Notes to Consolidated Financial Statements
1. Background and Basis of Presentation
Description of Business: Alexander & Baldwin, Inc. ("A&B" or the "Company") is a fully integrated real estate investment trust ("REIT") headquartered in Honolulu, Hawai‘i, whose history in Hawai‘i dates back to 1870. Over time, the Company has evolved from a 571-acre sugar plantation on Maui to become one of Hawai‘i's premier commercial real estate companies and the owner of the largest grocery-anchored, neighborhood shopping center portfolio in the state. As of December 31, 2022, the Company owns a portfolio of commercial real estate improved properties in Hawai‘i consisting of 22 retail centers, 12 industrial assets and four office properties, representing a total of 3.9 million square feet of gross leasable area; it also owns a portfolio of ground leases in Hawai‘i representing 140.7 acres as of December 31, 2022.
The Company operates in two segments: Commercial Real Estate and Land Operations. A description of each of the Company's reportable segments is as follows:
•Commercial Real Estate ("CRE") - This segment functions as a vertically integrated real estate investment company with core competencies in investments and acquisitions (i.e., identifying opportunities and acquiring properties); construction and development (i.e., designing and ground-up development of new properties or repositioning and redevelopment of existing properties); and in-house leasing and property management (i.e., executing new and renegotiating renewal lease arrangements, managing its properties' day-to-day operations and maintaining positive tenant relationships). The Company's preferred asset classes include improved properties in retail and industrial spaces and also urban ground leases. Its focus within improved retail properties, in particular, is on grocery-anchored neighborhood shopping centers that meet the daily needs of Hawai‘i communities. Through its core competencies and with its experience and relationships in Hawai‘i, the Company seeks to create special places that enhance the lives of Hawai‘i residents and to provide venues and opportunities that enable its tenants to thrive. Income from this segment is principally generated by owning, operating and leasing real estate assets.
•Land Operations - This segment includes the Company's legacy landholdings, assets, and liabilities that are subject to the Company's simplification and monetization effort. Financial results from this segment are principally derived from real estate development and land sales, joint ventures, and other legacy business activities.
Basis of Presentation and Principles of Consolidation: The Company presents its financial statements in accordance with accounting principles generally accepted in the United States ("GAAP") as outlined in the Financial Accounting Standard Board ("FASB") Accounting Standards Codification (the "Codification" or "ASC"). The Codification is the single source of authoritative accounting principles applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP.
The consolidated financial statements include the accounts of the Company (including all wholly-owned subsidiaries), as well as all other entities in which the Company has a controlling financial interest. Intercompany transactions and balances have been eliminated in consolidation. Significant investments in businesses, partnerships and limited liability companies in which the Company does not have a controlling financial interest, but the Company has the ability to exercise significant influence, are accounted for using the equity method.
A controlling financial interest in an entity may be established (i) through the Company holding a majority voting interest or (ii) if the Company is the primary beneficiary of an entity that qualifies as a variable interest entity ("VIE"), as defined in the Codification. The Company evaluates all partnerships, joint ventures and other arrangements with variable interests to determine if the entity or arrangement qualifies as a VIE. VIEs are entities where investors lack sufficient equity at risk for the entity to finance its activities without additional subordinated financial support or where equity investors, as a group, lack one of the following characteristics: (a) the power to direct the activities that most significantly impact the entity’s economic performance, (b) the obligation to absorb the expected losses of the entity, or (c) the right to receive the expected returns of the entity. If the entity or arrangement qualifies as a VIE and the Company is determined to be the primary beneficiary, the Company is required to consolidate the assets, liabilities, and results of operations of the VIE. The Company reevaluates whether an entity is a VIE as needed (i.e., when assessing reconsideration events that result in changes in the factors mentioned above) as part of determining if the consolidation or equity method treatment remains appropriate. As of December 31, 2022, the Company had an interest in various unconsolidated joint ventures that the Company accounts for using the equity method. Other than the obligations described in Note 10 – Commitments and Contingencies, obligations of the
Company's joint ventures do not have recourse to the Company and the Company's maximum exposure is limited to its investment.
Use of Estimates: The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported. Estimates and assumptions are used for, but not limited to: (i) asset impairments, including intangible assets and goodwill, (ii) litigation and contingencies, (iii) revenue recognition for long-term real estate developments, (iv) pension and postretirement estimates, and (v) income taxes. Future results could be materially affected if actual results differ from these estimates and assumptions.
Rounding: Amounts in the consolidated financial statements and notes are rounded to the nearest tenth of a million. Accordingly, a recalculation of some per-share amounts and percentages, if based on the reported data, may result in differences.
Discontinued Operations: In December 2022, in connection with the evaluation of strategic alternatives to monetize and dispose of Grace Pacific, the Company's Board of Directors authorized Management to complete a sale of Grace Pacific and the Company-owned quarry land on Maui (collectively, the “Grace Disposal Group”). As of December 31, 2022, the Company concluded that the plan to dispose of the Grace Disposal Group met the criteria for classification as held for sale and discontinued operations. Accordingly, the assets and liabilities associated with the Grace Disposal Group have been classified as held for sale in the consolidated balance sheets, its financial results have been classified as discontinued operations in the consolidated statements of operations and cash flows for all periods presented. Refer to Note 23 – Held for Sale and Discontinued Operations for additional information. All footnotes exclude discontinued operations unless otherwise noted.
Segment Reclassifications: The Company continually monitors its reportable segments for changes in facts and circumstances to determine whether changes in the identification or aggregation of operating segments are necessary. During the fourth quarter of 2022, the Company progressed on its simplification efforts related to the divestiture of its materials & construction business. The Grace Disposal Group, which was reclassified as held for sale and discontinued operations for all periods presented, made up the majority of activity in the Company’s former Materials and Construction ("M&C") segment. Accordingly, the former M&C segment has been eliminated and the segment information presented herein excludes the results of the Grace Disposal Group for all periods presented. As a result of this strategic shift, the chief operating decision maker began reviewing all investments in unconsolidated affiliates together within the Land Operations segment. This change resulted in a reorganization to present the income (loss) related to one joint venture which historically was included in the results of the former M&C segment to now be included in the results of the Land Operations segment. The segment disclosures in this filing have been recast to reflect these changes and therefore differ from prior period quarterly and annual filings to conform to the current year presentation. Refer to Note 20 – Segment Results for additional information.
2. Significant Accounting Policies
Real estate property, net: Real estate property, net primarily represents long-lived physical assets associated with the CRE segment's leasing activity (e.g., improved property leases and ground leases); it also includes landholdings and related assets in the Land Operations segment that the Company holds for either possible future development or future monetization as part of its simplification strategy. The balance primarily consists of land, buildings and improvements and is recorded at cost, net of accumulated depreciation.
Expenditures for additions, improvements and other enhancements to real estate properties are capitalized, and minor replacements, maintenance and repairs that do not improve or extend asset lives are charged to expense as incurred. When assets related to real estate properties are retired or otherwise disposed of, the related cost and accumulated depreciation is removed from the accounts and any resulting gain or loss is included in results of operations for the respective period.
Certain costs are capitalized related to the development and redevelopment of real estate properties, including pre-construction costs; real estate taxes; insurance; construction costs; attributable interest expense; and salaries, and related costs of personnel directly involved. Additionally, the Company makes estimates as to the probability of certain development and redevelopment projects being completed. If the Company determines the development or redevelopment is no longer probable of completion, the Company expenses all capitalized costs which are not recoverable.
Acquisitions of real estate properties: Acquisitions of real estate properties are evaluated to determine if they should be accounted for as asset acquisitions or business combinations (under current guidance, acquisitions of real estate properties are generally considered asset acquisitions). Under asset acquisition accounting, the Company estimates the fair value of acquired tangible assets (e.g., land, buildings and tenant improvements), identifiable intangible assets (e.g., in-place leases and favorable leases) and liabilities (e.g., unfavorable leases and assumed debt) based on an evaluation of available information at the date of the acquisition. Based on these estimates, the purchase consideration is allocated to the acquired assets and assumed
liabilities. Transaction costs incurred during the acquisition process are capitalized as a component of the purchase consideration. Upon the closing of a business combination, after identifying all tangible and intangible assets and liabilities, the excess consideration paid over the fair value of the assets and liabilities acquired and assumed, respectively, represents goodwill.
In estimating the fair value of the tangible and intangible assets acquired and liabilities assumed, the Company considers information obtained about each property as a result of its due diligence and marketing and leasing activities and uses various valuation methods, such as estimated cash flow projections using appropriate discount and capitalization rates, analysis of recent comparable sales transactions, estimates of replacement costs net of depreciation and other available market information. The fair value of the tangible assets of an acquired property considers the value of the property as if it were vacant.
Values for favorable leases acquired and unfavorable leases assumed are estimated based on the present value (using a discount rate reflecting the risks associated with leases acquired) of the difference between: (i) the contractual amounts to be paid pursuant to the leases negotiated and in-place at the time of acquisition and (ii) management’s estimate of fair market lease rates for the property or an equivalent property, measured over a period equal to the remaining term of the lease for favorable leases and the initial term plus the estimated term of any below-market, fixed-rate renewal options for unfavorable leases. The assets recognized and liabilities assumed are amortized to revenue over the related lease term plus fixed-rate renewal options, as appropriate.
The purchase price is further allocated to in-place lease values and tenant relationship values based on management's evaluation of the specific characteristics of the acquired lease portfolio and the Company's overall relationship with the anchor tenants. Such amounts are amortized to expense over the remaining initial lease term (and expected renewal periods for tenant relationships).
Real estate developments: Real estate developments represent certain costs capitalized and presented in the Land Operations segment that relate to (i) active real estate development projects and other land intended for sale or (ii) potential future real estate development projects intended for lease that would be part of future CRE segment operations. For potential future real estate development projects intended for lease, when management with the relevant authority has approved expenditures for activities clearly associated with the development and construction of a CRE segment project, the capitalized costs associated with such project (e.g., historical cost of land) will be included in Real estate property, net in the accompanying consolidated balance sheets.
Certain costs capitalized relating to active real estate development projects intended for sale may include pre-construction costs (e.g., costs related to land acquisition); construction costs (e.g., grading, roads, water and sewage systems, landscaping and project amenities); direct overhead costs (e.g., utilities, maintenance, insurance and real estate taxes); capitalized interest; and salaries and related costs of personnel directly involved.
For development projects, capitalized costs are allocated using the direct method for expenditures that are specifically associated with the unit being sold and the relative-sales-value method for expenditures that benefit the entire project. Direct overhead costs incurred after the development project is substantially complete and ready to be marketed are charged to selling, general and administrative expense as incurred. All indirect overhead costs are charged to selling, general and administrative costs as incurred.
Cash flows related to active real estate development projects and other land intended for sale are classified as operating activities in the consolidated statements of cash flows.
Capitalized Interest: Interest costs on developments and major redevelopments are capitalized as part of real estate development and redevelopment projects that have not yet been placed into service. Capitalization of interest commences when development activities and expenditures begin and end when the asset is substantially complete and ready for its intended use or ready to be marketed.
Other property, net: Other property, net represents all other long-lived physical assets other than those presented in Real estate property, net and Real estate developments. The balance primarily consists of corporate long-lived physical assets and Land Operations long-lived physical assets that are used in other Land Operations activities and are not included in Real estate property, net or Real estate developments in the accompanying consolidated balance sheets. Other property, net is stated at cost, net of accumulated depreciation. Expenditures for major renewals and betterments are capitalized. Replacements, maintenance and repairs that do not improve or extend asset lives are expensed as incurred.
Depreciation and Amortization: Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the assets. Estimated useful lives of property are as follows:
| | | | | |
Classification | Range of Life (in years) |
Building and improvements | 10 to 40 |
Leasehold improvements | 5 to 10 (lesser of useful life or lease term) |
Water, power and sewer systems | 5 to 50 |
Machinery and equipment | 2 to 35 |
Other property improvements | 3 to 35 |
Intangible Assets: Real estate intangible assets are included in Real estate intangible assets, net in the accompanying consolidated balance sheets and are generally related to the acquisition of commercial real estate properties. In the event a lease or leases with a tenant have been, or are expected to be, terminated early, the Company evaluates the remaining useful lives of depreciable or amortizable assets of the associated assets related to the lease terminated (i.e., tenant improvements, above and below market lease intangibles, in-place lease value and leasing commissions). Based upon consideration of the facts and circumstances surrounding the termination, the Company may accelerate the depreciation and amortization of such associated assets.
Other intangible assets are included in Prepaid expenses and other assets in the accompanying consolidated balance sheets and are generally related to software capitalized for internal use.
Cash and Cash Equivalents: Cash equivalents consist of highly liquid investments with a maturity of three months or less at the date of purchase. The Company carries these investments at cost, which approximates fair value.
Restricted Cash: The Company's historical restricted cash balances have been primarily composed of proceeds from §1031 of the Internal Revenue Code of 1986, as amended (the "Code") tax-deferred sales held in escrow pending future use in acquisitions of replacement real estate assets (if within the required time period). As of December 31, 2022 and 2021, there were $0.8 million of available proceeds from Code §1031 tax-deferred sales in the restricted cash balance.
Allowance for Credit Losses: The Company estimates its allowance for credit losses for financial assets within the scope of ASC Topic 326, Financial Instruments - Credit Losses ("ASC 326"), at portfolio levels which include the CRE segment and the Land Operations segment. Within these portfolio levels, the Company develops expected credit loss estimates by security type (which may include financing receivables or contract assets recognized in contracts with customers) by factoring historical loss information; information on both current conditions and reasonable and supportable forecasts of future conditions that may not be reflected in historical loss information; and other relevant credit quality information for the respective securities. As part of this process, the Company analyzes relevant information on a collective (pool) basis for securities with similar risk characteristics or separately on an individual basis when a financial asset does not share risk characteristics with other financial assets.
The portfolios of financial assets within the scope of ASC 326 relating to the CRE and Land Operations segments include financing receivables (i.e., notes receivable), which are primarily composed of historical development and other land-related transactions. The assets in these portfolios are analyzed on an individual basis, in which the Company considers certain, available information specific to the counterparties to the transactions (e.g., liquidity and solvency of the counterparties) and environmental factors that are relevant in the assessment of the expected collectability of the future cash flows for these assets (e.g., changes and expected changes in the general economic environment in which the counterparty operates). For these assets, the Company uses a discounted cash flow method to calculate the allowance for credit losses using the asset's effective interest rate.
Allowance for Doubtful Accounts: Allowances for doubtful accounts are established by management based on estimates of collectability. Estimates of collectability are principally based on an evaluation of the current financial condition of the Company’s customers and their payment history, which are regularly monitored by the Company.
Other receivables, net: Other receivables, net are primarily composed of notes receivable recorded at cost less allowances for credit losses on the consolidated balance sheets.
Inventories: Inventories related to trucking services within the Land Operations segment are stated at the lower of cost (principally average cost, first-in, first-out basis) or net realizable value. As of December 31, 2022 and 2021, inventories consisted of parts, materials, and supplies and were $0.4 million and $0.5 million, respectively.
Goodwill: The Company reviews goodwill for impairment at the reporting unit level annually or between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. The goodwill impairment test estimates the fair value of a reporting unit using an income approach that is based on a discounted cash flow analysis. The discounted cash flow approach relies on a number of assumptions, including future macroeconomic conditions, market factors specific to the reporting unit, the amount and timing of estimated future cash flows to be generated by the business over an extended period of time and a discount rate that considers the risks related to the amount and timing of the cash flows, among others. The Company classified these fair value measurements as Level 3. If the results of the Company's test indicates that a reporting unit's estimated fair value is less than its carrying value, an impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit's fair value, not to exceed the total amount of goodwill allocated to that reporting unit.
The Company's goodwill balance as of December 31, 2022 and 2021, was $8.7 million and is attributable to the CRE reporting unit, which is also a reportable segment. There is no goodwill related to the Land Operations reporting unit, which is also a reportable segment.
Assets and Liabilities Held for Sale: Assets and liabilities to be disposed of by sale ("disposal groups") are reclassified into Assets held for sale and Liabilities associated with assets held for sale on our consolidated balance sheets. The reclassification occurs when all the held for sale criteria have been met. Disposal groups are measured at the lower of carrying value or fair value less costs to sell and are not depreciated or amortized. The fair value of a disposal group, less any costs to sell, is assessed each reporting period it remains classified as held for sale and any remeasurement to the lower of carrying value or fair value less costs to sell is reported as an adjustment to the carrying value. Assets and liabilities as of December 31, 2022 and 2021, associated with the Grace Disposal Group were reclassified as held for sale in the consolidated balance sheets for all periods presented. The Grace Disposal Group includes financing leases that are secured by the associated leased heavy equipment and a revolving credit facility maintained by GLP Asphalt, a consolidated joint venture that is part of the Grace Disposal Group. The credit facility is collateralized by GLP Asphalt inventory and accounts receivable, and can only be used to finance GLP Asphalt working capital needs, including, the purchase of liquid asphalt. The Company does not expect the revolving credit facility to represent an obligation of the Company upon completion of a sale. Liabilities related to the cessation of sugar operations are presented within Accrued and other liabilities in the consolidated balance sheets.
