Suzy Hollinger - Director, IR
Stan Kuriyama - President & CEO
Joel Wine - CFO
Chris Benjamin - President, Alexander & Baldwin Land Group
Matt Cox - President, Matson Navigation Company
Jack Atkins - Stephens Inc.
Sheila Mcgrath - KBW
Brendan Maiorana - Wells Fargo
Alexander & Baldwin, Inc. (ALEX) Separation Plan Announcement Conference Call December 2, 2011 8:00 AM ET
Good day, ladies and gentlemen and welcome to the Alexander & Baldwin Inc Separation Plan announcement webcast. My name is Diana and I will be the operator for today. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions) As a reminder, today’s conference is being recorded for replay purposes. I would now like to turn the call over to your host, Ms. Suzy Hollinger, Director, Investor Relations. Please proceed Ma’am.
Thank you, operator. Hello and welcome to Alexander & Baldwin’s call to discuss our plans to separate our land and transportation company. On the call with me today are Stan Kuriyama, Alexander & Baldwin President and CEO; Joel Wine, CFO; Chris Benjamin, President of Alexander & Baldwin Land Group; and Matt Cox, President of Matson Navigation Company.
Before we commence, please note that statements in this call and presentation that set forth expectations or predictions are based on facts and situations that are known to us as of today, December 2, 2011. Actual results may differ materially due to risks and uncertainties such as those described in our December 1 press release announcing the separation plans and on pages 17 through 25 of our 2010 Form 10-K and our other subsequent filings with the SEC.
Statements in this call and presentation are not guarantees of future performance and we do not undertake any obligation to update our forward-looking statements. Slides from this presentation are available for your download at our website www.alexanderbaldwin.com. You’ll see an icon at the top of the website to direct you to the appropriate section for download.
I’ll turn the presentation now over to Stan, who will begin the formal presentation.
Good morning everyone and thank you for joining our call. We are excited to announce today a new chapter in Alexander & Baldwin’s 140-year history. After many years of periodically evaluating A&B structure, our Board of Directors has decided that the time is now right to separate the company to two independent public companies, one focused on real estate and agriculture and the other on transportation.
In the past our real estate business has benefited from the steady financial contribution from Matson. Over the past decade however, we’ve succeeded in growing our real estate business to the point where it is roughly equal in asset size and earnings with our transportation business. Most importantly we’ve doubled the size of our commercial portfolio where we now have nearly 8 million square feet quality office, industrial and retail properties which produced a significant and reliable source of income for our real estate business.
We’ve also invested heavily in our development business to create a robust pipeline of residential and commercial projects across the state of Hawaii. And last but not least, we’ve restored our agricultural operations to stability and profitability. In short, we’ve created a much larger and stronger real estate company that is not only capable of standing on its own, but it’s poised for growth and success as we continue to identify good near-term investment opportunities in Hawaii and as our real estate markets begin to recover over the longer term.
We’ve also strengthened our transportation companies over the same period of time. Matson has expanded its reach from its core Hawaii and Guam services to establish a successful premium service in China. We have invested over $0.5 billion building four container ships which gives us the youngest average vessel age among the Jones Act carriers. And we have built a top 10 logistics company with nationwide service which will serve as another platform for growth in future years. There are a number of benefits to this separation including the two fundamental ones; greater focus for each company's operations and greater clarity for each company's investors and analysts.
Separation will allow each company to focus solely on its own strategies, opportunities and challenges. And given the very different characteristics of our two businesses, separation will allow analysts and investors to obtain a better understanding of each company allowing us to develop a shareholder base that is more attractive to and better aligned with each respective business.
In this morning’s presentation Joe and I will provide you with some historical context with summary of the transaction and the rationale supporting separation. Chris and Matt will then give an overview of the two companies and their strategic outlooks. We will conclude with closing remarks and Q&A. From a historical perspective, the ownership of these two very distinct operations make sense.
A&B of course started as a sugar plantation, one of a number of plantations throughout the state in order to ship the state’s raw sugar to the West Coast for refining and sale, a co-op of the sugar plantations owned by Matson. It was not until 1969 however that the company bought out the interest of the other sugar plantations and Matson became a wholly-owned subsidiary.
