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Alexander & Baldwin (NYSE:ALEX)

Q4 2013 Earnings Call

February 20, 2014 5:00 pm ET

Executives

Suzy Hollinger

Stanley M. Kuriyama - Chairman and Chief Executive Officer

Christopher J. Benjamin - President, Chief Operating Officer and President of A&B Properties, Inc

George M. Morvis - Vice President of Corporate Development

Paul K. Ito - Chief Financial Officer, Senior Vice President, Controller and Treasurer

David Haverly - Senior Vice President of Leasing

Analysts

Sheila McGrath - Evercore Partners Inc., Research Division

Ian A. Zaffino - Oppenheimer & Co. Inc., Research Division

Young Ku - Wells Fargo Securities, LLC, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the fourth quarter and year end -- welcome to the Fourth Quarter and Full Year 2013 Alexander & Baldwin Earnings Conference Call. My name is Dominique, and I'll be your operator for today. [Operator Instructions]

I would now like to turn the conference over to Ms. Suzy Hollinger, Director, Investor Relations. Please proceed.

Suzy Hollinger

Thank you. Aloha, and welcome to Alexander & Baldwin's fourth quarter and full year 2013 earnings call. On the call with me today are Stan Kuriyama, A&B's Chairman and CEO; Chris Benjamin, A&B's President and COO; George Morvis, Vice President, Corporate Development; and Paul Ito, A&B's CFO.

Also with us today is David Haverly, A&B Property Senior Vice President of Leasing, who will participate in the question-and-answer portion of the call.

Before we commence, please note that statements in this call and presentation that are not historical facts 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 relative forward-looking statements. Factors that could also cause actual results to differ materially from those contemplated in the statements include, without limitation, those described on Pages 18 to 28 of the company's 2012 Form 10-K. 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 for the year. In particular, we will be referring to adjusted net income and diluted earnings per share that exclude the impact of Grace Pacific acquisition costs on 2013 results and separation-related expenses on 2012 results. We will also be referring to net operating income and adjusted operating profit and EBITDA for Grace.

Included in the appendix of today's live presentation are reconciliations of GAAP to these non-GAAP financial measures and a statement regarding our use of these measures.

Throughout this presentation, management will be referring to the portfolio of Hawaii commercial assets acquired in December from Kaneohe Ranch and the Harold K.L. Castle Foundation as the KR portfolio.

Slides from this presentation are available for download at our website, www.alexanderbaldwin.com. Slide 3 provides an agenda for today's presentation, after which, we will take your questions.

We'll start with Stan who will comment on results and review the fourth quarter highlights.

Stanley M. Kuriyama

Thank you, everyone, for joining us this afternoon. As noted in our press release, the company posted earnings in the fourth quarter of $0.46 a share, driven primarily by the strong performance from real estate. Our Development & Sales segment posted a $37 million increase in operating profit over last year's fourth quarter. Segment performance reflected the sales of the 24-acre parcel adjacent to Maui Business Park, 8 Kahala Avenue properties and 7 Mainland commercial properties.

Leasing operating profit was 5% higher, and NOI was 17% higher than the fourth quarter of 2012. Improved leasing performance resulted from the expansion of our Hawaii portfolio. Grace Pacific generated adjusted operating profit of $6 million and adjusted EBITDA of $8 million, which exclude the effect of purchase price allocation adjustments. Earnings also reflect a $5 million decline in Agribusiness operating profit compared to last year's fourth quarter, which was anticipated and resulted primarily from inventory valuation adjustments due to lower sugar prices.

The strong overall fourth quarter earnings performance drove a 17% increase in adjusted earnings for the full year. Adjusted net income was $0.88 a share compared to $0.75 in 2012. The fourth quarter capped off a busy year of strategic investments in Hawaii. We began the quarter with the closing of Grace Pacific on October 1 and the initiation of a modest quarterly dividend.