Self-Insured Liabilities: The Company is self-insured for certain losses that include, but are not limited to, employee health, workers’ compensation, general liability, real and personal property, and real estate construction warranty and defect claims. When feasible, the Company obtains third-party insurance coverage to limit its exposure to these claims. When estimating its self-insured liabilities, the Company considers a number of factors, including historical claims experience, demographic factors, and valuations provided by independent third-parties.
Redeemable Noncontrolling Interest: The Company has a 70% ownership interest in GLP Asphalt through its ownership of Grace Pacific. The noncontrolling interest in GLP Asphalt may be redeemed for cash at the option of the noncontrolling interest holder at a redemption value, which is derived from a specified formula in the GLP Asphalt operating agreement (i.e., other than fair value).
Noncontrolling interests in subsidiaries that are redeemable for cash or other assets outside of the Company’s control at other than fair value are classified as mezzanine equity, outside of equity and liabilities. Such amounts are adjusted at each reporting date to the higher of (1) the amount resulting from the initial carrying amount, increased or decreased for cumulative amounts of the noncontrolling interest holder's share of net income or loss, share of other comprehensive income or loss and dividends and (2) the redemption value on each annual balance sheet date. The resulting changes in the carrying value, increases or decreases, are recorded with corresponding adjustments against earnings surplus or, in the absence of earnings surplus, common stock.
Fair Value Measurements: ASC Topic 820, Fair Value Measurements and Disclosures ("ASC 820"), as amended, establishes a fair value hierarchy, which requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The hierarchy places the highest priority on unadjusted quoted market prices in active markets for identical assets or liabilities (Level 1 measurements) and assigns the lowest priority to unobservable inputs (Level 3 measurements). The three levels of inputs within the hierarchy are defined as follows:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2: Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect the Company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
If the technique used to measure fair value includes inputs from multiple levels of the fair value hierarchy, the lowest level of significant input determines the placement of the entire fair value measurement in the hierarchy.
Revenue Recognition and Leases - The Company as a Lessor: Sources of revenue for the Company primarily include commercial property rentals, sales of real estate and real estate development projects. The Company generates revenue from its two distinct segments:
Commercial Real Estate: The Commercial Real Estate segment owns, operates, leases, and manages a portfolio of retail, office, and industrial properties in Hawai‘i; it also leases urban land in Hawai‘i to third-party lessees. Commercial Real Estate revenue is recognized under lease accounting guidance with the Company as lessor.
Leases - The Company as Lessor: The Company reviews its contracts to determine if they qualify as a lease. A contract is determined to be a lease when the right to substantially all of the economic benefits and to direct the use of an identified asset is transferred to a customer over a defined period of time for consideration. During this review, the Company evaluates among other items, asset specification, substitution rights, purchase options, operating rights and control over the asset during the contract period.
The Company has lease agreements with lease and non-lease components, which are generally accounted for separately under ASC Topic 606, Revenue from Contracts with Customers. The Company has elected the practical expedient to not separate non-lease components from lease components for all classes of underlying assets where the component follows the same timing and pattern as the lease component and the lease component is classified as an operating lease. Non-lease components included in rental revenue primarily consist of tenant reimbursements for common area maintenance and other services paid for by the lessor and utilized by the lessee. Under the practical expedient, the Company accounts for the single, combined component under leasing guidance as the lease component is the predominant component in the contract.
Rental revenue is primarily derived from operating leases and, therefore, is generally recognized on a straight-line basis over the term of the lease. Fixed contractual payments from the Company's leases are recognized on a straight-line basis over the terms of the respective leases. Straight-line rental revenue commences when the customer assumes control of the leased premises. The accrued straight-line receivable represents the amount by which straight-line rental revenue exceeds rents currently billed in accordance with lease agreements. Certain of the Company's lease agreements include terms for contingent rental revenue (e.g., percentage rents based on tenant sales volume) and tenant reimbursed property taxes, which are both accounted for as variable payments.
Certain of the Company's leases include termination and/or extension options. Termination options allow the customer to terminate the lease prior to the end of the lease term under specific circumstances. The Company's extension options generally require a re-negotiation with the customer at market rates. Initial direct costs, primarily commissions, related to the leasing of properties are capitalized on the balance sheet and amortized over the lease term. All other costs to negotiate or arrange a lease are expensed as incurred.
Accounts receivable related to leases are regularly evaluated for collectability, considering factors including, but not limited to, the credit quality of the customer, historical trends of the customer, and changes in customer payment terms. Upon determination that the collectability of a customer receivable is not probable, the Company will reverse the receivable and any accrued straight-line receivable and record a corresponding reduction of revenue previously recognized. Subsequent revenue is recorded on a cash basis until collectability on related billings becomes probable. Upon determination that portions of a tenant's receivables are not probable of collection (e.g., due to current conditions impacting specific amounts), the Company will record an allowance for doubtful accounts for the recorded operating lease receivable and record a corresponding adjustment of revenue previously recognized.
In April 2020, the FASB staff issued a question-and-answer document focusing on lease concessions related to the effects of the 2019 coronavirus ("COVID-19") and the application of lease accounting guidance related to modifications (the "Lease Modification Q&A"). See Note 12 – Leases - The Company as a Lessor for further discussion on the impact of
applicable rent relief provided beginning in the quarter ended June 30, 2020 under the Lease Modification Q&A. As of December 31, 2022, the Company no longer provides COVID-19 lease concessions.
Land Operations: Revenues from sales of real estate are recognized at the point in time when control of the underlying goods is transferred to the customer and the payment is due (generally on the closing date). For certain development projects, the Company will use a percentage of completion for revenue recognition. Under this method, the amount of revenue recognized is based on the development costs that have been incurred throughout the reporting period as a percentage of total expected development costs associated with the development project. In evaluating the expected development costs associated with a development project, significant estimates and considerable judgments by management are involved.
The Company deems its contract prices reflective of the standalone selling prices of the underlying goods and services since the contracts are required to go through a competitive bidding process.
On a consolidated basis, in addition to disclosing amounts recorded as contract assets or contract liabilities in its consolidated balance sheets, the Company discloses information about the amount of contract consideration allocated to either wholly unsatisfied or partially satisfied performance obligations (see Note 11 – Revenue and Contract Balances). Related to this disclosure, the Company has elected to not disclose information about the amount of contract consideration allocated to remaining performance obligations for certain contracts that have original expected durations of one year or less. This may occur with contracts for sales of real estate that are executed as of the end of the period with control of the underlying assets to be transferred to the customer subsequent to the end of the period. The closing date of such transactions will generally occur within one year or less of the contract execution date.
Leases - The Company as Lessee: The Company determines if an arrangement is a lease at inception by considering whether that arrangement conveys the right to use an identified asset for a period of time in exchange for consideration. Operating leases are included in Operating lease right-of-use assets ("ROU assets") and Operating lease liabilities ("lease liabilities") in the Company's consolidated balance sheets. ROU assets and lease liabilities related to finance leases are included in Real estate property, net and Notes payable and other debt, respectively, in the Company's consolidated balance sheets.
ROU assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the Company's leases do not provide an implicit rate and are not readily determinable, the Company uses its incremental borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at commencement date. ROU assets also include any lease payments made at or before the commencement date and excludes any lease incentives received. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Operating lease expense for lease payments is recognized on a straight-line basis over the lease term.
In connection with its application of the lease guidance, the Company has evaluated the lease and non-lease components within its leases where it is the lessee and has elected, for all classes of underling assets, the practical expedient to present lease and non-lease components in its lease agreements as one component. The Company has also elected, for all classes of underlying assets, to not recognize lease liabilities and lease assets for leases with a term of 12 months or less.
Impairment of Long-Lived Assets Held and Used and Finite-Lived Intangible Assets: Long-lived assets held and used, including finite-lived intangible assets, are reviewed for possible impairment when events or circumstances indicate that the carrying value may not be recoverable. In such an evaluation, the estimated future undiscounted cash flows generated by the asset are compared with the amount recorded for the asset to determine if its carrying value is not recoverable. If this review determines that the recorded value will not be recovered, the amount recorded for the asset is reduced to estimated fair value. In evaluating the fair value of long-lived asset groups, significant estimates and considerable judgments are involved. These long-lived asset impairment analyses are highly subjective because they require management to make assumptions and apply considerable judgments to, among other things, estimates of the timing and amount of future cash flows, the cash flow projection period, uncertainty about future events, including changes in economic conditions, changes in operating performance, changes in the use of the assets and ongoing costs of maintenance and improvements of the assets, appropriate discount rates based on the perceived risks, and thus, the accounting estimates may change from period to period. Refer to Note 7 – Fair Value Measurements for further discussion.
Impairment of Investments in Affiliates: The Company's investments in affiliates that are accounted for under the equity method are reviewed for impairment whenever there is evidence that fair value may be below carrying cost. An
investment is written down to fair value if fair value is below carrying cost and the impairment is believed to be other-than-temporary. Refer to Note 7 – Fair Value Measurements for further discussion.
Share-Based Compensation: The Company records compensation expense for all share-based payment awards made to employees and directors. The Company’s various equity plans are more fully described in Note 14 – Share-based Payment Awards.
Employee Benefit Plans: The Company provides a wide range of benefits to existing employees and retired employees, including single-employer defined benefit plans, postretirement, defined contribution plans, post-employment and health care benefits. The Company records amounts relating to these plans based on various actuarial assumptions, including discount rates, assumed rates of return, compensation increases, turnover rates and health care cost rate trends. The Company reviews its actuarial assumptions on an annual basis and makes modifications to the assumptions based on current economic conditions and trends. The Company believes that the assumptions utilized in recording obligations under the Company’s plans, which are presented in Note 15 – Employee Benefit Plans, are reasonable based on its experience and on advice from its independent actuaries; however, differences in actual experience or changes in the assumptions may materially affect the Company’s financial position or results of operations.
Interest and other income (expense), net for the years ended December 31, 2022, 2021 and 2020, included the following (in millions):
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| | 2022 | | 2021 | | 2020 |
Pension and post-retirement benefit (expense) | | $ | (0.6) | | | $ | (3.0) | | | $ | (2.6) | |
Interest income | | 0.3 | | | 1.0 | | | 1.6 | |
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| | | | | | |
Other income (expense), net | | 0.7 | | | 0.3 | | | 0.9 | |
Interest and other income (expense), net | | $ | 0.4 | | | $ | (1.7) | | | $ | (0.1) | |
Income Taxes: The Company makes certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments are applied in the calculation of tax credits, tax benefits and deductions, and in the calculation of certain deferred tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes. Deferred tax assets and deferred tax liabilities are adjusted to the extent necessary to reflect tax rates expected to be in effect when the temporary differences reverse. Adjustments may be required to deferred tax assets and deferred tax liabilities due to changes in tax laws and audit adjustments by tax authorities. To the extent adjustments are required in any given period, the adjustments would be included within the tax provision in the accompanying consolidated statements of operations. Refer to Note 16 – Income Taxes for further discussion.
Discontinued Operations: The Company reports disposal groups as discontinued operations in the consolidated statements of operations when the criteria are met. The Company’s loss from discontinued operations for the years ended December 31, 2022, 2021 and 2020, included revenues and expenses associated with the Grace Disposal Group in addition to expenses associated with the resolution of liabilities from the Company’s former sugar operations. The results of operations are presented as discontinued operations in the consolidated statements of operations.
Earnings Per Share (“EPS”): Basic and diluted earnings per share are computed and disclosed in accordance with ASC Topic 260, Earnings Per Share. The Company utilizes the two-class method to compute earnings available to common shareholders. Under the two-class method, earnings are adjusted by accretion amounts to redeemable noncontrolling interests recorded at redemption value. The adjustments represent in-substance dividend distributions to the noncontrolling interest holder as the holder has a contractual right to receive a specified amount upon redemption. As a result, earnings are adjusted to reflect this in-substance distribution that is different from other common shareholders. In addition, the Company allocates net earnings to each class of common stock and participating security as if all of the net earnings for the period had been distributed. The Company's participating securities consist of time-based restricted unit awards that contain a non-forfeitable right to receive dividends and, therefore, are considered to participate in earnings with common shareholders. Basic earnings per common share excludes dilution and is calculated by dividing net earnings allocated to common shares by the weighted-average number of common shares outstanding for the period. Diluted earnings per common share is calculated by dividing net earnings allocable to common shares by the weighted-average number of common shares outstanding for the period, as adjusted for the potential dilutive effect of non-participating share-based awards.
Recently issued accounting pronouncements
In March 2020, the FASB issued Accounting Standards Update ("ASU") No. 2020-04, Reference Rate Reform, establishing ASC Topic 848, and amended the standard thereafter through ASU No. 2021-01 and ASU No. 2022-06 (collectively, "ASC 848"). ASC 848 provides optional practical expedients and exceptions related to the impacts of reference rate reform that affect certain debt, leases, derivatives and other contracts if certain criteria are met. The amendments apply only to contracts and hedging relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. These amendments are effective immediately and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2024. Reference rate reform has not had a material impact on any of the Company's existing contracts, therefore, the Company has not elected to apply any of the optional practical expedients and exceptions under ASC 848 as of the current date. The Company will assess future changes in its contracts and the impact of electing to apply the optional practical expedients and exceptions provided by ASC 848 as they occur, but does not expect their application will have a material effect on its financial position or results of operations.
3. Real Estate Property, Net and Other Property, Net
Real estate property, net as of December 31, 2022 and 2021, includes the following (in millions):
| | | | | | | | | | | | | | |
| | 2022 | | 2021 |
Land | | $ | 780.0 | | | $ | 784.9 | |
Buildings | | 719.6 | | | 709.4 | |
Other property improvements | | 99.3 | | | 93.9 | |
Subtotal | | 1,598.9 | | | 1,588.2 | |
Accumulated depreciation | | (202.3) | | | (180.5) | |
Real estate property, net | | $ | 1,396.6 | | | $ | 1,407.7 | |
Other property, net, as of December 31, 2022 and 2021, was as follows (in millions):
| | | | | | | | | | | | | | |
| | 2022 | | 2021 |
Land | | $ | 0.2 | | | $ | 0.3 | |
Buildings | | 6.4 | | | 6.3 | |
Machinery and equipment | | 4.4 | | | 8.3 | |
Water, power and sewer systems | | 0.5 | | | 21.0 | |
Other property improvements | | — | | | 1.5 | |
Subtotal | | 11.5 | | | 37.4 | |
Accumulated depreciation | | (9.0) | | | (19.5) | |
Other property, net | | $ | 2.5 | | | $ | 17.9 | |
As noted in Note 2 – Significant Accounting Policies, the Company may capitalize a portion of interest costs incurred to long-lived assets for developments, major redevelopments and other projects that meet certain criteria. Total interest costs incurred were $22.5 million, $26.5 million, and $30.5 million in 2022, 2021 and 2020, respectively. Capitalized interest costs related to development activities were $0.5 million, $0.3 million, and $0.3 million in 2022, 2021 and 2020, respectively.
Depreciation expense for the years ended December 31, 2022, 2021 and 2020, was $29.4 million, $29.2 million and $29.9 million, respectively.
4. Acquisitions and Intangible Assets, Net
Acquisitions in 2022
The Company did not execute any commercial real estate asset acquisitions during the year ended December 31, 2022.
Acquisitions in 2021
During the year ended December 31, 2021, the Company acquired two commercial real estate assets for $10.8 million that were accounted for as asset acquisitions. Such acquisitions were structured primarily with funds acquired from involuntary conversions in accordance with Code §1033 from the sale of land on Maui in 2018.
The allocation of purchase price to the aggregate assets acquired in connection with the two commercial real estate acquisitions in 2021 was as follows (in millions):
| | | | | | | | |
Fair value of assets acquired | | |
Assets acquired: | | |
Land | | $ | 8.8 | |
Property and improvements | | 2.0 | |
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Total assets acquired | | $ | 10.8 | |
As of the acquisition date, there were no in-place, favorable, or unfavorable leases for the acquired properties.
Intangible assets, net
Real estate intangible assets, net and other intangible assets included in Prepaid expenses and other assets as of December 31, 2022 and 2021 were as follows (in millions):
| | | | | | | | | | | |
| 2022 | | 2021 |
In-place leases | $ | 75.0 | | | $ | 124.8 | |
Favorable leases | 15.2 | | | 29.0 | |
Accumulated amortization of in-place leases | (38.8) | | | (81.9) | |
Accumulated amortization of favorable leases | (7.8) | | | (20.3) | |
Real estate intangible assets, net | $ | 43.6 | | | $ | 51.6 | |
| | | |
Other intangible assets | $ | 0.6 | | | $ | 3.2 | |
Accumulated amortization of other intangible assets | (0.6) | | | (3.2) | |
Other intangible assets, net | $ | — | | | $ | — | |
Total intangible asset amortization expense was $8.1 million, $10.7 million, and $13.3 million for the years ended December 31, 2022, 2021 and 2020, respectively. Estimated amortization expenses related to intangible assets over the next five years are as follows (in millions):
| | | | | |
| Estimated Amortization |
2023 | $ | 7.1 | |
2024 | 5.8 | |
2025 | 5.4 | |
2026 | 3.8 | |
2027 | 3.6 | |
5. Investments in Affiliates
The Company's investments in affiliates consist principally of equity investments in limited liability companies that operate or develop real estate and joint ventures that engage in materials-related activities and renewable energy. The Company does not have a controlling financial interest, but has the ability to exercise significant influence over the operating and financial policies of these investments and, accordingly, accounts for its investments using the equity method of accounting. Operating results presented in the Company's consolidated statements of operations include the Company's proportionate share of net income (loss) from its equity method investments.
