ACQUISITIONS

The Company applies the provisions of the Financial Accounting Standards Board's Accounting Standards Codification Topic 805, Business Combinations (ASC 805) to acquisitions. Under ASC 805, assets acquired and liabilities assumed are recorded at fair value. The excess of the purchase price over the net fair value of assets acquired and liabilities assumed is recorded as goodwill. The fair values of assets acquired and liabilities assumed are determined through the market, income or cost approaches, and the valuation approach is generally based on the specific characteristics of the asset or liability. Under the market approach, value is estimated using information from transactions in which other participants in the market have paid for reasonably similar assets that have been sold within a reasonable period from the valuation date. Adjustments are made to compensate for differences between reasonably similar assets and the item being valued. Under the income approach, the future cash flows expected to be received over the life of the asset, taking into account a variety of factors, such as long-term growth rates and the amount and timing of cash flows, are discounted to present value using a rate of return that accounts for the time value of money and investment risk factors. Under the cost approach, the Company estimates the cost to replace the asset with a new asset taking into consideration a variety of factors such as age, physical condition, functional obsolescence and economic obsolescence. The fair value of liabilities assumed is calculated as the net present value of estimated payments using prevailing market interest rates for liabilities with similar credit risk and terms.

Grace Acquisition

On October 1, 2013, the Company consummated its acquisition of 100 percent of the shares of Grace, a Hawaii-based materials and infrastructure construction company. Pursuant to an Agreement and Plan of Merger (Merger Agreement), by and among A&B, A&B II, LLC (Merger Sub), a Hawaii limited liability company and a wholly owned subsidiary of A&B, Grace Pacific Corporation, a Hawaii corporation (now Grace Pacific LLC, a Hawaii limited liability company and a wholly owned subsidiary of Grace Holdings), Grace Holdings and David C. Hulihee, in his capacity as the shareholders' representative, dated June 6, 2013, Grace Holdings merged with and into Merger Sub, with Merger Sub remaining as the surviving company and a wholly owned subsidiary of A&B (Merger). The results of Grace’s operations subsequent to the acquisition date are included in the Consolidated Statements of Income.

The Company views the acquisition of Grace as an attractive long-term investment, with favorable return metrics and diversification benefits that will augment A&B's ability to further pursue its core real estate strategies over time. Grace will extend and enhance A&B's community building capabilities to encompass infrastructure work, for which a steady and growing need exists in Hawaii. Grace will also allow A&B to further benefit from Hawaii's improving economy and real estate markets and also materially strengthens and diversifies A&B's financial profile and flexibility.

The total merger consideration paid to Grace equity holders was approximately $231.6 million, consisting of 5.4 million shares of A&B common stock, valued at $196.3 million, based on the fair value of the Company’s stock price on October 1, 2013, and approximately $35.3 million in cash. Additionally, approximately $67.6 million of net debt was assumed by A&B in the Merger. Pursuant to the Merger Agreement, the aggregate number of shares of A&B common stock issued in the Merger was determined by dividing $199.75 million, which was 85 percent of the total merger consideration prior to any post-closing adjustments, by $36.7859, which was the volume weighted average of the trading prices of A&B common stock on the New York Stock Exchange for the 20 consecutive trading days ending on the third trading day prior to the closing of the Merger. Of the $35.3 million cash portion of the acquisition price, as of December 31, 2014, approximately $9.3 million (Holdback Amount) remains withheld pro rata from Grace shareholders and retained by A&B to secure any final adjustments to the merger consideration and certain indemnification obligations of Grace shareholders pursuant to the Merger Agreement. These funds will be released by A&B in accordance with the terms set forth in the Merger Agreement. In addition, an amount of cash equal to $1 million of the merger consideration otherwise deliverable to Grace shareholders has been delivered to the shareholders' representative to cover the costs and expenses incurred by him in performing his duties as provided in the Merger Agreement. Any amounts not used, or retained for future use, by the shareholders' representative will be paid to Grace shareholders upon the release of any and all remaining portions of the Holdback Amount.

The allocation of purchase price to assets acquired and liabilities assumed is as follows (in millions):



	Preliminary Valuation October 1, 2013		Modifications			Final Valuation
Cash consideration	$	35.3	$	—		$	35.3
Common stock issued as consideration	196.3		—			196.3
Fair value of consideration transferred	231.6		—			231.6

Fair value of assets acquired and liabilities assumed
Assets acquired:
Cash and cash equivalents	5.7		—			5.7
Accounts receivable	37.1		—			37.1
Contracts retention	9.6		—			9.6
Costs and estimated earnings in excess of billings on uncompleted contracts	11.7		—			11.7
Inventories	42.0		—			42.0
Property, plant and equipment	148.6		—			148.6
Mineral rights	18.0		—			18.0
Intangible assets	5.8		(1.0		)	4.8
All other, net	10.4		0.9			11.3
Total assets acquired	288.9		(0.1		)	288.8

Liabilities assumed:
Accounts payable and accrued liabilities	26.3		—			26.3
Billings in excess of cost and estimated earnings on uncompleted contracts	7.5		0.6			8.1
Deferred tax liability, long-term	27.1		(0.6		)	26.5
Long-term debt, including current portion	72.7		(0.2		)	72.5
All other, net	4.9		3.4			8.3
Total liabilities assumed	138.5		3.2			141.7

Non-controlling interest	9.1		—			9.1
Excess of purchase price over net assets acquired	$	90.3	$	3.3		$	93.6

Goodwill is calculated as the excess of the purchase price over the fair value of the net assets recognized. The goodwill recorded as part of the acquisition primarily reflects the value of the know-how, operating processes and employee base of Grace, and other intangible assets that do not qualify for separate recognition. During 2014, based on new information, the Company recorded an adjustment to the preliminary valuation, resulting in a net increase to goodwill of $3.3 million. The adjustment did not have a significant impact on the Company's consolidated statements of operations, balance sheet, or cash flows for all periods presented, and therefore, was not retrospectively adjusted in the financial statements. The adjustment to goodwill was primarily due to adjustments to the fair value of liabilities related to the maintenance and management of former quarry sites.

