Most people looking to buy a home start out in the best neighborhoods they can afford. Alexander & Baldwin (NYSE: ALEX) has taken that approach to institutional-level property and put it on steroids. On the one hand, that's a great plan; on the other, it has left the real estate investment trust (REIT) highly focused on a very unique region. Whether or not this makes it a buy requires a closer look at what Alexander & Baldwin does and what you want from the REIT.
Is focus good?
The crux of the story at Alexander & Baldwin is that it owns property in Hawaii. While that sounds simple enough, it's really not because Hawaii isn't your typical property market. For starters, the state is a collection of islands. A great deal of what gets consumed in Hawaii has to be brought in from the mainland or other countries (and ferried around to various islands once it's there). That makes living and working there very expensive, so costs are generally pretty high, overall.
The island is also very dependent on tourism, which normally isn't such a bad thing but was a major problem during pandemic-hit 2020. So, recessions or anything that cools travel is a worry, even though being part of the United States gives Hawaii a leg up on other regions that have a similar dependency.
Meanwhile, Alexander & Baldwin has a heavy focus on retail properties. This segment makes up roughly two-thirds of the REIT's rent roll. It breaks that down into two segments, 48 percentage points in "essential" categories, like grocery stores and pharmacies, and 19 percentage points from "nonessential" tenants, like gyms. The remainder of the company's rents come from ground leases, industrial, and office properties, providing some diversification to the mix. All in, it's not a terrible breakdown, given the unique concentration on Hawaii.
The interesting thing here is that Alexander & Baldwin is in the midst of a multi-year process of slimming down. All in, it owns a collection of businesses, including a construction materials operation and a land development business. The goal is to jettison the "other stuff" and simply own and operate just commercial real estate assets located in Hawaii. At this point, the non-property operations are still around 25% of the company's asset base.
The long-term complexity
So, to some degree, this is a special situation, given the corporate makeover that's underway. That should probably turn off risk-averse investors. Add in the unique focus on the island state of Hawaii, and there's even more reason for investors to take a pass here. And then there was the impact of the coronavirus pandemic, which caused a notable drop in rent collections and was a big headwind to funds from operations (FFO). Being located in Hawaii was a major issue here because the state basically closed down its tourism business at one point, highlighting the importance of travelers to its economy and to Alexander & Baldwin's operations.
Results are starting to bounce back, but risk-averse dividend investors might not be so excited about the story here. Notably, the company ended up suspending its dividend briefly in 2020 to preserve cash. To be fair, it's not like the REIT was the only one to suspend its dividend last year, but when you look at the big picture, it underscores the risks here. That said, the dividend is back again and growing.
So this is a unique story that's most appropriate for more aggressive investors. And the nearly 25% of the business that's tied to noncommercial real estate operations is the real crux of it. Simply put, Alexander & Baldwin is looking to monetize those assets. That will free up cash that can then be put toward other purposes, like expanding its commercial real estate portfolio.
In other words, the REIT won't necessarily have to tap the capital markets for growth capital. The complexity is that it could be a lumpy, drawn-out process getting that cash.
Not a simple story
When you put it all together, Alexander & Baldwin is a REIT focused on owning property in Hawaii. That in and of itself complicates things. On top of that, it owns other legacy assets that it is looking to sell so it can focus more on its real estate business. This adds even more complexity, though also opportunity, given that the cash raised can be used to grow its core REIT operations.
In sum, most income investors will probably be happier with a less complex, and more diversified, REIT. However, investors interested in special situations might find this REIT and its 3% dividend yield alluring.