November, we closed the sale of the 24-acre parcel for the development of Maui's first Target-anchored center, and the proceeds from that sale were reinvested on a tax-deferred basis into income-producing properties. Also in November, we announced the purchase of the KR portfolio, which closed on December 20. We are pleased with how the transaction came together from both an acquisition and disposition perspective. $266 million of the funding for the acquisition came from sales proceeds of 6 Mainland industrial and retail properties that closed in mid-December.

We also announced the sale of Maui Mall, which closed in January. Proceeds from that sale were reinvested in the KR portfolio in a reverse 1031 exchange. As previously announced, in September, we purchased a portfolio of 27 properties along Kahala Avenue, Hawaii's premier residential neighborhood, for $100 million. We've since sold 10 lots for $53 million. 9 of these sales have already closed, and the 10th is an escrow and scheduled to close in April.

Based on this strong market reception, in December, we acquired the seller's 3 remaining Kahala properties for $30 million, 2 of which are large beachfront properties and the best lots in the portfolio.

Hawaii's economy continues to perform well. The state had another record year in visitor arrivals and expenditures. The average daily hotel rate in Hawaii in 2013 was 12% higher than the peak rates achieved in 2008, and revenue per available room was up 11% over 2012. This performance has, in turn, benefited Hawaii's broader economy. Hawaii's unemployment, for example, was 4.5% at the end of December compared to 5.1% a year ago, and bankruptcy filings declined by 18% in 2013.

Oahu's primary housing market also continues its strong recovery. Oahu's median single-family retail price reached $685,000 in December, returning to record levels achieved over 6 years ago in June 2007. Single-family sales volumes are about 30% below peak volumes obtained in 2004, indicating we still have room for growth in this market.

In the condo market, December median prices of $330,000 were near peak levels, while sales volumes remained 39% below peak volumes reached in 2005.

Oahu's industrial and retail markets remain strong, with vacancies dropping in all 3 major segments of the market to a 2.7% vacancy rate for industrial, 4.2% for retail and 12.2% for office. Oahu retail and industrial rents increased, while office rents have remained relatively stable.

And with that, I'd like to now ask Chris to update you on our operations.

Christopher J. Benjamin

Thank you, Stan. So as Stan noted, the fourth quarter was particularly busy, a remarkable conclusion to a big year for A&B. We had important development sales, the acquisition of the KR portfolio and the closing of the Mainland commercial property sales that funded the KR acquisition. But almost lost in that all the fourth quarter activity was the late December purchase of the last of Genshiro Kawamoto's Hawaii properties, which Stan referenced a moment ago.

Our progress in selling our original Kahala lots gave us the confidence to buy additional spectacular oceanfront lots, again, at a discount to market values.

Now I'll provide some additional color on fourth quarter properties and Agribusiness. In Development, we have been and will continue to be focused on advancing our major projects. On Oahu, construction of the 340-unit Waihonua high-rise condominium project is on track for completion and delivery of units early next year.

Meanwhile, presales of the collection are progressing well, with 56% of the 400 units in the tower presold. The timing of construction will depend on a variety of factors, including achieving acceptable presales and completing the regulatory approval process.

At Kukui'ula on Kauai, we closed the sale of 3 custom home lots in the fourth quarter. In total, for the year, the venture sold 8 lots and 2 cottages at very good prices. The lots sold for an average of $70 per square foot and the cottages sold for $1,600 per square foot of enclosed living space.

Our vertical development efforts at Kukui'ula are continuing to pay off, not only as we sell the homes we've built, but as this construction activity has catalyzed lot sales as well. We continue to expand our product offerings at Kukui'ula to appeal to a broader market base. The Club Bungalows offering pictured here consists of one-bedroom duplexes and 2- and 3-bedroom single-family detached condominium homes that range in size from 800 square feet to 1,900 feet square enclosed, priced from $1.2 million to $3 million. With the addition of the bungalows, we now have products with price ranges from $1.2 million to $8 million.

