Suzy Hollinger - Director, IR Chris Benjamin - President and CEO James Mead - CFO Paul Ito - SVP, Finance and Treasurer Lance Parker - President, A&B Properties.

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

Good day, ladies and gentlemen, and welcome to the 2017 Second Quarter Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this call is being recorded.

I would now like to turn the conference over to your host for today, Suzy Hollinger, Director of Investor Relations. You may begin..

Thank you, Sonya. Aloha, and welcome to our call today to discuss Alexander & Baldwin's second quarter 2017 earnings. With me today are our President and CEO, Chris Benjamin; Jim Mead, CFO; and Paul Ito, Senior Vice President, Finance.

Lance Parker, A&B Properties' President will be joining us as well and will participate in the Q&A portion of the call.

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.

These forward-looking statements include, but are not limited to, statements regarding the potential advantages, benefits and impact of and opportunities created by converting to a REIT, and to expected future dividends to shareholders.

Such forward-looking statements are subject to certain risks, uncertainties and assumptions, including prevailing market conditions.

Additional factors that could cause actual results to differ materially from those contemplated in the forward-looking statements include, without limitation, those described on page 13 to 24 of the company's 2016 Annual Report on Form 10-K and in other subsequent filings with the SEC, including the Form S-4 for Alexander & Baldwin REIT Holdings, Inc.

that was filed with the SEC on July 14th, 2017. 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 during our call today.

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

Chris will open up today's presentation with the performance highlights and then turn it over to Jim, who will provide some of his initial thoughts about the company as he takes the reins as CFO. Jim will be followed by Paul, who will discuss financial performance, and then we'll open up for your questions.

With that, let me turn the call over to Chris.

Chris?.

Thank you, Suzy. Good afternoon to our listeners, and thanks for being on the call. On our last quarterly earnings call, I discussed our ongoing strategic transformation, including the growth of our commercial real estate portfolio and the increase in recurring income streams it generates.

I'm excited about the tremendous progress we've made toward that goal and we continue to pull levers that add value to the portfolio.

We also are building momentum as we monetize more of our development pipeline through sales of both existing inventory and select development parcels and we're working to improve the performance of our Materials & Construction business. The Hawaii economy continues to perform well, providing a supportive backdrop for our operations.

In addition, we were excited to announce just a few weeks ago, our REIT conversion, an important milestone in our company's evolution. And to help with that transition, we've added great talent to our Board and management team.

Well, I will defer to Paul to cover the numbers later in the call, our Commercial Real Estate segment had an excellent quarter with a 4.7% increase in same-store NOI over last year's second quarter.

Paul will describe some reallocation of and increases in G&A expenses that occurred as a result of our continuing shift to focus on Commercial Real Estate. These changes did impact the operating profit comparison for the Commercial Real Estate segment, but the underlying performance is excellent.

Our Hawaii retail portfolio performed well, especially Kailua Town, producing strong same-store NOI growth. Hawaii retail re-leasing spreads for the quarter were remarkable at over 35%, thanks in large part to an anchor lease renewal with Regal Cinema at Pearl Highlands Center, where we're investing $3 million in Regal's upgrades.

If you exclude the Regal lease, Hawaii retail re-leasing spreads were still 10.5% for the quarter. So, still very strong even without the Regal lease. Because of the size of the portfolio, large deals do have a disproportionate effect on spreads.

Although, we are pleased with this quarter's results, we wouldn't expect to see these kinds of spreads on a recurring basis. We're probably looking at full year re-leasing spreads that are closer to the -- just over 13% we achieved in the first quarter. Underlying this performance is continued strengthen in the broader Hawaii market fundamentals.

The number of jobs in the state has increased over the last six years and at the same time, unemployment has declined to below 3%. This has driven steady growth in personal income and retail spending, which are not only supporting retail tenant performance, but also performance of our industrial tenants.

In addition, we benefit from our location in the middle of the Pacific, which helps insulate our retail portfolio from some of the negative impacts that are plaguing the retail sector on the mainland, including, of course, Internet shopping.

