Risky Land Sales And Volatile Investments Threaten Financial Stability

Key Takeaways

• Divesting noncore land and episodic sales may impact future revenues and investor trust with fluctuating financial performance.
  
• Initiatives in streamlining and significant capital in internal projects could strain cash reserves and affect short-term margins and balance sheet flexibility.
  
• Strategic growth through acquisitions and internal projects, alongside cost efficiencies and robust tenant demand, strengthens Alexander & Baldwin's market position and financial health.

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.

• The sale of 81 acres of noncore land might signal a strategy to divest less profitable or non-essential assets, potentially impacting future revenue streams if not replaced by higher-yielding investments.
  
• Mention of episodic land sales and the unpredictability of such transactions could lead to fluctuations in financial performance, affecting investor confidence and stock valuation.
  
• Initiatives to streamline the business and cost structure, while potentially improving operational efficiency, may not yield immediate financial benefits or might result in unforeseen expenses, thereby impacting net margins negatively in the short term.
  
• The push toward internal development projects, like the industrial build-to-suit at Maui Business Park and photovoltaic projects, involves substantial upfront capital expenditure, which could strain cash reserves if not managed prudently, affecting the company’s balance sheet flexibility.
  
• The company's focus on recycling capital to make accretive acquisitions amidst wide bid-ask spreads in the market indicates a strategy that might increase exposure to market volatility and risks associated with property valuation, impacting earnings if investments do not perform as expected.

Assumptions

• Analysts are assuming Alexander & Baldwin's revenue will decrease by -5.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 23.8% today to 22.6% in 3 years time.
• Analysts expect earnings to reach $42.3 million (and earnings per share of $0.68) by about October 2027, down from $52.4 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 43.2x on those 2027 earnings, up from 26.4x today. This future PE is greater than the current PE for the US REITs industry at 26.4x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.59%, as per the Simply Wall St company report.

Risks

• The company is seeing more investment opportunities at the top of the funnel, suggesting an ability to grow its commercial real estate portfolio through accretive acquisitions, which can enhance revenue and net margins.
  
• Alexander & Baldwin has made progress in streamlining its cost structure, evidenced by a significant decrease in G&A expenses, which directly contributes to improved net margins.
  
• The successful execution of 47 leases with blended spreads of 7.3% indicates strong leasing momentum and tenant demand in Hawaii, potentially leading to sustained or increased revenue from its commercial real estate operations.
  
• The development of internal growth projects, specifically the industrial build-to-suit at Maui Business Park and 5 photovoltaic projects, are expected to add significant incremental NOI in the near term, bolstering earnings.
  
• A notably strong balance sheet and liquidity position provide the company with the flexibility to support growth and withstand market volatility, which can safeguard earnings against adverse market conditions.

Valuation

• The analysts have a consensus price target of $21.0 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 2027, revenues will be $187.2 million, earnings will come to $42.3 million, and it would be trading on a PE ratio of 43.2x, assuming you use a discount rate of 6.6%.
• Given the current share price of $19.06, the analyst's price target of $21.0 is 9.2% 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.