Suzy Hollinger - Director of Investor Relations Chris Benjamin - President and Chief Executive Officer Paul Ito - Senior Vice President and Chief Financial Officer George Morvis - A&B Vice President Corporate Development Lance Parker - President of A&B Properties.

Steve O’Hara - Sidoti & Company Sheila McGrath - Evercore.

Good day, ladies and gentlemen, and welcome to the 2016 Second Quarter Earnings Conference Call. My name is Ashlee, and I will be your operator for today. At this time, all participants are in listen-only mode and later we will conduct a question-and-answer session.

[Operator Instructions] I’d now like to turn the conference over to your host for today, Suzy Hollinger, Director of Investor Relations. Please proceed..

Thank you, Ashless. Aloha and welcome to Alexander & Baldwin’s second quarter earnings call. On the call with me today are Chris Benjamin, President and CEO, and Paul Ito, Senior Vice President and CFO. Joining us for the Q&A portion of the call are George Morvis, A&B Vice President Corporate Development, and Lance Parker, President of A&B Properties.

Before we commence, please note that statements in this call and presentation 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 relevant forward-looking statements.

Factors that could cause actual results to differ materially from those contemplated in the statements include, without limitation, those described on pages 17 to 29 of the Company’s 2015 Annual Report on Form 10-K and in other subsequent filings with the SEC.

These forward 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 today.

Included in the appendix of today’s presentation slides is a statement regarding our use of these non-GAAP financial measures and required reconciliation. Slides from this presentation are available for download at our website, www.alexanderbaldwin.com.

We will start with Chris, who will comment on recent performance highlights and provide an update on operations. Paul will follow with a discussion of the quarter financial performance and metrics. Chris will then return for closing remarks and to open it up for your questions.

Chris?.

Thank you, Suzy, and good afternoon to our listeners. I'm pleased to report continued progress with our primary strategic initiative of expanding our Hawaii commercial portfolio. The signs of our success are evident both in our quarterly performance and our outlook for the year and beyond.

We continue to make progress in increasing the portfolio's value and the level of recurring income and cash it produces. For the quarter as compared to 2015, leasing operating profit was up 6.5% and occupancy remained high at 94%. NOI increased by 4.2% in the quarter. We are increasing our full-year 2016 NOI guidance from 2% to 3.4% growth.

We continue to expect strong same-store growth in Hawaii in 2016. The first element of our Hawaii investment strategy is of course the ongoing migration of our Mainland capital back to the islands through 1031 exchanges.

During the quarter, we completed three Mainland commercial property dispositions to fund our January acquisition of Manoa Marketplace. On a go-forward basis, our Hawaii commercial assets will now generate over 85% of our total portfolio NOI, up from just 40% when we began the migration a few years ago.

Both the pace and the quality of the migrations have far exceeded our original expectations and we now have just seven commercial properties remaining on the Mainland with a book value of about $145 million. We are actively seeking additional Hawaii acquisition opportunities, but will continue to be patient and wait for good ones.

We won’t chase deals just to place capital. We've talked about the other levers we're pulling in order to expand our Hawaii commercial portfolio including repositioning of the existing assets, redevelopment and build for hold development. We believe that we can expand in this manner at attractive returns on cost.

While we're early in this process, on slide 5, we are presenting, for the first time, a listing of recently completed and in process development and repositioning efforts.

Three projects, Gateway at Mililani Mauka South, which was recently completed, the Pearl Highlands food hall and the Lau Hala Shops in Kailua are expected to add a combined $3 million to $3.5 million of annual NOI at a cost of $30 million over the next two years.

Now admittedly this list starts off modest, but I believe it will grow in the near future as we plan to allocate additional capital to repositioning and redevelopment opportunities in our portfolio as well as additional build for hold developments.

An example of a small build for hold development is the 18,400 square-foot expansion of the Gateway at Mililani Mauka South office complex. This new freestanding medical office building sits on an undeveloped parcel that we acquired when we bought Gateway South in June 2012 and it takes advantage of strong regional demographics.

Liberty Dialysis will occupy roughly 80% of the new building with a physical therapist occupying another 5%. In June, the asset shifted from development in progress into the commercial portfolio thereby doubling the size of the Gateway South commercial property. It is expected to produce a stabilized 13% yield on cost of $16 million.

We are also excited to be moving forward with construction in the fall of the food hall at Pearl Highlands Center. A rendering is shown on this slide. We are investing $2.6 million in the project and expect stabilized returns on costs of between 10% to 12%.

Results of leasing efforts so far for this space have been strong with signed LOIs for 60% of the space at rents substantially above existing rents.