In November 2021, the Company's joint venture projects Kukui`ula Development Company (Hawaii) LLC ("KDCH"), Kukui`ula Web IP LLC, and Lodge IP LLC (collectively, "Kukui`ula") completed the sale of substantially all of their assets to a third party for $183.5 million ("Kukui`ula Transaction"), which resulted in the Company receiving cash distributions of $113.4 million. Subsequent to the Kukui`ula Transaction, the Company and its joint venture partner retained their respective ownership interest in KDCH.
The Company’s carrying value of investments in affiliates totaled $36.9 million and $35.7 million as of December 31, 2022 and 2021, respectively. The amounts of the Company’s investment as of December 31, 2022 and 2021 that represent undistributed earnings of investments in affiliates was approximately $5.6 million and $2.9 million, respectively. Dividends and distributions from unconsolidated affiliates totaled $0.8 million in 2022, $148.6 million in 2021, and $6.1 million in 2020. During the three years ended December 31, 2022, 2021 and 2020, Income (loss) related to joint ventures was $1.6 million, $17.9 million and $6.8 million, respectively, and return on investment operating cash distributions was $0.7 million, $8.9 million and $1.2 million, respectively.
A summary of combined assets and liabilities reported by such entities accounted for by the equity method as of December 31, 2022 and 2021, were as follows (in millions):
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| | 2022 | | 2021 |
Current assets | | $ | 56.5 | | | $ | 65.2 | |
Non-current assets | | 240.0 | | | 203.5 | |
Total assets | | $ | 296.5 | | | $ | 268.7 | |
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Current liabilities | | $ | 26.3 | | | $ | 25 | |
Non-current liabilities | | 121.1 | | | 88.3 | |
Total liabilities | | $ | 147.4 | | | $ | 113.3 | |
A summary of combined operating results reported by such entities accounted for by the equity method for each of the years ended December 31, 2022, 2021 and 2020, were as follows (in millions):
| | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
Revenues | | $ | 130.0 | | | $ | 231.1 | | | $ | 164.2 | |
Operating costs and expenses | | 118.4 | | | 204.1 | | | 137.0 | |
Gross Profit (Loss) | | $ | 11.6 | | | $ | 27.0 | | | $ | 27.2 | |
Income (Loss) from Continuing Operations1 | | $ | 1.6 | | | $ | (287.9) | | | $ | 15.3 | |
Net Income (Loss)1 | | $ | 1.3 | | | $ | (288.1) | | | $ | 14.9 | |
1Includes earnings from equity method investments held by the investee. |
Investments in affiliates net income (loss) for the year ended December 31, 2021, was primarily related to the net loss incurred by the joint venture as a result of the aforementioned Kukui`ula transaction in which the carrying value of the net assets sold exceeded the net sales proceeds. In connection with the Kukui`ula transaction, the Company recognized income related to joint ventures of $5.5 million during the fourth quarter of 2021, reflecting a basis difference that was derived from an other-than-temporary impairment charge of $186.8 million recorded by the Company in the fourth quarter of 2018.
6. Allowances and Other Reserves
The Company reduces recorded amounts for accounts receivable and other financial assets by various allowances and reserve accounts. Effective January 1, 2020, the Company adopted ASC 326 and certain amounts previously recorded in the allowance for doubtful accounts or in other allowances for financing receivables were reclassified to an allowance for credit losses.
The following table presents the balances and activity (including reclassifications) in the various allowance and reserve accounts related to the Company's accounts receivable and financial assets for the three years ended December 31, 2022, 2021 and 2020, (in millions):
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| | Balance at beginning of year | | Impact of adoption of ASC 3261 | | Impact of adoption of ASC 3262 | | Additions/(Reductions)3 | | Deductions or other4 | | Balance at end of year |
Year ended December 31, 2022 | | | | | | | | | | | | |
Deducted from assets | | | | | | | | | | | | |
Reserve for cash basis tenants | | $ | 11.1 | | | $ | — | | | $ | — | | | $ | (1.2) | | | $ | (3.0) | | | $ | 6.9 | |
Allowance for doubtful accounts | | $ | 0.8 | | | — | | | — | | | 0.2 | | | 1.4 | | | $ | 2.4 | |
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Allowance for credit losses - financing receivables | | $ | 2.5 | | | — | | | — | | | 0.2 | | | — | | | $ | 2.7 | |
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Year ended December 31, 2021 | | | | | | | | | | | | |
Deducted from assets | | | | | | | | | | | | |
Reserve for cash basis tenants | | $ | 12.7 | | | $ | — | | | $ | — | | | $ | (1.3) | | | $ | (0.3) | | | $ | 11.1 | |
Allowance for doubtful accounts | | $ | 2.6 | | | — | | | — | | | (1.7) | | | (0.1) | | | $ | 0.8 | |
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Allowance for credit losses - financing receivables | | $ | 3.9 | | | — | | | — | | | (1.4) | | | — | | | $ | 2.5 | |
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Year ended December 31, 2020 | | | | | | | | | | | | |
Deducted from assets | | | | | | | | | | | | |
Reserve for cash basis tenants | | $ | 0.9 | | | — | | | — | | | 10.6 | | | 1.2 | | | $ | 12.7 | |
Allowance for doubtful accounts | | $ | 0.6 | | | (0.3) | | | — | | | 3.6 | | | (1.3) | | | $ | 2.6 | |
| | | | | | | | | | | | |
Allowance for credit losses - financing receivables | | $ | — | | | 1.6 | | | 2.7 | | | (0.4) | | | — | | | $ | 3.9 | |
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Loans allowance | | $ | 1.6 | | | (1.6) | | | — | | | — | | | — | | | $ | — | |
Other reserves | | $ | 0.4 | | | — | | | — | | | — | | | (0.4) | | | $ | — | |
1 Reclassifications from other reserves or allowances that fall into the scope of ASC 326.
2 Impact of adoption of ASC 326 recorded against total equity.
3 Net provisions charged against income.
4 Write-offs or other activity (e.g., reclassifications for movement of allowances to cash basis reserves).
Refer to Note 12 – Leases - The Company as a Lessor for discussion on current period charges related to the Company's assessment of collectability on amounts due under leases. Note that under ASC 842, such charges and reserve activity reflect a reversal of the revenue and receivable balance originally recorded.
The allowance for credit losses for financing receivables at December 31, 2022, related to two assets that originated as part of transactions in the Land Operations segment. The credit quality of the Company's financing receivables is monitored each reporting period on an individual asset basis using specific information on the counterparties in these transactions. The first originated in 2008 and had an amortized cost basis of $1.6 million as of December 31, 2022 and 2021. Based on individual credit quality indicators of the counterparty as of December 31, 2022 and 2021, the most likely outcome of expected cash flows for the asset in a range of possible outcomes (i.e., the single best estimate) was zero and, as a result, the Company recorded a full allowance for credit losses for the financing receivable as of December 31, 2022 and 2021. The second financing receivable within Land Operations was generated in 2017 and had an amortized cost basis of $2.5 million and $2.8 million as of December 31, 2022 and 2021, respectively. This financing receivable was evaluated based on the credit quality indicators of the counterparty (as well as reasonable and supportable forecasts of future conditions that are relevant to determining the expected collectability of the receivable) as of December 31, 2022 and 2021, and the estimated allowance for credit losses was calculated using a discounted cash flow approach.
For allowance for credit losses estimated using the discounted cash flow approach, changes in present value attributable to the passage of time are reported as an adjustment to credit loss expense. As a result, the provision for expected credit losses in any given period may be impacted by changes in expected credit losses on future payments or current period collections for receivables on which allowances were recorded in previous periods, both of which may be further impacted or offset by changes in present value attributable to the passage of time.
7. Fair Value Measurements
Recurring Fair Value Measurements
The Company records its interest rate swaps at fair value. The fair values of the Company's interest rate swaps are classified as Level 2 measurements in the fair value hierarchy and are based on the estimated amounts that the Company would receive or pay to terminate the contracts at the reporting date and are determined using interest rate pricing models and interest rate related observable inputs (refer to Note 9 – Derivative Instruments for fair value information regarding the Company's derivative instruments).
The following tables present the fair value of those assets and (liabilities) measured on a recurring basis as of December 31, 2022 and 2021, (in millions):
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| | | Fair Value Measurements at |
| | | December 31, 2022 |
| Consolidated Balance Sheet Location | | Total | | Quoted Prices in Active Markets (Level 1) | | Significant Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Assets | | | | | | | | | |
Derivative financial instruments - interest rate swaps | Prepaid expenses and other assets | | $ | 5.5 | | | $ | — | | | $ | 5.5 | | | $ | — | |
Liabilities | | | | | | | | | |
Derivative financial instruments - interest rate swaps | Accrued and other liabilities | | $ | (2.8) | | | $ | — | | | $ | (2.8) | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fair Value Measurements at |
| | | December 31, 2021 |
| Consolidated Balance Sheet Location | | Total | | Quoted Prices in Active Markets (Level 1) | | Significant Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
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Liabilities | | | | | | | | | |
Derivative financial instruments - interest rate swaps | Accrued and other liabilities | | $ | (2.2) | | | $ | — | | | $ | (2.2) | | | $ | — | |
Non-Recurring Fair Value
Certain financial and nonfinancial assets and liabilities are measured at fair value on a nonrecurring basis and are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment. The Company’s process for identifying and recording impairment is discussed in Note 2 – Significant Accounting Policies.
Impairment of Long-lived Assets Held and Used and Finite-Lived Intangible Assets: During the year ended December 31, 2022, the Company recognized an impairment charge of $5.0 million related to parcels of conservation and agriculture zoned land on Oahu. During the year ended December 31, 2021, the Company recorded impairment charges of $26.1 million related to Grace Pacific's paving and roadway solutions operations, which included $1.8 million related to goodwill impairment of one reporting unit, GPRS (primarily consisting of Grace Pacific’s roadway and maintenance solutions operations). The Company classifies these fair value measurements as Level 3 in the fair value hierarchy because they involve significant unobservable inputs such as cash flow projections, discount rates, and management assumptions.
Impairment of Assets Held for Sale: As a result of Grace Pacific and the Maui Quarries classification as held for sale as of December 31, 2022, the Company measured the disposal group at its fair value less costs to sell and accordingly recorded impairment of $89.8 million for the three and twelve months ended December 31, 2022. The Company classifies these fair value measurements as Level 3 in the fair value hierarchy because they involve significant unobservable inputs such as cash flow projections, discount rates, and management assumptions.
Impairment of Investments in Unconsolidated Affiliate: The Company's investments in unconsolidated affiliates are reviewed for impairment whenever there is evidence that fair value may be below carrying cost. An investment is written down to fair value if fair value is below carrying cost and the impairment is believed to be other-than-temporary. Significant estimates that are highly subjective and with considerable judgment are involved, including the Company's current and future evaluation of general economic and market conditions, estimates regarding the timing and amount of future cash flows, including revenue,
and cost of sales, and appropriate discount rates based on the perceived risks, among others. Changes in these and other assumptions could affect the fair value of the unconsolidated affiliate. The Company classifies these fair value measurements as Level 3.
During the year ended December 31, 2022, the Company did not recognize any impairments of its investments in affiliates. During the year ended December 31, 2021, the Company determined that its investment in Maui Paving was other-than-temporarily impaired due to lower paving volumes and persisting, competitive market pressures that negatively affect sales and margins. As a result, the Company estimated the fair value of its investment in Maui Paving using a discounted cash flow model and recorded a non-cash, other-than-temporary impairment of $2.9 million.
The following tables present quantitative information about the significant unobservable inputs used to determine the fair value of the impairment of long-lived assets held and used and assets held for sale, net for the years ended December 31, 2022 and 2021, (in millions):
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| | | | | | | Quantitative Information about Level 3 Fair Value Measurements |
| Effective Date | | Fair Value | | Impairment Loss | | Valuation Technique/ Unobservable Inputs | | | | Weighted Average Discount Rate |
2022 | | | | | | | | | | | |
Assets held for sale, net1,2 | December 31, 2022 | | $ | 50.0 | | | $ | 89.8 | | | Indicative bids | | | | N/A |
Long-lived assets3 | December 31, 2022 | | — | | | 5.0 | | | Discounted cash flows | | | | 16% |
| | | | | | | Market comparables | | | | N/A |
Total | | | $ | 50.0 | | | $ | 94.8 | | | | | | | |
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2021 | | | | | | | | | | | |
Long-lived assets1 | December 31, 2021 | | $ | 27.3 | | | $ | 24.3 | | | Discounted cash flows | | | | 13% |
Goodwill1 | December 31, 2021 | | — | | | 1.8 | | | N/A | | | | N/A |
Investment in unconsolidated affiliate1 | December 31, 2021 | | 2.1 | | | 2.9 | | | Discounted cash flows | | | | 13% |
Total | | | $ | 29.4 | | | $ | 29.0 | | | | | | | |
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1 Assets or liabilities are presented in Assets held for sale or Liabilities associated with assets held for sale, respectively, in the Consolidated Balance Sheets. Impairment loss is presented in Income (loss) from discontinued operations, net of income taxes in the Consolidated Statements of Operations. |
2 Assets held for sale of $126.8 million, net of liabilities associated with assets held for sale of $81.0 million, and excluding estimated selling costs of $4.2 million. |
3 Included in Real estate property in the Consolidated Balance Sheets. Impairment loss is presented in Cost of Land Operations in the Consolidated Statements of Operations. |
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Financial Assets and Liabilities not Measured at Fair Value
Financial assets and liabilities that are not measured at fair value on our consolidated balance sheets include cash and cash equivalents, restricted cash, accounts and notes receivable, net and notes payable and other debt. The fair value of the Company's cash and cash equivalents, restricted cash, accounts receivable, net and short-term borrowings approximate their carrying values due to the short-term nature of the instruments, which is classified as Level 1 measurement in the fair value hierarchy.
The fair value of the Company's notes receivable approximated the carrying amount of $1.9 million and $8.4 million as of December 31, 2022 and 2021. The fair value of these notes is estimated using a discounted cash flow analysis in which the Company uses unobservable inputs such as market interest rates determined by the loan-to-value and market capitalization rates related to the underlying collateral at which management believes similar loans would be made, and is classified as a Level 3 measurement in the fair value hierarchy.
At December 31, 2022, the carrying amount of the Company's notes payable and other debt was $472.2 million and the corresponding fair value was $449.2 million. At December 31, 2021, the carrying amount of the Company's notes payable and other debt was $530.8 million and the corresponding fair value was $554.7 million. The fair value of debt is calculated by discounting the future cash flows of the debt at rates based on instruments with similar risk, terms and maturities as compared to the Company's existing debt arrangements, and is classified as a Level 3 measurement in the fair value hierarchy.
8. Notes Payable and Other Debt
As of December 31, 2022 and 2021, Notes payable and other debt consisted of the following (in millions):
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| | | | | | Principal Outstanding |
Debt | | Interest Rate (%) | | Maturity Date | | December 31, 2022 | | December 31, 2021 |
Secured: | | | | | | | | |
Laulani Village | | 3.93% | | 2024 | | $ | 59.0 | | | $ | 60.2 | |
Pearl Highlands | | 4.15% | | 2024 | | 77.3 | | | 79.4 | |
Photovoltaic Financing | | (1) | | 2027 | | 2.6 | | | — | |
Manoa Marketplace | | (2) | | 2029 | | 54.5 | | | 56.3 | |
Subtotal | | | | | | $ | 193.4 | | | $ | 195.9 | |
Unsecured: | | | | | | | | |
Series A Note | | 5.53% | | 2024 | | 14.2 | | | 21.3 | |
Series J Note | | 4.66% | | 2025 | | 10.0 | | | 10.0 | |
Series B Note | | 5.55% | | 2026 | | 36.0 | | | 45.0 | |
Series C Note | | 5.56% | | 2026 | | 11.0 | | | 13.0 | |
Series F Note | | 4.35% | | 2026 | | 15.2 | | | 15.2 | |
Series H Note | | 4.04% | | 2026 | | 50.0 | | | 50.0 | |
Series K Note | | 4.81% | | 2027 | | 34.5 | | | 34.5 | |
Series G Note | | 3.88% | | 2027 | | 28.1 | | | 28.1 | |
Series L Note | | 4.89% | | 2028 | | 18.0 | | | 18.0 | |
Series I Note | | 4.16% | | 2028 | | 25.0 | | | 25.0 | |
Term Loan 5 | | 4.30% | | 2029 | | 25.0 | | | 25.0 | |
Subtotal | | | | | | $ | 267.0 | | | $ | 285.1 | |
Revolving Credit Facilities: | | | | | | | | |
A&B Revolver | | (3) | | 2025 | | 12.0 | | | 50.0 | |
Subtotal | | | | | | $ | 12.0 | | | $ | 50.0 | |
Total debt (contractual) | | | | | | $ | 472.4 | | | $ | 531.0 | |
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Unamortized debt issuance costs | | | | | | (0.2) | | | (0.2) | |
Total debt (carrying value) | | | | | | $ | 472.2 | | | $ | 530.8 | |
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(1) Financing lease has a discount rate of 4.14%. |
(2) Loan has a stated interest rate of LIBOR plus 1.35%, but is swapped through maturity to a 3.14% fixed rate. |
(3) Loan has a stated interest rate of LIBOR plus 1.05% based on pricing grid. $50.0 million was swapped through June 2022 to a 2.40% fixed rate. |
The Company's notes payable and other debt is categorized between debt instruments secured by real estate improved properties or other assets ("Secured Debt"), unsecured notes payable and other term loans ("Unsecured Debt") and borrowings under revolving credit facilities ("Revolving Credit Facilities") which includes the existing revolving credit facility used for general Company purposes ("A&B Revolver").
