Alexander & Baldwin, Inc. Q1 2010 Earnings Call Transcript — Seeking Alpha

Alexander & Baldwin, Inc. (ALEX)

Q1 2010 Earnings Call Transcript

May 4, 2010 5:00 pm ET

Executives

Suzy Hollinger – Director, IR

Stan Kuriyama – President & CEO

Matt Cox – President, Matson Navigation Company, Inc.

Norb Buelsing – President, A&B Properties, Inc.

Chris Benjamin – SVP, CFO & Treasurer; General Manager, HC&S

Analysts

William Horner – Stephens Incorporated

Sloan Bohlen – Goldman Sachs

Sheila McGrath – KBW

Brendan Maiorana – Wells Fargo

Tom Wilson – Wilson Capital Management

Tom Spiro – Spiro Capital Management

Presentation

Operator

Good day, ladies and gentlemen. Welcome to the first quarter Alexander & Baldwin earnings conference call. My name is O'Meara and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will be conducting a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn this conference over to your host for today’s call, Ms. Suzy Hollinger, Director of Investor Relations. Please proceed.

Suzy Hollinger

Thank you, operator. Aloha and welcome to Alexander & Baldwin's first quarter 2010 earnings call. On the call with me today are Stan Kuriyama, A&B's President and CEO; Chris Benjamin, A&B's CFO and also General Manager of HC&S; Norb Buelsing, President of A&B Properties; and joining us from Matson's headquarters in Oakland is 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, May 04, 2010. Actual results may differ materially due to risks and uncertainties such as those described on pages 17 through 26 of our 2009 Form 10-K and our other subsequent filings with the SEC. Statements in this call and presentation are not guarantees of future performance.

Slides from this presentation are available for download at our website www.alexanderbaldwin.com. You will see an icon at the top of the website to direct you to the appropriate section for download.

This slide provides an agenda for our presentation, after which we will take your questions. We will start with Stan who will comment on the performance for the quarter.

Stan Kuriyama

Thank you, Suzy. I'm pleased to report that A&B posted a solid first quarter and a positive start to 2010. Net income was significantly higher in the first quarter at $17 million or $0.42 per share compared to earnings in the first quarter of 2009 of $3 million or $0.07 a share.

As you'll note from this chart, operating results for all segments improved in the first quarter of 2010 with the exception of real estate leasing. Consolidated operating profit was $42 million in the quarter compared to $17 million a year ago. However, our first quarter '09 operating profit was impacted by a $6 million workforce reduction charge that did not recur in the first quarter of 2010.

Let me now brief you on the quarter highlights from each of our business units. In ocean transportation, our China service is benefitting from the recovery in both volume and rates. Volumes in particular were significantly higher than a year ago and rates are higher on a sequential basis. Matt will have more details for you later in the presentation.

Hawaii container volumes and rates were relatively flat in the quarter compared to last year. While we believe that material increases in volumes and rates are unlikely for the rest of the year, we are pleased that the Hawaii trade seems to have bottomed. Guam's performance was also stable for the quarter. Overall, operating profits in our ocean transportation business continue to benefit from the vessel deployment changes, workforce reduction, and other cost cutting and operating efficiencies implemented over the past two years.

First quarter operating results for MIL benefitted from a large movement for the Department of Defense, as well as from prior year's cost cutting measures. Some stabilization in MIL's intermodal business also occurred in the quarter. In real estate, we continue to observe demand and favorable pricing for quality commercial properties as evidenced by our sales of Mililani Shopping Center in January. This sale drove quarter results for this segment, as well as for the overall company.

Leasing, however, was challenged by several factors; the downward reset of market rents, lower occupancies in our Mainland portfolio, and the time lag between sales and acquisitions of properties in our 1031 exchange program. Norbert would be addressing this further in our presentation.

Agribusiness results improved in the quarter with losses declining by $800,000. However, we didn’t plan on harvesting any sugar in the first quarter, meaningful performance comparisons can't be made until the second quarter. As Chris will describe later, we continue to expect significant improvement for the full year and we recently learned federal grant monies will be made available to help us accelerate our bioenergy research at HC&S.