Now, admittedly, this is a small deal, but I'm excited about it because it will provide great dining options for local residents, it is expected to draw increased traffic to the center when it opens in the first quarter of 2017 and will generate a nice return for the company.

Also in June, we began renovation of the former Kailua Macy’s building to transform it into the Lau Hala Shops. The project will add 48,400 square feet of leasable area to our commercial portfolio when it's completed in late 2017 and several new retail and dining options are expected to open in early 2018.

We've executed LOIs with restaurants and retailers for 87% of the available space. We look forward to announcing tenants soon. We plan to invest approximately $21 million in the redevelopment of the space and expect incremental NOI of between $1.9 million and $2.4 million when stabilized with returns on costs of between 9% and 11%.

With the greatly expanded Hawaii portfolio we are identifying more and more opportunities along the lines of the three I’ve just described. I hope to have more to report on similar initiatives as the year progresses.

In addition to the Mainland dispositions, proceeds from – which were used to fund – to reverse fund the Manoa Marketplace acquisition, development sales in the quarter included five joint venture unit sales at Kukui'ula and Ka Milo. Construction activity at Kukui'ula continues to be positive though sales have been more modest so far this year.

There is tremendous activity at the project with 26 developer homes under construction and importantly 14 member homes also being built. This level of member construction is a positive sign and the energy level in the community is quite high.

We are positioned well for the summer selling season as we have a wide array of lots and built product available or under construction. During the quarter, two sales closed at Kukui'ula and we also had two new binding contracts. The table on slide 9 shows sales progress for the year-to-date.

You will note that there are seven units under binding contract that we expect will close this year. Moving on to Maui, presales of the companies 70-unit Keala O Wailea joint venture project located at the Wailea Resort on Maui have been steady. To date, 43 units have been pre-sold under binding contract at an average price of $1.1 million.

Construction has commenced and the company expects to begin delivering units in late 2017. Also on Maui, interest in our affordable product at Kamalani has been very high and there is a waiting list for certain product types.

We continue to work through Maui counties process of qualifying buyers for homes and will provide a further update next quarter. Site work is proceeding on schedule. Shifting to materials and construction, this segment's financial performance was significantly suppressed by delays in paving activity primarily as a result of bad weather.

Rain out days quadrupled in the quarter compared to last year's second quarter causing tons paved to drop by about 25%. Obviously, in a high fixed cost business, this kind of volume impact has a disproportionate impact on earnings.

The segments outlook, however, continues to be quite positive with $72 million of new project wins in the second quarter and of course the slower pace of paving in the quarter creates a backlog of paving jobs increased 18% to $267 million at the end of June, so there's a significant backlog of work to keep our crews busy and improve our results going forward.

As I mentioned on our last call, we continue to pursue opportunities to invest in renewable energy projects in Hawaii. In June, we invested $15.4 million in Macquarie Infrastructure Corporations Oahu solar projects comprising two photovoltaic facilities totaling 6.5 megawatts located in central Oahu.

The project is expected to be placed into service by the end of the third quarter of 2016 and Paul will be describing the tax and book implications of our investment, which are similar to the accounting for our KRS II solar farm investment.

Although you will note book write-downs of the investment in the quarter, the cash flow and return characteristics of the investment are very attractive. We also made good progress in agribusiness during the quarter.

We're roughly halfway through the final sugar harvest, but we are on budget so far and still expect our original operating performance guidance to hold true.

Meanwhile sugar cessation-related losses are lower than originally projected and, as a result, we are improving our full-year guidance for cessation costs by $15 million to $20 million reducing the expected cessation costs down to $75 million to $90 million.

We remain very focused on facilitating the smooth transition for our employees and I am pleased to report good progress on that front so far.

In diversified ag, we continue to pursue the initiatives that I laid out on our last call, including a grazing trial, evaluating the merits of leasing land for large-scale ranching operations and energy crop trials. With that, let me turn the call over to Paul to discuss our financial performance..

Thanks, Chris. On slide 16, we have a snapshot of second quarter results. The company reported a net loss of $700,000 or $0.01 per diluted share. These results include a $10.5 million after-tax loss or $0.21 per diluted share for the agribusiness segment principally due to cessation costs.

Our leasing segment’s operating profit and cash flow performance showed continued strength in the quarter. Leasing operating profit for the second quarter was $14.8 million, a 6.5% increase compared to the second quarter of 2015 and NOI was $22.3 million, a 4.2% increase.

