Executives: Suzy Hollinger - Director, IR Chris Benjamin - President and CEO Paul Ito - SVP and CFO Leslie Brown - President, A&B Properties Lance Parker - VP,

Leasing
Analysts: Steve O'Hara - Sidoti & Company Sheila McGrath -

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

I would now like to introduce your host for today's conference, Ms. Suzy Hollinger, Director of Investor Relations. You may begin.

Suzy Hollinger: Thank you, Catherine. Aloha, and welcome to Alexander & Baldwin's first quarter 2017 earnings call.

On the call with me today are Chris Benjamin, President and Chief Executive Officer; Paul Ito, Senior Vice President and Chief Financial Officer; Lance Parker, President of A&B Properties; and Leslie Brown, A&B Properties' Vice President of Leasing. Before we commence, please note that statements in this call and presentation that are not historical facts, including potential benefits, consequences and impact of a potential REIT conversion, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve a number of risks and uncertainties that could cause actual results to differ materially from those contemplated by the relevant forward-looking statements. These forward-looking statements include, but are not limited to, the company's

plans regarding: one, the possibility of converting to a REIT and the timing thereof; and two, the potential advantages, benefits and impact of and opportunities created by converting to a REIT. Such forward-looking statements are subject to certain risks, uncertainties and assumptions, including prevailing market conditions. Additional factors that could cause actual results to differ materially from those contemplated in the forward-looking statements include, without limitation, those described on pages 13 to 24 of the company's 2016 Annual Report on Form 10-K and in other subsequent filings with the SEC.

These forward-looking statements are not guarantees of future performance, and we do not undertake any obligation to update our forward-looking statements. Management will be referring to non-GAAP financial measures when discussing results today. Included in the appendix of today's presentation slides is a statement regarding our use of these non-GAAP financial measures and required reconciliations. Slides from this presentation are available for download at our website, www.alexanderbaldwin.com. Both our earnings release and our first quarter supplement are available on our website as well.

Chris will open today's presentation with comments on strategic progress. Paul will provide some financial highlights, and then we'll take your questions. Chris?

Chris Benjamin: Thanks, Suzy, and aloha to our listeners. I know it's not exactly a slow news day, so we appreciate your time. I'm going to take a different approach today.

I'm going to limit my remarks about the quarter to one slide and provide a strategic update and some related perspective. I'll defer to Paul to provide some additional color on the financials. The company earned income from continuing operations available to shareholders' net of taxes of $4.4 million or $0.09 per share in the first quarter 2017 compared to $3.7 million or $0.08 per share in the first quarter of 2016. While the results were slightly better than last year, they were impacted negatively by a couple of special items, including $3.7 million of after-tax costs or $0.07 per share related to our evaluation of a possible REIT conversion and a $1.2 million after-tax write-down or $0.02 per share related to our Waihonu solar investment to account for tax benefits received. That write-down is not indicative of any performance issues with the solar project.

It's simply the accounting associated with this tax credit investment. Indeed, the investment is producing all the benefits we originally anticipated. Partially offsetting those negatives was $2.2 million or $0.05 per share of income tax benefit related to the adoption of a new accounting pronouncement. So, on balance, underlying performance improved and generally was in line with our expectations, with one exception that I'll discuss in a few moments. As I said, I want to focus my remarks today on the strategic transformation we continue to undergo.

I'm very pleased with the path we're on and the progress we're making. It's difficult to project exactly the trajectory of asset and earnings growth in the years ahead, but I can outline the initiatives we're working on and update you on our progress. I'll refer to a strategic transformation, and that's certainly what we're in the midst of. 5 years ago, we were primarily a shipping company with a diversified and mostly nonstrategic commercial real estate portfolio, primarily on the U.S. mainland.

We had a large sugar plantation and an expanding development pipeline. Today, following several proactive steps in the real estate business and the unavoidable sensation -- cessation of our sugar operation, we are a Hawaii-focused real estate company with an increasingly strategic commercial portfolio that is generating nearly 40% more NOI than just 5 years ago. That's great progress, but we have further to go and are patiently moving toward our goal of even greater concentration and a larger footprint in Hawaii commercial real estate. I say patiently because we're focused on creating long-term sustainable value, and that's not done overnight. It's created by carefully acquiring assets funded by proceeds from appropriate asset and land dispositions and taking comprehensive steps to build their value over time.