Underlying our performance in the first quarter were U.S. Mainland and Hawaii economic and market trends. The U.S. economy is returning to growth with increased business and consumer spending and manufacturing orders. This improvement coupled with reduced shipping capacity has resulted in strong demand in our China trade lane, driving not only increases in container volumes, but recent increases in rates as well.

This also provided support to MIL's international intermodal business. However, this economic improvement must be evidenced over a longer period of time to benefit the real estate markets where a continuing softness in demand for space has resulted in lower rents, greater concessions, and suppressed occupancies in our Mainland portfolio.

Hawaii also has seen some early signs of economic improvement. Tourism is showing increases in arrivals, expenditures, and hotel occupancies. Residential resales on Oahu have also improved and we have seen significant reductions in inventories and new housing starts. Again, early indications of this improvement have been seen in stabilizing Hawaii container volumes for Matson, but will have a lagging impact on our real estate development sales.

Overall, a return to growth for Hawaii's economy is most likely a year off and the pace of recovery is expected to be gradual. As a result, we do not foresee a dramatic recovery of our Hawaii real estate or Hawaii trade lane operations this year.

Now at this point, I'd like to turn the call over to Matt, Norb, and Chris to provide more color on the operating performance of their respective and their outlooks for the remainder of the year. Let's start with Matt Cox, President of Matson Navigation Company.

Matt Cox

Thanks, Stan. Ocean transportation's operating profit during the first quarter of 2010 was $10 million compared with a $0.5 operating loss in the first quarter of 2009. First quarter of 2009 profits were impacted by a $6 million workforce reduction charge that did not recur in the first quarter of 2010.

Even so, performance showed improvement largely due to increases in China container volumes. Growing demand, coupled with reduced China trade lane capacity also resulted in a successful rate negotiation season that concluded at the end of April. Through this process, we achieved an average 25% increase in contract rates over the average rates achieved in the first quarter of 2010. While we are pleased with this outcome, even these contract rates are subject to future fluctuations in markets supply and demand.

Container volumes in our Hawaii trade were down slightly in the first quarter compared with the same quarter a year ago. The largest cause for the decline was a change in the year-end sailing schedule that shifted approximately 400 containers from January 2010 into December 2009. The financial impact of lower container volumes was more than offset by higher auto volumes and from the timing – related to the timing of rental car fleet replacements.

As Stan mentioned, we saw stabilizing of volumes in our Hawaii trade lane. As you can see from this slide, year-over-year volume declines began moderating in the fourth quarter and we now have reached a point where we believe further significant declines are unlikely.

Guam container volumes and yields were up slightly in the quarter compared with the first quarter of 2009. We forecast Guam volumes to grow modestly in late 2010 due to approximately $1 billion of Department of Defense projects that have already been funded.

Operating profit also benefitted from new and ongoing efficiency measures. We expect to maintain vessel utilization levels in the 90% range, similar to the levels we've seen in the last three quarters and as a result, do not foresee any changes in our current nine-ship configuration. This level of utilization allows us to operate profitably at today's volume levels and to easily add vessels as volumes increase.

Moving to logistics, MIL's operating profit was $2 million in the quarter, a slight improvement from last year's first quarter, primarily due to a large movement for the Department of Defense and lower G&A costs. Although this business is relatively asset-light, there continues to be significant excess industry capacity in all modes, which has led to a continued gross margin squeeze across all of MIL's segments. And although volumes in the quarter increased slightly in the highway, expedited, and international intermodal segments, yields were lower across all segments.

The remainder of 2010 will continue to be challenging for our logistics business. We will continue to focus on organic growth opportunities and are pursuing additional cross-selling throughout our logistics businesses. Additional upside is dependent upon continuing recovery in the U.S. consumer expenditures.

And now, I'd like to turn the call over to Norb Buelsing, President of A&B Properties.

Norb Buelsing

Thanks, Matt and good afternoon. Real estate operating profit was $9 million compared to $12 million for the first quarter of 2009. Lower Mainland occupancies and rents, as well as the timing of commercial property sales and acquisitions were primary causes of the decline.

In January, we sold the 99% leased Mililani Shopping Center, generating significant profit. In the same month, we acquired a large Safeway-anchored retail center in Boulder, Colorado that provides significant upside opportunities. In early April, we reacquired the Lanihau Marketplace Shopping Center at a favorable price. Lanihau is also a grocery-anchored center, ideally located in Kailua-Kona, on the island of Hawaii. It was previously sold by the company in 2006.

