The following discussion and analysis should be read in conjunction with the
forward-looking statements disclaimer set forth at the beginning of this Annual
Report, the risk factors set forth in Item 1A of this Annual Report, and our
financial statements and the notes to those statements set forth in Item 8 of
this Annual Report.
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Table of Contents RESULTS OF OPERATIONS
Comparison of Years Ended December 31, 2022 and 2021
CONSOLIDATED
Years Ended December 31,
2022 2021
(inthousands except share amounts)
Operating revenues $ 20,960 $ 12,443 Segment operating costs and expenses (6,171 ) (5,600 ) General and administrative (2,795 ) (2,569 ) Share-based compensation (1,278 ) (1,449 ) Depreciation (1,109 ) (1,188 ) Operating income 9,607 1,637 Other income 71 13 Pension and other postretirement expenses (7,885 ) (4,732 ) Interest expense (6 ) (122 ) Income (Loss) from continuing operations 1,787 (3,204 ) Loss from discontinued operations - (216 ) Net Income (Loss) $
1,787 $ (3,420 )
Income (loss) from continuing operations per Common Share $ 0.09 $ (0.17 )
Loss from discontinuing operations per Common Share $ - $ (0.01 )
Net income (loss) per Common Share $ 0.09 $ (0.18 )
REAL ESTATE
Years Ended December 31,
2022 2021
(in thousands)
Operating revenues $ 11,600 $ 3,400
Operating costs and expenses (1,026 ) (750 )
Operating income $ 10,574 $ 2,650
Real estate operating revenues include the sales of our real estate inventory.
The increase in our consolidated operating income for the year ended December
31, 2022 compared to year ended December 31, 2021 was primarily attributed to
the sales of real estate inventory during the year.
In June 2022, we sold approximately 50 acres in West Maui to the County of Maui
for development of a regional park. Net proceeds of $1.9 million were collected
upon closing.
In February 2022, we entered into an agreement to sell a 646-acre parcel of agricultural land in Upcountry Maui. Terms of the agreement, as amended, included a purchase price of $9.6 million, a diligence period of three months, and other customary closing conditions. Net proceeds of $9.2 million were collected upon closing in May 2022.
In December 2021, we sold to the County of Maui the fee simple interest in a 1.065-acre property in West Maui, otherwise known as Lot B-1 of the Gorilla Foundation Subdivision, for $0.1 million.
In November 2021, we received twelve residential workforce housing credits valued at $0.6 million pursuant to Maui County Code Section 2.96.050 from the buyer of a 5.27-acre parcel located in Kapalua Resort, also known as Site 6-0. As a condition of the sale in 2016, the buyer of the parcel was required to transfer these credits within five years of closing. In June 2021, we sold and granted to a conservation organization a perpetual, non-exclusive conservation easement consisting of approximately 791 acres of unimproved land in Honolua Valley for $0.9 million. This easement permits the buyer right of entry to perform improvements to the property and enhance its conservation and preservation efforts in the area. In May 2021, we sold the property commonly known as the Steeple House located in the Kapalua Resort for $1.8 million. The sale included the fee simple interest of the 1.1-acre parcel as well as buildings and improvements located on the property.
There were no significant real estate development expenditures during the years ended December 31, 2022 and 2021, respectively.
Real estate development and sales are cyclical and depend on several factors. Results for one period are therefore not necessarily indicative of future performance trends in this business segment.
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LEASING
Years Ended December 31,
2022 2021
(in thousands)
Operating revenues $ 8,513 $ 8,103
Operating costs and expenses (3,598 ) (3,495 )
Operating income $ 4,915 $ 4,608
Operating revenues from leasing activities for the year ended December 31, 2022,
were comprised of $6.5 million from commercial, industrial, and agricultural
leases, $1.0 million of licensing fees from our registered trademarks and trade
names, and $1.0 million from potable and non-potable water system sales compared
to $6.2 million from commercial, industrial, and agricultural leases, $0.7
million of licensing fees from our registered trademarks and trade names, and
$1.2 million from potable and non-potable water system sales for the year ended
December 31, 2021.