And this is what I'm most excited about right now, the energy and enthusiasm of our team in building this value. Let me talk about a few things that are happening as we speak. We're bringing our Hawaii asset management and leasing functions in-house to enhance accountability, coordination and cost-effectiveness, which will help drive NOI growth. We're bringing staff on board at a measured pace and actively transitioning our properties. We're approaching tenants more strategically, leveraging our long-standing relationships, strong leasing team and compelling portfolio to create solutions for tenants, not just to fill spaces.

In some cases, this means better and expanded relationships with long-standing tenants like Safeway, CVS, Roy Yamaguchi, while in other cases, we're forging new, exciting relationships, including with some tenants we can't yet disclose. We're upgrading technology to be more efficient internally but also to better understand the needs and wants of our tenants and their customers. We're carefully studying the market in our existing portfolio to identify a balanced mix of redevelopment, new development and acquisition opportunities to continue expanding our portfolio. In the process, we're thinking about the right mix of asset classes and geography within Hawaii. All of this is going to help fuel sustained growth of the portfolio.

It's difficult to predict exactly how fast that growth will be realized, but we've identified a goal of 20% to 35% growth over the next 5 years, and we think that's imminently achievable. A critical part of the team making this happen, and I do want to reiterate that it's a team, a very strong team, is Leslie Brown, our Vice President of Leasing. We've invited Leslie to the call today to provide more color during Q&A. Leslie has rejoined A&B after working for General Growth Properties, where she was involved in leasing the Ward centers and Ala Moana center for 14 years. And then after that, consulting to the likes of Taubman and Heitman and managing the leasing of their Hawaii assets, International Market Place and The Shops at Wailea, respectively.

She's been helping us with Kailua leasing for the past couple of years but came onboard as our full-time Head of Leasing a few months ago, and we're very happy a few months ago, and we're very happy to have her back at A&B. Already, we've initiated a few expansion and upgrade opportunities shown on this slide. We have an acquisition, we have an active acquisition pipeline and have a list of redevelopment opportunities with stabilized yields on cost of about 10% that we continue to evaluate and advance. A new component to the work we have going on at Pearl Highlands is renovation of the Regal Cinema to create a high-end theater experience and keeping with the industry trend toward integrated dining and beverage service for theatergoers. Through a recent lease extension with Regal at Pearl Highlands, we're investing $3 million to upgrade the 48,000-square foot theater, and we'll generate $300,000 of annual incremental NOI as a result, a 10% return on cost.

This step, along with the food court enhancements at Pearl Highlands, will not only drive direct NOI growth through those spaces but enhance the customer experience and the performance of the rest of the center. This is the kind of experience that will continue to drive customers to our centers. Our growth efforts are helped by continued strong re-leasing results, with re-leasing spreads of over 13% so far, this year and same-store NOI growth projected at 3% to 4% for 2017. It's worth commenting on our view of asset classes, especially as a significant retail player in Hawaii and with the growing attention being paid to the retail asset class on the mainland. While we're not putting all our eggs in the retail basket, we remain confident in the attractiveness of our Hawaii retail portfolio.

The following key points are worth noting. First, our retail assets are predominantly the local consumer and are concentrated in what we consider needs-based anchored retail. Even our one resort retail asset, The Shops at Kukui'ula draws heavily from the local population, and we don't own any regional malls. We are primarily in grocery or drug-anchored retail centers, which represent 88% of our Hawaii retail ABR. We like this concentration, both for the reduced dependence on tourists but also for the relatively lower exposure to the retail segments that are most susceptible to Internet disintermediation.