In December, we began sales of The Villas at Kukui'ula, 13 high-end single-family homes being developed by A&B in partnership with East West Partners. In less than 2 months since their release, 4 binding sales contracts have been secured at The Villas at an average price of $4.5 million or $1,700 per square foot, indicating positive initial market reception.

We also saw improving sales activity in 2013 at 2 other resort residential projects. We closed 13 sales last year at our Ka Milo joint venture development with Brookfield Homes on the Big Island, including 5 units in the fourth quarter.

And on Maui, we have just 3 units left at our 150-unit Kai Malu joint venture with Armstrong Builders after selling 7 units in 2013. To increase our available inventory at Wailea, we're seeking county regulatory approval for a 70-unit condominium project, once again, in partnership with Armstrong Builders. If all goes well, we expect to be in presales later this year. Beyond this project, we've been advancing other development projects within the 160 acres we own, including opportunities to sell development parcels to interested third parties.

In November, also on Maui, Safeway Property Development Centers commenced construction of the Target-anchored center on the 24-acre parcel we sold them adjacent to Maui Business Park. Target will be a major anchor from our business park. And as the first and only Target store on Maui, it's expected to drive sales in the projects over the long term.

I'll now turn to our commercial portfolio, which produced $18.2 million of NOI in the fourth quarter, a 17% increase over last year's fourth quarter, raising total NOI for the year to $68.8 million. NOI increased primarily due to the expansion of the portfolio through the Hawaii commercial assets acquired in 2013. In total, we invested $565 million in Hawaii commercial real estate assets in 2013. 60% of the funding for these investments came from the sales of Mainland assets, with the balance coming from a combination of the Maui Mall sale, non-income-producing parcel sales and the assumption of debt.

In the process, we sold 60% of our Mainland commercial portfolio by GLA. Going forward, and as a result of these transactions, we project that over 75% of the portfolio NOI will come from Hawaii assets as compared to just 40% at the beginning of 2013.

In 2014, we expect NOI will continue to be positively affected by the acquisitions we completed in 2013. Based on our current outlook, we expect NOI to grow in the range of 8% to 12% this year. We're pleased with the significant progress we've made in executing our migration strategy, and we continue to look for good Hawaii investments to migrate the balance of the Mainland portfolio.

And of course, speaking of good Hawaii investments, the big news in the fourth quarter was the acquisition of the KR portfolio, the largest of our 2013 acquisitions. This is one of the premier commercial portfolios in Hawaii, and we are fortunate to have the opportunity to acquire it, an acquisition that was triggered by our strategic decision to migrate our commercial assets back to Hawaii. The portfolio includes 386,000 square feet of prime retail and industrial space, as a part of Kailua, an affluent Oahu neighborhood, and 51 acres of Kailua and urban Oahu land that is ground leased to third parties. In total, we now own 70% of the commercially zoned land in the town of Kailua. The ground leased land, both in Kailua and elsewhere on the island, has been improved by tenants with 760,000 square feet of retail and other commercial space.

Since closing on December 20, we've been working on integrating the assets into our portfolio, engaging with the community and tenants and evaluating near- and long-term opportunities.

Wrapping up on Slide 24, before I hand it over to George, let me touch on where we are with Agribusiness. As expected, we experienced an operating loss of $3.6 million in the quarter, a result of lower sugar sales that required us to adjust our inventory values at year end -- I'm sorry, correct myself, lower sugar prices that required us to adjust inventory values at year end.

As we've noted before, our Agribusiness operations are facing headwinds in 2014, primarily due to low domestic raw sugar prices. With myriad financial variables affecting Agribusiness profitability, it's always difficult to predict future earnings. However, at current prices and expected 2014 production levels, we are projecting an Agribusiness operating loss in a range of $6 million to $9 million in 2014 at the present time. The company has forward-priced approximately 21% of the 2014 crop, and so we have until July to price the remaining 80% or any portion of the remaining 80%. We'll be patient in pricing additional volumes in the hopes that prices will trend upward between now and July.

And with that, I'd like to turn it over to George to discuss Grace specifics.