In the meantime beginning with the construction of homes for its sugar workers A&B expanded into the real estate development business and primarily through the use of 1031 exchanges began to assemble a portfolio of commercial properties in Hawaii and on the mainland. The land business will continue to carry the Alexander & Baldwin name and will consist of our real estate leasing, real estate sales and agro business segments. Throughout this presentation we will refer to this new company as A&B.
The transportation company will continue to operate under the Matson brand and will consist of our ocean transportation and logistics segments. Post separation, the companies will each own over a billion dollars of assets and will each employ a 1000 or more employees. On a trailing 12 month basis the segments comprising A&B have revenues of $371 million and operating profit of $102 million.
Matson’s ocean transportation and logistics segments had combined revenues of $1.5 billion and $104 million of operating profit excluding results for Matson’s second China Long Beach service which was discontinued in the third quarter. It should be noted that these figures exclude corporate expenses.
Upon separation, I will become A&B’s Chairman and Chief Executive Officer. Chris Benjamin who recently became head of the company’s land group will server as A&B’s President and Chief Operating Officer and Paul Ito, currently Alexander & Baldwin’s Controller will become our Chief Financial Officer. Matson’s Board will be chaired by Walter Dods who is currently Chair of the Alexander & Baldwin Board. Matt Cox, Matson’s President will also becomes Matson’s Chief Executive Officer and Joel Wine will be Matson’s Chief Financial Officer. The rest of the management team at both companies is expected to remain unchanged. Each company will therefore enjoy continuity of leadership and a strong Hawaii presence and to be led by very experienced highly capable individuals.
At this point, let me turn the presentation over to Joel to discuss in more detail the rationale supporting our planned separation.
Thank you, Stan. As shown on slide seven, both the Real Estate and Transportation businesses have significantly grown their profit bases over the last 15 years. This chart on the upper left shows the average annual operating profit from our real estate operations has increased by 62% over the last five years versus the ‘96 to 2000 timeframe. Over the same comparison period, the Matson businesses grew operating profit by 41%.
The Real estate growth was the direct result of over $800 million invested in development projects and another $850 million invested in the acquisition of commercial properties over the last decade.
The Matson growth resulted from the successful expansion of core Hawaii service to Guam and China and our Matson Logistics business growing to become the 10th largest freight brokerage business in the country.
Over this period, Matson also invested substantially in its asset infrastructure, including over $500 million invested on vessel monitorization alone. So the key point is that both the land and transportation businesses have grown to a critical size; asset scale and core level of profitability to drive these independent companies.
Turning to slide eight, the core strategic rationale for the separation decision lies primarily in three categories that benefits highlighted here. The first is greater focus; the second is greater flexibility and the third is better alignment. Starting with focus, we believe each company will have a higher degree of strategic and operational focus as standalone companies. Focus will be greater in areas such as capital allocation, day to date focus of senior management on the core operational and financial drivers of each of our individual businesses and the prioritization and pursuit of business level specific strategic initiatives. So operationally, our overall decision making will be more streamlined and simplified with this greater focus.
In terms of flexibility; each company will also have more degrees of freedom and flexibility to customize decision making in a number of areas such as capital structure, dividend policy and separate stock currencies to facilitate both growth acquisition opportunities and equity based compensation arrangements. We believe this additional flexibility will benefit each company’s execution of its value enhancing growth strategies.
Turning to the third category I mentioned, a better alignment. The operational and financial performance of the independent companies will be more transparent and streamlined and thus it should attract a more focused and aligned investor base. Additionally, each company will likely garner expanded analyst research coverage which will also help increase transparency. Employee incentives will also be more directly aligned with the performance of the individual businesses and shareholders will benefit from being able to more easily compare operational performance, financial performance, capital structure and overall financial policy to a universe of more direct industry peers.
Overall, we believe these benefits are substantial and add up to a better structural position for both companies to execute their individual strategies and create shareholder value in the future.
Finally, now is the right time to effect this transaction, as we believe each business has reached a relatively stable point in their investment cycles and business outlooks such that separating into two businesses at this time is the right strategy to best enhance long term shareholder value.