Adobe, whose software runs under many retail websites, analyzes data on billions of website visits to create its digital price index, a real-time snapshot of online consumer spending. Analysts there studied digital shopping patterns over the one year period ended February 2017.

At a state level, they measured the growth in total e-commerce spending as well as the online spending per person, which is depicted on this slide. As you can see, Hawaii is an outlier and we think that's at least partly due to the transit times and cost of shipping to Hawaii and the cost of returns if there's no physical store in Hawaii.

Alaska, which is shown in the pink dot just below Hawaii, is very similar to us in these regards. This is not to say that we'll never be impacted by these factors, but this chart suggests there may be some structural barriers to Internet sales penetration in Hawaii.

Notwithstanding the tight Hawaii labor market, we've been successful in hiring experienced talent to nearly complete our in-house asset management and leasing teams. We've brought the property management functions for all of our Oahu properties in-house and we're on track for our neighbor island properties to be transitioned before year end.

We've always prided ourselves on the management of our properties and we've been supported by strong local third-party property managers over time. With our expanding scale, however, we feel that bringing these activities in-house made sense and we're very pleased with the results so far.

We've made good hires in building our internal leasing capability as well and have increased the velocity of leasing since we started migrating the leasing function in-house in the first quarter.

We think the direct connection between property management, leasing, and tenants will ultimately result in an enhanced and uniform tenant experience, allowing us to attract and retain the best tenants in order to grow NOI.

In redevelopment and development for hold, construction of the food court at Pearl Highlands is coming to completion and the space will be turned over to tenants later this month. Regal Cinema will complete its upgrades by year end.

Lau Hala Shops construction in Kailua remains on track for delivery to tenants early in 2018, with store openings expected by mid-2018. Planning and permitting for Ho'okele Shopping Center advanced during the quarter as did leasing activities. We continue to evaluate an advance planning also for other new projects to add to this list.

These investments will drive direct NOI growth and enhance the overall customer experience. Lastly, in Commercial Real Estate, we acquired the 73,300 square foot Honokohau Industrial Center in June for $10.1 million, which was funded entirely with 1031 exchange proceeds from non-income generating assets.

As we said at the time, this quality property currently has tenants in 94% of the available space. Now, beyond the progress in Commercial Real Estate, we monetized a few Land Operations assets during the quarter and more recently, sold 290 acres of vacant land on Maui for $8 million or about $28,000 an acre.

We've been working on monetization of development units and parcels and have 115 units and a half acre parcel that are binding and in escrow, totaling nearly $116 million in gross sales. This slide shows the status of sales at Kukui'ula and at Keala O Wailea on Maui.

I have to say I was at Kukui'ula last week and saw the latest construction progress both in vertical construction on homes and the development of some new lots that we're preparing on the far western end of the property and it looks absolutely spectacular. I think we're in a good position for continued sales there the balance of this year.

Before leaving development for sale, let me provide a brief update on Kamalani. As you may know, we're building the 170-unit first increment of the project to provide important affordable housing to Maui's workforce.

We've noted strong sales activity at the project over the last few months, with 21 new bound contracts received since March for a total of 47. Based on the current construction schedule, 34 closings are anticipated by the end of 2017. These closings won't generate significant income due to the affordable nature of the units.

However, we will receive affordable housing credits that can be used for development of market units on Maui. Going forward, we may seek partners to develop the market units at this project. Switching gears to Materials & Construction, I'm pleased to report improved performance for the quarter.

We were able to mobilize our crews to place over 60% more hot mix pavement than last year despite continued weather impacts.

We continue to see margin compression from competitive pricing pressures and expect that it will impact segment results for the remainder of this year, but we're taking actions to improve those business elements we can control and are focused particularly on reducing costs, increasing paving volumes, and winning paving bids.

We also are implementing performance improvement plans that were developed in conjunction with FMI Group, a leading industry consulting specialist; that we expect will enhance communications, coordination, efficiency, and cost effectiveness, which in turn, will help drive EBITDA growth over time.

So, to wrap-up before I hand it off to Jim, we've had generally good performance so far in 2017 and I feel very positive about our continued strategic momentum. While this particular slide is a bit of a repeat of information we shared on our REIT call last month, I think the information does bear repeating.

