MAUI LAND & PINEAPPLE CO INC quarterly report, Q1 FY2017

Maui Land & Pineapple Company, Inc. — Q1 2017 10-Q

Reporting period: Three months ended March 31, 2017. Unaudited consolidated results. The company owns approximately 23,000 acres on Maui and operates real estate, leasing, utilities, and resort amenities businesses.

Financial performance and position

Q1 2017 operating margin was approximately 61% and net margin approximately 60%, both substantially affected by a one-time land-sale gain. Current assets were $2.903 million versus current liabilities of $3.221 million. Cash declined $23,000 during the quarter despite positive operating cash flow, reflecting $1.376 million of deferred development spending and $5.622 million of debt repayment, among other financing outflows.

Material changes and drivers

• Revenue and earnings benefited primarily from the February sale of a 15-acre Kapalua Golf Academy practice course for $7.0 million. The transaction generated an approximately $6.4 million gain; $5.6 million of proceeds was applied to the revolving credit facility. The land was sold without development entitlements.
• Real estate segment revenue was $7.139 million and segment income was $6.403 million, compared with $0.168 million and a $0.132 million loss, respectively, in Q1 2016. The gain makes the period’s consolidated earnings a poor indicator of recurring performance.
• Leasing revenue was $1.586 million versus $1.615 million; segment income was $1.117 million versus $0.903 million. Management cited timing of tenant reimbursements and the prior-year sale of Kapalua Village Center as factors affecting results. Occupancy improved in the reported categories: Kapalua Resort 100% versus 86%, other West Maui 95% versus 90%, and Upcountry Maui 90% versus 37%.
• Utilities revenue fell to $0.676 million from $0.847 million, with segment income of $0.123 million versus $0.216 million, primarily due to lower water consumption. Resort amenities and other reported a $0.051 million segment loss versus $0.149 million income, amid fewer club members, lower dues, and higher payments to amenity operators.
• Interest expense declined to $0.094 million from $0.581 million. General and administrative expense fell, primarily due to lower legal fees, utility costs, and repairs; share-based compensation increased to $0.559 million from $0.380 million.

Liquidity, outlook, risks, and other matters

The company has a $15 million revolving credit facility maturing December 31, 2019, with two optional one-year extensions. Borrowings bear interest at LIBOR plus 3.50% (4.38% at March 31, 2017) and are secured by the 800-acre Kapalua Mauka project and approximately 30,000 square feet of resort commercial space. The company reported covenant compliance; covenants include minimum defined liquidity of $0.5 million, a $45 million maximum on total liabilities, and limits on new debt. Retirement benefits totaled $9.230 million, including $7.537 million for defined-benefit pension plans. Management does not expect minimum pension contributions in 2017.

Management plans to generate cash through leasing and other use of real estate, sales of non-core assets, and cost containment; proceeds and some credit availability may fund development, planning, permitting, entitlements, and property improvements. No quantified earnings or revenue guidance is provided. Management cautions that real estate development and sales are cyclical and period results may not indicate future performance.

Risks include real estate and Hawaii tourism demand, obtaining land-use entitlements, project cost and timing, competition, access to capital, debt covenant and refinancing risks, pension funding, environmental obligations, and weather or natural disasters. The filing says there were no changes to previously reported commitments and contingencies; other pending claims are not expected by management to materially adversely affect results. The Controller and Principal Accounting Officer was scheduled to resign effective April 30, 2017, not due to a disagreement. The company adopted an executive severance plan on April 28, 2017. Management concluded disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.

Important facts for investors to verify

• How much of the $5.832 million net income and $7.052 million operating cash flow reflects the nonrecurring land sale and related working-capital movements.
• Remaining facility availability and covenant headroom after the $5.6 million repayment, including the impact of the permanent commitment reduction required for collateral-sale proceeds.
• Timing, cost, and funding needs for planned development and deferred property improvements, and whether future asset sales are achievable.
• Trends in water usage, leasing economics, resort membership, and recurring segment profitability.
• Funding and cash requirements for the $9.230 million accrued retirement benefits, alongside the executive severance plan and accounting officer transition.