On March 5, 2021, the Financial Conduct Authority announced a timeline for the phase-out of the London Interbank Offered Rate ("LIBOR"). The Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency subsequently issued a joint statement saying that banks should stop entering into new contracts with LIBOR as soon as possible but at least by December 31, 2021. As of January 1, 2022, LIBOR can only be used for legacy LIBOR obligations entered into prior to December 31, 2021. In addition, the publication of US dollar LIBOR is expected to cease after June 30, 2023. The Secured Overnight Financing Rate ("SOFR") and Bloomberg Short Term Bank Yield Index ("BSBY") have been identified as replacements to LIBOR, with the former being recommended by the Federal Reserve-formed Alternative Reference Rates Committee.
Secured Debt
Laulani Village: In connection with asset acquisitions of commercial real estate improved properties made in the year ended December 31, 2018, the Company assumed a $62.0 million mortgage secured by Laulani Village that matures on May 1, 2024, and bears interest at 3.93%. The note required monthly interest only payments of approximately $0.2 million until May 2020. Thereafter, the note requires monthly principal and interest payments of approximately $0.3 million and a final principal payment of approximately $57.5 million due on May 1, 2024.
Pearl Highlands: On September 17, 2013, the Company consummated the acquisition of Pearl Highlands Center in Pearl City, Oahu. In connection with the acquisition, the Company assumed a $59.3 million mortgage loan secured by Pearl Highlands Center. On December 1, 2014, the loan was refinanced to increase the amount of the loan to $92.0 million (bearing interest at 4.15%). The refinanced loan requires monthly principal and interest payments of approximately $0.4 million and a final principal payment of approximately $73.0 million due on December 8, 2024.
Manoa Marketplace: In 2016, the Company, through wholly-owned subsidiaries, entered into a $60.0 million mortgage loan agreement secured by Manoa Marketplace with First Hawaiian Bank ("FHB"). The loan bears interest at LIBOR plus 1.35% and requires principal and interest payments over the term with a final principal payment of $41.7 million due on August 1, 2029. The Company had previously entered into an interest rate swap with a notional amount equal to the principal amount on the debt to fix the variable interest rate on the related periodic interest payments at an effective rate of 3.14% (refer to Note 9 – Derivative Instruments).
Assets Pledged as Collateral: The gross book value of the commercial real estate assets pledged as collateral described above at December 31, 2022, was $360.1 million.
Unsecured Debt
Prudential Series Notes: In December 2015, the Company entered into an agreement (the "Prudential Agreement") with Prudential Investment Management, Inc. and its affiliates (collectively, "Prudential") for an unsecured note purchase and private shelf facility that enabled the Company to issue notes in an aggregate amount up to $450.0 million, less the sum of all principal amounts then outstanding on any notes issued by the Company or any of its subsidiaries to Prudential and the amounts of any notes that are committed under the Prudential Agreement. The Prudential Agreement (which amended and renewed a then-existing agreement) had an issuance period that ended in December 2018 and contained certain restrictive covenants for the notes issued under the Prudential Agreement that were substantially the same as the covenants contained in the Historical Revolving Credit Facility (defined below). Borrowings under the uncommitted shelf facility bear interest at rates that were determined at the time of borrowing.
Bank Syndicated Loan: In February 2018, the Company entered into an agreement with Wells Fargo Bank, National Association ("Wells Fargo") and a syndicate of other financial institutions that provided for a $50.0 million term loan facility ("Wells Fargo Term Facility" or "Bank Syndicated Loan"). The Company also drew $50.0 million under the Wells Fargo Term Facility in February 2018 and used such term loan proceeds to repay amounts that were borrowed under revolving credit facilities described below. Borrowings under the Wells Fargo Term Facility bore interest at a variable base rate (LIBOR), as defined, plus a margin determined using a leverage based pricing grid. In February 2020 the Company entered into an interest rate swap agreement with a notional amount equal to the principal amount of the debt to fix the variable interest rate (LIBOR) on the related periodic interest payments resulting in an effective rate (subject to changes in the margin based on a pricing grid) of 3.15% as of December 31, 2021 (refer to Note 9 – Derivative Instruments). On August 31, 2021, concurrent with the closing of the 2021 A&B Revolver (discussed in Revolving credit facilities section below), the Company drew $50.0 million on the A&B Revolver and repaid the Bank Syndicated Loan in full, plus accrued interest, and satisfied all obligations thereto. In order to preserve an effective hedging relationship, the Company maintained a $50.0 million draw on the A&B Revolver until June 30, 2022, when the interest rate swap agreement was terminated.
Term Loan 5: In November 2017, the Company entered into a rate lock commitment to draw $25.0 million under its Note Purchase and Private Shelf Agreement with AIG Asset Management (U.S.), LLC. Under the commitment, the Company drew $25.0 million in December 2017. The note bears interest at 4.30% and matures on December 20, 2029. Interest only is paid semi-annually and the principal balance is due at maturity. On August 31, 2021, the Company entered into an agreement with AIG Asset Management to amend certain covenants related to the AIG Private Shelf Facility. All other terms of this agreement remain substantially unchanged.
Revolving credit facility
A&B Revolver: In August 2021, the Company entered into a Third Amended and Restated Credit Agreement ("2021 A&B Revolver") with Bank of America N.A., as administrative agent, First Hawaiian Bank, KeyBank National Association, Wells Fargo Bank, National Association, and other lenders party thereto, which amended and restated the Company's existing $450.0 million committed under the Second Amended and Restated Credit Agreement ("2017 A&B Revolver") with Bank of America N.A., as administrative agent, First Hawaiian Bank, and other lenders party thereto. The 2021 A&B Revolver increased the total revolving commitments to $500.0 million, extended the term of the facility from September 15, 2022, to August 29, 2025, and includes two six-month extension options. In addition, the 2021 A&B Revolver amended certain covenants (see below) and reduced the interest rates and fees charged under the financials-based pricing grid of the 2017 A&B Revolver.
At December 31, 2022, the Company had $12.0 million of revolving credit borrowings outstanding, $1.1 million in letters of credit had been issued against the facility, and $486.9 million remained available.
Covenants under 2021 A&B Revolver, Prudential Series Notes, and Term Loan 5 (subsequent to amendments)
The principal amendments under the 2021 A&B Revolver, the Prudential Amendment, and the AIG Amendment are as follows:
•An increase in the maximum ratio of secured debt to total adjusted asset value from 0.25:1.00 to 0.40:1.00.
•Establishes the minimum shareholders' equity amount to be $865.6 million plus 75% percent of the net proceeds received from equity issuances after June 30, 2021.
•Modification of the minimum unencumbered fixed charge coverage ratio to an unencumbered interest coverage ratio and increases the ratio from 1.50:1.00 to 1.75:1.00.
Debt principal payments
At December 31, 2022, debt principal payments and maturities during the next five years and thereafter and the corresponding amount of unamortized deferred financing costs or debt discounts or premiums were as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Scheduled Principal Payments | | | | |
| | 2023 | 2024 | 2025 | 2026 | 2027 | Thereafter | Total Principal | | (Unamort Debt Issue Cost)/ (Discount) Premium | | Total |
Secured debt | | $ | 5.4 | | $ | 134.9 | | $ | 2.1 | | $ | 2.2 | | $ | 3.8 | | $ | 45.0 | | $ | 193.4 | | | $ | — | | | $ | 193.4 | |
Unsecured debt | | 29.6 | | 27.0 | | 38.3 | | 67.0 | | 37.1 | | 68.0 | | 267.0 | | | (0.2) | | | 266.8 | |
Revolving credit facilities | | — | | — | | 12.0 | | — | | — | | — | | 12.0 | | | — | | | 12.0 | |
Total Notes payable and other debt | | $ | 35.0 | | $ | 161.9 | | $ | 52.4 | | $ | 69.2 | | $ | 40.9 | | $ | 113.0 | | $ | 472.4 | | | $ | (0.2) | | | $ | 472.2 | |
| | | | | | | | | | | | |
9. Derivative Instruments
The Company is exposed to interest rate risk related to its variable-rate debt. The Company balances its cost of debt and exposure to interest rates primarily through its mix of fixed-rate and variable-rate debt. From time to time, the Company may use interest rate swaps to manage its exposure to interest rate risk.
Cash flow hedges of interest rate risk
In October 2022, the Company entered into two forward starting interest rate swap agreements with notional amounts of $57.0 million and $73.0 million in order to hedge interest rate fluctuations related to $130 million of financing. The Company accounted for the agreements as cash flow hedges.
As of December 31, 2022, the Company had three interest rate swap agreements designated as cash flow hedges, two of which were forward interest rate swap agreements. As of December 31, 2021, there were two interest rate swap agreements designated as cash flow hedges, neither of which were forward interest rate swap agreements. The key terms of the agreements are as follows (dollars in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Effective | Maturity | Fixed Interest | | Notional Amount at | | Asset (Liability) Fair Value at |
Date | Date | Rate | | December 31, 2022 | | December 31, 2022 | | December 31, 2021 |
Interest Rate Swap Agreements | | | | | | |
4/7/2016 | 8/1/2029 | 3.14% | | $ | 54.5 | | | $ | 5.5 | | | $ | (1.7) | |
2/13/2020 | 2/27/2023 | (1) | | $ | — | | | $ | — | | | $ | (0.5) | |
Forward Interest Rate Swap Agreements | | | | | | |
5/1/2024 | 12/9/2031 | 4.88% | | $ | 57.0 | | | $ | (1.3) | | | $ | — | |
12/9/2024 | 12/9/2031 | 4.83% | | $ | 73.0 | | | $ | (1.5) | | | $ | — | |
| | | | | | | | |
(1) $50.0 million in notional interest rate swap was terminated on June 30, 2022, resulting in a realized gain of $0.5 million included within Interest and other income (expense), net. |
The asset related to the interest rate swap as of December 31, 2022, is presented within Prepaid expenses and other assets in the consolidated balance sheet. The liabilities related to the interest rate swaps as of December 31, 2021 and forward interest rate swaps as of December 31, 2022, are presented within Accrued and other liabilities. The changes in fair value of the cash flow hedges are recorded in accumulated other comprehensive income (loss) and subsequently reclassified into interest expense as interest is incurred on the related variable-rate debt.
The following table represents the pre-tax effect of the derivative instruments in the Company's consolidated statement of comprehensive income (loss) during the years ended December 31, 2022 and 2021, (in millions):
| | | | | | | | | | | | | | |
| | 2022 | | 2021 |
Derivatives in Designated Cash Flow Hedging Relationships: | | | | |
Amount of gain (loss) recognized in OCI on derivatives | | $ | 4.9 | | | $ | 2.3 | |
Impact of reclassification adjustment to interest expense included in Net Income (Loss) | | $ | 0.5 | | | $ | 1.6 | |
Realized interest rate hedging gain (loss) | | $ | (0.5) | | | $ | — | |
As of December 31, 2022, the Company expects to reclassify $1.1 million of net gains (losses) on derivative instruments from accumulated other comprehensive income to earnings during the next 12 months.
10. Commitments and Contingencies
Commitments and other financial arrangements
The Company has various financial commitments and other arrangements including standby letters of credit and bonds that are not recorded as liabilities on the Company's consolidated balance sheets as of December 31, 2022:
•Standby letters of credit issued by the Company's lenders under the Company's revolving credit facility totaled $1.1 million as of December 31, 2022. These letters of credit primarily relate to the Company's workers' compensation plans and if drawn upon, the Company would be obligated to reimburse the issuer.
•Bonds related to the Company's real estate activities totaled $18.6 million as of December 31, 2022, and represent commercial bonds issued by third party sureties (permit, subdivision, license and notary bonds). If drawn upon, the Company would be obligated to reimburse the surety that issued the bond for the amount of the bond, reduced for the work completed to date.
•Bonds related to Grace Pacific totaled $300.0 million as of December 31, 2022, and represent the face value of construction bonds issued by third party sureties (bid, performance and payment bonds). If drawn upon, the Company would be obligated to reimburse the surety that issued the bond for the amount of the bond, reduced for the work completed to date. As of December 31, 2022, the Company's maximum remaining exposure, in the event of defaults on all existing contractual construction obligations, was approximately $116.3 million.
The Company also provides certain bond indemnities and guarantees of indebtedness for certain of its unconsolidated affiliates that it accounts for as equity method investments (e.g., real estate joint ventures).
•Bond indemnities are provided for the benefit of the surety in exchange for the issuance of surety bonds and cover joint venture construction activities (such as project amenities, roads, utilities, and other infrastructure). Under such bond indemnities, the Company and the joint venture partners agree to indemnify the surety bond issuer from all losses and expenses arising from the failure of the joint venture to complete the specified bonded construction; the Company may be obligated to complete construction of the joint ventures' construction projects if the joint venture does not perform. The maximum potential amount of aggregate future payments is a function of the amount covered by outstanding bonds at the time of default by the joint venture, reduced by the amount of work completed to date.
•Guarantees of indebtedness may be provided by the Company for the benefit of financial institutions providing credit to unconsolidated equity method investees. As of December 31, 2022, the Company had no such arrangements with third party lenders related to its unconsolidated equity method investees and no amounts outstanding as of December 31, 2022.
The recorded amounts of the bond indemnities and guarantee of indebtedness were not material individually or in the aggregate. Other than those described above, obligations of the Company's joint ventures do not have recourse to the Company, and the Company's "at-risk" amounts are limited to its investment.
Legal proceedings and other contingencies
Prior to the sale of approximately 41,000 acres of agricultural land on Maui to Mahi Pono Holdings, LLC ("Mahi Pono") in December 2018, the Company, through East Maui Irrigation Company, LLC ("EMI"), also owned approximately 16,000 acres of watershed lands in East Maui and held four water licenses to approximately 30,000 acres owned by the State of Hawai‘i in East Maui. The sale to Mahi Pono included the sale of a 50% interest in EMI (which closed February 1, 2019), and provided for the Company and Mahi Pono, through EMI, to jointly continue the existing process to secure a long-term lease from the State for delivery of irrigation water to Mahi Pono for use in Central Maui.
The last of these water license agreements expired in 1986, and all four agreements were then extended as revocable permits that were renewed annually. In 2001, a request was made to the State Board of Land and Natural Resources (the "BLNR") to replace these revocable permits with a long-term water lease. Pending the completion by the BLNR of a contested case hearing it ordered to be held on the request for the long-term lease, the BLNR has kept the existing permits on a holdover basis. Three parties (Healoha Carmichael; Lezley Jacintho; and Na Moku Aupuni O Ko‘olau Hui) filed a lawsuit on April 10, 2015, (the "Initial Lawsuit") alleging that the BLNR has been renewing the revocable permits annually rather than keeping them in holdover status. The lawsuit challenged the BLNR’s decision to continue the revocable permits for calendar year 2015 and asked the court to void the revocable permits and to declare that the renewals were illegally issued without preparation of an environmental assessment ("EA"). In December 2015, the BLNR decided to reaffirm its prior decisions to keep the permits in holdover status. This decision by the BLNR was challenged by the three parties. In January 2016, the court ruled in the Initial Lawsuit that the renewals were not subject to the EA requirement, but that the BLNR lacked legal authority to keep the revocable permits in holdover status beyond one year (the "Initial Ruling"). The Initial Ruling was appealed to the Intermediate Court of Appeals ("ICA") of the State of Hawai‘i.
In May 2016, while the appeal of the Initial Ruling was pending, the Hawai‘i State Legislature passed House Bill 2501, which specified that the BLNR has the legal authority to issue holdover revocable permits for the disposition of water rights for a period not to exceed three years. The governor signed this bill into law as Act 126 in June 2016. Pursuant to Act 126, the annual authorization of the existing holdover permits was sought and granted by the BLNR in December 2016, November 2017 and November 2018 for calendar years 2017, 2018 and 2019. No extension of Act 126 was approved by the Hawai‘i State Legislature in 2019.
In June 2019, the ICA vacated the Initial Ruling, effectively reversing the determination that the BLNR lacked authority to keep the revocable permits in holdover status beyond one year (the "ICA Ruling"). The ICA remanded the case back to the trial court to determine whether the holdover status of the permits was both (a) "temporary" and (b) in the best interest of the State, as required by statute. The plaintiffs filed a motion with the ICA for reconsideration of its decision, which was denied on July 5, 2019. On September 30, 2019, the plaintiffs filed a request with the Supreme Court of Hawai‘i to review
and reverse the ICA Ruling. On November 25, 2019, the Supreme Court of Hawai‘i granted the plaintiffs' request to review the ICA Ruling and, on May 5, 2020, oral argument was held.