We take seriously the challenges and opportunities of becoming a REIT and we recognized that there were a few steps we could take to best position ourselves for success.

The addition of Jim as CFO, Tom Lewis as a Director, and the shareholder friendly changes we're making to our governance practices all reflect our commitment to creating and realizing shareholder value. I want to welcome Jim to his first quarterly conference call and say that we're already benefiting from his extensive REIT experience.

With that, let me turn it over to him to provide some of his thoughts as a newcomer to A&B.

Jim?.

Thank you, Chris, and hello everyone. I'm really excited to be here and I'd like to spend my time today to tell you why. But first, for those of you who don't know me, I've been a REIT CFO for quite a while and in a few sectors; multifamily, hotels, office, street retail, and mezzanine lending.

I've been fortunate that each of these experiences with companies that had a special skill set and uniqueness to fill a complementary spot for investors. I think A&B is equally special and unique. We've great assets and a home field advantage that no one else can replicate. That's why I'm here today.

As you might imagine, I've been drinking from a fire hose over the past three weeks. Nevertheless, I have been able to focus on a few strategically important things that I'd like to give you some thoughts on. First, given the transition the company is making, it is important that we maintain a low-risk approach to the balance sheet.

Thanks to Paul Ito, the balance sheet is in great shape and today, gives me the advantage of mostly long-term fixed-rate debt, a smooth maturity schedule, low leverage, and strong long-term lending relationships. Next, Chris asked me to really drill down on G&A.

I've more to speak about on the coming quarters, but at first glance, if you look at the REIT side of our business as the growth area, I would expect our G&A to evolve over time to become comparable with our REIT peers. More to come on this very important topic.

I'm now well integrated into the investment side of the business here and by way of comparison, I've had experience in very complex capital allocation processes at other REITs. I can tell you that our acquisition team, led by Jeff Pauker, is well founded in judgment and analytical capability.

I know we will be able to show off to you our capabilities in the coming quarters as we grow the Commercial Real Estate side of our business in Hawaii. And not to peek too far into the future, but one of our distinctive advantages is our personal relationships in this marketplace.

So, now with the UPREIT structure, Jeff and his team have an entirely new set of tools to make deals happen. And finally, the REIT announcement was more than just a tax strategy.

I've seen an energetic focus on activities that create value in a way that REIT investors will appreciate in which we are doing to drive total shareholder return for a broader investor base. So, much, much more to come here. Over the next few months, I will be reaching out to many of my friends who were investors in my prior lives.

And what I'd like to ask is that you please watch us closely, because at some point in this retransformation, either now, after our E&P purge when we're added to our REIT index, or as we execute our capital allocation strategy, you will find a time when it becomes important to take a position in us.

I want to thank Paul Ito for helping me in this transition. Paul is really left me in a strong position and I appreciate his support. So, now I'll turn the call over to Paul..

Thank you, Jim. So, turning to slide 16, all segments contributed to improved financial performance this quarter as compared to last year. Diluted EPS from continuing operations available to A&B shareholders was $0.07 per share compared to $0.06 per share last year.

Including after-tax earnings from discontinued HC&S operations, EPS available to A&B shareholders was $0.09 per share compared to $0.01 loss per share last year. The next slide shows segment operating profit and other income and expense items compared to last year.

The reasons for the variances are included in our earnings release and will be detailed in management's discussion and analysis which is included in the second quarter 10-Q that we'll file tomorrow. As a result, I'll focus my remarks on some of the key Commercial Real Estate performance metrics for the quarter.

I'll then update you on our capital structure and our capital plans. One thing to note on this slide that might seem unusual is that Commercial Real Estate operating profit for the quarter declined compared to last year despite the strong CRE segment operational performance.

The reason operating profit decline was primarily due to some changes in cost allocations as a result of the strategic realignment to focus on the growth of our Commercial Real Estate portfolio and earnings as well as the doubling up of certain costs that will continue while we transition property management and leasing in-house and exit existing third-party management contracts.

On slide 18 are some of the key Commercial Real Estate performance metrics for the quarter. Segment performance was largely driven by a 4.7% increase in same-store NOI, notably same-store NOI from the Hawaii retail portfolio was up 5.1%.