Second, Hawaii's distance from the mainland changes the Internet dynamic a bit. Air freight costs are often prohibitive, and standard shipping times are such that, at least for now, urgent needs are often best met by local retailers. We would never simply declare that Hawaii is different and bury our heads in the sand. On the contrary, we look critically at commercial real estate trends, both locally and nationally, and seek to leverage trends proactively. Currently, we think the needs-based anchored segment is best insulated from the disintermediation trend and the longer term may well play an important role in the fulfillment of online orders, whether from grocers, restaurants or other retailers.

And third, we don't intend to grow exclusively in retail. We expect to expand our industrial footprint over time for two key

strategic reasons: one, we believe industrial assets are the net beneficiaries of growth in online retailing; and two, we believe it's an asset class that has many similar characteristics to the grocery drug-anchored retail segment with which we've had so much success. This segment serves the local consumer primarily. It faces significant supply constraints as a result of land costs and entitlement challenges and is characterized by fragmented ownership, providing interesting acquisition opportunities for us. So, wrapping up on Commercial Real Estate, I'm enthused about our progress, proud of our team but also cognizant that this is a marathon, not a sprint, and we're going to pace ourselves and be smart about how we work to create value that will grow and last.

Let me now comment on some of our other strategic priorities. Our efforts to monetize more of our development pipeline, both through sales of existing inventory and select development parcels, have favorable momentum. Recorded sales in the first quarter were modest, but we have a growing level of interest as evidenced by the 16 new binding sales contracts we generated in the quarter and continued strong interest in our projects. Future sales are, as always, difficult to forecast, but we expect to have more contracts and closings to report as the year progresses. Diversified agriculture efforts are coming along well.

We don't expect this to be a near-term driver of profitability. In fact, we may continue to have some modest net expenses as we work on repurposing the sugar lands. But we're making good progress in discussions with several interested tenants, who will keep -- help keep these lands in active agriculture. We recently announced a partnership with TerViva, a seed oil-producing company to produce biofuels from Pongamia trees that initially will be grown on 250 acres on Maui. If successful, the partnership could expand up to 2,000 acres.

We also continue to advance our cattle trials and other energy crop trials that we've discussed on previous calls. Our objective is to deploy as much of our former sugar plantation lands as possible in viable agricultural uses as quickly as possible. I mentioned earlier that I'd talk about one particular miss in the first quarter, and that was in Materials & Construction. Earnings were down in the first quarter compared to the prior year despite attempts to accelerate paving activity. Over the past 2 years, we've faced weather challenges, and so we've added 2 additional paving crews on Oahu in the last 18 months, a 40% increase, in order to lay more asphalt when the weather is favorable.

The good news is that these moves, despite an increase in rainy days in the first quarter, enabled us to increase paving volume. But they only yielded 14% more asphalt lay down on Oahu. The costs associated with the additional crews offset much of the increased revenue. We're also facing pricing pressure from a highly competitive market and are feeling the impact on our margins. The competitive environment is likely to suppress earnings to roughly first quarter levels for most of the year, but there are a number of positives on the horizon.

First, we expect several long-delayed jobs, both paving and prestressed concrete jobs, to get going this year. Second, we've undertaken a comprehensive organizational efficiency initiative and are recruiting to fill a few key management positions. I believe we can leverage these initiatives, along with our market-leading facilities, resources and people, to improve profitability. And third, while there has only been one bid from the city of Honolulu in the past 9 months or so, Grace did win it. So as city bidding picks up, we expect to have the opportunity to further build our backlog.

We're not where we had hoped to be with Grace at this time, but we recognize it and are taking proactive steps to address it. Most encouraging to me is the way the Grace Pacific team is embracing the process and seizing the opportunities. I'm very confident we'll begin to realize the full potential of the business. So to conclude my remarks, we're firmly on track with our value creation efforts, and we continue to look for ways to uncover and drive value that is not currently appreciated by the investment community. A potential REIT conversion could be a very important step in this regard as it may not only help fuel our growth but also broaden our investor base.

We've made good progress over the past few months with our REIT evaluation and expect to complete the evaluation within the next few months. With that, let me turn it over to Paul for some financial highlights

Paul Ito: Thanks, Chris. Let me briefly comment on segment performance and our balance sheet strength. I'll begin with Slide 15, where we've detailed operating profit and key financial metrics by segment for the first quarter of 2017 compared to the first quarter of 2016. Commercial Real Estate operating profit was 9.2% higher, and same-store NOI was up 2.5%.