Now shifting from strategic rationale and turning to page nine, a large part of the reason we’re excited about this transaction is that both companies are endowed with highly valuable, irreplaceable assets unlike any other publicly traded company in our respective markets. A&B’s substantial asset base includes over 88,000 acres in Hawaii making it the fourth largest private landowner in the state; nearly 8 million square feet of commercial income properties in Hawaii and on the mainland and a development portfolio encompassing resort, primary residential and commercial projects across Hawaii.
A&B also owns and operates HC&S, the largest agricultural operation in Hawaii and will continue to be a major provider of renewable energy on the Islands of Maui and Kauai.
On the Matson side, the company is the market leading carrier of containerized freight and automobiles from the West Coast to Hawaii, Guam and the Mid-Pacific. Matson’s strong asset base includes 17 Jones Act vessels, over 47,000 company owned containers and equipment, dedicated marine terminal facilities in Hawaii, a 35% ownership stake in SSAT terminals which is one of the largest terminal operators on the US West Coast and also Matson Logistics. So overall both companies have strong asset bases and market positions today which we believe provides a solid foundation for future success as independent companies.
Before turning the presentation over the Chris and Matt to talk about each individual business, it’s important to note on page 10 that both companies will continue to be deeply rooted in the Hawaii economy. Economic performance of Hawaii will continue to be a major driver for both companies.
As we look forward there are emerging positive economic trends in the state which are expected to support future growth for both A&B and Matson. Visitor expenditures have been strong all year and were up 15% through September compared to the same period of 2010. Hawaii Tourism officials continue to forecast $12.6 billion in visitor expenditures for this year which will make 2011 the second best year ever in tourism spend only slightly behind 2007’s level of $12.8 billion.
International tourism particularly from China and Korea presents a huge opportunity of growth. Even a small share of the China tourism market will have a significant impact on Hawaii’s tourism industry and the Hawaii economy in general. In addition, the expansion of Hawaii’s construction industry resulting from new infrastructure investments like the planned $5 billion rail project for Honolulu are expected to drive future economic growth in the state.
So overall we are proud of how we’re growing our businesses over the years and are looking forward to capitalizing on a wide range of opportunities we foresee for these independent companies going forward.
Now let me turn the call over to Chris to discuss A&B, followed by Matt who will discuss Matson.
Thank you, Joel. As I describe the new A&B I would like to focus on our competitive positioning and the keys to how we will create value. But first, I want to expand a bit on Joel comments with respect to Hawaii.
We are increasingly bullish on Hawaii. It’s a spectacular place that’s poised for a recovery and an accelerating pace of growth; locally driven demand remained strong, but Hawaii is also increasingly attractive to a number of other key audiences. To the US Military Hawaii is a strategic advance position for Asia which will continue to benefit from significant military investment and activity.
To the domestic tourist and second home buyer, Hawaii is exotic, yet safe. Importantly, a dollar is still worth a dollar for the domestic traveler. For the international traveler, especially from Asia, Hawaii is an increasingly affordable paradise with a mixed culture that’s familiar and accepted.
Already, we’re seeing a recovery in the tourism and residential markets in Hawaii and as this recovery accelerates, A&B is positioned to benefit disproportionately. As Hawaii’s premier publicly held land company, we understand this market have tremendous deal flow and have a history of identifying and executing across a broad opportunity set, from highly successful land acquisitions, to office condo conversions, to complex entitlement efforts, to renewal energy development and on and on.
The capabilities that enable this success will survive and thrive in the new A&B. This include our management team and employee base, our land and real estate assets, our irreplaceable Maui farming operation, our understanding of the Hawaii market and the communities we serve, and our strong balance sheet which enables us to seize opportunities.
We’ll become more nimble in this new focused structure and better able to leverage these strategies, these strengths.
Slide 11 summarizes our key strategies for trading value at A&B. The theme that runs through the strategy is Hawaii. We’re going to invest in the market we know best and find new ways to create value for shareholders. We’ll do this first by focusing on our core land holdings and by pursuing appropriate entitlement and development activities. But we hope to accelerate our pace of investment in assets and markets within Hawaii that are complimentary to our current portfolio and pipeline.
We’ll continue to pursue joint ventures in order to supplement our inhouse capabilities, access third party capital and/or to gain access to new segments of the Hawaii market. We see growth opportunities in our Hawaii farming and energy operations and we’ll continue to benefit from our significant commercial real estate portfolio which provide stable earnings and cash flow to support the more cyclical development business.