We continue to seek other quality acquisitions, but are facing increased buyer competition. Mainland occupancies were 85% in the first quarter, down 5 percentage points compared with the first quarter of 2009, but sequentially unchanged from the fourth quarter. In general, renewal grants for our Mainland properties have declined by approximately 15% to 20%, consistent with rates for similarly located properties.

On the positive side, we've realized leasing activity in our Mainland industrial properties, which represent the bulk of our vacancies. We expect this recovery will continue as consumer spending strengthens. Recovery of the office space market will take longer. Fortunately, we have less exposure to this asset class.

Occupancies in our Hawaii portfolio remained fairly strong at 94%, but we are also starting to see renewals and rates affected as businesses face the challenges of a still soft economy. As a result of what we are observing, leasing will remain challenged. Although we do not expect to see material decreases in occupancies, replacement rents will be – will continue to be significantly lower than the rents previously in place. In addition, as I've mentioned, depreciation will be higher due to acquisitions under our 1031 program. Accordingly, operating profit for 2010 will remain lower as compared to 2009.

First quarter 2010 real estate sales operating profit was $21 million compared to the $6 million for the same quarter a year ago. In the first quarter, gains from the aforementioned Mililani Shopping Center sale drove results and were accompanied by sales of two other Hawaii properties. Solid buyer demand our quality properties is continuing to be experienced, resulting in favorable sale pricing.

As we said in the past, period-to-period comparison do not provide a constant – a consistent parameter of future performance as these sales are episodic by nature. As part of our ongoing 1031 exchange program, however, we do expect to continue to sell selected assets from our portfolio over the course of the year and reinvest in properties having higher appreciation potential.

In anticipation of future improvements in our real estate markets, we are proceeding with investments in core development projects such as Kukui'ula, Wailea and Maui Business Park and continue our entitlement design and permitting activities at various other projects. It is important to maintain momentum during this downtime, not only to be ready for the market's return, but also to capitalize on today's favorable construction pricing.

While we are starting to see increased buyer interest in primary housing, we do not expect a meaningful recovery in sales from development projects and joint ventures in 2010. We continue to aggressively pursue a number of potential investments in Hawaii real estate through our Project X program.

In the fourth quarter of 2009, we made our initial forays into the distressed debt market, acquiring a non-performing mortgage loan on a Hawaii property. This loan was paid off in the first quarter, generating $1.8 million of operating profit. In January, we acquired another non-performing mortgage loan on Hawaii property and we will continue to evaluate similar opportunities as they arise.

Our investment focus remains on Hawaii where we believe our competitive advantages will allow us to create the greatest value for our shareholders and we will continue to evaluate a broad spectrum of property types, ranging from vacant development parcels to existing improved properties to distressed debt.

With that, I'd like to turn it over to Chris Benjamin to discuss Agribusiness.

Chris Benjamin

Thanks, Norb. First quarter results for our Agribusiness business segment improved compared with the first quarter of 2009. An intentionally later start to the 2010 harvest designed to provide additional time for crop growth and factory maintenance meant that we weren’t selling bulk raw sugar at a negative margin as we had in the first quarter of 2009.

The first quarter operating loss resulted from a $1.9 million valuation adjustment to coffee inventory. We began the sugar harvest at Hawaiian Commercial & Sugar Company or HC&S on April 1st and so far, we've noted yields and operational efficiencies that bode well for the full year. Sugar prices have been declining recently, so we are fortunate that we locked in favorable pricing on about 70% of this year's production. We do remain exposed to pricing volatility on the balance of the crop, but domestic sugar prices have held up better than world prices in recent weeks. And we should still see a meaningful full-year increase in sugar prices.

We remain on track to reduce financial losses dramatically this year, at least to the single-digit range and we'll be in a better positioned to refine that guidance as the year progresses. Access to water remains a significant issue for the longer-term performance and viability of the plantation and we anticipate rulings on the two Maui water cases from the State Water Commission over the next few months.

Over the longer term, we remain focused on the potential conversion of our sugar plantation to an energy farm and are accelerating our evaluation of this potential. Recently, we announced a minimum of $12 million of federal support over the several years for research on energy crop development and energy conversion technologies at HC&S.

