Suzy Hollinger - Director of Investor Relations Stan Kuriyama - CEO Chris Benjamin - President and COO George Morvis - Vice President, Corporate Development Paul Ito - CFO David Haverly - SVP of Leasing, A&B Property.

Steve O'Hara - Sidoti & Company.

Good day, ladies and gentlemen, and welcome to the Third Quarter 2014 Alexander & Baldwin Earnings Conference Call. My name is Kim and I'll be your operator for today. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session.

(Operator instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Ms. Suzy Hollinger, Director of Investor Relations. Please proceed..

Thank you, Kim. Aloha, and welcome to Alexander & Baldwin's third quarter 2014 earnings call. On the call with me today are Stan Kuriyama, Chairman and CEO; Chris Benjamin, President and COO; George Morvis, Vice President, Corporate Development; and Paul Ito, Senior Vice President and CFO.

Also with us today is David Haverly, A&B Property's Senior Vice President of Leasing, who will participate in the question-and-answer portion of the call.

Before we commence, please note that statements in this call and presentation are not historical facts 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 relative forward-looking statements.

Factors that could also cause actual results to differ materially from those contemplated statements include, without limitation, those described on Pages 19 to 32 of the company's 2013 Form 10-K. These forward-looking statements are not guarantees of future performance, and we do not undertake any obligation to update our forward-looking statements.

Management will be referring to non-GAAP financial measures when discussing results for the quarter. In particular, we will be referring to net operating income when discussing leasing segment results and EBITDA when discussing Grace Pacific's performance.

Included in the appendix of today's live presentation slides is a statement regarding our use of these non-GAAP measures and required reconciliation. Slides from this presentation are available for download at our website, www.alexanderbaldwin.com. Slide 3 provides an agenda for today's presentation, after which we will take your questions.

We'll start with Stan, who will comment on results and review highlights..

Thank you, everyone, for joining us this afternoon. As noted in our release, the company earned $0.21 share in the third quarter. Our real estate businesses performed well, generating operating profit of $24 million in the quarter, a 49% increase over last year.

These results together with earnings from Grace Pacific drove the increase in consolidated net income in the quarter, despite incurring a significant loss in agribusiness that we previously forecasted. Turning to recent highlights, we continue to see positive sales activity at our development projects across Hawaii.

At The Collection condominium project in urban Honolulu, we've sold under binding contract nearly 80% of the 450 units released to date and we commenced site work construction two weeks ago. In September, we closed the Kahala Avenue home and we currently have two additional lots and a separate home in escrow under binding contracts.

Strong year-to-date sales at Kukui'ula on Kauai have nearly depleted our built inventory, leaving us with only a few built homes for sale. As a result, we are in the midst of another round of home building activity at the project.

Sixteen homes are now under construction, and we are in active planning and design on another 54 units of varying styles and price points. Sales activity at our Maui Business Park project is accelerating.

The County of Maui purchase of a 4.1-acre site for slightly over for $7 million is scheduled to close this week and Chris will provide additional detail on the positive momentum that's building at the project.

Leasing continues to perform well, posting $12 of operating profit in the third quarter, an 8% increase compared to the third quarter of last year. The portfolio also generated $19 million of NOI in the quarter, a 9% increase over last year.

And finally in July we invested $24 million in a 12 megawatt solar facility, the largest such facility in the state. The facility was placed in service in September and compliments our very successful 6 megawatt solar facility that we completed on Kauai in December 2012.

Paul will be describing the somewhat complicated tax and book implications of our investment, but the bottom line is that the cash flow and return characteristics of this investment are very attractive. A few words now on the Hawaii economy.

Hawaii's tourism industry continues to performance at a very high level and is on pace to surpass last year's record for arrivals and tourism expenditures. The hotel industry also experienced record high year-to-date average daily rates and revenue per available room. Construction continues its upward trend.

The value of statewide construction permits grew 16% year-to-date through September, compared to last year. Tourism together with the strengthening construction sector is driving improved performance across the broader Hawaii economy.

Unemployment for example, at the end of September was 4.2%, compared to 4.7% last September, which is notable given that Hawaii’s labor force grew 3% to a record 666,000 employees in September. Bankruptcy filings through September were down 18% compared to the same period last year.

Foreclosures declined by 40% in the third quarter and debit and credit card same-store sales activity increased 8% in the quarter. Year-to-date through September, the median and resale price for an Oahu single family home was $670,000 and $350,000 for a condominium. Both were up 5% for the period, compared to the same period last year.