On October 11, 2019, the BLNR took up the renewal of all the existing water revocable permits in the state, acting under the ICA Ruling, and approved the continuation of the four East Maui water revocable permits for another one-year period through December 31, 2020. On November 13, 2020, the BLNR approved another renewal of such permits through December 31, 2021.
On March 2, 2022, the Supreme Court of Hawai’i vacated the ICA’s ruling relating to the BLNR's decision to continue the revocable permits for the calendar year 2015, holding that Hawaii Revised Statutes Chapter 343 (the Hawaii Environmental Policy Act) did apply to the permits. The court remanded the matter back to the Circuit Court to determine if any exceptions would apply and, if not, how HRS Chapter 343 should be applied in light of the steps taken by A&B/EMI toward the long-term water lease. The Supreme Court of Hawai’i also determined that the BLNR had the statutory authority to continue the permits for more than one year, but required BLNR to make findings of fact and conclusions of law determining that the action would serve the best interests of the State. A&B/EMI will continue to defend against the plaintiffs’ claims on remand.
In a separate matter, on December 7, 2018, a contested case request filed by the Sierra Club (contesting the BLNR's November 2018 approval of the 2019 revocable permits) was denied by the BLNR. On January 7, 2019, the Sierra Club filed a lawsuit in the circuit court of the first circuit in Hawai‘i against BLNR, A&B and EMI, seeking to invalidate the 2019 and 2020 holdovers of the revocable permits for, among other things, failure to perform an EA. The lawsuit also sought to enjoin A&B/EMI from diverting more than 25 million gallons a day until a permit or lease is properly issued by the BLNR, and for the imposition of certain conditions on the revocable permits by the BLNR. The count seeking to invalidate the revocable permits based on the failure to perform an EA was dismissed by the court, based on the ICA Ruling in the Initial Lawsuit. The Sierra Club’s lawsuit was amended to include a challenge to the BLNR’s renewal of the revocable permits for calendar year 2020. After a full trial on the merits held beginning in August of 2020, the court ruled, on April 6, 2021, against the Sierra Club on its lawsuit challenging the 2019 and 2020 revocable permits. On February 17, 2022, the Sierra Club filed its notice of appeal challenging the decision on the August 2020 trial. The court separately considered a lawsuit filed by the Sierra Club appealing the BLNR’s decision to deny it a contested case hearing on the 2021 revocable permits, which were granted by the BLNR on or about November 13, 2020. In that case, on May 28, 2021, the court issued an interim decision that the Sierra Club’s due process rights were violated, ordered the BLNR to hold a contested case hearing on the 2021 permits, and that the permits would be vacated. On July 30, 2021, the court modified its ruling to say that the permits would not be invalidated, but left in place pending the outcome of the contested case hearing. The contested case hearing was held by the BLNR in December 2021 to address the continuation of the revocable permits for both calendar years 2021 and 2022 and BLNR issued a decision on June 30, 2022. On December 27, 2021, while BLNR’s decision in the contested case hearing was pending, the court further modified its ruling to allow the permits to remain in place until the earlier of May 1, 2022, the date on which the BLNR renders a substantive decision on the continuation of the permits for calendar year 2022, or further order of the court. On April 26, 2022, the court orally granted an extension of the May 1, 2022 deadline to the earlier of June 15, 2022, or the date on which the BLNR renders a substantive decision on the continuation of the permits for calendar year 2022, or as may be further ordered by the court. On June 1, 2022, the court granted an extension of the June 15, 2022 deadline to the earlier of July 15, 2022 or the date on which the BLNR renders a substantive decision on the continuation of the permits for calendar year 2022 or as may be further ordered by the court. On June 30, 2022, the BLNR issued its final decision on the contested case hearing on the permits for calendar years 2021 and 2022, approving the continuation of the permits through the end of calendar year 2022. The Sierra Club has filed a notice of appeal of that decision to the Circuit Court of the First Circuit in Hawai‘i. The Company and the BLNR also appealed the court’s determination that the Sierra Club was entitled to a contested case hearing on the 2021 revocable permits.
On November 10, 2022, the BLNR voted to continue the revocable permits for calendar year 2023 and, at that same meeting, denied the Sierra Club’s oral request for a contested case hearing. The Sierra Club subsequently submitted a written request to the BLNR for a contested case hearing on the continuation of the revocable permits, which the BLNR denied on December 9, 2022. On November 29, 2022, the Sierra Club filed an appeal of BLNR’s decisions to deny its oral request for a contested case hearing and to continue the revocable permits for 2023 and on December 15, 2022, the Sierra Club amended its appeal to also challenge the BLNR’s denial of its written request for a contested case hearing. The BLNR’s decision to continue the permits through the end of calendar year 2023 will stand unless overturned on appeal or the Sierra Club obtains a preliminary injunction to prevent the decision from remaining in place.
In connection with A&B’s obligation to continue the existing process to secure a long-term water lease from the State, A&B and EMI will defend against the remaining claims made by the Sierra Club.
In addition to the litigation described above, the Company is a party to, or may be contingently liable in connection with, other legal actions arising in the normal conduct of its businesses. While the outcomes of such litigation and claims cannot
be predicted with certainty, in the opinion of management after consultation with counsel, the reasonably possible losses would not have a material effect on the Company's consolidated financial statements as a whole.
Further note that certain of the Company's properties and assets may become the subject of other types of claims and assessments at various times (e.g., environmental matters based on normal operations of such assets). Depending on the facts and circumstances surrounding such potential claims and assessments, the Company records an accrual if it is deemed probable that a liability has been incurred and the amount of loss can be reasonably estimated/valued as of the date of the financial statements.
11. Revenue and Contract Balances
The Company generates revenue through its Commercial Real Estate and Land Operations segments. Through its Commercial Real Estate segment, the Company owns and operates a portfolio of commercial real estate properties and generates income (i.e., revenue) as a lessor through leases of such assets. Refer to Note 12 – Leases - The Company as a Lessor for further discussion of lessor income recognition. The Land Operations segment generates revenue from contracts with customers. The Company further disaggregates revenue from contracts with customers by revenue type when appropriate if the Company believes disaggregation best depicts how the nature, amount, timing and uncertainty of the Company's revenue and cash flows are affected by economic factors. Revenue by type for the years ended December 31, 2022, 2021 and 2020, was as follows (in millions):
| | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
Revenues: | | | | | | |
Commercial Real Estate | | $ | 187.2 | | | $ | 174.1 | | | $ | 151.6 | |
Land Operations: | | | | | | |
Development sales revenue | | 8.1 | | | 16.0 | | | 7.9 | |
Unimproved/other property sales revenue | | 19.9 | | | 41.3 | | | 9.7 | |
Other operating revenue | | 15.3 | | | 22.6 | | | 21.1 | |
Land Operations | | 43.3 | | | 79.9 | | | 38.7 | |
Total revenues | | $ | 230.5 | | | $ | 254.0 | | | $ | 190.3 | |
Timing of revenue recognition may differ from the timing of invoicing to customers. Generally, unearned project-related costs will be earned over the next twelve months.
The following table provides information about receivables, contract assets and contract liabilities from contracts with customers as of December 31, 2022 and 2021 (in millions):
| | | | | | | | | | | | | | |
| | 2022 | | 2021 |
Accounts receivable | | $ | 8.6 | | | $ | 3.0 | |
Allowances (credit losses and doubtful accounts) | | (2.5) | | | (0.8) | |
Accounts receivable, net of allowance for credit losses and allowance for doubtful accounts | | $ | 6.1 | | | $ | 2.2 | |
Variable consideration1 | | $ | 62.0 | | | $ | 62.0 | |
Other deferred revenue | | $ | 6.8 | | | $ | 6.3 | |
| | | | |
1 Variable consideration deferred as of the end of the periods related to amounts received in the sale of agricultural land on Maui in 2018 that, under revenue recognition guidance, could not be included in the transaction price. |
For the year ended December 31, 2022, the Company did not recognize any revenue related to the Company's contract liabilities reported as of December 31, 2021. For the year ended December 31, 2021, the Company recognized revenue of approximately $0.9 million related to the Company's contract liabilities reported as of December 31, 2020.
On December 17, 2018, A&B entered into a Purchase and Sale Agreement and Escrow Instructions (the "PSA") with Mahi Pono (the "Buyer") related to the sale of agricultural land on Maui. In connection with the sale, the Company deferred approximately $62.0 million of revenue related to certain performance obligations involving securing adequate water to support the Buyer's agricultural plans for the land, through an agreement with the State of Hawai‘i to provide rights to access state water for agricultural irrigation (“State Water Lease”), as well as ensuring that the Buyer has continued access to water prior to the issuance of the State Water Lease. Under the terms of the PSA, the Company may be required to remit amounts up to $62.0 million to the Buyer to the extent performance obligations are not met (recorded as deferred revenue of $62.0 million as of December 31, 2022 and 2021).
Regarding other information related to the Company's contracts with customers, the amount of revenue recognized from performance obligations satisfied in prior periods (e.g., due to changes in transaction price) was not material in any of the periods presented.
12. Leases - The Company as a Lessor
The Company leases real estate property to tenants under operating leases. Such activity is primarily composed of operating leases within its CRE segment.
As a result of the coronavirus pandemic ("COVID-19"), the Company provided certain of its tenants rent relief arrangements during the years ended December 31, 2022, 2021 and 2020, which typically consisted of rent deferrals or other relief modifications that resulted in changes to fixed contractual lease payments for specified months. Consistent with lease accounting guidance and interpretations provided by the FASB for rent relief arrangements specifically related to COVID-19, the Company elected to treat such eligible lease concessions (i.e., such rent deferrals, fixed-to-variable modifications or payment forgiveness arrangements that do not result in a substantial increase in the rights of the lessor or obligations of the lessee) outside of the lease accounting modification framework.
For such eligible rent deferrals, the Company accounts for the event as if no changes to the lease contract were made and continues to record lease receivables and recognize income during the deferral period. For the eligible other relief modifications mentioned above that resulted in reductions to fixed contractual lease payments the Company reports, for periods covered by the modification, reduced rental income (i.e., revenue) equal to the agreed-upon amounts (offset by any variable lease payments). The Company assesses collectability on all such amounts due under leases and only recognizes revenue to the extent such amounts are probable of collection (or payment is received).
The historical cost of, and accumulated depreciation on, leased property as of December 31, 2022 and 2021, was as follows (in millions):
| | | | | | | | | | | |
| 2022 | | 2021 |
Leased property - real estate | $ | 1,572.0 | | | $ | 1,562.8 | |
Less accumulated depreciation | (201.8) | | | (182.1) | |
Property under operating leases - net | $ | 1,370.2 | | | $ | 1,380.7 | |
Total rental income (i.e., revenue) under these operating leases relating to lease payments and variable lease payments were as follows (in millions):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Lease payments | $ | 130.8 | | | $ | 122.7 | | | $ | 99.1 | |
Variable lease payments | 59.3 | | | 55.8 | | | 53.3 | |
Total rental income | $ | 190.1 | | | $ | 178.5 | | | $ | 152.4 | |
Contractual future lease payments to be received on non-cancelable operating leases as of December 31, 2022, were as follows (in millions):
| | | | | |
2023 | $ | 124.5 | |
2024 | 113.5 | |
2025 | 96.6 | |
2026 | 83.9 | |
2027 | 73.0 | |
Thereafter | 554.6 | |
Total future lease payments to be received | $ | 1,046.1 | |
| |
13. Leases - The Company as a Lessee
Principal non-cancelable operating leases include land and office space that have lease terms that expire through 2031. Management expects that in the normal course of business, most operating leases will be renewed or replaced by other similar leases. The Company has equipment under a finance lease with a lease term that expires through 2027.
Lease expense for operating leases that provide for future escalations are accounted for on a straight-line basis. For the years ended December 31, 2022 and 2021, lease expense under operating and finance leases was as follows (in millions):
| | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
Lease cost - operating and finance leases: | | | | | | |
Operating lease cost | | $ | 2.7 | | | $ | 2.5 | | | $ | 2.5 | |
Finance lease cost: | | | | | | |
Amortization of right-of-use assets | | 0.1 | | | — | | | — | |
| | | | | | |
Total lease cost - operating and finance leases | | $ | 2.8 | | | $ | 2.5 | | | $ | 2.5 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Other amounts relating to leases segregated between those for finance and operating leases include the following for the years ended December 31, 2022 and 2021 (dollars in millions):
| | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
Cash paid for amounts included in the measurement of lease liabilities: | | | | | | |
Operating cash outflows from operating leases | | $ | 2.7 | | | $ | 2.5 | | | $ | 2.4 | |
Operating cash outflows from financing leases | | $ | — | | | $ | — | | | $ | — | |
Financing cash flows from finance leases | | $ | 0.1 | | | $ | — | | | $ | — | |
Other details: | | | | | | |
Weighted-average remaining lease term (years) - operating leases | | 3.0 | | 3.7 | | 4.6 |
Weighted-average remaining lease term (years) - finance leases | | 4.8 | | 0.0 | | 0.0 |
Weighted-average discount rate - operating leases | | 4.2 | % | | 4.4 | % | | 4.4 | % |
Weighted-average discount rate - finance leases | | 4.1 | % | | — | % | | — | % |
Future lease payments under non-cancelable operating and finance leases as of December 31, 2022, were as follows (in millions):
| | | | | | | | | | | | | | |
| | Operating Leases | | Finance Leases |
2023 | | $ | 2.6 | | | $ | 0.2 | |
2024 | | 2.1 | | | 0.2 | |
2025 | | 0.7 | | | 0.2 | |
2026 | | 0.6 | | | 0.2 | |
2027 | | 0.2 | | | 1.8 | |
Thereafter | | 0.4 | | | — | |
Total lease payments | | $ | 6.6 | | | $ | 2.6 | |
Less: Interest | | (1.7) | | | — | |
Total lease liabilities | | $ | 4.9 | | | $ | 2.6 | |
ROU assets and lease liabilities related to operating leases are presented separately on the consolidated balance sheets. Information for finance leases as of the years ended December 31, 2022 and 2021, were as follows (in millions):
| | | | | | | | | | | | | | | | | |
| Consolidated Balance Sheet Location | | 2022 | | 2021 |
Assets | | | | | |
ROU assets | Real estate property, net | | $ | 2.6 | | | $ | — | |
Liabilities | | | | | |
Lease liabilities | Notes payable and other debt | | $ | 2.6 | | | $ | — | |
14. Share-based Payment Awards
On April 26, 2022, shareholders approved the Alexander & Baldwin, Inc. 2022 Omnibus Incentive Plan ("2022 Plan"). The 2022 Plan serves as the successor to the 2012 Incentive Compensation Plan ("2012 Plan") and allows for the granting of stock options, stock appreciation rights, stock awards, restricted stock units, dividend equivalent rights, and other awards. The 2012 Plan allowed for the granting of stock options, stock appreciation rights, stock awards, and restricted stock units, including an automatic grant program for non-employee directors. All awards outstanding under the 2012 Plan remain subject to the terms of the 2012 Plan. Effective April 26, 2022, no additional shares will be issued under the 2012 Plan. The shares of common stock authorized to be issued under the 2022 Plan are to be drawn from the shares of the Company's authorized but unissued common stock or from shares of its common stock that the Company acquired, including shares purchased on the open market or private transactions.
The 2022 Plan allows for the granting of up to 3.2 million shares in the form of stock options, restricted stock units or common stock, subject to adjustment for shares under the 2022 Plan or 2012 Plan that expire or are forfeited, cancelled, or terminated for any reason prior to the issuance of the shares. This includes 2.5 million new shares and 0.7 million shares that carried over from the 2012 Plan. As of December 31, 2022, there were 3.4 million remaining shares available for future grants.
Under the 2022 Plan and the 2012 Plan, shares of common stock or restricted stock units may be granted as time-based awards or market-based performance awards.
At each annual shareholder meeting, non-employee directors will receive an award of restricted stock units that entitle the holder to an equivalent number of shares of common stock upon vesting.
The following table summarizes non-vested restricted stock unit activity for the year ended December 31, 2022, (in thousands, except weighted-average grant-date fair value amounts):
| | | | | | | | | | | | | | |
| | Restricted Stock Units | | Weighted- Average Grant-date Fair Value |
Outstanding, January 1, 2022 | | 677.7 | | $ | 21.26 |
Granted | | 306.3 | | $ | 25.56 |
Vested | | (305.1) | | $ | 24.30 |
Canceled | | (116.5) | | $ | 21.84 |
Outstanding, December 31, 2022 | | 562.4 | | $ | 21.83 |
The time-based restricted stock units granted to employees vest ratably over a period of three years. The time-based restricted stock units granted to non-employee directors vest over a one-year period. The market-based performance share units cliff vest over three years, provided that the total shareholder return of the Company's common stock over the relevant period meets or exceeds pre-defined levels of total shareholder returns relative to indices, as defined.
As of December 31, 2022, there was $5.4 million of total unrecognized compensation cost related to non-vested restricted stock units granted under the 2022 plan; that cost is expected to be recognized over a remaining weighted-average period of 1.7 years.