This research, funded by the U.S. Department of Energy and the Office of Naval Research, will be conducted by HC&S, various government agencies including the USDA and the University of Hawaii's College of Tropical Agriculture and Human Resources. It will complement HC&S' efforts to create a viable energy business model and it is affirmation of the key role HC&S could play in achieving greater energy independent for Hawaii.

That concludes our operational updates and I will now comment briefly on financial matters.

Our balance sheet is strong with solid assets, relatively low debt levels, and as you can see at the bottom of this slide, ample liquidity. This gives us financial flexibility to preserve our dividend and capitalize on opportunities to support and grow our businesses. Our total debt did increase $33 million in the quarter as a result of relatively low operating cash flows, accelerating investments into our businesses, and the payment of our quarterly dividend.

Cash flow slide reflects the items I just summarized. Operating cash flows were suppressed in the quarter, largely because of the later start to our sugar harvest this year. Also, on this slide, you will see a reconciliation of our gross capital expenditures to our GAAP capital expenditures. The primary differences being 1031 exchanges and the fact that spending within real estate joint ventures including Kukui'ula is classified as an investment.

For 2010, we plan to increase our investment – our investments in our businesses substantially from the levels of 2009. Currently, our capital budget for the year is $335 million, which includes estimated 1031 exchanges of $130 million. Our capital spending in ocean transportation reflects a return to normalized levels of maintenance capital, including container and other equipment purchases, which had been curtailed in recent years.

Agribusiness 2010 maintenance capital spending will remain at low levels and is contingent upon the achievement of specific operational milestones. Spending on real estate investments including existing developments, joint ventures, and new Project X real estate investments is budgeted at roughly three times last year's level, although $75 million of this is placeholder capital for as yet unidentified investment opportunities.

I'll wrap up with a couple of miscellaneous financial matters. First, increased pension expense played a significant role in driving 2009 operating profits lower. For 2010, we don't yet have final calculations, but we anticipate a moderate reduction in pension expense from the 2009 levels.

We had several retirements that became effective late last year and early this year, increasing settlement expenses for non-qualified benefit plans. These payments are most notable at the corporate level where we incurred $1.3 million of settlement expenses in the first quarter. In the third quarter of 2010, we expect to incur another $3 million of non-qualified plan settlement expenses at the corporate level.

And with that, I'll turn the call back to Stan for his concluding remarks.

Stan Kuriyama

Thank you, Chris. And as you heard from our business units, we are pleased with the company's overall positive performance in the quarter. Three keys to continued improvement for the balance of the year are first, the seen strength in our China trade lane; second, significant improvement in Agribusiness results as described by Chris; and third, flat to modestly improved year-over-year performance from our Hawaii and Guam trade lanes and our other business units.

One exception is our leasing segment, where for the reasons described earlier, we do not expect to achieve last year's results. And as always, we will continue to vigorously pursue growth opportunities in the company's core businesses in order to create long-term shareholder value.

That concludes our presentation this afternoon and we would be now happy to answer your questions. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) And we will pause momentarily to compile the list of questions. And your first question comes from the line of George Pickral from Stephens Incorporated. Please proceed.

William Horner – Stephens Incorporated

Hey, it's William Horner on for George. Quick question.

Stan Kuriyama

Hi, William.

William Horner – Stephens Incorporated

How are you all? Stan or Matt, you touched on Hawaii volumes and rates being relatively flat. And unlikely an increase for the rest of the year and as Q1 volumes are stable of that of Q1 '09, but still well below the 2010 – or 2009 run rate. How should we read into that? I think Stan may have just clarified in his final comments, but are you expecting volumes to be more in line with Q1 '10 or flat year-over-year with comparative quarters?

Matt Cox

William, this is Matt. I think we certainly expect volumes to be stable with the 2009 levels. And so you will – we do expect that the normal seasonal play will come into effect so that it's typical that in the second and third quarters we do experience seasonal growth. I think what we meant to say or to clarify that the 2010 volumes westbound in the Hawaii trade are likely to look a lot like 2009, but we will see sequential or seasonal increases with the first quarter being our lowest of the year.

William Horner – Stephens Incorporated

Okay, great. And to touch on that, with China container volumes, should we expect kind of a similar run rate to Q1 '10 as opposed to year-over-year?

