Eric Broder Van Dyke/iStock Editorial via Getty Images
Eric Broder Van Dyke/iStock Editorial via Getty Images
I still have a Buy rating for Alexander & Baldwin, Inc. (NYSE:ALEX) stock.
Previously, I outlined ALEX's key catalysts in my earlier update published on November 3, 2023. I assess Alexander & Baldwin's financial performance and management guidance in the current article.
Alexander & Baldwin achieved a +6% core FFO (Funds From Operations) beat for the fourth quarter of 2023, and the company anticipates that its FFO derived from its core Commercial Real Estate business can expand by a reasonably decent +8% in the current year. Taking into account its positive results and guidance, I stick to a Buy rating for ALEX.
Alexander & Baldwin disclosed the company's financial results for the final quarter of the prior year with a press release issued on February 28 after trading hours.
ALEX's operating revenue and core FFO (Funds From Operations) per share declined by -15% QoQ and -6% QoQ to $52.9 million and $0.29, respectively for Q4 2023. It is likely that economic pressures had affected the performance of Alexander & Baldwin's properties in a negative way to some extent. The overall unemployment rate in the US rose from 3.6% last year to 3.7% this year, and this coincided with a -1.6 percentage points contraction in the leased occupancy rate for ALEX's industrial property assets between end-2022 and end-2023.
But it is worth noting that Alexander & Baldwin's Q4 2023 results exceeded the sell side analysts' expectations. ALEX delivered a +8% top line beat for the fourth quarter of 2023, while its Q4 FFO per share was +6% higher than the consensus projection.
Earlier, I mentioned in my early-November 2023 write-up that the "stability of the Hawaiian economy and the company's ongoing cost-control efforts put ALEX in a good position to beat the market's expectations" with regards to its future results. I have been proven to be right.
In its Q4 2023 earnings presentation slides, Alexander & Baldwin cited statistics which show that Hawaii's unemployment rate decreased from 3.7% for 2022 to 2.9% in 2023, in contrast with the increase in the US's unemployment rate during the same period as mentioned above. ALEX also highlighted in its quarterly earnings presentation that the number of people visiting Hawaii grew by +4% in the previous year. These numbers suggest that Hawaii's economy was indeed resilient and performed relatively better than the overall US economy, and this has contributed to Alexander & Baldwin's above-expectations Q4 2023 results.
Separately, ALEX's Selling, General & Administrative or SG&A costs declined from $1.6 million in the fourth quarter of 2022 to $1.4 million for the last quarter of 2023. In other words, Alexander & Baldwin has continued to optimize its expenses to improve its profitability, and this enabled it to report better-than-expected FFO for the recent quarter.
ALEX has guided for the company's core Commercial Real Estate business' FFO per share to grow by +8% from $0.940 in FY 2023 to $1.015 for FY 2024 as per the mid-point of its guidance.
The management's expectations of a high single digit percentage growth in FFO for Alexander & Baldwin's core Commercial Real Estate operations are pretty decent in my opinion. More importantly, I am of the view that ALEX has a number of levers in place to allow it to continue delivering strong FFO growth for the foreseeable future.
With my November 3, 2023 article, I noted that "value-accretive portfolio optimization moves" might be an important growth driver for ALEX in the short to intermediate term.
Alexander & Baldwin's core real estate properties are those in the retail and industrial property segments, and the company has the intention of being more aggressive in monetizing its non-core office assets this year. At its Q4 2023 results briefing, ALEX revealed that it is considering a potential "redevelopment" of its four office properties" to "reposition these assets for higher and better use", or even an outright disposal in 2024.
On the other hand, ALEX shared at the company's recent fourth quarter earnings call that it has "4,000 acres of non-core land" which it "will be opportunistically monetizing" so as to "recycle that (capital) into CRE (Commercial Real Estate) growth opportunities."
Also, Alexander & Baldwin reduced its G&A or General & Administrative expenses by a meaningful 5% for full-year FY 2023. The company noted at its latest quarterly earnings briefing that it has "been identifying ways in which we're able to simplify" its business operations. This implies that there is the potential for the company to enhance its future profitability with further cost cutting.
I continue to use a 20 times P/FFO ratio to value Alexander & Baldwin, just like what I did in my March 7, 2023 initiation piece. A 20 times P/FFO valuation multiple applied to the mid-point of ALEX's FY 2024 Commercial Real Estate business FFO guidance translates into a potential upside of +22% for the stock, which is sufficient to warrant a Buy rating. The company's Commercial Real Estate business FFO guidance is achievable, considering its Q4 2023 results beat and the multiple levers I mentioned in the previous section of the article.