The fair value of the Company's time-based awards is determined using the Company's stock price on the date of grant. The fair value of the Company's market-based awards is estimated using the Company's stock price on the date of grant and the probability of vesting using a Monte Carlo simulation with the following weighted-average assumptions:
| | | | | | | | | | | | | | | | | | | | |
| | 2022 Grants | | 2021 Grants | | 2020 Grants |
Volatility of A&B common stock | | 47.7 | % | | 47.2 | % | | 22.6 | % |
Average volatility of peer companies | | 51.1 | % | | 51.1 | % | | 22.5 | % |
Risk-free interest rate | | 1.4 | % | | 0.2 | % | | 1.3 | % |
The weighted-average grant date fair value of the time-based restricted units and market-based performance share units granted in 2022, 2021 and 2020, was $25.56, $16.63, and $22.01, respectively. No compensation cost is recognized for actual forfeitures of time-based or market-based awards if an employee is terminated prior to rendering the requisite service period. There was no tax benefit realized upon vesting for the years ended December 31, 2022, 2021 and 2020.
The Company recognizes compensation cost net of actual forfeitures of time-based or market-based awards. A summary of compensation cost related to share-based payments is as follows for the years ended December 31, 2022, 2021 and 2020, (in millions):
| | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
Share-based expense: | | | | | | |
Time-based and market-based restricted stock units | | $ | 4.9 | | | $ | 5.9 | | | $ | 5.8 | |
Total share-based expense | | 4.9 | | | 5.9 | | | 5.8 | |
Total recognized tax benefit | | — | | | — | | | — | |
Share-based expense (net of tax) | | $ | 4.9 | | | $ | 5.9 | | | $ | 5.8 | |
| | | | | | |
Cash received upon option exercise | | $ | — | | | $ | 1.4 | | | $ | 3.5 | |
Intrinsic value of options exercised | | $ | — | | | $ | 0.6 | | | $ | 0.5 | |
Tax benefit realized upon option exercise | | $ | — | | | $ | — | | | $ | — | |
Fair value of stock vested | | $ | 5.6 | | | $ | 5.4 | | | $ | 3.0 | |
15. Employee Benefit Plans
During the year ended December 31, 2022, the Company completed the termination of its funded single-employer defined benefit pension plans that covered certain non-bargaining unit employees and bargaining unit employees of the Company (see Pension Plan Termination below), and transferred the life insurance benefits for retirees as of June 30, 2022, to an insurance company. The Company continues to maintain its plans that provide retiree health care and the remaining life insurance benefits to certain salaried and hourly employees. Employees are generally eligible for such benefits upon retirement and completion of a specified number of years of service. The Company does not pre-fund these health care and life insurance benefits and has the right to modify or terminate certain of these plans in the future. Certain groups of retirees pay a portion of the benefit costs.
Pension Plan Termination: On February 23, 2021, the Company’s Board of Directors approved a plan to effect the termination of the A&B Retirement Plan for Salaried Employees of Alexander & Baldwin, LLC and the Pension Plan for Employees of A&B Agricultural Companies (collectively, the “Defined Benefit Plans”), which became effective on May 31, 2021. On June 30, 2022, the Company completed the termination of the Defined Benefit Plans by meeting the following criteria: (1) an irrevocable action to terminate the Defined Benefit Plans had occurred, (2) the Company was relieved of the primary responsibility of the Defined Benefit Plans, and (3) the significant risks related to the obligations of the Defined Benefit Plans and the assets used to effect the settlement was eliminated for the Company.
During the year ended December 31, 2022, the Company made cash contributions of $28.7 million to defined benefit plans, and in connection with the Defined Benefit Plans termination process, recorded a pre-tax settlement charge of $76.9 million within Pension termination in the consolidated statements of operations, which represents the acceleration of deferred charges previously included within accumulated other comprehensive loss and the impact of remeasuring the plan assets and obligations at termination. In addition, the Company recorded an income tax benefit of $18.3 million during the year ended December 31, 2022, to reclassify the tax effects in accumulated other comprehensive loss upon completion of the termination of the Defined Benefit Plans.
Benefit Obligations, Plan Assets and Funded Status of the Plans: The measurement date for the Company’s benefit plan disclosures is December 31 of each year. The status of the funded defined benefit pension plan and the unfunded accumulated post-retirement benefit plans as of December 31, 2022 and 2021, and are shown below (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Benefits | | Other Post-retirement Benefits | | Non-qualified Plan Benefits |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
Change in Benefit Obligation | | | | | | | | | | | | |
Benefit obligation at beginning of year | | $ | 227.2 | | | $ | 218.7 | | | $ | 12.6 | | | $ | 13.5 | | | $ | 3.1 | | | $ | 3.1 | |
Service cost | | 1.4 | | | 1.2 | | | 0.1 | | | 0.1 | | | — | | | — | |
Interest cost | | 0.7 | | | 5.1 | | | 0.4 | | | 0.3 | | | 0.1 | | | — | |
Plan participants’ contributions | | — | | | — | | | 0.6 | | | 0.7 | | | — | | | — | |
Actuarial (gain) loss | | (44.5) | | | 17.2 | | | (2.2) | | | (0.6) | | | (0.6) | | | — | |
Benefits paid | | (13.9) | | | (15.0) | | | (1.2) | | | (1.4) | | | — | | | — | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Settlement | | (170.9) | | | — | | | (2.2) | | | — | | | (0.6) | | | — | |
| | | | | | | | | | | | |
Benefit obligation at end of year | | $ | — | | | $ | 227.2 | | | $ | 8.1 | | | $ | 12.6 | | | $ | 2.0 | | | $ | 3.1 | |
| | | | | | | | | | | | |
Change in Plan Assets | | | | | | | | | | | | |
Fair value of plan assets at beginning of year | | $ | 186.6 | | | $ | 200.6 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Actual return on plan assets | | (27.1) | | | (5.7) | | | — | | | — | | | — | | | — | |
Employer contributions | | 25.3 | | | 6.7 | | | 2.8 | | | 0.7 | | | 0.6 | | | — | |
Participant contributions | | — | | | — | | | 0.6 | | | 0.7 | | | — | | | — | |
| | | | | | | | | | | | |
Benefits paid | | (13.9) | | | (15.0) | | | (1.2) | | | (1.4) | | | — | | | — | |
Settlement | | (170.9) | | | — | | | (2.2) | | | — | | | (0.6) | | | — | |
| | | | | | | | | | | | |
Fair value of plan assets at end of year | | $ | — | | | $ | 186.6 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | |
Funded Status (Recognized Liability1) | | $ | — | | | $ | (40.6) | | | $ | (8.1) | | | $ | (12.6) | | | $ | (2.0) | | | $ | (3.1) | |
| | | | | | | | | | | | |
|
1 Presented as Accrued pension and post-retirement benefits in the accompanying consolidated balance sheets as of December 31, 2022 and 2021. |
Defined benefit pension plan actuarial losses in the changes in benefit obligations for 2021 resulted primarily from reflecting a lump sum window and transfer of remaining benefit obligations to an insurance company. Defined benefit pension plan actuarial gains in the changes in benefit obligations for 2022 resulted from favorable lump sum election and insurer annuity pricing upon pension termination.
Benefit Plan Assets Investment Policies and Target Asset Allocations: Prior to termination in June 2022, the Company served as the plan sponsor for the defined benefit pension plan and was responsible for the investment and management of the pension plan assets. The Company managed the pension plan assets based upon a liability-driven investment strategy, which sought to increase the correlation of the pension plan assets and liabilities to reduce the volatility of the plan's funded status and, over time, improve the funded status of the plan. As a result, the asset allocation of the defined benefit pension plan was weighted toward fixed income investments, which reduced investment volatility, but also reduced investment returns over time. In connection with the liability-driven investment strategy, the Company appointed an investment adviser to direct investments and select investment options, based on established guidelines. The Company’s weighted-average asset allocation as of December 31, 2021, was as follows:
| | | | | | | | | | | | |
| | | | | | 2021 |
Fixed income securities1 | | | | | | 98 | % |
Cash and cash equivalents | | | | | | 2 | % |
Total | | | | | | 100 | % |
| | | | | | |
1Fixed income securities include investment-grade corporate bonds from diversified industries and U.S. Treasuries. |
Fair Value of Plan Assets: As a result of the pension termination, the Company had no defined benefit pension plan assets as of December 31, 2022, and therefore, no corresponding fair values. The fair values of the Company’s defined benefit pension plan assets as of December 31, 2021, by asset category, were as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Fair Value Measurements at |
| | | | December 31, 2021 |
| | | | | | | | Total | | Quoted Prices in Active Markets (Level 1) | | Significant Observable Inputs (Level 2) |
Asset Category | | | | | | | | | | | | |
Cash and cash equivalents | | | | | | | | $ | 4.6 | | | $ | 4.6 | | | $ | — | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Assets measured at NAV | | | | | | | | 182.0 | | | — | | | — | |
Total | | | | | | | | $ | 186.6 | | | $ | 4.6 | | | $ | — | |
| | | | | | | | | | | | |
The Company’s pension plan assets were held in a master trust and stated at estimated fair value, which was based on the fair values of the underlying investments. Purchases and sales of securities were recorded on a trade-date basis. Interest income was recorded on the accrual basis. Dividends were recorded on the ex-dividend date.
Investments in funds that were measured at fair value using the net asset value ("NAV") per share practical expedient in accordance with ASC 820 are not classified in the fair value hierarchy table above. The NAV was based on the fair value of the underlying assets owned by the fund and determined by the investment manager or custodian of the fund. The fair value amounts presented is intended to permit reconciliation of the fair value hierarchy to the amounts presented in the fair value of plan assets. These investments primarily included other fixed income investments and securities.
Expected Rate-of-Return on Plan Assets: The expected return on plan assets assumption was principally based on the long-term outlook for various asset class returns, asset mix, the historical performance of the plan assets under the liability-driven investment strategy, and a comparison of the estimated long-term return calculated to the distribution of assumptions adopted by other plans with similar asset mixes. For the years ended December 31, 2022 and 2021, the plan assets experienced a negative return of 14.5% and 2.8%, respectively.
Accumulated Benefit Obligation for Defined Benefit Pension Plans: In 2007, the Company changed the traditional defined benefit pension plan formula for new non-bargaining unit employees hired after January 1, 2008, and, replaced it with a cash balance defined benefit pension plan formula. Subsequently, effective January 1, 2012, the Company changed the benefits under its traditional defined benefit plans for non-bargaining unit employees hired before January 1, 2008, and, replaced the benefit with the same cash balance defined benefit pension plan formula provided to those employees hired after January 1, 2008. Retirement benefits under the cash balance pension plan formula were based on a fixed percentage of eligible compensation, plus interest. The plan interest credit rate varied from year-to-year based on the 10-year U.S. Treasury rate. During the year ended December 31, 2019, the Company amended the cash balance pension plan such that, effective January 1, 2020, benefit accruals under the cash balance formula ceased and were replaced with a non-elective contribution by the Company into a defined contribution plan. All accumulated benefits under the traditional defined benefit pension plan and the cash balance pension plan will remain credited to employees' accounts under the amendments made in 2019. During the year ended December 31, 2020, the Company amended the traditional defined benefit pension plan formula for remaining bargaining unit employees to cease accruals effective January 1, 2021.
As a result of the pension termination, the Company had no accumulated benefit obligation as of December 31, 2022. The accumulated benefit obligation for the Company’s qualified pension plans was $227.2 million as of December 31, 2021.
Estimated Benefit Payments: The estimated future benefit payments for the next ten years are as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | 2028-2032 |
Estimated Benefit Payments | | | | | | | | | | | | |
Post-retirement Benefits | | $ | 0.6 | | | $ | 0.6 | | | $ | 0.6 | | | $ | 0.6 | | | $ | 0.6 | | | $ | 2.7 | |
Non-qualified Plan Benefits | | — | | | 0.5 | | | 1.6 | | | — | | | — | | | — | |
Total | | $ | 0.6 | | | $ | 1.1 | | | $ | 2.2 | | | $ | 0.6 | | | $ | 0.6 | | | $ | 2.7 | |
Estimated Future Contributions: Contributions are determined annually for each plan by the Company’s pension Administrative Committee, based upon the actuarial-determined minimum required contribution under the Employee Retirement Income Security Act of 1974, as amended, the Pension Protection Act of 2006, and the maximum deductible contribution allowed for tax purposes. During the years ended December 31, 2022, 2021 and 2020, the Company made contributions of $28.7 million, $7.4 million, and zero to its defined benefit plans, respectively. The Company’s funding policy is to contribute cash to its defined benefit plans so that it meets at least the minimum contribution requirements. With the completion of the pension plan termination in 2022, the Company expects to make no further contributions to the defined benefit pension plans.
Net Benefit Cost Recognized and Amounts Recognized in Other Comprehensive Income: Components of the net periodic benefit cost and other amounts recognized in other comprehensive income (loss) for the defined benefit pension plans and the post-retirement health care and life insurance benefit plans during the years ended December 31, 2022, 2021 and 2020, are shown below (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Benefits | | Other Post-retirement Benefits | | Non-qualified Plan Benefits |
Components of Net Periodic Benefit Cost | | 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 |
Service cost | | $ | 1.4 | | | $ | 1.2 | | | $ | 0.8 | | | $ | 0.1 | | | $ | 0.1 | | | $ | 0.1 | | | $ | — | | | $ | — | | | $ | — | |
Interest cost | | 0.7 | | | 5.1 | | | 6.5 | | | 0.4 | | | 0.3 | | | 0.3 | | | 0.1 | | | — | | | 0.1 | |
Expected return on plan assets | | (2.6) | | | (5.0) | | | (6.8) | | | — | | | — | | | — | | | — | | | — | | | — | |
Amortization of net loss | | 1.7 | | | 2.5 | | | 2.5 | | | 0.1 | | | — | | | (0.1) | | | 0.1 | | | 0.1 | | | 0.1 | |
Amortization of prior service cost | | 0.1 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | | |
Pension termination | | 76.7 | | | — | | | — | | | 0.1 | | | — | | | — | | | 0.1 | | | — | | | — | |
Net periodic benefit cost | | $ | 78.0 | | | $ | 3.8 | | | $ | 3.0 | | | $ | 0.7 | | | $ | 0.4 | | | $ | 0.3 | | | $ | 0.3 | | | $ | 0.1 | | | $ | 0.2 | |
| | | | | | | | | | | | | | | | | | |
Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income (Loss) | | | | | | | | | | | | | | | | | | |
Net gain (loss) | | $ | 14.4 | | | $ | (28.0) | | | $ | (3.8) | | | $ | 2.2 | | | $ | 0.6 | | | $ | (3.7) | | | $ | 0.4 | | | $ | — | | | $ | (0.2) | |
Amortization of net loss1 | | 1.7 | | | 2.6 | | | 2.5 | | | 0.1 | | | 0.1 | | | (0.1) | | | 0.1 | | | 0.1 | | | 0.1 | |
| | | | | | | | | | | | | | | | | | |
Prior service cost | | — | | | — | | | (0.1) | | | — | | | — | | | — | | | — | | | — | | | — | |
Amortization of prior service credit1 | | 0.1 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | | |
Pension termination1 | | 76.7 | | | — | | | — | | | 0.1 | | | — | | | — | | | 0.1 | | | — | | | — | |
Income taxes related to other comprehensive income (loss)1 | | (18.3) | | | — | | | — | | | (0.1) | | | — | | | — | | | 0.1 | | | — | | | — | |
Total recognized in Other comprehensive income (loss) | | 74.6 | | | (25.4) | | | (1.4) | | | 2.3 | | | 0.7 | | | (3.8) | | | 0.7 | | | 0.1 | | | (0.1) | |
Total recognized in net periodic benefit cost and Other comprehensive income (loss) | | $ | (3.4) | | | $ | (29.2) | | | $ | (4.4) | | | $ | 1.6 | | | $ | 0.3 | | | $ | (4.1) | | | $ | 0.4 | | | $ | — | | | $ | (0.3) | |
| | | | | | | | | | | | | | | | | | |
1 Represents amortization or recognition of balances previously recorded to Accumulated other comprehensive income (loss) in the consolidated balance sheets and recognized as a component of net periodic benefit cost. |
Other components of net periodic benefit costs (other than the service cost component) are recorded in Interest and other income (expense), net in the consolidated statements of operations.
Amounts recognized on the consolidated balance sheets in accumulated other comprehensive income (loss) as of December 31, 2022 and 2021, were as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Benefits | | Other Post-retirement Benefits | | Non-qualified Plan Benefits |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
Net gain (loss), net of taxes | | $ | — | | | $ | (74.5) | | | $ | 0.3 | | | $ | (2.6) | | | $ | — | | | $ | (0.7) | |
Unrecognized prior service credit (cost), net of taxes | | — | | | (0.1) | | | — | | | — | | | — | | | — | |
Total Accumulated other comprehensive income (loss) | | $ | — | | | $ | (74.6) | | | $ | 0.3 | | | $ | (2.6) | | | $ | — | | | $ | (0.7) | |
Unrecognized gains and losses of the post-retirement benefit plans are amortized over the average future lifetime of inactive participants in excess of a 10% corridor. Although current health costs are expected to increase, the Company attempts to mitigate these increases by maintaining caps on certain of its benefit plans, using lower cost health care plan options where possible, requiring that certain groups of employees pay a portion of their benefit costs, self-insuring for certain insurance plans, encouraging wellness programs for employees, and implementing measures to mitigate future benefit cost increases.
