market value of our total assets, or causes the fair market value
of our TRS securities alone to exceed 25% (or, for 2018 and subsequent taxable years, 20%) of the fair market value of our
total assets, in each case as determined for REIT asset testing purposes, we would, absent timely responsive action, fail to
qualify as a REIT.
Complying with the REIT requirements may cause us to sell assets or forgo otherwise attractive investment opportunities.
To qualify as a REIT, we must continually satisfy various requirements concerning, among other things, the nature
of our assets, the sources of our income and the amounts we distribute to our shareholders. For example, we must ensure
that, at the end of each calendar quarter, at least 75% of the value of our total assets consists of some combination of “real
estate assets” (as defined in the Code), cash, cash items and U.S. government securities. The remainder of our investments
(other than government securities, qualified real estate assets and securities issued by a TRS) generally cannot include more
than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding
securities of any one issuer. In addition, in general, no more than 5% of the value of our total assets (other than government
securities, qualified real estate assets and securities issued by a TRS) can consist of the securities of any one issuer, and no
more than 25% (or, for 2018 and subsequent taxable years, 20%) of the value of our total assets can be represented by
securities of one or more TRSs. If we fail to comply with these requirements at the end of any calendar quarter, we must
correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to
avoid losing our REIT qualification and suffering adverse tax consequences. As a result, we may be required to sell assets or
forgo otherwise attractive investment opportunities. These actions could have the effect of reducing our income, amounts
available for distribution to our shareholders and amounts available for making payments on our indebtedness.
We may be required to borrow funds, sell assets or raise equity to satisfy our REIT distribution requirements, which could
adversely affect our ability to execute our business plan and grow.
We generally must distribute annually at least 90% of our REIT taxable income, determined without regard to the
dividends paid deduction and excluding any net capital gains, to qualify as a REIT. To the extent that we satisfy this
distribution requirement and qualify as a REIT but distribute less than 100% of our REIT taxable income, including any net
capital gains, we will be subject to tax at ordinary corporate tax rates on the retained portion. In addition, we will be subject
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to a 4% nondeductible excise tax if the actual amount that we distribute to our shareholders in a calendar year is less than a
minimum amount specified under U.S. federal tax laws. We intend to make distributions to our shareholders to comply with
the REIT requirements of the Code.
From time to time, we may generate taxable income greater than our cash flow as a result of differences in timing
between the recognition of taxable income and the actual receipt of cash or the effect of nondeductible capital expenditures,
the creation of reserves or required debt or amortization payments. If we do not have other funds available in these
situations, we could be required to borrow funds on unfavorable terms, sell assets at disadvantageous prices or distribute
amounts that would otherwise be invested in future acquisitions to make distributions sufficient to enable us to pay out
enough of our taxable income to satisfy the REIT distribution requirement and to avoid corporate income tax and the 4%
excise tax in a particular year. These alternatives could increase our costs or reduce our equity or adversely impact our
ability to raise short- and long- term debt. Furthermore, the REIT distribution requirements may increase the financing we
need to fund capital expenditures and further growth and expansion initiatives. Thus, compliance with the REIT
requirements may hinder our ability to grow, which could adversely affect the value of our common stock.
Whether we issue equity, at what price and the amount and other terms of any such issuances will depend on many
factors, including alternative sources of capital, our then-existing leverage, our need for additional capital, market
conditions and other factors beyond our control. If we raise additional funds through the issuance of equity securities or
debt convertible into equity securities, the percentage of stock owned by our existing shareholders may be reduced. In
addition, new equity securities or convertible debt securities could have rights, preferences and privileges senior to those of
our current shareholders, which could substantially decrease the value of our securities owned by them. Depending on the
share price we are able to obtain, we may have to sell a significant number of shares to raise the capital we deem necessary
to execute our long-term strategy, and our shareholders may experience dilution in the value of their shares as a result.
Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends.
The maximum U.S. federal income tax rate applicable to income from “qualified dividends” payable to U.S.
shareholders that are individuals, trusts and estates is currently 20%. Dividends payable by REITs, however, generally are
not eligible for the reduced rates applicable to qualified dividends. Although these rules do not adversely affect the taxation
of REITs, the more favorable rates applicable to regular corporate qualified dividends could cause investors who are
individuals, trusts and estates to perceive investments in REITs to be relatively less attractive than investments in the stocks
of non-REIT corporations that pay dividends, which could adversely affect the value of the stock of REITs, including our
common stock. However, for taxable years that begin after December 31, 2017 and before January 1, 2026, shareholders
that are individuals, trusts or estates are generally entitled to a deduction equal to 20% of the aggregate amount of ordinary
income dividends received from a REIT, subject to certain limitations.
The REIT ownership limitations and transfer restrictions contained in our articles of incorporation may restrict or prevent
you from engaging in certain transfers of our common stock, and could have unintended antitakeover effects.
For us to satisfy the REIT requirements, no more than 50% in value of all classes or series of our outstanding
shares of stock may be owned, actually or constructively, by five or fewer individuals (as defined in the Code to include
certain entities) at any time during the last half of each taxable year beginning with our 2018 taxable year. In addition, our
capital stock must be beneficially owned by 100 or more persons during at least 335 days of a taxable year of 12 months or
during a proportionate part of a shorter taxable year beginning with our 2018 taxable year. Among other things, our articles
of incorporation generally restrict shareholders from owning more than 9.8% of our outstanding shares. Under applicable
constructive ownership rules, any shares of stock owned by certain affiliated owners generally would be added together for
purposes of the stock ownership limits. These ownership limitations may prevent you from engaging in certain transfers of
our common stock.
Furthermore, the ownership limitations and transfer restrictions contained in our articles of incorporation may
delay, deter or prevent a transaction or a change in control that might involve a premium price for our stock or otherwise be
in the best interests of our shareholders. As a result, the overall effect of the ownership limitations and transfer restrictions
may be to render more difficult or discourage any attempt to acquire us, even if such acquisition may be favorable to the
interests of our shareholders. This potential inability to obtain a premium could reduce the price of our common stock.
Our cash distributions are not guaranteed and may fluctuate.
A REIT generally is required to distribute at least 90% of its REIT taxable income to its shareholders (determined
without regard to the dividends paid deduction and excluding any net capital gains). Generally, we expect to distribute all or
substantially all of our REIT taxable income, including net capital gains, so as to not be subject to the income or excise tax
15
on undistributed REIT taxable income. Our board of directors, in its sole discretion, will determine on a quarterly basis the
amount of cash to be distributed to our shareholders based on a number of factors including, but not limited to, our results
of operations, cash flow and capital requirements, economic conditions, tax considerations, borrowing capacity and other
factors, including debt covenant restrictions, that may impose limitations on cash payments and plans for future acquisitions
and divestitures. Consequently, our distribution levels may fluctuate.
Certain of our business activities may be subject to corporate level income tax and other taxes, which would reduce our cash
flows, and would cause potential deferred and contingent tax liabilities.
Our TRS assets and operations will continue to be subject to U.S. federal income taxes at regular corporate rates.
We may also be subject to a variety of other taxes, including payroll taxes and state, local, and foreign income, property,
transfer and other taxes on assets and operations. In addition, we could, in certain circumstances, be required to pay an
excise or penalty tax, which could be significant in amount, in order to utilize one or more relief provisions under the Code
to maintain qualification for taxation as a REIT. We also could incur a 100% excise tax on transactions with a TRS if they
are not conducted on an arm’s length basis, or we also could be subject to tax in situations and on transactions not presently
contemplated. Any of these taxes would decrease our earnings and our available cash.
If we dispose of an asset held at the REIT level during our first five years as a REIT, we also will be subject to a
federal corporate level tax on the gain recognized from such sale, up to the amount of the built-in gain that existed on
January 1, 2017, which is based on the fair market value of such asset in excess of our tax basis in such asset as of January
1, 2017. We currently do not expect to sell any asset if the sale would result in the imposition of a material tax liability. We
cannot, however, assure you that we will not change our plans in this regard.
In addition, the IRS and any state or local tax authority may successfully assert liabilities against us for corporate
income taxes for taxable years prior to the time we qualified as a REIT, in which case we will owe these taxes plus
applicable interest and penalties, if any. Moreover, any increase in taxable income for these pre-REIT periods will likely
result in an increase in pre-REIT accumulated earnings and profits, which could cause us to pay an additional taxable
distribution to our shareholders after the relevant determination.
The tax imposed on REITs engaging in “prohibited transactions” may limit our ability to engage in transactions that would
be treated as sales for federal income tax purposes.
A REIT’s net income from prohibited transactions is subject to a 100% penalty tax. The term “prohibited
transaction” generally includes a sale or other disposition of property (including mortgage loans, but other than foreclosure
property, as discussed below) that is held primarily for sale to customers in the ordinary course of our trade or business. We
might be subject to this tax if we were to dispose of or securitize loans in a manner that was treated as a prohibited
transaction for U.S. federal income tax purposes.
We intend to conduct our operations so that no asset that we own (or are treated as owning) will be treated as, or as
having been, held for sale to customers, and that a sale of any such asset will not be treated as having been in the ordinary
course of our business. As a result, we may choose not to engage in certain sales of loans at the REIT level, and may limit the
structures we utilize for our securitization transactions, even though the sales or structures might otherwise be beneficial to us.
In addition, whether property is held “primarily for sale to customers in the ordinary course of a trade or business” depends on
the particular facts and circumstances. No assurance can be given that any property that we sell will not be treated as property
held for sale to customers, or that we can comply with certain safe-harbor provisions of the Internal Revenue Code that would
prevent such treatment. The 100% prohibited transaction tax does not apply to gains from the sale of property that is held
through a TRS or other taxable corporation, although such income will be subject to tax in the hands of the corporation at
regular corporate rates. We intend to structure our activities to prevent prohibited transaction characterization.
Changes to U.S. federal and state income tax laws could materially affect us and our stockholders.
The present U.S. federal income tax treatment of REITs may be modified, possibly with retroactive effect, by
legislative, judicial or administrative action at any time, which could affect the U.S. federal income tax treatment of an
investment in our common equity. The U.S. federal income tax rules dealing with REITs constantly are under review by
persons involved in the legislative process, the IRS and the U.S. Treasury Department, which results in statutory changes as
well as frequent revisions to regulations and interpretations. The recently enacted Tax Cuts and Jobs Act made substantial
changes to the Code. Among those changes are a significant permanent reduction in the generally applicable corporate tax rate,
changes in the taxation of individuals and other non-corporate taxpayers that generally but not universally reduce their taxes on
a temporary basis subject to ‘‘sunset’’ provisions, the elimination or modification of various currently allowed deductions
(including substantial limitations on the deductibility of interest and, in the case of individuals, the deduction for personal state
16
and local taxes), certain additional limitations on the deduction of net operating losses, and preferential rates of taxation on
most ordinary REIT dividends and certain business income derived by non-corporate taxpayers in comparison to other ordinary
income recognized by such taxpayers.
The effect of these, and the many other, changes made in the Tax Cuts and Jobs Act is highly uncertain, both in terms
of their direct effect on the taxation of an investment in our common equity and their indirect effect on the value of our assets
or market conditions generally. Furthermore, many of the provisions of the Tax Cuts and Jobs Act will require guidance through
the issuance of Treasury regulations in order to assess their effect. There may be a substantial delay before such regulations are
promulgated, increasing the uncertainty as to the ultimate effect of the statutory amendments on us. There may also be technical
corrections legislation proposed with respect to the Tax Cuts and Jobs Act, the effect and timing of which cannot be predicted
and may be adverse to us or our stockholders.
You are urged to consult with your tax advisor with respect to the status of legislative, regulatory or administrative
developments and proposals and their potential effect on an investment in our stock.
Changes to the Hawai`i tax code could result in increased state-level taxation of REITs doing business in Hawai`i or
mandated state-level withholding of taxes on REIT dividends.
The Hawai`i State legislature has recently considered legislation that would eliminate the REIT dividends paid
deduction for Hawai`i State income tax purposes for income generated in Hawai`i for a number of years or permanently. Such a
repeal could result in double taxation of REIT income in Hawai`i under the Hawai`i tax code, reduce returns to shareholders
and make our stock less attractive to investors, which could in turn lower the value of our stock. The Hawai`i State legislature
also has considered mandating withholding of Hawai`i State income tax on dividends paid to out-of-state shareholders. Such
shareholders may not be able to receive a credit of these taxes from their home state, thereby resulting in double taxation of
such dividends. This could reduce returns to shareholders and make our stock less attractive to investors, which could in turn
lower the value or our stock.
The ability of our board of directors to revoke our REIT qualification, without shareholder approval, may cause adverse
consequences to our shareholders.
Our articles of incorporation provide that the board of directors may revoke or otherwise terminate our anticipated
REIT election, without the approval of our shareholders, if it determines that it is no longer in our best interests to continue
to qualify as a REIT. If we cease to be a REIT, we will not be allowed a deduction for dividends paid to shareholders in
computing our taxable income, and we will be subject to U.S. federal income tax at regular corporate rates, which may have
adverse consequences on our total return to our shareholders.
We have limited experience operating as a REIT, which may adversely affect our financial condition, results of
operations, cash flow and ability to satisfy debt service obligations, as well as the per share trading price of our common
stock.
We have begun operating in compliance with the REIT requirements for the taxable year ended December 31,
2017. Accordingly, our senior management team has limited experience operating a REIT, and we cannot assure you that
our past operating experience will be sufficient to operate our company successfully as a REIT. Our limited experience
operating as a REIT could, by adversely affecting our ability to remain qualified as a REIT or otherwise, adversely affect
our financial condition, results of operations, cash flow and ability to satisfy debt service obligations, as well as the per
share trading price of our common stock.
Our articles of incorporation contains restrictions on the ownership and transfer of our stock, though they may not be
successful in preserving our qualification for taxation as a REIT.
For us to remain qualified for taxation as a REIT, no more than 50% of the value of outstanding shares of our stock
may be owned, beneficially or constructively, by five or fewer individuals at any time during the last half of each taxable
year other than the first year for which we elect to be taxed as a REIT. In addition, a person actually or constructively
owning 10% or more of the vote or value of the shares of our capital stock could lead to a level of affiliation between the
Company and one or more of its tenants that could cause our revenues from such affiliated tenants to not qualify as rents
from real property. Subject to certain exceptions, our articles of incorporation prohibit any stockholder from owning
beneficially or constructively more than (i) 9.8% in value of the outstanding shares of all classes or series of our capital
stock or (ii) 9.8% in value or number, whichever is more restrictive, of the outstanding shares of any class or series of our
capital stock.
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We refer to these restrictions collectively as the “ownership limits” and we included them in our articles of
incorporation to facilitate our compliance with REIT tax rules. The constructive ownership rules under the Code are
complex and may cause the outstanding stock owned by a group of related individuals or entities to be deemed to be
constructively owned by one individual or entity. As a result, the acquisition of less than 9.8% of our outstanding common
stock (or the outstanding shares of any class or series of our stock) by an individual or entity could cause that individual or
entity or another individual or entity to own constructively in excess of the relevant ownership limits. Any attempt to own or
transfer shares of our common stock or of any of our other capital stock in violation of these restrictions may result in the
shares being automatically transferred to a charitable trust or may be void. Even though our articles of incorporation contain
the ownership limits, there can be no assurance that these provisions will be effective to prevent our qualification for
taxation as a REIT from being jeopardized, including under the affiliated tenant rule. Furthermore, there can be no
assurance that we will be able to enforce the ownership limits. If the restrictions in our articles of incorporation are not
effective and as a result we fail to satisfy the REIT tax rules described above, then absent an applicable relief provision, we
will fail to remain qualified for taxation as a REIT.
Risks Related to Our Business
Changes in economic conditions may result in a decrease in market demand for our real estate assets in Hawai`i and the
Mainland and our materials and construction products.
Our business, including our assets and operations, is concentrated in Hawai`i. A weakening of economic drivers in
Hawai`i, which include tourism, military and consumer spending, public and private construction starts and spending,
personal income growth, and employment, or the weakening of consumer confidence, market demand, or economic
conditions on the Mainland, may adversely affect the demand for or sale of Hawai`i real estate, the level of real estate
leasing activity in Hawai`i and on the Mainland, and demand for our materials and construction products. In addition, an
increase in interest rates or other factors could reduce the market value of our real estate holdings, as well as increase the
cost of buyer financing that may reduce the demand for our real estate assets.
We may face new or increased competition.
There are numerous other developers, buyers, managers and owners of commercial and residential real estate and
undeveloped land that compete or may compete with us for management and leasing revenues, land for development,
properties for acquisition and disposition, and for tenants and purchasers of properties. Intense competition could lead to
increased vacancies, increased tenant incentives, decreased rents, sales prices or sales volume, or lack of development
opportunities.
Our wholly owned subsidiary Grace Pacific LLC (“Grace” or “Grace Pacific”) competes in an industry that favors
the lowest bid. Increasing competitive market conditions, including out-of-state or new in-state contractors competing for a
limited number of projects available, could adversely impact our results of operations through market share erosion due to
lost bids, as well as lower pricing and thus lower margins realized on successful bids. Grace also mines aggregate and
imports asphalt for sale. Grace’s customers could seek alternative sources of supply, similar to some of its competitors that
are importing liquid asphalt and aggregate.
We may face potential difficulties in obtaining operating and development capital.
The successful execution of our strategy requires substantial amounts of operating and development capital.
Sources of such capital could include banks, life insurance companies, public and private offerings of debt or equity,
including rights offerings, sale of certain assets and joint venture partners. If our credit profile deteriorates significantly, our
access to the debt capital markets or our ability to renew our committed lines of credit may become restricted, the cost to
borrow may increase, or we may not be able to refinance debt at the same levels or on the same terms. Further, we rely on
our ability to obtain and draw on a revolving credit facility to support our operations. Volatility in the credit and financial
markets or deterioration in our credit profile may prevent us from accessing funds. There is no assurance that any capital
will be available on terms acceptable to us or at all to satisfy our short or long-term cash needs.
We may raise additional capital in the future on terms that are more stringent to us, that could provide holders of new
issuances rights, preferences and privileges that are senior to those currently held by our common stockholders, or that
could result in dilution of common stock ownership.
To execute our business strategy, we may require additional capital. If we incur additional debt or raise equity, the
terms of the debt or equity issued may give the holders rights, preferences and privileges senior to those of holders of our
common stock, particularly in the event of liquidation. The terms of any new debt may also impose additional and more
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stringent restrictions on our operations than currently in place. If we issue additional common equity, either through public
or private offerings or rights offerings, your percentage ownership in us would decline if you do not participate on a ratable
basis.
Failure to comply with certain restrictive financial covenants contained in our credit facilities could impose restrictions on
our business segments, capital availability or the ability to pursue other activities.
Our credit facilities and term debt contain certain restrictive financial covenants. If we breach any of the covenants
and such breach is not cured in a timely manner or waived by the lenders, and results in default, our access to credit may be
limited or terminated and the lenders could declare any outstanding amounts immediately due and payable.
Increasing interest rates would increase our overall interest expense.
Interest expense on our floating-rate debt ($75.9 million as of December 31, 2017) would increase if interest rates
rise. Additionally, the interest expense associated with fixed-rate debt could rise in future periods when the debt matures and
is refinanced. Furthermore, the value of our commercial real estate portfolio and the market price of our stock could decline
if market interest rates increase and investors seek alternative investments with higher distribution rates.
Our significant operating agreements and leases could be replaced on less favorable terms or may not be replaced.
Our various businesses have significant operating agreements and leases that expire at various points in the future.
These agreements and leases may not be renewed or could be replaced on less favorable terms.
An increase in fuel prices may adversely affect our operating environment and costs.
Fuel prices have a direct impact on the health of the Hawai`i economy. Increases in the price of fuel may result in
higher transportation costs to Hawai`i and adversely affect visitor counts and the cost of goods shipped to Hawai`i, thereby
affecting the strength of the Hawai`i economy and its consumers. Increases in fuel costs also can lead to other non-
recoverable, direct expense increases to us through, for example, increased costs of energy and petroleum-based raw
materials used in the production of aggregate, and the manufacture, transportation, and placement of hot mix asphalt.
Increases in energy costs for our leased real estate portfolio are typically recovered from lessees, although our share of
energy costs increases as a result of lower occupancies, and higher operating cost reimbursements impact the ability to
increase underlying rents. Rising fuel prices also may increase the cost of construction, including delivery costs to Hawai`i,
and the cost of materials that are petroleum-based, thus affecting our real estate development projects and margins.
Noncompliance with, or changes to, federal, state or local law or regulations may adversely affect our business.
We are subject to federal, state and local laws and regulations, including government rate, land use, environmental
and tax regulations. Noncompliance with, or changes to, the laws and regulations governing our business could impose
significant additional costs on us and adversely affect our financial condition and results of operations. For example, the
real estate segments are subject to numerous federal, state and local laws and regulations, which, if changed, or not
complied with may adversely affect our business. We frequently utilize §1031 of the Code to defer taxes when selling
qualifying real estate and reinvesting the proceeds in replacement properties. This often occurs when we sell bulk parcels of
land in Hawai`i or commercial properties in Hawai`i or on the Mainland, all of which typically have a very low tax basis. A
repeal of or adverse amendment to §1031 of the Code, which has often been considered by Congress, could impose
significant additional costs on us. We are subject to Occupational Safety and Health Administration regulations,
Environmental Protection Agency regulations, and state and county permits related to our operations. The Materials &
Construction segment is additionally subject to Mine Safety and Health Administration regulations. The Land Operations
segment is subject the Hawai`i Public Utilities Commission’s regulation of agreements between us and Hawai`i’s utilities
regarding the sale of electric power, and various county, state and federal environmental laws, regulations and permits
governing farming operations and generation of electricity (including, for example, the use of pesticides).
Changes to, or our violation of or inability to comply with any of the laws, regulations and permits mentioned
above could increase our operating costs or ability to operate the affected line of business.
Work stoppages or other labor disruptions by our unionized employees or those of other companies in related industries may
increase operating costs or adversely affect our ability to conduct business.
As of December 31, 2017, approximately 53 percent of our regular full-time employees were covered by collective
bargaining agreements with unions. We may be adversely affected by actions taken by our employees or those of other
companies in related industries against efforts by management to control labor costs, restrain wage or benefits increases or
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modify work practices. Strikes and disruptions may occur as a result of our failure or that of other companies in our industry
to negotiate collective bargaining agreements with such unions successfully. For example, in our Materials & Construction
segment, a labor disruption resulting from a unionized workforce stoppage may significantly impede our production and
ability to complete projects that are in process. Additionally, in our Land Operations segment, we may be unable to
complete construction of a development-for-sale project if building materials or labor are unavailable due to labor
disruptions in the relevant trade groups.
The loss of or damage to key vendor and customer relationships may impact our ability to conduct business and adversely
affect our profitability.
Our business is dependent on our relationships with key vendors, customers and tenants. The loss of or damage to
any of these key relationships may impact our ability to conduct business and adversely affect our profitability.
Interruption, breaches or failure of our information technology and communications systems could impair our ability to
operate, adversely affect our profitability and damage our reputation.
We are dependent on information technology systems. All information technology and communication systems are
subject to reliability issues, integration and compatibility concerns and cybersecurity-threatening intrusions. Further, we
may experience failures caused by the occurrence of a natural disaster or other unanticipated problems at our facilities. Any
failure, or security breaches, of our systems could result in interruptions in our service or production, increased cost, lower
profitability and damage to our reputation.
We are susceptible to weather and natural disasters.
Our Commercial Real Estate and Land Operations segments are vulnerable to natural disasters, such as hurricanes,
earthquakes, tsunamis, floods, fires, tornadoes and unusually heavy or prolonged rain, which could cause personal injury and
loss of life. In addition, natural disasters could damage our real estate holdings, which could result in substantial repair or
replacement costs to the extent not covered by insurance, a reduction in property values, or a loss of revenue, and could have an
adverse effect on our ability to develop, lease and sell properties. The occurrence of natural disasters could also cause increases
in property insurance rates and deductibles, which could reduce demand for, or increase the cost of owning or developing our
properties.
Drought, greater than normal rainfall, hurricanes, low-wind conditions, earthquakes, tsunamis, floods, fires, other
natural disasters, agricultural pestilence, or negligence or intentional malfeasance by individuals, may also adversely impact
the conditions of the land and thereby harming the prospects for the Land Operations segment, including agribusiness-
related activities, our renewable energy operations, and our land infrastructure and facilities, including dams and reservoirs.
For the Materials & Construction segment, because nearly all of the segment’s activities are performed outdoors,
its operations are substantially dependent on weather conditions. For example, periods of wet or other adverse weather
conditions could interrupt paving activities, resulting in delayed or loss of revenue, under-utilization of crews and
equipment and less efficient rates of overhead recovery. Adverse weather conditions also restrict the demand for aggregate
products, increase aggregate production costs and impede its ability to efficiently transport material.
We maintain casualty insurance under policies we believe to be adequate and appropriate. These policies are
generally subject to large retentions and deductibles. Some types of losses, such as losses resulting from physical damage to
dams, generally are not insured. In some cases we retain the entire risk of loss because it is not economically prudent to
purchase insurance coverage or because of the perceived remoteness of the risk. Other risks are uninsured because
insurance coverage may not be commercially available. Finally, we retain all risk of loss that exceeds the limits of our
insurance.
Heightened security measures, war, actual or threatened terrorist attacks, efforts to combat terrorism and other acts of
violence may adversely impact our operations and profitability.
As our business is concentrated in Hawai`i, an attack on Hawai`i as a result of war or terrorism may severely or
irreparably harm the Company, including our real estate holdings, our facilities and information technology systems, and
personnel.
War, geopolitical instability, terrorist attacks and other acts of violence may also cause consumer confidence and
spending to decrease, or may affect the ability or willingness of tourists to travel to Hawai`i, thereby adversely affecting
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Hawai`i’s economy and us. Future terrorist attacks could also increase the volatility in the U.S. and worldwide financial
markets
Loss of our key personnel could adversely affect our business.
Our future success will depend, in significant part, upon the continued services of our key personnel, including our
senior management and skilled employees. The loss of the services of key personnel could adversely affect our future
operating results because of such employee’s experience, knowledge of our business and relationships. If key employees
depart, we may have to incur significant costs to replace them, and our ability to execute our business model could be
impaired if we cannot replace them in a timely manner. We do not maintain key person insurance on any of our personnel.
We are subject to, and may in the future be subject to, disputes, legal or other proceedings, or government inquiries or
investigations, that could have an adverse effect on us.
The nature of our business exposes us to the potential for disputes, legal or other proceedings, or government
inquiries or investigations, relating to labor and employment matters, contractual disputes, personal injury and property
damage, environmental matters, construction litigation, business practices, and other matters, as discussed in the other risk
factors disclosed in this section. These disputes, individually or collectively, could harm our business by distracting our
management from the operation of our business. If these disputes develop into proceedings, these proceedings, individually
or collectively, could involve or result in significant expenditures or losses by us. As a real estate developer, we may face
warranty and construction defect claims, as described below under “Risks Relating to Our Land Operations Segment.”
Changes in the value of pension assets, or a change in pension law or key assumptions, may result in increased expenses or
plan contributions.
The amount of our employee pension and postretirement benefit costs and obligations are calculated on
assumptions used in the relevant actuarial calculations. Adverse changes in any of these assumptions due to economic or
other factors, changes in discount rates, higher health care costs, or lower actual or expected returns on plan assets, may
result in increased cost or required plan contributions. In addition, a change in federal law, including changes to the
Employee Retirement Income Security Act and Pension Benefit Guaranty Corporation premiums, may adversely affect our
single-employer pension plans and plan funding. These factors, as well as a decline in the fair value of pension plan assets,
may put upward pressure on the cost of providing pension and medical benefits and may increase future pension expense
and required funding contributions. Although we have actively sought to control increases in these costs, there can be no
assurance that we will be successful in limiting future cost and expense increases.
Risks Relating to Our Commercial Real Estate Segment
We are subject to risks associated with real estate construction and development.
Our redevelopment and development-for-hold projects are subject to risks relating to our ability to complete our
projects on time and on budget. Factors that may result in a development project exceeding budget or being prevented from
completion include, but are not limited to:
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our inability to secure sufficient financing or insurance on favorable terms, or at all;
construction delays, defects, or cost overruns, which may increase project development costs;
an increase in commodity or construction costs, including labor costs;
the discovery of hazardous or toxic substances, or other environmental, culturally-sensitive, or related issues;
an inability to obtain, or a significant delay in obtaining, zoning, construction, occupancy and other required
governmental permits and authorizations;
difficulty in complying with local, city, county and state rules and regulations regarding permitting, zoning,
subdivision, utilities, water quality, as well as federal rules and regulations regarding air and water quality and
protection of endangered species and their habitats;
insufficient infrastructure capacity or availability (e.g., water, sewer and roads) to serve the needs of our projects;
an inability to secure tenants necessary to support the project or maintain compliance with debt covenants;
failure to achieve or sustain anticipated occupancy levels;
condemnation of all or parts of development or operating properties, which could adversely affect the value or
viability of such projects; and
instability in the financial industry could reduce the availability of financing.
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Significant instability in the financial industry like that experienced during the financial crisis of 2008-2009, may
result in, among other things, declining property values and increasing defaults on loans. This, in turn, could lead to
increased regulations, tightened credit requirements, reduced liquidity and increased credit risk premiums for virtually all
borrowers. Deterioration in the credit environment may also impact us in other ways, including the credit or solvency of
vendors, tenants, or joint venture partners, the ability of partners to fund their financial obligations to joint ventures and our
access to mortgage financing for our own properties.
We are subject to a number of factors that could cause leasing rental income to decline.
We own a portfolio of commercial income properties. Factors that may adversely affect the portfolio’s profitability
include, but are not limited to:
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a significant number of our tenants are unable to meet their obligations;
increases in non-recoverable operating and ownership costs;
• we are unable to lease space at our properties when the space becomes available;
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the rental rates upon a renewal or a new lease are significantly lower than prior rents or do not increase sufficiently to
cover increases in operating and ownership costs;
the providing of lease concessions, such as free or discounted rents and tenant improvement allowances; and
the discovery of hazardous or toxic substances, or other environmental, culturally-sensitive, or related issues at the
property.
The bankruptcy of key tenants may adversely affect our cash flows and profitability.
We may derive significant cash flows and earnings from certain key tenants. If one or more of these tenants
declares bankruptcy or voluntarily vacates from the leased premise and we are unable to re-lease such space or to re-lease it
on comparable or more favorable terms, we may be adversely impacted. Additionally, we may be further adversely
impacted by an impairment or “write-down” of intangible assets, such as lease-in-place value, favorable lease asset, or a
deferred asset related to straight-line lease rent, associated with a tenant bankruptcy or vacancy.
Our financial results are significantly influenced by the economic growth and strength of Hawai`i.
All of our redevelopment and development-for-hold activity is conducted in Hawai`i. Consequently, the growth
and strength of Hawai`i’s economy has a significant impact on the demand for our real estate development projects. As a
result, any adverse change to the growth or health of Hawai`i’s economy could have an adverse effect on our commercial
real estate business.
The value of our development-for-hold projects and commercial properties is affected by a number of factors.
We have significant investments in various commercial real estate properties and development-for-hold projects.
Weakness in the real estate sector, especially in Hawai`i, difficulty in obtaining or renewing project-level financing, and
changes in our investment and redevelopment and development-for-hold strategy, among other factors, may affect the fair
value of these real estate assets. If the undiscounted cash flows of our commercial properties or redevelopment or
development-for-hold projects were to decline below the carrying value of those assets, we would be required to recognize
an impairment loss if the fair value of those assets were below their carrying value.
Risks Relating to Our Land Operations Segment
We are subject to risks associated with real estate construction and development.
Our development-for-sale projects are subject to risks relating to our ability to complete our projects on time and
on budget. Factors that may result in a development project exceeding budget or being prevented from completion include,
but are not limited to:
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our inability or that of buyers to secure sufficient financing or insurance on favorable terms, or at all;
construction delays, defects, or cost overruns, which may increase project development costs;
an increase in commodity or construction costs, including labor costs;
the discovery of hazardous or toxic substances, or other environmental, culturally-sensitive, or related issues;
an inability to obtain, or a significant delay in obtaining, zoning, construction, occupancy and other required
governmental permits and authorizations;
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difficulty in complying with local, city, county and state rules and regulations regarding permitting, zoning,
subdivision, utilities, affordable housing and water quality, as well as federal rules and regulations regarding air and
water quality and protection of endangered species and their habitats;
insufficient infrastructure capacity or availability (e.g., water, sewer and roads) to serve the needs of our projects;
an inability to secure buyers necessary to support the project or maintain compliance with debt covenants;
failure to achieve or sustain anticipated sales levels;
buyer defaults, including defaults under executed or binding contracts;
condemnation of all or parts of development or operating properties, which could adversely affect the value or
viability of such projects;
an inability to sell our constructed inventory; and
instability in the financial industry could reduce the availability of financing.
Significant instability in the financial industry like that experienced during the financial crisis of 2008-2009, may
result in, among other things, declining property values and increasing defaults on loans. This, in turn, could lead to
increased regulations, tightened credit requirements, reduced liquidity and increased credit risk premiums for virtually all
borrowers. Fewer loan products and strict loan qualifications make it more difficult for borrowers to finance the purchase of
units in our projects. Additionally, more stringent requirements to obtain financing for buyers of commercial properties
make it significantly more difficult for us to sell commercial properties and may negatively impact the sales prices and other
terms of such sales. Deterioration in the credit environment may also impact us in other ways, including the credit or
solvency of customers, vendors, or joint venture partners, the ability of partners to fund their financial obligations to joint
ventures and our access to mortgage financing for our own properties.
Governmental entities have adopted or may adopt regulatory requirements that may restrict our development activity.
We are subject to extensive and complex laws and regulations that affect the land development process, including
laws and regulations related to zoning and permitted land uses. Government entities have adopted or may approve
regulations or laws that could negatively impact the availability of land and development opportunities within those areas. It
is possible that increasingly stringent requirements will be imposed on developers in the future that could adversely affect
our ability to develop projects in the affected markets or could require that we satisfy additional administrative and
regulatory requirements, which could delay development progress or increase the development costs to us.
Real estate development projects are subject to warranty and construction defect claims in the ordinary course of business
that can be significant.
In our development-for-sale projects, we are subject to warranty and construction defect claims arising in the
ordinary course of business. The amounts payable under these claims, both in legal fees and remedying any construction
defects, can be significant and could exceed the profits made from the project. As a consequence, we may maintain liability
insurance, obtain indemnities and certificates of insurance from contractors generally covering claims related to
workmanship and materials, and create warranty and other reserves for projects based on historical experience and
qualitative risks associated with the type of project built. Because of the uncertainties inherent in these matters, we cannot
provide any assurance that our insurance coverage, contractor arrangements and reserves will be adequate to address some
or all of our warranty and construction defect claims in the future. For example, contractual indemnities may be difficult to
enforce, we may be responsible for applicable self-insured retentions, and certain claims may not be covered by insurance
or may exceed applicable coverage limits. Additionally, the coverage offered and the availability of liability insurance for
construction defects could be limited or costly. Accordingly, we cannot provide any assurance that such coverage will be
adequate, available at an acceptable cost, or available at all.
We are involved in joint ventures and subject to risks associated with joint venture relationships.
We are involved in joint venture relationships and may initiate future joint venture projects. A joint venture
involves certain risks such as, among others:
• we may not have voting control over the joint venture;
• we may not be able to maintain good relationships with our venture partners;
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the venture partner at any time may have economic or business interests that are inconsistent with our economic or
business interests;
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the venture partner may fail to fund its share of capital for operations and development activities or to fulfill its other
commitments, including providing accurate and timely accounting and financial information to us;
the joint venture or venture partner could lose key personnel;
the venture partner could become insolvent, requiring us to assume all risks and capital requirements related to the
joint venture project, and any resulting bankruptcy proceedings could have an adverse impact on the operation of the
project or the joint venture; and
• we may be required to perform on guarantees we have provided or agree to provide in the future related to the
completion of a joint venture’s construction and development of a project, joint venture indebtedness, or on
indemnification of a third party serving as surety for a joint venture’s bonds for such completion.
Our financial results are significantly influenced by the economic growth and strength of Hawai`i.
Virtually all of our real estate development activity is conducted in Hawai`i. Consequently, the growth and strength
of Hawai`i’s economy has a significant impact on the demand for our real estate development projects. As a result, any
adverse change to the growth or health of Hawai`i’s economy could have an adverse effect on our real estate business.
The value of our development projects is affected by a number of factors.
We have significant investments in various development projects and joint venture investments. Weakness in the
real estate sector, especially in Hawai`i, difficulty in obtaining or renewing project-level financing, and changes in our
investment and development strategy, among other factors, may affect the fair value of these real estate assets owned by us
or by our joint ventures. If the fair value of our joint venture development projects were to decline below the carrying value
of those assets, and that decline was other-than-temporary, we would be required to recognize an impairment loss.
Additionally, if the undiscounted cash flows of our development projects were to decline below the carrying value of those
assets, we would be required to recognize an impairment loss if the fair value of those assets were below their carrying
value.
Our ability to use or lease agricultural lands for agricultural purposes may be limited by government regulation.
Given the large scale of our agricultural landholdings on Maui and Kauai, many of the third parties to whom we
lease land for agricultural purposes may be characterized as large scale commercial agricultural operations. Legislation
passed on Kauai placed restrictions on the ability of such operations to use land within specified distances of highways,
schools, oceans, streams, residences, parks, care homes, hospitals and other similar uses, to grow crops other than ground
cover. This legislation also put significant restrictions regarding, and public notification obligations concerning, pesticide
use on such operations and limited their ability to use genetically modified organism (GMO) crops. On Maui, similar
legislation passed by a voter initiative placed a moratorium on the ability to farm GMO crops. In November 2016, the Kauai
and Maui legislation was invalidated by the courts. If additional legislative agricultural restrictions are passed, such as
restrictions on the use of pesticides, our ability to use or lease lands for large scale agricultural purposes, and any rents that
we can achieve for those lands, may be adversely affected.
The transition to a diversified agricultural model is subject to both the risks affecting the business generally and the
inherent difficulties associated with implementing and executing the strategy.
Our ability to transition to a new diversified model and improve the operating results depends upon a number of
factors, including:
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the extent to which management has properly understood and is able to manage the dynamics and demands of the
various farming operations comprising the diversified agricultural model, in which we may have limited or no prior
experience;
the ability to secure applicable permits and/or licenses from governmental agencies that may be necessary for
executing the strategy;
the ability to respond to any unanticipated changes in expected cash flows, liquidity, cash needs and cash expenditures
with respect to the new diversified model, including our ability to obtain any additional financing or other liquidity
enhancing transactions, if and when needed;
the ability to execute strategic initiatives in a cost-effective manner, including identifying business partners to explore
potential opportunities; and
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our ability to access adequate, affordable and uninterrupted sources of water (see the “The lack of water for
agricultural irrigation could adversely affect the operations and profitability of the Land Operations segment” risk
factor below).
Commercial agriculture is challenged in Hawaii, as in other U.S. jurisdictions, due to various factors, including high
production costs, a shrinking farm labor base, and community opposition to conventional farming techniques, which include
the use of legally approved chemical pesticides and fertilizers and the concentrated presence of livestock. These factors could
impact our ability to successfully transition to diversified agriculture, and could similarly affect the success of leasehold tenant
farmers on our agricultural lands.
There is no assurance that we will be able to effectively implement and execute a new diversified agricultural
model, which could have an adverse impact on our results of operations.
The diversified agricultural model may not achieve the financial results expected.
We are currently evaluating several categories of replacement agricultural activities in the transition to the
diversified model, including but not limited to energy crops, agroforestry, grass finished livestock operations, diversified
food crops/agricultural park, and orchard crops. There is no assurance that our replacement agricultural activities will be
economically feasible or improve the Land Operations segment’s operating results.
Agricultural land is illiquid and difficult to value.