Matt Cox

I would say that for the first quarter, our ships were relatively full or full almost every week from the beginning of the year to the end of the quarter with the exception of a two-week period around the Lunar New Year. So I would say the volumes we experienced in the first quarter are likely to remain in place for the rest of the year because effectively we were full. So that's kind of what we expect there.

William Horner – Stephens Incorporated

And how ships do currently have in drydock?

Matt Cox

Well, we have four ships in reserve that are in class and available to be put back into the Hawaii service when volumes recover, but we do have four vessels in class and available to put back into service.

William Horner – Stephens Incorporated

Okay, great. And then one more question. This is for Chris. Could you provide a little more color regarding the research support for biofuel Maui? Is this something where you can more easily transition into a new crop or business strategy by carving out an existing piece of the acreage or is it something where you would consider exiting the sugar business altogether? So I guess what I'm saying is that – I mean, obviously your – this is going to be a slow transition trying to find a viable option, but what sort of ability you have in the near term to work on it?

Chris Benjamin

Yes, good question, William. Well, first of all, it's a very exciting development because it helps support and extend – expand a lot of what we've been doing over the last few years, which has been to look at viable options to producing and selling sugar. As most of our investors know, we took a very hard look at ethanol a couple of years and determined that it didn’t pencil out. But we didn't stop there. We began to look at other potential fuel, expansion of electricity production, and other ways of capitalizing on energy markets and making a transition.

There are scenarios where we could make a gradual transition where we would still primarily be producing sugar, but we would expand our energy production and then over the longer term, perhaps transition and then there are scenarios where we might make a more dramatic one-time transition from sugar into energy.

So it's really too early to say which of those we would pursue, but we are evaluating both and what I would say is that in any scenario for the next several years anyway, we are a sugar producer, because even if we made a decision today to transition into energy, there is a fair amount of lead time. So that's why we have to get the sugar business back to a reasonable level of financial performance, preserve our access to water, and then evaluate a longer-term transition.

William Horner – Stephens Incorporated

Okay, great. I appreciate it. That's all I have for now. Thanks.

Operator

And your next question comes from the line of Sloan Bohlen from Goldman Sachs. Please proceed. You may proceed, sir.

Sloan Bohlen – Goldman Sachs

Sorry about that. Hi, guys. Just to follow-on on the question about the sugar business, the scenario in which you would continue to produce sugar, I mean, is that still pretty dependent on what happens with the water cases?

Chris Benjamin

Well, everything we look at in that business is dependent on what happens with the water cases because regardless of what end product we are producing, the key to success and the key to financial viability is going to be how much biomass we can produce. And again, whether we turn it into crystallized sugar or turn it into energy, we need to grow as much as we can because we have high fixed costs. So the water case really – water cases really become critical to determining what natural resources we have access to and then therefore how much biomass we can produce.

So the transition to energy doesn't in any way negate the importance of water cases. In fact, certainly the – one of the primary things we will be looking at is our long-term potential to produce adequate biomass to make that kind of investment into renewable energy.

Sloan Bohlen – Goldman Sachs

Okay. And I guess maybe just as a refresh, what are the alternatives under the water case? I guess to kind of ask the other way is what options would you be left with if the water cases kind of went the other way on you?

Chris Benjamin

Well, it's hard to predict what the outcome of the water cases would be and to a large degree, our ability to react or compensate for water losses is going to be dependent on where and when we lose access to water, even down to what streams it comes from and that sort of thing, because the farming operations are very dependent on exactly where you need water and where you are getting it.

So it's hard to really the question, but I would say that we have some – we already pump a significant amount of ground water, but we are really stressing the capacity of those wells. So there is only so much we can do to replace loss of surface water. And so we really are very dependent on maintaining the access. That's why we've been very clear about the fact that if we were to lose significant amounts of surface water, it could have a devastating impact on us.

But to get any more specific about what else we could do really is going to have to wait until we see what the rulings are.

Sloan Bohlen – Goldman Sachs

Okay, that color is helpful though. And just switching gears, maybe a question for Norb. Maybe if you could run through kind of one, the story on the one shopping center that was bought in the quarter? You've now bought and sold it twice. I just wanted to – maybe if you could take us through the story of what the value proposition is there now versus back in 2005? And then second, if you can maybe give us some cap rates on what was bought and sold?