Assumptions in Plan Accounting: The weighted average assumptions used to determine benefit information during the years ended December 31, 2022, 2021 and 2020, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Benefits | | Other Post-retirement Benefits | | Non-qualified Plan Benefits |
| | 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 |
Weighted Average Assumptions | | | | | | | | | | | | | | | | | | |
Discount rate to determine benefit obligations | | N/A | | 2.26% | | 2.40% | | 5.41% | | 2.86% | | 2.49% | | 5.24% | | 1.68% | | 1.07% |
Discount rate to determine net cost | | N/A | | 2.39% | | 3.28% | | 3.51% | | 2.48% | | 3.38% | | 1.68% | | 1.07% | | 2.48% |
Rate of compensation increase | | N/A | | N/A | | N/A | | 0.5%-3.0% | | 0.5%-3.0% | | 0.5%-3.0% | | N/A | | N/A | | N/A |
Expected return on plan assets | | N/A | | 2.60% | | 3.70% | | N/A | | N/A | | N/A | | N/A | | N/A | | N/A |
Interest crediting rates | | N/A | | 2.15% | | 0.71% | | N/A | | N/A | | N/A | | 2.15% | | 2.15% | | 0.71% |
Initial health care cost trend rate | | N/A | | N/A | | N/A | | 5.90% | | 5.90% | | 5.70% | | N/A | | N/A | | N/A |
Ultimate rate | | N/A | | N/A | | N/A | | 4.00% | | 4.00% | | 4.50% | | N/A | | N/A | | N/A |
Year ultimate rate is reached | | N/A | | N/A | | N/A | | 2045 | | 2045 | | 2037 | | N/A | | N/A | | N/A |
A&B Defined Contribution Plans: The Company sponsors defined contribution plans that qualify under Section 401(k) of the Code and provides matching contributions of up to 3% of eligible compensation. The Company’s matching contributions expensed under these plans totaled $0.6 million for each of the years ended December 31, 2022, 2021 and 2020, respectively. The Company also maintains profit sharing plans and, if a minimum threshold of Company performance is achieved, provides contributions of 1% to 5%, depending upon Company performance above the minimum threshold. There were $0.8 million, $0.7 million and $0.5 million of profit sharing contribution expenses recognized in the years ended December 31, 2022, 2021 and 2020, respectively.
As noted above, during the year ended December 31, 2019, the Company amended the cash balance pension plan such that, effective January 1, 2020, benefit accruals under the cash balance formula would cease and would be replaced with a non-elective contribution of 3% of the participant's annual eligible compensation made by the Company into the participant's defined contribution plan. The Company's contribution expensed under this non-elective component of the defined contribution plan totaled $0.7 million, $0.6 million, and $0.7 million for the years ended December 31, 2022, 2021 and 2020, respectively.
16. Income Taxes
The Company elected to be taxed as a REIT and operate in a manner that allows us to qualify as a REIT for federal income tax purposes commencing with our taxable year ended December 31, 2017. The Company's taxable REIT subsidiary ("TRS") filed separately as a C corporation. The Company also files separate income tax returns in various states.
As a REIT, the Company will generally be allowed a deduction for dividends that it pays, and therefore, will not be subject to United States federal corporate income tax on its taxable income that is currently distributed to shareholders. The Company may be subject to certain state gross income and franchise taxes, as well as taxes on any undistributed income and federal and state corporate taxes on any income earned by its TRS.
Distributions with respect to the Company’s common stock can be characterized for federal income tax purposes as ordinary income, capital gains, unrecaptured section 1250 gains, return of capital, or a combination thereof. Taxable distributions paid for the years ended December 31, 2022, 2021 and 2020, were classified as ordinary income.
The income tax expense (benefit) on income (loss) from continuing operations for the years ended December 31, 2022, 2021 and 2020, consisted of the following (in millions):
| | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
Current: | | | | | | |
Federal | | $ | (18.0) | | | $ | 0.1 | | | $ | (0.1) | |
State | | (0.3) | | | (0.1) | | | (0.3) | |
Current | | $ | (18.3) | | | $ | — | | | $ | (0.4) | |
Deferred: | | | | | | |
Federal | | $ | — | | | $ | — | | | $ | — | |
State | | — | | | — | | | — | |
Deferred | | $ | — | | | $ | — | | | $ | — | |
Income tax expense (benefit) | | $ | (18.3) | | | $ | — | | | $ | (0.4) | |
Income tax expense (benefit) for the years ended December 31, 2022, 2021 and 2020, differs from amounts computed by applying the statutory federal rate to income from continuing operations before income taxes for the following reasons (in millions):
| | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
Computed federal income tax expense (benefit) | | $ | 3.9 | | | $ | 15.8 | | | $ | 4.0 | |
State income taxes | | (1.5) | | | 1.4 | | | (0.4) | |
Valuation allowance | | 5.3 | | | (8.0) | | | (0.2) | |
REIT rate differential | | (7.8) | | | (9.0) | | | (4.7) | |
Other non-deductible expense | | — | | | — | | | 0.6 | |
Share-based compensation | | (0.1) | | | 0.1 | | | 0.2 | |
Effective rate differences between current and deferred taxes | | 0.4 | | | (0.5) | | | 0.1 | |
Pension termination | | (18.3) | | | — | | | — | |
| | | | | | |
| | | | | | |
| | | | | | |
Other, net | | (0.2) | | | 0.2 | | | — | |
Income tax expense (benefit) | | $ | (18.3) | | | $ | — | | | $ | (0.4) | |
The change in the Company's effective tax rate for the year ended December 31, 2022, as compared to the year ended December 31, 2021, is primarily due to the termination of the Company's Defined Benefit Plans, impairments incurred in 2021 and 2022, and changes in the valuation allowance on deferred tax assets during the year and overall increase in pretax book income for the year ended December 31, 2022.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities as of December 31, 2022 and 2021, were as follows (in millions):
| | | | | | | | | | | | | | |
| | 2022 | | 2021 |
Deferred tax assets: | | | | |
Employee benefits | | $ | 6.3 | | | $ | 17.7 | |
Capitalized costs | | 1.5 | | | 1.6 | |
Joint ventures and other investments | | 6.0 | | | 6.4 | |
Impairment and amortization | | 24.8 | | | 1.7 | |
Solar investment benefits | | 14.9 | | | 15.7 | |
Insurance and other reserves | | 7.2 | | | 6.0 | |
Disallowed interest expense | | 8.9 | | | 10.5 | |
Net operating losses | | 44.1 | | | 52.6 | |
Operating lease liability | | 6.6 | | | 1.6 | |
Other | | 1.0 | | | 3.0 | |
Total deferred tax assets | | $ | 121.3 | | | $ | 116.8 | |
Valuation allowance | | (109.8) | | | (109.6) | |
Total net deferred tax assets | | $ | 11.5 | | | $ | 7.2 | |
| | | | |
Deferred tax liabilities: | | | | |
Property (including tax-deferred gains on real estate transactions) | | $ | 5.0 | | | $ | 5.6 | |
Operating lease asset | | 6.5 | | | 1.6 | |
| | | | |
Total deferred tax liabilities | | $ | 11.5 | | | $ | 7.2 | |
| | | | |
Net deferred tax assets (liabilities) | | $ | — | | | $ | — | |
Federal tax credit carryforwards at December 31, 2022, totaled $8.2 million, of which $8.1 million will expire in 2036 and $0.1 million will expire in 2039. State tax credit carryforwards at December 31, 2022, totaled $6.7 million and may be carried forward indefinitely under state law. As of December 31, 2022, the Company had gross federal net operating loss carryforwards of $169.2 million ($35.5 million tax-effected) that can be carried forward indefinitely under federal law. As of December 31, 2022, the Company had state net operating loss carryforwards of $169.7 million ($8.6 million tax-effected) that can be carried forward indefinitely.
A valuation allowance must be provided if it is more likely than not that some portion or all of the deferred tax assets will not be realized, based upon consideration of all positive and negative evidence. Sources of evidence include, among other things, a history of pretax earnings or losses, expectations of future results, tax planning opportunities and appropriate tax law.
Due to the recent losses the Company has generated in its TRS, the Company believes that it is more likely than not that its U.S. and state deferred tax assets will not be realized as of December 31, 2022. Therefore, the Company recorded an increase in the valuation allowance of $0.2 million on its net U.S. and state deferred tax assets for the current period. Should the Company determine that it would be able to realize its deferred tax assets in the foreseeable future, an adjustment to the deferred tax assets may cause a material increase to income in the period such determination is made. Significant management judgment is required in determining the period in which reversal of a valuation allowance should occur. The net change to the valuation allowance recorded during each of the years ended December 31, 2022, 2021 and 2020, was as follows (in millions):
| | | | | | | | | | | | | | | | | | | | |
| | Balance at Beginning of Year | | Net Change | | Balance at End of Year |
2022 | | $ | 109.6 | | | $ | 0.2 | | | $ | 109.8 | |
2021 | | $ | 104.0 | | | $ | 5.6 | | | $ | 109.6 | |
2020 | | $ | 99.3 | | | $ | 4.7 | | | $ | 104.0 | |
The Company receives an income tax benefit for exercised stock options calculated as the difference between the fair market value of the stock issued at the time of exercise and the option exercise price, tax-effected. The Company also receives an income tax benefit for restricted stock units when they vest, measured as the fair market value of the stock issued at the time of vesting, tax effected. Due to the Company's valuation allowance in the respective periods, there were no net tax benefits recognized from share-based transactions for the years ended December 31, 2022, 2021 and 2020.
The Company recognizes accrued interest and penalties on income taxes as a component of income tax expense. As of December 31, 2022, accrued interest and penalties were not material. The Company has not identified any material unrecognized tax positions and as such has no related interest or penalty accruals.
As of December 31, 2022, tax years 2019 and later are open to audit by the tax authorities. The Company does not believe that the result of any potential audits will have a material adverse effect on its results of operations, financial condition or liquidity.
17. Earnings Per Share ("EPS")
Basic earnings per common share excludes dilution and is calculated by dividing net earnings allocated to common shares by the weighted-average number of common shares outstanding for the period. Diluted earnings per common share is calculated by dividing net earnings allocated to common shares by the weighted-average number of common shares outstanding for the period, as adjusted for the potential dilutive effect of non-participating share-based awards, as well as adjusted by the number of additional shares, if any, that would have been outstanding had the potentially dilutive common shares been issued.
The following table provides a reconciliation of income (loss) from continuing operations to net income (loss) for the years ended December 31, 2022, 2021 and 2020 (in millions):
| | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
Income (loss) from continuing operations | | $ | 37.1 | | | $ | 75.4 | | | $ | 19.3 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Distributions and allocations to participating securities | | (0.2) | | | (0.3) | | | (0.1) | |
Income (loss) from continuing operations available to A&B shareholders | | 36.9 | | | 75.1 | | | 19.2 | |
Income (loss) from discontinued operations available to A&B shareholders | | (86.6) | | | (39.6) | | | (14.1) | |
Exclude: Loss (income) attributable to discontinued noncontrolling interest | | (1.1) | | | (0.4) | | | 0.4 | |
Net income (loss) available to A&B common shareholders | | $ | (50.8) | | | $ | 35.1 | | | $ | 5.5 | |
The number of shares used to compute basic and diluted earnings per share for the years ended December 31, 2022, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
Denominator for basic EPS - weighted average shares outstanding | | 72.6 | | | 72.5 | | | 72.3 | |
Effect of dilutive securities: | | | | | | |
Stock options and restricted stock unit awards | | 0.2 | | | 0.1 | | | 0.1 | |
| | | | | | |
Denominator for diluted EPS - weighted average shares outstanding | | 72.8 | | | 72.6 | | | 72.4 | |
There were 0.1 million, zero, and 0.3 million shares of anti-dilutive securities outstanding during the years ended December 31, 2022, 2021 and 2020 respectively.
18. Accumulated Other Comprehensive Income (Loss)
Other comprehensive income (loss) principally includes amortization of deferred pension and postretirement costs. The components of accumulated other comprehensive loss, net of taxes, were as follows for the years ended December 31, 2022 and 2021 (in millions):
| | | | | | | | | | | | | | |
| | 2022 | | 2021 |
Employee benefit plans: | | | | |
Pension plans | | $ | — | | | $ | (74.6) | |
Post-retirement plans | | (0.3) | | | (2.6) | |
Non-qualified benefit plans | | — | | | (0.7) | |
Total employee benefit plans | | (0.3) | | | (77.9) | |
Interest rate swap | | 2.1 | | | (2.8) | |
Accumulated other comprehensive income (loss) | | $ | 1.8 | | | $ | (80.7) | |
The changes in accumulated other comprehensive income (loss) by component for the years ended December 31, 2022, 2021 and 2020 were as follows (in millions, net of tax):
| | | | | | | | | | | | | | | | | | | | |
| | Employee Benefit Plans | | Interest Rate Swap | | Total |
Balance, January 1, 2020 | | $ | (48.0) | | | $ | (0.8) | | | $ | (48.8) | |
Other comprehensive income (loss) before reclassifications, net of taxes of $0 | | (7.7) | | | (6.9) | | | (14.6) | |
Amounts reclassified from accumulated other comprehensive income (loss), net of taxes of $0 | | 2.4 | | | 1.0 | | | 3.4 | |
Balance, December 31, 2020 | | $ | (53.3) | | | $ | (6.7) | | | $ | (60.0) | |
Other comprehensive income (loss) before reclassifications, net of taxes of $0 | | (27.4) | | | 2.3 | | | (25.1) | |
Amounts reclassified from accumulated other comprehensive income (loss), net of taxes of $0 | | 2.8 | | | 1.6 | | | 4.4 | |
Balance, December 31, 2021 | | $ | (77.9) | | | $ | (2.8) | | | $ | (80.7) | |
Other comprehensive income (loss) before reclassifications, net of taxes of $0 | | 17.0 | | | 4.9 | | | 21.9 | |
Amounts reclassified from accumulated other comprehensive income (loss), net of taxes of $0 | | 78.9 | | | — | | | 78.9 | |
Taxes on other comprehensive income (loss) | | (18.3) | | | — | | | (18.3) | |
Balance, December 31, 2022 | | $ | (0.3) | | | $ | 2.1 | | | $ | 1.8 | |
The reclassifications of other comprehensive income (loss) components out of accumulated other comprehensive income (loss) for the years ended December 31, 2022, 2021 and 2020, were as follows (in millions):
| | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
Unrealized interest rate hedging gain (loss) | | $ | 4.9 | | | $ | 2.3 | | | $ | (6.9) | |
Impact of reclassification adjustment to interest expense included in Net Income (Loss) | | 0.5 | | | 1.6 | | | 1.0 | |
Realized interest rate hedging gain (loss) | | (0.5) | | | — | | | — | |
Actuarial gain (loss) | | 17.0 | | | (27.4) | | | (7.7) | |
Amortization of defined benefit pension items reclassified to net periodic pension cost: | | | | | | |
Net loss* | | 1.9 | | | 2.8 | | | 2.5 | |
Prior service cost* | | — | | | — | | | (0.1) | |
| | | | | | |
Amortization of prior service credit* | | 0.1 | | | — | | | — | |
| | | | | | |
Pension termination | | 76.9 | | | — | | | — | |
Total before income tax | | $ | 100.8 | | | $ | (20.7) | | | $ | (11.2) | |
Income taxes related to other comprehensive income (loss) | | (18.3) | | | — | | | — | |
Other comprehensive income (loss), net of tax | | $ | 82.5 | | | $ | (20.7) | | | $ | (11.2) | |
* This accumulated other comprehensive income (loss) component is included in the computation of net periodic pension cost (refer to Note 15 – Employee Benefit Plans).
19. Related Party Transactions
Land Operations. The Company provides materials and services to certain unconsolidated investments in affiliates. The Company also recognizes interest earned on a note receivable related to a construction loan secured by a mortgage on real property with one of the Company's joint ventures. During the years ended December 31, 2022, 2021 and 2020, the Company recognized $0.3 million, $4.5 million and $1.9 million, respectively, related to revenues earned from transactions with these affiliates. There were no receivables from service arrangements with these affiliates as of December 31, 2022 and 2021.
20. Segment Results
Operating segments are components of an enterprise that engage in business activities from which it may earn revenues and incur expenses, whose operating results are regularly reviewed by the chief operating decision maker ("CODM") to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available.
The accounting policies of the operating segments are described in Note 2 – Significant Accounting Policies. The Company measures and evaluates operating segments based on operating profit, exclusive of interest expense, general corporate expenses and income taxes. Revenues related to transactions between reportable segments have been eliminated in consolidation. Transactions between reportable segments are accounted for on the same basis as transactions with unrelated third parties.
Prior to December 31, 2022 the Company operated and reported on three segments: Commercial Real Estate; Land Operations; and Materials & Construction. During the fourth quarter of 2022, the Company progressed on its simplification efforts related to the divestiture of its materials & construction business. The Grace Disposal Group, which was reclassified as held for sale and discontinued operations for all periods presented, made up the majority of activity in the Company’s former M&C segment. Accordingly, the former M&C segment has been eliminated and the segment information presented herein excludes the results of the Grace Disposal Group for all periods presented. All comparable information for the historical periods has been restated to reflect the impact of these changes. As a result of these changes, the Company now operates and reports on two segments: Commercial Real Estate and Land Operations.