George M. Morvis

Thanks, Chris. Turning to Slide 26. Before the effects of purchase price allocation, or PPA adjustments on income, Grace reported fourth quarter 2013 operating profit of $5.7 million and adjusted EBITDA of $7.7 million. Based on the fair market value allocation of purchase price that will be detailed in A&B's Form 10-K that will be filed by March 3, we anticipate that Grace's full year 2014 operating profit will be impacted by about $4.6 million in incremental noncash expenses attributable to PPA adjustments, such as higher depreciation and amortization expenses that flow through the income statement.

We also anticipate that the full year 2014 impact to EBITDA will be roughly $600,000. However, nearly all of the negative impacts to EBITDA should end by December 2014.

Grace's paving volumes totaled 115,000 tons in the fourth quarter of 2013. About 21,000 tons of paving originally scheduled for the quarter were delayed and deferred into 2014. In addition, an equipment failure lowered quarry throughput in the quarter. The paving delays were attributable to a variety of factors, including weather delays and subcontractors' scheduling issues. The quarry equipment has since been repaired and placed back into service.

For these reasons, we are comfortable with the $7.7 million of EBITDA generated by Grace in the fourth quarter of 2013. The start of the first quarter has seen continued weather challenges in Hawaii, impacting Grace's operations, with a higher-than-anticipated number of paving days lost to rain outs. As a result, we are not anticipating a significant recovery in Grace's paving volumes until the second quarter. Weather delays represent a deferral, not a loss of business. And our consolidated backlog at Grace at the end of January has grown to nearly $226 million, up 10% from Grace's backlog at the date of acquisition.

Let me now hand the call over to Paul to discuss financial matters.

Paul K. Ito

Thank you, George. Stan covered earnings earlier, so let me start with our balance sheet on Slide 28, where we compare our balance sheet at the end of 2013 to the balance sheet at the end of 2012.

Total assets increased significantly in 2013 due to the investments we've made in Hawaii real estate and Grace, which when combined totaled more than $1 billion. The additional debt on our balance sheet relates principally to the mortgages assumed for commercial property acquisitions, the financing for the Kahala portfolio, the addition of Grace and investments in our various development projects.

Debt was also temporarily higher at year end because we used $60 million of bridge financing for the KR portfolio acquisition. The bridge loan was fully repaid when the sale of Maui Mall closed on January 6, resulting in a reduction of our debt-to-debt plus equity ratio by 2 percentage points to 36%. Despite the significant investment activity, our revolver availability remains high at $246 million, which provides more than ample capacity to continue to pursue good investment and growth opportunities.

Turning to Slide 29. We show our budgeted capital expenditures for 2014, along with the comparison of 2013 actual and planned expenditures. While we always include a modest placeholder for opportunistic investments in our plan, the size and timing of investment opportunities is, of course, unpredictable. As you can see on this slide, for example, we started 2013 with a planned budget of $200 million and ended up investing almost $1.1 billion. Over 80% of our 2014 budget is for growth capital with about $30 million earmarked for maintenance capital, including $13 million for Leasing, $5 million for Grace, and $12 million for Agribusiness.

I'll now turn the call over to Stan for closing remarks.

Stanley M. Kuriyama

Thank you, Paul. 2013 was an important year of building value in our company. Over the course of the year, we invested, as Paul mentioned, over $1 billion in high-quality real estate and business acquisitions that will enhance both near- and long-term shareholder value and advance our goal of positioning Alexander & Baldwin as the best vehicle for investing in Hawaii's future.

In 2014, much of our effort will be on integrating and generating returns from these investments. However, we will not lose sight of the need to continue to build out our real estate development pipeline, opportunistically seek new investments in Hawaii real estate and complementary businesses and migrate our Mainland portfolio to Hawaii. Identifying a less volatile future for our Agribusiness segment will be another important priority. Although we have successfully improved production and produced solid results over the last 3 years, 2014 will be a challenging earning year for Agribusiness due to the decline in sugar prices. After all of the major investments we made in 2013, which are reflected in an $800 million increase in assets on our balance sheet, our capital structure remains extremely strong with nearly $250 million in debt capacity available to fund future growth opportunities; opportunities, which we intend to fully pursue throughout the coming year.