Norb Buelsing

Sure. In respect to Lanihau, actually that was acquired in this second – in the current quarter, second quarter. But I'd be happy to comment on it. Lanihau, we acquired that property initially back in 2005 and we also at the same time acquired an option to purchase approximately 22 acres of development land adjacent to it.

We sold the property together with the option the following year and realized a good gain on it at that time. And the – in the subsequent years, the development did not proceed. We stayed in touch with the parties that acquired it and we are fortunate in being able to reacquire just the improved portion of the center and that was acquisition cost of $22.5 million.

So in that intervening period, there was a renegotiation of one of the anchor tenant ground – anchor tenant leases, which significantly improved cash flow from the property. So we are comfortable with it, it's well located; it's a grocery drug-anchored center.

In respect to the properties that are replaced, this actually – the 1031 funds came from sales that occurred in the latter part of 2009. And those sale cap rates were slightly lower than what we achieved on the price of – on the investment of Lanihau Marketplace, but similar.

Sloan Bohlen – Goldman Sachs

Okay. That's helpful. And I think that's all I've got. Thank you, guys.

Chris Benjamin

Thanks, Sloan.

Operator

And your next question comes from the line of Sheila McGrath from KBW. Please proceed.

Sheila McGrath – KBW

Yes. Good afternoon. I was wondering if you could discuss Horizon's recent announcement to enter the China trade lane and your thoughts or expectations for the competitive landscape there.

Matt Cox

This is Matt, Sheila. Hi, how are you?

Sheila McGrath – KBW

Good.

Matt Cox

I would say from a – I certainly would want to defer most of the question to Horizon themselves, but what I can say is that the introduction or their introduction into that trade merely replaces Horizon Lines who is currently occupying that – I'm sorry, Maersk Line, thanks, who is currently using that space. So there is no net addition to the transpacific trade lane in its entirety.

And so while we expect – so we don't expect any dramatic impact on what is a very, very large transpacific market. And beyond that, I really wouldn't – I would just direct you to Horizon Lines for their motivation or their expectations about it.

Sheila McGrath – KBW

Okay. And I have another question for Norb. I was wondering if you could discuss the pickup in industrial leasing. Was that in Savannah or where exactly did you see that? Just a little more detail on that.

Norb Buelsing

Sure, Sheila. Well, actually we did lease some additional space in Savannah and that market in general is seeing quite a bit of activity. The Savannah – the port of Savannah is posting good numbers, but additionally, overall, we are seeing the industrial, as is typical, tends to lead out of recessionary periods. And we are seeing interest both on – from new tenants that are looking in the market, but additionally from existing tenants that were previously holding back and making decisions as far as renewals and extensions and expansions.

So while we have realized a few leases already in the first quarter, the activity leads us to believe that that the improvements will be seen throughout the year.

Sheila McGrath – KBW

Okay, that's helpful. And Norb, if you could also give us a little more detail on the distressed debt purchases? I – you did mention that that first purchase was paid back in full. I was just wondering what went on there. And also, a little bit more detail on perhaps what property type the second purchase was for.

Norb Buelsing

Sure. Again, I can give you information on the first. This was – the debt on this property was secured by some industrial lands in West Oahu. We – as we indicated, we acquired the debt and subsequently, within approximately two months, the borrower paid off the full amount. So we acquired it at a discount and as indicated in the earlier slides, our gain on it was about $1.8 million from the short period that we held it.

The second debt acquisition which occurred in January, this is a property on Maui that the security is a small shopping center. I can't say much more about this, because at present, we are acting as a lender on this. So the information specific to this property at this point remains confidential.

Sheila McGrath – KBW

Okay. One last question. Chris, you mentioned increasing the debt and part of that was behind the dividend payment. I was just wondering if you could give us a little bit more color going forward on the dividend outlook for the balance of the year.

Chris Benjamin

Sheila, as we've said in the past, the dividend is, as much as anything else, a commitment that reflects our long-term view of the company, not a short-term cash flow consideration. We have the capacity to sustain the dividend, we have a high degree of confidence that our businesses will recover.

And so while our payout ratio of course for 2009 was very high, higher than our historical target, higher than anyone would target over the very long term, we feel good about getting the payout ratio back into a reasonable range as our earnings recover. We've got the ability to continue to support the dividend and that's our perspective at this point.