Even if qualified farm lessees can be identified and engaged in leases, agricultural operations are high risk by nature
and turnover can be expected. From a landlord’s perspective, agricultural leases produce only modest rents that could imply a
valuation of the land that could materially understate other methods of appraising asset value.
Our power sales contracts could be replaced on less favorable terms or may not be replaced.
Our power sales contracts expire at various points in the future and may not be replaced or could be replaced on
less favorable terms, which could adversely affect Land Operations profitability.
The market for power sales in Hawai`i is limited.
The power distribution systems in Hawai`i are small and island-specific; currently, there is no ability to move
power generated on one island to any other island. In addition, Hawai`i law generally limits the ability of independent
power producers, such as us, to sell their output to firms other than the respective utilities on each island, without
themselves becoming utilities and subject to the State’s Public Utilities Commission (PUC) regulation. Further, any sales of
electricity by us to the utilities on each island are subject to the approval of the PUC. Unlike some areas in the Mainland,
Hawai`i’s independent power producers have no ability to use utility infrastructure to transfer power to other locations.
The lack of water for agricultural irrigation could adversely affect the operations and profitability of the Land Operations
segment.
It is crucial for our land to have access to sufficient, reliable and affordable sources of water in order to conduct
any agricultural activity. On Maui, there are regulatory and legal challenges to our ability to divert water from streams. In
addition, access to water is subject to weather patterns that cannot reliably be predicted. If we are limited in our ability to
divert stream waters for our use or there is insufficient rainfall on an extended basis, this would have a significant, adverse
effect on the utility of the land and our ability to employ the land in active agricultural use.
Governmental entities have adopted or may adopt regulatory requirements related to our dams, reservoirs, and other water
infrastructure that may adversely affect our operations.
We are subject to inspections and regulations that apply to certain of our dams, reservoirs, and other water
infrastructure. Certain of these facilities have deficiencies noted by the State of Hawaii, which we are working with the
regulators to resolve. It is possible that current or future requirements imposed on landowners and dam owners/operators may
require that we satisfy additional administrative and regulatory requirements and thereby increase the holding costs to us and/or
decrease the operational utility of the subject facilities.
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Risks Relating to Our Materials & Construction Segment
Our Materials & Construction segment’s revenue growth and profitability are dependent on factors outside of our control.
Our Materials & Construction segment’s ability to grow its revenues and improve profitability is dependent on
factors outside of our control, which include, but are not limited to:
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decreased government funding for infrastructure projects (see the “Economic downturns or reductions in government
funding of infrastructure projects could reduce our revenues and profits from our materials and construction
businesses.” risk factor below);
reduced spending by private sector customers resulting from poor economic conditions in Hawai`i;
an increased number of competitors;
less success in competitive bidding for contracts;
a decline in transportation and logistical costs, which may result in customers purchasing material from sources
located outside of Hawai`i in a more cost-efficient manner;
limitations on access to necessary working capital and investment capital to sustain growth; and
inability to hire and retain essential personnel and to acquire equipment to support growth.
Economic downturns or reductions in government funding of infrastructure projects could reduce our revenues and profits
from our materials and construction businesses.
The segment’s products are used in public infrastructure projects, which include the construction, maintenance and
improvement of highways, streets, roads, airport runways and similar projects. Our materials and construction businesses,
including our aggregates business, are highly dependent on the amount and timing of infrastructure work funded by various
governmental entities, which, in turn, depends on the overall condition of the economy, the need for new or replacement
infrastructure, the priorities placed on various projects funded by governmental entities and federal, state or local
government spending levels. We cannot be assured of the existence, amount and timing of appropriations for spending on
these and other future projects, including state and federal spending on roads and highways. Spending on infrastructure
could decline for numerous reasons, including decreased revenues received by state and local governments for spending on
such projects (including federal funding), and other competing priorities for available state, local and federal funds. State
spending on highway and other projects can be adversely affected by decreases or delays in, or uncertainties regarding,
federal highway funding. The segment is reliant upon contracts with the City and County of Honolulu, the State of Hawai`i
and the Federal Government for a significant portion of its revenues. If revenues and profits are impacted by economic
downturns or reductions in government funding, the segment’s long-lived assets and goodwill may become impaired.
We may face community opposition to the operation or expansion of quarries or other facilities.
Quarries and other segment facilities require special and conditional use permits to operate. Permitting and
licensing applications and proceedings and regulatory enforcement proceedings are all matters open to public scrutiny and
comment. In addition, the Makakilo quarry is adjacent to residential areas and heavy equipment and explosives are used in
the mining process. As a result, from time to time, our Materials & Construction segment operations may be subject to
community opposition and adverse publicity that may have a negative effect on operations and delay or limit any future
expansion or development of segment operations.
Our materials and construction businesses operate only in Hawai`i, and adverse changes to the economy and business
environment in Hawai`i could adversely affect operations and profitability.
Because our operations are concentrated in a specific geographic location, our materials and construction
businesses are susceptible to fluctuations in operations and profitability caused by changes in economic or other conditions
in Hawai`i.
Significant contracts may be canceled or we may be disqualified from bidding for new contracts.
Governmental entities typically have the right to cancel their contracts with our construction businesses at any time
with payment generally only for the work already completed plus a negotiated compensatory overhead recovery amount. In
addition, our construction businesses could be prohibited from bidding on certain governmental contracts if we fail to
maintain qualifications required by those entities, such as maintaining an acceptable safety record.
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If our materials and construction businesses are unable to accurately estimate the overall risks, requirements or costs when
bidding on or negotiating a contract that we are ultimately awarded, the segment may achieve a lower than anticipated
profit or incur a loss on the contract.
The majority of the Materials & Construction segment’s revenues are derived from “quantity pricing” (fixed unit
price) contracts. Approximately 19 percent of 2017 segment revenues and backlog are derived from “lump sum” (fixed total
price) contracts. Quantity pricing contracts require the provision of line-item materials at a fixed unit price based on
approved quantities irrespective of actual per unit costs. Lump sum contracts require that the total amount of work be
performed for a single price irrespective of actual quantities or actual costs. Expected profits on contracts are realized only
if costs are accurately estimated and then successfully controlled. If cost estimates for a contract are inaccurate, or if the
contract is not performed within cost estimates, then cost overruns may result in losses or cause the contract not to be as
profitable as expected.
If our materials and construction businesses are unable to attract and retain key personnel and skilled labor, or encounter
labor difficulties, the ability to bid for and successfully complete contracts may be negatively impacted.
The ability to attract and retain reliable, qualified personnel is a significant factor that enables our materials and
construction businesses to successfully bid for and profitably complete their work. This includes members of management,
project managers, estimators, supervisors, and foremen. The segment’s future success also will depend on its ability to hire,
train and retain, or to attract, when needed, highly skilled management personnel. If competition for these employees is
intense, it could be difficult to hire and retain the personnel necessary to support operations. If we do not succeed in
retaining our current employees and attracting, developing and retaining new highly skilled employees, segment operations
and future earnings may be negatively impacted.
A majority of segment personnel are unionized. Any work stoppage or other labor dispute involving unionized
workforce, or inability to renew contracts with the unions, could have an adverse effect on operations.
Our construction and construction-related businesses may fail to meet schedule or performance requirements of our paving
contracts.
Asphalt paving contracts have penalties for late completion. In most instances, projects must be completed within
an allotted number of business or calendar days from the time the notice to proceed is received, subject to allowances for
additional days due to weather delays or additional work requested by the customer. If our construction businesses
subsequently fail to complete the project as scheduled, we may be responsible for contractually agreed-upon liquidated
damages, an amount assessed per day beyond the contractually allotted days, at the discretion of the customer. Under these
circumstances, the total project cost could exceed original estimates and could result in a loss of profit or a loss on the
project. Additionally, our construction businesses enter into lump sum and quantity pricing contracts where profits can be
adversely affected by a number of factors beyond our control, which can cause actual costs to materially exceed the costs
estimated at the time of our original bid.
Timing of the award and performance of new contracts could have an adverse effect on Materials & Construction segment
operating results and cash flow.
It is generally very difficult to predict whether and when bids for new projects will be offered for tender, as these
projects frequently involve a lengthy and complex design and bidding process, which is affected by a number of factors,
such as market conditions, funding arrangements and governmental approvals. Because of these factors, segment results of
operations and cash flows may fluctuate from quarter to quarter and year to year, and the fluctuation may be substantial.
The uncertainty of the timing of contract awards after a winning bid is submitted may also present difficulties in
matching the size of equipment fleet and work crews with contract needs. In some cases, our materials and construction
businesses may maintain and bear the cost of more equipment than is currently required, in anticipation of future needs for
existing contracts or expected future contracts.
In addition, the timing of the revenues, earnings and cash flows from contracts can be delayed by a number of
factors, including delays in receiving material and equipment from suppliers and services from subcontractors and changes
in the scope of work to be performed.
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Dependence on a limited number of customers could adversely affect our materials and construction businesses and results
of operations.
Due to the size and nature of the segment’s construction contracts, one or a few customers have in the past and
may in the future represent a substantial portion of consolidated segment revenues and gross profits in any one year or over
a period of several consecutive years. For example, in 2017, approximately 86 percent of Grace’s construction related
revenue was generated from projects administered by the federal government, State of Hawai`i, or the various counties in
Hawai`i where Grace served as general contractor or subcontractor. Similarly, segment backlog frequently reflects multiple
contracts for certain customers; therefore, one customer may comprise a significant percentage of backlog at a certain point
in time. For example, the State of Hawai`i comprised approximately 56 percent of Grace’s construction backlog at
December 31, 2017. The loss of business from any such customer, or a default or delay in payment on a significant scale by
a customer, could have an adverse effect on our materials and construction businesses or results of operations.
Our materials and construction businesses are likely to require more capital over the longer term.
The property and machinery needed to produce aggregate products and perform asphaltic concrete paving
contracts are expensive. Although capital needs over the next five years are expected to be relatively modest, over the
longer term, our materials and construction businesses may require increasing annual capital expenditures. The segment’s
ability to generate sufficient cash flow to fund these expenditures depends on future performance, which will be subject to
general economic conditions, industry cycles and financial, business, and other factors affecting operations, many of which
are beyond our control. If the segment is unable to generate sufficient cash to operate its business, it may be required,
among other things, to further reduce or delay planned capital or operating expenditures.
An inability to obtain bonding could limit the aggregate dollar amount of contracts that our materials and construction
businesses are able to pursue.
As is customary in the construction industry, we may be required to provide surety bonds to our customers to
secure our performance under construction contracts. Our ability to obtain surety bonds primarily depends upon our
capitalization, working capital, past performance, management expertise and reputation and certain external factors,
including the overall capacity of the surety market. Surety companies consider such factors in relationship to the amount of
backlog and their underwriting standards, which may change from time to time. Events that adversely affect the insurance
and bonding markets generally may result in bonding becoming more difficult to obtain in the future, or being available
only at a significantly greater cost. The inability to obtain adequate bonding would limit the amount that our construction
businesses are to able bid on new contracts and could have an adverse effect on the segment’s future revenues and business
prospects.
Our Materials & Construction segment operations are subject to hazards that may cause personal injury or property
damage, thereby subjecting us to liabilities and possible losses, which may not be covered by insurance.
Segment employees are subject to the usual hazards associated with performing construction activities on road
construction sites, plants and quarries. Operating hazards can cause personal injury and loss of life, damage to or destruction
of property, plant and equipment and environmental damage. We maintain general liability and excess liability insurance,
workers’ compensation insurance, auto insurance and other types of insurance, all in amounts consistent with our materials
and construction businesses’ risk of loss and industry practice, but this insurance may not be adequate to cover all losses or
liabilities incurred in operations.
Insurance liabilities are difficult to assess and quantify due to unknown factors, including the severity of an injury,
the determination of liability in proportion to other parties, the number of incidents not reported and the effectiveness of the
segment’s safety program. If insurance claims or costs were above our estimates, our materials and construction businesses
might be required to use working capital to satisfy these claims, which could impact their ability to maintain or expand their
operations.
Environmental and other regulatory matters could adversely affect our materials and construction businesses’ ability to
conduct business and could require significant expenditures.
Segment operations are subject to various environmental laws and regulations relating to the management, disposal
and remediation of hazardous substances, climate change and the emission and discharge of pollutants into the air and
water. Our materials and construction businesses could be held liable for such contamination created not only from their
own activities but also from the historical activities of others on properties that the segment acquires or leases. Segment
operations are also subject to laws and regulations relating to workplace safety and worker health, which, among other
28
things, regulate employee exposure to hazardous substances. Violations of such laws and regulations could subject us to
substantial fines and penalties, cleanup costs, third-party property damage or personal injury claims. In addition, these laws
and regulations have become, and enforcement practices and compliance standards are becoming, increasingly stringent.
Moreover, we cannot predict the nature, scope or effect of legislation or regulatory requirements that could be imposed, or
how existing or future laws or regulations will be administered or interpreted, with respect to products or activities to which
they have not been previously applied. Compliance with more stringent laws or regulations, as well as more vigorous
enforcement policies of the regulatory agencies, could require substantial expenditures for, among other things, equipment
not currently possessed, or the acquisition or modification of permits applicable to segment activities.
Short supplies and volatility in the costs of fuel, energy and raw materials may adversely affect our materials and
construction businesses.
Our materials and construction businesses require a continued supply of diesel fuel, electricity and other energy
sources for production and transportation. The financial results of these businesses have at times been affected by the high
costs of these energy sources. Significant increases in costs or reduced availability of these energy sources have and may in
the future reduce financial results. Moreover, fluctuations in the supply and costs of these energy sources can make planning
business operations more difficult. We do not hedge our fuel price risk, but instead focus on volume-related price
reductions, fuel efficiency, alternative fuel sources, consumption and the natural hedge created by the ability to increase
aggregates prices.
Similarly, segment operations also require a continued supply of liquid asphalt, which serves as a key raw material in the
production of asphaltic concrete. Liquid asphalt is subject to potential supply constraints and significant price fluctuations,
which are generally correlated to the price of crude oil, though not as closely as diesel or gasoline, and are beyond the control
of our materials and construction business. Accordingly, significant increases in the price of crude oil will have an adverse
impact on the financial results of the Materials & Construction segment due to higher costs of production of asphaltic concrete.
Conversely, significant declines in the price of oil had, and in the future, may have an adverse impact on our material and
construction sales of liquid asphalt concrete, due to lower costs of importing asphalt to Hawai`i, which may result in customers
sourcing liquid asphalt from competition located outside of Hawai`i.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 3. LEGAL PROCEEDINGS
A&B owns 16,000 acres of watershed lands in East Maui. A&B also held four water licenses to another 30,000 acres
owned by the State of Hawai`i in East Maui. The last of these water license agreements expired in 1986, and all four
agreements were then extended as revocable permits that were renewed annually. In 2001, a request was made to the State
Board of Land and Natural Resources (the "BLNR") to replace these revocable permits with a long-term water lease. Pending
the conclusion by the BLNR of this contested case hearing on the request for the long-term lease, the BLNR has kept the
existing permits on a holdover basis. Three parties filed a lawsuit on April 10, 2015 (the "4/10/15 Lawsuit") alleging that the
BLNR has been renewing the revocable permits annually rather than keeping them in holdover status. The lawsuit asks the
court to void the revocable permits and to declare that the renewals were illegally issued without preparation of an
environmental assessment ("EA"). In December 2015, the BLNR decided to reaffirm its prior decisions to keep the permits in
holdover status. This decision by the BLNR is being challenged by the three parties. In January 2016, the court ruled in the
4/10/15 Lawsuit that the renewals were not subject to the EA requirement, but that the BLNR lacked legal authority to keep the
revocable permits in holdover status beyond one year. The court has allowed the parties to make an immediate appeal of this
ruling. In May 2016, the Hawai`i State Legislature passed House Bill 2501, which specified that the BLNR has the legal
authority to issue holdover revocable permits for the disposition of water rights for a period not to exceed three years. The
governor signed this bill into law as Act 126 in June 2016. Pursuant to Act 126, the annual authorization of the existing
holdover permits was sought and granted by the BLNR in December 2016 and November 2017.
In addition, on May 24, 2001, petitions were filed by a third party, requesting that the Commission on Water Resource
Management of the State of Hawai`i ("Water Commission") establish interim instream flow standards ("IIFS") in 27 East Maui
streams that feed the Company's irrigation system. The Water Commission initially took action on the petitions in 2008 and
2010, but the petitioners requested a contested case hearing to challenge the Water Commission's decisions on certain petitions.
The Water Commission denied the contested case hearing request, but the petitioners successfully appealed the denial to the
Hawai`i Intermediate Court of Appeals, which ordered the Water Commission to grant the request. The Commission then
authorized the appointment of a hearings officer for the contested case hearing and expanded the scope of the contested case
29
hearing to encompass all 27 petitions for amendment of the IIFS for East Maui streams in 23 hydrologic units. The evidentiary
phase of the hearing before the Commission-appointed hearings officer was completed on April 2, 2015. On January 15, 2016,
the Commission-appointed hearings officer issued his recommended decision on the petitions. The recommended decision
would restore water to streams in 11 of the 23 hydrologic units. In March 2016, the hearings officer ordered a reopening of the
contested case proceedings in light of the Company’s January 2016 announcement to cease sugar operations at HC&S by the
end of the year and to transition to a new diversified agricultural model on the former sugar lands. In April 2016, the Company
announced its commitment to fully and permanently restore the priority taro streams identified by the petitioners. Re-opened
evidentiary hearings occurred in the first quarter of 2017 and a decision is pending. In August 2017, the hearings officer in the
reopened evidentiary hearing issued his proposed decision. The Commission heard arguments on the proposed decision in
October 2017.
HC&S also used water from four streams in Central Maui ("Na Wai Eha") to irrigate its agricultural lands in Central
Maui. Beginning in 2004, the Water Commission began proceedings to establish IIFS for the Na Wai Eha streams. Before the
IIFS proceedings were concluded, the Water Commission designated Na Wai Eha as a surface water management area,
meaning that all uses of water from these streams required water use permits issued by the Water Commission. Following
contested case proceedings, the Water Commission established IIFS in 2010, but that decision was appealed, and the Hawai`i
Supreme Court remanded the case to the Water Commission for further proceedings. The parties to the IIFS contested case
settled the case in 2014. Thereafter, proceedings for the issuance of water use permits commenced with over 100 applicants,
including HC&S, vying for permits. While the water use permit proceedings were ongoing, A&B announced the cessation of
sugar cane cultivation at the end of 2016. This announcement triggered a re-opening and reconsideration of the 2014 IIFS
decision. Contested case proceedings were held to simultaneously reconsider the IIFS, determine appurtenant water rights, and
consider applications for water use permits. Based on those proceedings, the Hearing Officer issued his recommendation to the
Water Commission on November 1, 2017. The Commission has not yet issued its decision.
If the Company is not permitted to use sufficient quantities of stream waters, it would have a material adverse effect
on the Company’s pursuit of a diversified agribusiness model in subsequent years and the value of the Company’s agricultural
lands.
A&B is a party to, or may be contingently liable in connection with, other legal actions arising in the normal conduct
of its businesses, the outcomes of which, in the opinion of management after consultation with counsel, would not have a
material effect on A&B’s consolidated financial statements as a whole.
ITEM 4. MINE SAFETY DISCLOSURES
The information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the
Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulations S-K (17 CFR 229.104) is included
in Exhibit 95 to this Annual Report on Form 10-K.
30
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
As of February 15, 2018, there were 2,244 shareholders of record of A&B common stock. In addition, Cede & Co.,
which appears as a single record holder, represents the holdings of thousands of beneficial owners of A&B common stock.
The following performance graph compares the monthly dollar change in the cumulative shareholder return on the
Company’s common stock:
COMPAPP RISON OF 5 YEAR CUMULATIAA VE TOTATT L RETURN*
Among Alexander & Baldwin, Inc., the S&P 500 Index,
the S&P Midcap 400 Index, the Dow Jones US Industrial Average Index
and the Dow Jones US Real Estate Index
$250
$225
$200
$175
$150
$125
$100
$75
$50
12/12
12/13
12/14
12/15
12/16
12/17
Alexander & Baldwin, Inc.
S&P 500
S&P Midcap 400
Dow Jones US Real Estate
Dow Jones US Industrial Average
*$100 invested on 12/31/12 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.
Copyright© 2018 Standard & Poor's, a division of S&P Global. All rights reservrr ed.
Copyright© 2018 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reservrr ed.
Trading volume averaged 213,042 shares a day in 2017, 178,858 shares a day in 2016, and 172,542 shares a day in
2015.
31
The quarterly intra-day high and low sales prices and end of quarter closing prices, as reported by the New York Stock
Exchange, were as follows:
Dividends
Paid Per
Share
Market Price
Low
High
Close
$
$
$
$
$
$
$
$
0.06
0.06
0.06
0.07
$ 37.83
$ 39.36
$ 42.80
$ 46.43
$ 28.82
$ 32.94
$ 35.12
$ 36.98
$ 36.68
$ 36.14
$ 38.42
$ 44.87
0.07
0.07
0.07
15.92
$ 46.27
$ 46.87
$ 46.67
$ 46.96
$ 40.78
$ 39.53
$ 40.58
$ 27.50
$ 44.52
$ 41.38
$ 46.33
$ 27.74
2016
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2017
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
During the fourth quarter of 2017, the Company declared a distribution to its shareholders in the aggregate amount of
$783 million (approximately $15.92 per share) ("Special Distribution"), which represented the Company's previously
undistributed non-REIT earnings and profits accumulated prior to January 1, 2017, the Company's REIT taxable income for the
2017 taxable year, and a substantial portion of the Company's estimated REIT taxable income for the 2018 taxable year. The
Company completed the payment of the Special Distribution on January 23, 2018 through an aggregate of $156.6 million in
cash and the issuance of 22,587,299 shares of the Company's common stock.
The Company has completed a conversion process to qualify as a REIT commencing with the taxable year ended
December 31, 2017. As a REIT the Company is generally required to distribute at least 90% of its REIT taxable income to its
shareholders (determined without regard to the dividends paid deduction and excluding any net capital gains). Generally, the
Company expects to distribute all or substantially all of the REIT taxable income, including net capital gains, so as to not be
subject to the income or excise tax on undistributed REIT taxable income. The Company's Board of Directors, in its sole
discretion, will determine on a quarterly basis the amount of cash to be distributed to the Company's shareholders based on a
number of factors including, but not limited to, A&B's results of operations, cash flow and capital requirements, economic
conditions, tax considerations, borrowing capacity and other factors, including debt covenant restrictions, that may impose
limitations on cash payments and plans for future acquisitions and divestitures.
A&B common stock is included in the Russell 2000 Index, Russell 3000 Index, and the S&P 400 Diversified REITs
Sub Industry Index.
In October 2017, A&B’s Board of Directors authorized A&B to repurchase up to $150 million of its common stock
beginning on November 8, 2017 through December 31, 2019. The authorization supersedes a previous authorization that was
originally set to expire on December 31, 2017. No shares were repurchased in 2017, 2016, or 2015 under such plan.
32
Securities authorized for issuance under equity compensation plans as of December 31, 2017, included:
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
(a) 1
Weighted-average exercise
price of outstanding options,
warrants and rights
(b) 1
Number of securities
remaining available for
future issuance under equity
compensation plans
(excluding securities
reflected in column (a))
(c) 2
630,500
630,500
$12.58
$12.58
1,064,838
1,064,838
Plan Category
Equity compensation plans
approved by security
holders
Total
1 Number of securities reflects the antidilutive adjustments to outstanding stock option awards, including the number of stock options and the
weighted average price for such awards, as a result of the Company's Special Distribution that was declared on November 16, 2018 and settled on
January 23, 2018 in connection with its conversion to a REIT.
2 Under the 2012 Incentive Compensation Plan, 1,064,838 shares may be issued either as restricted stock grants, restricted stock unit grants, or stock
option grants.
The following are the Company's recent purchases of equity securities and use of proceeds for the fourth quarter of
fiscal year 2017.
Issuer Purchases of Equity Securities
Period
October 1-31, 2017
November 1-30, 2017
December 1-31, 2017
Total Number of
Shares Purchased1
1,672
—
256,928
Average Price
Paid per Share
$45.24
$—
$28.72
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans
or Programs
Maximum Number
of Shares that
May Yet Be
Purchased
Under the Plans
or Programs
—
—
—
—
—
—
1 Represents shares accepted in satisfaction of tax withholding obligations arising upon option exercises.
33
ITEM 6. SELECTED FINANCIAL DATA
The following should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and Item 8, “Financial Statements and Supplementary Data.”
Year Ended December 31,
2017
2016
2015
2014
20131
$
136.9
$
134.7
$
133.6
$
125.3
$
96.7
234.3
456.3
78.0
57.4
191.3
52.9
—
—
—
379.6
76.7
1.8
(14.7)
6.1
(29.0)
—
40.9
(4.1)
36.8
—
36.8
27.7
64.5
(3.1)
78.5
104.7
54.9
238.1
46.6
69.4
47.6
41.2
—
—
4.6
209.4
28.7
(2.3)
—
2.7
(19.1)
2.4
12.4
(7.0)
5.4
—
5.4
29.4
34.8
(0.5)
34.3
(In millions, except per share amounts)
Consolidated statements of operations data2:
Operating Revenue:
Commercial Real Estate
Land Operations
Materials & Construction
Total Operating Revenue
Operating Costs and Expenses:
Cost of Commercial Real Estate
Cost of Land Operations
Cost of Materials & Construction
Selling, general and administrative
REIT evaluation/conversion costs3
Impairment of real estate assets4
Acquisition/ separation costs5
Total operating costs and expenses
Operating Income
Income related to joint ventures6
Reductions in solar investments, net7
Interest and other income, net
Interest expense, net
Gain on insurance proceeds
Income from continuing operations before income taxes and net gain
(loss) on sale of improved properties
Income tax benefit (expense)7
Income from continuing operations before net gain (loss) on sale of
improved properties
Net gain (loss) on sale of improved properties, net of income taxes8
Income from continuing operations
Income (loss) from discontinued operations, net of tax
Net income (loss)
Income attributable to noncontrolling interest
Net income (loss) attributable to A&B
Capital expenditures9,10,11
Depreciation and amortization11
Earnings (loss) available to A&B shareholders per share:
Basic:
Continuing operations available to A&B Shareholders
Discontinued operations available to A&B Shareholders
Basic earnings per share available to A&B Shareholders
Diluted:
Continuing operations available to A&B Shareholders
34
84.5
204.1
425.5
75.5
60.4
166.1
66.4
15.2
22.4
—
61.9
190.9
387.5
79.0
35.0
154.5
52.0
9.5
11.7
—
120.2
219.0
472.8
80.4
71.1
175.7
51.6
—
—
—
406.0
341.7
378.8
45.8
19.2
(9.8)
(1.7)
(26.3)
—
27.2
0.5
27.7
5.0
32.7
(41.1)
(8.4)
(1.8)
94.0
36.8
(2.6)
(2.5)
(26.8)
—
98.9
(37.0)
61.9
(1.1)
60.8
(29.7)
31.1
(1.5)
19.5
7.2
(2.6)
2.1
(25.6)
—
0.6
218.2
218.8
9.3
228.1
2.4
230.5
(2.2)
228.3
42.5
41.4
4.63
0.05
4.68
4.30
$
$
$
$
$
$
$
$
$
$
$
$
(10.2) $
29.6
$
61.4
$
119.6
$
44.7
$
75.1
$
505.3
119.5
$
55.7
$
55.0
$
41.7
0.66
$
1.15
(0.84)
(0.61)
(0.18) $
0.54
0.65
$
1.14
$
$
$
0.69
0.57
1.26
0.68
$
$
$
0.11
0.66
0.77
0.11
Discontinued operations available to A&B Shareholders
Diluted earnings per share available to A&B Shareholders
Cash dividends declared per common share
(In millions)
Consolidated balance sheet data:
Investment in real estate and joint ventures
Total assets12
Total liabilities12
Redeemable noncontrolling interest
Total equity (includes noncontrolling interest)
Long-term debt – non-current12
0.04
4.34
4.48
$
$
$
$
(0.83)
(0.60)
(0.18) $
0.54
$
0.57
1.25
0.25
$
0.21
$
0.17
0.65
0.76
0.04
$
$
As of December 31,
2017
2016
2015
2014
20131
$ 1,557.5
$ 1,573.9
$ 1,564.6
$ 1,639.9
$ 1,606.8
$ 2,231.2
$ 2,156.3
$ 2,242.3
$ 2,321.1
$ 2,274.7
$ 1,572.1
$
$
932.3
$ 1,003.6
$ 1,107.3
$ 1,108.2
10.8
$
11.6
$
— $
—
8.0
651.1
$ 1,213.2
$ 1,227.1
$ 1,213.8
$ 1,166.5
585.2
$
472.7
$
496.6
$
632.0
$
606.6
$
$
$
1 2013 includes the results, capital expenditures, and depreciation and amortization of Grace from the acquisition date of October 1, 2013 through December
31, 2013.
2 Amounts recast to reflect the adoption of Financial Accounting Standards Board Accounting Standards Update No. 2017-07, Improving the Presentation of
Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.
3 Costs related to the Company's in-depth evaluation of and conversion to a REIT.
4 During the year ended December 31, 2017, the Company recorded impairments of $22.4 million related to three mainland commercial properties classified
as held for sale as of December 31, 2017. During the year ended December 31, 2016, A&B recorded non-cash impairment charges of $11.7 million related to
certain non-active, long-term development projects in its Land Operations segment.
5 Acquisition/separation costs relate to the acquisition of Grace Pacific LLC on October 1, 2013.
6 Income (loss) related to joint ventures include non-cash impairment and equity losses as follows: (1) $5.1 million in 2016 related to certain joint venture
development projects in the Land Operations segment and a surplus parcel held by an unconsolidated joint venture in the Materials & Construction segment,
(2) $0.3 million related to the sale of Crossroads in 2014, and (3) $6.3 million in 2013 related to the consolidation of The Shops at Kukui`ula.
7 Represents non-cash reductions in the carrying value of A&B’s KRS II and Waihonu joint venture solar investments. Tax benefits associated with joint
venture solar investments are included in Income tax benefit (expense).
8 Amounts in 2017 represent the sales of one office building in Maui, Hawai`i in January 2017 and one industrial property in California in November 2017.
Amounts in 2016 represent the sales of two California properties and one Utah office property in June 2016. Amounts in 2015 represent the sales of one
Colorado retail property in March 2015, one Texas office building in May 2015, and one Washington office building in December 2015.
9 Represents gross capital additions to and acquisitions in or for the commercial real estate portfolio, including gross tax-deferred property purchases, but
excluding the assumption of debt, that are reflected as non-cash transactions in the Consolidated Statements of Cash Flows.
10 Excludes expenditures for real estate developments held for sale, which are classified as Cash Flows from Operating Activities within the Consolidated
Statements of Cash Flows, and excludes investment in joint ventures classified as Cash Flows from Investing Activities. Operating cash flows for
expenditures related to real estate developments were $20.8 million, $15.3 million, $7.2 million, $41.7 million, and $150.6 million for 2017, 2016, 2015,
2014 and 2013, respectively. Investments in real estate joint ventures were $16.4 million, $20.8 million, $25.8 million, $28.7 million, and $22.2 million in
2017, 2016, 2015, 2014 and 2013, respectively.
11 Includes amounts from discontinued operations.
12 Amounts recast to reflect the adoption of Financial Accounting Standards Update No. 2015-03, Interest- Imputation of Interest (Subtopic 835-30),
Simplifying the Presentation of Debt Issuance Costs.
35
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
Statements in this Form 10-K that are not historical facts are forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 that 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. 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 business generally discussed in the
Company's most recent Form 10-K, Form 10-Q and other filings with the Securities and Exchange Commission. The
information in this Form 10-K should be evaluated in light of these important risk factors. We do not undertake any obligation
to update the Company's forward-looking statements.
The risk factors discussed in "Risk Factors" could cause our results to differ materially from those expressed in
forward-looking statements. There may be other risks and uncertainties that we are unable to predict at this time or that we
currently do not expect to have a material adverse effect on our financial position, results of operations or cash flows. Any such
risks could cause our results to differ materially from those expressed in forward-looking statements.
INTRODUCTION
Management’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is a supplement
to the accompanying consolidated financial statements and provides additional information about A&B’s business, recent
developments, financial condition, liquidity and capital resources, cash flows, results of operations and how certain accounting
principles, policies and estimates affect A&B’s financial statements. MD&A is organized as follows:
• Business Overview: This section provides a general description of A&B’s business, as well as recent developments
that A&B believes are important in understanding its results of operations and financial condition or in understanding
anticipated future trends.
• Critical Accounting Estimates: This section identifies and summarizes those accounting policies that significantly
impact A&B’s reported results of operations and financial condition and require significant judgment or estimates on
the part of management in their application.
• Consolidated Results of Operations: This section provides an analysis of A&B’s consolidated results of operations for
the three years ended December 31, 2017, 2016, and 2015.
• Analysis of Operating Revenue and Profit by Segment: This section provides an analysis of A&B’s results of
operations by business segment.
•
Liquidity and Capital Resources: This section provides a discussion of A&B’s financial condition and an analysis of
A&B’s cash flows for three years ended December 31, 2017, 2016, and 2015, as well as a discussion of A&B’s ability
to fund its future commitments and ongoing operating activities through internal and external sources of capital.
• Contractual Obligations, Commitments, Contingencies and Off-Balance-Sheet Arrangements: This section provides a
discussion of A&B’s contractual obligations and other commitments and contingencies that existed at December 31,
2017.
• Quantitative and Qualitative Disclosures about Market Risk: This section discusses how A&B monitors and manages
exposure to potential gains and losses associated with changes in interest rates.
• Rounding: 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, and may be slightly different.
36
BUSINESS OVERVIEW
A&B, whose history dates back to 1870, is headquartered in Honolulu and operates through three reportable segments:
Commercial Real Estate; Land Operations; and Materials & Construction.
The Company has completed a conversion process to comply with the requirements to be treated as a REIT
commencing with the taxable year ended December 31, 2017 (the “REIT Conversion”).
Commercial Real Estate
The Commercial Real Estate segment owns, operates and manages retail, industrial, and office properties in Hawai`i
and on the mainland. The Commercial Real Estate segment also leases urban land in Hawai`i to third-party lessees.
Land Operations
The Land Operations segment actively manages the Company's land and real estate-related assets and deploys these
assets to their highest and best use. Primary activities of the Land Operations segment include planning, zoning, financing,
constructing, purchasing, managing, selling, and investing in real property; renewable energy; and diversified agribusiness
activities.
Materials & Construction
The Materials & Construction segment performs asphalt paving as prime contractor and subcontractor; imports and
sells liquid asphalt; mines, processes and sells basalt aggregate; produces and sells asphaltic and ready-mix concrete; provides
and sells various construction- and traffic-control-related products and manufactures and sells precast concrete products.
CRITICAL ACCOUNTING ESTIMATES
A&B’s significant accounting policies are described in Note 2 to the Consolidated Financial Statements. The
preparation of financial statements in conformity with accounting principles generally accepted in the United States, upon
which the MD&A is based, requires that management exercise judgment when making estimates and assumptions about future
events that may affect the amounts reported in the financial statements and accompanying notes. Future events and their effects
cannot be determined with certainty and actual results will, inevitably, differ from those critical accounting estimates. These
differences could be material.
A&B considers an accounting estimate to be critical if: (i)(a) the accounting estimate requires A&B to make
assumptions that are difficult or subjective about matters that were highly uncertain at the time that the accounting estimate was
made, (b) changes in the estimate are reasonably likely to occur in periods subsequent to the period in which the estimate was
made, or (c) different estimates by A&B could have been used, and (ii) changes in those assumptions or estimates would have
had a material impact on the financial condition or results of operations of A&B. The critical accounting estimates inherent in
the preparation of A&B’s financial statements are described below.
Impairment of Long-Lived Assets and Finite-Lived Intangible Assets
A&B’s long-lived assets, including finite-lived intangible assets, are reviewed for possible impairment when events or
circumstances indicate that the carrying value may not be recoverable. In such an evaluation, the estimated future undiscounted
cash flows generated by the asset are compared with the amount recorded for the asset to determine if its carrying value is not
recoverable. If this review determines that the recorded value will not be recovered, the amount recorded for the asset is
reduced to estimated fair value. These asset impairment analyses are highly subjective because they require management to
make assumptions and apply considerable judgments to, among others, estimates of the timing and amount of future cash
flows, expected useful lives of the assets, uncertainty about future events, including changes in economic conditions, changes
in operating performance, changes in the use of the assets, and ongoing costs of maintenance and improvements of the assets
and, thus, the accounting estimates may change from period to period. If management uses different assumptions or if different
conditions occur in future periods, A&B’s financial condition or its future operating results could be materially impacted. A&B
has evaluated certain long-lived assets, including intangible assets, for impairment.
37
During the fourth quarter of 2017, in connection with the Company's strategic decision to dispose of certain of its
Mainland commercial properties and increase focus on its Hawai`i commercial portfolio, the Company classified several of its
Mainland properties as held for sale. In connection with this determination, the Company recorded $22.4 million of
impairments of real estate for three properties, as the expected sales proceeds, less costs to sell, were less than the carrying
values of those assets.
During the fourth quarter of 2016, as a result of a change in its strategy for development activities, the Company
recorded non-cash impairment charges of $11.7 million related to certain non-active, long-term development projects. The
impairment loss recorded reduced the carrying amounts to the estimated fair value, reflecting the change to the Company’s
development-for-sale strategy to de-risk its portfolio by not pursuing certain long-term projects that were not in active
development and instead focus on projects with a shorter-term lifespan, generally 3 to 5 years.
The impairment charges are presented within Impairment of real estate assets in the accompanying consolidated
statements of operations. There were no material long-lived asset impairment charges recorded in 2015.
Impairment of Investments
A&B’s investments in unconsolidated affiliates are reviewed for impairment whenever there is evidence that fair value
may be below carrying cost. An investment is written down to fair value if fair value is below carrying cost and the impairment
is believed to be other-than-temporary. In evaluating the fair value of an investment and whether any identified impairment is
other-than-temporary, significant estimates and considerable judgments are involved. These estimates and judgments are based,
in part, on A&B’s current and future evaluation of economic conditions in general, as well as a joint venture’s current and
future plans. Additionally, these impairment calculations are highly subjective because they also require management to make
assumptions and apply judgments to estimates regarding the timing and amount of future cash flows and take into account
various factors, including sales prices, development costs, market conditions, and absorption rates, probabilities related to
various cash flow scenarios, and appropriate discount rates based on the perceived risks, among others. In evaluating whether
an impairment is other-than-temporary, A&B considers all available information, including the length of time and extent of the
impairment, the financial condition and near-term prospects of the affiliate, A&B’s ability and intent to hold the investment for
a period of time sufficient to allow for any anticipated recovery in market value, and projected industry and economic trends,
among others. Changes in these and other assumptions could affect the projected operational results and fair value of the
unconsolidated affiliates, and accordingly, may require valuation adjustments to A&B’s investments that may materially impact
A&B’s financial condition or its future operating results. For example, if current market conditions deteriorate significantly or a
joint venture’s plans change materially, impairment charges may be required in future periods, and those charges could be
material.
The Company made investments of $23.8 million in 2014 and $15.4 million in 2016 in tax equity investments related
to the construction and operation of (1) a 12-megawatt solar farm on Kauai and (2) two photovoltaic facilities with a combined
capacity of 6.5 megawatts on Oahu, respectively. The Company recovers its investments primarily through tax credits and tax
benefits, which are recorded in the Income tax expense (benefit) line item in the consolidated statements of operations. As these
tax benefits were received and recognized, the Company recorded non-cash reductions of the investments' carrying value. For
the years ended December 31, 2017 and 2016, the Company recorded net, non-cash reductions of the investments' carrying
value of $2.6 million and $9.8 million, respectively.
Weakness in particular real estate markets, difficulty in obtaining or renewing project-level financing or development
approvals, and changes in A&B’s development strategy, among other factors, may affect the value or feasibility of certain
development projects owned by A&B or by its joint ventures and could lead to additional impairment charges in the future.
