Maui Lease And Kaka'ako Occupancy Will Drive Resilience Despite Challenges

Key Takeaways

• Strategic real estate and lease agreements bolster revenue growth, future earnings, and strengthen net margins through optimized rental income and equity investment opportunities.
  
• Operational streamlining and focus on Hawaii exhibit resilience and adaptability, ensuring steady earnings and effective response to macroeconomic uncertainties.
  
• Macroeconomic uncertainty, tenant lease contingencies, tariffs, and market conditions in Hawaii may limit growth, revenue, and predictability of net earnings.

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 transfer of a 5-acre lot at Maui Business Park to a self-storage developer through a 75-year ground lease provides immediate recurring FFO of nearly $0.01 per share for 2025 and offers an opportunity for equity investment in the self-storage development, potentially enhancing future revenue growth and earnings.
  
• Improvements in the CRE portfolio performance with same-store NOI growing by 4.2% for the quarter, driven by increased occupancy rates such as Kaka'ako Commerce Center reaching 95.6% leased occupancy, are expected to positively impact revenue and earnings.
  
• The execution of 42 leases with strong leasing spreads of 10.2% is likely to sustain revenue growth and enhance net margins over time by optimizing rental income from properties.
  
• Streamlining of business and cost structure, as evidenced by a reduction in G&A expenses by 3.4% compared to the previous year, could lead to enhanced net margins and overall earnings improvement.
  
• The company's strategic focus on Hawaii and adaptation to macroeconomic uncertainties through measures like pre-purchasing construction materials suggests potential resilience in maintaining steady earnings and protecting net margins amid market fluctuations.

Alexander & Baldwin Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Alexander & Baldwin's revenue will decrease by 8.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 27.6% today to 26.5% in 3 years time.
• Analysts expect earnings to reach $48.1 million (and earnings per share of $0.75) by about May 2028, down from $65.0 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 38.5x on those 2028 earnings, up from 19.1x today. This future PE is greater than the current PE for the US REITs industry at 24.4x.
• 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 6.57%, as per the Simply Wall St company report.

Alexander & Baldwin Future Earnings Per Share Growth

Risks

• The company acknowledges macroeconomic uncertainty affecting the overall market, which could impact leasing activity and tenant stability, affecting future revenues and net margins.
  
• Potential issues related to the resolution of tenant lease contingencies could result in reversals of occupancy gains, affecting future earnings and cash flow.
  
• The impact of tariffs and rising construction costs could increase project expenses and reduce overall operational margins, potentially impacting net earnings.
  
• Uncertainty in the real estate transaction market in Hawaii may hinder external growth opportunities, limiting revenue growth and future earnings potential.
  
• Reliance on favorable resolutions of contingencies and one-time joint venture income for land operations raises concerns about the consistency and predictability of net earnings.

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 2028, revenues will be $182.0 million, earnings will come to $48.1 million, and it would be trading on a PE ratio of 38.5x, assuming you use a discount rate of 6.6%.
  
• Given the current share price of $17.04, the analyst price target of $21.0 is 18.9% 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.