The Company incurred $4.6 million of acquisition costs and other related fees (all of which were incurred in 2013), which were recorded in selling, general and administrative costs.

From October 1, 2013 through December 31, 2013, Grace contributed operating revenues of $54.9 million and net earnings of $1.7 million (including earnings attributed to non-controlling interest of $0.5 million), which included deductions of $0.1 million and $1.7 million for operating revenue and net earnings, respectively, related to purchase price allocation adjustments. The unaudited pro forma combined historical results (using audited Grace results for its fiscal years ended September 30, 2013 and 2012), as if Grace had been acquired at the beginning of 2012 are as follows (in millions):



	Year Ended December 31,
	2013		2012
Operating revenue	$	539.1	$	454.1
Income from continuing operations, after tax	$	31.7	$	14.8

The 2013 pro forma results excludes $6.9 million of pre-tax transaction-related costs incurred by A&B and Grace and includes amortization of the definite lived intangible assets and depreciation based on estimated fair value and useful lives. The pro forma results are for informational purposes only and are not necessarily indicative of what actually would have occurred if the acquisition had been completed as of the beginning of 2012, nor are the pro forma results necessarily indicative of future consolidated results.

Kailua Portfolio Acquisition

On December 20, 2013, the Company consummated the purchase of a portfolio of commercial and other properties in Hawaii for $360.7 million, plus assumed debt of $12.0 million, from Castle Family LLC, Castle 1974 LLC, Castle Residuary LLC, Castle Kaopa LLC, and Harold K. L. Castle Foundation (collectively “KR”). The portfolio encompasses 43 grocery- and drug store-anchored shopping centers, light industrial properties and 51 acres ground leased to third-parties and improved with 760,000 square feet of retail and other commercial space, primarily located in the Windward Oahu town of Kailua. The portfolio also includes approximately 585 acres of mostly preservation-zoned land on Oahu. The purchase of the portfolio was funded with approximately $270 million of 1031 and 1033 proceeds from the sales of commercial properties and other non-income generating assets, a $60 million bridge loan, the assumption of $12.0 million in mortgage debt principal, and borrowings under the Company's line of credit for the balance. The portion of the purchase price not initially funded with 1031 and 1033 proceeds was ultimately funded with tax-deferred proceeds from the sale of Maui Mall in January 2014. The acquisition of the portfolio is expected to improve the long-term growth prospects of the Company’s commercial portfolio.

The allocation of purchase price to assets acquired and liabilities assumed is as follows (in millions):



Fair value of assets acquired and liabilities assumed
Assets acquired:
Property, plant and equipment	$	367.7
Intangible assets	30.4
Total assets acquired	398.1

Liabilities assumed:
Intangible liabilities	26.0
Liabilities assumed	11.4
Total liabilities assumed	37.4

Net assets acquired	$	360.7

The Company incurred $1.1 million of acquisition costs and other related fees in 2013, which were recorded in selling, general and administrative costs.

From the date of acquisition on December 20, 2013 through December 31, 2013, the portfolio contributed net revenues of $0.8 million and net earnings of $0.4 million. The unaudited pro forma combined historical results, as if the portfolio had been acquired at the beginning of 2012 are as follows (in millions):



	Year Ended December 31,
	2013		2012
Operating revenue	$	391.0	$	285.5
Income from continuing operations, after tax	$	23.3	$	14.2

The pro forma results include transaction costs, amortization of in-place and above/below leases and depreciation increase based on estimated fair value and useful lives. The pro forma results are not necessarily indicative of what actually would have occurred if the acquisition had been completed as of the beginning of 2012, nor are they necessarily indicative of future consolidated results.

Other Acquisitions

In 2013, A&B completed various acquisitions that included Waianae Mall (January 2013), Napili Plaza (May 2013), Pearl Highlands Center (September 2013) and The Shops at Kukui’ula (September 2013). The acquisitions were funded with $111.1 million of 1031 proceeds, the assumption of $130.9 million of debt and $0.8 million of cash.

The allocation of purchase price to assets acquired and liabilities assumed is as follows (in millions):



Fair value of assets acquired and liabilities assumed
Assets acquired:
Property, plant and equipment	$	224.2
Intangible assets	20.9
Goodwill	9.3
Total assets acquired	254.4

Liabilities assumed:
Intangible liabilities	8.3
Liabilities assumed	134.2
Total liabilities assumed	142.5

Net assets acquired	$	111.9

The Company incurred $2.1 million of acquisition costs and other related fees, which were recorded in selling, general and administrative costs in 2013.

From the acquisition dates through December 31, 2013, the acquired assets contributed net revenues of $12.4 million and net earnings after tax of $2.1 million. The unaudited pro forma combined historical results have been omitted because after making every reasonable effort, the properties' complete historical information is impracticable to obtain.