Having referenced our strong track record of creating shareholder value, let me offer a couple of examples of how we’ve done this. At the Wailea resort on Maui, we conceptualized and entitled this land in the early 1970s and developed into Hawaii’s premier masterplan for resort destination. In 1989, we sold Wailea to a Japanese firm. In 2003 leveraging our Hawaii market knowledge our balance sheet strength and our relationships, we repurchased all of the remaining 217 acres of developable property at Wailea for a fraction of what we had sold it for. Since then we sold or developed roughly 100 acres of Wailea more than recovering our full investment.
Today, we have 170 spectacular acres remaining of which 27 are under active development. On the other end of the spectrum, we’ve successfully executed shorter-term projects on purchased or joint-ventured fully-entitled parcels primarily on Oahu including three high-rise condominium projects featured on this slide.
Though these projects were similar in type, they targeted very different market segments. Lanikea and Waikiki targeted offshore buyers Keola La’i targeted the local residential market and Hokua developed in a joint venture with two prominent local development partners targeted the luxury condo market. Our next high-rise development condominium project Waihonua is well located near the Ala Moana shopping center and is targeted at both local and offshore buyers.
Residential development on Oahu is an area where we see incremental opportunities that will nicely complement our significant Maui and Kauai presence. This example is evidence of the company's successful development track record across a broad range of product types in Hawaii. They show how we leverage our unique land assets and balance sheet strength with local market expertise and relationships to move opportunistically yet decisively to meet Hawaii’s needs.
We have a robust development pipeline of over a dozen Hawaii projects, some with ready inventory including Wailea and Kukui’ula, the largest resort residential project in the state, Maui Business Park II, the largest commercial project on Maui and Waihonua as described earlier. Our development pipeline projects is more fully described in our real estate supplement and on the A&B Properties’ website.
In the end though it all comes down to results. An important benefit of our enhanced focus will be better transparency and alignment of incentives. Historically the company as a conglomerate has been measured primarily on earnings per share which is not necessarily an optimal measure of long-term value creation in our real estate businesses.
Proper decision making depends on striving for the right goal and this slide summarizes the key metrics that we will use to evaluate and measure our performance in each of our lines of business going forward. Compensation will be aligned with results on these measures.
In closing, let me reiterate that we will focus on the Hawaii market, seeking growth opportunities across a wide range of asset classes within the state. We retain the financial strength and flexibility to finance our projects through the real estate market cycles. We will continue to work with our communities to pursue responsible development that will help shape the future of our state while creating substantial value for our shareholders. Now let me ask Matt to discuss Matson.
Thanks Chris and good morning to everyone. Matson is the preeminent shipping company in the Pacific with a leading market share and our core trade lanes of Hawaii, Guam and Micronesia. And Matson has been long recognized for industry-leading ontime arrival performance and award winning customer service.
In 2006 Matson expanded from our core Hawaii and Guam services to encompass China in which Matson operates a premium expedited service from Shanghai to Long beach. Matson shore site operations is in Hawaii and our dedicated terminals in the West Coast are integral to providing the high-quality reliable customer service.
So what’s our strategy? In our core services, we continue to position ourselves to benefit from recovering Hawaii economy and the expected increases in cargo to Guam as the US military executes its relocation and expansion strategy in the Pacific. We also intend to leverage our knowledge and expertise in serving island communities to services in other Pacific island trades.
We continue to be interested in expansion opportunities in other Jones Act markets such as Alaska. We also plan to grow in the international trade segments through our 35% ownership interest in SSAT, one of the largest terminal operators on the US west coast. On the logistic side, our focus will be on the organic expansion of our highway brokers business, our intermodal rail and warehousing services and also in the development of international trade forum and consolidation offerings including leveraging our Shanghai presence for incremental growth in freight forwarding and consolidation in the China ports we serve.
The map on slide 17 shows Matson, how we leverage our two key aspects of our business to drive shareholder value. And the first is our ability to combine the Jones Act services to Hawaii and Guam with the eastbound head-haul in the highly competitive transpacific trade which enables us to deliver profitable cargo in both customers, in both directions. And our fleet of 17 Jones Act vessels provides adequate capacity to meet Hawaii’s market needs as they expand overtime.