Goodwill
The Company reviews goodwill for impairment at the reporting unit level annually and whenever events or changes in
circumstances indicate that it is more likely than not that the fair value of the reporting unit is less than its carrying amount. The
goodwill impairment test estimates the fair value of a reporting unit using various methodologies, including discounted cash
flows and market multiples. The discounted cash flow approach relies on a number of assumptions, including future
macroeconomic conditions, market factors specific to the reporting unit, the amount and timing of estimated future cash flows
to be generated by the business over an extended period of time, long-term growth rates for the business, and a discount rate
that considers the risks related to the amount and timing of the cash flows, among others. Under the market multiple
methodology, the estimate of fair value is based on market multiples of EBITDA (earnings before interest, taxes, depreciation
and amortization) or revenues. When using market multiples of EBITDA or revenues, the Company must make judgments
about the comparability of those multiples in closed and proposed transactions and comparability of multiples for guideline
38
companies. Additionally, the foregoing assumptions could be adversely impacted by any of the risks discussed in "Risk
Factors."
If the results of the Company's test indicates that a reporting unit's estimated fair value is less than its carrying value,
an impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit's fair value, not to
exceed the total amount of goodwill allocated to that reporting unit.
At December 31, 2017, the Company's goodwill totaled $102.3 million, primarily related to the 2013 acquisition of
Grace Pacific. Of the total goodwill, $93.6 million relates to three reporting units in the Materials & Construction segment. The
valuation of each reporting unit assumes that each is an unrelated business to be sold separately and independently from the
other reporting units. As of the date of the last impairment test in the fourth quarter of 2017, the weighted average percentage
(using reporting units’ carrying value) by which the fair values of the reporting units exceeded their carrying values was
approximately 11 percent. The Company's fair value estimate for reporting units include a number of assumptions, including
increased levels of road infrastructure spending by governmental and private entities, expectations about the Company's share
of governmental contracts, and material input and labor costs, among others. If actual revenues are lower (for example, due to a
lower level of government or private contracts bid or won by the reporting units), or costs are higher than anticipated and
cannot be recovered as part of the price of the work performed, as well as other factors that result in adverse changes in the key
assumptions used in the fair value estimates mentioned above, the fair value of the Company's reporting units could be
negatively impacted.
Revenue Recognition for Certain Long-Term Real Estate Developments
As discussed in Note 2 to the Consolidated Financial Statements, revenues from real estate sales are generally
recognized when sales are closed and title, risks and rewards pass to the buyer. For certain real estate sales, A&B and its joint
venture partners account for revenues on long-term real estate development projects that have continuing post-closing
involvement, such as Kukui'ula, using the percentage-of-completion method. Following this method, the amount of revenue
recognized is based on the percentage of development costs that have been incurred through the reporting period in relation to
total expected development cost associated with the subject property. Accordingly, if material changes to total expected
development costs or revenues occur, A&B’s financial condition or its future operating results could be materially impacted.
Recent Accounting Pronouncements
See Note 2 to the Consolidated Financial Statements for a full description of the impact of recently issued accounting
standards, which is incorporated herein by reference, including the expected dates of adoption and estimated effects on A&B’s
results of operations and financial condition.
39
CONSOLIDATED RESULTS OF OPERATIONS
The following analysis of the consolidated financial condition and results of operations of Alexander & Baldwin, Inc.
and its subsidiaries (collectively, the “Company”) should be read in conjunction with the consolidated financial statements and
related notes thereto. Amounts in this narrative are rounded to millions, but per-share calculations and percentages were
calculated based on thousands. Accordingly, a recalculation of some per-share amounts and percentages, if based on the
reported data, may be slightly different than the more accurate amounts included herein. The financial information included in
the following table and narrative reflects the presentation of the HC&S sugar operations as discontinued operations for all
periods presented.
(dollars in millions, except per share amounts)
Operating revenue
Operating costs and expenses
Operating income
Other income (expense), net
Income tax benefit (expense)
Net gain (loss) on the sale of improved property, net of income taxes
Income from continuing operations
Discontinued operations (net of income taxes)
Net income (loss)
Income attributable to noncontrolling interest
Net income (loss) attributable to A&B
Basic earnings (loss) per share - continuing operations
Basic earnings (loss) per share - discontinued operations
Net income (loss) available to A&B shareholders
Diluted earnings (loss) per share - continuing operations
Diluted earnings (loss) per share - discontinued operations
Net income (loss) available to A&B shareholders
2017
$ 425.5
406.0
19.5
(18.9)
218.2
9.3
228.1
2.4
230.5
(2.2)
$ 228.3
$
$
$
$
4.63
0.05
4.68
4.30
0.04
4.34
2016
Change
9.8% $ 387.5
341.7
18.8%
45.8
(57.4)%
(18.6)
(1.6)%
0.5
436X
5.0
86.0%
32.7
7X
(41.1)
NM
(8.4)
NM
(1.8)
(22.2)%
$ (10.2)
NM
2015
Change
(18.0)% $ 472.8
378.8
(9.8)%
94.0
(51.3)%
4.9
NM
(37.0)
NM
(1.1)
NM
60.8
(46.2)%
(29.7)
(38.4)%
31.1
NM
(1.5)
(20.0)%
29.6
NM
$
7X
NM
NM
7X
NM
NM
$ 0.66
(0.84)
$ (0.18)
(42.8)% $
(37.7)%
NM
$
1.15
(0.61)
0.54
$ 0.65
(0.83)
$ (0.18)
(43.0)% $
(38.3)%
NM
$
1.14
(0.60)
0.54
On November 16, 2017 the Company announced that its Board of Directors declared a special distribution on its
shares of common stock in an aggregate amount of $783 million, or approximately $15.92 per share (the "Special
Distribution"), payable in cash and shares of the Company's stock. The Special Distribution represents the Company's
previously undistributed non-REIT earnings and profits ("E&P") accumulated prior to January 1, 2017, which were required to
be distributed in connection with the Company's conversion to a REIT for the 2017 taxable year, the Company's REIT taxable
income for the 2017 taxable year and a substantial portion of the Company's estimated REIT taxable income for the 2018
taxable year. The Special Distribution was paid on January 23, 2018. Shareholders had an opportunity to elect to receive the
Special Distribution in the form of cash or additional shares of common stock, subject to a limit of $156.6 million of cash. As
the deadline for the common shareholders' election was January 12, 2018, subsequent to December 31, 2017, the total Special
Distribution of $783 million was included in the computation of the Company's diluted earnings (loss) per share.
2017 vs. 2016
Operating revenue for 2017 increased 9.8%, or $38.0 million, to $425.5 million, primarily due to higher revenue from
the Land Operations and Materials & Construction segments. The reasons for business and segment-specific year-to-year
fluctuations in revenue are further described below in the Analysis of Operating Revenue and Profit by Segment.
Operating costs and expenses for 2017 increased 18.8%, or $64.3 million, to $406.0 million, primarily due to increases
in operating expenses incurred by the Land Operations and Materials & Construction segments, as well as impairment charges
recorded during the fourth quarter of 2017 related to certain, mainland commercial properties. The reasons for the operating
cost and expense changes are described below, by business segment, in the Analysis of Operating Revenue and Profit by
Segment. Operating costs and expenses for 2017 and 2016 also included costs of $15.2 million and $9.5 million, respectively,
related to the Company's REIT conversion.
40
Other income (expense), net was a net expense of $18.9 million in 2017 compared to a net expense of $18.6 million in
2016. The change from the prior year was primarily due to an increase of $3.5 million in interest income, a $1.6 million
decrease in pension and post retirement other expense and a $7.2 million decrease in the adjustment to reduce the carrying
amount of tax equity solar investments. These increases were offset by $12.0 million, lower income from joint ventures.
Income tax benefit (expense) was a benefit of $218.2 million in 2017, primarily reflected the reversal of approximately
$223.0 million of net deferred liabilities in connection with the Company's conversion to a REIT, partially offset by approximately
$3.0 million due to the impact of the enactment of the Tax Cuts and Jobs Act of 2017. Income tax benefit of $0.5 million for 2016
reflected a lower effective income tax rate for the year ended December 31, 2016, primarily driven by the non-refundable federal
tax credit related to the Company’s Waihonu tax equity solar investment.
Net gain (loss) on sale of improved property, net of income taxes increased 86.0%, or $4.3 million, to $9.3 million due
to the aggregate gain realized on the sales of two commercial properties during 2017, as compared to the net gain of $5.0
million on commercial property sales during 2016. Additionally, following our conversion to a REIT, sales of improved
properties are no longer subject to taxation.
Income attributable to noncontrolling interest increased $0.4 million in 2017 compared to 2016. The noncontrolling
interest represents third-party noncontrolling interests in two entities consolidated by Grace and in which Grace owns a 70 percent
and 51 percent share.
2016 vs. 2015
Operating revenue for 2016 decreased 18.0%, or $85.3 million, to $387.5 million, primarily due to lower revenue from
the Land Operations and Materials & Construction segments, offset by increased revenue from the Commercial Real Estate
segment. The reasons for business- and segment-specific year-to-year fluctuations in revenue are further described below in the
Analysis of Operating Revenue and Profit by Segment.
Operating costs and expenses for 2016 decreased 9.8%, or $37.1 million, to $341.7 million, primarily due to lower
operating expenses incurred by the Land Operations and Materials & Construction segments. The reasons for the operating
cost and expense changes are described below, by business segment, in the Analysis of Operating Revenue and Profit by
Segment. Operating costs and expenses for 2016 also included costs of $9.5 million related to the Company's evaluation of a
potential REIT conversion.
Other income (expense), net was an expense of $18.6 million in 2016 compared with income of $4.9 million in 2015.
The change in other income (expense) from the prior year was primarily due to $17.6 million lower income from joint ventures,
and a $7.2 million increase in the adjustment to reduce the carrying amount of tax equity solar investments, offset by a $1.0
million increase in interest income.
Income taxes benefit (expense) was a slight benefit in 2016 compared to expense in 2015, due to lower earnings in 2016
as compared to 2015. Income taxes also reflected a lower effective income tax rate for the year ended December 31, 2016 primarily
driven by the non-refundable federal tax credit related to the Company’s solar investment.
Net gain (loss) on sale of improved property, net of income taxes was $5.0 million due to commercial property sales
during 2016, as compared to the net loss of $1.1 million on commercial property sales during 2015.
Income attributable to noncontrolling interest increased $0.3 million in 2016 compared to 2015. The noncontrolling
interest represents third-party noncontrolling interests in two entities consolidated by Grace and in which Grace owns a 70 percent
and 51 percent share.
41
ANALYSIS OF OPERATING REVENUE AND PROFIT BY SEGMENT
Additional detailed information related to the operations and financial performance of the Company’s Operating
Segments is included in Note 19 to the Consolidated Financial Statements (Part II, Item 8). The following information should
be read in relation to the information contained therein.
Commercial Real Estate
2017 vs. 2016
(dollars in millions)
Commercial Real Estate operating revenue
Commercial Real Estate operating costs and expenses
Selling, general and administrative
Intersegment operating revenue, net1
Impairment of real estate assets
Other income/(expense), net
Commercial Real Estate operating profit
Operating profit margin
Cash Net Operating Income ("Cash NOI")2
Hawai`i
Mainland
Total
Same-Store Cash Net Operating Income ("Same-Store Cash NOI")2
Hawai`i
Mainland
Total
Gross Leasable Area ("GLA") (million sq. ft.) - Improved (at year end)
Hawai`i
Mainland
Total improved
Hawai`i ground leases (acres at year end)
2017
2016
Change
$
$
$
$
$
$
$
$
$
$
$
$
136.9
(75.5)
(6.8)
2.5
(22.4)
(0.3)
34.4
25.1%
74.0
10.9
84.8
67.4
8.3
75.6
3.0
1.0
4.0
117
134.7
(79.0)
(2.5)
2.0
—
(0.4)
54.8
1.6%
4.4%
(172.0)%
25.0%
NM
25.0%
(37.2)%
40.7%
6.0%
(17.6)%
2.2%
4.5%
6.8%
4.8%
69.8
13.2
83.0
64.4
7.7
72.2
2.9
1.8
4.7
106
1 Intersegment operating revenue for Commercial Real Estate is primarily from our Materials & Construction segment and is eliminated in our consolidated
results of operations.
2 Refer to page 45 or a discussion of management's use of a non-GAAP financial measure and the required reconciliation of non-GAAP measures to GAAP
measures.
Commercial Real Estate operating revenue for 2017 was 1.6% percent higher than 2016, primarily attributable to the
increases in Hawai`i same-store rents. "Same-store" refers to properties that were owned and operated for the entirety of the
prior calendar year. The same-store pool excludes properties under development or redevelopment and also excludes properties
acquired or sold during the comparable reporting periods, including stabilized properties. New developments and
redevelopments are moved into the same-store pool upon one full calendar year of stabilized operation, which is typically upon
attainment of market occupancy.
Operating profit was 37.2% lower in 2017, compared with 2016, principally due to aggregate impairment charges of
$22.4 million related to certain of its U.S. Mainland properties that were classified as held for sale as of December 31, 2017.
42
The Company's commercial portfolio's occupancy and same-store occupancy percentage summarized by geographic
location and property type as of December 31, 2017 and 2016 was as follows:
Occupancy
Retail
Industrial
Office
Total
As of December 31, 2017
As of December 31, 2016
Percentage Point Change
Hawai`i Mainland
Total
Hawai`i Mainland
Total
Hawai`i Mainland
Total
93.1%
95.1%
89.1%
93.5%
96.9%
100.0%
88.0%
94.1%
93.4%
96.5%
88.3%
93.6%
92.8%
96.6%
84.7%
96.1%
89.4%
90.5%
93.1%
92.5%
88.7%
93.4%
90.4%
92.2%
0.3
(1.5)
4.4
0.1
0.8
10.6
(2.5)
3.7
0.3
4.0
(0.4)
1.4
Same-Store Occupancy
As of December 31, 2017
As of December 31, 2016
Percentage Point Change
Hawai`i Mainland
Total
Hawai`i Mainland
Total
Hawai`i Mainland
Total
Retail
Industrial
Office
Total
92.9%
95.3%
86.5%
93.3%
96.9%
100.0%
88.0%
94.1%
93.3%
96.7%
87.6%
93.5%
92.5%
96.6%
87.7%
93.6%
96.1%
100.0%
90.5%
95.1%
92.9%
97.7%
89.8%
94.0%
0.4
(1.3)
(1.2)
(0.3)
0.8
—
(2.5)
(1.0)
0.4
(1.0)
(2.2)
(0.5)
In 2017, the Company signed or renewed 211 leases or 909,422 square feet, at an average spread of 13.9%, and the
change in average annual rental income on renewals, including tenant concessions, if any, as compared to the prior rental
income was approximately 13.6%. Total tenant improvement costs and leasing commissions were $14.3 million in 2017 and
$6.6 million in 2016.
GLA was 4.0 million square feet at December 31, 2017, compared to 4.7 million square feet as of December 31, 2016
as a result of the following activity:
Date
Dispositions
Property
11/17 Midstate 99 Distribution Center
1/17
The Maui Clinic Building
Total dispositions
Date
6/17
GLA
790,200
16,600
806,800
Acquisitions
Property
Honokohau Industrial
Total improved acquisitions
GLA
73,200
73,200
43
2016 vs. 2015
(dollars in millions)
Commercial Real Estate operating revenue
Commercial Real Estate operating costs and expenses
Selling, general and administrative
Intersegment operating revenue, net1
Other income (expense), net
Commercial Real Estate operating profit
Operating profit margin
Cash NOI2
Hawai`i
Mainland
Total
GLA - Improved (at year end)
Hawai`i
Mainland
Total improved
Hawai`i ground leases (acres at year end)
Change
0.8%
1.7%
(78.6)%
11.1%
—%
3.0%
11.5%
(21.0)%
4.7%
$
$
$
$
2016
2015
134.7
(79.0)
(2.5)
2.0
(0.4)
54.8
40.7%
69.8
13.2
83.0
2.9
1.8
4.7
106
$
$
$
$
133.6
(80.4)
(1.4)
1.8
(0.4)
53.2
39.8%
62.6
16.7
79.3
2.7
2.2
4.9
106
1 Intersegment operating revenue for Commercial Real Estate is primarily from our Materials & Construction segment and is eliminated in our consolidated
results of operations.
2 Refer to page 45 for a discussion of management's use of a non-GAAP financial measure and the required reconciliation of non-GAAP measures to GAAP
measures.
Commercial Real Estate operating revenue for 2016 was 0.8 percent higher than 2015, principally due to the revenue
impact from the acquisitions of Manoa Marketplace (January 2016) and Aikahi Shopping Center leasehold improvements (May
2015), as well as improved performance from Hawai`i properties, partially offset by the disposition of three Mainland
properties in 2015 and three Mainland properties in 2016.
Operating profit was 3.0 percent higher in 2016, compared with 2015, principally due to improved performance from
Hawai`i properties and the favorable impact from the previously mentioned Hawai`i acquisitions, partially offset by the
Mainland dispositions and higher selling, general and administrative expenses due to approximately $1.3 million of transaction
costs primarily related to the acquisition of Manoa Marketplace in 2016.
GLA was 4.7 million square feet at December 31, 2016, compared to 4.9 million square feet as of December 31, 2015
as a result of the following activity:
Date
6/16
6/16
6/16
Dispositions
Property
Ninigret Office Park
Gateway Oaks
Prospect Park
Total dispositions
GLA
185,500
59,700
163,300
408,500
Date
12/16
Acquisitions
Property
2927 East Manoa Road (Ground
Lease)
1/16
Manoa Marketplace
Total improved acquisitions
GLA
N/A
139,300
139,300
44
Use of Non-GAAP Financial Measures
The Company uses non-GAAP measures when evaluating operating performance because management believes that they
provide additional insight into the Company’s and segments' core operating results, and/or the underlying business trends affecting
performance on a consistent and comparable basis from period to period. These measures generally are provided to investors as
an additional means of evaluating the performance of ongoing core operations.
Cash Net Operating Income ("Cash NOI") is a non-GAAP measure used by the Company in evaluating the CRE
segment’s operating performance as it is an indicator of the return on property investment, and provides a method of comparing
performance of operations, on an unlevered basis, over time. Cash NOI should be not be viewed as a substitute for, or superior
to, financial measures calculated in accordance with GAAP.
Cash NOI is calculated as total property revenues less direct property-related operating expenses. Cash NOI excludes
straight-line rent adjustments, amortization of favorable/unfavorable leases, amortization of tenant incentives, general and
administrative expenses, impairments of real estate, and depreciation and amortization (including amortization of maintenance
capital, tenant improvements and leasing commissions).
The Company’s methods of calculating non-GAAP measures may differ from methods employed by other companies
and thus may not be comparable to such other companies.
A reconciliation of Commercial Real Estate operating profit to Commercial Real Estate Cash NOI is as follows (in
millions):
Commercial Real Estate Operating Profit
Plus: Depreciation and amortization
Less: Straight-line lease adjustments
Plus: Lease incentive amortization
Less: Favorable/(unfavorable) lease amortization
Less: Termination income
Plus: Other (income)/expense, net
Plus: Impairment of real estate assets
Plus: Selling, general, administrative and other expenses
Commercial Real Estate Cash NOI
Land Operations
2017 vs. 2016 vs. 2015
2017
2016
2015
$
$
34.4
26.0
(1.6)
—
(2.9)
(1.7)
0.3
22.4
7.9
84.8
$
$
54.8
28.4
(2.1)
0.1
(3.3)
(0.1)
0.4
—
4.8
83.0
$
$
53.2
28.9
(2.3)
0.1
(3.6)
(0.7)
(0.5)
—
4.2
79.3
Direct year-over-year comparison of the Land Operations segment results may not provide a consistent, measurable
indicator of future performance because results from period to period are significantly affected by the mix and timing of
property sales. Operating results, by virtue of each project’s asset class, geography and timing are inherently variable. Earnings
from joint venture investments are not included in segment revenue, but are included in operating profit. The mix of real estate
sales in any year or quarter can be diverse and can include developed residential real estate, developable subdivision lots,
undeveloped land, and property sold under threat of condemnation. The sale of undeveloped land and vacant parcels in Hawai`i
generally provides higher margins than does the sale of developed property, due to the low historical cost basis of the
Company’s land owned in Hawai`i. Consequently, Land Operations revenue trends, cash flows from the sales of real estate, and
the amount of real estate held for sale on the Company's balance sheet do not necessarily indicate future profitability trends for
this segment. Additionally, the operating profit reported in each quarter does not necessarily follow a percentage of sales trend
because the cost basis of property sold can differ significantly between transactions.
45
(in millions)
Development sales revenue
Unimproved/other property sales revenue
Other operating revenues1
Total Land Operations operating revenue
Operating expenses
Impairment of real estate assets
Earnings from joint ventures
Reductions in solar investments, net
Interest and other income
Total Land Operations operating profit
Land Operations operating profit margin
2017
2016
2015
$
$
35.0
25.6
23.9
84.5
(73.9)
—
3.3
(2.6)
2.9
$
14.2
$
12.5
28.7
20.7
61.9
(46.3)
(11.7)
15.1
(9.8)
(2.2)
7.0
$
$
75.0
26.3
18.9
120.2
(83.8)
—
30.2
(2.6)
(2.3)
61.7
16.8%
11.3%
51.3%
1 Other operating revenues includes revenue related to trucking, renewable energy and diversified agriculture. In December 2016, the Company completed its
final sugar harvest and ceased its sugar operations. The results of sugar operations have been presented within discontinued operations for all periods
presented.
2017: Land Operations revenue was $84.5 million and included sales of one Kahala Avenue parcel, 35 units on Maui,
a 293-acre parcel in Haiku, Maui, a 273-acre parcel on the island of Kauai, six lots at Maui Business Park, a 146-acre parcel in
Kihei, Maui, a three-acre parcel in Wailea, Maui, and a 0.8-acre vacant, urban parcel on Maui, along with trucking service and
power sales revenues.
Operating profit was $14.2 million and included earnings from the Company's real estate development-related joint
ventures and investments. The segment results also included a $2.6 million non-cash reduction in the carrying value of the
Company's Solar Investment and $2.9 million of interest and other income primarily related to notes receivable on a third-party
development-for-sale project that was repaid during the fourth quarter of 2017.
2016: Land Operations revenue was $61.9 million, principally related to the sales of three vacant parcels of $27.7
million on Maui, two residential lots on Oahu of $6.9 million, The Collection developer fee of $4.4 million, 0.5 acres at Maui
Business Park II of $1.0 million, trucking service revenue, and power sales revenue.
Operating profit for the year ended December 31, 2016 included joint venture residential sales of 451 residential units
at The Collection, 14 units at Kukui'ula on Kauai and 10 units at Ka Milo on the Island of Hawai`i. The margin on these sales
was partially offset by joint venture expenses. During the fourth quarter of 2016, as a result of a change in its strategy for
development activities, the Company recorded non-cash impairment charges of $11.7 million related to certain non-active,
long-term development projects. The impairment loss recorded reduced the carrying amounts to the estimated fair value,
reflecting the change to the Company’s development-for-sale strategy to de-risk its portfolio by not pursuing certain long-term
projects that were not in active development and instead focus on projects with a shorter-term investment period, generally 3 to
5 years. Operating profit includes the reduction of the Company's solar energy investments of $9.8 million in 2016.
2015: Land Operations segment revenue was $120.2 million, principally related to the sales of five residential lots on
Oahu, 18.4 acres at Maui Business Park II, 10 parcels on Maui, three Kauai parcels, and a parcel in Santa Barbara, California.
Operating profit also included joint venture residential sales of 329 Waihonua condominium units on Oahu, 22 units at
Kukui'ula on Kauai, 12 units at Ka Milo on the Island of Hawai`i, and the one remaining unit at Kai Malu on Maui. The margin
on these sales was partially offset by joint venture expenses. Operating profit includes the reduction of the Company's solar
energy investments of $2.6 million in 2015.
46
Discontinued Operations
2017 vs. 2016 vs. 2015
The revenue, operating income (loss), and after-tax effects of discontinued operations for 2017, 2016, and 2015 were
as follows (in millions):
Sugar operations revenue
Cost of sugar operations
Operating income (loss) from sugar operations
Sugar operations cessation costs
Gain on asset dispositions
Income (loss) from discontinued operations before income taxes
Income tax (expense) benefit
Income (loss) from discontinued operations
2017
2016
2015
$
$
22.9
22.5
0.4
(2.7)
6.0
3.7
(1.3)
2.4
$
98.4
87.5
10.9
(77.6)
—
(66.7)
25.6
$ (41.1)
$
97.7
124.6
(26.9)
(22.6)
—
(49.5)
19.8
(29.7)
$
2017: Income from discontinued operations of $2.4 million for 2017 reflected gains realized on asset dispositions
during the year, as well as the results of operations related to the final sugar voyage that was completed in January 2017 and
other exit related costs related to the cessation of the sugar operations. See Note 18, "Cessation of Sugar Operations" for further
discussion regarding the cessation and the related costs associated with such exit and disposal activities.
2016: Loss from discontinued operations increased by $11.4 million from the prior year primarily due to an increase in
sugar cessation charges of $77.6 million recognized during 2016 related to the cessation of the HC&S sugar operation, offset
by improved results of operations related to the final harvest. The cessation charges included asset write-offs and accelerated
depreciation, employee severance benefits and related costs, and property removal, restoration and other exit-related costs. See
Note 18, "Cessation of Sugar Operations" for further discussion regarding the cessation and the related costs associated with
such exit and disposal activities. The improved results of sugar operations were primarily due to lower overall production costs
and higher sugar margins.
2015: Loss from discontinued operations during 2015 reflected the results of the Company's HC&S sugar operations.
During 2015, the HC&S sugar operations incurred an operating loss of $26.9 million primarily due to low raw sugar margin as
a result of low production and low power margin due to low pricing and volume. The cessation charges of $22.6 million
recognized during 2015 consist of employee severance benefits and related costs, as well as asset write-offs for certain fixed
assets. There were no commercial property sales in 2015 that were classified as discontinued operations pursuant to Financial
Accounting Standards Board Accounting Standards Update 2014-08, Reporting Discontinued Operations and Disclosures of
Disposals of Components of an Entity.
47
Materials & Construction
2017 vs. 2016
(dollars in millions)
Materials & Construction operating revenue
Operating profit
Operating profit margin
Depreciation and amortization
Aggregate tons delivered (tons in thousands)
Asphalt tons delivered (tons in thousands)
Backlog1,2 at period end
2017
2016
$
$
$
$
$
$
$
204.1
22.0
10.8%
12.2
691.6
553.8
202.1
$
190.9
23.3
12.2%
11.7
696.1
444.9
242.9
Change
6.9%
(5.6)%
4.3%
(0.6)%
24.5%
(16.8)%
1 Backlog represents the total of (1) the amount of revenue that Grace Pacific and Maui Paving, LLC, a 50-percent-owned unconsolidated affiliate, expect to
realize on contracts awarded and (2) government contracts in which Grace Pacific has been confirmed to be the lowest bidder and formal communication of
the award is perfunctory ($17.2 million as of December 31, 2017). Backlog primarily consists of asphalt paving and, to a lesser extent, Grace Pacific’s
consolidated revenue from its Prestress and construction-and traffic control-related products. Backlog includes estimated revenue from the remaining portion
of contracts not yet completed, as well as revenue from approved change orders. The length of time that projects remain in backlog can span from a few days
for a small volume of work to 36 months for large paving contracts and contracts performed in phases. Maui Paving's backlog at December 31, 2017 and 2016
was $10.6 million and $15.0 million, respectively.
2 As of December 31, 2017 and 2016, the backlog included contractual revenue with related parties of $1.0 million and $1.3 million, respectively.
Materials & Construction revenue was $204.1 million in 2017, compared to $190.9 million in 2016. Revenue
increased 6.9 percent primarily due to higher overall net material and construction volumes. Backlog at the end of
December 31, 2017 was $202.1 million, compared to $242.9 million as of December 31, 2016. Backlog reasonably expected to
be filled within the next fiscal year is $127.1 million.
Operating profit was $22.0 million for 2017, compared to $23.3 million for 2016, primarily due to lower paving
margins as a result of competitive market pressures, as well as lower earnings from a materials joint venture. Earnings from
joint venture investments are not included in segment revenue but are included in operating profit.
2016 vs. 2015
(dollars in millions)
Materials & Construction operating revenue
Operating profit
Operating profit margin
Depreciation and amortization
Aggregate tons delivered (tons in thousands)
Asphalt tons delivered (tons in thousands)
Backlog at period end
2016
2015
$
$
$
$
190.9
23.3
12.2%
11.7
696.1
444.9
242.9
$
$
$
$
219.0
30.9
14.1%
11.6
840.2
466.7
226.5
Change
(12.8)%
(24.6)%
0.9%
(17.2)%
(4.7)%
7.2%
Materials & Construction revenue was $190.9 million in 2016, compared to $219.0 million in 2015. Revenue declined
12.8 percent primarily due to a reduction in the price of asphalt sold due to the decline in oil prices and lower material and
construction volumes and unit prices. During 2016, Materials & Construction experienced 232.5 crew days that were rained
out, as compared to 175.5 days during 2015, which negatively impacted paving volume. Unit prices for paving decreased due
to competitive pressures. Backlog at the end of December 31, 2016 was $242.9 million, compared to $226.5 million as of
December 31, 2015.
Operating profit was $23.3 million for 2016, compared to $30.9 million for 2015. The decrease was primarily related
to decreased paving, quarrying, and material sales, as well as lower earnings from a materials joint venture, partially offset by
higher asphalt sales margins, due to lower material cost. Operating profit for 2016 was also impacted by a $2.6 million accrual
for environmental costs related to the management of a former quarry site and a net loss of $1.0 million related to the sales of
vacant land parcels by an unconsolidated affiliate. Earnings from joint venture investments are not included in segment revenue
but are included in operating profit.
48
LIQUIDITY AND CAPITAL RESOURCES
Overview: A&B's primary liquidity needs have historically been to support working capital requirements and fund
capital expenditures, commercial real estate acquisitions and real estate developments. A&B’s principal sources of liquidity
have been cash flows provided by operating activities, available cash and cash equivalent balances, and borrowing capacity
under its various credit facilities.
A&B’s operating income is generated by its subsidiaries. There are no material restrictions on the ability of A&B’s
wholly owned subsidiaries to pay dividends or make other distributions to A&B. A&B regularly evaluates investment
opportunities, including development projects, commercial real estate acquisitions, joint venture investments, share
repurchases, business acquisitions and other strategic transactions to increase shareholder value. A&B cannot predict whether
or when it may make investments or what impact any such transactions could have on A&B’s results of operations, cash flows
or financial condition. A&B’s cash flows from operations, borrowing availability and overall liquidity are subject to certain
risks and uncertainties, including those described in the section entitled "Risk Factors" beginning on page 13.
Cash Flows: Cash flows used in operations for the year ended December 31, 2017 was $1.3 million while cash flows
from operations for the years ended December 31, 2016 and 2015 were $111.2 million, and $129.1 million, respectively. Cash
flows from operating activities includes expenditures related to real estate developments held for sale. The decrease in cash
flows from operating activities is primarily attributed to cash outlays for working capital purposes, including a discretionary
pension contribution and employee severance payments related to the cessation of HC&S sugar operations. These outflows are
offset by non-cash impairment charges of $22.4 million for certain commercial real estate assets included in the 2017
operations.
Cash used in investing activities was $3.9 million and $33.2 million for the years ended December 31, 2017 and 2016,
respectively, while cash provided by investing activities was $18.4 million for the year ended December 31, 2015. During the
year ended December 31, 2017, cash used in investing activities included cash outlays related to capital expenditures and
investments in unconsolidated affiliates, which were $42.5 million and $41.9 million, respectively. Proceeds received from the
disposal of properties and other assets were $47.2 million, primarily related to the sales of Midstate 99 Distribution Center for
$33.4 million in November and The Maui Clinic Building for $3.4 million in January. Other investing cash flow activity during
2017 included $33.3 million of proceeds from joint ventures and other investments, primarily related to repayment of a notes
receivable on a third-party development-for-sale project in the fourth quarter.
Net cash flows used in investing activities for capital expenditures were as follows:
(in millions)
Commercial real estate property acquisitions/improvements
Tenant improvements
Quarrying and paving
Agribusiness and other
Total capital expenditures1
2017
2016
26.7
6.1
6.3
3.4
42.5
$
$
95.0
3.8
9.3
8.0
116.1
$
$
Change
(71.9)%
60.5%
(32.3)%
(57.5)%
(63.4)%
1 Excludes capital expenditures for real estate developments to be held and sold as real estate development inventory, which are
classified in the consolidated statement of cash flows as operating activities and are excluded from the table above.
In 2018, A&B expects that its required capital expenditures for growth and maintenance capital will be approximately
$60-$65 million for the Commercial Real Estate portfolio and $8-$12 million for Materials & Construction. An additional $40-
$45 million has been projected for Land Operations. Should investment opportunities in excess of the amounts budgeted arise,
A&B believes it has adequate sources of liquidity to fund these investments.
Net cash flows provided by financing activities was $96.1 million for the year ended December 31, 2017 as compared
to net cash used in financing activities for the years December 31, 2016 and 2015 of $84.7 million and $131.6 million,
respectively. The increase in cash flows used in financing activities in 2017 as compared to 2016 was due to higher amounts
borrowed under the Company's revolving senior credit facility during 2017, offset by repayment amounts made on the
Company's long term debt.
On November 16, 2017, in connection with its conversion to a REIT, the Company declared the Special Distribution
of $783 million (approximately $15.92 per share), which represented the Company's previously undistributed non-REIT
earnings and profits accumulated prior to January 1, 2017, the Company's REIT taxable income for the 2017 taxable year, and a
substantial portion of the Company's estimated REIT taxable income for the 2018 taxable year. The Company completed the
49
payment of the Special Distribution on January 23, 2018 through an aggregate of $156.6 million in cash and the issuance of
22,587,299 shares of the Company's common stock.
On February 23, 2018, the Company acquired a portfolio of commercial properties in Hawai`i (the "Portfolio") for a
total consideration of $254.1 million, including assumed debt of $62.0 million. The Portfolio consists of three grocery-anchored
shopping centers: (1) Laulani Village Shopping Center located in Ewa Beach, Oahu, (2) Hokulei Village Shopping Center
located in Lihue, Kauai, and (3) Pu`unene Shopping Center located in Kahului, Maui.
The acquisition of the Portfolio was funded through proceeds from the sale of U.S. Mainland commercial properties
via tax-deferred §1031 exchanges, the assumption of a $62.0 million promissory note (“Promissory Note”), and borrowings
under the Company’s revolving senior credit facility at the time of closing.
The Promissory Note bears interest at 3.93 percent and requires monthly interest payments of approximately $0.2
million until May 2020 and principal and interest payments of approximately $0.3 million thereafter. The Promissory Note
matures on May 1, 2024 and is secured by the Laulani Village Shopping Center.
On February 26, 2018,the Company entered into an agreement with Wells Fargo Bank, National Association and a
syndicate of other financial institutions that provides for a $50 million term loan facility (“Wells Fargo Term Facility”). The
Company also drew $50 million under the Wells Fargo Term Facility on February 26, 2018 and used such term loan proceeds to
repay amounts that were borrowed under the Company’s Revolving Credit Facility to fund the acquisition of the Portfolio.
Borrowings under the Wells Fargo Term Facility bear interest at a stated rate, as defined, plus a margin that is determined based
on a pricing grid using the ratio of debt to total assets ratio, as defined.
The Company believes that funds generated from results of operations, available cash and cash equivalents, and
available borrowings under credit facilities will be sufficient to finance the Company’s business requirements for the next fiscal
year, including working capital, capital expenditures, potential acquisitions and stock repurchases. There can be no assurance,
however, that the Company will continue to generate cash flows at or above current levels or that it will be able to maintain its
ability to borrow under its available credit facilities.
Other Sources of Liquidity: Additional sources of liquidity for the Company consisted of cash and cash equivalents,
trade and income tax receivables, contracts retention, and inventories, totaling $174.1 million at December 31, 2017, an
increase of $73.7 million from December 31, 2016. This net increase is primarily due to aggregate borrowings of $100 million
under the Company's new term facilities during the fourth quarter of 2017.
The Company also has revolving credit and term facilities that provide additional sources of liquidity for working
capital requirements or investment opportunities on a short-term as well as longer-term basis. On September 15, 2017, the
Company entered into a Second Amended and Restated Credit Agreement ("A&B Revolver") with Bank of America N.A., as
administrative agent, First Hawaiian Bank, and other lenders party thereto, which amended and restated its existing $350
million committed revolving credit facility ("Revolving Credit Facility"). The A&B Revolver increased the total revolving
commitments to $450 million, extended the term of the Revolving Credit Facility to September 15, 2022, amended certain
covenants, and reduced the interest rates and fees charged under the Revolving Credit Facility. Additionally, all other terms of
the Revolving Credit Facility remain substantially unchanged. At December 31, 2017, $66.0 million was outstanding, $11.8
million in letters of credit had been issued against the facility, and $372.2 million remained available.
In December 2015, the Company entered into a three-year unsecured note purchase and private shelf agreement (the
"Prudential Agreement") with Prudential Investment Management, Inc. and its affiliates (collectively, "Prudential") that enabled
the Company to issue notes in an aggregate amount up to $450 million, less the sum of all principal amounts then outstanding
on any notes issued by the Company or any of its subsidiaries to Prudential and the amounts of any notes that are committed
under the Prudential Agreement. The Prudential Agreement, as amended, expires in December 2018 and contains certain
restrictive covenants that are substantially the same as the covenants contained in the A&B Revolver, as amended. Borrowings
under the shelf facility bear interest at rates that are determined at the time of the borrowing.
A&B’s ability to access its credit facilities is subject to its compliance with the terms and conditions of the credit
facilities, including financial covenants. The financial covenants under current agreements require A&B to maintain certain
financial metrics, such as the maintenance of minimum shareholders’ equity levels, minimum EBITDA to fixed charges ratio,
maximum debt to total assets ratio, minimum unencumbered income-producing asset value to unencumbered debt ratio and
limitations on priority debt. As a result of the Special Distribution, that was declared on November 16, 2017 and settled on
January 23, 2018, the Company received waivers related to the impact of the Special Distribution on the minimum
50
shareholder’s equity computation for its A&B Revolver and unsecured term loan agreements. The Company's debt is more
fully described in Note 8 to the Consolidated Financial Statements.
Balance Sheet: The Company has a working capital deficit of $652.0 million as of December 31, 2017, which is a
decrease of $625.2 million, from a $26.8 million deficit as of December 31, 2016. The change in the working capital is due to
the increase in dividend payable related to the special distribution of $783.0 million comprised of $156.6 million in cash and
$626.4 million in shares, both paid in January 2018. The increase in liabilities was offset by an increase in cash on hand due to
fourth quarter term borrowings, an increase in real estate held for sale due to the Company's strategic decision to put certain of
its Mainland commercial properties up for sale, recognition of previously deferred revenue related to the last sugar harvest
shipment (which was shipped as of December 31, 2016 but not recognized until receipt by the customer in January 2017),
payment of substantially all HC&S cessation related liabilities during 2017, and an increase in the Company's income tax
receivable from 2016 to 2017.
Tax-Deferred Real Estate Exchanges:
Sales: During 2017, sales and condemnation proceeds that qualified for potential tax-deferral treatment under
Internal Revenue Code Sections 1031 and 1033 totaled approximately $34.1 million from the sale of office properties in
California and Maui and a land parcel on Maui. During 2016, sales and condemnation proceeds that qualified for potential tax-
deferral treatment under Internal Revenue Code §1031 and §1033 totaled approximately $77.4 million from the sales of two
California properties and one Utah office property in June 2016.
