Item 7. Management’s Discussion and Analysis
Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our Annual Report on Form 10-K and audited consolidated financial statements and related notes are for the year ended December 31, 2023. The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those expressed or implied by the forward-looking statements below. Factors that could cause or contribute to those differences in our actual results include, but are not limited to, those discussed below and those discussed elsewhere within this Annual Report, particularly in the section entitled “ Cautionary Note Regarding Forward-Looking Statements. ” Depending upon the context, the terms the “Company,” “we,” “our,” and “us,” refer to either Maui Land & Pineapple Company, Inc. alone, or to Maui Land & Pineapple Company, Inc. and its subsidiaries collectively.
Overview
Maui Land & Pineapple Company, Inc. is a Delaware corporation and the successor to a business organized in 1909 as a Hawai‘i corporation. The Company reincorporated from Hawai‘i to Delaware pursuant to a plan of conversion completed on July 18, 2022. Total authorized capital stock of the Company includes 48,000,000 shares, consisting of 43,000,000 shares of common stock, par value $0.0001 per share, and 5,000,000 shares of preferred stock, par value $0.0001 per share. Shares of the Company’s common stock are listed on the New York Stock Exchange (“NYSE”) under the ticker symbol “MLP.”
We are a legacy company on Maui, energized by global best practices and local values. The Company owns and stewards approximately 22,300 acres of land on the island of Maui, Hawai‘i along with approximately 268,000 square feet of commercial real estate. Our focus is activating our assets to their most productive use with a mission to meet critical needs and preserve a sense of place for future generations. We have identified critical needs as increasing housing inventory, job creation, water and food security, and renewed connection to people, place, and culture.
A leadership transition began in April 2023 with the addition of a CEO and Board Chair, both experienced in real estate planning, development, and asset management. Between April and December, the transition continued with the addition of three team members with planning, community development, and land management experience. In this new chapter for Maui Land & Pineapple Company, we will build capable, multi-disciplinary team of internal experts and external partners to become a considerate thought-leader who can turn vision into reality. We aim to build trust and deepen relationships through ongoing engagement with stakeholders, community, and other partners. This will enable us to implement scalable, disciplined business processes via a lean team to thoughtfully manage a growing pipeline of projects.
As an initial step by the new leadership team, we have audited our assets under management and available for lease and development. The initial results of this review identified opportunities to increase the level of utilization, occupancy, and stabilized income from our operating assets.
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As of December 31, 2023, our commercial properties and land were occupied at the following levels:
Asset Management Summary (a non-GAAP financial measurement)
Total
Leased
Vacant
Commercial Real Estate (CRE)
(square feet)
Sq. ft.
Percent
Sq. ft.
Percent
Industrial
188,171
133,562
71
%
54,609
29
%
Office
10,105
6,127
61
%
3,978
39
%
Retail
62,134
56,783
91
%
5,351
9
%
Residential
7,339
3,000
41
%
4,339
59
%
Total CRE
267,749
199,472
74
%
68,277
26
%
Total
Leased
Vacant
Land
(acres)
Acres
Percent
Acres
Percent
Comm./Ind.
22
22
100
%
-
0
%
Residential/Mixed Use
933
12
1
%
921
99
%
Agriculture
10,981
3,596
33
%
7,385
67
%
Conservation
10,350
-
0
%
10,350
100
%
Total Land
22,286
3,630
16
%
18,656
84
%
To improve the stable operating revenue from our commercial real estate, we have updated tenanting plans for our properties, with a focus on placemaking in our town centers. Among other things, the plans include tenant improvements designed to improve occupancy and reposition spaces and land with tenancies at market rents. As these plans are implemented, we expect the occupancy of our existing land and commercial real estate portfolio to increase.
Our commercial real estate is located in three areas surrounded by our landholdings. Kapalua Village Center is a mixed-use, luxury coastal property offering spaces that foster convenience, well-being, adventure, and culture in the core of Kapalua Resort. Hali‘imaile Town Center is adjacent to Makawao Town and houses an eclectic collection of local businesses, art galleries, and makers spaces, mixed with a renowned Hawai‘i Regional Cuisine restaurant and a Maui distillery. Lastly, the ‘Alaeloa Business Center is where agriculture meets adventure in the former pineapple base yard whose tenants primarily steward land and natural resources in West Maui.
To establish and execute our land utilization strategies, we intend to make investments in our internal and external teams to ensure we have the capabilities, market research, planning, engineering, and other consultant services necessary. Our primary goal is to establish executable strategies for the conversion of land from current uses to meet the long-term needs of the community, including the provision of land for agriculture and housing in a supply-constrained market. We also intend to identify non-strategic lands for sale and strategic land developments to advance to completion.
Our landholdings include residential, agricultural and conservation areas. Residential parcels include 83 acres within Kapalua Resort area, zoned for higher density, mixed-use, allowing more than 700 residential units, hospitality, and commercial uses. Also included in Kapalua Resort are 800 acres zoned for lower density residential use of approximately 650 homes. Agriculturally zoned parcels total 9,500 acres sitting on the slopes of West Maui, with another 1,400 acres sitting on the slopes of Upcountry Maui. All 10,350 acres of land in perpetual conservation are along the West Maui coastline, including the largest private nature preserve in Hawai‘i where the focus is to ensure rainfall capture in the pristine native forest to replenish the aquifers.