In September, days on market were very low at 19 days for homes and 23 days for condos. Oahu retail vacancy remained low at 4.3%, while asking rents increased 4% for the third quarter compared to last year. Vacancy for industrial space was 2.2% for the third quarter and asking rents increased 2% compared to last year.

Although office occupancy slipped slightly in the quarter, rents improved by 3.2%. And with that, I’d like to now ask Chris to update you on our real estate and agribusiness operations..

Thanks, Stan and good afternoon to everyone on the call. As Stan indicated, our real estate segments are performing well and were beginning to realize the benefits of the robust development pipeline we've built and the strategic moves we've made to migrate the portfolio to Hawaii.

We're particularly excited about the recent sales activity and construction progress at our development projects and the NOI growth in our commercial portfolio. Starting on Oahu, our two urban high-rise projects in Honolulu are progressing very well.

Construction is winding down at Waihonua, the landscape in [Izzan] (ph) and interior finishes are almost complete. We received our Certificate of Occupancy for the building last week and expect to close the bulk of the units in January.

As a reminder, this project was completely sold out under binding contracts in August 2013 at an average price of $727 per square foot. As we wrap up one high-rise project, we're pleased to be starting the next. Construction of the collection began in mid October following strong pre-sales of the tower and loft units.

We've binding contracts for 79% of the 450 units released for sale at an average price of $765 per square foot. Still to be released early next year are the 14 townhome units. We finalized our capital stack for the collection and we executed the construction loan documents last week.

Hawaiian Dredging, the contractor for our Waihonua project has been retained also for the collection and has begun site work. Total development cost including land are expected to be in the range of $600 to $650 per square foot. We anticipate construction taking about two years with deliveries of units in late 2016 to early 2017.

At our Kahala Avenue portfolio on Oahu, one home closed in the third quarter, bringing the total units sold to date to 13 and total gross revenue to $60.9 million. We have three additional properties in Escrow including two lots that comprise of 1.5 acre street-to-beach parcel and a separate non-oceanfront home.

When these three sales closed later this year and I should point out that they are all now under non-binding, I am sorry, under binding contracts, we will have sold 16 of 30 Kahala lots and 45% of our acreage in just six quarters. We're very pleased with this pace and the pricing we've achieved.

The remaining land available for sale is disproportionately comprised of higher value oceanfront parcels. Turning to Kauai, year-to-date sales activity at Kukui'ula has been strong.

So far we've closed 11 sales including four lots averaging about $1.8 million, four cottages averaging about $2.7 million, a bungalow and two custom homes, one for $7.2 million and another for $6.1 million. These sales have been generated by a combination of our own vertical development program and relationships with third party builders.

In addition to these 11 closings, we have binding contracts for 10 additional units, a cottage and a lot that both will close later this month and two bungalows and six villas that will be completed and sold next year. Our success this year has created what we consider a high-class problem, limited remaining inventory.

Fortunately there are 16 homes currently under construction through various initiatives and we're launching an expanded vertical development program that will bring an additional 54 homes to market within the next few years. This brings to 70, the number of homes either under construction today or planned for construction.

Continued progress in attracting third party builders to Kukui'ula could expand this number even further. A great example of a partnership with a third party at Kukui'ula is our popular club villas development joint venture with East West Partners.

We quickly sold out the first six homes earlier this year at an average price of $4.5 million and expect to launch sales of the next seven units within the next couple weeks. These seven additional homes are included in the unit count I provided on the previous slide.

Transitioning now to Maui, we closed in July the sale of a 6.4 acre hotel zone parcel in the Wailea resort for $10.6 million, which is pictured on this slide. We're seeing growing interest from third party developers and other parcels within the project and continue to advance the approvals for our own 70 unit condominium project on the MF-11 parcel.

It's labeled here as Keala 'O Wailea, the name of the project. After a lengthy regulatory approval process, we expect to begin marketing and presales in early 2015. At Maui Business Park, we're extremely pleased by the County's purchase of -- the County of Maui's purchase of 4.1 acres -- of a 4.1 acre site for $7.1 million.

The sale is scheduled to close this week, but the county sale is only one of several active transactions at Maui Business Park. As anticipated, the development of Maui's first target store at Maui Business Park on a parcel that we sold last year is creating a significant pull to the park.

In addition to the County sale, we have four contracts in Escrow, covering 18 acres and in various stages of buyer due diligence. Turning now to our commercial portfolio on Slide 21, our portfolio produced $19.1 million of NOI in the third quarter, a 9.1% increase over the third quarter last year.