Slide 18 lays out our key metrics and those that we focus on managing the performance of our business and compensation will be aligned with the results on these key measures.
So to sum up for Matson on slide 19, we are excited about Matson’s growth prospects and the future value creation opportunities. We have an extensive physical asset base which is enhanced by un-parallel level of customer service and a premium brand with the 17 Jones Act vessels and barges, and 47,000 pieces of both containers and equipment and modern terminal facilities both in Hawaii and the West Coast.
We have a strong balance sheet and credit profile which will enable us to expand into other Jones Act markets and also to expand into niche services and other Pacific Island trades and also to leverage our strategically located terminals and logistics capabilities to take advantage of the growing international trade.
Matson will pay a dividend to complement our core business growth resulting in what we believe to be an attractive long-term total return to shareholders.
And with that, I will now turn the call back over to Joel.
Thanks Matt. On slide 20, the separation will be accomplished through a tax rate spinoff after which shareholders will own one share in each of A&B and Matson for each share they own today in Alexander & Baldwin. Executing a transaction of this nature requires more detailed internal work on a number of items such as organizational structure, transition service agreements between each company, governance and other matters.
The high level key external steps that need to be addressed to execute the separation include the receipt of a favorable IRS ruling on the tax free nature of the spinoff and secondly the effectiveness of an SEC registration statement for the new common equity shares that will be issued to shareholders at the time of the spinoff. We expect these steps to be completed such that our Board will be in a position to approve the final separation plan and for the spinoff to be executed sometime in the next six to nine months.
From a financial and capital structure point of view, each company will be adequately capitalized to maintain strong balance sheets that will provide the financial flexibility necessary to pursue future growth opportunities for both companies. We expect to allocate our existing debt 40% to A&B and 60% to Matson and there is no additional leverage contemplated in this transaction. The exact amount of debt allocated to each company will be determined closer to the point of separation and will mostly be dependent upon our free cash flow generation and the normal fluctuations in our debt balances between now and then. We’ve also had detailed discussions with our lead lenders and we are confident that the capitalization plans for each company are sound and financeable.
With respect to dividend policies, Matson is expected to pay an attractive dividend at or above market averages and we currently project that to be in the range of $0.50 to $0.70 per share annually. A&B will not pay a dividend initially as we think retaining cash flow for investing in new and now returning real estate opportunities is the best shareholder maximizing strategy. With respect to our regular quarterly dividend, the company expects to maintain it until the separation is completed.
We will be busy moving forward with our separation plans; we expect the day to day business impact from the transaction to be insignificant. There will be no interruptions in our operations or the people we do business with. And as has been mentioned earlier on this call, both companies will remain very significant corporations in the Hawaii economy and business environment.
Lastly, as both A&B and Matson already perform most day to day functions independently, the elimination of work force staff is not a driving force to the separation decision and we expect no net job losses as a result of this transaction nor do we expect any material increases in corporate overhead expenses in aggregate.
Let me now turn the presentation over to Stan for some closing remarks.
Thank you, Joel. Separation of our land and transport businesses is a major milestone in Alexander & Baldwin’s long history. We firmly believe that in this process we are creating two strong, more focused companies that will be better able to pursue strategies to enhance shareholder value going forward than if we had remained together. We are eager to complete this separation transaction, but there is a lot to be done over the next several months to bring it to a close and we will of course keep you posted on our progress.
And that concludes our presentation this morning. We will be happy to now take your questions.
(Operator Instructions) The first question will come from the line of Jack Atkins of Stephens Inc.
Jack Atkins - Stephens Inc.
My first question for you this morning is in relation to the timeline for this process; you laid out the steps that need to be taken over the next six to nine months but could you give us some milestones today that we should be looking for just as sort of ballpark for us we should be thinking about as this process moves along, you know how should we think about the timeline over there?