Sheila McGrath – KBW

Okay, thank you.

Operator

(Operator Instructions) And your next question comes from the line of Brendan Maiorana from Wells Fargo. Please proceed.

Brendan Maiorana – Wells Fargo

Hi, thanks. Maybe just sticking with Chris, the plan that you've got in terms of CapEx for real estate, $160 million and you mentioned, I think, $75 million of that is placeholder capital. So I'm not sure if that's sort of teed up for potential acquisitions or Project X, which I guess would leave $85 million left over and I think that is – you've got $80 million slated for Kukui'ula. So am I – is it correct to – ?

Chris Benjamin

Yes, let me try to help this out, Brendan.

Brendan Maiorana – Wells Fargo

Sure.

Chris Benjamin

Basically, if you break it down very simply, about $10 million of lease portfolio, commercial portfolio investments which include some maintenance capital, TIs, other things associated with managing and leasing of the portfolio, so about $10 million there. About $75 million to Project X, which is of course as yet unidentified and then about $75 million of development capital.

Now, if you take our total development capital potential spending, it actually totals something like $90 million or $100 million for the year, we know that just based on construction progress and permits and other things, there is always sort of a timing difference.

So what we do is we – I think we've identified actually more than $75 million of potential Kukui'ula capital and then capital on a handful of other projects, existing development pipeline projects. But then we give that a haircut and just trim it down to about $75 million in expected CapEx for development. Is that helpful?

Brendan Maiorana – Wells Fargo

Yes. That's very helpful. So then if I look in the supplemental package or – well, I guess the – let’s just say the Kukui'ula project cost for this year, how do you think that just – I mean, I don't need the specific numbers, but does that number kind of trend down in '11 and '12 as you guys kind of look out or is that sort of a number that you think you'll spend for the next couple of years?

Chris Benjamin

Yes. No, that will absolutely trend down. As we've indicated, we expect to have substantial completion on the amenities, golf course, clubhouse by late this year, early next year. And so we would expect that to trend down significantly in future years.

Brendan Maiorana – Wells Fargo

And because it looks like from your – from the real estate supplemental that you guys posted six weeks or so ago, there is a lot of projects that may start in 2011 if the market comes back and then a fair number of that could be in '12 again. So – I mean, is – as I look out at your capital position, do you envision that those projects are somewhat self-funding or is this going to be funded by an increase in debt or would there be asset sales that may help fund some of this investment?

Chris Benjamin

Well, I think the best place to start with that is to say we'll know a lot more, I think, by the end of this year before we get into next year in terms of how quickly the market is turning and how quickly our sales prospects are improving. And then we will meet our capital into our development projects based on that. And we of course have typically pre-sale requirements and the like before we go vertical on projects.

So there will be a very rational metering of capital into those projects. I would say that on balance, there will be probably more near-term buildup of the portfolio before it becomes self-funding. But then I think the advantage that we have is we do have a number of projects that can be mobilized pretty quickly. We've of course got Kukui'ula that will be in a very good position, we've got Kai Malu and Maui, we have others that really do have monetization potential quite soon.

So to give you an estimate on how much net capital goes into the business next year, it's way too early, but it will be tempered by the fact that we are going to be pretty well positioned to be selling some properties as we are developing others.

Brendan Maiorana – Wells Fargo

Sure. Okay. That's helpful. And then maybe just stick with you for another one. The – you had the $1.9 million charge in the Agribusiness. So from the inventory valuation adjustment, so if we strip that number out, the operating profit was actually positive in the quarter. But it sounds like you are still sort of tempering the outlook a bit and saying that you expect it to be down for the year. Is that just because the first quarter tends to be seasonally a little bit lower or how should we think about that kind of – ?

Chris Benjamin

Yes, the first – right. Essentially, what happens in the first quarter is we sell – our primary product other than sugar and coffee is power, we sell energy. And at HC&S in particular, where we are essentially only selling power in the first quarter and this year, we sold no sugar. So because of that, you've got the positive of the energy, but you don't have any negative margin on sugar. And historically, last two years, we have had negative margins.