Performance benefitted from the net expansion of the portfolio through Hawaii retail assets acquired in 2013, primarily in September and December last year, an improved performance from our Mainland office properties this year. NOI for the first three quarters of 2015 was 15.2% higher than last year.

Now due to the timing of the 2013 acquisitions, both NOI and operating profit growth moderated in the third quarter and will further moderate in the fourth quarter with growth in the fourth quarter about half of the level of third quarter growth. The company continues to project full year 2014 NOI growth of between 12% and 14%.

Over 75% of total portfolio NOI for the quarter came from Hawaii assets, that's up from 45% when we separated from Matson, reflecting the significant progress we've made in migrating the portfolio to Hawaii. We believe this migration has resulted in a substantial overall improvement in the quality and strategic value of the portfolio.

Our Kailua Town investment, the largest of our 2013 commercial acquisitions, is performing well, and we’re achieving targeted rent renewal increases, representative of the trends we're seeing across our portfolio.

Turning to Slide 23, agribusiness posted an operating loss of $7.3 million in the third quarter, bringing the total Ag operating loss for the nine months ended September 30 to $3.8 million.

The loss principally reflects lower sugar prices and higher cost per ton of sugar sold, as poor weather conditions have resulted in lower forecasted full year production. It's difficult even with less than two months left in the harvest to predict full year results accurately due to the many factors that can impact production levels.

However, as a result of continued weather challenges over the past few months, including the impacts of three hurricanes that discarded Hawaii, we're now expecting our full year agribusiness loss in 2014 to be at the high end of the $6 million to $9 million range we had previously provided.

With that, let me turn the call over to George to discuss Grace..

Thanks, Chris and for a strong second quarter, Grace's performance moderated in the third quarter to $7 million of adjusted operating profit and $9 million of earnings before interest taxes, depreciation and amortization or EBITDA.

These results were primarily due to lower material sales and paving volumes, caused by a slower than anticipated pace of jobs released by the city and county of Honolulu and by weather related impacts that lowered the number of available paving days.

The city did not award a single paving bid in the third quarter and it now looks like most of the work originally slated to be put out for bid by the city in the second half of 2014, will not see bid solicited until the first quarter of 2015. Grace's long-term outlook remains very positive.

Its consolidated backlog at the end of September, was $236 million, 8% higher than at the end of 2013.

As a reminder, the city paving work referenced before has been fully budgeted, but only half of the city's $120 million paving budget for the fiscal year ended June 30, 2014, has been put out for bid and all of its $132 million paving budget for its fiscal year ending June 30, 2015 remains to be bid.

With that, I’ll turn it over to Paul Ito to talk about financial matters.

Paul?.

Thank you, George. Stan covered earnings and the primary drivers earlier, so let me start with our balance sheet on Slide 26, where we compare our balance sheet at the end of September to the balance sheet at the end of 2013.

Debt decreased from year-end due to a January repayment of a $60 million bridge loan for the Kailua portfolio acquisition, but was partially offset by investments in working capital, principally related to the production of sugar in aggregate as well as continued investment in our real estate development projects.

As of September 30, our debt to debt plus equity ratio was 36%, a two percentage point decline from the end of 2013.

Turning to the next slide, through September 2014, our growth capital investments totaled $80 million, most of which was for growth capital related to the solar tax equity investment that I'll discuss in a moment, active real estate projects, joint ventures, and Grace with the remainder for maintenance capital.

Although it is always difficult to predict the size and timing of the placement of additional capital we are continuing with our evaluation of various investment opportunities. In the third quarter, the company made a $23.8 million tax equity investment in a 12-megawatt solar farm on Kauai which we refer to as KRS II.

This investment will provide us with after tax cash returns significantly exceed our 10% to 15% hurdle rate for renewable energy investments. As you can see from the slide on a cash basis through September we have recovered more than $13 million and expect to recover over 60% of our initial investment by year-end.

By the end of 2015 nearly all of our remaining investment will be recovered resulting in very quick payback. Post 2015 we will continue to receive cash benefits from the KRS II investment as shown on the slide. Although the cash benefits to date are $13 million, under GAAP we required about $5 million in net benefits.

Because the majority of the return from the investment is through tax benefits we are reducing our book investment basis as we recognize the tax benefits.

Noncash carrying value reductions are recorded above the line in the reduction in KRS II carrying value line item of the income statement while tax benefits are reflected in the income tax expense benefit line item. Book income impacts in future years will be contingent upon the timing and amounts of KRS II income and distributions.