Sure. Jack its Joel. I mentioned the two biggest gating time items are the IRS ruling request and the filing of the SEC registration statement. So you should look for news on both of those fronts. Generally, our tax attorneys have advised us that the IRS ruling request takes four to six months in general, so we will be working hard to get that filed as quickly as we can which will take a month or two. So that will be an important pacing item. And the SEC registration statement will require and be available to be submitted after our 1231 audits are completed, so when the year end pro-forma numbers are available, we would work hard to file that statement probably sometime in the March timeframe is our current planning. Those two items are going to be the biggest pacing items and we will give updates in Q1 and Q2 on how they are progressing.
Jack Atkins - Stephens Inc.
And then you talked about your conversations with your lenders and preparation for this announcement; have your lenders indicated that both businesses will be investment grade following the spinoff?
We benefit from having investment grade credit metrics and characteristics today and in our conversations with our lead lenders, they continue to feel very good about both companies maintaining investment grade profile. So, we feel very good about the financial structure and capitalization plans we put forward here.
Jack Atkins - Stephens Inc.
Okay, great, and then, Joel, you mentioned that 60% of the debt will be allocated approximately to Matson, could you, maybe, talk about how the 60:40 split was determined?
Yes, we really approached it with a clean slate. We asked ourselves a question. What’s best for both companies and both companies are strong cash flow generators over time, but Matson, you know, definitely has more quarter-to-quarter, year-in-year-out predictability to its cash flow. And so putting a little bit more than 50% on Matson made sense as we optimized across both companies. But we really approached it with a blank sheet of paper and said what’s best for the initial capitalization of both companies.
Jack Atkins - Stephens Inc.
Okay great. And then Matt looking at Matson, Stan highlighted the young age of your fleet. I am wondering if you could maybe step back for a moment and look over the next three to five years, and then do you see significant investments and potential new builds for your fleet over the next, you know, three to five years? And if you could just comment on that, I think that would be helpful.?
I mean, Matson has long had the approach of chunking up its investments rather than having a clear free investment of vessels. We’ve chosen to take the approach, replacing vessels in part from time to time. So, if we were to look forward to the next three or five years, our current thinking is that we will probably need to replace two Jones Act vessels during that timeframe. And so, you know, in our current thinking, we put that into kind of our planning. And the other point is just to add onto what Joel said was that we did factor in that capital allocation when we looked to the initial debt levels between the two companies to make sure that we could maintain an investment grade credit profile through the investment cycle. So that was another element of the initial debt level allocation process.
Jack Atkins - Stephens Inc.
And last question, I’ll jump back in queue. Matt, you talked about you know one of the strategies for Matson is potentially growing into other Jones Act trade lane, you know we’ve seen Trailer Bridge file for bankruptcy and then you know I think everyone is familiar with the problems that Horizon Lines is having. Could you maybe talk about the other Jones Act protected lanes that you are looking at and also you know given what we are seeing with both Trailer Bridge and Horizon, is the Puerto Rico trade looking you know maybe a little bit more attractive to you guys?
The way we think about it, there are four principle offshore Jones Act trades. There is the Hawaii and Guam, those are two, the third is Alaska and the fourth is Puerto Rico. And I think of course we operate into of the four, the Hawaii and Guam. We continue to be interested in Alaska and both whether it’s as an additional carrier or by acquiring one of the two existing operators and that opportunity would have availed to us, we will be interested. Well Puerto Rico, we were in a joint venture in Puerto Rico a number of years ago and for a number of reasons, we don’t like the Puerto Rico trade and so I don’t see us even despite the financial difficulties of the operators there, given the overtonnage situation to see us being a participant in that trade.
Next question will come from the line of Sheila Mcgrath of KBW.
Sheila Mcgrath - KBW
I wanted to know, could you discuss the real estate company, your thoughts on how the real estate company will now finance development capital because Matson historically, their cash flows had been a source for real estate capital.
One of the most important keys for the development business is having ready access to capital, to move quickly and cease opportunities. So an important element as we’ve thought through capital structure for A&B going forward is what we have a lot of fire power in unfunded revolver. So our conversations to our banks and lenders have been very important and we are very confident that the company out of the box will have significant assets to access to capital in a sizeable revolver, so we can move quickly and cease opportunities. So from an initial capitalization perspective that was very important. The second thing I mentioned is the income portfolio has grown substantially which as Stan mentioned in his remarks has been a great success for the company over the last 10 to 15 years. So if you look at that portfolio of $55 million to $60 millionish of NOI and growing, that's a very steady source of significant cash flow that will benefit A&B going forward to allow it to finance its business opportunities.