As far as projecting the magnitude of any loss or whether or not it could be possible that we could eliminate the loss is too early to say, because at the end of the quarter, we hadn't even started the harvest and even now, we are only four weeks into what is an eight or nine-month harvest. So it really is too early to say, but I do expect that we will have a much better feel for the full-year outlook when we get through the second quarter and have our next call in late July.

Brendan Maiorana – Wells Fargo

Okay. Okay and then I'm not sure, Chris if this one is for you or Norb, but your 1031 program, where do you kind of stand either today or at the beginning of the second quarter in terms of what you can deploy, what you have left to deploy?

Norb Buelsing

Hi. At the beginning of the second quarter, we had a fairly substantial amount of 1031 funds available as could be expected with the large sale from Mililani Shopping Center. And that sale was about $50 million. So with that, those funds have yet to be deployed. In total, the amount was about $86 million. But again, we did invest in the Lanihau Shopping Center. So it's a – the amounts constantly change, but we do see quality reinvestment properties for the properties that were disposed off.

Brendan Maiorana – Wells Fargo

Sure. Yes, but you've got – yes, just kind of thinking about the mismatch of timing of the dispositions and acquisitions. Okay. And the just last, the profit that you got on the debt payback, was that in – where – which line item was that in the income statement?

Chris Benjamin

Shows up in other income within the leasing segment.

Brendan Maiorana – Wells Fargo

Within the leasing or the sales?

Chris Benjamin

Sales.

Brendan Maiorana – Wells Fargo

Okay. All right, so it was in that. Okay.

Operator

And your next question comes from the line of Tom Wilson from Wilson Capital Management. Please proceed.

Tom Wilson – Wilson Capital Management

Hi, just really quick, what's the NAV of your real estate now?

Chris Benjamin

We don't opine on that. We really don't talk about – we don't assess or disclose publicly our assessment of NAV of the portfolio.

Tom Wilson – Wilson Capital Management

Okay. And then just how many square feet of industrial space you have now? Because I know you did a couple of transactions there.

Norb Buelsing

This was – this is overall for – this is at the end of the third quarter, Tom.

Tom Wilson – Wilson Capital Management

Okay.

Norb Buelsing

First quarter rather.

Tom Wilson – Wilson Capital Management

End of the first quarter, yes.

Norb Buelsing

Okay. Of the total – our total leasable area is 8.3 million. That includes everything. I'd have to get back to you on the breakout. I know it's in the real estate supplement of the amount that's strictly industrial.

Tom Wilson – Wilson Capital Management

Okay. All right, great. Thank you very much.

Operator

And your next question comes from the line of Tom Spiro from Spiro Capital Management. Please proceed.

Tom Spiro – Spiro Capital Management

I'm Spiro, Spiro Capital. Aloha.

Chris Benjamin

Hey, Tom.

Tom Spiro – Spiro Capital Management

Hi. Question for Matt. The press release notes the reduction in China trade lane capacity in the first quarter. The pricing negotiations in the spring seem to have gone rather well. Has that capacity stayed out or has it started to come back?

Matt Cox

Well, Tom, it has started to come back. I think overall trade capacity, let's say at year-end, they represented and I'm talking not just in the transpacific, but worldwide, about 10% of the ship – container ships were idle at the end of the year, which was about more or less 500 container ships. And that has held relatively firm through this contract period.

We do now expect though some reintroduction of that capacity as individual carriers begin to ramp up for the seasonally busier time of year. And exactly how many ships are going to be deployed are the individual actions of all the different shipping lines. But there will be additional capacity deployed and it will be needed because of our seasonal increases as the year progresses.

One of the open questions really is whether all of the idle capacity gets introduced at one time, it could have a negative effect on utilization and pricing and it's just one of those things we are just going – we are going to be watching very closely.

Tom Spiro – Spiro Capital Management

Thanks. And last question, could you give us a status report on the government's antitrust investigation?

Chris Benjamin

Tom, yes, there is nothing new to report of any significance since what we reported in our 10-K.

Tom Spiro – Spiro Capital Management

Thank you.

Operator

And this concludes the question-and-answer session. I will now turn the conference over to Ms. Suzy Hollinger for closing remarks.

Suzy Hollinger

Thanks for being on the call today. If you have further questions, you can contact me at area code 808-525-8422. Thank you and aloha.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation, you may now disconnect. Have a great day.

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