With that, let me now turn the call over to Stan for closing remarks..

Thank you, Paul. Both the Hawaii economy and the company are performing well and there remains room for continued growth on both fronts. We're particularly pleased by the increase in sales activity at our development projects across the state and we hope to be able to announce the close of several sales in the fourth quarter.

We continue to expand our pipeline by investing in both near and long-term development projects. Our commercial portfolio is performing well and the integration of our 2013 acquisitions is proceeding smoothly.

Although Grace Pacific's year-to-date EBITDA has been somewhat lower than expected, Grace has generated strong operating cash flow for A&B and our long-term outlook for Grace remains very positive for the reasons George noted earlier.

In Agribusiness we are guiding toward a $9 million full year operating loss for this segment due to continuing inclement weather. However, we price 20% for 2015 crop at relatively attractive levels. So if we are able to make our full-year production targets 2015 could be a much better year.

As always though, pricing and production uncertainty make it very difficult to forecast future results particularly at this early point in the process. And that concludes our presentation this afternoon and we'll now be happy to answer your questions..

(Operator Instructions) Okay your first question comes from the line of Steve O'Hara from Sidoti & Company. Please proceed..

Hi good afternoon..

Hey Steve. .

Just I guess I had a question about, you know maybe what you're seeing in terms of the Japanese Yen, has there been any, have you seen any discernible change in terms of may be overall demand on the Hawaiian economy there and I'm just wondering it sounded like construction was kind of expected to pick up this year and it seemed like Yuhiro hadn’t seen maybe what they expected, but it sounds like 2015 should be a better year.

I'm just wondering your thoughts on that?.

I think we agree 2015 should be a better year for construction. There are a number of projects on the drawing boards and permitted and expected to start next year. So I think that's good news. And as far as the Japanese are concerned the recent weakening of the Yen has been too recent to really have an impact yet on tourism.

The tourist numbers from Japan have been favorable. We haven’t seen too much of decline in tourism throughout the year. But I guess it does remain to be seen what a sustained weak Yen would have on tourism.

Clearly the Japanese tourists do look at exchange rate when making their travel decisions and so in the past we've seen some impact, but year-to-date it has been good for Japan and it is actually too early to tell what future impacts may be. Investment activity from Japanese has been good Steve.

You know they've of course always invested in commercial and high-end residential properties and we see that trend continuing through 2014..

Okay, thank you..

(Operator Instructions) Your next question comes from the line of Steve O'Hara from Sidoti & Company. Please proceed..

Hi thanks for the followup. I think there was some phone issues earlier, so maybe people got cut off.

Could you just talk maybe about what you're seeing in the neighbor island, is the demand there for maybe single-family residential? You know it seems like prices are still good maybe in Oahu, but maybe what you're seeing in volumes and maybe what gets us to the next leg of the construction or maybe the next level to the economy from maybe single family home construction at some point, when would, maybe you see that happening?.

Yes Steve, this is Chris.

So first of all I'm assuming that you are focused more on the primary residential market?.

Yeah, yep..

Yeah. We're seeing certainly on Maui and we've done some market research lately on Maui because we have as you know Kihei and Hali’imaile we've got stuff in the pipeline in the primary residential market. And we're actually quite encouraged by what we see in terms of demand and projected pricing improvement in the market.

So I think that the market should be strong over the next several years with construction activity increasing. Right now I think the construction activity on Maui is probably a little bit, certainly Maui Business Park is busy. There is activity there, but as far as primary residential I don't think it is real active.

So I think it, I do expect that it will pick up. I don't know how it will pick up related to supply capacity and how much that will drive pricing or construction costs up. But it certainly should drive construction activity up as we're seeing a fair amount of unmet demand on Maui for primary presidential product..

I think Steve with respect to Oahu, you know we obviously have the high rise construction. We have commercial construction that is occurring and will continue to take place. There is a lot of work for example being done at our Fillmore shopping center.

The next level of construction that will really occur is when the large suburban residential projects on this island start.

And as you know there are about four or five of these large projects slated for future development in west Oahu and central Oahu and it's going to be those projects I think that will take construction to sort of the peak levels of performance..

Okay..

I mean the other good thing I should mention that has happened and will continue to take place over the next several years is a light rail project. I mean that's a $5 billion plus construction project for the state and that obviously will have a material impact as well..