Strong same-store performance in the quarter helped drive year-to-date overall same-store NOI growth to 3.3%, in line with the company's guidance of a 3% to 4% increase in same-store NOI for the full year 2017. Chris already discussed leasing spreads which were exceptional at 19.8% for the quarter overall.

With respect to occupancy, overall portfolio occupancy increased 70 basis points to 94.1%, driven by a 140 basis point increase in Hawaii occupancy to 93.8%. And Hawaii portfolio ABRs remained stable at $27 a foot for retail, $13 a foot for industrial, and $28 a foot for office.

As a reminder, our second quarter supplement was posted on our website earlier today and includes more detailed information. Let me move on to our capital structure which remains strong. The debt to debt plus equity was 32.1% and we had $239 million of liquidity available on a revolver at the end of the quarter.

Net debt to EBITDA was 4.6 turns, reflecting relatively low leverage. Our debt metrics for the quarter have been generally consistent over the last two quarters. That, of course, will change in January 2018 with the payment of the special distribution that we discussed at length on our REIT conversion announcement call.

We expect to draw on our revolving credit facility to fund the cash portion of the special distribution. We're also currently working on upsizing our revolver by an additional $100 million in terming out some of our short-term debt on a long-term basis.

Both actions will comfortably allow us to accommodate the special distribution using our revolving credit facility. Slide 20 summarizes our capital expenditures, breaks out growth and maintenance capital spending by segment, and provides our full year capital budget.

We invested $49 million of gross -- growth investment capital in the first half of the year, including $15 million for the acquisition of the Honokohau Industrial Center and repositioning and development for hold opportunities in the commercial portfolio.

Additionally, $34 million went to Land Operations' growth capital, including active real estate projects and joint ventures, which included funding draws under the Keauhou B-note investment and capital for Kamalani. In addition to this growth capital, $6 million was for maintenance capital. Let me now turn the call back to Chris for closing remarks..

Thanks Paul. I'm very pleased with all that we've been able to accomplish so far this year and the momentum we've created going into the second half of 2017.

Our Commercial Real Estate portfolio continues to perform well and we've done a lot of work to position our portfolio for future growth from migrating leasing and property management in-house and evaluating and unearthing acquisition opportunities to advancing redevelopment and development for hold projects.

We've taken the necessary steps to convert to a REIT for 2017 taxable year, which will have multiple benefits to the company on the acquisition front as well as in expanding the investor audience for the stock, which in turn, will create more trading liquidity and should lower our cost of capital.

We've also taken steps in our Land Operations and Materials & Construction businesses to increase cash flow and value for investors. We've positioned several development assets for retail and wholesale monetization and look forward to strategic closings in the quarters ahead.

We also continue to expand diversified agriculture on our former plantation lands and have issued several press releases detailing progress that we're making on that front. Finally, in Materials & Construction, we're taking several steps to enhance performance and drive cash flow.

Going forward, we'll continue to advance implementation of our Hawaii Commercial Real Estate growth strategy and work through the remaining conversion steps and related events we detailed in our REIT conversion announcement presentation, including the holding company merger vote, the special distribution, and our -- ultimately, our election to be taxed as a REIT on our 2017 tax return.

Finally, in closing, I want to say that since we announced the REIT decision, many of you have been calling with questions about how to model NAV for the company. We appreciate that some of our assets are more difficult to value than with other REITs.

To help your analysis and to better define our priorities and the initiatives underway, we'll be holding an Analyst Day including a deep-dive NAV session in New York City on the morning of September 14th. We'll webcast the session, but we'd love to have you in person if you can make it.

If you haven't received to save the date, please contact Suzy, and she can give you the details. That concludes our formal remarks and now I'll open it up for your questions..

Thank you. [Operator Instructions] And our first question comes from Sheila McGrath of Evercore. Your line is now open..

Yes. Good afternoon. The leasing spreads in the quarter were really strong and even stronger for Hawaii.

I'm sorry if I missed this, Chris, but was that a ground lease that got repriced or what was driving the exceptional leasing spreads in Hawaii?.