The elimination of COVID-19 related travel restrictions and social distancing
measures resulted in increased visitor traffic to the island of Maui. Income
recognized from our commercial leasing portfolio was correspondingly higher for
the year ended December 31, 2022 compared to the year ended December 31, 2021,
specifically higher percentage rental income. Certain rental income is
contingent upon the sales of the tenant exceeding a defined threshold and
recognized as a percentage of sales after those thresholds are achieved.
Percentage rental income was $1.9 million and $1.5 million during the years
ended December 31, 2022 and 2021, respectively.
The increase in leasing operating costs and expenses for the year ended December
31, 2022, compared to the year ended December 31, 2021, was primarily due to
higher property maintenance costs for our commercial leasing portfolio
properties.
Our leasing operations face substantial competition from other property owners
in Maui and Hawaii.
RESORT AMENITIES
Years Ended December 31,
2022 2020
(in thousands)
Operating revenues $ 847 $ 940
Operating costs and expenses (1,547 ) (1,355 )
Operating loss $ (700 ) $ (415 )
Our Resort Amenities segment includes the operations of the Kapalua Club, a
private, non-equity club providing its members special programs, access and
other privileges at certain of the amenities at the Kapalua Resort including a
30,000 square foot full-service spa, a private pool-side dining beach club, and
two 18-hole championship golf courses. The Kapalua Club does not own or operate
any resort amenities and the member dues collected are primarily used to pay
contracted fees to provide access for its members to the spa, beach club and
other resort amenities.
The decrease in operating revenues for year ended December 31, 2022, compared to the year ended December 31, 2021, was due to lower membership levels of the Kapalua Club.
Contracted fee expenses correspondingly increased for the year ended December 31, 2022, compared to the year ended December 31, 2021, primarily due to higher contracted golf course fees charged to the Company.
Member dues may be affected in future periods depending on the impact of COVID-19 on public health measures and travel regulations.
OTHER INCOME
We earned approximately $67,000 of investment income from our interest-bearing cash and investment accounts established in October 2022.
In March 2021, we received a final closing distribution of $13,000 from our 51% ownership interest in Kapalua Bay Holdings, LLC ("KBH"). The investment was previously written down to zero in 2009.
PENSION EXPENSE
In November 2022 and 2021, the Company signed purchase agreements with insurers
to annuitize the scheduled pension payments of certain plan participants.
Approximately $14.5 million and $10.5 million were disbursed from plan assets
for the group annuity contracts in 2022 and 2021, respectively. Settlement
charges of $7.5 million and $4.3 million were recognized in pension expense for
the years ended December 31, 2022 and 2021, respectively, as a result of the
annuity purchases.
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INTEREST EXPENSE
There were no outstanding borrowings on our credit facility with a bank at
December 31, 2022 and 2021. Interest expense for the years ended December 31,
2022 and 2021 were zero and $0.1 million, respectively. On December 31, 2022 and
2021, interest rates on our credit facility were 6.38% and 2.12%, respectively.
DISCONTINUED OPERATIONS
In December 2019, we entered into an Asset Purchase Agreement ("Agreement") to
sell the assets of Kapalua Water Company, Ltd. ("KWC") and Kapalua Waste
Treatment Company, Ltd. ("KWT") located in the Kapalua Resort subject to certain
closing conditions, including completion of due diligence and approval by the
State of Hawaii Public Utilities Commission ("PUC"). In March 2021, the sale was
approved by the PUC subject to certain closing conditions of its Decision and
Order. The Company received net proceeds of approximately $4.2 million upon
closing of the sale in May 2021.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
We had cash on hand of $8.5 million and $5.6 million at December 31, 2022 and
2021, respectively. We hold deposit accounts with several local banks in Hawaii.
Accounts at each institution are insured by the Federal Deposit Insurance
Corporation up to $250,000. We rely on the financial strength and stability of
these banks and have no reason to believe that our deposits would be unavailable
on demand.
Our investments consisted of corporate bond securities maturing over various
dates through February 2024. The fair value of our investments was $3.0 million
at December 31, 2022. We intend to hold our bond investments until maturity.