That concludes our presentation this afternoon, and we'd now be happy to answer your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Sheila McGrath of Evercore.

Sheila McGrath - Evercore Partners Inc., Research Division

Stan, I was wondering if you could give us some insight in terms of the Kahala sales, how they're running in terms of pricing versus your original underwriting, both in terms of pricing and also the velocity of sales.

Stanley M. Kuriyama

Yes, well -- we've been very pleased with the initial results. Let me turn that over to Chris for more detailed color on that.

Christopher J. Benjamin

Sure. The answer is we've been very pleased. We underwrote the project at 20-plus IRR, and the assumptions that we made in underwriting that have been met or exceeded both by the pace and the pricing of the sales. Now having said that -- that sounds very good -- but it's a long project. It will be probably -- could be a 3- to 5-year project of selling them out. So it will -- we're not ready to declare a victory yet, but we've been very pleased so far, and our intent and expectation is that we'll be able to maintain and even increase pricing as we go along. So far, so good.

Sheila McGrath - Evercore Partners Inc., Research Division

And could you give us some insight in terms of the last 3 lots that you acquired? Were they not originally for sale? Or how did that all transpire?

Christopher J. Benjamin

Essentially, they were not originally for sale. Mr. Kawamoto had decided to retain those lots. And then subsequent to our closing of the original lots last September, he had a change of heart and approached us, and we negotiated a price. And we did not make the decision to buy those lots until we had gone -- we had sufficient other sales that had gone binding. We wanted to prove to ourselves the strength of the market and our original underwriting assumptions, and we were able to do that. And so we pulled the trigger on that sale in December -- I'm sorry, on that purchase in December, again, at what we believe to be a significant discount to market values.

Sheila McGrath - Evercore Partners Inc., Research Division

Okay. And then moving to the collection, you did mention that it's 56% sold-out or committed already. I heard you mention that there is still necessary permits. Could you just give us an idea of one, how that pace is running versus your expectation; and two, what are the other permits that you have to get there?

Christopher J. Benjamin

Yes. So with respect to sales activity, I would say that we're quite pleased with the pace of sales. Typically, the lender has a say in this. Typically, we will be targeting between 50% and 60% presales before we decide to go vertical on the project. And we're obviously well on our way to that. I will note, though, that it's a little different in this case because in addition to the tower, there are 2 other products that we haven't yet released yet. We expect them to sell very well. We don't expect any problem with that. But on the tower itself, which is the most critical piece and largest piece, of course, we're well on our way to what would be a presale requirement, even though we don't have a specific number to say in terms of our targets. So bottom line is pleased with sales. As I said in my prepared remarks, we are, as you noted, waiting for the completion of the regulatory approval process. We received our development permit, which was the primary permit that we needed, and we received approval of that. But 2 groups have filed a petition for a contested case hearing to challenge that approval. So that's the primary thing that we're waiting on. The authority that -- with which they have filed the petition, has to consider that petition and rule on that and we're waiting for that ruling, which we would expect in the next month or so.

Sheila McGrath - Evercore Partners Inc., Research Division

Okay. And one last question, and I'll get back in line. In terms of the operating profit from development sales, you highlight that it's from Kahala, some commercial sales and the land, so. Could you break that up a little further, so we can understand where the majority of it's coming from? Or how that breaks up?

Christopher J. Benjamin

Well, the biggest single driver of that was the sale to Safeway on Maui. We don't really get down into breaking it down, too specifically. But I would say, I think if you go back to the earlier guidance we gave on that sale that the number of acres, the pricing being consistent with prior sales. I think you can get a pretty good number for that, and then the balance of it was Kahala sales and a couple of other joint venture sales.