Sheila Mcgrath - KBW
And with this separation would you say that the new real estate entity would have a predisposition to want to sell more lands and redeploy them into income-producing assets, would that be more aggressive pace, do you think?
I don't know that I would say we will be more aggressive, that will still be an important focus of what we do is trying to create value in a variety of ways from our land and then where to allow and redeploy those proceeds into income-producing assets. I would say that we will continue to be as aggressive in both the entitlement and development side of business as well as where it is more appropriate to land monetization business, but I would say the area where we hope to be more active and more aggressive over the next few years is generally in investments in Hawaii, both development assets and commercial assets as hopefully we come out of the cycle that we have been in and get more active in deploying capital back into Hawaii.
Sheila Mcgrath - KBW
Just on the liabilities when you talk about the real estate company allocating 40% of the debt, I would assume it means of the long-term debt on the balance sheet, I am just wondering on the other liabilities, if there is any guidance or when you will file like, do all the differed income taxes that they don’t all go with the real estate entity, when will we know a little bit more about how that kind of shapes out?
Your first assumption is correct, in terms of debt allocation, that long-term liabilities as you look at our balance sheet again at the end of our September 10-Q the total debt was $570 million. So the 60% to 40% split we were talking about apply that to the debt balance at the end of the quarter, that’s the right way to think about it and then in terms of general liabilities, when we cement our SEC registration statement that I mentioned before that, that we will be able to submit and file after the of December 31st audit is available, we will outline all of the pro forma financials for both companies, but as the general rule all the existing liabilities are easy to trace, they gave rise from business activity from Matson or the A&B businesses and so all the liabilities will continue to stay with the business units where they gave, from the operations they came from.
(Operator Instructions) The next question will come from the line of Brendan Maiorana, Wells Fargo.
Brendan Maiorana - Wells Fargo
Chris, I wanted to start with you on A&B. So you know, I think, kind of the focus of the presentation and your comments really surrounds Hawaii and that seems like, you know, certainly where would be, you guys have that competitive advantage with respect to your real estate operations. But when we look at the existing portfolio, you’ve got, call it rough numbers kind of 40% of market value of the assets is still derived from the mainland income producing assets and a higher portion and 40% of the sustainable or regular cash flow or NOI. So how do you kind of plan to reorient you know what’s now a significant portion on the mainland back to Hawaii, given that your base is in those assets is very low. So if you were to sell and sit on the cash for a while, you’ll have a pretty big tax bill?
The first thing is that we intend to focus all new investment as much as possible back in Hawaii. Certainly, on the development side, and to the extent that we’re doing 1031 exchanges, whether it raw land proceeds or income portfolio, sales, we will target Hawaii first for commercial assets as well. It doesn’t necessarily mean that we’re going to make a dramatic rapid shift of existing mainland assets back to Hawaii. But overtime, as we monetize mainland assets, we will try to use 1031 exchange as to move them back to Hawaii where we can.
But as you know but as you know Hawaii is a relatively small market and on the commercial portfolio side, we have traditionally benefited from being able to place capital on use in US mainland just because there have been more opportunities available.
So there is a not a set timeline for how quickly we might transition the portfolio back to Hawaii and there is not even a goal of transitioning a 100% of it back. It’s simply a stated objective of trying to focus our investments going forward on the market that we know best. And exactly what that means and how quick we’ll transition the commercial portfolio back to Hawaii is yet to be seen. But I would say that on the development side, we would absolutely intend to focus almost exclusively on Hawaii and again put our money to work in the market that we know best.
Brendan Maiorana - Wells Fargo
And then this is maybe a little bit of asking Sheila’s question in sort of the opposite light, but if the opportunities that came up, the development opportunities and Hawaii begin accelerate I must say the commercial opportunities are lower; would you be guys be comfortable monetizing a significant portion of the mainland income producing assets and recycling that capital back into development so that you would be a little bit more of higher weighted development company than a commercial portfolio today?