Both measures reflect increased Hawaii retail same-store NOI, but the operating profit comparison also reflects the reclassification of 2016 Manoa Marketplace acquisition cost into the CRE segment as a result of the segment realignment that we implemented at year-end. Portfolio occupancy at quarter end was stable at 94%. As Chris mentioned, we saw positive re-leasing spreads of 13.3% on 33 comparable leases of the 43 leases that were executed in the first quarter. The largest lease rolling this year was the one that was renewed in the first quarter at an 11.9% ABR spread. During the quarter, we also renewed four ground leases at very significant increases between 44% and 100%.

While these ground leases are quite small and won't have a major impact on overall NOI, the percentage step-up in renewal rents demonstrate the power of growth from this segment of our portfolio as some of the larger ground leases reopen over the next 10 years. In the Land Operations segment, we had a couple of parcel sales on Maui in and near Maui Business Park. These sales totaled $4 million and produced $2.7 million of margin. Operating profit for the first quarter of 2017 was negatively impacted, however, by the $2 million noncash write-down of our tax equity investment in the Waihonu solar facilities that Chris discussed earlier. Also, impacting operating profits were segment operating expenses and a modest loss from agricultural operations.

Chris covered Materials & Construction performance in sufficient detail, so let me move on to our capital structure, which remains strong. Debt to debt plus equity was just under 32%, and we had $425 million of liquidity available on our revolver and a private placement shelf at the end of the first quarter. Net debt-to-EBITDA was 4.8 turns. Our debt metrics were slightly higher than at year-end due to a $45 million net increase in debt in the quarter, primarily due to final severance payments to HC&S employees as well as investments in ongoing development projects in the Commercial Real Estate portfolio. We've included some additional information in the appendix to the slide presentation.

First, as always, we have some data on the Hawaii economy, which had a strong performance in the first quarter. Tourism, in particular, showed tremendous strength with expenditures and arrivals increasing by 10.4% and 3.1%, respectively, compared to the first quarter of 2016. This performance follows a fifth consecutive year of all-time record visitor expenditures and arrivals in 2016. We also have included some information about debt maturities and capital expenditures in the appendix. So that concludes our formal comments.

We're now happy to take your questions.

Operator: [Operator Instructions]. And our first question comes from Steve O'Hara with Sidoti & Company. Steve O'Hara: I guess just on Grace, maybe it sounds like you guys are taking on, like you said, a comprehensive review and so forth. And I'm just, I guess I'm wondering, do you think it's an internal issue exacerbated by maybe the weak demand environment? And would, do you think if the market improves and there's more contracts, does that kind of maybe lessen everybody's scrambling over what's kind of out there and hurting pricing?

Chris Benjamin: Well, a few things.

First of all, the most important thing Steve -- this is Chris. The most important thing to say is that this is an incredibly strong business. It's got tremendous market position, tremendous people, tremendous assets and -- from the quarry to the asphalt plant to, obviously, all the moving -- the mobile equipment that we have. We have a great business here, and it's continuing to produce a lot of earnings and cash flow. And we've got to keep that in mind.

Having said that, we have had some pressures. The most significant one over the last couple of years has been weather. And weather sort of is unpredictable and goes in cycles, and I know it -- I'm sure it gets tiring to hear about the weather, but it is true that we have had a much higher number of rain out days the last couple of years than we would normally expect. But we're taking actions to try to overcome some of those weather disadvantages by adding more crews and trying to make sure that when the sun does shine, we can pave as much as possible. So, we're doing what we can short of controlling the weather, which is obviously outside of our ability.