The improvement in operating profit and NOI was principally attributable to the timing of acquisitions and dispositions. Occupancy remains stable at 94% quarter-to-quarter and quarter-over-quarter.

Development and sales operating profit was $5 million in the quarter and included the three commercial property dispositions to fund the January acquisition of Manoa Marketplace as well as the sales of five joint venture units.

Operating profit from development and sales in the second quarter of 2015 was $14.3 million and primarily included the sales of three Kahala properties and a 2.4-acre parcel at Maui Business Park. Materials and construction contributed $4.9 million of operating profit in the second quarter compared to $7 million for the second quarter of 2015.

EBITDA was $7.8 million compared to $9.7 million for the second quarter of 2015. Performs declined due principally to a decrease in tons paved due to delays primarily caused by weather partially offset by increased material sales margin and quarry efficiency gains.

While we are well-positioned to make up some of that work over the next several months if the weather cooperates, the abnormally wet weather pattern experienced in the second quarter has continued into July.

The agribusiness segment reported a pretax operating loss for the second quarter of $19.9 million, which included $18.5 million of sugar cessation related expenses. Agribusiness operating losses were $1.4 million compared to $4.7 million in the second quarter of 2015.

The loss from agribusiness operations was lower in the second quarter of 2016 compared to last year due to higher raw sugar margins principally resulting from lower production costs. On slide 18, we have our balance sheet at the end of the quarter and at the end of 2015.

Our debt to debt plus equity ratio increased 2 percentage points since the end of last year primarily due to the investments in Oahu, the commercial portfolio and ongoing development projects. On slide 19 is our debt maturity schedule and as you can see maturities are well laddered.

Early next week we will borrow $60 million on a secured basis for a 13-year term loan at a fixed interest rate of 3.135% under a swap arrangement. This borrowing will effectively fund the repayment of $35 million of secured debt maturing later this year.

These actions will increase our weighted average maturities to approximately six years with only a negligible increase on our weighted average cost of debt. Moving on to slide 20, we invested $127 million of gross investment capital in the first half of 2016 of which $82 million was for the Manoa Marketplace acquisition.

Additionally, $38 million went to investment capital including the Oahu solar farm investment, active real estate projects and joint ventures and repositioning opportunities in the portfolio. In addition to this investment capital, $10 million was for maintenance capital.

For the balance of the year, we are projecting an additional $146 million in gross capital expenditures primarily for ongoing repositioning and development projects and undesignated investment in new projects.

We also have $19 million remaining as a placeholder for commercial property acquisitions, which we anticipate will be funded through tax-deferred exchanges. As in past years, our budget includes capital for opportunistic investments, the size and timing of which of course is unpredictable.

As Chris mentioned, the company made a $15.4 million tax equity investment in two solar farms on Oahu totaling 6.5 megawatts, which we refer to as [indiscernible]. We expect that this investment will provide us with after-tax cash returns consistent with the low double-digit returns we target for renewable energy investments.

As most of our returns comes in the form of state and federal tax benefits, our actual investment returns will be dependent upon our actual cash tax appetite. We expect to recover nearly all of our investment by the end of 2017 resulting in a very quick payback. Post 2017, we will continue to receive modest cash benefits from the investment.

From a book perspective because the majority of the return from the investment is through tax benefits, we are reducing our book investment basis as we record the tax benefits.

Carrying value reductions are recorded above the line in the reduction in solar investments line item of the income statement while tax benefits are reflected in the income tax expense benefit line. In the second quarter of 2016, we recognized about $8.7 million in tax benefits, which offset the carrying value reductions of $8.7 million.

Book income in tax in future periods will be contingent upon the timing and amount of income and distributions. With that, let me turn the call back to Chris for closing remarks..

Thank you, Paul. You know we've mentioned a couple of times the weather and so it's probably worth noting that tropical storm Darby came through over the weekend, but we have no lasting effects or any property damage as a result of it.

We did lose a couple days of paving and harvesting at Grace and HC&S, but the sun is out and those operations are back in full swing. So I just wanted to mention that. In closing, I've indicated that I feel very good about the advancement of our strategy.

The signs of progress are most evident in the leasing segment as we expand our portfolio, but there is progress across the board.

We sometimes take for granted of projects like The Collection for example where most of the units have been sold out for well over a year and we then just have that minor detail of building the building and delivering a quality project.

But let me tell you, that’s no small task to complete that buildout especially given all the other construction projects in urban Honolulu competing for resources, but our team is getting it done and getting it done very well. We are excited about delivering a great product and a great value to a mostly local buyer pool later this year.