Purchases: During 2017, the Company utilized $10.1 million from tax-deferred sales to acquire Honokohau
Industrial Park under a reverse 1031 exchange transaction. During 2016, the Company acquired both the leasehold and leased
fee interests of Manoa Marketplace, a retail center on Oahu for $82.4 million. The proceeds from the sales of the three
Mainland properties that were completed during the second quarter have been applied to the Manoa Marketplace acquisition
under a reverse §1031 transaction that qualifies for tax-deferral treatment under Internal Revenue Code §1031. Additionally,
$8.2 million of §1033 condemnation proceeds received during the fourth quarter were applied to the Manoa Marketplace
acquisition. Also during 2016, the Company acquired the leased fee interest in 2929 East Manoa Road for $2.8 million using
$1.2 million of proceeds from the Mainland property sales under a §1031 transaction and expects to fund the remainder from
sales proceeds in 2017.
Proceeds from §1031 tax-deferred sales are held in escrow pending future use to purchase new real estate assets. The
proceeds from §1033 condemnations are held by the Company until the funds are redeployed. As of December 31, 2017, there
were approximately $34.1 million from tax-deferred sales or condemnations that had not been reinvested.
CONTRACTUAL OBLIGATIONS, COMMITMENTS, CONTINGENCIES AND OFF-BALANCE SHEET
ARRANGEMENTS
Contractual Obligations: At December 31, 2017, the Company had the following estimated contractual obligations
(in millions):
Contractual Obligations
Total
2018
Long-term debt obligations
Estimated interest on debt
Purchase obligations
Pension benefits
Post-retirement obligations
Non-qualified benefit obligations
Operating lease obligations
Total
(a) $
(b)
(c)
(d)
(e)
(f)
631.8
150.3
40.6
126.2
7.8
4.2
42.4
$ 1,003.3
$
$
41.8
24.2
40.6
12.6
0.9
0.7
5.5
126.3
$
Payment due by period
2019-2020
80.9
$
42.2
—
25.3
1.8
1.4
10.2
161.8
2021-2022 Thereafter
342.3
$
49.6
—
62.8
3.5
2.1
17.9
478.2
166.8
34.3
—
25.5
1.6
—
8.8
237.0
$
$
$
(a)
Long-term debt obligations (including current portion, but excluding debt premium or discount) include principal
repayments of short-term and long-term debt for the respective period(s) described (see Note 8 to the
Consolidated Financial Statements for principal repayments for each of the next five years). Long-term debt
includes amounts borrowed under revolving credit facilities, which have been reflected as payments due in 2022.
This amount does not include the debt issuance cost.
51
(b)
(c)
(d)
(e)
(f)
Estimated cash paid for interest on debt is determined based on (1) the stated interest rate for fixed debt and (2)
the rate in effect on December 31, 2017 for variable rate debt. Because the Company’s variable rate debt may be
rolled over, actual interest may be greater or less than the amounts indicated. Estimated interest on debt also
includes swap payments on the Company's interest rate swaps.
Purchase obligations include only non-cancelable contractual obligations for the purchases of goods and services.
Arrangements are considered purchase obligations if a contract specifies all significant terms, including fixed or
minimum quantities to be purchased, a pricing structure and approximate timing of the transaction. Any amounts
reflected on the consolidated balance sheet as accounts payable and accrued liabilities are excluded from the table
above.
Post-retirement obligations include expected payments to medical service providers in connection with providing
benefits to the Company’s employees and retirees. The $3.5 million noted in the column labeled “Thereafter”
comprises estimated benefit payments for 2023 through 2027. Post-retirement obligations are described further in
Note 11 to the Consolidated Financial Statements. The obligation for pensions reflected on the Company’s
consolidated balance sheet is excluded from the table above because the Company is unable to reliably estimate
the timing and amount of contributions.
Non-qualified benefit obligations include estimated payments to executives and directors under the Company’s
three non-qualified plans. The $2.1 million noted in the column labeled “Thereafter” comprises estimated benefit
payments for 2023 through 2027. Additional information about the Company’s non-qualified plans is included in
Note 11 to the Consolidated Financial Statements.
Operating lease obligations primarily include land, office space and equipment under non-cancelable, long-term
lease arrangements that do not transfer the rights and risks of ownership to A&B. These amounts are further
described in Note 9 to the Consolidated Financial Statements.
Other Commitments and Contingencies: A description of other commitments, contingencies and off-balance sheet
arrangements, is described in Note 14 to the Consolidated Financial Statements of Item 8 in this Form 10-K, and incorporated
herein by reference.
52
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A&B is exposed to changes in interest rates, primarily as a result of its borrowing and investing activities used to
maintain liquidity and to fund business operations. In order to manage its exposure to changes in interest rates, A&B utilizes a
balanced mix of debt maturities, along with both fixed-rate and variable-rate debt. The nature and amount of A&B’s long-term
and short-term debt can be expected to fluctuate as a result of future business requirements, market conditions, and other
factors.
A&B’s fixed rate debt, excluding debt premium or discount, consists of $555.9 million in principal term notes. A&B’s
variable rate debt consists of $66.5 million under its revolving credit facilities and $9.4 million under term loans. Other than in
default, A&B does not have an obligation, nor the option in some cases, to prepay its fixed-rate debt prior to maturity and, as a
result, interest rate fluctuations and the resulting changes in fair value would not have an impact on A&B’s financial condition
or results of operations unless A&B was required to refinance such debt. For A&B’s variable rate debt, a one percent increase
in interest rates would have a $0.8 million impact on A&B's results of operations for 2017, assuming the December 31,
2017 balance of the variable rate debt was outstanding throughout 2017.
The following table summarizes A&B’s debt obligations at December 31, 2017, presenting principal cash flows and
related interest rates by the expected fiscal year of repayment.
Expected Fiscal Year of Repayment as of December 31, 2017 (dollars in millions)
2018
2019
2020
2021
2022
Thereafter
Total
Fair Value at
December 31,
2017
Liabilities
Fixed rate
Average interest rate
Variable rate
$
41.3
4.60%
0.5
$
Average interest rate* 3.27%
$
39.7
4.47%
$
41.2
4.54%
$ — $ — $
3.24%
$
51.0
4.46%
9.4
3.16%
3.21%
$
40.4
4.42%
66.0
$
3.00%
$
$
342.3
$
555.9
4.26%
4.36%
— $
75.9
$
$
3.02%
3.09%
491.3
151.0
*Estimated interest rates on variable debt are determined based on the rate in effect on December 31, 2017. Actual interest rates may be greater or less than the
amounts indicated when variable rate debt is rolled over.
From time to time, the Company may invest its excess cash in short-term money market funds that purchase
government securities or corporate debt securities. At December 31, 2017, the amount invested in money market funds was
immaterial. These money market funds maintain a weighted average maturity of less than 90 days, and accordingly, a one
percent change in interest rates is not expected to have a material impact on the fair value of these investments or on interest
income.
A&B has no material exposure to foreign currency risks.
53
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59
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm.............................................................
Consolidated Statements of Operations............................................................................................
Consolidated Statements of Comprehensive Income (Loss) ............................................................
Consolidated Balance Sheets............................................................................................................
Consolidated Statements of Cash Flows...........................................................................................
Consolidated Statements of Equity...................................................................................................
Notes to Consolidated Financial Statements ....................................................................................
Background and Basis of Presentation...........................................................................
Significant Accounting Policies .....................................................................................
Related Party Transactions .............................................................................................
Discontinued Operations ................................................................................................
Investments in Affiliates.................................................................................................
Uncompleted Contracts ..................................................................................................
Property ..........................................................................................................................
Notes Payable and Long-Term Debt ..............................................................................
Leases – The Company as Lessee ..................................................................................
Leases – The Company as Lessor ..................................................................................
Employee Benefit Plans .................................................................................................
Income Taxes..................................................................................................................
Share-Based Awards.......................................................................................................
Commitments and Contingencies...................................................................................
Derivative Instruments ...................................................................................................
Earnings Per Share ("EPS") ...........................................................................................
Redeemable Noncontrolling Interest..............................................................................
Cessation of Sugar Operations .......................................................................................
Segment Results .............................................................................................................
1.
2.
3.
4.
5.
6.
7.
8.
9.
10
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
Subsequent Events..........................................................................................................
106
54
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Alexander & Baldwin, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Alexander & Baldwin, Inc. and subsidiaries (the
“Company”) as of December 31, 2017 and 2016, the related consolidated statements of operations, comprehensive income
(loss), equity, and cash flows, for each of the three years in the period ended December 31, 2017, and the related notes
(collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2017, in conformity with accounting principles generally
accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in
Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission, and our report dated March 1, 2018, expressed an unqualified opinion on the Company’s internal control over
financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to
error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Deloitte & Touche LLP
Honolulu, Hawaii
March 1, 2018
We have served as the Company’s auditor since 1950.
55
ALEXANDER & BALDWIN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share amounts)
Operating Revenue:
Commercial Real Estate
Land Operations
Materials & Construction
Total operating revenue
Operating Costs and Expenses:
Cost of Commercial Real Estate
Cost of Land Operations
Cost of Materials & Construction
Selling, general and administrative
REIT evaluation/conversion costs
Impairment of real estate assets
Total operating costs and expenses
Operating Income
Income related to joint ventures
Reductions in solar investments, net (Note 5, 12, 14)
Interest and other income (expense), net
Interest expense
Income from Continuing Operations Before Income Taxes and Net Gain (Loss) on
Sale of Improved Properties
Income tax benefit (expense)
Income from Continuing Operations Before Net Gain (Loss) on Sale of Improved
Properties
Net gain (loss) on the sale of improved properties, net of income taxes
Income from Continuing Operations
Income (loss) from discontinued operations, net of income taxes (Note 4)
Net Income (Loss)
Income attributable to noncontrolling interest
Net Income (Loss) Attributable to A&B Shareholders
Basic Earnings (Loss) Per Share of Common Stock:
Continuing operations available to A&B shareholders
Discontinued operations available to A&B shareholders
Net income (loss) available to A&B shareholders
Diluted Earnings (Loss) Per Share of Common Stock:
Continuing operations available to A&B shareholders
Discontinued operations available to A&B shareholders
Net income (loss) available to A&B shareholders
Weighted-Average Number of Shares Outstanding:
Basic
Diluted
Amounts Available to A&B Shareholders (Note 16):
Continuing operations available to A&B shareholders, net of income taxes
Discontinued operations available to A&B shareholders, net of income taxes
Net income (loss) available to A&B shareholders
Year Ended December 31,
2017
2016
2015
$
136.9
$
134.7
$
84.5
204.1
425.5
75.5
60.4
166.1
66.4
15.2
22.4
406.0
19.5
7.2
(2.6)
2.1
(25.6)
0.6
218.2
218.8
9.3
228.1
2.4
230.5
(2.2)
61.9
190.9
387.5
79.0
35.0
154.5
52.0
9.5
11.7
341.7
45.8
19.2
(9.8)
(1.7)
(26.3)
27.2
0.5
27.7
5.0
32.7
(41.1)
(8.4)
(1.8)
$
$
$
$
$
$
$
228.3
$
(10.2) $
$
$
$
$
4.63
0.05
4.68
4.30
0.04
4.34
49.2
53.0
0.66
$
(0.84)
(0.18) $
0.65
$
(0.83)
(0.18) $
49.0
49.4
227.7
2.4
230.1
$
$
32.2
$
(41.1)
(8.9) $
133.6
120.2
219.0
472.8
80.4
71.1
175.7
51.6
—
—
378.8
94.0
36.8
(2.6)
(2.5)
(26.8)
98.9
(37.0)
61.9
(1.1)
60.8
(29.7)
31.1
(1.5)
29.6
1.15
(0.61)
0.54
1.14
(0.60)
0.54
48.9
49.3
56.2
(29.7)
26.5
See Notes to Consolidated Financial Statements.
56
ALEXANDER & BALDWIN, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In millions)
Net Income (Loss)
Other Comprehensive Income (Loss), net of tax:
Unrealized interest rate hedging gain (loss)
Reclassification adjustment for interest expense included in net income or loss
Defined benefit pension plans:
Actuarial loss
Amortization of net loss included in net periodic pension cost
Amortization of prior service credit included in net periodic pension cost
Curtailment
Prior service cost
Income taxes related to other comprehensive income
Other comprehensive income (loss), net of tax
Comprehensive Income (Loss)
Comprehensive income attributable to noncontrolling interest
Year Ended December 31,
2017
2016
2015
$
230.5
$
(8.4) $
31.1
(0.4)
0.5
(3.2)
5.7
(1.1)
—
—
(0.6)
0.9
231.4
(2.2)
2.6
0.4
(4.6)
7.5
(0.9)
(1.5)
—
(1.4)
2.1
(6.3)
(1.8)
—
—
(7.1)
7.3
(1.3)
—
(0.4)
0.6
(0.9)
30.2
(1.5)
28.7
Comprehensive Income (Loss) Attributable to A&B Shareholders
$
229.2
$
(8.1) $
See Notes to Consolidated Financial Statements.
57
ALEXANDER & BALDWIN, INC.
CONSOLIDATED BALANCE SHEETS
(In millions)
December 31,
2017
2016
ASSETS
Current Assets:
Cash and cash equivalents
Accounts receivable, net
Contracts retention
Costs and estimated earnings in excess of billings on uncompleted contracts
Inventories
Real estate held for sale
Income tax receivable
Prepaid expenses and other assets
Total current assets
Investments in Affiliates
Real Estate Developments
Property – Net
Intangible Assets – Net
Deferred Tax Asset
Goodwill
Restricted Cash
Other Assets
Total assets
LIABILITIES AND EQUITY
Current Liabilities:
Notes payable and current portion of long-term debt
Accounts payable
Billings in excess of costs and estimated earnings on uncompleted contracts
Accrued interest
Deferred revenue
Indemnity holdback related to Grace acquisition
HC&S cessation-related liabilities
Accrued dividends
Accrued and other liabilities
Total current liabilities
Long-term Liabilities:
Long-term debt
Deferred income taxes
Accrued pension and post-retirement benefits
Other non-current liabilities
Total long-term liabilities
Total liabilities
Commitments and Contingencies (Note 14)
Redeemable Noncontrolling Interest (Note 17)
Equity:
Common stock - no par value; authorized, 150 million shares; outstanding, 49.3 million
and 49.0 million shares at December 31, 2017 and December 31, 2016, respectively
Accumulated other comprehensive loss
(Distributions in excess of accumulated earnings) Retained earnings
Total A&B shareholders' equity
Noncontrolling interest
Total equity
Total liabilities and equity
See Notes to Consolidated Financial Statements.
58
$
$
$
$
$
$
$
68.9
34.1
13.2
20.2
31.9
67.4
27.7
11.4
274.8
401.7
151.0
1,147.5
46.9
16.5
102.3
34.3
56.2
2,231.2
46.0
43.3
5.7
6.5
0.9
9.3
4.6
783.0
27.5
926.8
585.2
—
19.9
40.2
645.3
1,572.1
8.0
2.2
32.1
13.1
16.4
43.3
1.0
10.6
19.6
138.3
390.8
179.5
1,231.6
53.8
—
102.3
10.1
49.9
2,156.3
42.4
35.2
3.5
6.3
17.6
9.3
19.1
—
31.7
165.1
472.7
182.0
64.8
47.7
767.2
932.3
10.8
1,161.7
(42.3)
(473.0)
646.4
4.7
651.1
2,231.2
$
1,157.3
(43.2)
95.2
1,209.3
3.9
1,213.2
2,156.3
ALEXANDER & BALDWIN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Cash Flows from Operating Activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operations:
Depreciation and amortization
Deferred income taxes
Gains on asset transactions, net of asset write-downs
Share-based compensation expense
Investments in affiliates, net of distributions
Changes in operating assets and liabilities:
Trade, contracts retention, and other receivables
Costs and estimated earnings in excess of billings on uncompleted contracts - net
Inventories
Prepaid expenses, income tax receivable and other assets
Accrued pension and post-retirement benefits
Accounts payable and contracts retention
Accrued and other liabilities
Real estate inventory sales (real estate developments held for sale)
Expenditures for real estate inventory (real estate developments held for sale)
Net cash (used in) provided by operations
Cash Flows from Investing Activities:
Capital expenditures for property, plant and equipment
Proceeds from disposal of property and other assets
Payments for purchases of investments in affiliates and other investments
Proceeds from investments in affiliates and other investments
Net cash (used in) provided by investing activities
Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt
Payments of long-term debt and deferred financing costs
Borrowings (payments) on line-of-credit agreement, net
Distribution to noncontrolling interests
Dividends paid
Proceeds from issuance (repurchase) of capital stock and other, net
Net cash provided by (used in) financing activities
Cash, Cash Equivalents and Restricted Cash:
Net increase (decrease) in cash, cash equivalents, and restricted cash
Balance, beginning of period
Balance, end of period
Year Ended December 31,
2017
2016
2015
$
230.5
$
(8.4) $
31.1
41.4
(199.0)
(12.7)
4.4
5.5
(0.9)
(1.5)
11.4
(23.0)
(47.4)
3.3
(40.1)
47.6
(20.8)
(1.3)
(42.5)
47.2
(41.9)
33.3
(3.9)
292.5
(181.0)
2.6
(0.5)
(10.3)
(7.2)
96.1
90.9
12.3
$
103.2
$
119.5
(20.1)
(11.6)
4.1
1.4
4.3
0.7
12.7
(0.1)
6.3
(0.4)
10.7
7.4
(15.3)
111.2
(116.1)
88.8
(47.2)
41.3
(33.2)
272.0
(334.3)
(9.9)
(1.4)
(12.3)
1.2
(84.7)
55.7
16.9
(35.8)
4.7
(3.7)
(3.1)
(1.4)
25.9
(12.5)
3.6
0.1
(18.2)
73.0
(7.2)
129.1
(44.7)
48.1
(29.4)
44.4
18.4
132.0
(248.1)
(3.0)
(1.1)
(10.3)
(1.1)
(131.6)
(6.7)
19.0
12.3
$
15.9
3.1
19.0
59
Year Ended December 31,
2017
2016
2015
(24.9) $
(4.0) $
(26.2) $
— $
(27.3)
(6.4)
— $
2.5
$
— $
— $
— $
1.9
$
4.5
783.0
$
$
— $
— $
8.0
0.9
5.4
$
$
$
— $
1.3
$
— $
9.6
1.9
—
0.4
6.0
—
8.0
—
Other Cash Flow Information:
Interest paid, net of capitalized interest
Income taxes paid
Noncash Investing and Financing Activities:
Contribution of land and development assets to joint ventures
Real estate exchanged for note receivable
Declared distribution from investment in affiliate
Declared distribution to noncontrolling interest
Asset retirement obligations
Uncollected proceeds from disposal of equipment
Capital expenditures included in accounts payable and accrued expenses
Dividends declared
See Notes to Consolidated Financial Statements.
$
$
$
$
$
$
$
$
$
$
60
ALEXANDER & BALDWIN, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(In millions)
Common
Stock
Stated
Shares
48.8
Value
$ 1,147.3
Total Equity
(Distributions
Accumulated
in Excess of
Other
Accumulated
Compre-
hensive
Loss
Earnings)
Retained
Earnings
Non-
Controlling
Interest
$
(44.4) $
(0.9)
$
101.0
29.6
10.9
1.1
4.7
(0.9)
0.6
1,151.7
0.1
48.9
4.1
1.5
1,157.3
0.1
49.0
(45.3)
2.1
(43.2)
0.9
(10.3)
(3.1)
117.2
(10.2)
(12.3)
1.3
(0.8)
95.2
228.3
(793.3)
3.7
(8.5)
3.5
0.4
3.9
1.0
(0.2)
Balance, January 1, 2015
Net income
Other comprehensive income, net of tax
Dividends on common stock ($0.21 per share)
Reclassification of redeemable noncontrolling
interest (Note 17)
Distributions to noncontrolling interest
Adjustments to redemption value of redeemable
noncontrolling interest (Note 17)
Share-based compensation
Shares issued or repurchased, net
Excess tax benefit from share-based awards
Balance, December 31, 2015
Net income (loss)
Other comprehensive income, net of tax
Dividends on common stock ($0.25 per share)
Distributions to noncontrolling interest
Adjustments to redemption value of redeemable
noncontrolling interest (Note 17)
Share-based compensation
Shares issued or repurchased, net
Balance, December 31, 2016
Net income
Other comprehensive income, net of tax
Dividends on common stock ($16.13 per share)
Distributions to noncontrolling interest
Adjustments to redemption value of redeemable
noncontrolling interest (Note 17)
Redeem-
able
Non-
Controlling
Interest
$
—
0.4
8.5
(0.4)
3.1
11.6
1.4
(0.9)
(1.3)
10.8
1.2
(0.3)
(3.7)
8.0
Total
$ 1,214.8
30.7
(0.9)
(10.3)
(8.5)
—
(3.1)
4.7
(0.9)
0.6
1,227.1
(9.8)
2.1
(12.3)
—
1.3
4.1
0.7
1,213.2
229.3
0.9
(793.3)
(0.2)
3.7
4.4
$
(42.3) $
(6.9)
(473.0) $
(6.9)
651.1
$
4.7
$
Share-based compensation
Shares issued or repurchased, net
Balance, December 31, 2017
4.4
0.3
49.3
—
$ 1,161.7
See Notes to Consolidated Financial Statements.
61
Alexander & Baldwin, Inc.
Notes to Consolidated Financial Statements
1. BACKGROUND AND BASIS OF PRESENTATION
Description of Business: Alexander & Baldwin, Inc. ("A&B" or the "Company") is headquartered in Honolulu and
operates three segments: Commercial Real Estate; Land Operations; and Materials & Construction.
• Commercial Real Estate: includes leasing, property management, redevelopment and development-for-hold activities.
Significant assets include improved commercial real estate and urban ground leases. Income from this segment is
principally generated by leasing and operating real estate assets.
•
Land Operations: includes planning, zoning, financing, constructing, purchasing, managing, selling, and investing in
real property; leasing agricultural land; renewable energy; and diversified agribusiness. Primary assets include
landholdings, renewable energy assets (investments in hydroelectric and solar facilities and power purchase
agreements) and development projects. Income from this segment is principally generated by renewable energy
operations, agricultural leases, select farming operations, development sales and fees, and parcel sales.
• Materials & Construction: performs asphalt paving as prime contractor and subcontractor; imports and sells liquid
asphalt; mines, processes and sells basalt aggregate; produces and sells asphaltic and ready-mix concrete; provides and
sells various construction- and traffic-control-related products; and manufactures and sells precast concrete products.
Assets include two grade A (prime) rock quarries, an asphalt storage terminal, paving hot mix plants and quarry and
paving equipment. Income is generated principally by materials supply and paving construction.
The Company has completed a conversion process to comply with the requirements to be treated as a real estate
investment trust (“REIT”) commencing with the taxable year ended December 31, 2017. In connection with our conversion to a
REIT, the Company undertook the following actions:
• On November 8, 2017, the Company completed a holding company merger ("Holding Company Merger") in order to
facilitate the Company's ongoing REIT compliance. Pursuant to the Holding Company Merger, the then-existing
Alexander & Baldwin, Inc. ("A&B Predecessor"), Alexander & Baldwin REIT Holdings, Inc., a Hawai`i corporation
and a direct, wholly owned subsidiary of A&B Predecessor (“A&B REIT Holdings”), and A&B REIT Merger
Corporation, a Hawai`i corporation and a direct, wholly owned subsidiary of A&B REIT Holdings (“Merger Sub”)
completed a merger through which Merger Sub was merged with and into A&B Predecessor, with A&B Predecessor
continuing as the surviving corporation and being renamed "Alexander & Baldwin Investments, LLC." Additionally,
as a result of the Holding Company Merger, A&B REIT Holdings replaced A&B Predecessor as the Hawai`i-based,
publicly held corporation through which the Company’s operations are conducted, and all shares of common stock,
including the reserve of common stock issuable under the outstanding awards and equity incentive compensation
plans, of A&B Predecessor were converted into shares of A&B REIT Holdings common stock on a one-for-one basis;
promptly following the merger A&B REIT Holdings was renamed “Alexander & Baldwin, Inc.” In these Notes to the
Financial Statements, unless the context requires otherwise, references to A&B or the Company refer to Alexander &
Baldwin, Inc. prior to the consummation of the Holding Company Merger (subsequently renamed Alexander &
Baldwin Investments, LLC) and to A&B REIT Holdings following consummation of the Holding Company Merger
(subsequently renamed Alexander & Baldwin, Inc.).
• On November 16, 2017 (the "Declaration Date"), the Company declared a distribution to its shareholders in the
aggregate amount of $783 million (approximately $15.92 per share) (the "Special Distribution"), which represented
the Company's previously undistributed non-REIT earnings and profits accumulated prior to January 1, 2017, the
Company's REIT taxable income for the 2017 taxable year, and a substantial portion of the Company's estimated REIT
taxable income for the 2018 taxable year. The Company completed the payment of the Special Distribution on January
23, 2018 ("the Distribution Date") through an aggregate of $156.6 million in cash and the issuance of 22,587,299
shares of the Company's common stock.
Reclassifications: Prior year financial statement amounts are reclassified as necessary to conform to the current year
presentation related to the application of Rule 3-15 of Regulation S-X and the adoption of certain new accounting standards
discussed below. There was no impact on net income or (accumulated deficit) / retained earnings as a result of the
reclassifications. See Note 2 "Significant Accounting Policies" for additional information.
62
Rounding: Amounts in the consolidated financial statements and notes are rounded to the nearest tenth of a million.
Accordingly, a recalculation of some per-share amounts and percentages, if based on the reported data, may result in
differences.
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include the accounts of Alexander & Baldwin, Inc.
and all wholly owned and controlled subsidiaries, after elimination of intercompany amounts. Significant investments in
businesses, partnerships and limited liability companies in which the Company does not have a controlling financial interest,
but has the ability to exercise significant influence, are accounted for under the equity method. A controlling financial interest is
one in which the Company has a majority voting interest or one in which the Company is the primary beneficiary of a variable
interest entity. In determining whether the Company is the primary beneficiary of a variable interest entity in which it has an
interest, the Company is required to make significant judgments with respect to various factors including, but not limited to, the
Company’s ability to direct the activities that most significantly impact the entity’s economic performance, the rights and
ability of other investors to participate in decisions affecting the economic performance of the entity, and kick-out rights,
among others. Activities that significantly affect the economic performance of the entities in which the Company has an interest
include, but are not limited to, establishing and modifying detailed business, development, marketing and sales plans,
approving and modifying the project budget, approving design changes and associated overruns, if any, and approving project
financing, among others. The Company has not consolidated any variable interest entity in which the Company does not also
have voting control because it has determined that it is not the primary beneficiary since decisions to direct the activities that
most significantly impact the entity’s performance are shared by the joint venture partners.
The consolidated financial statements include the results of GP/RM, a supplier in the precast concrete industry, and
GLP Asphalt, LLC ("GLP"), an importer and distributor of liquid asphalt, which are owned 51 percent and 70 percent,
respectively. These entities are consolidated because the Company holds a controlling financial interest through its majority
ownership of the voting interests of the entities. The remaining interest in these entities is reported as noncontrolling interest in
the consolidated financial statements. Profits, losses and cash distributions are allocated in accordance with the respective
operating agreements.
Use of Estimates: The preparation of the consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make estimates and assumptions that affect the
amounts reported. Estimates and assumptions are used for, but not limited to: (i) asset impairments, including intangible assets
and goodwill, (ii) litigation and contingencies, (iii) revenue recognition for long-term real estate developments and construction
contracts, (iv) pension and postretirement estimates, and (v) income taxes. Future results could be materially affected if actual
results differ from these estimates and assumptions.
Customer Concentration: Grace derives a significant portion of Materials & Construction revenues from a limited
customer base. For the years ended December 31, 2017, 2016, and 2015, revenue of approximately $67.7 million, $52.0
million, and $38.1 million, respectively, was generated directly and indirectly from projects administered by the City and
County of Honolulu. For the years ended December 31, 2017, 2016, and 2015, revenue of approximately $60.2 million, $50.1
million, and $80.8 million, respectively, was generated directly and indirectly from the State of Hawai`i, where Grace served as
general contractor or subcontractor.
Cash and Cash Equivalents: Cash equivalents consist of highly liquid investments with a maturity of three months or
less at the date of purchase. The Company carries these investments at cost, which approximates fair value. There were no
outstanding checks in excess of funds on deposit at December 31, 2017 and 2016.
Allowance for Doubtful Accounts: Allowances for doubtful accounts are established by management based on
estimates of collectability. Estimates of collectability are principally based on an evaluation of the current financial condition of
the Company’s customers and their payment history, which are regularly monitored by the Company. The changes in the
allowance for doubtful accounts, included on the consolidated balance sheets as an offset to “Accounts receivable,” for the
three years ended December 31, 2017, 2016, and 2015 were as follows (in millions):
Balance at
Beginning of
Year
$1.0
$1.7
$1.7
2017
2016
2015
Provision for
Bad Debt
$1.0
$0.8
$0.4
63
Write-offs
and Other
$(0.6)
$(1.5)
$(0.4)
Balance at
End of Year
$1.4
$1.0
$1.7
Operating Cycle: The Company uses the duration of the construction contracts that range from one year to three years
as its operating cycle for purposes of classifying assets and liabilities related to contracts. Accounts receivable and contracts
retention collectible after one year related to the Materials & Construction segment are included in current assets in the
consolidated balance sheets and amounted to $8.0 million and $8.2 million as of December 31, 2017 and December 31, 2016,
respectively. Accounts and contracts payable related to the Materials & Construction segment payable after one year are
included in current liabilities in the consolidated balance sheets and amounted to $0.4 million and $0.6 million as of
December 31, 2017 and December 31, 2016, respectively.
Inventories: Sugar inventories were stated at the lower of cost (first-in, first-out basis) or market value. Materials &
supplies and Materials & Construction segment inventory are stated at the lower of cost (principally average cost, first-in, first-
out basis) or market value.
Inventories at December 31, 2017 and 2016 were as follows (in millions):
Sugar inventories
Asphalt
Processed rock, Portland cement, and sand
Work in progress
Retail merchandise
Parts, materials and supplies inventories
Total
$
$
2017
2016
— $
12.2
13.5
2.8
1.7
1.7
31.9
$
17.5
7.4
12.6
3.0
1.7
1.1
43.3
Property: Property is stated at cost, net of accumulated depreciation and amortization. Expenditures for major
renewals and betterments are capitalized. Replacements, maintenance, and repairs that do not improve or extend asset lives are
charged to expense as incurred. Upon acquiring commercial real estate that is deemed a business, the Company records land,
buildings, leases above and below market, and other intangible assets based on their fair values. Costs related to due diligence
are expensed as incurred.
Depreciation: Depreciation and amortization is computed using the straight-line method over the estimated useful
lives of the assets or the units-of-production method for quarry production-related assets. Estimated useful lives of property are
as follows:
Classification
Building and improvements
Leasehold improvements
Water, power and sewer systems
Rock crushing and asphalt plants
Machinery and equipment
Other property improvements
Range of Life (in years)
10 to 40
5 to 10 (lesser of useful life or lease term)
5 to 50
25 to 35
2 to 35
3 to 35
Real Estate Developments: Expenditures for real estate developments are capitalized during construction and are
classified as real estate developments on the consolidated balance sheets. When construction is substantially complete, the costs
are reclassified as either Real Estate Held for Sale or Property, based upon the Company’s intent to either sell the completed
asset or to hold it as an investment property, respectively. Cash flows related to real estate developments are classified as either
operating or investing activities, based upon the Company’s intention to sell the property or retain ownership of the property as
an investment following completion of construction.
For development projects, capitalized costs are allocated using the direct method for expenditures that are specifically
associated with the unit being sold and the relative-sales-value method for expenditures that benefit the entire project.
Capitalized development costs typically include costs related to land acquisition, grading, roads, water and sewage systems,
landscaping, capitalized interest, and project amenities. Direct overhead costs incurred after the development project is
substantially complete, such as utilities, maintenance and real estate taxes, are charged to selling, general and administrative
expense as incurred. All indirect overhead costs are charged to selling, general and administrative costs as incurred.
Capitalized Interest: Interest costs incurred in connection with significant expenditures for real estate developments,
the construction of assets, or investments in real estate joint ventures are capitalized during the period in which activities
64
necessary to get the asset ready for its intended use are in progress. Capitalization of interest is discontinued when the asset is
substantially complete and ready for its intended use. Capitalization of interest on investments in real estate joint ventures is
recorded until the underlying investee commences its principal operations, which is typically when the investee has other-than-
ancillary revenue generation. Total interest cost incurred was $26.4 million, $28.3 million, and $29.1 million in 2017, 2016 and
2015, respectively. Capitalized interest in 2017, 2016 and 2015 was $0.9 million, $2.0 million, and $2.3 million, respectively,
and was principally related to the Company's investment in The Collection, the Company’s Maui Business Park II, and
Kamalani projects.
Real Estate Assets Held for Sale: The Company separately classifies assets held for sale in its consolidated financial
statements. As of December 31, 2017, the Company has Hawai`i real estate developments and certain U.S. Mainland
commercial properties that were classified as held for sale with a total net asset value of $67.4 million. Real estate investments
to be disposed of are reported at the lower of carrying amounts or estimated fair value, less costs to sell. During the fourth
quarter of 2017, the Company recorded aggregate impairment charges of $22.4 million related to certain U.S. Mainland
commercial properties assets. The following table summarizes the assets held for sale and liabilities related to the assets held
for sale as of December 31, 2017:
Real Estate Developments
Property – Net
Other Assets
Total assets
Impairment of real estate assets
Real estate held for sale
$
$
21.1
64.8
3.9
89.8
(22.4)
67.4
Impairment of Long-Lived Assets and Finite-Lived Intangible Assets: Long-lived assets, including finite-lived
intangible assets, are reviewed for possible impairment when events or circumstances indicate that the carrying value may not
be recoverable. In such an evaluation, the estimated future undiscounted cash flows generated by the asset are compared with
the amount recorded for the asset to determine if its carrying value is not recoverable. If this review determines that the
recorded value will not be recovered, the amount recorded for the asset is reduced to estimated fair value. These asset
impairment analyses are highly subjective because they require management to make assumptions and apply considerable
judgments to, among others, estimates of the timing and amount of future cash flows, expected useful lives of the assets,
uncertainty about future events, including changes in economic conditions, changes in operating performance, changes in the
use of the assets and ongoing costs of maintenance and improvements of the assets, and thus, the accounting estimates may
change from period to period. If management uses different assumptions or if different conditions occur in future periods,
A&B’s financial condition or its future operating results could be materially impacted.
During the fourth quarter of 2017, the Company recorded aggregate impairment charges of $22.4 million related to
certain of its U.S. Mainland commercial properties that were classified as held for sale as of December 31, 2017.
During the fourth quarter of 2016, as a result of a change in its strategy for development activities, the Company
recorded non-cash impairment charges of $11.7 million related to certain non-active, long-term development projects. The
impairment loss recorded reduced the carrying amounts to the estimated fair value, reflecting the change to the Company’s
development-for-sale strategy to de-risk its portfolio by not pursuing certain long-term projects that were not in active
development and instead focus on projects with a short-term lifespan, generally 3 to 5 years.
The impairment charges are presented within Impairment of real estate assets in the accompanying consolidated
statements of operations. There were no material long-lived asset impairment charges recorded in 2015.
Impairment of Investments: The Company's investments in unconsolidated affiliates are reviewed for impairment
whenever there is evidence that fair value may be below carrying cost. An investment is written down to fair value if fair value
is below carrying cost and the impairment is believed to be other-than-temporary. In evaluating the fair value of an investment
and whether any identified impairment is other-than-temporary, significant estimates and considerable judgments are involved.
These estimates and judgments are based, in part, on the Company’s current and future evaluation of economic conditions in
general, as well as a joint venture’s current and future plans. Additionally, these impairment calculations are highly subjective
because they also require management to make assumptions and apply judgments to estimates regarding the timing and amount
of future cash flows that may consider various factors, including sales prices, development costs, market conditions and
absorption rates, probabilities related to various cash flow scenarios, and appropriate discount rates based on the perceived
risks, among others. In evaluating whether an impairment is other-than-temporary, the Company considers all available
65
information, including the length of time and extent of the impairment, the financial condition and near-term prospects of the
affiliate, the Company’s ability and intent to hold the investment for a period of time sufficient to allow for any anticipated
recovery in market value, and projected industry and economic trends, among others. Changes in these and other assumptions
could affect the projected operational results and fair value of the unconsolidated affiliates, and accordingly, may require
valuation adjustments to the Company’s investments that may materially impact the Company’s financial condition or its future
operating results. For example, if current market conditions deteriorate significantly or a joint venture’s plans change
materially, impairment charges may be required in future periods, and those charges could be material.
Weakness in particular real estate markets, difficulty in obtaining or renewing project-level financing or development
approvals, and changes in the Company’s development strategy, among other factors, may affect the value or feasibility of
certain development projects owned by the Company or by its joint ventures and could lead to additional impairment charges in
the future.
Fair Value Measurements: The fair values of cash and cash equivalents, receivables and short-term borrowings
approximate their carrying values due to the short-term nature of the instruments. The carrying amount and fair value of the
Company’s debt at December 31, 2017 was $631.2 million and $642.3 million, respectively, and $515.1 million and $529.3
million at December 31, 2016, respectively. The fair value of debt is calculated by discounting the future cash flows of the debt
at rates based on instruments with similar risk, terms and maturities as compared to the Company’s existing debt arrangements
(level 2).
FASB ASC Topic 820, Fair Value Measurements and Disclosures (ASC 820), as amended, establishes a fair value
hierarchy, which requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs
when measuring fair value. The hierarchy places the highest priority on unadjusted quoted market prices in active markets for
identical assets or liabilities (Level 1 measurements) and assigns the lowest priority to unobservable inputs (Level 3
measurements). The three levels of inputs within the hierarchy are defined as follows:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2: Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or
liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by
observable market data.
Level 3: Significant unobservable inputs that reflect the Company’s own assumptions about the assumptions that
market participants would use in pricing an asset or liability.
If the technique used to measure fair value includes inputs from multiple levels of the fair value hierarchy, the lowest
level of significant input determines the placement of the entire fair value measurement in the hierarchy.
The Company's U.S. Mainland commercial properties as well as the Company's non-active long-term development
projects that were impaired during each of the years ended December 31, 2017 and 2016, respectively, represent assets
measured at fair value on a nonrecurring basis subsequent to their initial recognition. The Company estimated the fair values of
these long-lived assets based on the Company’s own judgments about the assumptions that market participants would use in
pricing the real estate assets and available, observable market data. The Company classified these fair value measurements as
Level 3 inputs. After the impairment charges recorded, the aggregate carrying value of the impaired U.S. Mainland commercial
properties was $46.3 million, and the aggregate carrying value of the non-active, long-term development projects were not
material.
Intangible Assets: Intangible assets are recorded on the consolidated balance sheets as other non-current assets and
are related to the acquisition of commercial properties. Intangible assets acquired in 2017 and 2016 were as follows:
In-place/favorable leases
2017
2016
Amount
$
0.3
Weighted
Average Life
(Years)
Amount
Weighted
Average Life
(Years)
1.6
$
8.5
7.0
Intangible assets for the years ended December 31, 2017 and 2016 included the following (in millions):
66
In-place leases
Favorable leases
Permitted quarry rights
Contract backlog
Trade name/customer relationships
Accumulated amortization
Total assets
$
$
2017
2016
70.2
17.9
18.0
2.6
2.2
(64.0)
46.9
$
$
69.9
17.9
18.0
2.6
2.2
(56.8)
53.8
Aggregate intangible asset amortization was $6.0 million, $9.2 million, and $10.5 million for 2017, 2016 and 2015,
respectively. Estimated amortization expenses related to intangible assets over the next five years are as follows (in millions):
2018
2019
2020
2021
2022
Estimated
Amortization
$
$
$
$
$
5.4
4.5
3.6
3.1
2.9
Goodwill: The Company reviews goodwill for impairment at the reporting unit level annually and whenever events or
changes in circumstances indicate that it is more likely than not that the fair value of the reporting unit is less than its carrying
amount. The goodwill impairment test estimates the fair value of a reporting unit using various methodologies, including
discounted cash flows and market multiples. The discounted cash flow approach relies on a number of assumptions, including
future macroeconomic conditions, market factors specific to the reporting unit, the amount and timing of estimated future cash
flows to be generated by the business over an extended period of time, long-term growth rates for the business, and a discount
rate that considers the risks related to the amount and timing of the cash flows, among others. Under the market multiple
methodology, the estimate of fair value is based on market multiples of EBITDA (earnings before interest, taxes, depreciation
and amortization) or revenues. When using market multiples of EBITDA or revenues, the Company must make judgments
about the comparability of those multiples in closed and proposed transactions and comparability of multiples for guideline
companies.