Operator

And your next question comes from the line of Ian Zaffino of Oppenheimer.

Ian A. Zaffino - Oppenheimer & Co. Inc., Research Division

Just to go back to Kahala, can you give us an idea of what the spread was between those 10 sales? Was it all sort of like kind of grouped around the average? Or does it vary widely -- and then -- so I'm trying to get a sense of what the 300 properties that you mentioned were beachfront, what we should kind of be thinking of that in terms of value?

Christopher J. Benjamin

Yes. It's good question, and it's a little bit tough one to answer. But generally, think of our properties in Kahala being in 3 groups. There are -- there are oceanfront lots. There are lots that are on the ocean side of Kahala Avenue, but don't touch the ocean. And then there are lots that are across the street on the mountainside, which we refer to as the Malka lots. We have a mixture of the 3. The majority of them are either on the Malka side or the oceanfront, with a smaller number that are on the ocean side but not touching the ocean. The ranges, of course, depend on where they are. Typically, the Malka lots, the lots across street from the ocean, we've been seeing -- achieving pricing in the $150 a square foot range, whereas in the ocean side, we're in the high $300 a square foot range for those lots. And sales have ranged between those levels. Now we do anticipate that as we go forward, we will be able to push that pricing up, and we have -- we have confidence that we'll be able to do that. To then translate those numbers into how many -- how much future revenue gets again, a little complicated because you have to look at what we have in each category, but generally, about a little over half of our remaining land is oceanfront. And then the balance is split roughly between the 2 sides of the street on the non-ocean -- in the 2 non-ocean categories. I hope that's helpful. It's a lot to digest.

Ian A. Zaffino - Oppenheimer & Co. Inc., Research Division

Yes. No, that's helpful. And then just kind of on the Agribusiness. Given the situation it's in -- does it make sense to maybe do some type of like planned maintenance shutdowns or take it offline for a little a while? Or do you have the ability to do that or flex that way? Or just help us understand that piece of business.

Christopher J. Benjamin

Yes, it's a good question, and we look at a lot of different scenarios of how to schedule the operation and make sure that we are managing costs and revenue as well as we can. But the challenge with taking extended periods of downtime there is that your only source -- your primary source of revenue in the business is sugar and the only way to be generating sugar revenue is to be producing sugar. And with the crop size that we have, we've been very fortunate to be able to increase our crop size over the last several years dramatically. But what that does is that, that means you've got to be grinding or harvesting for a longer period of time. And so it really takes us a full 9 months or so to get our crop through the mill. So if you took an extended shutdown, you would essentially have crops sitting in the field that you're not harvesting and therefore, you're not generating revenues. So we're looking at a lot of different twists to our operating model to enhance profitability, many of which we've implemented over last few years, and we'll continue to look at them. But the bottom line is we need to keep the mill running for the good majority of the year in order to be generating sugar revenue.

Operator

[Operator Instructions] And your next question comes from the line of Young Ku of Wells Fargo.

Young Ku - Wells Fargo Securities, LLC, Research Division

Just a quick modeling question. Maybe this is for Paul. The quarterly G&A for Q4, it seems like it moves up a little bit but not as much as I would have expected given the Grace Pacific acquisition. So doesn't the G&A, incremental G&A, run through that G&A line item or is it run net of -- in the Grace-specific EBITDA?

Paul K. Ito

Yes. The Grace G&A runs through its operating profit line. Go ahead.

Young Ku - Wells Fargo Securities, LLC, Research Division

So that $5.9 million, up a little bit from Q3. So is that a good run rate to use for '14?

Christopher J. Benjamin

No. For 2014, I would, for modeling purposes, use something in the range of a little bit over $18 million. Our 5-year average has been about $19 million, but we think it will be a little bit lower than that. So you're [ph] over $18 million.