With respect to the competitive market, I do think that as the recent sort of lull in bidding activity is resolved and the county gets back to bidding more jobs, there may well be a little bit less hunger and a little bit less competition for them. But there's also the reality of the fact that we periodically get new competitive entrants that come in and try to stake their claim to the market, and those things, those -- that can influence the competitive bidding environment as well, so that's another thing that we have to factor in. But the one thing that I want to make extremely clear is that I don't feel that there are any -- I think you referred to as internal issues. I think we've got a tremendous team, tremendous assets, and I think we've got the opportunity to really fix a little bit of our internal coordination, some of our scheduling activities. We're looking at how we can employ technology a little bit better to make sure we've got optimal efficiency.

But I'm feeling very optimistic about the business as it is today and its ability to regain its historic profitability levels as we implement some of these initiatives, and as, hopefully, the market returns to a little bit more rational pricing practices. Stephen O'Hara: Okay, thank you. That's helpful. And then just on the lease renewals maybe for the balance of the year. I mean, at this point, maybe -- what's your expectation on the improvement that you think you can get there? And maybe what does that do for 2018? Does that help boost maybe same-store rent? Or is it kind of maybe this year, a lower year, where it's not as impactful for next year?

Lance Parker: Hey, Steve, this is Lance.

So, let me start with, first, in terms of how we see the rest of the year. We see our expirations as really an opportunity for us. So, in terms of Q1, we completed roughly 21% of our roll for the year, and we have 13.3% increase on either renewals or new leases. And we expect that that will continue throughout the rest of the year, and our guidance of 3% to 4% NOI growth is still steady. I'd also say that importantly, year-to-date, we've completed almost third of our roll, and importantly, 3 of the 4 largest in our portfolio.

So, we're feeling pretty good in terms of 2017. Steve O'Hara: Okay. And just, I mean, you've seen pretty good increases. Are they about where you expected them to come in? Or did they come in maybe a little bit better than your projections initially?

Chris Benjamin: Leslie, maybe you can provide some color on that.

Leslie Brown: I feel like 13.3% increase in the renewal spread is pretty high, and so I would say we've greatly surpassed what we thought we would do and being conservative and probably shooting in the 3% to 4%.

And I feel like we're going to be able to continue to hit those numbers throughout the rest of the year.

Operator: And our next question comes from Sheila McGrath with Evercore.

Sheila McGrath: Chris, I was wondering if you could comment on bringing in the management in leasing, what that will do for the company and also how we should think about that on G&A impact for the balance of the year.

Chris Benjamin: Yes. Let me just start the answer, Sheila.

Thanks for the question. And then I'll hand it over to Lance and/or Leslie to elaborate. I think the one point that I'll make, and then I'll turn it over, is the fact that this is one of the big benefits of our growing concentration in Hawaii and the increased scale of our activity and the concentration within the retail asset class and what will probably likely later be additional concentration within the industrial asset class. I think that that scale and that concentration is really what facilitates our being able to take these steps that I think are going to give us both better performance and better efficiency. So, with that just sort of kickoff, let me turn it to Lance, and then Leslie I'm sure can add on.

Lance Parker: Sure. Thanks, Chris. Yes, I would just add, the real driver to this, Sheila, is efficiency, accountability and ultimately, driving better customer service to our tenants. And as Chris said, now that we have the scale to be able to do that in-house, we think direct employee touches will allow us to do that. Now that said, obviously, efficiency will drive some cost savings.

I think it's a little too early for us to quantify, but we certainly expect to achieve that. Leslie, any other?

Leslie Brown: I feel the same way. I've always worked in a landlord situation where we had these functions in-house, and I think just our being able to be directly in touch all the time with the tenants is very, very important as we grow the portfolio and maintain it.

Sheila McGrath: Okay, great. And then, Chris, I was interested in your comments about industrial.

I know the market has very low vacancy, and I'm curious on your plans to grow. Would it only be on Oahu? Is it mostly acquisition versus development? What are you thinking about how to grow that segment for A&B?

Chris Benjamin: Well, sure. As I said in my remarks, I think that what we, one of the things we like about the industrial segment is that it does have a lot of the same characteristics as the retail segment, not just in terms of asset ownership and leasing but also in terms of the acquisition and growth opportunities that we see. Again, with the exception, of course, of the CRE portfolio, the industrial segment is very fragmented, and that creates a lot of attractive acquisition opportunities. But also, we have land.