If the results of the Company's test indicates that a reporting unit's estimated fair value is less than its carrying value,
an impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit's fair value, not to
exceed the total amount of goodwill allocated to that reporting unit.
The changes in the carrying amount of goodwill allocated to the Company's reportable segments for the years ended
December 31, 2017 and 2016 were as follows (in millions):
Balance, January 1, 2016
Changes to goodwill
Balance, December 31, 2016
Changes to goodwill
Balance, December 31, 2017
Materials &
Construction
Commercial
Real Estate
Total
$
$
93.6
$
—
93.6
—
93.6
$
8.7
—
8.7
—
8.7
$
$
102.3
—
102.3
—
102.3
Revenue Recognition: The Company has a wide variety of revenue sources, including sales of real estate, commercial
property rentals, material sales, paving construction, and the sales of raw sugar and molasses. Before recognizing revenue, the
Company assesses the underlying terms of the transaction to ensure that recognition meets the requirements of relevant
accounting standards. In general, the Company recognizes revenue when persuasive evidence of an arrangement exists,
delivery of the service or product has occurred, the sales price is fixed or determinable, and collectability is reasonably assured.
67
Sales of Real Estate Revenue Recognition: Sales of real estate revenue involve proceeds from the sale of a variety of
real estate development inventory. Real estate development inventory may include industrial lots, residential lots, agricultural
lots, condominium units, single-family homes and multi-family homes. Sales are recorded when the risks and rewards of
ownership have passed to the buyers (generally on closing dates), adequate initial and continuing investments have been
received, and collection of remaining balances, if any, is reasonably assured. For certain development projects that have
continuing post-closing involvement and for which total revenue and capital costs are reasonably estimable, the Company uses
the percentage-of-completion method for revenue recognition. Under this method, the amount of revenue recognized is based
on development costs that have been incurred through the reporting period as a percentage of total expected development cost
associated with the development project. This generally results in a stabilized gross margin percentage, but requires significant
judgment and estimates.
Commercial Real Estate Revenue Recognition: Commercial Real Estate revenue is recognized on a straight-line basis
over the terms of the related leases, including periods for which no rent is due (typically referred to as “rent holidays”).
Differences between revenues recognized and amounts due under respective lease agreements are recorded as increases or
decreases, as applicable, to deferred rent receivable. Also included in rental revenue are certain tenant reimbursements and
percentage rents determined in accordance with the terms of the leases. Income arising from tenant rents that are contingent
upon the sales of the tenant exceeding a defined threshold are recognized only after the contingency has been resolved
(i.e., sales thresholds have been achieved).
Construction Contracts and Related Products Revenue Recognition: Grace generates revenue primarily from material
sales and paving contracts. The recognition of revenue is based on the underlying terms of the transaction.
Materials: Revenues from material sales, which include basalt aggregate, liquid asphalt and hot mix asphalt, are
recognized when title to the product and risk of loss passes to third parties (generally this occurs when the product is picked up
by customers or their agents) and when collection is reasonably assured.
Construction: A majority of paving contracts is performed for Hawai`i state, federal, and county governments. Unit
price contracts, which comprise a significant portion of Grace's paving contracts, require Grace to provide line-item
deliverables at fixed unit prices based on approved quantities irrespective of Grace’s actual per unit costs. Earnings on unit
price contracts are recognized as quantities are delivered. Lump sum contracts require that the total amount of work be
performed for a single price irrespective of actual quantities or Grace’s actual costs. Earnings on fixed-price paving contracts
are generally recognized using the percentage-of-completion method with progress toward completion measured on the basis of
unit cost of work completed as of a specific date to an estimate of the total unit cost of work to be delivered under each
contract. Grace uses this method as its management considers this to be the best available measure of progress on contracts.
Contracts in progress are reviewed regularly, and sales and earnings may be adjusted based on revisions to assumption and
estimates, including, but not limited to, revisions to job performance, job site conditions, changes to the scope of work,
estimated contract costs, progress toward completion, changes in internal and external factors or conditions and final contract
settlement. Selling, general and administrative costs are charged to expense as incurred. Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses become evident.
Sugar and Molasses Revenue Recognition: Revenue from sugar sales is recorded when title to the product and risk of
loss passes to third parties (generally this occurs when the product is shipped or delivered to customers) and when collection is
reasonably assured.
Agricultural Costs: Costs of growing and harvesting sugar cane are charged to the cost of inventory in the year
incurred and to cost of sales as sugar is sold.
Discontinued Operations: On December 31, 2015, due to continuing and significant operating losses stemming from
low sugar prices and poor production levels, the Company determined it would cease sugar operations at its Hawaiian
Commercial & Sugar Company (“HC&S”) division on Maui upon completion of its final harvest in 2016. HC&S completed its
harvest in December 2016, and the Company ceased its sugar operations (the "Cessation"). As a result, the Company
concluded that its sugar operations met the requirements to be reported as discontinued operations for all periods presented.
See Note 4, "Discontinued Operations" for additional detail.
Employee Benefit Plans: The Company provides a wide range of benefits to existing employees and retired
employees, including single-employer defined benefit plans, postretirement, defined contribution plans, post-employment and
health care benefits. The Company records amounts relating to these plans based on various actuarial assumptions, including
discount rates, assumed rates of return, compensation increases, turnover rates and health care cost trend rates. The Company
reviews its actuarial assumptions on an annual basis and makes modifications to the assumptions based on current economic
conditions and trends. The Company believes that the assumptions utilized in recording obligations under the Company’s plans,
68
which are presented in Note 11, “Employee Benefit Plans,” are reasonable based on its experience and on advice from its
independent actuaries; however, differences in actual experience or changes in the assumptions may materially affect the
Company’s financial position or results of operations.
Share-Based Compensation: The Company records compensation expense for all share-based payment awards made
to employees and directors. The Company’s various equity plans are more fully described in Note 13, "Share-Based Awards."
Redeemable Non-controlling Interest: Non-controlling interests in subsidiaries that are redeemable for cash or other
assets outside of the Company’s control are classified as mezzanine equity, outside of equity and liabilities, and are adjusted to
fair value on each balance sheet date. The resulting changes in fair value of the estimated redemption amount, increases or
decreases, are recorded with corresponding adjustments against retained earnings or, in the absence of retained earnings,
common stock.
Earnings Per Share (“EPS”): Basic and diluted earnings per share are computed and disclosed in accordance with
FASB Accounting Standards Codification Topic 260, Earnings Per Share. The Company utilizes the two-class method to
compute earnings available to common shareholders. Under the two-class method, earnings are adjusted by accretion amounts
to redeemable noncontrolling interests recorded at redemption value. The adjustments represent in-substance dividend
distributions to the noncontrolling interest holder as the holder has a contractual right to receive a specified amount upon
redemption. As a result, earnings are adjusted to reflect this in-substance distribution that is different from other common
shareholders. In addition, the Company allocates net earnings to each class of common stock and participating security as if all
of the net earnings for the period had been distributed. The Company's participating securities consist of time-based restricted
unit awards that contain a non-forfeitable right to receive dividends and, therefore, are considered to participate in earnings
with common shareholders. Basic earnings per common share excludes dilution and is calculated by dividing net earnings
allocated to common shares by the weighted-average number of common shares outstanding for the period. Diluted earnings
per common share is calculated by dividing net earnings allocable to common shares by the weighted-average number of
common shares outstanding for the period, as adjusted for the potential dilutive effect of non-participating share-based awards.
Additionally, as the deadline for the common shareholders' election was January 12, 2018, subsequent to December 31, 2017,
the total Special Distribution of $783 million (approximately $15.92 per share) was included in the computation of the
Company's diluted earnings (loss) per share.
Income Taxes: The Company makes certain estimates and judgments in determining income tax expense for financial
statement purposes. These estimates and judgments are applied in the calculation of tax credits, tax benefits and deductions,
and in the calculation of certain deferred tax assets and liabilities, which arise from differences in the timing of recognition of
revenue and expense for tax and financial statement purposes. Deferred tax assets and deferred tax liabilities are adjusted to the
extent necessary to reflect tax rates expected to be in effect when the temporary differences reverse. Adjustments may be
required to deferred tax assets and deferred tax liabilities due to changes in tax laws and audit adjustments by tax authorities. To
the extent adjustments are required in any given period, the adjustments would be included within the tax provision in the
accompanying consolidated statements of operations. The Company records a liability for uncertain tax positions not deemed to
meet the more-likely-than-not threshold. The Company did not have material uncertain tax positions as of December 31, 2017
and 2016.
The Company believes that it is more likely than not that the benefit from its state nonrefundable energy tax credit
carryforward will not be realized. Consequently, the Company has recorded a valuation allowance of $6.9 million on the
deferred tax asset relating to this credit carryforward. If our assumptions change and the Company determines that it will be
able to realize the credit, the tax benefits relating to any reversal of the valuation allowance on the deferred tax assets will be
recognized as a reduction in income tax expense.
The Company accounts for tax credits related to its investments in KRS II and Waihonu using the flow-through
method, which reduces the provision for income taxes in the year the tax credits first become available.
Comprehensive Income (Loss): Comprehensive income (loss) includes all changes in equity, except those resulting
from transactions with shareholders and net income (loss). Other comprehensive income (loss) principally includes
amortization of deferred pension and postretirement costs. The components of accumulated other comprehensive loss, net of
taxes, were as follows for the years ended December 31, 2017 and 2016 (in millions):
69
Unrealized components of benefit plans:
Pension plans
Post-retirement plans
Non-qualified benefit plans
Interest rate swap
Accumulated other comprehensive loss
2017
2016
$
$
(43.1) $
(1.0)
(0.1)
1.9
(42.3) $
(43.8)
(0.6)
(0.6)
1.8
(43.2)
The changes in accumulated other comprehensive loss by component for the years ended December 31, 2017, 2016
and 2015 were as follows (in millions, net of tax):
Employee
Benefit Plans
Interest Rate
Swap
Total
Balance, January 1, 2015
Other comprehensive loss before reclassifications, net of
taxes of $2.9 for employee benefit plans
Amounts reclassified from accumulated other comprehensive
loss, net of taxes of $2.3 for employee benefit plans
Balance, December 31, 2015
Other comprehensive loss before reclassifications, net of
taxes of $2.1 and $1.0 for employee benefit plans and interest
rate swap, respectively
Amounts reclassified from accumulated other comprehensive
loss, net of taxes of $2.3 and $0.2 for employee benefit plans
and interest rate swap, respectively
Balance, December 31, 2016
Other comprehensive loss before reclassifications, net of
taxes of $1.2 and $0.2 for employee benefit plans and interest
rate swap, respectively
Amounts reclassified from accumulated other comprehensive
loss, net of taxes of $1.8 and $0.2 for employee benefit plans
and interest rate swap, respectively
Balance, December 31, 2017
$
$
$
$
(44.4) $
— $
(44.4)
(4.6)
3.7
(45.3) $
(3.4)
3.7
(45.0) $
—
—
— $
1.6
0.2
1.8
$
(4.6)
3.7
(45.3)
(1.8)
3.9
(43.2)
(2.0)
(0.2)
(2.2)
2.8
(44.2) $
0.3
1.9
$
3.1
(42.3)
The reclassifications of other comprehensive loss components out of accumulated other comprehensive loss for the
years ended December 31, 2017, 2016 and 2015 were as follows (in millions):
2017
2016
2015
$
(0.4) $
2.6
$
Unrealized hedging gain (loss)
Reclassification adjustment for interest expense included in
net income or loss
Actuarial loss*
Amortization of defined benefit pension items reclassified to
net periodic pension cost:
Prior service cost
Net loss*
Prior service credit*
Curtailment
Total before income tax
Income taxes
Other comprehensive income (loss), net of tax
$
0.5
(3.2)
—
5.7
(1.1)
—
1.5
(0.6)
0.9
$
0.4
(4.6)
—
7.5
(0.9)
(1.5)
3.5
(1.4)
2.1
$
—
—
(7.1)
(0.4)
7.3
(1.3)
—
(1.5)
0.6
(0.9)
* These accumulated other comprehensive loss components are included in the computation of net periodic pension cost (see Note
11 for additional details).
70
Self-Insured Liabilities: The Company is self-insured for certain losses that include, but are not limited to, employee
health, workers’ compensation, general liability, real and personal property, and real estate construction warranty and defect
claims. When feasible, the Company obtains third-party insurance coverage to limit its exposure to these claims. When
estimating its self-insured liabilities, the Company considers a number of factors, including historical claims experience,
demographic factors, and valuations provided by independent third-parties.
Interest and other income (expense), net is comprised primarily of interest income and other components of net
periodic benefit costs related to pension and postretirement benefits. The components of Interest and other income (expense),
net on the Consolidated Statement of Operations for the years ended December 31, 2017, 2016 and 2015 are as follows:
Interest income
Pension and postretirement benefit expense
Other income (expense)
Interest and other income (expense), net
2017
2016
2015
$
$
5.3
$
(2.6)
(0.6)
2.1
$
1.8
(4.2)
0.7
(1.7)
$
$
0.8
(3.7)
0.4
(2.5)
New Accounting Pronouncements:
In May 2014, Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No.
2014-09, Revenue from Contracts with Customers (Topic 606), (“ASU 2014-09”) which provides guidance for revenue
recognition. ASU 2014-09 affects any entity that either enters into contracts with customers to transfer goods or services or
enters into contracts for the transfer of non-financial assets. ASU 2014-09 will supersede the revenue recognition requirements
in FASB Accounting Standards Codification Topic 605, Revenue Recognition, and most industry-specific guidance. Under ASU
2014-09, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the
consideration the entity expects to be entitled to in exchange for those goods or services. ASU 2014-09 provides a five-step
analysis of transactions to determine when and how revenue is recognized including (i) identify the contract(s) with a customer,
(ii) identify the performance obligations in the contract(s), (iii) determine the transaction price, (iv) allocate the transaction
price to the performance obligations in the contract(s), and (v) recognize revenue when, or as, the entity satisfies a performance
obligation. In addition, ASU 2014-09 requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash
flows arising from contracts with customers.
In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of
the Effective Date, deferring the effective date of this standard. As a result, ASU 2014-09 and related amendments will be
effective for the Company for its fiscal year beginning January 1, 2018, including interim periods within that fiscal year. Early
adoption is permitted, but not before August 1, 2017, the original effective date of ASU 2014-09.
In March, April, May, and December 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with
Customers (Topic 606): Principal Versus Agent Consideration (Reporting Revenue Gross Versus Net), ASU No. 2016-10,
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, and ASU No.
2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, and
ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers,
respectively (collectively, the “Amendments”). The Amendments serve to clarify certain aspects of and have the same effective
date as ASU 2014-09.
The Company has completed its evaluation of the impact of adopting ASU No. 2014-09 and has identified the major
revenue streams. Based on the evaluation, the Company does not anticipate a significant impact on the financial statements,
controls structure around the implementation, or notes in the consolidated financial statements. Upon adoption at January 1,
2018, the Company will recognize an insignificant cumulative effect amount using the modified retrospective approach.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) ("ASU 2016-02"). ASU 2016-02 requires
the identification of arrangements that should be accounted for as leases by lessees. In general, lease arrangements exceeding a
twelve month term must now be recognized as assets and liabilities on the balance sheet of the lessee. Under ASU 2016-02, a
right-of-use asset and lease obligation will be recorded for all leases, whether operating or financing, while the income
statement will reflect lease expense for operating leases and amortization/interest expense for financing leases. The balance
sheet amount recorded for existing leases at the date of adoption of ASU 2016-02 must be calculated using the applicable
incremental borrowing rate at the date of adoption. In addition, ASU 2016-02 requires the use of the modified retrospective
71
method, which will require adjustment to all comparative periods presented in the consolidated financial statements. ASU
2016-02 is effective for financial statements issued for fiscal years beginning after December 15, 2018. The Company is
currently assessing the impact that adopting this new accounting standard will have on its consolidated financial statements and
footnote disclosures.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230) ("ASU 2016-15"). ASU
2016-15 is an update that addresses eight specific cash flow issues with the objective of reducing the existing diversity in
practice of cash receipts and cash payments presentation and classification in the statement of cash flows. ASU 2016-15 is
effective for financial statements issued for fiscal years beginning after December 15, 2017. The Company elected to early
adopt ASU 2016-15 in the fourth quarter of fiscal year 2017. The adoption of this standard did not have a material impact on
the Company’s financial position or results of operation.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash ("ASU
2016-18"). ASU 2016-18 will require entities to show the changes on the total cash, cash equivalents, restricted cash and restricted
cash equivalents in the statement of cash flows. As a result, entities will no longer present transfers between these items on the
statement of cash flows. The guidance will be applied retrospectively and is effective for fiscal years beginning after December
15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The Company elected to early adopt
this guidance in the fourth quarter of fiscal year 2017, pursuant to which the Company applied the cash flow presentation
requirements retrospectively to all periods presented.
The impact of adopting the above guidance for the years ended December 31, 2016 and 2015 was as follows:
2016
2015
Previously
Reported
Impact of
Adoption
Current
Presentation
Previously
Reported
Impact of
Adoption
Current
Presentation
Cash Flows from Operating Activities
Cash Flows from Investing Activities
Cash Flows from Financing Activities
Cash, Cash Equivalents and Restricted Cash
Net increase in cash and cash equivalents and restricted
cash
Balance, beginning of period
Balance, end of period
$
$
$
$
$
111.2 $
(25.6) $
(84.7) $
— $
(7.6) $
— $
111.2
$
129.1 $
— $
(33.2) $
1.0 $
17.4 $
129.1
18.4
(84.7) $
(131.6) $
— $
(131.6)
0.9 $
(7.6) $
(6.7) $
(1.5) $
17.4 $
1.3
17.7
2.2 $
10.1 $
19.0
12.3
2.8
0.3
$
1.3 $
17.7 $
15.9
3.1
19.0
The reconciliation of Cash, Cash Equivalents and Restricted Cash as of December 31, 2017, 2016 and 2015 was:
Cash and Cash Equivalents
Restricted Cash
Cash, Cash Equivalents and Restricted Cash
2017
2016
2015
$
$
68.9
$
34.3
103.2
$
2.2
$
10.1
12.3
$
1.3
17.7
19.0
In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test
for Goodwill Impairment ("ASU 2017-04"). The guidance simplifies the accounting for goodwill impairment for all entities by
eliminating the requirement to calculate the implied fair value of goodwill (i.e., Step 2 of today’s goodwill impairment test) to
measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s
carrying amount over its fair value (i.e., measure the charge based on today’s Step 1). The standard does not change the guidance
on completing Step 1 of the goodwill impairment test. An entity will still be able to perform today’s optional qualitative goodwill
impairment assessment before determining whether to proceed to Step 1. The Company elected to early adopt this guidance in
the fourth quarter of fiscal year 2017. The adoption of this standard did not have any impact on the Company’s financial position
or results of operations.
In January 2017, the FASB issued ASU No. 2017-01, Clarifying the Definition of a Business ("ASU 2017-01"). ASU
2017-01 provides guidance regarding the definition of a business with the objective of providing guidance to assist entities with
72
evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 is
effective for fiscal years beginning after December 15, 2017, including interim periods within those years. ASU 2017-01 should
be applied prospectively and early adoption is permitted. The new guidance will result in many real estate transactions being
classified as an asset acquisition and transaction costs being capitalized. The Company elected to early adopt FASB ASU No.
2017-01 in the second quarter of fiscal year 2017. The adoption of this standard did not have a material impact on the Company’s
financial position or results of operations.
In March 2017, the FASB issued ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net
Periodic Postretirement Benefit Cost ("ASU 2017-07"). ASU 2017-07 provides that entities will present the service cost
component of net periodic benefit cost in the same income statement line item(s) as other employee compensation costs arising
from services rendered during the period. Only the service cost component will be eligible for capitalization in assets. In
addition, entities will present the other components of net periodic benefit cost separately from the line item(s) that includes the
service cost and outside of any subtotal of operating income, if one is presented. These components will not be eligible for
capitalization in assets. ASU 2017-07 is effective for fiscal years or interim periods beginning after December 15, 2017 and
early adoption is permitted. The Company elected to early adopt this guidance in the fourth quarter of fiscal year 2017, and has
recorded the other components of net periodic benefit costs within other expense, which is classified in Interest and other
income (expense), net in the accompanying consolidated statements of operations. The service cost component of net periodic
benefit cost is classified in Selling, general and administrative in the consolidated statements of operations. The Company
applied the presentation requirement of ASU 2017-07 retrospectively to all periods presented. The impact of adopting the
above guidance was as follows:
Accordingly, the Company also reclassified prior period amounts for the other components of net periodic benefit
costs totaling $4.2 million and $3.7 million for the years ended December 31, 2016, and 2015, respectively, from Selling,
general and administrative to Interest and other income, net.
The impact of adopting the above guidance for the years ended December 31, 2016 and 2015 were as follows:
Selling, general and administrative
Interest and other income, net
2016
2015
Previously
Reported
Impact of
Adoption
Current
Presentation
Previously
Reported
Impact of
Adoption
Current
Presentation
$
$
56.2 $
2.5 $
(4.2) $
(4.2) $
52.0
$
(1.7) $
55.3 $
1.2 $
(3.7) $
(3.7) $
51.6
(2.5)
In May 2017, the FASB issued ASU No. 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification
Accounting (“ASU 2017-09”). The guidance clarifies when changes to the terms or conditions of a share-based payment award
must be accounted for as modifications. Entities will apply the modification accounting guidance if the value, vesting conditions
or classification of the award changes. The guidance also clarifies that a modification to an award could be significant and therefore
require disclosure, even if modification accounting is not required. Therefore, an entity will have to make all of the disclosures
about modifications that are required today, in addition to disclosing that compensation expense hasn’t changed, if that’s the case.
The guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017.
Early adoption is permitted, including in any interim period for which financial statements have not yet been issued or made
available for issuance. The guidance will be applied prospectively to awards modified on or after the adoption date. The Company
is currently assessing the impact that adopting this new accounting standard will have on its consolidated financial statements and
footnote disclosures.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to
Accounting for Hedging Activities. The guidance amends the hedge accounting model in ASC 815 to enable entities to better
portray the economics of their risk management activities in the financial statements and enhance the transparency and
understandability of hedge results. The amendments expand an entity’s ability to hedge nonfinancial and financial risk
components and reduce complexity in fair value hedges of interest rate risk. This ASU eliminates the requirement to separately
measure and report hedge ineffectiveness and generally requires the entire change in the fair value of a hedging instrument to
be presented in the same income statement line as the hedged item. This ASU is effective for fiscal years beginning after
December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted in any interim period or fiscal
year before the effective date. For cash flow and net investment hedges existing at the date of adoption, entities will apply the
new guidance using a modified retrospective approach (i.e., with a cumulative effect adjustment recorded to the opening
balance of retained earnings as of the initial application date). The guidance provides transition relief to make it easier for
entities to apply certain amendments to existing hedges (including fair value hedges) where the hedge documentation needs to
73
be modified. The presentation and disclosure requirements apply prospectively. The Company is currently assessing the impact
that adopting this new accounting standard will have on its consolidated financial statements and footnote disclosures.
In February 2018, the FASB issued ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220).
The guidance permits entities to reclassify tax effects stranded in accumulated other comprehensive income as a result of tax
reform to retained earnings, giving entities the option to reclassify these amounts rather than require reclassification. The FASB
also gave entities the option to apply the guidance retrospectively or in the period of adoption. When adopted, the standard
requires all entities to make new disclosures, regardless of whether they elect to reclassify stranded amounts. Entities are
required to disclose whether or not they elected to reclassify the tax effects related to the Tax Cuts and Jobs Act of 2017 as well
as their policy for releasing income tax effects from accumulated OCI. The guidance is effective for fiscal years beginning after
December 15, 2018, and interim periods within those fiscal years. Entities are able to early adopt the guidance in any interim or
annual period for which financial statements have not yet been issued and apply it either (1) in the period of adoption or (2)
retrospectively to each period in which the income tax effects of the Tax Cuts and Jobs Act of 2017 related to items in
accumulated OCI are recognized. The Company is currently assessing the impact that adopting this new accounting standard
will have on its consolidated financial statements and footnote disclosures.
3.
RELATED PARTY TRANSACTIONS
Construction Contracts and Material Sales. The Company entered into contracts in the ordinary course of business, as
a supplier, with affiliates that are members in entities in which the Company also is a member. Revenues earned from
transactions with affiliates totaled approximately $21.1 million, $12.0 million, and $23.0 million for the years ended December
31, 2017, 2016, and 2015, respectively. Receivables from these affiliates were $2.9 million as of December 31, 2017 and
immaterial as of December 31, 2016. Amounts due to these affiliates were immaterial as of December 31, 2017 and 2016.
Commercial Real Estate. The Company entered into contracts in the ordinary course of business, as a lessor of
property, with unconsolidated affiliates in which the Company has an interest, as well as with certain entities that are owned by
a director of the Company. Revenues earned from these transactions were $5.2 million for the years ended December 31, 2017,
$6.1 million for the year ended December 31, 2016, and immaterial for the year ended December 31, 2015. Receivables from
these affiliates were immaterial as of December 31, 2017 and 2016.
Land Operations. During the year ended December 31, 2017, the Company recorded developer fee revenues of
approximately $2.4 million related to management and administrative services provided to certain unconsolidated investments
in affiliates. Developer fee revenues recorded for the years ended 2016 and 2015 were $4.6 million and $2.9 million,
respectively. Receivables from these affiliates were immaterial as of December 31, 2017 and 2016.
Consulting Agreement. In January 2016, the Company entered into a one-year consulting agreement with a former
executive of its Grace subsidiary (who retired in December 2015) to provide services related to the operation of Grace,
including assisting in leadership transition, operating performance and government and community affairs. The agreement was
for $200,000 for the 2016 calendar year and terminated on December 31, 2016.
4.
DISCONTINUED OPERATIONS
In December 2016, the Company completed its final sugar harvest and ceased its sugar operations.
The historical results of operations have been presented as discontinued operations in the consolidated financial
statements and prior periods have been recast.
The revenue, operating income (loss), gain on asset dispositions, income tax (expense) benefit and after-tax effects of
these transactions for the years ended December 31, 2017, 2016, and 2015 were as follows (in millions):
74
Sugar operations revenue
Cost of sugar operations
Operating income (loss) from sugar operations
Sugar operations cessation costs
Gain on asset dispositions
Income (loss) from discontinued operations before income taxes
Income tax (expense) benefit
Income (loss) from discontinued operations
Basic earnings (loss) per share
Diluted earnings (loss) per share
2017
2016
2015
22.9
22.5
0.4
(2.7)
6.0
3.7
(1.3)
2.4
$
98.4
87.5
10.9
(77.6)
—
(66.7)
25.6
$ (41.1)
$
97.7
124.6
(26.9)
(22.6)
—
(49.5)
19.8
$ (29.7)
0.05
0.04
$ (0.84)
$ (0.83)
$ (0.61)
$ (0.60)
$
$
$
$
There was no depreciation and amortization related to discontinued operations for the year ended December 31, 2017.
Depreciation and amortization related to discontinued operations was $70.9 million and $12.4 million for the years ended December
31, 2016, and 2015, respectively.
5.
INVESTMENTS IN AFFILIATES
The Company's investments in affiliates consist principally of equity investments in limited liability companies in
which the Company has the ability to exercise significant influence over the operating and financial policies of these
investments. Accordingly, the Company accounts for its investments using the equity method of accounting. The Company’s
investments in affiliates totaled $401.7 million and $390.8 million as of December 31, 2017 and 2016, respectively. The
amounts of the Company’s investment at December 31, 2017 and December 31, 2016 that represent undistributed earnings of
investments in affiliates were approximately $8.2 million and $15.5 million, respectively. Dividends and distributions from
unconsolidated affiliates totaled $10.4 million in 2017, $71.6 million in 2016 and $72.2 million in 2015.
Operating results include the Company's proportionate share of net income from its equity method investments. A
summary of combined financial information related to the Company's equity method investments at December 31 is as follows
(in millions):
Current assets
Non-current assets
Total assets
Current liabilities
Non-current liabilities
Total liabilities
Revenues
Operating costs and expenses
Operating income
Income from Continuing Operations*
Net Income*
2017
2016
153.1
754.9
908.0
52.5
192.8
245.3
$
$
$
$
154.3
727.8
882.1
65.8
175.0
240.8
Year Ended December 31,
2016
2015
2017
200.5
166.3
34.2
16.0
15.5
$
$
$
$
489.3
449.8
39.5
31.7
31.7
$
$
$
$
471.7
411.6
60.1
57.2
56.1
$
$
$
$
$
$
$
$
* Includes earnings from equity method investments held by the investee.
In 2002, the Company entered into a joint venture with DMB Communities II, an affiliate of DMB Associates, Inc., an
Arizona-based developer of master-planned communities (“DMB”), for the development of Kukui'ula, a master planned resort
residential community located in Poipu, Kauai, planned for up to 1,500 high-end residential units. The carrying value of the
75
Company's investment in Kukui'ula, which includes capital contributed by A&B to the joint venture and the value of land initially
contributed, net of joint venture earnings and losses, was $302.6 million as of December 31, 2017 and $290.7 million as of
December 31, 2016. The total capital contributed to the joint venture by the Company as a percent of total committed was
approximately 61% as of December 31, 2017. Due to the joint venture’s obligation to complete improvements and amenities, the
joint venture uses the percentage-of-completion method for revenue recognition. The Company does not have a controlling financial
interest in the joint venture, but exercises significant influence over the operating and financial policies of the venture, and therefore,
accounts for its investment using the equity method. Due to the complex nature of cash distributions to the members, net income
of the joint venture is allocated to the members, including the Company, using the Hypothetical Liquidation at Book Value
(“HLBV”) method. Under the HLBV method, joint venture income or loss is allocated to the members based on the period change
in each member’s claim on the book value of net assets of the venture, excluding capital contributions and distributions made
during the period.
In 2010, A&B acquired fully-entitled land near the Ala Moana Center in Honolulu for the development of Waihonua
("Waihonua"), a 340-saleable unit residential high-rise condominium. In 2012, the Company formed a joint venture and
contributed the land, pre-development assets and cash. The Company also secured capital partners that provided the remainder
of the $65.0 million in total equity required for the project and the joint venture secured construction financing. In connection
with the project, the Company provided a limited guaranty to the construction lender in the amount of the lesser of $20.0
million or the outstanding loan balance. The Company's exposure to loss was limited to its equity investment and the
outstanding balance on the loan, up to $20.0 million. The Company does not have a controlling financial interest in the joint
venture, but exercises significant influence over the operating and financial policies of the venture, and therefore, accounted for
its investment under the equity method. Construction of Waihonua was completed in November 2014, and 12 units closed in
December 2014. The remaining 328 units closed in January 2015 and the construction loan was paid off, extinguishing the
guarantee. The Company had no carrying value related to its investment in Waihonua at December 31, 2017 and 2016,
respectively. For the year ended December 31, 2015, the Company determined that its Waihonua joint venture met the
conditions of a significant subsidiary under Rule 1-02(w) of Regulation S-X and, therefore, pursuant to Rule 3-09 of
Regulation S-X, has attached separate financial statements to this Annual Report on Form 10-K as Exhibit 99.1.
In July 2014, the Company invested $23.8 million in KRS II, an entity that owns and operates a 12-megawatt solar
farm in Koloa, Kauai. The Company does not have a controlling financial interest in KRS II, but exercises significant influence
over the operating and financial policies of the venture, and therefore, accounts for its investment under the equity method. Due
to the complex nature of cash distributions, net income of the joint venture is allocated to the Company using the HLBV
method. Under the HLBV method, joint venture income or loss is allocated to the members based on the period change in each
member’s claim on the net assets of the venture, excluding capital contributions and distributions made during the period. For
the years ended December 31, 2017 and 2016, the Company recorded a net, non-cash reduction of $0.2 million and $1.1
million, respectively, in Reduction in solar investments, net in the accompanying consolidated statements of operations. The
carrying value of the Company's investment at December 31, 2017 and 2016 was $0.9 million and $2.2 million. In connection
with the KRS II investment, the Company provided a limited indemnity to Kauai Island Utility Cooperative ("KIUC") that
indemnifies KIUC for payments up to $6.0 million made by KIUC under a KIUC guaranty to the lender that provided KRS II's
project financing. KIUC is an equity partner and managing member of KRS II, project sponsor and customer for the output of
the KRS II facility. The fair value of the Company's indemnity was not material.
During 2016, the Company also invested $15.4 million in Waihonu, an entity that operates two photovoltaic facilities
with a combined capacity of 6.5 megawatts in Mililani, Oahu. The Company does not have a controlling financial interest in
Waihonu, but exercises significant influence over the operating and financial policies of the venture, and therefore, accounts for
its investment under the equity method. Due to the complex nature of cash distributions, net income of the joint venture is
allocated to the Company using the HLBV method, as described in the above paragraph. During the year ended December 31,
2017, the Company recorded a net, non-cash reduction of $2.4 million in Reduction in solar investments, net. As of December
31, 2017, the Company's investment was $1.4 million.
In October 2014, the Company contributed land, pre-paid development assets and cash to The Collection LLC, a joint
venture formed to develop a 464-unit high-rise residential condominium project on Oahu, consisting of a 396-saleable unit
high-rise condominium tower, 14 three-bedroom townhomes, and a 54-unit mid-rise building. In addition to the Company's
initial contribution, the Company also secured equity partners that contributed an additional $16.8 million in cash. The
Company's total agreed upon contribution, which includes the land and pre-paid development assets already contributed, was
$50.3 million. In connection with the project, the Company provided a limited guaranty to the construction lender for the
project at the lesser of $30.0 million or the outstanding loan balance. The Company's exposure to loss is limited to its total
equity investment and the outstanding balance on the loan, up to $30.0 million. The fair value of the Company's guaranty was
not material. The Company's investment at December 31, 2017 and 2016 was $18.5 million and $15.3 million, respectively.
The Company accounts for its investment under the equity method. As of December 31, 2017, all 396 tower units and 54 loft
76
units and two townhomes have closed escrow. For the year ended December 31, 2017, the Company determined that The
Collection joint venture met the conditions of a significant subsidiary under Rule 1-02(w) of Regulation S-X and, therefore,
pursuant to Rule 3-09 of Regulation S-X, has attached separate financial statements to this Annual Report on Form 10-K as
Exhibit 99.4.
The Company also has investments in various other joint ventures that operate or develop real estate and joint ventures
that engage in materials and construction-related activities and renewable energy. The Company does not have a controlling
financial interest, but has the ability to exercise significant influence over the operating and financial policies of these joint
ventures and, accordingly, accounts for its investments in these ventures using the equity method of accounting.
6.
UNCOMPLETED CONTRACTS
Information related to uncompleted contracts as of December 31, 2017 and 2016 is as follows (in millions):
2017
2016
Costs incurred on uncompleted contracts
$
137.5
$
35.8
173.3
158.8
14.5
$
92.2
26.8
119.0
106.1
12.9
20.2
(5.7)
14.5
$
$
16.4
(3.5)
12.9
$
$
$
Estimated earnings
Subtotal
Less: billings to date
Total
Included in accompanying balance sheet under the following captions:
Costs and estimated earnings in excess of billings on uncompleted contracts
Estimated billings in excess of costs and estimated earnings on uncompleted contracts
Total
7.
PROPERTY
Property on the consolidated balance sheets includes the following (in millions):
Buildings
Land
Machinery and equipment
Asphalt plants and quarry assets
Water, power and sewer systems
Other property improvements
Vessel
Subtotal
Accumulated depreciation
Property - net
December 31,
2017
2016
$
471.6
$
613.3
74.7
80.2
109.9
70.5
—
566.5
622.6
254.0
78.2
156.4
65.9
11.3
1,420.2
(272.7)
1,147.5
$
$
1,754.9
(523.3)
1,231.6
Depreciation expense for the years ended December 31, 2017, 2016, and 2015 was $32.3 million, $106.1 million and
$43.8 million, respectively. During the year ended December 31, 2016, HC&S recorded accelerated depreciation of $70.9 million.
77
8.
NOTES PAYABLE AND LONG-TERM DEBT
At December 31, 2017 and 2016, notes payable and long-term debt consisted of the following (in millions):
Revolving credit facilities:
Wells Fargo GLP Revolver, matures in 2018 (a)
Revolving credit facility, matures in 2022 ($372.2 million available) (b)
Term loans:
6.38%, payable through 2017, secured by Midstate Hayes
1.85%, payable through 2017, unsecured
2.00%, payable through 2018, unsecured
3.31%, payable through 2018, unsecured
5.19%, payable through 2019, unsecured
6.90%, payable through 2020, unsecured
LIBOR plus 2.00%, payable through 2021 (c)
LIBOR plus 1.00%, payable through 2021, secured by asphalt terminal (d)
3.15%, payable through 2021, second mortgage secured by Kailua Town Center III
LIBOR plus 1.50%, payable through 2021, secured by Kailua Town Center III (e)
5.53%, payable through 2024, unsecured
3.90%, payable through 2024, unsecured
4.15%, payable through 2024, secured by Pearl Highlands Center
5.55%, payable through 2026, unsecured
5.56%, payable through 2026, unsecured
4.35%, payable through 2026, unsecured
4.04%, payable through 2026, unsecured
3.88%, payable through 2027, unsecured
4.16%, payable through 2028, unsecured
4.30%, payable through 2029, unsecured
LIBOR plus 1.35%, payable through 2029, secured by Manoa Marketplace (f)
Total debt (contractual)
Unamortized debt premium (discount)
Unamortized debt issuance costs
Total debt (carrying value)
Less current portion
Long-term debt
(a) Loan has a stated interest rate of LIBOR plus 1.50%.
(b) Loan has a stated interest rate of LIBOR plus 1.65%, based on pricing grid.
(c) Loan is secured by a letter of credit.
(d) Loan has a stated interest rate of LIBOR plus 1.00%, but is swapped through maturity to a 5.98% fixed rate.
(e) Loan has a stated interest rate of LIBOR plus 1.50%, but is swapped through maturity to a 5.95% fixed rate.
(f) Loan has a stated interest rate of LIBOR plus 1.35%, but is swapped through maturity to a 3.14% fixed rate.
2017
2016
$
0.5
$ —
66.0
14.9
—
—
0.1
1.0
4.4
8.2
2.5
0.8
2.8
6.5
48.8
65.0
9.4
4.8
4.9
10.8
28.5
62.6
87.0
46.0
25.0
22.0
50.0
50.0
25.0
25.0
60.0
631.8
0.5
(1.1)
631.2
(46.0)
$ 585.2
9.4
6.1
—
11.2
28.5
68.1
88.8
46.0
25.0
22.0
—
50.0
—
—
60.0
515.8
0.5
(1.2)
515.1
(42.4)
$ 472.7
Revolving Credit Facilities: The Company had a revolving senior credit facility that provided for an aggregate $350
million, 5-year unsecured commitment ("Revolving Credit Facility"), with an uncommitted $100 million increase option. The
Revolving Credit Facility also provides for a $100 million sub-limit for the issuance of standby and commercial letters of credit
and an $80 million sub-limit for swing line loans. Amounts drawn under the facilities bear interest at a stated rate, as defined,
plus a margin that is determined based on a pricing grid using the ratio of debt to total adjusted asset value, as defined. The
agreement contains certain restrictive covenants, the most significant of which requires the maintenance of minimum
78
shareholders’ equity levels, minimum EBITDA to fixed charges ratio, maximum debt to total assets ratio, minimum
unencumbered income-producing asset value to unencumbered debt ratio, and limitations on priority debt.
