Most real estate investment trusts (REITs) employ a highly focused strategy. They either concentrate on a specific property type or location. Alexander & Baldwin (NYSE: ALEX) is in the latter group as it's a pure-play REIT in the state of Hawaii.
The company likes the Hawaiian market because of its strong fundamentals. The state is in the top five in both job and income growth. Meanwhile, it has a supply-constrained real estate market due in part to a long entitlement process. Because of that, Alexander & Baldwin benefits from higher rental rates compared to other states.
Here's a closer look at the company's Hawaii-focused investment strategy.
Alexander & Baldwin company profile
Alexander & Baldwin is a diversified REIT focused on owning properties in Hawaii. At the end of 2021's first quarter, the REIT owned 3.9 million square feet of commercial space in the state. Its assets included:
- 22 retail centers.
- 10 industrial real estate assets.
- Four office properties.
- 149 acres of ground leases.
Alexander & Baldwin is the only publicly traded REIT focused exclusively on Hawaii and is the state's largest owner of grocery-anchored neighborhood shopping centers.
While Alexander & Baldwin has a diversified real estate portfolio, roughly 60% of its net operating income (NOI) comes from its retail assets. The REIT also gets nearly 18% of its NOI from its industrial assets, more than 17% from its ground lease assets -- primarily under retail and industrial properties -- and the final 4% from its office properties.
The REIT leases this space to various tenants. Its top 10 include:
- Albertsons: Seven leases comprising 7.3% of its annual base rent (ABR).
- Sam's Club: One lease contributing 3.6% of its ABR.
- CVS: Six leases comprising 3% of its ABR.
- Foodland Supermarket: Nine leases supplying 2.4% of ABR.
- Ross Dress for Less: Two leases providing 2.1% of ABR.
- Coleman World Group: Two leases comprising 2% of ABR.
- GP/RM Prestress: One lease supplying 1.7% of ABR.
- 24 Hour Fitness: One lease contributing 1.6% of ABR.
- Ulta Salon: Three leases comprising 1.6% of its ABR.
- Petco: Three leases supplying 1.4% of ABR.
Overall, Alexander & Baldwin's 10 largest tenants contribute 26.7% of its ABR. While most of its largest tenants are retailers, the bulk of these companies are grocery stores and pharmacies that are less likely to face disruption from e-commerce and economic downturns.
In addition to its commercial real estate (CRE) portfolio, Alexander & Baldwin owns other valuable assets. It has a land business, which includes a 25,900-acre land portfolio, and a development-for-sale portfolio. The REIT also has a materials and construction business. At the end of 2021's first quarter, 25% of the company's assets were non-CRE businesses.
Alexander & Baldwin news
The pandemic impacted Alexander & Baldwin's operations in 2020, given its exposure to the retail sector. Rental collection rates declined due to government-mandated business and travel restrictions, with the REIT collecting 85% of the rent it billed during the fourth quarter. Occupancy also declined, driven mainly by lease terminations related to the pandemic.
On a more positive note, in 2020, Alexander & Baldwin made solid progress on its strategic plan to simplify its business and generate cash by monetizing its non-CRE assets. The REIT sold 4.2 acres at Maui Business Park II, 18 units at its Kukui'ula joint venture project, the Port Allen Solar Facility and 20 acres of industry-zoned land under that facility, and 1,200 acres of noncore agricultural and conservation land. It used the cash from those asset sales to repay debt.
Market conditions in Hawaii improved in early 2021. Alexander & Baldwin noted that the NOI from its CRE assets increased by 17% from the prior quarter. The company benefited from a strong rebound in its portfolio of grocery-anchored properties and its nonretail CRE assets. It also continued to sell noncore land and other assets while evaluating strategic options for its materials and construction business.
Alexander & Baldwin stock price
Alexander & Baldwin's Hawaii-focused investment strategy hasn't delivered value for shareholders in recent years: