Efforts To Raise Occupancy And Streamline Costs Will Aim To Boost Revenue, But Analysts Predict Declining Earnings

Key Takeaways

• Focus on lease renewals and occupancy improvements in industrial and retail assets aims to boost revenue and NOI growth.
  
• Strategic land sales and debt management position the company for financial stability and growth through acquisitions and investments.
  
• Heavy reliance on a Hawaii-focused strategy and challenges with occupancy and refinancing could impact revenue growth due to geographic and market risks.

Catalysts

Alexander & Baldwin, Inc. (NYSE: ALEX) (A&B) is the only publicly-traded real estate investment trust to focus exclusively on Hawai'i commercial real estate and is the state's largest owner of grocery-anchored, neighborhood shopping centers.

• Alexander & Baldwin is focused on improving their revenue by increasing occupancy in their industrial portfolio and securing timely renewals and new leases in retail assets, which should drive up revenue and same-store NOI growth.
  
• The company is actively pursuing development and redevelopment opportunities, including a new build-to-suit at Maui Business Park, which is expected to enhance future revenue streams and potentially bolster earnings in the long term.
  
• Efforts to streamline the business and cost structure, including a significant 12.4% reduction in G&A expenses, indicate potential for improved net margins as operational efficiencies are realized.
  
• The strategic sale of noncore landholdings has allowed the company to reduce carrying costs significantly, which may lead to increased net profit margins and stronger financial performance.
  
• With a strong and flexible balance sheet and no significant debt maturities in 2025, Alexander & Baldwin is well-positioned to pursue accretive acquisitions and investments, potentially leading to improved earnings growth.

Alexander & Baldwin Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Alexander & Baldwin's revenue will decrease by 6.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 26.5% today to 31.4% in 3 years time.
• Analysts expect earnings to reach $61.1 million (and earnings per share of $0.82) by about March 2028, down from $64.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 32.2x on those 2028 earnings, up from 19.8x today. This future PE is greater than the current PE for the US REITs industry at 28.7x.
• Analysts expect the number of shares outstanding to grow by 0.16% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.0%, as per the Simply Wall St company report.

Alexander & Baldwin Future Earnings Per Share Growth

Risks

• The company faces potential challenges related to the leased occupancy rates, which have been slightly volatile, with economic occupancy dropping by 10 basis points. Continued fluctuations in occupancy could impact rental revenue growth.
  
• Rising interest rates and prevailing market conditions may affect refinancing options, impacting net margins due to increased interest expenses on debt if rates are unfavorable.
  
• The forecast for same-store NOI growth is moderate, and the presence of vacancies, particularly in the industrial and office sectors, poses a risk to achieving higher revenue growth in the short term.
  
• The uncertainty around land sales, particularly given the non-core land being smaller and spread out, might impact expected revenues from Land Operations if the market conditions are not favorable for these types of sales.
  
• The heavy reliance on a Hawaii-focused commercial real estate strategy might expose the company to geographic risks, such as economic downturns or natural disasters in Hawaii, potentially impacting overall earnings and revenue streams.

Valuation

• The analysts have a consensus price target of $22.0 for Alexander & Baldwin based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $194.6 million, earnings will come to $61.1 million, and it would be trading on a PE ratio of 32.2x, assuming you use a discount rate of 7.0%.
• Given the current share price of $17.46, the analyst price target of $22.0 is 20.6% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.