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RESULTS OF OPERATIONS
Comparison of Years Ended December 31, 2023 and 2022
CONSOLIDATED
Years Ended December 31,
2023
2022
(in thousands except share amounts)
Operating revenues
$
10,915
$
20,960
Segment operating costs and expenses
(6,547
)
(6,171
)
General and administrative
(3,998
)
(2,795
)
Share-based compensation
(2,846
)
(1,278
)
Depreciation
(869
)
(1,109
)
Operating income
(3,345
)
9,607
Other income
707
71
Pension and other postretirement expenses
(436
)
(7,885
)
Interest expense
(6
)
(6
)
Net Income (Loss)
$
(3,080
)
$
1,787
Net income (loss) per Common Share
$
(0.15
)
$
0.09
LAND DEVELOPMENT AND SALES
Years Ended December 31,
2023
2022
(in thousands)
Operating revenues
$
1,626
$
11,600
Operating costs and expenses
(595
)
(1,026
)
Operating income
$
1,031
$
10,574
Real estate operating revenues include the sales of our real estate inventory. The decrease in our consolidated operating income for the year ended December 31, 2023 compared to year ended December 31, 2022 was attributed to decreased sales of real estate inventory during the year.
In December 2023, we contributed approximately 30 acres of land in Upcounty Maui, valued at $1.6 million to BRE2 LLC, a joint venture between the Company and Stone Properties for development and sales of ranch lots. There were no proceeds from the transaction as the land was an equity contribution to the joint venture and was recognized as real estate operating revenues. We anticipate sales of the ranch lots to be approximately $4.1 million, and with approximately $2.2 million being our share of sales proceeds, which we expect to occur in late 2024 to mid-2025.
In August 2023, we received a return of restricted cash, in the amount of $20,000 that was held in escrow as part of a parcel sale transaction that did not close and was terminated in April 2023. The return of the $20,000 cash was included in operating revenues.
There were no significant real estate development expenditures during the years ended December 31, 2023 and 2022, 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. Prior to the Maui wildfires which occurred on August 8, 2023, there was a shortage of primary housing supply on Maui. While the provision of land to generate primary housing and additional jobs was a priority of ours prior to the wildfires, the loss of over 2,000 homes and over 3,000 jobs in the Lahaina wildfire have accelerated our efforts to get land into productive use to meet these critical needs.
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LEASING
Years Ended December 31,
2023
2022
(in thousands)
Operating revenues
$
8,461
$
8,513
Operating costs and expenses
(4,420
)
(3,598
)
Operating income
$
4,041
$
4,915
Operating revenues from leasing activities for the year ended December 31, 2023, were comprised of $5.9 million from commercial, industrial, and agricultural leases, $0.8 million of licensing fees from our registered trademarks and trade names, $ 1.5 million from potable and non-potable water system sales and $0.3 million in grant revenue from the State of Hawai‘i for conservation management of our Pu‘u Kukui Watershed, compared to $6.1 million from commercial, industrial, and agricultural leases, $1.0 million of licensing fees from our registered trademarks and trade names, $1.0 million from potable and non-potable water system sales and $0.4 million for grant revenues from the State of Hawai‘i for conservation management for the year ended December 31, 2022.
Certain rental income is contingent upon the sales of tenants exceeding a defined threshold and recognized as a percentage of sales after those thresholds are achieved. As the COVID-19 pandemic waned, visitor traffic to Maui was increasing and these percentage rents, leasing revenues in general and land licensing from adventure tourism tenants were returning to pre-pandemic levels until August 8, 2023, the date of the devastating Maui wildfires. The wildfires directly and critically impacted West Maui and took its toll on percentage rents and licensing revenues for tourism based tenants. Income recognized from percentage rents and land licensing in 2023 amounted to $2.2 million as compared to $2.9 million in 2022, a decrease of $0.7 million as a direct impact of the wildfires. Tourist traffic has started increasing again post wildfire, and as a result, it is anticipated that percentage rents will return to pre-wildfire levels in 2024 to 2025.
The increase in leasing operating costs and expenses for the year ended December 31, 2023, compared to the year ended December 31, 2022, was primarily due to higher property maintenance costs for our commercial leasing portfolio properties and the hiring of a property management and leasing firm to grow our leasing portfolio and the associated start-up costs and fees.
Our leasing operations face substantial competition from other property owners in Maui and Hawai‘i.
RESORT AMENITIES
Years Ended December 31,
2023
2022
(in thousands)
Operating revenues
$
828
$
847
Operating costs and expenses
(1,532
)
(1,547
)
Operating loss
$
(704
)
$
(700
)
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 and fitness center, 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, 2023, compared to the year ended December 31, 2022, was due to the refunds of membership fees during a two-month period following the Maui wildfires on August 8, 2023 as Club operations were temporarily closed.