In December 2015, the Revolving Credit Facility was amended to extend the maturity date to December 2020.
In September 2017, the Company entered into a Second Amended and Restated Credit Agreement ("A&B Revolver")
with Bank of America N.A., as administrative agent, First Hawaiian Bank, and other lenders party thereto, which amended and
restated its existing $350 million committed Revolving Credit Facility. The A&B Revolver increased the total revolving
commitments to $450 million, extended the term of the Revolving Credit Facility to September 15, 2022, amended certain
covenants (see below), and reduced the interest rates and fees charged under the Revolving Credit Facility. All other terms of
the Revolving Credit Facility remain substantially unchanged.
At December 31, 2017, $66.0 million was outstanding, $11.8 million in letters of credit had been issued against the
Revolving Credit Facility, and $372.2 million was available.
At December 31, 2017, the Company had, at one of its subsidiaries, a $30.0 million line of credit that expires in
October 2018. As of December 31, 2017, $0.5 million was outstanding under the line of credit. No amounts were outstanding as
of December 31, 2016. The credit line is collateralized by the subsidiary's accounts receivable, inventory and equipment and
may only be used for asphalt purchase. The Company and the noncontrolling interest holders are guarantors, on a several basis,
for their pro rata shares (based on membership interests) of borrowings under the line of credit.
Unsecured Term Loans: In December 2015, the Company entered into an agreement (the "Prudential Agreement")
with Prudential Investment Management, Inc. and its affiliates (collectively, "Prudential") for an unsecured note purchase and
private shelf facility that enables the Company to issue notes in an aggregate amount up to $450.0 million (“Prudential Shelf
Facility”), less the sum of all principal amounts then outstanding on any notes issued by the Company or any of its subsidiaries
to Prudential and the amounts of any notes that are committed under the Prudential Agreement. The Prudential Agreement, as
amended, expires in December 2018 and contains certain restrictive covenants that are substantially the same as the covenants
contained in the Revolving Credit Facility, as amended. Borrowings under the uncommitted shelf facility bear interest at rates
that are determined at the time of the borrowing.
In September 2017, the Company entered into an amendment (the "Pru Amendment") of its Second Amended and
Restated Note Purchase and Private Shelf Agreement, dated as of December 10, 2015, which amended certain covenants (see
below). Additionally, the Pru Amendment included a provision for a contingent incremental interest rate increase of 20 basis
points on all outstanding notes unless, following the Company's planned earnings and profits purge, the maximum ratio of debt
to total adjusted asset value is equal to or less than 0.35 to 1.00 with respect to any fiscal quarter ending on or before September
30, 2018. The contingent interest rate adjustment, if triggered, will continue until such time that the Company's ratio of debt to
total adjusted asset value declines to 0.35 to 1.00 or below. If the contingent interest rate adjustment is not triggered on
September 30, 2018, or if triggered, but subsequently the Company's ratio of debt to total adjusted asset value declines to 0.35
to 1.00 or below, the contingent interest rate adjustment shall have no further force or effect.
Changes to Revolver Amendment and Pru Amendment Covenants: The principal amendments under the A&B
Revolver and the Pru Amendment are as follows:
• An increase in the maximum ratio of debt to total adjusted asset value from 0.50:1.0 to 0.60:1.0.
• An increase in the aggregate maximum amount of priority debt at any time from 20 percent to 25 percent.
• Allows the Company to consummate the holding company merger to adopt certain governance changes and facilitate
•
the Company's ongoing compliance with REIT requirements.
Sets the minimum shareholders' equity amount to be $850.6 million plus 75 percent of the net proceeds received from
equity issuances, less non-recurring costs related to the REIT conversion, among other additions and subtractions.
• Allows for the payment of minimum dividends required to maintain REIT status and other dividends in any amount so
long as no event of default shall then exist or would exist after giving effect to such dividends.
As a result of the Special Distribution that was declared on November 16, 2017 and settled on January 23, 2018, the
Company received waivers related to the impact of the Special Distribution on the minimum shareholder’s equity computation
for its Revolving Credit Facility and its unsecured term loan agreements.
79
On October 10, 2017, the Company entered into a rate lock commitment to draw $50 million under its Prudential Shelf
Facility, pursuant to which the Company drew $50 million on November 21, 2017. The note bears interest at 4.04 percent and
matures on November 21, 2026. Interest only is paid semi-annually and the principal balance is due at maturity.
On October 30, 2017, the Company entered into a second rate lock commitment to draw $25 million under its
Prudential Shelf Facility, pursuant to which the Company drew $25 million on December 8, 2017. The note bears interest at
4.16 percent and matures on December 8, 2028. Interest only is paid semi-annually and the principal balance is due at maturity.
On November 30, 2017, the Company entered into a rate lock commitment to draw $25 million under its Note
Purchase and Private Shelf Agreement with AIG Asset Management (U.S.), LLC ("AMG"). Under the commitment, the
Company drew $25 million on December 20, 2017. The note bears interest at 4.30 percent and matures on December 20, 2029.
Interest only is paid semi-annually and the principal balance is due at maturity.
Real Estate Secured Term Debt: On December 20, 2013, the Company consummated the acquisition of the Kailua
Portfolio, a collection of retail assets on Oahu. In connection with the acquisition of the Kailua Portfolio, the Company
assumed a $12.0 million mortgage note, which matures in September 2021, and an interest rate swap that effectively converts
the floating rate debt to a fixed rate of 5.95 percent. As of December 31, 2017, the balance of the mortgage note was $10.8
million. The Company also secured a $5.0 million second mortgage on the Kailua Portfolio during the first quarter of 2017,
which bears interest at 3.15 percent and matures in 2021. The second mortgage has an outstanding balance as of December 31,
2017 of $4.9 million.
On September 24, 2013, KDC LLC ("KDC"), a wholly owned subsidiary of A&B and a 50 percent member of
Kukui'ula Village LLC ("Village"), entered into an Amended and Restated Limited Liability Company Agreement of Kukui'ula
Village ("Agreement") with DMB Kukui'ula Village LLC ("DMB)", a Delaware limited liability company, as a member, and
KKV Management LLC, a Hawai`i limited liability company, as the manager and a member. Village owns and operates The
Shops at Kukui'ula, a commercial retail center on the south shore of Kauai. Under the Agreement KDC assumed control of
Village. Accordingly, A&B consolidated Village's assets and liabilities at fair value, which included secured loans totaling
approximately $51.2 million. The first loan, totaling $41.8 million ("Real Estate Loan"), was secured by The Shops at
Kukui'ula and 45 acres owned by Kukui'ula Development Company (Hawai`i), LLC ("Kukui'ula"), in which KDC is a member.
The second loan, totaling $9.4 million, ("Term Loan") was secured by a letter of credit. On November 5, 2013, the Company
refinanced the outstanding balances of the Real Estate Loan and Term Loan related to The Shops at Kukui'ula and extended the
maturities of each by 3-years. The Real Estate Loan outstanding of $34.6 million, incurred interest at LIBOR plus 2.85 percent
and required principal amortization of $0.9 million per quarter. During 2016, the outstanding balance of the Real Estate Loan
was paid in full and extinguished. The Term Loan of $9.4 million, is interest only, secured by a letter of credit, and bears
interest at LIBOR plus 2.0 percent. At December 31, 2017, the outstanding balance of the Term Loan was $9.4 million.
On September 17, 2013, the Company closed the purchase of Pearl Highlands Center, a 415,400-square-foot, fee
simple retail center in Pearl City, Oahu (the “Property”), for $82.2 million in cash and the assumption of a $59.3 million
mortgage loan (the “Pearl Loan”), pursuant to the terms of the Real Estate Purchase and Sale Agreement, dated April 9, 2013,
between PHSC Holdings, LLC and A&B Properties. On December 1, 2014, the Company refinanced and increased the amount
of the loan secured by the Property. The new loan ("Refinanced Loan") was increased to $92.0 million and bears interest at 4.15
percent. The Refinanced Loan matures in December 2024, and requires monthly principal and interest payments of
approximately $0.4 million. A final principal payment of approximately $73.0 million is due on December 8, 2024. The
Refinanced Loan is secured by the Property under a Mortgage and Security Agreement between the Company and The
Northwestern Mutual Life Insurance Company.
In 2016, ABL Manoa Marketplace LF LLC, A&B Manoa LLC, ABL Manoa Marketplace LH LLC, and ABP Manoa
Marketplace LH LLC (the "Borrowers"), wholly owned subsidiaries of the Company, entered into a $60 million mortgage loan
agreement ("Loan") with First Hawaiian Bank ("FHB"). The Loan bears interest at LIBOR plus 1.35 percent and matures on
August 1, 2029. The Loan requires interest-only payments for the first 36 months and principal and interest payments for the
remaining 120 months term using a 25 years amortization period. A final principal payment of $41.7 million is due on August
1, 2029. The Company had previously entered into an interest rate swap with a notional amount of $60 million to fix the
variable interest rate on the Company's debt at an effective rate of 3.135 percent (see Note 15). The Loan is secured by Manoa
Marketplace under a Mortgage, Security Agreement and Fixture Filing between the Borrowers and FHB, dated August 1, 2016.
The approximate book values of assets used in the Commercial Real Estate segment pledged as collateral under the
foregoing credit agreements at December 31, 2017 was $233.0 million. The approximate book values of assets used in the
80
Materials & Construction segment pledged as collateral under the foregoing credit agreements at December 31, 2017 was $25.9
million. There were no assets used in the Land Operations segment that were pledged as collateral.
Debt Maturities: At December 31, 2017, debt maturities during the next five years and thereafter, excluding
amortization of debt discount or premium, are $41.8 million in 2018, $41.2 million in 2019, $39.7 million in 2020, $60.4
million for 2021, $106.4 million in 2022, and $342.3 million thereafter.
9.
LEASES - THE COMPANY AS LESSEE
Principal non-cancelable operating leases include land, office space, harbors and equipment leased for periods that
expire through 2043. Management expects that in the normal course of business, most operating leases will be renewed or
replaced by other similar leases. Rental expense under operating leases totaled $6.1 million, $6.8 million, and $7.2 million for
2017, 2016, and 2015, respectively. Rental expense for operating leases that provide for future escalations are accounted for on
a straight-line basis.
Future minimum payments under non-cancelable operating leases were as follows (in millions):
2018
2019
2020
2021
2022
Thereafter
Total
Minimum Lease
Payments
$
$
5.5
5.1
5.1
5.1
3.7
17.9
42.4
10.
LEASES - THE COMPANY AS LESSOR
The Company leases to third-parties land and buildings under operating leases. The historical cost of, and accumulated
depreciation on, leased property at December 31, 2017 and 2016 were as follows (in millions):
Leased property - real estate
Less accumulated depreciation
Property under operating leases - net
2017
2016
$
$
1,089.0
(104.0)
985.0
$
$
1,149.0
(120.4)
1,028.6
Total rental income, excluding tenant reimbursements (which totaled $33.0 million, $31.8 million and $30.2 million for
the years ended December 31, 2017, 2016, and 2015, respectively), under these operating leases were as follows (in millions):
Minimum rentals
Contingent rentals (based on sales volume)
Total
2017
2016
2015
$
$
95.4
4.4
99.8
$
$
95.2
5.4
100.6
$
$
96.2
4.8
101.0
81
Future minimum rentals on non-cancelable operating leases at December 31, 2017 were as follows (in millions):
2018
2019
2020
2021
2022
Thereafter
Total
Operating Leases
$
$
84.6
76.1
65.3
51.6
42.2
279.7
599.5
11.
EMPLOYEE BENEFIT PLANS
The Company has funded single-employer defined benefit pension plans that cover substantially all non-bargaining
unit employees and certain bargaining unit employees. In addition, the Company has plans that provide certain retiree health
care and life insurance benefits to substantially all salaried to certain hourly employees. Employees are generally eligible for
such benefits upon retirement and completion of a specified number of years of credited service. The Company does not pre-
fund these health care and life insurance benefits and has the right to modify or terminate certain of these plans in the future.
Certain groups of retirees pay a portion of the benefit costs.
Plan Administration, Investments and Asset Allocations: The Company has an Investment Committee that is
responsible for the investment and management of the pension plan assets. In 2013, the Company changed its pension plan
investment and management approach to a liability-driven investment strategy, which seeks to increase the correlation of the
pension plan assets and liabilities to reduce the volatility of the plan's funded status and, over time, improve the funded status of
the plan. The adoption of this strategy has resulted in an asset allocation that is weighted more toward fixed income
investments, which reduces investment volatility but also reduces investment returns over time. In connection with the adoption
of a liability-driven investment strategy, the Company appointed an investment adviser that directs investments and selects
investment options, based on guidelines established by the Investment Committee.
The Company’s investment strategy for its pension plan assets is to achieve a diversified mix of investments that
balances long-term growth with an acceptable level of risk. The mix of assets includes a fixed income allocation that increases
as the plan's funded status improves. The Company’s weighted-average asset allocations at December 31, 2017 and 2016, and
2017 year-end target allocation, by asset category, were as follows:
Domestic equity securities
International equity securities
Fixed income securities
Other
Cash and cash equivalents
Total
Target
2017
2016
—%
—%
99%
—%
1%
—%
—%
98%
—%
2%
31%
20%
35%
9%
5%
100%
100%
100%
The Company’s investments in equity securities primarily include domestic large-cap and mid-cap companies, but
also include an allocation to small-cap and international equity securities. Equity investments do not include any direct
holdings of the Company’s stock but may include such holdings to the extent that the stock is included as part of certain mutual
fund or ETF holdings. Debt securities include investment-grade corporate bonds from diversified industries and U.S.
Treasuries. Other types of investments include funds that invest in commercial real estate assets, and to a lesser extent, private
equity investments in technology companies.
The expected return on plan assets assumption (6.8 percent for 2017) is principally based on the long-term outlook for
various asset class returns, asset mix, the historical performance of the plan assets under the liability-driven investment
strategy, and a comparison of the estimated long-term return calculated to the distribution of assumptions adopted by other
plans with similar asset mixes. For the years ended December 31, 2017 and 2016, the return on plan assets was 3.90% and 2.64
82
percent, respectively. Over the long-term, the actual returns have generally exceeded the benchmark returns used by the
Company to evaluate performance of its fund managers.
The Company’s pension plan assets are held in a master trust and stated at estimated fair value, which is based on the
fair values of the underlying investments. Purchases and sales of securities are recorded on a trade-date basis. Interest income
is recorded on the accrual basis. Dividends are recorded on the ex-dividend date.
Equity Securities: Domestic and international common stocks are valued by obtaining quoted prices on recognized
and highly liquid exchanges.
Exchange-Traded Funds (ETF): ETFs are valued by obtaining quoted prices on recognized and highly liquid
exchanges.
Fixed Income Securities: Corporate bonds and U.S. government treasury and agency securities are valued based upon
the closing price reported in the market in which the security is traded. U.S. government agency, corporate asset-backed
securities, and mortgage securities may utilize models, such as a matrix pricing model, that incorporate other observable inputs
such as cash flow, security structure, or market information, when broker/dealer quotes are not available.
Private Equity Fund and Insurance Contract Interests: The fair value of underlying investments in private equity
assets is determined based on one or more valuation techniques, such as the market or income valuation approach, utilizing
information provided by the general partner and taking into consideration the purchase price of the underlying securities,
developments concerning the investee company subsequent to the acquisition of the investment, financial data and projections
of the investee company provided to the general partner, illiquidity and non-transferability, and such other factors as the general
partner deems relevant. Insurance contract interests consist of investments in group annuity contracts, which are valued based
on the present value of expected future payments.
The fair values of the Company’s pension plan assets at December 31, 2017 and 2016, by asset category, are as follows
(in millions):
Fair Value Measurements as of
December 31, 2017
Quoted Prices in
Active Markets
(Level 1)
Total
Significant
Observable
Inputs
(Level 2)
$
$
4.5
$
4.5
$
81.2
102.3
9.6
81.2
—
—
197.6
$
85.7
$
—
—
102.3
9.6
111.9
Asset Category
Cash and cash equivalents
Fixed income securities:
U.S. Treasury obligations
Domestic corporate bonds and notes
Foreign corporate bonds
Total
83
Fair Value Measurements as of
December 31, 2016
Quoted Prices in
Active Markets
(Level 1)
Significant
Observable Inputs
(Level 2)
Significant
Unobservable Inputs
(Level 3)
Total
Asset Category
Cash and Cash equivalents
$
6.1
$
6.1
$
— $
Equity securities:
Domestic
Domestic exchange-traded funds
International
International and emerging markets
exchange-traded funds
Fixed income securities:
U.S. Treasury obligations
Domestic corporate bonds and notes
Foreign corporate bonds
Other types of investments:
Limited partnership interest in private
equity fund
Exchange-traded global real estate
securities
Insurance contracts
Exchange-traded commodity fund
Other receivables
Total
28.1
16.9
24.5
4.1
21.7
26.6
1.5
0.1
9.9
0.1
2.9
0.6
28.1
16.9
24.5
4.1
21.7
—
—
—
9.9
—
2.9
0.6
—
—
—
—
—
26.6
1.5
—
—
—
—
—
$
143.1
$
114.8
$
28.1
$
—
—
—
—
—
—
—
—
0.1
—
0.1
—
—
0.2
The table below presents a reconciliation of all pension plan investments measured at fair value on a recurring basis
using significant unobservable inputs (Level 3) for the years ended December 31, 2017 and 2016 (in millions):
Fair Value Measurements Using Significant
Unobservable Inputs (Level 3)
Insurance
Total
Private Equity
Beginning balance, January 1, 2016
Actual return on plan assets:
Assets held at the reporting date
Ending balance, December 31, 2016
Actual return on plan assets:
Assets held at the reporting date
Ending balance, December 31, 2017
$
$
0.2
$
0.2
$
(0.1)
0.1
(0.1)
— $
(0.1)
0.1
(0.1)
— $
0.4
(0.2)
0.2
(0.2)
—
Contributions are determined annually for each plan by the Company’s pension Administrative Committee, based
upon the actuarially determined minimum required contribution under the Employee Retirement Income Security Act of 1974,
as amended, the Pension Protection Act of 2006, and the maximum deductible contribution allowed for tax purposes. In 2017,
2016 and 2015, the Company contributed approximately $49.2 million, $0.5 million, and $2.6 million, respectively, to its
defined benefit pension plans. The Company’s funding policy is to contribute cash to its pension plans so that it meets at least
the minimum contribution requirements.
For the plans covering employees who are members of collective bargaining units, the benefit formulas are determined
according to the collective bargaining agreements, either using career average pay as the base or a flat dollar amount per year of
service.
In 2007, the Company changed the traditional defined benefit pension plan formula for new non-bargaining unit
employees hired after January 1, 2008 and, replaced it with a cash balance defined benefit pension plan formula. Subsequently,
effective January 1, 2012, the Company changed the benefits under its traditional defined benefit plans for non-bargaining unit
84
employees hired before January 1, 2008 and, replaced the benefit with the same cash balance defined benefit pension plan
formula provided to those employees hired after January 1, 2008. Retirement benefits under the cash balance pension plan
formula are based on a fixed percentage of eligible compensation, plus interest. The plan interest credit rate will vary from
year-to-year based on the 10-year U.S. Treasury rate.
Benefit Plan Assets and Obligations: The measurement date for the Company’s benefit plan disclosures is December
31 of each year. The status of the funded defined benefit pension plan and the unfunded accumulated post-retirement benefit
plans at December 31, 2017 and 2016 and are shown below (in millions):
Pension Benefits
Other Post-retirement Benefits
2017
2016
2017
2016
Change in Benefit Obligation
Benefit obligation at beginning of year
$
197.0
$
194.6
$
11.9
$
Service cost
Interest cost
Plan participants’ contributions
Actuarial (gain) loss
Benefits paid
Curtailment
Benefit obligation at end of year
Change in Plan Assets
Fair value of plan assets at beginning of year
Actual return on plan assets
Employer contributions
Participant contributions
Benefits paid
Other
Fair value of plan assets at end of year
Funded Status and Recognized Liability
$
$
$
$
2.8
8.0
—
12.3
(14.0)
—
206.1
143.1
19.3
49.2
—
(14.0)
—
$
$
3.1
8.5
—
4.7
(13.0)
(0.9)
197.0
146.2
9.4
0.5
—
(13.0)
—
$
$
0.1
0.4
1.0
0.7
(1.8)
—
12.3
$
— $
—
0.8
1.0
(1.8)
197.6
$
143.1
$
— $
12.2
0.1
0.5
1.1
—
(2.1)
0.1
11.9
—
—
0.9
1.1
(2.1)
0.1
—
(8.5) $
(53.9) $
(12.3) $
(11.9)
The accumulated benefit obligation for the Company’s qualified pension plans was $204.5 million and $197.0 million
as of December 31, 2017 and 2016, respectively. Amounts recognized on the consolidated balance sheets and in accumulated
other comprehensive loss at December 31, 2017 and 2016 were as follows (in millions):
Non-current assets
Current liabilities
Non-current liabilities
Total
Net loss (gain) (net of taxes)
Unrecognized prior service credit (net of taxes)
Total
Pension Benefits
Other Post-retirement
Benefits
2017
2016
2017
2016
$
$
$
$
— $
— $
— $
—
(8.5)
—
(53.9)
(0.8)
(11.5)
(8.5) $
(53.9) $
(12.3) $
44.6
(1.5)
43.1
$
$
45.6
(1.8)
43.8
$
$
1.0
—
1.0
$
$
—
(1.0)
(10.9)
(11.9)
0.6
—
0.6
The information for qualified pension plans with an accumulated benefit obligation in excess of plan assets at December
31, 2017 and 2016 is shown below (in millions):
85
Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets
2017
2016
$
$
$
206.1
206.0
197.6
$
$
$
197.0
197.0
143.1
The estimated prior service credit for the defined benefit pension plans that will be amortized from accumulated other
comprehensive loss into net periodic benefit cost in 2018 is $0.5 million. The estimated net loss that will be recognized in net
periodic pension cost for the defined benefit pension plans in 2018 is $3.8 million. The estimated net loss for the other defined
benefit post-retirement plans that will be amortized from accumulated other comprehensive loss into net periodic pension cost
in 2018 is $0.3 million. The estimated prior service cost for the other defined benefit post-retirement plans that will be
amortized from accumulated other comprehensive loss into net periodic pension cost in 2018 is negligible.
Unrecognized gains and losses of the post-retirement benefit plans are amortized over 5 years. Although current health
costs are expected to increase, the Company attempts to mitigate these increases by maintaining caps on certain of its benefit
plans, using lower cost health care plan options where possible, requiring that certain groups of employees pay a portion of
their benefit costs, self-insuring for certain insurance plans, encouraging wellness programs for employees, and implementing
measures to mitigate future benefit cost increases.
Components of the net periodic benefit cost and other amounts recognized in other comprehensive income (loss) for
the defined benefit pension plans and the post-retirement health care and life insurance benefit plans during 2017, 2016, and
2015, are shown below (in millions):
Components of Net Periodic Benefit Cost
2017
2016
2015
2017
2016
2015
Pension Benefits
Postretirement Benefits
Service cost
Interest cost
Expected return on plan assets
Amortization of net loss
Amortization of prior service cost
Curtailment (gain)/loss
Net periodic benefit cost
Other Changes in Plan Assets and Benefit Obligations
Recognized in Other Comprehensive Income
Net loss (gain)
Amortization of unrecognized gain (loss)
Prior service cost
Amortization of prior service credit
Total recognized in other comprehensive income
Total recognized in net periodic benefit cost and
$
$
2.8
8.0
(9.4)
4.1
(0.5)
—
5.0
$
$
3.1
8.5
$
3.1
8.0
(10.0)
(11.1)
7.1
(0.5)
(0.9)
$
7.3
$
6.9
(0.8)
—
6.1
$
0.1
0.4
—
—
—
—
$
0.1
0.5
—
0.2
—
—
$
0.5
$
0.8
$
0.1
0.5
—
0.1
—
0.1
0.8
$
2.4
$
4.4
$
7.0
$
0.7
$ — $
0.4
(4.1)
—
0.5
(1.2)
(7.1)
—
1.4
(1.3)
(6.9)
0.4
0.8
1.3
—
—
—
0.7
(0.2)
—
—
(0.2)
(0.1)
—
—
0.3
Other comprehensive income
$
3.8
$
6.0
$
7.4
$
1.2
$
0.6
$
1.1
The weighted average assumptions used to determine benefit information during 2017, 2016 and 2015 were as follows:
Weighted Average Assumptions:
Discount rate
Expected return on plan assets
Pension Benefits
Other Post-retirement Benefits
2017
2016
2015
2017
2016
2015
3.70%
6.80%
4.20%
7.10%
4.50%
7.10%
3.70%
—%
4.20%
—%
4.50%
—%
Rate of compensation increase
0.5%-3% 0.5%-3%
0.5%-3%
0.5%-3% 0.5%-3%
0.5%-3%
Initial health care cost trend rate
Ultimate rate
Year ultimate rate is reached
6.50%
4.50%
2037
6.80%
4.50%
2037
7.00%
4.50%
2037
86
If the assumed health care cost trend rate were increased or decreased by one percentage point, the accumulated post-
retirement benefit obligation, as of December 31, 2017, 2016 and 2015 and the net periodic post-retirement benefit cost for
2017, 2016 and 2015 would have increased or decreased as follows (in millions):
Other Post-retirement Benefits
One Percentage Point
2017
Increase
2016
2015
2017
2016
2015
Decrease
Effect on total of service and interest cost
components
Effect on post-retirement benefit obligation
$
$
0.1
1.3
$
$
0.1
1.0
$
$
0.1
1.1
$
$
— $
(1.0) $
— $
(0.9) $
—
(0.9)
Non-qualified Benefit Plans: The Company has non-qualified supplemental pension plans covering certain employees
and retirees, which provide for incremental pension payments from the Company’s general funds so that total pension benefits
would be substantially equal to amounts that would have been payable from the Company’s qualified pension plans if it were
not for limitations imposed by income tax regulations. The obligations relating to these plans totaled $3.4 million at
December 31, 2017. A 3.5 percent discount rate was used to determine the 2017 obligation. There was a cost of $1.3 million
associated with the non-qualified plan in 2017, a benefit of $0.6 million in 2016, and a cost of $0.1 million in 2015. The cost in
2017 included a $1.5 million settlement loss. As of December 31, 2017, the amount recognized in accumulated other
comprehensive loss for unrecognized loss, net of tax, was approximately $0.5 million, and the amount recognized as
unrecognized prior service credit, net of tax, was $0.6 million. The estimated net loss and prior service credit, net of tax, that
will be recognized in net periodic pension cost in 2018 is $0.1 million.
Estimated Benefit Payments: The estimated future benefit payments for the next ten years are as follows (in millions):
Pension
Benefits
Non-qualified
Plan Benefits
Post-retirement
Benefits
2018
2019
2020
2021
2022
2023-2027
$
$
$
$
$
$
12.6
12.7
12.6
12.7
12.8
62.8
$
$
$
$
$
$
0.7
1.4
$
$
— $
— $
— $
2.1
$
0.9
0.9
0.9
0.8
0.8
3.5
Current liabilities of approximately $1.5 million, related to non-qualified plan and post-retirement benefits, are
classified as accrued and other liabilities in the consolidated balance sheet as of December 31, 2017.
Multiemployer Plans: Grace and certain subsidiaries contribute to a number of multiemployer defined benefit pension
plans under the terms of collective-bargaining agreements that cover their union-represented employees. The risks of
participating in these multiemployer plans are different from single-employer plans in the following aspects:
a. Assets contributed to the multiemployer plan by one employer may be used to provide benefits to employees of
other participating employers.
b. If a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by
the remaining participating employers.
c. If the Company chooses to stop participating in some of its multiemployer plans, the Company may be required to
pay those plans an amount based on the underfunded status of the plan, referred to as a withdrawal liability.
The Company's participation in these plans for the year ended December 31, 2017, is outlined in the table below. The
"EIN Pension Plan Number" column provides the Employee Identification Number (EIN) and the 3-digit plan number, if
applicable. The most recent Pension Protection Act (PPA) zone status available in 2017 is for the plan's year-end as of
December 31, 2016, for the Pension Trust Fund for Operating Engineers Pension Plan and Laborer's National (Industrial)
Pension Fund. The zone status available for 2017 for the Hawai`i Laborers Trust Funds is for the plan year-end as of February
28, 2017. GP Roadway Solutions, Inc. and GP/RM Prestress, LLC have separate contracts and different expiration dates with
the Hawai`i Laborers Trust Fund. The zone status is based on information that the Company received from the plan and is
87
certified by the plan's actuary. Among other factors, plans that are less than 65 percent funded are "red zone" plans in need of
reorganization; plans between 65 percent and 80 percent funded or that have an accumulated funding deficiency or are expected
to have a deficiency in any of the next six years are "yellow zone" plans; plans that meet both of the "yellow zone" criteria are
"orange zone" plans; and if the plan is funded more than 80 percent, it is a "green zone" plan. The "FIP/RP Status Pending/
Implemented" column indicates plans for which a financial improvement plan (FIP) or a rehabilitation plan (RP) is either
pending or has been implemented. The last column lists the expiration dates of the collective-bargaining agreements to which
the plans are subject.
There were no plans to which the Company contributed more than 5 percent of the total contributions.
Pension
Protection
Act Zone
Status
FIP/RP
Status
Contribution
by Entity
Contribution
by Entity
Contribution
by Entity
Fund
EIN Plan No.
2017 and
2016
Pending/
Implemented
Jan. 1 - Dec.
31, 2017
Jan. 1 - Dec.
31, 2016
Jan. 1 - Dec.
31, 2015
Surcharge
Imposed
Expiration
Date
Current
Plan Year
End
Operating
Engineers 94-6090764; 001
Red
Laborers
National
Hawai`i
Laborers
Hawai`i
Laborers
Total
52-6074345; 001
Red
99-6025107; 001
Green
99-6025107; 001
Green
Yes
Yes
No
No
$
4.9 $
4.7 $
0.2
0.8
0.2
0.1
0.7
0.2
$
6.1 $
5.7 $
No
No
No
No
4.6
0.1
0.8
0.2
5.7
9/2/19
12/31/17
8/31/18
12/31/17
8/31/19
2/28/17
9/30/19
2/28/17
Defined Contribution Plans: The Company sponsors defined contribution plans that qualify under Section 401(k) of
the Internal Revenue Code and provides matching contributions of up to 3 percent of eligible compensation. The Company’s
matching contributions expensed under these plans totaled $0.5 million in each of the years ended December 31, 2017 and
2016. The Company also maintains profit sharing plans and, if a minimum threshold of Company performance is achieved,
provides contributions of 1 to 5 percent, depending upon Company performance above the minimum threshold. There were no
profit sharing contribution expenses recognized in 2017, 2016 and 2015.
Grace 401(k) Plans: The Company allows for discretionary non-elective employer contributions up to the sum of 10
percent of each eligible employee's compensation for the 12 months in the plan year, subject to certain limitations. Management
profit sharing bonuses can be deferred to the employee's 401(k) account, but will be subject to the IRS' annual limit on
employee elective deferrals. For the years ended December 31, 2017, 2016 and 2015, Grace recognized discretionary employer
contributions and profit sharing expense of approximately $2.0 million.
88
12.
INCOME TAXES
For the prior taxable years, the Company has filed a consolidated federal income tax return, which includes all of its
wholly owned subsidiaries. For its taxable year ended December 31, 2017, the Company intends to file its tax return as a REIT,
which it will accomplish by filing the 2017 Form 1120-REIT with the Internal Revenue Service on or before October 15, 2018.
The Company’s TRSs will file separately as a C corporation. The Company also files individual separate income tax returns in
various states. The Company completed the necessary preparatory work and obtained the necessary approvals such that the
Company believes it has been organized and operates in a manner that enables it to qualify, and continue to qualify, as a REIT
for federal income tax purposes. As a result, the income tax provision for the year ended December 31, 2017 includes a $223
million deferred tax benefit from the de-recognition of the deferred tax assets and liabilities associated with the entities
included in the REIT.
As a REIT, the Company will generally be allowed a deduction for dividends that it pays, and therefore, will not be
subject to United States federal corporate income tax on its taxable income that is currently distributed to shareholders. The
Company may be subject to certain state gross income and franchise taxes, as well as taxes on any undistributed income and
federal and state corporate taxes on any income earned by its TRSs. In addition, the Company could be subject to corporate
income taxes related to assets held by the REIT that are sold during the 5-year period following the date of conversion, to the
extent such sold assets had a built-in gain as of January 1, 2017. The Company does not intend to dispose of any REIT assets
after the REIT conversion within the 5-year period, unless various tax planning strategies, including Internal Revenue Code
Section 1031 like-kind exchanges or other deferred tax structures are available, to mitigate the built-in gain tax liability of
conversion.
Distributions with respect to the Company’s common stock can be characterized for federal income tax purposes as
ordinary income, capital gains, unrecaptured section 1250 gains, return of capital, or a combination thereof. Taxable
distributions paid for the years ended December 31, 2017, 2016 and 2015 were classified as ordinary income.
89
The income tax expense (benefit) on income from continuing operations for each of the three years in the period ended
December 31, consisted of the following (in millions):
Current:
Federal
State
Current
Deferred:
Federal
State
Deferred
Income tax expense (benefit)
2017
2016
2015
$
$
$
$
$
(2.6) $
(0.5)
(3.1) $
(200.7) $
(14.4)
(215.1) $
(218.2) $
2.9
0.9
3.8
$
$
(1.4) $
0.2
(1.2) $
$
2.6
13.4
1.6
15.0
18.5
2.8
21.3
36.3
Income tax expense (benefit) for 2017, 2016 and 2015 differs from amounts computed by applying the statutory
federal rate to income from continuing operations before income taxes for the following reasons (in millions):
2017
2016
2015
$
12.3
$
Computed federal income tax expense
State income taxes
Valuation allowance - state tax credit
REIT rate differential
Nondeductible transaction costs
Tax credits, including solar
Return to provision
Amended return
Share-based compensation
Noncontrolling interest
Rate change effect related to REIT conversion
Rate change effect related to Tax Cuts and Jobs Act of 2017
Other—net
Income tax expense (benefit)
$
$
3.3
0.1
6.9
(2.2)
—
(0.3)
(1.1)
(0.1)
(4.0)
(0.7)
(223.0)
3.0
(0.1)
(218.2) $
0.6
—
—
2.4
(8.7)
0.1
(0.2)
(1.5)
(0.7)
—
—
(1.7)
2.6
$
34.0
4.4
—
—
—
—
(0.7)
0.1
—
(0.5)
—
—
(1.0)
36.3
The Company's effective tax rate was lower for the year ended 2017 compared to the same period in 2016 primarily
due to the deferred tax benefit generated from the de-recognition of deferred tax assets and liabilities associated with the
entities included in the REIT.
90
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax
liabilities at December 31 of each year are as follows (in millions):
Deferred tax assets:
Employee benefits
Capitalized costs
Joint ventures and other investments
Impairment and amortization
Solar investment benefits
Insurance and other reserves
Net operating losses
Other
Total deferred tax assets
Valuation allowance
Total net deferred tax assets
Deferred tax liabilities:
2017
2016
$
9.1
$
10.7
2.8
0.7
16.6
2.9
7.7
1.4
$
$
51.9
(6.9)
45.0
$
$
35.8
23.0
1.3
11.4
15.0
6.0
—
3.5
96.0
—
96.0
Property (including tax-deferred gains on real estate transactions)
$
25.7
$
260.3
Straight-line rental income and advanced rent
Other
Total deferred tax liabilities
Net deferred tax assets (liabilities)
—
2.8
28.5
16.5
$
$
8.4
9.3
278.0
(182.0)
$
$
Federal tax credit carryforwards as of December 31, 2017 totaled $8.7 million and will expire in 2036. State tax credit
carryforwards as of December 31, 2017 totaled $6.9 million and may be carried forward indefinitely under state law. As of
December 31, 2017 the Company had federal and state net operating loss carryforwards of $6.2 million and $1.5 million,
respectively, both expiring in 2037.
A valuation allowance must be provided if it is more likely than not that some portion of all of the deferred tax assets
will not be realized, based upon consideration of all positive and negative evidence. Sources of evidence include, among other
things, a history of pretax earnings or losses, expectations of future results, tax planning opportunities and appropriate tax law.
Since the Company converted to a REIT for the year ended December 31, 2017, realization of the benefit from state
tax credits is not more likely than not. Therefore, a full valuation allowance of $6.9 million was established against the state tax
credits until such time as the Company determines it is able to benefit from the credits due to certain dispositions of C
corporation assets that the Company received in the initial REIT conversion.
The Company’s income taxes receivable has been increased by the tax benefits from share-based compensation. The
Company receives an income tax benefit for exercised stock options calculated as the difference between the fair market value
of the stock issued at the time of exercise and the option exercise price, tax-effected. The Company also receives an income tax
benefit for restricted stock units when they vest, measured as the fair market value of the stock issued at the time of vesting, tax
effected. The net tax benefits from share-based transactions totaled $5.3 million and $1.9 million for 2017 and 2016,
respectively.
In 2016, the Company invested $15.4 million in Waihonu Equity Holdings, LLC ("Waihonu"), an entity that operates
two photovoltaic facilities with a combined capacity of 6.5 megawatts in Mililani, Oahu. The Company accounts for its
investment in Waihonu under the equity method. The investment return from the Company's investment in Waihonu is
principally composed of non-refundable federal and refundable state tax credits. The federal tax credits are accounted for using
the flow through method, which reduces the provision for income taxes in the year that the federal tax credits first become
available. During 2016, the Company recognized income tax benefits of approximately $8.7 million related to the non-
refundable tax credits, $2.9 million related to the refundable state tax credits in Income Tax Receivable, as well as a
91
corresponding reduction to the carrying amount of its investment in Waihonu, recorded in Investments in Affiliates in the
accompanying consolidated balance sheets.
For the year ended December 31, 2017, the Company recorded reductions to the carrying value of its Waihonu and
KIUC Renewable Solutions Two ("KRS II") investments of $2.4 million and $0.2 million, respectively, in Reduction in Solar
Investments, net in the accompanying consolidated statements of operations. For the year ended December 31, 2016, the
Company recorded reductions to the carrying value of its Waihonu and KRS II investments of $8.7 million and $1.1 million,
respectively, in Reduction in Solar Investments, net in the accompanying consolidated statements of operations.
The Company recognizes accrued interest and penalties on income taxes as a component of income tax expense. As of
December 31, 2017, accrued interest and penalties were not material. As of December 31, 2017, the Company has not
identified any material unrecognized tax positions.
The Company is subject to taxation by the United States and various state and local jurisdictions. As of December 31,
2017, tax years 2016, 2015, 2014 and 2013 are open to audit by the tax authorities. The federal audit of the 2012 tax return for
the Company on a standalone basis and the 2012 tax return for which the Company was included in the consolidated tax group
with Matson has concluded. The Department of Taxation also completed its audit of the 2015 Hawai`i state income tax return
for the Company. There were no material adjustments to the income statement resulting from the completion of these audits.
The IRS is currently auditing tax years 2013 and 2014. In February 2018, the Company was notified that the IRS will be
auditing tax years 2016 and 2015 and the Department of Taxation will be auditing tax year 2016. The Company believes that
the result of these open audits will not have a material adverse effect on its results of operations, financial condition or liquidity.
On December 22, 2017, The Tax Cuts and Jobs Act of 2017 (the "Act") was signed into law. The Act made significant
changes, including lowering the U.S. corporate tax rate from 35% to 21% effective January 1, 2018. As of December 31, 2017
the Company has completed its accounting for the tax effects of the Act and recorded a tax expense of $3.0 million due to a
remeasurement of its deferred tax assets and liabilities.
13.