Well, I think hypothetically the answer is yes, but I don’t think that we see the need right now to monetize mainland commercial properties or any commercial properties in order to support our development business. I think we feel that we’ve got sufficient cash flow from the commercial properties as well as the significant dry powder that Joel mentioned that we think we’ll able to do both, we’ll be able to maintain that commercial portfolio and continue to invest in a significant amount of development properties in Hawaii.
If we got into a scenario where the only way we could pursue development opportunities in Hawaii was to monetize some mainland assets I suppose there is a scenario where we might do that, but it would be very tax inefficient, so it would not be our preferred strategy.
Brendan let me just add, this is Stan that you know and thinking about separation, one of the critical factors for us was to come up with a capital structure, talk to our lenders about both term debt and revolving credit facilities to ensure that we have adequate capitalization and adequate ability to access financing to not only fund day to day operations of course, but to fund our strategic growth objectives.
So you know for example in Matt’s case, he mentioned a planned need to build a couple of more vessels in the future that was taken into account so a significant development capital and investment capital in our development businesses and other real estate opportunities and Hawaii was taken into account and so a part of our decision to announce a separation was because we reached that point of comfort in looking at our financial capabilities over the future years.
Brendan Maiorana - Wells Fargo
Yeah, I can understand and I think I certainly think that it makes sense to recognize kind of where you guys are coming from. But my sense is probably also a part of the rationale for separating the vehicles into the real estate and the transportation is you are looking at where your share price is relative to the intrinsic value and there is probably a pretty wide gap there and one way to narrow that gap is to become two more focused companies.
But it would seem to me that you know to the real estate company still is a little bit of an odd mix of assets on Hawaii the agri-business and then the stuff on the mainland and if you really want to kind of narrow that gap relative to intrinsic value versus the share price orienting more of the portfolio into Hawaii overtime seems like probably the easiest way to kind of get that gap to narrow.
So I am just -- and you guys are talking about that’s where the competitive advantage is; so it would seem like that’s the opportunity overtime and how you guys do that I guess is you know it will be of interest to investors. So that’s kind of what the genesis of kind of asking that question.
We certainly agree with that.
Brendan Maiorana - Wells Fargo
Is a restructure out of question just given that you’ve got so much of this tied up in development and it just doesn’t makes sense?
Well I think, I would not say tied up in development I would say that our primary strategy for creating value is real estate development and that as you know is not a good fit with the restructure. So what we did do is a deep dive and look carefully at the REIT option and it was in the end a relatively easy decision to organize the company as a Sea Corp to be able to pursue the strategy for value creation that we think is most important which is the development business. We could have tried to shoe horn it into a REIT restructure with the tax or a REIT subsidiary, but it really didn’t make sense and we think that the structure fits the strategy and is the right solution for shareholders and where we can get the most value.
Brendan Maiorana - Wells Fargo
And then Chris on the agri-business is there any thought, discussion, opportunity to similar to what you guys did with the coffee business to do with that with the sugar business where you can kind of own the land, keep the optionality on the land but get income from leasing that land out to someone who might operate the sugar business and have that little bit more stable income generating part of the portfolio as opposed to being the owner of sugar operations?
Well, Brendan, the first thing we’re focused on is trying to, as we have used the term de-risk or stabilize the business, even under the current ownership structure and I think that’s our first goal and we can do that through longer term off-take agreements for both sugar and energy and that’s our first focus. We certainly would be open to structures along the lines of what we did in Hawaii, but it’s a much more complicated operation over there; it’s much more insecurely linked to other things that we do on Maui and it’s much less prone, I think or appropriate for kind of a cargo like we did on Kauai; wouldn’t rule it out, but I would say our primary focus is trying to de-risk and stabilize the business under the current structure.
Brendan Maiorana - Wells Fargo
Sure. And just last one quickly for Joel. So as we think about the dividend Matson $0.50 to $0.70 a share; so $0.50 to $0.70 is comparable per share to the $1.26 per share current dividend. Is that correct?
And this concludes the question-and-answer portion for today’s conference. I would now like to turn the call back to Suzy Hollinger for closing remarks.
Thanks to everyone for being on the call this morning. If you have additional questions, please call me at 808-525-8422.
Thank you very much. This concludes today’s conference. And thank you everyone for your participation. You may now disconnect and have a great day.
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