No, so, these re-leasing spreads are just for our space leases. We did coincidently have a ground lease that renewed at a very favorable spread, but that was not included in these numbers that I cited.

So, the biggest single driver of the Hawaii retail re-leasing spread number of 35% was the Regal Cinema lease, which included a fairly significant TI allowance. So, we also reported -- I've reported in my remarks, if you strip that out, then it was about 10.5% for the Hawaii retail portfolio.

So, still very good and that Regal lease is going to be very, very positive for us..

Okay, great. And then on the income tax line item, well, one, if I did the calculation right, it looks like the rate is high. Number one.

And number two, what -- how should we think about that looking now that you are a REIT in terms of that line item?.

Hey Sheila, this is Paul. So, in terms of the quarter, the income tax rate was a little bit higher because some of the REIT conversion costs are not deductible from a tax perspective and so that is essentially a permanent difference that increases the rate.

And then from a conversion to REIT, we expect that we will reflect the financials of the company under a REIT structure in the fourth quarter. And what essentially will happen is the income tax expense will only relate to the TRS side of the business and there will be a reversal of the income tax related to the REIT.

But those calculations have to be done. So, I can give you an effective rate to use today, but as we get closer and we do those calculations, we'll be able to provide more guidance..

Okay, great. And then if you could just touch on the acquisition pipeline and the prospects for funding any new acquisitions with any Ag land sales that will be great..

Yes, I'll start. This is Chris, and then I'll let Lance jump in. Obviously, these are always hard to predict because acquisitions or dispositions aren't done till they are done, but I'd say, in general, we feel like we have a pretty good pipeline of opportunities that we're pursuing anyway.

And to Jim's point earlier, we certainly will look to do acquisitions as exchanges and probably are -- the first place we would turn for proceeds would be to our mainland portfolio so that we can complete the migration. But also as we have any Ag land sales or other non-income producing land sales, that would be an important resource as well.

But as Jim pointed out, we also believe that the UPREIT structure could be helpful for increasing deal flow. So, those are both positive things. I don't know, Lance, you want to add any particulars or sort of characterize the kinds of opportunities we're looking, but overall, Sheila, I would say that our guys are busy..

Okay. Thank you..

Thank you. [Operator Instructions] And our next question comes from Steve O'Hara of Sidoti & Company. Your line is now open..

Hi, thanks for taking my questions..

Yes, hi Steve..

Hi. Just curious on Max's [ph] recent call, they noted kind of a slowdown in the condo activity. And I'm just wondering I know there was a lot of projects going on.

Can you talk about maybe the reasons for the slowdown? Is it kind of demand has been satiated? Or people may be less active with projects in this late in the cycle or at this stage in the cycle? And maybe just remind us what your exposure there is on that front? Thank you..

Sure. Thanks Steve. I'm not inclined to opine a lot on the reasons for the current -- if you want to characterize that as a slowdown, I don't know that it's a significant slowdown. I think there is a fair amount of inventory in the market.

We made a decision three or four years ago that The Collection would be our last ground-up condo tower in this cycle. Because these cycles do tend to have finite lives and so we just made the decision that Collection would be our last tower.

We did, however, make a financial investment through our B-note structure in one other tower that is still under construction. But that's a relatively -- or actually a very secure position. They have presales that are more than sufficient to cover the construction loan in which we're a participant. So, we feel very good about that investment.

As far as the market beyond that, there has been a lot of units delivered and it's actually been a very, very robust cycle. So, I would say, overall, it's been very good. We just tend not to want to push the back end of the cycle and get overexposed and so we made the decision not to go forward with any more condos in the cycle..

Okay. Thank you. And then just on the REIT conversion and the TRS. Just curious about the ability of the businesses within the TRS to be able to raise capital they need to.

And then, if there was something especially attractive over those businesses to acquire, how does that impact the REIT itself? And is there a limit with the size that these businesses can grow within the TRS?.

Yes, Steve. So, first of all, I think it's important to say that we don't have in our strategic priority list acquisitive growth of any of our TRS businesses. So, we're not looking, for example, for bolt-on acquisitions for Grace. We're not looking to necessarily take down any new large development projects.