Young Ku - Wells Fargo Securities, LLC, Research Division

Okay, got it. That's helpful. And then staying with Grace a little bit, so it sounds like Q4 run rate sits about $18 million on an adjusted EBITDA basis. I think you guys mentioned previously that, in 2014, you have said that, that's a ramp up to $40 million, I was wondering if you're still kind of expecting that? Or do you expect some of that growth to spill into 2015?

George M. Morvis

Young, it's George. No, we're still comfortable with that guidance with the caveat that, of course, we've got a sort of slow start to this year and what-not. So it's all going to depend on how much of our planned paving volumes that we can make up over the course of the year. But in terms of the $41 million, we're comfortable with that number. The other caveat I would mention is that because of the PPA adjustments that we're going to have during the year that flow through the income statements and hit cost of goods sold. That $41 million is going to be closer to $40 million because of that $600,000 in incremental adjustments that we mentioned from the PPA process.

Young Ku - Wells Fargo Securities, LLC, Research Division

Okay, that's helpful. And Chris, I think you mentioned that in the real estate leasing portfolio, you expect that NOI to grow by 8% to 10% in 2014. Could you perhaps just tells us how much of that would be kind of on a same-store basis, what the growth would be on a same-store basis?

Christopher J. Benjamin

Actually, I'm going to ask David to jump in here and provide that color.

David Haverly

Young, I don't have a breakdown of same-store between, let's call it the 8% to 12% target NOI increase, but a large majority of the increase is relating to the Hawaii acquisitions we had in the fourth quarter for 2013.

Young Ku - Wells Fargo Securities, LLC, Research Division

Okay, got it. And just one last question on Agribusiness. So it sounds like it's going to be $69 million of operating loss. And should we expect loss to be kind of in a specific few quarters do you expect it to be kind of -- I know it's somewhat seasonal but I'm just looking at the progression.

Christopher J. Benjamin

Yes. That's good question, Young, and it's important one, and I'll ask anyone else to jump in here if you know the details. But just generally, we would expect better performance in the first couple of quarters. First of all, the first quarter, we're not selling a lot of sugar. We're selling power, and we sell power more profitably at least from an accounting standpoint than we do sugar. And so -- and even in the second quarter, I think we have a voyage [ph] of sugar that's priced relatively well. Later in the year, as we're selling some what could be lower-priced sugar is when we would probably expect to see, I would guess, in the third and fourth quarters, we would see more agri losses.

Operator

You have a follow-up question from the line of Sheila McGrath from Evercore.

Sheila McGrath - Evercore Partners Inc., Research Division

Yes. Chris or Stan, you did mention a number or increasing activity at the resort residential. I'm just wondering if you could give us a little more detail on the strength that you're seeing. Is it broad-based on the Neighbor Islands and kind of how we should think about that across your portfolio in 2014?

Stanley M. Kuriyama

Sure. So Sheila, I think the thing I'd start with is to acknowledge that Neighbor Island Resort is still very slowly recovering. I wouldn't -- and we've got some great results in the last few months at Kukui'ula that I'm very pleased about, but I wouldn't say that, that translates necessarily into robust growth across the state for resort product. We are -- I'll get to Kukui'ula the last, I would say that we expect good sales at Ka Milo on the Big Island this year. I don't know that it will be a big driver of profit for us because we're still in the process of escalating pricing there. But it's certainly very positive momentum, and we're pleased with that. On Maui, however, we only have 3 units left at Ka Milo and while we certainly expect to sell those this year, we don't have other standing inventory on Maui in the resort segment except for some custom home locks [ph] at Wailea, and we did sell one of those recently, and so that's a positive thing. But Maui will be a little bit more suppressed and not a big earnings driver for us just because we don't have standing inventory. As I mentioned, we are trying to get final approvals for our 70-unit condominium project at Wailea, and we hope to be in presales this year, but that will be another couple of years before we're closing those sales. So that's Maui. At Kukui'ula, I think, we're very encouraged by the fact that we're seeing these kind of sales in the $4.5 million price range with The Villa project, a product that I mentioned. We're also pleased to be selling more lots because as you know, for a long time, we sold no lots. People wanted finished product, and now they are buying lots. So we're encouraged by those signs. I think it will be definitely a better year at Kukui'ula, but for reasons that we always go back to, with respect to percentage of completion and some of the other factors, I would not project significant sort of material earnings from our resort product this year. But I think we are very well-positioned for growth over the next few years, and I'm encouraged by some of the signs I've seen recently.