We have light industrial zone land on Maui. We don't have any immediate plans to develop on Maui. But that's certainly something that we'll be looking at, just as we are developing Ho'okele at Maui Business Park on the retail side. I'd like to ask Lance to elaborate a little bit on the -- sort of our growth thinking, but I would say it would not just be on Oahu. It could opportunistically also be on the neighbor islands.

Lance, do you want to...

Lance Parker: Yes. So first, just on the industrial market. I mean aside from the vacancy at 1.5, which is at an all-time low, we like the ABR that we've got in our portfolio at 12.60. So just from a supply-demand standpoint and the ability to drive those sorts of rents, we do think it's an asset class that we like.

Oahu, like so many of our other acquisitions, I would say is a market that we focus on just given some of our historic landholdings on the neighbor islands. That said, we do think this is an asset class that makes sense. And like we do for all of our new investments and acquisitions, we look for appropriate risk-adjusted returns, whether it be based on location or quality of the asset, and to the extent that we can find those, really, we'd look at opportunities throughout the state. Sheila Kathleen : Okay. And I guess last question.

On the acquisition pipeline, I'm curious if you're underwriting many new opportunities, and if you could remind us again about how much assets are left to fund from the Mainland, to fund new acquisitions in Hawaii.

Lance Parker: Sure. So, let me start with the first part of the question. We have been very active in the market looking for new acquisition opportunities, and we think about the acquisition landscape in a sort of 2 different ways. I'd say, first and foremost, it has been tight, so it's difficult to find new acquisitions.

And we continue to look at capital allocation in the context of new acquisitions versus development opportunities that we have within our portfolio. And as we stated in the past, we do have 3 or 4 development versus redevelopment opportunities that we've earmarked about $100 million toward over the next 5 years. And we'll continue to weigh that versus existing cap rates in the market and look at all investment opportunities, not just buying new but also building for our portfolio. And I'm sorry, could you remind me the second part of the question, Sheila?

Sheila Kathleen: Just about roughly on asset value, how much Mainland assets left do you have to sell that you can redeploy into Hawaii?

Lance Parker: Sure. So, we have 7 assets remaining on the Mainland, and we have the book value disclosed in our real estate supplement.

We're just under -- I'd say about $145 million, roughly, in terms of book value, so that would be -- that, in addition to any other land sales or other assets that we may dispose of in the state, non-income-producing assets would be 1031 funds that we would use to redeploy into acquisitions. Sheila Kathleen : Okay, great. Actually, one more question. If you could just update us on that repositioning. I believe it's in Kailua, the one that used to be a -- I think it was a Macy's.

If you could update us on that project.

Lance Parker: Yes. I think -- Leslie, do you want to take that?

Leslie Brown: Sure. We -- the Macy's building is about 48,000 square feet. When Macy's moved out, we came up with a plan to remerchandise the building in accordance with what we think the community wants and can use.

So we're about 87% leased already with a few leases out for signature. I think by the time we open, we'll be 98% leased and opened by, I think end of '18 is our target opening, maybe a little bit earlier.

Chris Benjamin: And so that's a great example, Sheila, of how we're trying to really create experiences and spaces that will attract people to our retail centers. So this is going to be, it's going to have two restaurants, open air, outdoor seating. It's going to have a nice mix of inline.

It will have a healthy grocer. I'm sorry, words are escaping me. Potentially a fitness component. So some things that we think will really be much more additive to the community than the old department store was and really create almost a gathering place, which I think will, again, as I said with Pearlridge, not only drive NOI growth within the assets but also help support the surrounding assets within Kailua. And of course, we own 70% of the urban land within Kailua, so it will have a lot of positive externalities to the adjacent properties.

Operator: [Operator Instructions]. And I'm showing no further questions at this time. I'd like to turn the call back to Ms. Suzy Hollinger for any closing remarks.

Suzy Hollinger: Thanks, everyone, for being on the call today.

If you have further questions, you can call me at 808-525-8422. Thanks, and have a great evening.

Operator: Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect.

Everyone, have a great day.