The Commercial Real Estate segment owns, operates and manages a portfolio of retail, industrial and office properties in Hawai‘i totaling 3.9 million square feet of gross leasable area. The Company also leases approximately 140.7 acres of commercial land in Hawai‘i to third-party lessees under ground leases.
The Land Operations segment generates its revenues from real estate development and land sales, income/loss from joint ventures, and other legacy business activities in Hawai‘i. Historically, this segment also generated revenues from the sale of hydroelectric energy until the disposal of McBryde Resources Inc. in the year ended December 31, 2022.
Operating segment information for the years ended December 31, 2022, 2021 and 2020 is summarized below (in millions):
| | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
Operating Revenue: | | | | | | |
Commercial Real Estate | | $ | 187.2 | | | $ | 174.1 | | | $ | 151.6 | |
Land Operations1 | | 43.3 | | | 79.9 | | | 38.7 | |
Total operating revenue | | 230.5 | | | 254.0 | | | 190.3 | |
Operating Profit (Loss): | | | | | | |
Commercial Real Estate2 | | 81.5 | | | 72.6 | | | 49.8 | |
Land Operations1,3,4 | | (1.4) | | | 53.2 | | | 18.0 | |
Total operating profit (loss)1 | | 80.1 | | | 125.8 | | | 67.8 | |
Gain (loss) on disposal of commercial real estate properties, net | | — | | | 2.8 | | | 0.5 | |
Interest expense | | (22.0) | | | (26.2) | | | (30.2) | |
Corporate and other expense4 | | (39.3) | | | (27.0) | | | (19.2) | |
Income (Loss) from Continuing Operations Before Income Taxes | | $ | 18.8 | | | $ | 75.4 | | | $ | 18.9 | |
| | | | | | |
Identifiable Assets: | | | | | | |
Commercial Real Estate | | $ | 1,499.9 | | | $ | 1,499.5 | | | $ | 1,499.9 | |
Land Operations5 | | 112.0 | | | 144.5 | | | 285.1 | |
Other | | 48.6 | | | 81.1 | | | 65.8 | |
Assets Held for Sale | | 126.8 | | | 154.7 | | | 185.2 | |
Total assets | | $ | 1,787.3 | | | $ | 1,879.8 | | | $ | 2,036.0 | |
| | | | | | |
Capital Expenditures: | | | | | | |
Commercial Real Estate6 | | $ | 21.4 | | | $ | 39.6 | | | $ | 18.8 | |
Land Operations7 | | 0.2 | | | 7.4 | | | 1.4 | |
Other | | 0.1 | | | 0.2 | | | 0.4 | |
Total capital expenditures | | $ | 21.7 | | | $ | 47.2 | | | $ | 20.6 | |
| | | | | | |
Depreciation and Amortization: | | | | | | |
Commercial Real Estate | | $ | 36.5 | | | $ | 37.7 | | | $ | 40.1 | |
Land Operations | | 1.2 | | | 1.1 | | | 1.5 | |
Other | | 0.3 | | | 0.8 | | | 0.9 | |
Total depreciation and amortization | | $ | 38.0 | | | $ | 39.6 | | | $ | 42.5 | |
1 In 2021, the Company changed the composition of its reportable segments based on how the CODM assesses the Company's performance, which caused reported amounts (i.e., revenue and operating profit) in the historical period to be reclassified from Land Operations to the previous M&C reportable segment, and subsequently to discontinued operations, which reduced Land Operations segment Operating Revenue and Operating Profit (Loss) by $1.9 million for the year ended December 31, 2020. In 2022, as a result of the Grace Disposal Group's classification as held for sale and discontinued operations, the Company changed the composition of its reportable segments based on how the CODM assesses the Company's performance, which caused reported amounts (i.e. operating profit) related to one joint venture in the historical period to be reclassified from the former M&C segment to Land Operations, which changed Land Operations Operating Profit (Loss) by $(2.5) million and $2.1 million for the years ended December 31, 2021 and 2020, respectively and Total operating profit (loss) by $38.3 million and $13.1 million for the years ended December 31, 2021 and 2020, respectively. All comparable information for the historical periods has been restated to reflect the impact of these changes.
2 Commercial Real Estate segment operating profit (loss) includes intersegment operating revenue, primarily from the Land Operations segment, as well as pension termination charges of $0.7 million for the year ended December 31, 2022.
3 Land Operations segment operating profit (loss) includes $1.6 million, $17.9 million, and $6.8 million of equity in earnings (losses) from the Company's various joint ventures for the years ended December 31, 2022, 2021 and 2020, respectively.
4 Land Operations segment operating profit (loss) includes pension termination charges of $62.2 million for the year ended December 31, 2022, as well as a gain on sale of non-core assets, net, of $54.0 million for the year ended December 31, 2022, related to the McBryde transaction (Note 22 – Sale of Business).
5 The Land Operations segment includes assets related to its investment in various joint ventures. As a result of the change in the composition of the Land Operations segment in 2022, as noted above, total identifiable assets increased $23.4 million and $26.7 million as of December 31, 2021 and 2020, respectively.
6 Represents gross capital additions to the commercial real estate portfolio, including gross tax deferred property purchases but excluding the assumption of debt, that are reflected as non-cash transactions in the consolidated statements of cash flows.
7 Excludes expenditures for real estate developments held for sale, which are classified as cash flows from operating activities within the consolidated statements of cash flows, and excludes investment in joint ventures classified as cash flows from investing activities.
21. Long-lived Assets - Disposals
2020 Port Allen solar power facility asset sale
In connection with its strategy to simplify its business, during the quarter ended September 30, 2020, the Company executed a purchase and sale agreement and consummated the sale of assets related to its solar power facility in Port Allen on Kauai for purchase consideration (measured at the date of disposal) of approximately $17.1 million. As a result, the Company derecognized the carrying value of the net assets of the disposal group and recorded a gain on disposal of approximately $8.9 million which is included in Gain (loss) on disposal of non-core assets, net in the consolidated statements of operations. The disposal was not considered individually significant and does not qualify for presentation and disclosure as a discontinued operation.
22. Sale of Business
On May 31, 2022, the Company entered into Purchase and Sale Agreements with Brue Baukol Capital Partners, an unrelated third party, which resulted in the sale of approximately 18,900 acres of primarily conservation and agricultural land on the island of Kauai and 100% of the Company's ownership interest in McBryde Resources, Inc., the operator of hydroelectric power facilities on Kauai, in exchange for cash proceeds and escrow receivables of $73.9 million and $0.9 million, respectively. The sale closed on June 30, 2022. In connection with the sale, the Company recognized a net gain of $54.0 million for the year ended December 31, 2022, which is presented within Gain (loss) on disposal of non-core assets, net in the consolidated statements of operations. The disposal was not considered individually significant and does not qualify for presentation and disclosure as a discontinued operation.
23. Held for Sale and Discontinued Operations
In December 2022, in connection with the evaluation of strategic alternatives to monetize and dispose of Grace Pacific and the Company-owned quarry land on Maui, the Company's Board of Directors authorized Management to complete a sale of the Grace Disposal Group. In conjunction with the Board's authorization, the Company concluded that the plan to dispose of the Grace Disposal Group met the criteria for classification as held for sale and discontinued operations as of December 31, 2022. Accordingly, the assets and liabilities associated with the Grace Disposal Group are presented in the Consolidated Balance Sheets as Assets held for sale and Liabilities associated with assets held for sale and the results of operations are presented as discontinued operations in the Consolidated Statements of Operations and Cash Flows. While the ultimate outcome is neither certain nor guaranteed, the Company intends to conduct the respective businesses in the ordinary course in substantially the same manner in which it previously has been conducted until a sale occurs.
The following table summarizes income (loss) from discontinued operations included in the Consolidated Statements of Operations for the three years ended December 31, 2022, 2021 and 2020 (in millions):
| | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
| | | | | | |
Revenue | | $ | 171.2 | | | $ | 126.2 | | | $ | 116.6 | |
Cost of sales1 | | (153.5) | | | (121.0) | | | (109.3) | |
Selling, general and administrative | | (14.5) | | | (15.6) | | | (15.5) | |
Impairment of assets | | (89.8) | | | (26.1) | | | (5.6) | |
Gain (loss) on disposal of non-core assets, net | | 0.1 | | | 0.1 | | | 0.2 | |
Operating income (loss) from discontinued operations1 | | (86.5) | | | (36.4) | | | (13.6) | |
Income (loss) related to joint ventures | | (0.4) | | | (0.4) | | | (0.8) | |
Impairment of equity method investments | | — | | | (2.9) | | | — | |
Interest and other income (expense), net | | 0.5 | | | 0.2 | | | 0.4 | |
Interest expense | | (0.2) | | | (0.1) | | | (0.1) | |
Income (loss) from discontinued operations before income taxes1 | | (86.6) | | | (39.6) | | | (14.1) | |
Income tax benefit (expense) attributable to discontinued operations | | — | | | — | | | — | |
Income (loss) from discontinued operations1 | | (86.6) | | | (39.6) | | | (14.1) | |
Loss (income) attributable to discontinued noncontrolling interest | | (1.1) | | | (0.4) | | | 0.4 | |
Income (loss) from discontinued operations attributable to A&B Shareholders1 | | $ | (87.7) | | | $ | (40.0) | | | $ | (13.7) | |
1Includes $(0.4) million, $(1.1) million, and $(0.8) million in costs associated with the resolution of liabilities from the Company’s former sugar operations and previously presented in Income (loss) from discontinued operations for the years ended December 31, 2022, 2021 and 2020, respectively. |
The assets and liabilities held for sale included in the consolidated balance sheets as of December 31, 2022 and 2021, were as follows (in millions):
| | | | | | | | | | | | | | |
| | 2022 | | 2021 |
| | | | |
Cash and cash equivalents | | $ | 0.1 | | | $ | 4.6 | |
| | | | |
Accounts receivable and retention, net of allowance for credit losses and allowance for doubtful accounts of $0.4 million and $0.5 million as of December 31, 2022, and December 31, 2021, respectively | | 30.8 | | | 26.7 | |
Inventories | | 45.0 | | | 19.8 | |
Other property, net | | 67.4 | | | 65.7 | |
Operating lease right-of-use assets | | 31.3 | | | 13.2 | |
| | | | |
Prepaid expenses and other assets | | 42.0 | | | 24.7 | |
Less: Impairment recognized on classification as held for sale | | (89.8) | | | — | |
Total Assets held for sale | | $ | 126.8 | | | $ | 154.7 | |
| | | | |
Notes payable and other debt | | $ | 14.1 | | | $ | 2.0 | |
Accounts payable | | 10.2 | | | 6.4 | |
Operating lease liabilities | | 31.3 | | | 12.9 | |
Deferred revenue | | — | | | 0.2 | |
Accrued and other liabilities | | 25.4 | | | 24.3 | |
Total Liabilities associated with assets held for sale | | $ | 81.0 | | | $ | 45.8 | |
As a result of the Grace Disposal Group classification as held for sale as of December 31, 2022, the Company measured the disposal group at its fair value less costs to sell and accordingly recorded impairment of $89.8 million in the fourth quarter of 2022.
Related Party Transactions within Discontinued Operations and Held for Sale: The Company enters into contracts in the ordinary course of business, as a supplier, with affiliate entities that require accounting under the equity method due to the Company's financial interests in such entities and also with affiliate parties that are members in entities in which the Company also is a member and holds a controlling financial interest. Related to the periods during which such relationships existed, revenues earned from transactions with such affiliates were $16.9 million, $9.3 million and $8.6 million for the years ended years ended December 31, 2022, 2021 and 2020, respectively. Expenses recognized from transactions with such affiliates were $4.8 million, $1.4 million and $1.1 million for the years ended December 31, 2022, 2021 and 2020, respectively. Receivables from these affiliates were $6.9 million and $1.1 million as of December 31, 2022 and 2021, respectively. Amounts due to these affiliates were $0.4 million and $0.3 million as of December 31, 2022 and 2021, respectively.
24. Subsequent Events
On February 28, 2023, the Company's Board of Directors declared a cash dividend of $0.22 per share of outstanding common stock, payable on April 4, 2023, to shareholders of record as of the close of business on March 17, 2023.
25. Unaudited Summarized Quarterly Information
The unaudited summarized quarterly information for the fiscal years 2022 and 2021 have been reclassified as a result of the discontinued operations presentation as described in Note 23 – Held for Sale and Discontinued Operations. Unaudited quarterly results for the years ended December 31, 2022 and 2021, were as follows (in millions, except per share amounts):
| | | | | | | | | | | | | | | | | | | | | | | |
| 2022 |
| Q1 | | Q2 | | Q3 | | Q4 |
Revenue | $ | 59.2 | | | $ | 51.1 | | | $ | 49.4 | | | $ | 70.8 | |
Total operating profit (loss) | $ | 22.4 | | | $ | 11.8 | | | $ | 19.0 | | | $ | 26.9 | |
Income (Loss) from Continuing Operations | $ | 9.6 | | | $ | 5.5 | | | $ | 5.8 | | | $ | 16.2 | |
Income (loss) from discontinued operations, net of income taxes | $ | 1.4 | | | $ | (1.1) | | | $ | 1.0 | | | $ | (87.9) | |
Net income (loss) attributable to A&B shareholders | $ | 10.5 | | | $ | 4.1 | | | $ | 6.4 | | | $ | (71.6) | |
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Net income (loss) available to A&B common shareholders | $ | 10.5 | | | $ | 4.0 | | | $ | 6.3 | | | $ | (71.6) | |
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Earnings (Loss) Per Share Available to A&B Shareholders: | | | | | | | |
Basic Earnings (Loss) Per Share of Common Stock: | | | | | | | |
Continuing operations available to A&B shareholders | $ | 0.13 | | | $ | 0.08 | | | $ | 0.08 | | | $ | 0.22 | |
Discontinued operations available to A&B shareholders | 0.01 | | | (0.02) | | | 0.01 | | | (1.21) | |
Net income (loss) available to A&B shareholders | $ | 0.14 | | | $ | 0.06 | | | $ | 0.09 | | | $ | (0.99) | |
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Diluted Earnings (Loss) Per Share of Common Stock: | | | | | | | |
Continuing operations available to A&B shareholders | $ | 0.13 | | | $ | 0.07 | | | $ | 0.08 | | | $ | 0.22 | |
Discontinued operations available to A&B shareholders | 0.01 | | | (0.02) | | | 0.01 | | | (1.21) | |
Net income (loss) available to A&B shareholders | $ | 0.14 | | | $ | 0.05 | | | $ | 0.09 | | | $ | (0.99) | |
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Weighted-average number of shares outstanding: | | | | | | | |
Basic | 72.6 | | | 72.7 | | | 72.7 | | | 72.5 | |
Diluted | 72.8 | | | 72.8 | | | 72.8 | | | 72.7 | |
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| 2021 |
| Q1 | | Q2 | | Q3 | | Q4 |
Revenue | $ | 57.2 | | | $ | 59.5 | | | $ | 49.7 | | | $ | 87.6 | |
Total operating profit (loss) | $ | 26.6 | | | $ | 28.7 | | | $ | 20.8 | | | $ | 49.5 | |
Income (Loss) from Continuing Operations | $ | 13.7 | | | $ | 16.0 | | | $ | 7.8 | | | $ | 37.9 | |
Income (loss) from discontinued operations, net of income taxes | $ | (3.8) | | | $ | (3.0) | | | $ | (1.3) | | | $ | (31.5) | |
Net income (loss) attributable to A&B shareholders | $ | 9.9 | | | $ | 12.8 | | | $ | 6.4 | | | $ | 6.3 | |
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Net income (loss) available to A&B common shareholders | $ | 9.9 | | | $ | 12.8 | | | $ | 6.3 | | | $ | 6.1 | |
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Earnings (Loss) Per Share Available to A&B Shareholders: | | | | | | | |
Basic Earnings (Loss) Per Share of Common Stock: | | | | | | | |
Continuing operations available to A&B shareholders | $ | 0.19 | | | $ | 0.22 | | | $ | 0.11 | | | $ | 0.52 | |
Discontinued operations available to A&B shareholders | (0.05) | | | (0.04) | | | (0.02) | | | (0.44) | |
Net income (loss) available to A&B shareholders | $ | 0.14 | | | $ | 0.18 | | | $ | 0.09 | | | $ | 0.08 | |
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Diluted Earnings (Loss) Per Share of Common Stock: | | | | | | | |
Continuing operations available to A&B shareholders | $ | 0.19 | | | $ | 0.22 | | | $ | 0.11 | | | $ | 0.51 | |
Discontinued operations available to A&B shareholders | (0.05) | | | (0.04) | | | (0.02) | | | (0.43) | |
Net income (loss) available to A&B shareholders | $ | 0.14 | | | $ | 0.18 | | | $ | 0.09 | | | $ | 0.08 | |
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Weighted-average number of shares outstanding: | | | | | | | |
Basic | 72.5 | | | 72.5 | | | 72.5 | | | 72.5 | |
Diluted | 72.6 | | | 72.6 | | | 72.7 | | | 72.7 | |