Sheila McGrath - Evercore Partners Inc., Research Division

Okay. And you did mention at Wailea that you would consider sale of some development parcels. Is that just because of the pricing you think could be better than going forward and developing it yourself? Or could you just give us a little explanation there?

Christopher J. Benjamin

Yes. Typically, on a transaction like that it's because we sort of assessed our development prospects and developed the residual land value and we've gotten an offer that either meets or exceeds that, and obviously it's a lot lower risk. But the other factor is that it's a portfolio of assets that we have at Wailea, and we've got 170 acres or so right now, and we want to pursue a mixture of monetization strategy. So it will be a mixture of development on our own, development through joint ventures, and then some parcel sales. And so that's why -- those are the 2 reasons that we would consider parcel sales.

Sheila McGrath - Evercore Partners Inc., Research Division

Okay. Last question. Typically, at this first conference call of the year, you do give some very broad-based guidance, which is helpful considering the different segments. So on Ag, you said minus 6 to minus 9 on operating loss for the year. If there's any other items and you did give us guidance on NOI. On Grace Pacific, if you could remind us on the seasonality, also if you can touch on interest expense for the quarter, which was higher, did you take down more debt at the end of the quarter? Just any kind of opportunities you can give us for watch out for this item? That would be helpful.

George M. Morvis

Sure, Sheila, this is George. I'll answer the question about Grace, and then I'll turn it over to Paul to sort of inform you about the expected interest over next year. In terms of the Grace expectations, our guidance, previously, which is certainly consistent is that we would expect roughly 20% to 25% of EBITDA to fall in the first and fourth quarters of a calendar year and 25% to 30% or the balance to fall in each of the second and third quarters of the respective quarters. So if you add them all up, you would end up with 100% over four quarters.

Sheila McGrath - Evercore Partners Inc., Research Division

Okay. And that -- sorry, one quick question, George, on the other accounting item that you mentioned, specifically, for Grace. Is that like -- should we expect that kind of evenly across the quarters?

George M. Morvis

Yes. Yes. I mean -- because it's based on adjustment -- fair market value adjustment to inventory, a lot of that's going to be tempered by how quickly the inventory flows through. So I would anticipate that to be more in the first half of the year as opposed to the second half of the year just because it's ROC in the aggregate inventory, that type of stuff.

Stanley M. Kuriyama

Sheila, I'd like to, just to add in on Grace. It really is weather-related in terms of their earnings performance over the course of the year, because the work is there, right? They have a lot of pending contracts, huge backlog. So it's a matter of performing that work, and that's where the weather comes in. And so, of course, in Hawaii, the first and fourth quarters are going to be your wettest months. And we've already seen that in this first quarter. January and February were wet months, wetter than we expected. So you're going to see that definite seasonality. Ultimately, it all turns on how many good days of paving we have in the quarter.

Christopher J. Benjamin

Sheila, on your question on interest expense, it will obviously depend on our level of debt, which is contingent on a number of factors: one being the CapEx that was mentioned, as well as sales and revenues and earnings. But assuming we spend all the capital that we have in our plan, I would probably project an increase of interest expense in the $8 million to $10 million range over 2013.

Stanley M. Kuriyama

2014.

Christopher J. Benjamin

Sorry, yes, 2014.

Operator

With no additional questions in the queue I would like to hand the call back over to Ms. Suzy Hollinger, Director, Investor Relations, for closing remarks.

Suzy Hollinger

Thanks, everyone, for being on the call. If you have additional questions, please contact me at (808) 525-8422. Have a nice evening. Thanks.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a wonderful day.

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