We also had $15.0 million of available credit under a revolving line of credit
facility with First Hawaiian Bank ("Credit Facility") as of December 31, 2022
and 2021, respectively. In 2021, we executed a Fourth Loan Modification
Agreement and Second Amended and Restated Credit Agreement ("Agreements")
extending the maturity date of the Credit Facility to December 31, 2025. The
Agreements provide revolving or term loan borrowing options. Interest on
revolving borrowing is calculated based on the Bank's prime rate minus 1.125
percentage points. Interest on term loan borrowing is fixed at the Bank's
commercial loan rates with interest rate swap options available. We have pledged
approximately 30,000 square feet of commercial leased space in the Kapalua
Resort as security for the Credit Facility. Net proceeds from the sale of any
collateral are required to be repaid toward outstanding borrowings and will
permanently reduce the Credit Facility's revolving commitment amount. There are
no commitment fees on the unused portion of the Credit Facility. The terms of
the Credit Facility include various representations, warranties, affirmative,
negative, and financial covenants and events of default customary for financings
of this type. Financial covenants include a minimum liquidity (as defined) of
$2.0 million, a maximum of $45.0 million in total liabilities, and a limitation
on new indebtedness.
We were in compliance with the covenants under the Credit Facility at December 31, 2022,
Cash Flows Net cash flow provided by our operating activities totaled $6.3 million and $1.4 million for the years ended December 31, 2022 and 2021, respectively. Net proceeds from sales of real estate were approximately $11.2 million and $2.7 million for the years ended December 31, 2022 and 2021, respectively. Voluntary contributions of $5.7 million and $1.0 million were made to our defined benefit pension plan during the years ended December 31, 2022 and 2021, respectively. A minimum funding contribution of $0.6 million was also made in January 2021. No minimum funding contributions are required in 2023. In October 2022, we invested $3.0 million of our increased cash balance from operating cash flows in shorter term bond securities. These bond investments yielded approximately 4.98% in aggregate at December 31, 2022.
Future Cash Inflows and Outflows
In December 2021, we entered into an agreement to sell the Kapalua Central
Resort property for $40.0 million. On May 13, 2022, terms of the agreement were
amended to include a closing condition requiring the Maui Planning Commission to
approve a (5) five-year extension of a Special Management Area ("SMA") permit
issued by the County of Maui by April 10, 2023. If the extension is not approved
by April 10, 2023, the purchase agreement will terminate. If the extension is
approved, the closing date is expected to be no later than (30) thirty days
after the date of the extension approval.
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Our business initiatives include investing in our operating infrastructure and continued planning and entitlement efforts on our development projects. At times, this may require borrowing under our Credit Facility or other indebtedness, repayment of which may be dependent on selling of our real estate assets at acceptable prices in condensed timeframes. We believe our cash and cash equivalents balances, cash provided from ongoing operating activities, and available borrowings under our revolving credit facility, will provide sufficient liquidity to enable us to meet our working capital requirements, contractual obligations, and timely service our debt obligations for at least the next 12 months and the foreseeable longer term.
Our indebtedness could have the effect of, among other things, increasing our exposure to general adverse economic and industry conditions, limiting our flexibility in planning for, or reacting to, changes in our business and industry, and limiting our ability to borrow additional funds.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our accounting policies are described in Note 1 to our financial statements set forth in Item 8 of this Annual Report. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires the use of accounting estimates. Some of these estimates and assumptions involve a high level of subjectivity and judgment and therefore the impact of a change in these estimates and assumptions could materially affect the amounts reported in our financial statements. The accounting policies and estimates that we have identified as being critical to our financial statements are as follows:
• Our long-lived assets are reviewed for impairment if events or circumstances
indicate that the carrying amount of the long-lived asset may not be
recoverable. These asset impairment loss analyses contain uncertainties
because they require management to make assumptions and apply considerable
judgments to, among others, estimates of the timing and amount of future cash
flows, expected useful lives of the assets, uncertainty about future events,
including changes in economic conditions, changes in operating performance,
changes in the use of the assets, and ongoing costs of maintenance and
improvements of the assets; thus, the accounting estimates may change from
period to period. If management uses different assumptions or if different
conditions occur in future periods, our financial condition or future
operating results could be materially impacted.
• Deferred development costs consist principally of predevelopment and offsite
development costs related to various projects in the planning stages by our
real estate segment. Based on our future development plans for the Kapalua
Resort and other properties, and the estimated value of these future projects,
we have concluded that our deferred development costs will be recoverable from
our future development projects. Our assumptions and estimates could be
subject to significant change because of the long-term nature of our
development plans and the uncertainty of when or if certain projects will be
developed.
