Hawaii Market Will Sustain High Occupancy Amid Rising Costs

Key Takeaways

• High occupancy, steady rent growth, and strong asset management support durable revenue gains in a supply-constrained Hawaii market with premium rents.
  
• Streamlined operations, strong balance sheet, and selective development position the company for increased earnings and opportunistic growth.
  
• Heavy reliance on Hawaii and tourism, fading lease tailwinds, rising redevelopment costs, and allocation risks threaten long-term revenue growth and profitability.

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.

• Hawaii's persistent population growth, urbanization, and tight land-use restrictions continue to drive high occupancy (Q2 portfolio occupancy ~95.8%) and steady rental growth, creating a durable competitive advantage as demand outpaces supply-supporting ongoing revenue and net operating income (NOI) growth.
  
• Significant redevelopment and build-to-suit activity (adding over 150,000 sq. ft. of GLA by 2027 with $3.8M in anticipated stabilized NOI) positions the company to capture rising demand for industrial and necessity-based retail, while limited land availability in Hawaii ensures these new assets command premium rents, positively impacting long-term earnings.
  
• Streamlined operations and ongoing resolution of legacy land obligations are freeing up cash flow, lowering run-rate costs, and increasing operational efficiency, which directly benefits net margins and AFFO.
  
• Strong active asset management, as evidenced by consistently positive leasing spreads (Q2 blended lease spreads of 6.8%) and enhanced tenant quality, is expected to drive further revenue growth and margin expansion as market rents trend upward in a supply-constrained environment.
  
• A robust balance sheet (net debt/EBITDA at 3.3x, significant fixed-rate debt, and $300M liquidity) provides flexibility for opportunistic acquisitions and accretive development projects, supporting long-term earnings and FFO growth amid stable investor demand for yield-focused, inflation-protected REITs.

Alexander & Baldwin Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Alexander & Baldwin's revenue will decrease by 9.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 32.9% today to 23.3% in 3 years time.
• Analysts expect earnings to reach $40.7 million (and earnings per share of $0.71) by about September 2028, down from $78.5 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 47.0x on those 2028 earnings, up from 17.4x today. This future PE is greater than the current PE for the US REITs industry at 29.4x.
• Analysts expect the number of shares outstanding to grow by 0.17% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.21%, as per the Simply Wall St company report.

Alexander & Baldwin Future Earnings Per Share Growth

Risks

• Alexander & Baldwin is highly reliant on the Hawaiian economy and tourism, which exposes it to potential shocks or prolonged downturns in Hawaii's tourism and local sectors; any weakening in visitation, particularly from international markets, could reduce tenant sales and occupancy, negatively impacting revenue and net margins.
  
• Much of the company's earnings growth in recent quarters has come from favorable market conditions and individual lease renewals rather than persistent lease mark-to-market opportunities, suggesting that long-term same-store NOI growth may decelerate as these tailwinds fade, potentially capping revenue and earnings growth.
  
• Ongoing capital expenditures required to maintain and redevelop older and geographically concentrated assets (e.g., the $20 million TI for Sam's Club) may be underrepresented in AFFO calculations and are likely recurring, putting sustained pressure on net margins and reducing available cash for dividends or growth investments.
  
• Inflation in construction and materials costs, exacerbated by tariffs and supply chain risks, could continue to inflate development and redevelopment expenses for new and existing projects, thereby compressing development yields and reducing net returns on investment over time.
  
• Despite improved leverage metrics, the company's strategy to deploy cash toward growth rather than continued debt reduction may increase risk, particularly if borrowing costs rise due to higher interest rates or market volatility, leading to higher interest expenses and lower profitability.

Valuation

• The analysts have a consensus price target of $21.25 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 $174.8 million, earnings will come to $40.7 million, and it would be trading on a PE ratio of 47.0x, assuming you use a discount rate of 7.2%.
• Given the current share price of $18.79, the analyst price target of $21.25 is 11.6% 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.