Contracted fee expenses increased for the year ended December 31, 2023, compared to the year ended December 31, 2022. However, with the closing of Club amenities as described above, the amenity fees were also suspended, resulting in a net decrease of operating costs in 2023 as compared to 2022.
The Club has undergone restructuring in 2023 and revised policies and practices have been implemented to reduce the impact of the amenity fees and to better match club dues with club expenses. The Club has begun accepting new membership applications beginning late 2023.
OTHER INCOME
Investment income of approximately $0.5 million and $0.1 million was earned from our money market and bond investment portfolio during the years ended December 31, 2023 and 2022, respectively
In July 2023, we received $0.2 million of cash collateral returned from an owner-controlled insurance program of our partnership interest in Kapalua Bay Holdings, LLC (“KBH”). The investment was previously written down to zero in 2009.
PENSION EXPENSE
The termination notification of the Qualified Plan originally made on August 31, 2023, was amended to November 30, 2023. The change in timing provides for the Company to do lump sum payments, the total to be determined by participant election, in the third or fourth quarters of 2024 and final annuitization of plan participants to take place in the first or second quarters of 2025. An estimated settlement charge (GAAP expense) between $7.0 million to $8.0 million will be recognized at the time of final annuitization and plan termination.
In November 2022, we signed a purchase agreement with an insurer to annuitize the scheduled pension payments of certain plan participants. Approximately $14.5 million were disbursed from plan assets for the group annuity contract. A settlement charge of $7.5 million was recognized in pension expense for the year ended December 31, 2022 as a result of the annuity purchase.
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SHARE-BASED COMPENSATION PLANS
The Company accounts for share-based compensation, including grants of restricted shares of common stock and options to purchase common shares, as compensation expense over the respective vesting periods in the consolidated financial statements based on their fair values on the grant dates. The impact of forfeitures that may occur prior to vesting is estimated and considered in the expense recognized.
INTEREST EXPENSE
There were no outstanding borrowings on our credit facility with a bank at December 31, 2023 and 2022. On December 31, 2023 and 2022, interest rates on our credit facility were 7.38% and 6.38%, respectively.
LIQUIDITY AND CAPITAL RESOURCES
We had cash on hand of $5.7 million and $8.5 million at December 31, 2023 and 2022, respectively. We hold deposit accounts with several local banks in Hawai‘i. 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 June 2025. The fair value of our investments was $3.1 million at December 31, 2023. 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 (the “Bank”) (the “Credit Facility”) as of December 31, 2023 and 2022, respectively. In 2021, we executed a Fourth Loan Modification Agreement and Second Amended and Restated Credit Agreement (collectively the “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, 2023.
Cash Flows
Net cash flow provided by (used in) our operating activities totaled ($1.4) million and $6.3 million for the years ended December 31, 2023 and 2022, respectively.
Minimum funding contributions to our defined benefit pension plan were not required during the year ended December 31, 2023. A voluntary contribution of $5.7 million was made during the year ended December 31, 2022. No minimum funding contributions are required in 2024.
Interest income from our investment portfolio was $0.5 million and $0.1 million during the years ended December 31, 2023 and 2022, respectively. Our bond investments yielded approximately 5.7% and 5.0% in aggregate at December 31, 2023 and 2022, respectively.
Future Cash Inflows and Outflows
The Company entered into a joint venture, BRE2 LLC with Stone Properties, a Hawai‘i based LLC to develop and sell ranch lots in Hali‘imaile, Hawai‘i. We anticipate sales of the ranch lots to be $4.1 million and $2.2 million being our share of sales proceeds which will occur in late 2024 to mid 2025.
Land development costs to be capitalized are budgeted at $0.9 million, maintenance and capital expenditures on the Company’s operating assets are budgeted at $1.3 million and capital expenditures to the Company’s water assets and infrastructure is budgeted at $3.4 million in 2024.
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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 investment 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 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 (i) management approves and commits to a plan to sell the property; (ii) the property is available for immediate sale in its present condition, subject only to terms that are usual and customary; (iii) an active program to locate a buyer and other actions required to complete the plan to sell have been initiated; (iv) the sale of the property is probable and is expected to be completed within one year; (v) 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). Management measures expected credit losses on held-to-maturity debt securities on a collective basis by major type. If there are anticipated credit losses a reserve for credit losses will be established and held to debt maturities will be presented net of the allowance. There were no accrued interest receivable on held-to-maturity debt securities at December 31, 2023.
•
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. Real estate assets that would be considered for sale are remnant parcels that are not part of existing strategic development plans and projects.
•
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 7 to our financial statements set forth in Item 8 of this Annual Report.
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•
Stock options were issued to the Chairman of the Board and the Board of Directors. With the option issuances, management engages with a certified valuation company to perform the valuation analysis and calculations based on option terms, number of shares issued, issuance share price, volatility, risk and historical trends with the options issuances. The valuation expense is reviewed and approved by the Company’s Audit Committee and valuation expenses are recognized over the duration of the exercisable period of the issuances.
•
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 12 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 9 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, 2023, we did not have any significant off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K.
Item 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are a smaller reporting company, as defined in Item 10(f)(1) of Regulation S-K and are not required to provide the information required by this Item.
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