There are myriad other ways in which we are dancing the ball on a daily basis, both strategically and operationally. And since these calls are not sufficient for conveying that progress, we are planning an Investor Day in New York this fall and will be providing more information about it in the coming weeks.

It will be an opportunity to expand on our strategic direction, update you on our execution of that strategy and discuss how it's likely to evolve over time as we seek to accelerate value creation. So we are looking forward to that opportunity to engage with you in the fall.

As a final note, I should point out the Hawaii economy continues to perform at a high level providing a positive environment for growth and we've included a number of slides in the appendix to this presentation to summarize Hawaii's key economic indicators.

That concludes our presentation this afternoon and we will be happy to take your questions now..

[Operator Instructions] Your first question comes from the line of Steve O’Hara of Sidoti & Company. Please proceed..

Hi, good morning..

Hey, Steve..

Hi. Can you just – in terms of the – I know the real estate sales was light in the first quarter and may seem like you picked up in the second quarter.

I'm just wondering, I mean, it seems like most of them were at kind of JV units or whatever, but I'm just wondering how you feel about the outlook for the real estate sales? I mean it sounds like some of the commentary on residential demand and commercial demand seem pretty good and I'm just wondering if you – you think you are in the right place there and maybe a little more color would be great? Thanks..

Thanks, Steve. This is Chris, I will start and then I will let Lance elaborate. I feel very good about the fundamentals. I feel very good about where the economy is. I think the real estate markets generally are favorable. I also feel very good about the product that we have.

Of course we’re sold out of the tower units The Collection, we could probably be selling more of those right now, but we have other good inventory in residential product on several islands. So I feel good about what we are offering. As you know real estate sales are a bit episodic.

They go up and down and it has been a little bit of the wall this year, but I do think, as I said, that we are well-positioned going forward and I remain optimistic that we will have new sales and then of course very importantly, we will be closing all the sales at The Collection this fall and that's going to be a significant driver of performance in the fourth quarter.

So, overall, I feel good, but I do at acknowledge that it's been a little bit slower year to date then maybe we would have expected. I don't know if I left you anything to elaborate on, Lance, but go ahead..

Hi Steve, this is Lance. The thing I had Chris is just that we acknowledge the slower first quarter.

I’d say that over the last few months, we’ve certainly seen a pickup in demand and I think by way of example just in July alone, we had three closings at Ka Milo, we’ve secured a nonbinding contract for a lot at Maui Business Park as well as for one of our parcels in Kahala. So, again, I'm hoping for stronger second half performance..

Okay. And then just on the improved NOI forecast, what was the prime driver of that? Is it just kind of improved rents that you are seeing? I didn't see that in the release, maybe I missed it..

Really the biggest driver of that has been just sort of strong same-store performance for our retail segment here in Hawaii. So it’s a combination of slightly higher rents as well as quicker renewals and that is really what’s driving that guidance..

Okay. And then just finally on the – maybe the solar investment. Energy costs have come down I guess in a general, maybe not as much in Hawaii, have the returns declined in those of investments or they pretty much the same as they were a few years ago? Thank you..

Steve, it is George. I think it’s fair to say that both the returns have declined, but also the risk have declined as the technologies becoming much more proven. And so, we are still getting attractive risk adjusted returns on our marginal investments in that space and as a portfolio we are still very pleased with the level of returns overall..

Okay, thank you, very much..

[Operator Instructions] Your next question comes from the line of Sheila McGrath from Evercore. Please proceed..

Yes, good morning.

Chris, I was wondering if you could give us a little bit more color on what was driving the improved guidance on the ag cessation cost?.

Sure, I'd be happy to, Sheila. So, on the cessation costs there really are two components.

One is actual costs incurred – sort of cash operating costs incurred as part of the shutdown or cessation process and that has to do with clearing off fields that we are not going to harvest and getting them ready for diversified ag uses and some other things that are true operating costs that we had budgeted at a certain level.

The other component is just book non-cash expenses related to impairment of the equipment and facilities and the like and we've actually had sort of better than expected results on both sides.

We’ve had lower costs associated with some of that – clearing those fields and repositioning the lands for diversified ag and then we've also had and are projecting lower book impacts.

We were very conservative in terms of our estimation of residual value for assets and as a result we had projected a certain amount of depreciation during the year to take assets down to their realizable value.

As we've gone through the process of engaging auction houses and looking at how we can dispose of some of these assets, we've increased our expectation of residual values and that means that we take down our depreciation level for the year. So the combination of those two factors drove the improvement in cessation costs. .

Okay, great.

You think you're still comfortable that next year would be break even from the ag segment?.