SHARE-BASED PAYMENT AWARDS
2012 Incentive Compensation Plan (“2012 Plan”): The 2012 Incentive Compensation Plan allows for the granting of
stock options, restricted stock units and common stock. Under the 2012 Plan, 4.3 million shares of common stock were initially
reserved for issuance, and as of December 31, 2017, 1.1 million shares of the Company’s common stock remained available for
future issuance. The shares of common stock authorized to be issued under the 2012 Plan may be drawn from the shares of the
Company’s authorized but unissued common stock or from shares of its common stock that the Company acquires, including
shares purchased on the open market or private transactions.
The 2012 Plan consists of four separate incentive compensation programs: (i) the discretionary grant program, (ii) the
stock issuance program, (iii) the incentive bonus program and (iv) the automatic grant program for the non-employee members
of the Company’s Board of Directors. Share-based compensation is generally awarded under three of the four programs, as
more fully described below.
Discretionary Grant Program: Under the Discretionary Grant Program, stock options may be granted with an
exercise price no less than 100 percent of the fair market value (defined as the closing market price) of the Company’s common
stock on the date of the grant. Options generally become exercisable ratably over three years and have a maximum contractual
term of 10 years. There were no option grants in 2017 and 2016, and the Company currently has no plans to issue options in the
future.
Stock Issuance Program: Under the Stock Issuance Program, shares of common stock or restricted stock units may be
granted. Equity awards granted may be designated as time-based awards or market-based performance awards.
Automatic Grant Program: At each annual shareholder meeting, non-employee directors will receive an award of
restricted stock units that entitle the holder to an equivalent number of shares of common stock upon vesting.
In connection with the completion of the Holding Company Merger, all A&B Predecessor restricted stock units
outstanding on November 8, 2017 were replaced with A&B restricted stock units with terms and conditions substantially
identical to the terms and conditions formerly applicable to the A&B Predecessor restricted stock units that were replaced.
Additionally, effective as of the completion of the Holding Company Merger, all A&B Predecessor stock options outstanding
on November 8, 2017 were replaced with A&B stock options with terms and conditions substantially identical to the terms and
conditions formerly applicable to the A&B Predecessor stock options.
92
As a result of the Special Distribution, which was paid in the form of cash and stock, the Company's restricted stock
units and outstanding stock options were adjusted under the anti-dilution provisions of the 2012 Plan. The number of shares of
each restricted stock unit and stock option award and the exercise price of each stock option award were adjusted in order to
preserve the aggregate intrinsic value of the outstanding awards and accordingly did not result in additional compensation
expense.
The following table summarizes the Company's stock option activity during 2017 (in thousands, except weighted
average exercise price and weighted average contractual life):
2012 Plan
Stock
Options
Weighted-
Average
Exercise
Price
Weighted-
Average
Contractual
Life
Aggregate
Intrinsic
Value
Outstanding, January 1, 2017
Exercised Prior to Special Distribution
Anti-dilutive Adjustment for Special
Distribution
Exercised Subsequent to Special
Distribution
Outstanding, December 31, 2017
Vested or expected to vest
Exercisable, December 31, 2017
903.5
(233.6)
342.2
(381.6) $
630.5
630.5
630.5
$
$
$
$
$
17.78
16.47
11.25
12.58
12.58
12.58
2.9 years
2.9 years
2.9 years
$
$
$
9,516
9,516
9,516
The following table summarizes 2017 non-vested restricted stock unit activity (in thousands, except weighted-average
grant-date fair value amounts):
Outstanding, January 1, 2017
Granted
Vested
Canceled
Outstanding, December 31, 2017
2012 Plan
Restricted
Stock Units
Weighted-
Average
Grant-date
Fair Value
293.5
139.1
(96.3)
(17.4)
318.9
$
$
$
$
$
33.81
42.85
37.20
35.03
36.66
The time-based restricted stock units vest ratably over 3 years. The market-based performance share units cliff vest
over 3 years, provided that the total shareholder return of the Company’s common stock over the relevant period meets or
exceeds pre-defined levels of total shareholder returns relative to indices, as defined.
As of December 31, 2017, there was $6.0 million of total unrecognized compensation cost related to non-vested
restricted stock units granted under the 2012 plan; that cost is expected to be recognized over a period of 3 years.
The fair value of the Company’s time-based awards is determined using the Company's stock price on the date of
grant. The fair value of the Company's market-based awards is estimated using the Company's stock price on the date of grant
and the probability of vesting using a Monte Carlo simulation with the following weighted-average assumptions:
2017 Grants
2016 Grants
Volatility of A&B common stock
Average volatility of peer companies
Risk-free interest rate
24.1%
25.6%
1.6%
26.3%
35.3%
1.1%
The weighted average fair value of the time-based restricted units and market-based performance share units was
$42.85 in 2017 and $30.91 in 2016. No compensation cost is recognized for estimated or actual forfeitures of time-based or
93
market-based awards if an employee is terminated prior to rendering the requisite service period. The tax benefit realized upon
vesting were $1.0 million, $0.9 million and $1.5 million for December 31, 2017, 2016 and 2015, respectively.
A summary of compensation cost related to share-based payments is as follows (in millions):
Share-based expense (net of estimated forfeitures):
Time-based and market-based restricted stock units
Total share-based expense
Total recognized tax benefit
Share-based expense (net of tax)
Cash received upon option exercise
Intrinsic value of options exercised
Tax benefit realized upon option exercise
Fair value of stock vested
2017
2016
2015
$
$
$
$
$
$
4.4
$
4.1
$
4.4
(0.5)
3.9
8.1
13.2
4.2
3.7
$
$
$
$
$
4.1
(1.4)
2.7
4.6
2.6
1.0
2.2
$
$
$
$
$
4.6
4.6
(1.2)
3.4
0.5
0.5
0.2
4.2
14.
COMMITMENTS AND CONTINGENCIES
Commitments, Guarantees and Contingencies: Commitments and financial arrangements not recorded on the
Company's consolidated balance sheet, excluding lease commitments that are disclosed in Note 9, included the following as of
December 31, 2017:
Standby letters of credit(a)
Bonds(b)
$
$
11.8
428.3
(a)
Consists of standby letters of credit, issued by the Company’s lenders under the Company’s revolving credit facilities, and relate primarily to the
Company’s real estate activities. In the event the letters of credit are drawn upon, the Company would be obligated to reimburse the issuer of the
letter of credit. None of the letters of credit have been drawn upon to date.
(b)
Represents bonds related to construction and real estate activities in Hawai`i. Approximately $404.3 million is related to construction bonds
issued by third party sureties (bid, performance and payment bonds) and the remainder is related to commercial bonds issued by third party
sureties (permit, subdivision, license and notary bonds). In the event the bonds are drawn upon, the Company would be obligated to reimburse the
surety that issued the bond. None of the bonds has been drawn upon to date.
Indemnity Agreements: For certain real estate joint ventures, the Company may be obligated under bond indemnities to
complete construction of the real estate development if the joint venture does not perform. These indemnities are designed to
protect the surety in exchange for the issuance of surety bonds that cover joint venture construction activities, such as project
amenities, roads, utilities, and other infrastructure, at its joint ventures. Under the indemnities, the Company and its joint
venture partners agree to indemnify the surety bond issuer from all losses and expenses arising from the failure of the joint
venture to complete the specified bonded construction. The maximum potential amount of aggregate future payments is a
function of the amount covered by outstanding bonds at the time of default by the joint venture, reduced by the amount of work
completed to date. The recorded amounts of the indemnity liabilities were not material individually or in the aggregate.
The Company is a guarantor of indebtedness for certain of its unconsolidated joint ventures' borrowings with third
party lenders, relating to the repayment of construction loans and performance of construction for the underlying project. As of
December 31, 2017, the Company's limited guarantees on indebtedness related to five of its unconsolidated joint ventures
totaled $5.6 million. The Company has not incurred any significant historical losses related to guarantees on its joint venture
indebtedness.
In July 2014, the Company invested $23.8 million in a tax equity investment related to the construction and operation
of a 12-megawatt solar farm on Kauai. The Company recovers its investment primarily through tax credits and tax benefits. In
connection with this investment, the Company provided a contingent $6.0 million guaranty of KRS II project debt. The other
equity partner and managing member of KRS II, project sponsor and customer for the output of the facility, Kauai Island Utility
Cooperative, is the primary guarantor of the project debt.
94
Other than obligations described above and those described in Notes 5 and 8, obligations of the Company’s joint ventures
do not have recourse to the Company and the Company’s “at-risk” amounts are limited to its investment.
Legal Proceedings and Other Contingencies: A&B owns 16,000 acres of watershed lands in East Maui. A&B also
held four water licenses to another 30,000 acres owned by the State of Hawai`i in East Maui. The last of these water license
agreements expired in 1986, and all four agreements were then extended as revocable permits that were renewed annually. In
2001, a request was made to the State Board of Land and Natural Resources (the "BLNR") to replace these revocable permits
with a long-term water lease. Pending the conclusion by the BLNR of this contested case hearing on the request for the long-
term lease, the BLNR has kept the existing permits on a holdover basis. Three parties filed a lawsuit on April 10, 2015 (the
"4/10/15 Lawsuit") alleging that the BLNR has been renewing the revocable permits annually rather than keeping them in
holdover status. The lawsuit asks the court to void the revocable permits and to declare that the renewals were illegally issued
without preparation of an environmental assessment ("EA"). In December 2015, the BLNR decided to reaffirm its prior
decisions to keep the permits in holdover status. This decision by the BLNR is being challenged by the three parties. In January
2016, the court ruled in the 4/10/15 Lawsuit that the renewals were not subject to the EA requirement, but that the BLNR
lacked legal authority to keep the revocable permits in holdover status beyond one year. The court has allowed the parties to
make an immediate appeal of this ruling. In May 2016, the Hawai`i State Legislature passed House Bill 2501, which specified
that the BLNR has the legal authority to issue holdover revocable permits for the disposition of water rights for a period not to
exceed three years. The governor signed this bill into law as Act 126 in June 2016. Pursuant to Act 126, the annual
authorization of the existing holdover permits was sought and granted by the BLNR in December 2016 and November 2017.
In addition, on May 24, 2001, petitions were filed by a third party, requesting that the Commission on Water Resource
Management of the State of Hawai`i ("Water Commission") establish interim instream flow standards ("IIFS") in 27 East Maui
streams that feed the Company's irrigation system. The Water Commission initially took action on the petitions in 2008 and
2010, but the petitioners requested a contested case hearing to challenge the Water Commission's decisions on certain petitions.
The Water Commission denied the contested case hearing request, but the petitioners successfully appealed the denial to the
Hawai`i Intermediate Court of Appeals, which ordered the Water Commission to grant the request. The Commission then
authorized the appointment of a hearings officer for the contested case hearing and expanded the scope of the contested case
hearing to encompass all 27 petitions for amendment of the IIFS for East Maui streams in 23 hydrologic units. The evidentiary
phase of the hearing before the Commission-appointed hearings officer was completed on April 2, 2015. On January 15, 2016,
the Commission-appointed hearings officer issued his recommended decision on the petitions. The recommended decision
would restore water to streams in 11 of the 23 hydrologic units. In March 2016, the hearings officer ordered a reopening of the
contested case proceedings in light of the Company’s January 2016 announcement to cease sugar operations at HC&S by the
end of the year and to transition to a new diversified agricultural model on the former sugar lands. In April 2016, the Company
announced its commitment to fully and permanently restore the priority taro streams identified by the petitioners. Re-opened
evidentiary hearings occurred in the first quarter of 2017 and a decision is pending. In August 2017, the hearings officer in the
reopened evidentiary hearing issued his proposed decision. The Commission heard arguments on the proposed decision in
October 2017.
HC&S also used water from four streams in Central Maui ("Na Wai Eha") to irrigate its agricultural lands in Central
Maui. Beginning in 2004, the Water Commission began proceedings to establish IIFS for the Na Wai Eha streams. Before the
IIFS proceedings were concluded, the Water Commission designated Na Wai Eha as a surface water management area, meaning
that all uses of water from these streams required water use permits issued by the Water Commission. Following contested case
proceedings, the Water Commission established IIFS in 2010, but that decision was appealed, and the Hawai`i Supreme Court
remanded the case to the Water Commission for further proceedings. The parties to the IIFS contested case settled the case in
2014. Thereafter, proceedings for the issuance of water use permits commenced with over 100 applicants, including HC&S,
vying for permits. While the water use permit proceedings were ongoing, A&B announced the cessation of sugar cane
cultivation at the end of 2016. This announcement triggered a re-opening and reconsideration of the 2014 IIFS decision.
Contested case proceedings were held to simultaneously reconsider the IIFS, determine appurtenant water rights, and consider
applications for water use permits. Based on those proceedings, the Hearing Officer issued his recommendation to the Water
Commission on November 1, 2017. The Commission has not yet issued its decision.
If the Company is not permitted to use sufficient quantities of stream waters, it would have a material adverse effect on
the Company’s pursuit of a diversified agribusiness model in subsequent years and the value of the Company’s agricultural
lands.
A&B is a party to, or may be contingently liable in connection with, other legal actions arising in the normal conduct
of its businesses, the outcomes of which, in the opinion of management after consultation with counsel, would not have a
material effect on A&B’s consolidated financial statements as a whole.
95
15.
DERIVATIVE INSTRUMENTS
The Company is exposed to interest rate risk related to its floating rate interest debt. The Company balances its cost of
debt and exposure to interest rates primarily through its mix of fixed and floating rate debt. From time to time, the Company
may use interest rate swaps to manage its exposure to interest rate risk.
Cash Flow Hedges of Interest Rate Risk
During 2016, the Company entered into an interest rate swap agreement with a notional amount of $60.0 million
which was designated as a cash flow hedge. The Company structured the interest rate swap agreement to hedge the variability
of future interest payments due to changes in interest rates with regards to the Company's long-term debt. A summary of the
key terms related to the Company's outstanding cash flow hedge as of December 31, 2017 is as follows (dollars in millions):
Effective Date Maturity Date
Interest Rate
December 31, 2017
December 31, 2017
December 31, 2016
Balance Sheet
4/7/2016
8/1/2029
3.14%
$
60.0
$
2.8
$
2.8
Other assets
Notional Amount at
Fair Value at
Classification on
The Company assessed the effectiveness of the cash flow hedge at inception and will continue to do so on an ongoing
basis. The effective portion of the changes in fair value of the cash flow hedge is recorded in accumulated other comprehensive
loss and subsequently reclassified into interest expense as interest is incurred on the related-variable rate debt. When
ineffectiveness exists, the ineffective portion of changes in fair value of the cash flow hedge is recognized in earnings in the
period affected.
Non-designated Hedges
As of December 31, 2017, the Company has two interest rate swaps that have not been designated as cash flow hedges
whose key terms are as follows (dollars in millions):
Effective Date Maturity Date
Interest Rate
December 31, 2017
December 31, 2017
December 31, 2016
Balance Sheet
Notional Amount at
Fair Value at
Classification on
1/1/2014
9/1/2021
5.95%
6/18/2008
3/1/2021
5.98%
Total
$
$
$
10.9
4.8
15.7
$
$
$
(0.9) $
(0.3) $
(1.2) $
Other non-current
liabilities
Other non-current
liabilities
(1.3)
(0.5)
(1.8)
The following table represents the pre-tax effect of the derivative instruments in the Company's consolidated statement
of comprehensive income (loss) (in millions):
Derivatives in Designated Cash Flow Hedging Relationships:
Amount of (gain) loss recognized in OCI on derivatives (effective portion)
Amounts of (gain) loss reclassified from accumulated OCI into earnings under "interest
expense" (ineffective portion and amount excluded from effectiveness testing)
Derivatives Not Designated as Cash Flow Hedges:
Amount of realized and unrealized loss on derivatives recognized in earnings under "interest
income and other"
2017
2016
$
$
$
0.4
$
(2.6)
(0.5) $
(0.4)
0.6
$
0.7
The Company recorded 0.6 million and $0.7 million of income during 2017 and 2016, respectively, related to the
change in fair value of the interest rate swaps in Interest income and other in the accompanying consolidated statements of
operations.
The Company measures all of its interest rate swaps at fair value. The fair values of the Company's interest rate swaps
(Level 2) are based on the estimated amounts that the Company would receive or pay to terminate the contracts at the reporting
date and are determined using interest rate pricing models and interest rate related observable inputs.
96
16.
EARNINGS PER SHARE ("EPS")
Basic earnings per common share excludes dilution and is calculated by dividing net earnings allocated to common
shares by the weighted-average number of common shares outstanding for the period. Diluted earnings per common share is
calculated by dividing net earnings allocated to common shares by the weighted-average number of common shares
outstanding for the period, as adjusted for the potential dilutive effect of non-participating share-based awards as well as
adjusted by the number of additional shares, if any, that would have been outstanding had the potentially dilutive common
shares been issued.
On November 16, 2017, the Company declared the Special Distribution on its shares of common stock in an aggregate
amount of $783.0 million, or approximately $15.92 per share. The Company paid the Special Distribution on January 23,
2018. The Special Distribution was payable in the form of cash and shares of the Company's stock at the election of each
shareholder, subject to an aggregate limit of $156.6 million of cash (the "Shareholder Election"). As the deadline for the
common shareholders' election was January 12, 2018, subsequent to December 31, 2017, the total Special Distribution of
$783.0 million was included in the computation of the Company's diluted earnings (loss) per share.
The following table provides a reconciliation of income from continuing operations to income from continuing
operations available to A&B shareholders (in millions):
Income from continuing operations, net of income taxes
Less: Income attributable to noncontrolling interest
Income from continuing operations attributable to A&B shareholders, net of income taxes
Undistributed earnings (losses) allocated to redeemable noncontrolling interest
Income from continuing operations available to A&B shareholders, net of income taxes
Income (loss) from discontinued operations available to A&B shareholders, net of income taxes
$
228.1
$
32.7
$
(2.2)
225.9
1.8
227.7
2.4
(1.8)
30.9
1.3
32.2
(41.1)
Net income (loss) available to A&B shareholders
$
230.1
$
(8.9) $
60.8
(1.5)
59.3
(3.1)
56.2
(29.7)
26.5
2017
2016
2015
The number of shares used to compute basic and diluted earnings per share is as follows (in millions):
Denominator for basic EPS – weighted-average shares outstanding
Effect of dilutive securities:
Non-participating stock options and restricted stock unit awards
Special Distribution
Denominator for diluted EPS – weighted-average shares outstanding
2017
2016
2015
49.2
0.8
3.0
53.0
49.0
48.9
0.4
—
49.4
0.4
—
49.3
There were no anti-dilutive securities outstanding during the year ended December 31, 2017, 2016 and 2015.
17.
REDEEMABLE NONCONTROLLING INTEREST
The Company has a 70 percent ownership interest in GLP that was acquired in connection with the acquisition of
Grace Pacific LLC. The redeemable noncontrolling interest of GLP is recorded at the greater of (i) the initial carrying amount,
increased or decreased for the noncontrolling interest's share of net income or loss and distributions or (ii) the redemption
value, which is derived from a specified formula. These adjustments are reflected in the computation of earnings per share
using the two-class method.
97
18.
CESSATION OF SUGAR OPERATIONS
A summary of the pre-tax costs and remaining costs associated with the Cessation is as follows (in millions):
Charges
Recognized
During 2017
Cumulative
Amount
Recognized as of
December 31,
2017
Remaining to be
Recognized
Total
Employee severance benefits and related
costs
Asset write-offs and accelerated
depreciation
Property removal, restoration and other
exit-related costs
Total Cessation-related costs
$
$
0.3
$
22.1
$
— $
—
2.4
2.7
71.3
9.5
$
102.9
$
—
0.9
0.9
$
22.1
71.3
10.4
103.8
A rollforward of the Cessation-related liabilities during the year ended December 31, 2017 is as follows (in millions):
Balance at December 31, 2016
Expense
Cash payments
Balance at December 31, 2017
1 Includes asset retirement obligations.
Employee Severance
Benefits and Related
Costs
Other Exit Costs1
Total
$
$
13.7
$
0.3
(14.0)
— $
5.4
$
2.4
(3.2)
4.6
$
19.1
2.7
(17.2)
4.6
The Cessation-related liabilities were included in the accompanying consolidated balance sheets as follows (in
millions):
Employee severance benefits and related
costs
Other exit costs
Total Cessation-related liabilities
Classification on
Balance Sheet
HC&S cessation-related
liabilities
HC&S cessation-related
liabilities
December 31, 2017
December 31, 2016
$
$
— $
4.6
4.6
$
13.7
5.4
19.1
98
19.
SEGMENT RESULTS
Operating segments are components of an enterprise that engage in business activities from which it may earn
revenues and incur expenses, whose operating results are regularly reviewed by the chief operating decision maker to make
decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial
information is available. The Company operates three segments: Commercial Real Estate (formerly Leasing); Land Operations
(formerly Real Estate Development and Sales and Agribusiness); and Materials & Construction.
The Commercial Real Estate segment owns, operates, and manages a portfolio of retail, office and industrial
properties in Hawai`i and on the Mainland totaling 4.0 million square feet of GLA. The Company also leases 117 acres of
commercial land in Hawai`i to third-party lessees.
The Land Operations segment generates its revenues and creates value through an active and comprehensive program
of land stewardship, planning, entitlement, development, real estate investment and sale of land and commercial and residential
properties, principally in Hawai`i.
The Materials & Construction segment performs asphalt paving as prime contractor and subcontractor; imports and
sells liquid asphalt; mines, processes and sells rock and sand aggregates; produces and sells asphaltic concrete and ready-mix
concrete; provides and sells various construction- and traffic-control-related products and manufactures and sells precast
concrete products.
The accounting policies of the operating segments are described in the summary of significant accounting policies.
Reportable segments are measured based on operating profit, exclusive of interest expense, general corporate expenses and
income taxes. Revenues related to transactions between reportable segments have been eliminated. Transactions between
reportable segments are accounted for on the same basis as transactions with unrelated third parties.
General contractor and subcontractor revenues for the years ended December 31, 2017 and 2016 were derived directly
and indirectly from the State of Hawai`i in the amounts of $60.2 million and $50.1 million, respectively. In addition, for the
years ended December 31, 2017 and 2016, amounts were derived directly and indirectly from the City and County of Honolulu
in the amounts of $67.7 million and $52.0 million, respectively.
99
Operating segment information for the years ended December 31, 2017, 2016, and 2015 is summarized as below (in
millions):
2017
2016
2015
Revenue:
Commercial Real Estate
Land Operations
Materials & Construction
Total revenue
Operating Profit (Loss):
Commercial Real Estate1,2
Land Operations3,4
Materials & Construction5
Total operating profit
Interest expense
General corporate expenses
REIT evaluation/conversion costs6
$
136.9
$
134.7
$
84.5
204.1
425.5
34.4
14.2
22.0
70.6
(25.6)
(29.2)
(15.2)
0.6
218.2
218.8
9.3
228.1
2.4
230.5
(2.2)
228.3
61.9
190.9
387.5
54.8
7.0
23.3
85.1
(26.3)
(22.1)
(9.5)
27.2
0.5
27.7
5.0
32.7
(41.1)
(8.4)
(1.8)
(10.2) $
$
133.6
120.2
219.0
472.8
53.2
61.7
30.9
145.8
(26.8)
(20.1)
—
98.9
(37.0)
61.9
(1.1)
60.8
(29.7)
31.1
(1.5)
29.6
Income from Continuing Operations Before Income Taxes and Net Gain
(Loss) on Sale of Improved Properties
Income tax benefit (expense)7
Income from Continuing Operations Before Net Gain (Loss) on Sale of
Improved Properties
Net gain (loss) on the sale of improved properties, net of income taxes8
Income From Continuing Operations
Income (loss) from discontinued operations, net of income taxes
Net Income (Loss)
Income attributable to noncontrolling interest
Net Income (Loss) Attributable to A&B Shareholders
$
1 Commercial Real Estate operating profit includes intersegment operating revenue, primarily from our Materials & Construction segment, and is
eliminated in our consolidated results of operations.
2 Commercial Real Estate operating profit includes $22.4 million of impairments of real estate for three mainland properties classified as held for
sale as of December 31, 2017.
3 The Land Operations segment includes approximately $3.3 million, $15.1 million, and $30.2 million in equity in earnings from its various real
estate joint ventures for 2017, 2016, and 2015, respectively. The Land Operations segment also includes non-cash impairment charges of $11.7
million in 2016 related to certain non-active, long-term development projects.
4 Amounts include non-cash reductions of $2.6 million, $9.8 million, and $2.6 million related to the Company's tax equity solar investments in KRS
II and Waihonu for each of the years ended December 31, 2017, 2016, and 2015, respectively.
5 During the year ended December 31, 2016, the Company recorded charges of $2.6 million for environmental costs related to the management of a
former quarry site and a net loss of $1.0 million related to the sales of vacant land parcels by an unconsolidated affiliate.
6 Costs related to the Company's in-depth evaluation of and conversion to a REIT.
7 The Company has completed a conversion process to comply with the requirements to be treated as a REIT for federal income tax purposes
commencing with the taxable year ended December 31, 2017. As a result, the income tax provision for the year ended December 31, 2017
included a $223 million deferred tax benefit related to the de-recognition of the deferred tax assets and liabilities associated with the entities
included in the REIT. The income tax provision for the year ended December 31, 2016 also included non-cash reductions in the carrying value of
A&B’s KRS II and Waihonu joint venture solar investments. Tax benefits associated with the KRS II and Waihonu investments are included in the
Income tax expense line item in the Consolidated Statements of Operations.
8 Amounts in 2017 represent the sales of one office building in Maui, Hawai`i in January 2017 and one industrial property in California in
November 2017. Amounts in 2016 represent the sales of two California properties and one Utah office property in June 2016. Amounts in 2015
represent the sales of one Colorado retail property in March 2015, one Texas office building in May 2015, and one Washington office building in
December 2015.
100
Identifiable Assets:
Commercial Real Estate
Land Operations9
Materials & Construction
Other
Total assets
Capital Expenditures:
Commercial Real Estate10
Land Operations11,12
Materials & Construction
Other
Total capital expenditures
Depreciation and Amortization:
Commercial Real Estate
Land Operations12
Materials & Construction
Other
Total depreciation and amortization
2017
2016
2015
$ 1,128.1
$ 1,119.5
$ 1,075.7
604.2
379.2
119.7
$ 2,231.2
632.8
371.8
32.2
$ 2,156.3
759.7
386.6
20.3
$ 2,242.3
$
32.8
$
98.7
$
23.0
1.4
6.3
0.2
5.3
9.3
0.3
2.1
7.2
1.4
40.7
$
113.6
$
33.7
26.0
1.6
12.2
1.6
41.4
$
$
28.4
6.7
11.7
1.8
48.6
$
$
28.9
1.3
11.6
1.5
43.3
$
$
$
9 The Land Operations segment includes approximately $369.9 million, $357.5 million, and $379.7 million related to its investment in various real
estate joint ventures as of December 31, 2017, 2016, and 2015, respectively.
10 Represents gross capital additions to the commercial real estate portfolio, including gross tax-deferred property purchases, but excluding the
assumption of debt, that are reflected as non-cash transactions in the consolidated statements of cash flows.
11 Excludes expenditures for real estate developments held for sale, which are classified as Cash Flows from Operating Activities within the
Consolidated Statements of Cash Flows, and excludes investment in joint ventures classified as Cash Flows from Investing Activities. Operating
cash flows for expenditures related to real estate developments were $20.8 million, $15.3 million, and $7.2 million for 2017, 2016, and 2015,
respectively. Investments in real estate joint ventures were $16.4 million, $20.8 million, and $25.8 million in 2017, 2016, and 2015, respectively.
Excludes expenditures from discontinued operations, which are classified as Cash Flows from Investing Activities within the Consolidated
Statements of Cash Flows of $1.8 million, $2.5 million, and $11.0 million for 2017, 2016, and 2015, respectively.
12 Amounts recast to reflect discontinued operations.
101
Unaudited quarterly segment results for the years ended December 31, 2017 and 2016 were as follows (in millions):
Revenue:
Commercial Real Estate
Land Operations
Materials & Construction
Total revenue
Operating Profit (Loss):
Commercial Real Estate1,2
Land Operations3
Materials & Construction4
Total operating profit
Interest expense
General corporate expenses
REIT evaluation/conversion costs5
Income (Loss) from Continuing Operations Before Income Taxes
and Net Gain on Sale of Improved Properties
Income tax benefit (expense)6
Income from Continuing Operations Before Net Gain on Sale of
Improved Properties
Net gain on the sale of improved properties7
Income from Continuing Operations
Income (loss) from discontinued operations, net of income taxes
Net Income
Income attributable to noncontrolling interest
Net Income Attributable to A&B Shareholders
Amounts Available to A&B Shareholders:
Income from Continuing Operations, Net of Taxes
Less: Income attributable to noncontrolling interests
Income from Continuing Operations Attributable to A&B
Shareholders, Net of Taxes
Less: Undistributed earnings allocated to redeemable
noncontrolling interest
Income from Continuing Operations Available to A&B
Shareholders, Net of Taxes
Income from discontinuing operations
Net Income Available to A&B Shareholders
2017
Q1
Q2
Q3
Q4
$ 33.7
$ 33.8
$ 33.9
$ 35.5
11.0
48.5
93.2
14.3
(2.4)
5.6
17.5
(6.2)
(5.7)
(4.8)
0.8
0.8
1.6
3.0
4.6
2.4
7.0
(0.7)
6.3
4.6
(0.7)
3.9
0.5
4.4
2.4
6.8
$
$
$
12.1
52.2
98.1
13.4
1.7
6.7
21.8
(6.2)
(5.9)
(2.2)
7.5
(3.5)
4.0
—
4.0
0.8
4.8
(0.5)
4.3
4.0
(0.5)
3.5
0.2
3.7
0.8
4.5
22.6
55.0
38.8
48.4
111.5
122.7
13.6
10.4
6.7
30.7
(6.1)
(8.9)
(4.4)
11.3
(3.7)
7.6
—
7.6
(0.8)
6.8
(0.7)
6.1
(6.9)
4.5
3.0
0.6
(7.1)
(8.7)
(3.8)
(19.0)
224.6
205.6
6.3
211.9
—
211.9
(0.3)
$ 211.6
7.6
(0.7)
$ 211.9
(0.3)
6.9
211.6
0.5
0.6
$
$
7.4
(0.8)
6.6
212.2
—
$ 212.2
$
$
$
$
102
2017
Q1
Q2
Q3
Q4
Earnings (Loss) Per Share Available to A&B Shareholders:
Basic Earnings (Loss) Per Share of Common Stock:
Continuing operations available to A&B shareholders
$ 0.09
$ 0.08
Discontinued operations available to A&B shareholders
0.05
0.02
Net income available to A&B shareholders
$ 0.14
$ 0.10
Diluted Earnings (Loss) Per Share of Common Stock:
Continuing operations available to A&B shareholders
$ 0.09
$ 0.07
Discontinued operations available to A&B shareholders
0.05
0.02
Net income available to A&B shareholders
$ 0.14
$ 0.09
$ 0.15
(0.02)
$ 0.13
$ 4.31
—
$ 4.31
$ 0.15
(0.02)
$ 0.13
$ 3.42
—
$ 3.42
Weighted-Average Number of Shares Outstanding:
Basic
Diluted8
49.1
49.6
49.2
49.6
49.2
49.6
49.2
62.0
103
6.0
50.6
91.4
14.2
(4.3)
8.0
17.9
(6.9)
(6.9)
—
4.1
(0.3)
3.8
2016
Q1
Q2
Q3
Q4
$ 34.8
$ 34.5
$ 32.7
$ 32.7
5.5
42.0
82.0
18.1
52.1
102.9
32.3
46.2
111.2
13.6
(10.4)
4.9
8.1
(6.8)
(4.0)
(1.9)
(4.6)
2.8
13.5
7.8
5.6
26.9
(6.4)
(5.5)
(1.9)
13.1
(1.0)
13.5
13.9
4.8
32.2
(6.2)
(5.7)
(5.7)
14.6
(1.0)
12.1
13.6
(1.8)
4.9
3.1
(3.7)
(0.6)
(0.1)
—
3.8
(10.8)
(7.0)
(0.5)
—
13.6
(13.0)
0.6
(0.7)
$ (7.5) $ (0.7) $ (1.9) $ (0.1)
0.1
12.2
(13.6)
(1.4)
(0.5)
$
$
3.8
(0.5)
3.1
(0.1)
$ 12.2
(0.5)
$ 13.6
(0.7)
3.3
0.4
3.0
0.1
11.7
12.9
0.4
0.4
3.7
(10.8)
3.1
(3.7)
$ (7.1) $ (0.6) $ (1.5) $
12.1
(13.6)
13.3
(13.0)
0.3
Revenue:
Commercial Real Estate
Land Operations
Materials & Construction
Total revenue
Operating Profit (Loss):
Commercial Real Estate1,2
Land Operations3
Materials & Construction4
Total operating profit
Interest expense
General corporate expenses
REIT evaluation/conversion costs5
Income (Loss) from Continuing Operations Before Income Taxes
and Net Gain on Sale of Improved Properties
Income tax benefit (expense)6
Income (Loss) From Continuing Operations Before Net Gain on
Sale of Improved Properties
Net gain on the sale of improved properties, net of income taxes7
Income From Continuing Operations
Loss from discontinued operations, net of income taxes
Net Income (Loss)
Income attributable to noncontrolling interest
Net Loss Attributable to A&B
Amounts Available to A&B Shareholders:
Income from Continuing Operations, Net of Taxes
Less: Income attributable to noncontrolling interests
Income from Continuing Operations Attributable to A&B
Shareholders, Net of Taxes
Less: Undistributed earnings allocated to redeemable
noncontrolling interest
Income from Continuing Operations Available to A&B
Shareholders, Net of Taxes
Income from discontinuing operations
Net Income (Loss) Available to A&B Shareholders
104
Earnings (Loss) Per Share Available to A&B Shareholders:
Basic Earnings (Loss) Per Share of Common Stock:
Continuing operations available to A&B shareholders
Discontinued operations available to A&B shareholders
Net income (loss) available to A&B shareholders
Diluted Earnings (Loss) Per Share of Common Stock:
2016
Q1
Q2
Q3
Q4
$ 0.08
(0.23)
$ (0.15)
$ 0.06
(0.07)
$ (0.01)
$ 0.25
(0.28)
$ (0.03)
$ 0.27
(0.26)
$ 0.01
Continuing operations available to A&B shareholders
Discontinued operations available to A&B shareholders
Net income (loss) available to A&B shareholders
$ 0.08
(0.22)
$ (0.14)
$ 0.06
(0.07)
$ (0.01)
$ 0.24
(0.28)
$ (0.04)
$ 0.27
(0.26)
$ 0.01
Weighted-Average Number of Shares Outstanding:
Basic
Diluted
48.9
49.3
49.0
49.4
49.0
49.4
49.0
49.4
1 Commercial Real Estate operating profit includes intersegment operating revenue, primarily from our Materials & Construction segment, and is
eliminated in our consolidated results of operations.
2 Commercial Real Estate operating profit includes $22.4 million of impairments of real estate for three mainland properties classified as held for
sale as of December 31, 2017.
3 During the fourth quarter of 2016, the Company recorded $11.7 million of non-cash impairment charges related to certain non-active, long-term
development projects.
4 During the year ended December 31, 2016, the Company recorded charges of $2.6 million for environmental costs related to the management of a
former quarry site, a gain of $0.6 million on the sale of a vacant non-core land parcel in the fourth quarter of 2016, and a loss of $1.6 million
related to the sale of vacant non-core land parcel by an unconsolidated affiliate in the third quarter of 2016.
5 Costs related to the Company's in-depth evaluation of a REIT conversion.
6 The Company has completed a conversion process to comply with the requirements to be treated as a REIT for federal income tax purposes
commencing with the taxable year ended December 31, 2017. As a result, the income tax provision for the quarter ended December 31, 2017
included a $223 million deferred tax benefit related to the de-recognition of the deferred tax assets and liabilities associated with the entities
included in the REIT. The income tax provision for the quarter ended December 31, 2016 included non-cash reductions in the carrying value of
A&B’s KRS II and Waihonu joint venture solar investments. Tax benefits associated with the KRS II and Waihonu investments are included in the
Income tax expense line item in the Consolidated Statements of Operations.
7 Amounts in 2017 represent the sales of one office building in Maui, Hawai`i in January 2017 and one industrial property in California in
November 2017. Amounts in 2016 represent the sales of two California and one Utah office properties in June 2016. Amounts in 2015 represent
the sales of one Colorado retail property in March 2015, one Texas office building in May 2015, and one Washington office building in December
2015.
8 On November 16, 2017, the Company declared the Special Distribution on its shares of common stock in an aggregate amount of $783.0 million,
or approximately $15.92 per share. The Company paid the Special Distribution on January 23, 2018. The Special Distribution was payable in the
form of cash and shares of the Company's stock at the election of each shareholder, subject to an aggregate limit of $156.6 million of cash (the
"Shareholder Election"). As the deadline for the common shareholders' election was January 12, 2018, subsequent to December 31, 2017, the total
Special Distribution of $783 million was included in the computation of the Company's diluted earnings (loss) per share.
105
20.
SUBSEQUENT EVENTS
On February 23, 2018, Alexander & Baldwin, Inc. (the “Company”) acquired a portfolio of commercial properties in
Hawai`i (the "Portfolio") for a total consideration of $254.1 million, including assumed debt of $62.0 million. The Portfolio
consists of three grocery-anchored shopping centers: (1) Laulani Village Shopping Center located in Ewa Beach, Oahu, (2)
Hokulei Village Shopping Center located in Lihue, Kauai, and (3) Pu`unene Shopping Center located in Kahului, Maui. The
Portfolio adds approximately 390,000 of gross leasable area to the Company’s Commercial Real Estate portfolio.
The acquisition of the Portfolio was funded through proceeds from the sale of U.S. Mainland commercial properties
via tax-deferred §1031 exchanges, the assumption of a $62.0 million promissory note (“Promissory Note”), and borrowings
under the Company’s revolving senior credit facility at the time of closing.
The Promissory Note bears interest at 3.93 percent and requires monthly interest payments of approximately $0.2
million until May 2020 and principal and interest payments of approximately $0.3 million thereafter. The Promissory Note
matures on May 1, 2024 and is secured by the Laulani Village Shopping Center.
On February 26, 2018, the Company entered into an agreement with Wells Fargo Bank, National Association and a
syndicate of other financial institutions that provides for a $50 million term loan facility (“Wells Fargo Term Facility”). The
Company also drew $50 million under the Wells Fargo Term Facility on February 26, 2018 and used such term loan proceeds to
repay amounts that were borrowed under the Company’s Revolving Credit Facility to fund the acquisition of the Portfolio.
Borrowings under the Wells Fargo Term Facility bear interest at a stated rate, as defined, plus a margin that is determined based
on a pricing grid using the ratio of debt to total assets ratio, as defined.
106
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
(a)
Disclosure Controls and Procedures
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief
Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term
is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report.
Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as
of December 31, 2017, the Company’s disclosure controls and procedures were effective.
(b)
Internal Control Over Financial Reporting
There have not been any changes in the Company's internal control over financial reporting (as such term is
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the Company's fiscal fourth quarter that
have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial
reporting.
(a)
Management’s Annual Report on Internal Control Over Financial Reporting
The management of Alexander & Baldwin, Inc. has the responsibility for establishing and maintaining adequate
internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f)
under the Securities Exchange Act of 1934, as amended, as a process designed by, or under the supervision of, the company’s
principal executive and principal financial officers and effected by the company’s board of directors, management and other
personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with accounting principles generally accepted in the United States of America
and includes those policies and procedures that:
•
•
•
Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of assets of the company;
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with accounting principles generally accepted in the United States of America, and that
receipts and expenditures of the company are being made only in accordance with authorizations of management
and directors of the company; and
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting only provides reasonable assurance with
respect to financial statement presentation and preparation and cannot provide absolute assurance that all control issues and
instances of fraud, if any, will be detected. Management does not expect that the Company’s internal controls will prevent or
detect all errors and all fraud. Additionally, the design of a control system must consider the benefits of the controls relative to
their costs. Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31,
2017. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal Control-Integrated Framework (2013). Based on its assessment, management
believes that, as of December 31, 2017, the Company’s internal control over financial reporting was effective.