• Assets are classified as held for sale when management approves and commits to
a plan to sell the property; the property is available for immediate sale in
its present condition, subject only to terms that are usual and customary; an
active program to locate a buyer and other actions required to complete the
plan to sell have been initiated; the sale of the property is probable and is
expected to be completed within one year; the property is being actively
marketed for sale at a price that is reasonable in relation to its current
fair value; and actions necessary to complete the plan of sale indicate that
it is unlikely that significant changes to the plan will be made or that the
plan will be withdrawn. Assets held for sale are stated at the lower of net
book value or estimated fair value less cost to sell.
• Held-to-maturity debt securities are stated at amortized cost. Investments are
reviewed for impairment by management on a periodic basis. If any impairment
is considered other-than-temporary, the security is written down to its fair
value and a corresponding loss recorded as a component of other income
(expense).
• Sales of real estate assets that are considered central to our ongoing major
operations are classified as real estate sales revenue, along with any
associated cost of sales, in our consolidated statements of operations and
comprehensive income. Sales of real estate assets that are considered
peripheral or incidental transactions to our ongoing major or central
operations are reflected as net gains or losses in our consolidated statements
of operations and comprehensive income.
• If the sale of a real estate asset represents a strategic shift that has, or
will have, a major effect on our operations, such as the discontinuance of a
business segment, then the operations of the property, including any interest
expense directly attributable to it, are classified as discontinued
operations, and amounts for all prior periods presented are reclassified from
continuing operations to discontinued operations. The disposal of an
individual property generally will not represent a strategic shift and,
therefore, will typically not meet the criteria for classification as
discontinued operations.
• Determining pension expense and obligations for our defined benefit pension
plan utilizes actuarial estimates of participants' age at retirement, life
span, the long-term rate of return on investments and other factors. In
addition, pension expense is sensitive to the discount rate utilized to value
the pension obligation. These assumptions are subject to the risk of change as
they require significant judgment and have inherent uncertainties that
management or its consulting actuaries may not control or anticipate. A
detailed discussion of our defined benefit pension plans is contained in Note
6 to our financial statements set forth in Item 8 of this Annual Report.
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• Management calculates the income tax provision, current and deferred income
taxes, and tax credits along with the valuation allowance based upon various
complex estimates and interpretations of income tax laws and regulations.
Deferred tax assets and tax credits are reduced by a valuation allowance to
the extent that it is more likely than not that they will not be realized. To
the extent we begin to generate taxable income in future years, and it is
determined the valuation allowance is no longer required, the tax benefit for
the remaining deferred tax assets and tax credits will be recognized at such
time. A detailed discussion of our income taxes is contained in Note 11 to our
financial statements set forth in Item 8 of this Annual Report.
• Our results of operations could be affected by significant litigation or
contingencies adverse to the Company, including, but not limited to, liability
claims, environmental matters, and contract terminations. We record accruals
for legal matters when the information available indicates that it is probable
that a liability has been incurred and the amount of the loss can be
reasonably estimated. We make adjustments to these accruals to reflect the
impact and status of negotiations, settlements, rulings, advice of legal
counsel and other information and events that may pertain to a particular
matter. Predicting the outcome of claims and lawsuits and estimating related
costs and exposure involves substantial uncertainties that could cause actual
costs to vary materially from those estimates. In making determinations of
likely outcomes of litigation matters, we consider many factors. These factors
include, but are not limited to, the nature of specific claims, our experience
with similar types of claims, the jurisdiction in which the matter is filed,
input from outside legal counsel, the likelihood of resolving the matter
through alternative dispute resolution mechanisms and the matter's current
status. A detailed discussion of significant litigation matters and
contingencies is contained in Note 8 to our financial statements set forth in
Item 8 of this Annual Report.
IMPACT OF INFLATION AND CHANGING PRICES
Most land holdings we own were acquired from 1911 to 1932 and are carried at cost. At the Kapalua Resort, some of the fixed assets were constructed and placed in service in the mid-to-late 1970's. Depreciation expense would be considerably higher if fixed assets were stated at current replacement cost.
OFF-BALANCE SHEET ARRANGEMENTS
As of December 31, 2022, we did not have any significant off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
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