Yeah, so let me answer that in two ways. One is to talk about next year and one is to talk about going forward. Next year there could be some variability. There could be – frankly – we are guessing at sort of residual values.

If we do a little better on dispositions of assets next year, we could have some modest gains from that, if we don't depreciate the assets enough this year, we could have some modest losses.

So I want to caveat that next year could have some modest one-time impact that could swing it positive or negative, but as a general rule we are projecting something in the range of breakeven starting next year. But next year itself could be a bit of an anomaly based on the things I just referenced.

Going forward after that, we would expect to straddle breakeven and the unpredictable parts – some of the parts are very predictable in terms of -- some of the carrying costs and what we expect to get from rent and that sort of thing, but some parts are a little bit less known now and mostly they relate to the level and pace of diversified ag activity that we have.

We've made it very clear that we’re not going to be putting significant amounts of money into diversified ag, but there could be some things that get going that at least in the near-term require some start up costs and R&D. Some of that could drive modest losses, but at the same time, we could have better than expected rent of land.

So I'm just going to say we’re going to straddle breakeven going forward most likely and as we get better clarity on our diversified ag plans, we will be able to give more guidance..

Okay, great. And then just moving to the commercial real estate part of the portfolio, could you give us a little bit of information on what the cap rates were on the mainland dispositions and how those compared to your expectations on those sales? That’s the first part of the question.

And the second part is we know you didn't by anything in Hawaii this quarter, but if Lance might touch on if there is any transactions in the marketplace that you might not have pursued, what kind of rate on the strip centers, any notable transactions so that we could kind of look to as a price check..

Sure. Sheila, I'm actually going to have Lance address both of those. The cap rate question, and the Mainland and then the Hawaii question as well..

Yeah. Hi, Sheila. So to the first question in terms of Mainland dispositions, so we sold three office buildings to reverse fund the majority of the Manoa acquisition.

The cap rates for two of those office buildings were at 6.2% and then the third was slightly higher than 9% on a cap rate basis and that was driven primarily by the downsizing of a tenant perceptively as well as some rolls in the next couple of years.

And then to compare that to sort of market here, there really weren't any major trades in Q2 that we could point to, I guess maybe the best comparison might be Manoa itself and that was at a 5.3 cap just to give you an idea of sort of expectations on purchase cap rates here in the states.

And then prior deals I think we’ve provided some indication on really sort of high performing core retail acquisitions sometimes sub-5..

Okay, two more quick questions. Lance, you mentioned Maui Business Park that you have a parcel under contract.

I was wondering if you could – how big is that parcel and is that a third quarter event or a fourth-quarter event?.

I'm going to punt on that a little bit, Sheila. Typically, we don't report out on nonbinding contracts, so that was really just to provide some context to some of the activity that we are seeing. But ones that goes binding, we would be prepared to provide a little bit more guidance on that..

Okay. And then last question is, Chris, you guys have made a lot of progress in terms of certainly the disclosures on those renovations is really helpful and now you're 85% of Hawaii NOI, I'm just wondering what the update thought process is on lead conversion. That was always kind of one of the kind of hurdles to get more of the portfolio in Hawaii.

Just wondered if that is something that’s – if there is any new kind of dialogue on that or – give us an update on that..

So I would say more than new, I would just say ongoing evaluation. I mean I think that we’ve made it very clear that there are a couple of primary, I guess, historically impediments to going down a REIT path. One has been the very eclectic nature of the portfolio and the fact it has been spread across the Mainland.

And so to your point, yeah, we've done I think a great job, frankly much better than I think we could have hoped over the last few years in not only growing the portfolio, but having it be more concentrated in Hawaii largely in retail assets. And so I think from that standpoint, we have a much more attractive story.

But the other thing as you know is that we have significant parts of our business that are not readable if you will. They are obviously not re-qualifying activities and so there remains the question of how do you fund those and how do you continue to pursue those? Because those are not activities that we would want to abandon.

And so, we do continue to evaluate the options there. We have a lot of questions that would have to be resolved related to how we continue to support those non-businesses REIT business, but we are continuing to look at it.

We have advisors that have helped us over the years and we will continue to look at it, so I would just summarize by saying I think we are making great progress in some of the areas that would be prerequisites to being a REIT, but we still have areas that we have to evaluate in terms of the viability of such a structure..

Okay great, thank you..

There are no more questions at this time. I will now turn the call back over to Suzy Hollinger for any further remarks..

Thanks, Ashlee. Thanks everyone for being on the call today. If you have questions, you can call me at 808-525-8422. Thank you and have a nice evening..

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a great day..