The Company’s independent registered public accounting firm, Deloitte & Touche LLP, has issued an audit report on
the Company’s internal control over financial reporting. That report appears below.
107
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Alexander & Baldwin, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Alexander & Baldwin, Inc. and subsidiaries (the “Company”)
as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in
Internal Control - Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated financial statements as of and for the year ended December 31, 2017, of the Company, and our
report dated March 1, 2018, expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s
Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s
internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the
assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
Honolulu, Hawaii
March 1, 2018
108
(c)
Changes in Internal Control Over Financial Reporting
There have not been any changes in the Company's internal control over financial reporting (as such term is defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the Company's fiscal fourth quarter that have materially
affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
A.
Directors
For information about the directors of A&B, see the section captioned “Election of Directors” in A&B’s proxy statement
for the 2018 Annual Meeting of Shareholders (“A&B’s 2018 Proxy Statement”), which section is incorporated herein by reference.
B.
Executive Officers
As of February 15, 2018, the name of each executive officer of A&B (in alphabetical order), age (in parentheses), and
present and prior positions with A&B and business experience for the past five years are given below.
Generally, the term of office of executive officers is at the pleasure of the Board of Directors. For a discussion of
compliance with Section 16(a) of the Exchange Act by A&B’s directors and executive officers, see the subsection captioned
“Section 16(a) Beneficial Ownership Reporting Compliance” in A&B’s 2018 Proxy Statement, which subsection is incorporated
herein by reference. For a discussion of change in control agreements between A&B and certain of A&B’s executive officers, and
the Executive Severance Plan, see the subsections captioned “Other Potential Post-Employment Payments” in A&B’s 2018 Proxy
Statement, which subsections are incorporated herein by reference.
References within this section to A&B include the Company and Alexander & Baldwin, Inc. prior to the Holding Company
Merger. Also, references to “A&B Predecessor” are to Alexander & Baldwin, Inc. prior to its separation from Matson, Inc. on
June 29, 2012.
Christopher J. Benjamin (54)
Chief Executive Officer of A&B, 1/16-present; President of A&B, 6/12-present; Chief Operating Officer of A&B,
6/12-12/15; President of Land Group of A&B Predecessor, 9/11-6/12; President of A & B Properties Hawai`i, LLC. ("ABP"),
9/11-8/15; Senior Vice President of A&B Predecessor, 7/05-8/11; Chief Financial Officer of A&B Predecessor, 2/04-8/11; Treasurer
of A&B Predecessor, 5/06-8/11; Plantation General Manager, Hawaiian Commercial & Sugar Company, 3/09-3/11; first joined
A&B Predecessor in 2001.
Meredith J. Ching (61)
Senior Vice President, External Affairs, of A&B, 6/12-present; Senior Vice President (Government & Community
Relations) of A&B Predecessor, 6/07-6/12; first joined A&B Predecessor in 1982.
Clayton K. Y. Chun (40)
Chief Accounting Officer of A&B, 1/18-present; Controller of A&B, 9/15-present; Audit Senior Manager of Deloitte &
Touche, LLP, 9/00-8/15.
Nelson N. S. Chun (65)
Senior Vice President and Chief Legal Officer of A&B, 6/12-present; Senior Vice President and Chief Legal Officer of
A&B Predecessor, 7/05-6/12; first joined A&B Predecessor in 2003.
109
James E. Mead (58)
Chief Financial Officer of A&B, 7/17-present; Executive Vice President and Chief Financial Officer of SL Green Realty
Corp., 11/10-1/15.
Lance K. Parker (44)
Senior Vice President and Chief Real Estate Officer of A&B, 10/17-present; President of ABP, 9/15-present; Senior
Vice President of ABP, 6/13-8/15; Vice President of ABP, 7/07-6/13; first joined A&B Predecessor in 2004.
C.
Corporate Governance
For information about the Audit Committee of the A&B Board of Directors, see the section captioned “Certain Information
Concerning the Board of Directors” in A&B’s 2018 Proxy Statement, which section is incorporated herein by reference.
D.
Code of Ethics
For information about A&B’s Code of Ethics, see the subsection captioned “Code of Ethics” in A&B’s 2018 Proxy
Statement, which subsection is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
See the section captioned “Executive Compensation” and the subsection captioned “Compensation of Directors” in
A&B’s 2018 Proxy Statement, which section and subsection are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
See the section captioned “Security Ownership of Certain Shareholders” and the subsection titled “Security Ownership
of Directors and Executive Officers” in A&B’s 2018 Proxy Statement, which section and subsection are incorporated herein by
reference. See the Equity Compensation Plan Information table in Item 5 of Part II.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
See the section captioned “Election of Directors” and the subsection captioned “Certain Relationships and
Transactions” in A&B’s 2018 Proxy Statement, which section and subsection are incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information concerning principal accountant fees and services appears in the section captioned “Ratification of
Appointment of Independent Registered Public Accounting Firm” in A&B’s 2018 Proxy Statement, which section is incorporated
herein by reference.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
A.
Financial Statements
The financial statements are set forth in Item 8 of Part II above.
110
B.
Financial Statement Schedules
SCHEDULE III – REAL ESTATE AND ACCUMULATED DEPRECIATION
Alexander & Baldwin, Inc.
December 31, 2017
(in millions)
Initial Cost
Costs Capitalized
Subsequent to Acquisition
Gross Amounts of Which Carried at
Close of Period
Encum-
brances (1)
Land
Buildings
and
Improvements
Improvements
Carrying
Costs
Land
Buildings
and
Improvements
Total (2)
Accumulated
Depreciation (3)
Date of
Construction
Date
Acquired/
Completed
Description
Commercial Real Estate Segment
Industrial :
Honokohau Industrial (HI)
$
— $
4.9 $
4.8 $
— $
— $
4.9 $
4.8 $
9.7 $
2.1
21.8
11.4
1.2
3.1
20.5
7.8
26.9
14.3
19.2
4.4
7.3
5.7
2.6
9.3
2.4
7.2
10.4
2.3
80.6
15.6
12.0
6.4
15.3
10.5
37.1
8.6
12.6
38.7
36.6
1.2
3.1
23.7
27.4
31.4
18.2
22.6
5.4
8.3
5.7
2.6
16.3
4.2
30.7
17.7
2.3
164.6
15.6
14.7
11.0
24.7
22.7
80.4
18.0
Kailua Industrial/Other (HI)
Kaka'ako Commerce Center (HI)
Komohana Industrial Park (HI)
P&L Warehouse (HI)
Port Allen (HI)
Sparks Business Center (NV)
Waipio Industrial (HI)
Office :
1800 and 1820 Preston Park (TX) (4)
Concorde Commerce Center (AZ) (4)
Deer Valley Financial Center (AZ) (4)
Judd Building (HI)
Kahului Office Building (HI)
Kahului Office Center (HI)
Lono Center (HI)
Gateway at Mililani Mauka South
(HI)
Stangenwald Building (HI)
Retail :
Aikahi Park Shopping Center (HI)
Gateway at Mililani Mauka (HI)
Kahului Shopping Center (HI)
Kailua Retail Other (HI)
Kaneohe Bay Shopping Ctr. (HI)
Kunia Shopping Center (HI)
Lahaina Square (HI)
Lanihau Marketplace (HI)
Little Cottonwood Center (UT)
Manoa Marketplace (HI)
Napili Plaza (HI)
Pearl Highlands Center (HI)
Port Allen Marina Ctr. (HI)
Royal MacArthur Center (TX)
The Shops at Kukui'ula (HI)
Waianae Mall (HI)
Waipio Shopping Center (HI)
Other :
Ho'okele Shopping Center (HI)
Oahu Ground Leases (HI)
Other miscellaneous investments
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
15.7
—
—
—
—
—
60.0
—
87.0
—
—
—
—
—
—
—
—
10.5
16.9
25.2
—
—
3.2
19.6
4.5
3.9
3.4
1.0
1.0
—
—
7.0
1.8
23.5
7.3
—
84.0
—
2.7
4.6
9.4
12.2
43.3
9.4
43.4
—
3.5
8.9
17.4
24.0
—
170.5
2.6
2.0
20.6
10.8
—
0.7
17.2
7.7
19.9
20.9
19.2
2.1
0.4
—
1.4
3.5
1.0
6.7
4.7
—
73.8
13.4
10.6
3.7
13.2
9.1
35.9
8.0
96.2
3.4
10.1
30.1
10.1
7.6
—
0.6
0.1
0.1
1.2
0.6
1.2
2.4
3.3
0.1
7.5
6.3
5.4
2.3
6.9
5.7
1.2
5.8
1.4
0.5
5.7
2.3
6.8
2.2
1.4
2.7
2.1
1.4
1.2
0.6
7.9
1.1
2.7
3.5
4.3
0.7
5.5
—
18.5
—
—
—
—
—
—
—
(0.5)
(12.9)
(5.4)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
10.5
16.9
25.2
—
—
3.2
19.6
4.5
3.9
3.4
1.0
1.0
—
—
7.0
1.8
23.5
7.3
—
84.0
—
2.7
4.6
9.4
12.2
43.3
9.4
43.4
—
3.5
8.9
17.4
24.0
—
170.5
2.6
(0.1)
(0.3)
(1.6)
(2.3)
(0.7)
Various
Various
1969
1990
1970
2017
2013
2014
2010
1970
(2.0)
1983, 1993
1983-1993
(8.9)
1996-1998
(1.9)
1988-1989
2002
2009
(8.6)
1997, 1998
(9.0)
(8.5)
1998
2001
(1.9)
1898, 1979
(8.0)
(4.1)
(1.5)
1974
1991
1973
(0.8)
1992, 2006
(1.1)
1901, 1980
(1.3)
1971
(1.1)
2008, 2013
(1.3)
(9.3)
(6.3)
(4.5)
(0.8)
(3.1)
1951
Various
1971
2004
1973
1987
(2.2)
1998, 2008
(2.2)
(1.5)
1977
1991
2006
2006
2005
2000
1989
1991
1991
2012
1996
2015
2011
1951
2013
2001
2002
2010
2010
2010
2016
2003, 2013
2013
1971
2007
2013
2013
2009
2013
104.1
147.5
(13.2)
1992-1994
4.5
12.8
33.6
14.4
8.3
5.5
0.6
18.6
4.5
16.3
42.5
31.8
32.3
5.5
171.1
21.2
(2.2)
(3.7)
(4.1)
(2.1)
2002
2006
2009
1975
(1.8)
1986, 2004
2017
—
(0.1)
(7.7)
Total
Total for Hawai`i
Total for U.S. Mainland
Total
$
$
$
162.7 $
569.6 $
469.5 $
122.5 $
(18.8) $
569.6 $
573.2 $
1,142.8 $
(129.8)
162.7 $
538.9 $
373.1 $
95.9 $
— $
538.9 $
469.0 $
1,007.9 $
—
30.7
96.4
26.6
(18.8)
30.7
104.2
134.9
162.7 $
569.6 $
469.5 $
122.5 $
(18.8) $
569.6 $
573.2 $
1,142.8 $
(88.9)
(40.9)
(129.8)
111
Description (amounts in millions)
Land Operations Segment
Encum-
brances (1)
Land
Buildings and
Improvements
Improvements
Carrying
Costs
Land
Buildings and
Improvements
Total (2)
Accumulated
Depreciation (3)
Agricultural Land
$
— $
9.7 $
— $
— $
— $
9.7 $
Aina ‘O Kane
Brydeswood
Grove Ranch
Haliimaile
Kahala Portfolio
Kamalani
Maui Business Park II
The Ridge at Wailea (MF-19)
Waiale Community
Wailea B-1
Wailea B-II
Wailea MF-7
Wailea SF-S
Wailea SF-8
Wailea, other
Other Kauai landholdings
Other Maui Landholdings
Other miscellaneous investments
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
34.4
—
—
1.7
—
4.6
3.3
2.9
4.0
1.3
15.3
—
0.2
3.1
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
0.1
0.2
1.1
1.2
0.6
1.5
0.8
—
26.5
38.3
6.2
1.8
—
—
5.9
—
—
8.3
13.4
1.4
6.1
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(9.1)
—
(2.5)
—
—
—
—
34.4
—
—
1.7
—
4.6
3.3
2.9
4.0
1.3
15.3
—
0.2
3.1
— $
1.2 $
0.6 $
1.5 $
0.8 $
— $
26.5 $
38.3 $
6.2 $
1.8 $
— $
— $
5.9 $
— $
— $
8.3 $
4.4 $
1.6 $
4.7 $
9.7 $
1.2
0.6
1.5
0.8
34.4
26.5
38.3
7.9
1.8
4.6
3.3
8.8
4.0
1.3
23.6
4.4
1.8
7.8
Total
$
— $
80.5 $
1.4 $
112.0 $
(11.6) $
80.5 $
101.8 $
182.3 $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(0.6)
(0.7)
(2.4)
(3.7)
(1) See Note 8 to consolidated financial statements.
(2) The aggregate tax basis, as of December 31, 2017, for the Commercial Real Estate segment and Land Operations segment assets was approximately $633.3
million, including outside tax basis of consolidated joint venture investments.
(3) Depreciation is computed based upon the following estimated useful lives:
Building and improvements:
Leasehold improvements:
Other property improvements:
10 – 40 years
5 – 10 years (lesser of useful life or lease term)
3 – 35 years
(4) During the fourth quarter of 2017, the Company recorded impairment charges of $0.5 million, $12.9 million, and $5.4 million for 1800 and 1820 Preston
Park, Concorde Commerce Center, and Deer Valley Financial Center, respectively. See Note 2 "Significant Accounting Policies" for additional
information.
Reconciliation of Real Estate (in millions)
Balance at beginning of year
Additions and improvements
Dispositions, retirements and other adjustments
Impairment of real estate assets
Balance at end of year
2017
2016
2015
$
1,352.7
$
1,332.5
$
1,397.1
57.8
(66.6)
(18.8)
118.8
(87.0)
(11.6)
32.2
(96.8)
—
$
1,325.1
$
1,352.7
$
1,332.5
Reconciliation of Accumulated Depreciation (in millions)
2017
2016
2015
Balance at beginning of year
Depreciation expense
Dispositions, retirements and other adjustments
Balance at end of year
$
$
122.7
$
128.0
$
120.5
18.8
(8.0)
20.2
(25.5)
20.5
(13.0)
133.5
$
122.7
$
128.0
112
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Alexander & Baldwin, Inc.
Opinion on the Consolidated Financial Statement Schedule
We have audited the consolidated financial statements of Alexander & Baldwin, Inc. and subsidiaries (the “Company”) as of
December 31, 2017 and 2016, and for each of the three years in the period ended December 31, 2017, and the Company’s
internal control over financial reporting as of December 31, 2017, and have issued our reports thereon dated March 1, 2018;
such reports are included elsewhere in this Form 10-K. Our audits also included the consolidated financial statement schedule
of the Company listed in the Index at Item 15. This consolidated financial statement schedule is the responsibility of the
Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statement
schedule based on our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the
consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ Deloitte & Touche LLP
Honolulu, Hawaii
March 1, 2018
113
C.
Exhibits Required by Item 601 of Regulation S-K
Exhibits not filed herewith are incorporated by reference to the exhibit number and previous filing shown in parentheses.
All previous exhibits were filed with the Securities and Exchange Commission in Washington, D.C. Exhibits filed pursuant to the
Securities Exchange Act of 1934 were filed under file number 001-34187. Shareholders may obtain copies of exhibits for a copying
and handling charge of $0.15 per page by writing to Alyson J. Nakamura, Corporate Secretary, Alexander & Baldwin, Inc., P. O.
Box 3440, Honolulu, Hawai`i 96801.
2.
Plan of acquisition, reorganization, arrangement, liquidation or succession.
2.a Agreement and Plan of Merger, dated as of July 10, 2017, by and among Alexander & Baldwin Investments, LLC
(formerly Alexander & Baldwin, Inc.), Alexander & Baldwin, Inc. (formerly Alexander & Baldwin REIT Holdings, Inc.)
and A&B REIT Merger Corporation (Exhibit 2.1 to Form 8-K, dated July 12, 2017).
3.
Articles of incorporation and bylaws.
3.a Amended and Restated Articles of Incorporation of Alexander & Baldwin, Inc., effective as of November 8, 2017
(Exhibit 3.1 to Form 8-K, dated November 8, 2017).
3.b Amended and Restated Bylaws of Alexander & Baldwin, Inc., effective as of November 8, 2017 (Exhibit 3.2 to Form
8-K, dated November 8, 2017).
4.
Instruments defining the rights of security holders
4.a Description of Capital Stock (Exhibit 4.1 to Form 8-K, dated November 8, 2017).
4.b Form of Company Common Stock Certificate (Exhibit 4.2 to Form 8-K, dated November 8, 2017).
10.
Material contracts.
10.a. (i) Amended and Restated Operating Agreement of Kukui`ula Development Company (Hawai`i), LLC, dated May
1, 2009, by and between KDC, LLC, a Hawai`i limited liability company, and DMB Kukui`ula LLC, an Arizona limited
liability company (Exhibit 10.6 to Amendment No. 2 to Form 10 filed on May 21, 2012).
(ii) First Amendment to the Amended and Restated Operating Agreement of Kukui`ula Development Company (Hawai`i),
LLC, dated September 28, 2010, by and between KDC, LLC, a Hawai`i limited liability company, and DMB Kukui`ula
LLC, an Arizona limited liability company (Exhibit 10.7 to Amendment No. 2 to Form 10 filed on May 21, 2012).
(iii) Second Amendment to the Amended and Restated Operating Agreement of Kukui`ula Development Company
(Hawai`i), LLC, dated July 20, 2011, by and between KDC, LLC, a Hawai`i limited liability company, and DMB Kukui`ula
LLC, an Arizona limited liability company (Exhibit 10.8 to Amendment No. 2 to Form 10 filed on May 21, 2012).
(iv) General Contract of Indemnity, among Alexander & Baldwin, LLC (formerly known as Alexander & Baldwin, Inc.),
Kukui`ula Development Company (Hawai`i), LLC, DMB Kukui`ula LLC, and DMB Communities LLC, in favor of
Travelers Casualty and Surety Company of America, dated June 13, 2006 (incorporated by reference to Exhibit 10.1 to
Alexander & Baldwin, Inc.’s Form 8-K dated June 14, 2006 (File No. 000-00565)).
(v) Mutual Indemnification Agreement, among Kukui`ula Development Company (Hawai`i), LLC, DMB Kukui`ula
LLC, DMB Communities LLC, and Alexander & Baldwin, LLC (formerly known as Alexander & Baldwin, Inc.), dated
June 14, 2006 (incorporated by reference to Exhibit 10.2 to Alexander & Baldwin, Inc.’s Form 8-K dated June 14, 2006
(File No. 000-00565)).
(vi) General Agreement of Indemnity, among Alexander & Baldwin, LLC (formerly known as Alexander & Baldwin,
Inc.), Kukui`ula Development Company (Hawai`i), LLC, and DMB Communities LLC, in favor of Safeco Insurance
Company of America, dated August 30, 2006 and entered into September 5, 2006 (incorporated by reference to Exhibit 10.1
to Alexander & Baldwin, Inc.’s Form 8-K dated September 5, 2006 (File No. 000-00565)).
(vii) Mutual Indemnification Agreement, among Kukui`ula Development Company (Hawai`i), LLC, DMB Kukui`ula
LLC, DMB Communities LLC, and Alexander & Baldwin, LLC (formerly known as Alexander & Baldwin, Inc.), dated
114
August 30, 2006 and entered into September 5, 2006 (incorporated by reference to Exhibit 10.2 to Alexander & Baldwin,
Inc.’s Form 8-K dated September 5, 2006 (File No. 000-00565)).
(viii) Credit Agreement between Alexander & Baldwin, LLC (formerly known as Alexander & Baldwin, Inc.), First
Hawaiian Bank, Bank of America, N.A. and the other lenders party thereto, dated as of June 4, 2012 (Exhibit 10.2 to
Form 8-K, dated June 4, 2012).
(ix) First Amendment to Credit Agreement by and among Alexander & Baldwin, LLC, Grace Pacific LLC, Alexander
& Baldwin, Inc., A&B II, LLC, Bank of America, N.A., and First Hawaiian Bank, dated December 18, 2013 (Exhibit
10.a.(xvi) to Alexander & Baldwin, Inc.’s Form 10-Q for the quarter ended March 31, 2015).
(x) Second Amended and Restated Credit Agreement by and among Alexander & Baldwin, LLC, Grace Pacific LLC,
Alexander & Baldwin, LLC, Series R, Alexander & Baldwin, LLC, Series T, Alexander & Baldwin, LLC, Series M,
Bank of America, N.A., First Hawaiian Bank, and other lenders party thereto, dated September 15, 2017 (Exhibit 10.1
to Form 8-K, dated September 19, 2017).
(xi) Joinder Agreement, by Alexander & Baldwin, Inc., dated November 8, 2017, to Second Amended and Restated
Credit Agreement, dated September 15, 2017, among Alexander & Baldwin, LLC, Grace Pacific LLC, Alexander &
Baldwin, LLC, Series R, Alexander & Baldwin, LLC, Series T, Alexander & Baldwin, LLC, Series M, Bank of America,
N.A., First Hawaiian Bank, and other lenders party thereto.
(xii) Amended and Restated Credit Agreement, dated December 10, 2015, among Alexander & Baldwin, LLC, Grace
Pacific LLC, Bank of America, N.A., and other lenders party thereto (Exhibit 10.a.(xvii) to Form 10-K for the year ended
December 31, 2015).
(xiii) Amended and Restated Note Purchase and Private Shelf Agreement among Alexander & Baldwin, LLC (formerly
known as Alexander & Baldwin, Inc.), Prudential Investment Management, Inc. and the other purchasers party thereto,
dated as of June 4, 2012 (Exhibit 10.1 to Form 8-K, dated June 4, 2012).
(xiv) Modification to Amended and Restated Note Purchase and Private Shelf Agreement among Alexander & Baldwin,
LLC, Alexander & Baldwin, Inc., Prudential Investment Management, Inc. and the other purchasers party thereto, dated
as of September 27, 2013 (Exhibit 10.a.(xviii) to Alexander & Baldwin, Inc.’s Form 10-Q for the quarter ended September
30, 2013).
(xv) Second Amended and Restated Note Purchase and Private Shelf Agreement among Alexander & Baldwin, Inc.,
Alexander & Baldwin, LLC, Prudential Investment Management, Inc., and certain affiliates of Prudential Investment
Management, Inc., dated December 10, 2015 (Exhibit 10.a.(xx) to Form 10-K for the year ended December 31, 2015).
(xvi) Amendment to Second Amended and Restated Note Purchase and Private Shelf Agreement by and among Alexander
& Baldwin, Inc., Alexander & Baldwin, LLC, Prudential Investment Management, Inc., and certain affiliates of Prudential
Investment Management, Inc., dated September 15, 2017 (Exhibit 10.2 to Form 8-K, dated September 19, 2017).
(xvii) Joinder Agreement, by Alexander & Baldwin, Inc. (formerly Alexander & Baldwin REIT Holdings, Inc.), dated
November 8, 2017, to Second Amended and Restated Note Purchase and Private Shelf Agreement, dated December 10,
2015, as amended, between Alexander & Baldwin, LLC, Alexander & Baldwin, Inc., and the other Guarantors party
thereto, on the one hand, and the Purchasers party thereto, on the other hand.
(xviii) Second Amendment to Second Amended and Restated Note Purchase and Private Shelf Agreement, by and among
Alexander & Baldwin, Inc., Alexander & Baldwin, LLC, Alexander & Baldwin, LLC, Series R, Alexander & Baldwin,
LLC, Series T, Alexander & Baldwin, LLC, Series M, Prudential Investment Management, Inc., and certain affiliates of
Prudential Investment Management, Inc., dated January 8, 2018.
(xix) Limited Guaranty among A & B Properties, Inc., First Hawaiian Bank, Wells Fargo Bank N.A., Bank of Hawai`i,
and Central Pacific Bank, dated as of November 30, 2012 (Exhibit 10.1 to Form 8-K, dated December 4, 2012).
(xx) Completion Guaranty among A & B Properties, Inc., First Hawaiian Bank, Wells Fargo Bank N.A., Bank of Hawai`i,
and Central Pacific Bank, dated as of November 30, 2012 (Exhibit 10.2 to Form 8-K, dated December 4, 2012).
115
(xxi) Note and Mortgage Assumption Agreement, dated January 15, 2013, among U.S. Bank National Association, as
trustee for Morgan Stanley Capital I Inc., Commercial Mortgage Pass-Through Certificates, Series 2006-IQ11, TNP SRT
Waianae Mall, LLC, and A&B Waianae LLC (Exhibit 10.a.(xx) to Form 10 K for the year ended December 31, 2012).
(xxii) Loan Assumption and Amendment to Loan Documents, among PHSC Holdings, LLC, ABP Pearl Highlands LLC,
Pearl Highlands LLC, and The Northwestern Mutual Life Insurance Company, dated September 17, 2013 (Exhibit 10.a.
(xxii) to Form 10-Q for the quarter ended September 30, 2013).
(xxiii) Promissory Note between ABP Pearl Highlands LLC and The Northwestern Mutual Life Insurance Company,
dated December 1, 2014 (Exhibit 10.1 to Form 8-K, dated December 1, 2014).
(xxiv) Mortgage and Security Agreement between ABP Pearl Highlands LLC and The Northwestern Mutual Life
Insurance Company, dated December 1, 2014 (Exhibit 10.2 to Form 8-K, dated December 1, 2014).
(xxv) Term Loan Agreement among Kukui`ula Village LLC, Bank of America, N.A., and the other financial institutions
party thereto, dated as of November 5, 2013 (Exhibit 10.a.(xxviii) to Alexander & Baldwin, Inc.’s Form 10-K for the
year ended December 31, 2013).
(xxvi) Real Estate Term Loan Agreement among Kukui`ula Village LLC, Kukui`ula Development Company (Hawai`i),
LLC, Bank of America, N.A., and the other financial institutions party thereto, dated as of November 5, 2013 (Exhibit
10.a.(xxix) to Alexander & Baldwin, Inc.’s Form 10-K for the year ended December 31, 2013).
(xxvii) Promissory Note by ABL Manoa Marketplace LF LLC, A&B Manoa LLC, ABL Manoa Marketplace LH LLC,
and ABP Manoa Marketplace LH LLC to First Hawaiian Bank, dated August 1, 2016 (Exhibit 10.a.(xxxiv) to Form 10-
Q for the quarter ended September 30, 2016).
(xxviii) Mortgage, Security Agreement and Fixture Filing by ABL Manoa Marketplace LF LLC, A&B Manoa LLC,
ABL Manoa Marketplace LH LLC, and ABP Manoa Marketplace LH LLC to First Hawaiian Bank, dated August 1, 2016
(Exhibit 10.a.(xxxv) to Form 10-Q for the quarter ended September 30, 2016).
(xxix) Limited Liability Company Agreement of Alexander & Baldwin Investments, LLC, dated as of November 8, 2017
(Exhibit 10.1 to Form 8-K, dated November 8, 2017).
*10.b.1. (i) Alexander & Baldwin, Inc. 2012 Incentive Compensation Plan (Exhibit 99.1 to Form S-8 filed on June 29,
2012).
(ii) Amendment No. 1 to Alexander & Baldwin, Inc. 2012 Incentive Compensation Plan, effective as of January 24, 2017
(Exhibit 10.b.1.(ii) to Form 10-K for the year ended December 31, 2016).
(iii) Alexander & Baldwin, Inc. Amended and Restated 2012 Incentive Compensation Plan, as assumed (Exhibit 99.1 to
Post-Effective Amendment No. 1 to Form S-8 filed on November 8, 2017).
(iv) Form of Notice of Stock Option Grant (Exhibit 99.2 to Form S-8 filed on June 29, 2012).
(v) Form of Stock Option Agreement for Executive Employees (Exhibit 99.4 to Form S-8 filed on June 29, 2012).
(vi) Form of Notice of Time-Based Restricted Stock Unit Grant (Exhibit 10.b.1.(iv) to Form 10-K for the year ended
December 31, 2012).
(vii) Form of Time-Based Restricted Stock Unit Agreement for Executive Employees (Exhibit 10.b.1.(v) to Form 10-K
for the year ended December 31, 2012).
(viii) Form of Restricted Stock Unit Agreement for Non-Employee Directors (Exhibit 99.8 to Form S-8 filed on June
29, 2012).
(ix) Form of Restricted Stock Unit Agreement for Non-Employee Directors (Deferral Election) (Exhibit 99.9 to Form
S-8 filed on June 29, 2012).
116
(x) Form of Notice of Performance-Based Restricted Stock Unit Grant (Exhibit 99.10 to Form S-8 filed on June 29,
2012).
(xi) Form of Performance-Based Restricted Stock Unit Agreement for Executive Employees (Exhibit 99.12 to Form S-8
filed on June 29, 2012).
(xii) Form of Universal Stock Option Agreement for Substitute Options-Executive Officers (2007 Plan) (Exhibit 99.13
to Form S-8 filed on June 29, 2012).
(xiii) Form of Universal Stock Option Agreement for Substitute Options (1998 Plan) (Exhibit 99.15 to Form S-8 filed
on June 29, 2012).
(xiv) Form of Universal Stock Option Agreement for Substitute Options (1998 Non-employee Director Plan) (Exhibit
99.16 to Form S-8 filed on June 29, 2012).
(xv) Form of Universal Restricted Stock Unit Award Agreement for Substitute Awards-Executive Officer (2007 Plan)
(Exhibit 99.17 to Form S-8 filed on June 29, 2012).
(xvi) Form of Universal Restricted Stock Unit Award Agreement for Substitute Awards-Non-employee Board Member
(Exhibit 99.19 to Form S-8 filed on June 29, 2012).
(xvii) Form of Universal Restricted Stock Unit Award Agreement for Substitute Awards-Non-employee Board Member
(Deferral Elections) (Exhibit 99.20 to Form S-8 filed on June 29, 2012).
(xviii) Form of Restricted Stock Unit Award Agreement for Substitute 2012 Performance-Based Award-Executive Officer
(Exhibit 99.21 to Form S-8 filed on June 29, 2012).
(xxix) Form of Notice of Award of Performance Share Units (Exhibit 10.2 to Form 8-K, dated January 28, 2013).
(xx) Form of Performance Share Unit Award Agreement (Exhibit 10.1 to Form 8-K, dated January 28, 2013).
(xxi) Form of Notice of Award of Performance Share Units (Exhibit 10.b.1.(xix) to Form 10-K for the year ended
December 31, 2014).
(xxii) Form of Performance Share Unit Award Agreement (Exhibit 10.b.1.(xx) to Form 10-K for the year ended December
31, 2014).
(xxiii) Form of Letter Agreement (Exhibit 10.1 to Form 8-K, dated June 28, 2012).
(xxiv) Alexander & Baldwin, Inc. Executive Severance Plan (Exhibit 10.2 to Form 8-K, dated June 28, 2012).
(xxv) Alexander & Baldwin, Inc. One-Year Performance Improvement Incentive Plan (Exhibit 10.3 to Form 8-K, dated
January 28, 2013).
(xxvi) Amendment No. 1 to Alexander & Baldwin, Inc. One-Year Performance Improvement Incentive Plan, dated July
29, 2014 (Exhibit 10.b.1(xxii) to Alexander & Baldwin, Inc.’s Form 10-Q for the quarter ended September 30, 2014).
(xxvii) Alexander & Baldwin, Inc. Excess Benefits Plan (Exhibit 10.4 to Form 8-K, dated June 28, 2012).
(xxviii) Amendment No. 1 to the Alexander & Baldwin, Inc. Excess Benefits Plan, effective as of March 1, 2013 (Exhibit
10.b.1(xxiii) to Form 10-Q for the quarter ended March 31, 2013).
(xxix) Alexander & Baldwin, Inc. Deferred Compensation Plan for Outside Directors (Exhibit 10.b.1(xxii) to Form 10-
Q for the quarter ended June 30, 2012).
(xxx) Alexander & Baldwin, Inc. Retirement Plan for Outside Directors (Exhibit 10.b.1(xxiii) to Form 10 Q for the
quarter ended June 30, 2012).
117
(xxxi) Amendment No. 1 to the Alexander & Baldwin, Inc. Retirement Plan for Outside Directors, effective as of March 1,
2013 (Exhibit 10.b.1(xxvi) to Form 10 Q for the quarter ended March 31, 2013).
(xxxii) Letter Agreement, dated October 22, 2009, between Alexander & Baldwin, LLC (formerly known as Alexander
& Baldwin, Inc.) and W. Allen Doane (incorporated by reference to Exhibit 10.b.1(lxxii) to Alexander & Baldwin, Inc.’s
Form 10-K for the year ended December 31, 2009).
(xxxiii) Retention Agreement, dated July 10, 2017, between Alexander & Baldwin, Inc. and Paul K. Ito (Exhibit 10.1 to
Form 8-K, dated July 10, 2017).
(xxxiv) Amendment to Retention Agreement, dated December 20, 2017, between Alexander & Baldwin, Inc. and Paul
K. Ito.
(xxxv) Executive Employment Agreement, dated July 10, 2017, between Alexander & Baldwin, Inc. and James E. Mead
(Exhibit 10.2 to Form 8-K, dated July 10, 2017).
*All exhibits listed under 10.b.1. are management contracts or compensatory plans or arrangements.
21.
Subsidiaries.
21. Alexander & Baldwin, Inc. Subsidiaries as of February 1, 2018.
23.
Consent.
23.1 Consent of Deloitte & Touche LLP dated March 1, 2018.
23.2 Consent of KKDLY LLC dated March 1, 2018 - Kewalo Development LLC.
23.3 Consent of KKDLY LLC dated March 1, 2018 - The Collection LLC.
31.1 Certification of Chief Executive Officer, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32. Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
95. Mine Safety Disclosure.
99.1 Financial Statements of Kewalo Development LLC as of and for the years ended December 31, 2015 and 2014.
99.2 Financial Statements of Kewalo Development LLC as of and for the years ended December 31, 2017 and 2016.
99.3 Financial Statements of The Collection LLC as of and for the years ended December 31, 2016 and 2015.
99.4 Financial Statements of The Collection LLC as of and for the year ended December 31, 2017.
ITEM 16. FORM 10-K SUMMARY
None.
118
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
March 1, 2018
ALEXANDER & BALDWIN, INC.
(Registrant)
By: /s/ Christopher J. Benjamin
Christopher J. Benjamin
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant in the capacities and on the dates indicated.
119
Signature
Title
Date
/s/ Stanley M. Kuriyama
Stanley M. Kuriyama
Chairman of the Board
March 1, 2018
/s/ Christopher J. Benjamin
Christopher J. Benjamin
President, Chief Executive
Officer, and Director
/s/ James E. Mead
James E. Mead
Executive Vice President and
Chief Financial Officer
/s/ Clayton K.Y. Chun
Clayton K.Y. Chun
Vice President, Chief
Accounting Officer and Controller
March 1, 2018
March 1, 2018
March 1, 2018
March 1, 2018
March 1, 2018
March 1, 2018
Director
Director
Director
/s/ W. Allen Doane
W. Allen Doane
/s/ Robert S. Harrison
Robert S. Harrison
/s/ David C. Hulihee
David C. Hulihee
/s/ Charles G. King
Charles G. King
/s/ Thomas A. Lewis, Jr.
Thomas A. Lewis, Jr.
/s/ Douglas M. Pasquale
Douglas M. Pasquale
/s/ Michele K. Saito
Michele K. Saito
/s/ Jenai S. Wall
Jenai S. Wall
/s/ Eric K. Yeaman
Eric K. Yeaman
Lead Independent Director
March 1, 2018
Director
Director
Director
Director
Director
March 1, 2018
March 1, 2018
March 1, 2018
March 1, 2018
March 1, 2018
120
CORPORATE INFORMATION
BOARD OF DIRECTORS
Christopher J. Benjamin (54)
President and Chief Executive Officer
ALEXANDER & BALDWIN, INC.
W. Allen Doane (70) 1
Chairman and Chief Executive Officer
ALEXANDER & BALDWIN, INC. (RETIRED)
Robert S. Harrison (57) 3
Chairman and Chief Executive Officer
FIRST HAWAIIAN, INC.
David C. Hulihee (69)
Chairman and President
ROYAL CONTRACTING CO., LTD.
Chief Executive Officer
GRACE PACIFIC LLC (RETIRED)
Charles G. King (72) 2, 3
Managing General Partner
KAONOULU RANCH, LLLP
President
KAC LAND, INC.
Former Owner, President and Dealer Principal
KING AUTO CENTER
Stanley M. Kuriyama (64)
EXECUTIVE MANAGEMENT
Christopher J. Benjamin (54)
President and Chief Executive Officer
Meredith J. Ching (61)
Executive Vice President
External Affairs
Nelson N.S. Chun (65)
Executive Vice President
Chief Legal Officer
James E. Mead (58)
Executive Vice President
Chief Financial Officer
Lance K. Parker (44)
Executive Vice President
Chief Real Estate Officer
Pike B. Riegert (52)
President
GRACE PACIFIC LLC
TITLES AND AGES AS OF MARCH 2, 2018
Chairman and Retired Chief Executive Officer
ALEXANDER & BALDWIN, INC.
INVESTOR INFORMATION
Thomas A. Lewis, Jr. (65) 2
Chief Executive Officer
REALTY INCOME CORPORATION (RETIRED)
Douglas M. Pasquale (63) 1, 3
Founder and Chief Executive Officer
CAPSTONE ENTERPRISES CORPORATION
Chairman and Chief Executive Officer
NATIONWIDE HEALTH PROPERTIES, INC. (RETIRED)
Michele K. Saito (58) 2
President
DTRIC INSURANCE COMPANY
Jenai S. Wall (59) 2
Chairman and Chief Executive Officer
FOODLAND SUPER MARKET, LTD.
Eric K. Yeaman (50) 1
President and Chief Operating Officer
FIRST HAWAIIAN, INC.
1
AUDIT
Douglas M. Pasquale, Chairman
2
COMPENSATION
Charles G. King, Chairman
3
NOMINATING AND CORPORATE GOVERNANCE
Robert S. Harrison, Chairman
TITLES AND AGES AS OF MARCH 2, 2018
Alexander & Baldwin, Inc. was founded in 1870. A&B’s corporate headquarters are
located in Honolulu, Hawai'i. Its common stock is traded on the New York Stock
Exchange under the symbol ALEX.
Shareholders with questions about A&B are encouraged to write to Alyson J. Nakamura,
Vice President and Corporate Secretary. Shareholders who wish to communicate
with any or all members of the Board of Directors may send correspondence to A&B’s
headquarters, c/o A&B Law Department, 822 Bishop Street, Honolulu, HI 96813.
Inquiries from professional investors may be directed to:
Suzy P. Hollinger
Vice President, Investor Relations
Phone: (808) 525-8422
E-mail: shollinger@abhi.com
Corporate news releases, the annual report and other information about the Company
are available at A&B’s website: www.alexanderbaldwin.com
Transfer Agent & Registrar
Computershare Shareowner Services
For questions regarding stock certificates or other transfer-related matters,
representatives of the Transfer Agent may be reached at 1-866-442-6551 between
9 a.m. and 7 p.m., Eastern Time, or via: www.computershare.com/investor
Correspondence may be sent to:
Computershare
PO BOX 505000 Louisville, KY 40233-5000
Overnight Correspondence:
Computershare
462 South 4th Street, Suite 1600 Louisville, KY 40202
Auditors:
Deloitte & Touche LLP
Honolulu, Hawai'i
822 Bishop Street Honolulu, Hawai‘i 96813 p (808) 525-6611 f (808) 525-6652 alexanderbaldwin.com