We're comfortable with and looking to maximize value from the existing TRS assets. Then to the extent that we have, I'll call them kind of organic add-on opportunities in those projects, whether it's to do some vertical construction and in a development or do a profit improvement program within Grace.

I'm very confident that we have access to the capital necessary to do that. But I would actually expect that we're probably a net monetizer of TRS assets, particularly on the development side over the next few years. So, I don't expect to have to put capital into the TRS businesses..

Okay. And then maybe just finally, [Indiscernible] good performance within the REIT renewals on the leasing portfolio, was that factored in originally into your expectations or did you change your outlook for the NOI growth this year? I don't know if I missed it..

I think it was generally one those leases done and across the finish line. But I would say, it was generally consistent with our expectations. So, I think we're sticking with our full year NOI -- same-store NOI growth of 3% to 4%. I think we're still comfortable with that range..

Okay. All right. Thank you very much..

Thank you, Steve..

Thank you. And we do have a follow-up question from Sheila McGrath of Evercore. Your line is now open..

Yes. On the development sales slide in the deck, it seems like you have a lot of under contract -- under binding contract. And I was just wondering if you could give us any visibility on how much you expect? Is most of that going to close in 2017 or is some of that moving -- will close next year? I think it's $115 million..

Yes. I think most of -- it, not all of it, but most of it is probably scheduled for this year.

Lance, do you want to jump in and provide a little bit more color on that?.

Sure..

One thing, as Lance -- before Lance jumps in, one thing you do have to be very careful of, of course, is a lot of these binding sales are in joint ventures and so you have to -- Sheila, you got to be thoughtful and careful about what -- how that translates into margin for us as a joint venture partner, but, Lance, maybe you can talk about timing..

Yes. No, that's an important qualifier Sheila that Chris just made. But in terms of timing, we look at numbers per development and so going sort of from left to right on the slide, Keala O Wailea. Of the 58 binding presales that we have, we were scheduling for a roughly a third of those to close at the end of this year.

And then the rest would spill over into 2018. Kamalani, we have 47 bound contracts. I'd say, roughly 75% of those are likely to close this year. And then the remaining binding contracts between Ka Milo, Kukui'ula, Maui Business Park, and The Collection are actually all expected to close this year as well..

Okay, great. And then on to the balance sheet quickly. The metrics are all very conservative. I think you had -- you did mention this in mid-July, but the net debt to EBITDA after you pay the E&P moves a little bit higher.

Do you think if that's a metric -- a secondary metric for you because you have so much land and other assets? Or just wanted to know how you are thinking about leverage metrics..

So, -- hey it's Jim..

Hey Jim..

I think of the company as being in this transition and one of the things I'm trying to impress and I think they've embraced is that we don't want financial risk to be a clouding factor in the rest of the story. There's so much potential that will go on in the transition of the company.

So, the question on credit is, I think we want to have a strong credit position with lots of capacity all the time.

Now with the E&P, specifically, I think that in the conference call that was held at the time of the decision to be a common REIT for 2017, it was mentioned that the debt to EBITDA metric would go higher as a result of the E&P distribution. But I'm going to say that, that's also without regard to anything else that goes on in the company.

Other potential liquidity events from other assets in the company. And I think so -- what I heard Chris say in the last call, was similar to what I think as well that it pushes it up into a reasonable range, but higher than -- priced towards the high end of where we're comfortable. And I still think it's a reasonable metric to use.

We do have a lot of capacity for debt on the assets that are not the Commercial Real Estate assets.

But again, when I focus on credit metrics and when Paul and I talked about what is done in the past, we're really focused on the long-term debt capacity of the Commercial Real Estate portfolio because that's what we are focused on and that's what we're growing right now.

So, I think that the metrics may be more conventionally oriented than what you're inferring. So, that's the way we're going to look at it going forward..

Okay, Great. Thank you..

Thank you. [Operator Instructions] And this does conclude our question-and-answer session. I would now like to turn the call back over to Suzy Hollinger for closing remarks..

Thanks everyone for being on the call. I know you'll be lining up in my inbox soon. 808-525-8422. Thanks. Bye..

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day..