Okay, and then I don’t know if you have any more in queue, but I guess maybe on the leasing side, just maybe you could talk about what opportunities maybe you're seeing or just kind of your appetite to continue to move the mainland portfolio to Hawaii and maybe what you're seeing in terms of valuation to make that more or less attractive at this point?.

So, why don’t I start that Steve and then I'll hand it to David to add some more color. First of all we continue to have appetite in Hawaii, but we've been very clear about the fact that we're going to do it. We don't have targeted pace or a timeline for getting the rest of the portfolio migrated to Hawaii.

So it's really going to be driven by where we seek good return opportunities for returns that are superior to what we have on the mainland. That doesn’t necessarily mean higher cap rate buys in Hawaii than what we're selling on the mainland.

It sometimes made even a lower cap rate, but better growth potential and greater value-added potential over time and so that's the kind of stuff we're focused on and we're looking at a number of opportunities, nothing that we've hit on yet this year. We obviously had a very busy year last year.

We still have appetite, but it will happen when it happens and we're not going to force it. And David if you want to talk a little bit maybe about cap rates and specific asset classes that we're interested in..

Sure. Steve, now we continue to be very interested in the retail market in Hawaii and we’re continuing to see strong cap rates on that side.

Recently we’re seeing cap rates running probably from 4 to mid 5 cap rate on retail projects and you know for various industrial project you’ve seeing probably somewhere between 5 to maybe an 8 cap range on that side.

As Chris mentioned we continue to look at all asset classes for acquisitions in Hawaii and we’re very pleased with our acquisitions in 2013 and the results we have been having from those..

Okay, all right thank you and then just, I guess one more and then I’ll jump off if maybe you get somebody else. In terms of the condo market I mean it seems like you guys have gone after more of the local market rather than maybe the premium market where it’s a foreign buyer or luxury buyer.

And maybe you could talk about you know maybe the competition you have in that market and maybe why it you chose it? And then finally, on the ground leasing portfolio, you know when did the ground leases start to come up? Is there any, you know is it just gradual over time or is there any kind of peak or value there in terms of when those come up? Thank you..

Okay, Steve this is Chris. I’ll answer the first question and then let David talk about the ground leases.

Yeah, we are very happy to be in what I'd call the segment of the condo market that we are in and it wasn’t by accident that we targeted the price point in the market that we are targeting 75% of our sales at Hawaii Honolulu were to local buyers and 85% of our sales in the Collection so far have been to local buyers, so we’re less dependent on offshore buyers.

And obviously it feels good to be providing quality housing for local buyers. Having said that, the decision was really driven by the fact, that we saw the greatest depth in the market, in the price range that we’re in. We had units starting at $350,000 at the Collection and that going up you know peaking at right around $1 million.

But the bulk of them in probably the $600,000 - $700,000 range and we just felt that the depth of that market was significantly greater.

We have a little bit of competition in that segment, but most of the product right now is either the higher end product that’s targeting probably disproportionally more offshore buyers and then some affordable projects and so we don’t. We’re very confident in the Collection, our ability to sell out the rest of the units there.

We don’t feel that we've got a tremendous amount of competition. We think that it’s a price point that is very much needed, so we’re very happy with where we are and then I'll let David talk about ground leases..

Hi, Steve..

Hi..

On the ground leases our neighbor island urban commercial portfolio we have a pretty regular rollover of ground leases. But maybe not the higher level of increase in rents or values that we’ll see, that you’d find on the Kailua portfolio that we acquired.

For that portfolio we’re seeing probably larger value increases in the land which drives the rental income that we get from it. But those are more sporadically laid out over next probably three to five years and we'll see several of those leases come up for renewals.

And several over the next, between three to ten years will actually expire and we have the opportunity to potentially take those leases back..

Okay, and with the ground leases in terms of the, just and I’m sorry, did you talk about you know in terms of the larger ones when they come up? Oh no, I am sorry..

So generally for the Kailua portfolio they all kind of range between probably a three to five-year kind of a time frame for rent reopenings and then probably on longer term three to ten years for lease expirations and they vary in size..

Okay, great. All right, thank you..

Thanks Steve..

Thank you, Steve..

Okay, ladies and gentlemen, that concludes our question-and-answer session. I will now turn the conference back over to Suzy for closing remarks..

Thanks, Kim. Many of you were at NAREIT today and couldn’t be on the call, so if you need to follow up with me or if you have any questions regarding the presentation and the earnings release that was made today, please call me at 808-525-8422. Thank you..

Ladies and gentlemen that concludes today's conference. Thank you for your participation. You may now disconnect and have a great day..