UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________________ to _________________

Commission file number 001-35492

ALEXANDER & BALDWIN, INC.

(Exact name of registrant as specified in its charter)

Hawaii			45-4849780
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)
P. O. Box 3440,	Honolulu,	Hawaii	96801
(Address of principal executive offices)			(Zip Code)

(808) 525-6611

(Registrant's telephone number, including area code)

N/A

(Former name, former address, and former

fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, without par value	ALEX	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Number of shares of common stock outstanding as of September 30, 2019: 72,258,124

ALEXANDER & BALDWIN, INC.

FORM 10-Q

For the Quarterly Period Ended September 30, 2019

TABLE OF CONTENTS

			Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements		1
		Condensed Consolidated Balance Sheets - As of September 30, 2019 and December 31, 2018	1
		Condensed Consolidated Statements of Operations - Three and Nine Months Ended September 30, 2019 and 2018	2
		Condensed Consolidated Statements of Comprehensive Income (Loss) - Three and Nine Months Ended September 30, 2019 and 2018	3
		Condensed Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2019 and 2018	4
		Condensed Consolidated Statements of Equity - Three and Nine Months Ended September 30, 2019 and 2018	6
		Notes to Condensed Consolidated Financial Statements	8
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations		25
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		39
Item 4.	Controls and Procedures		39
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings		40
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		40
Item 4.	Mine Safety Disclosures		40
Item 5.	Other Information		40
Item 6.	Exhibit Index		41
	Signature		42

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ALEXANDER & BALDWIN, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions) (Unaudited)

	September 30, 2019			December 31, 2018
ASSETS
Real estate investments
Real estate property	$	1,531.4		$	1,293.7
Accumulated depreciation	(124.3		)	(107.2		)
Real estate property, net	1,407.1			1,186.5
Real estate developments	93.8			155.2
Investments in real estate joint ventures and partnerships	135.4			141.0
Real estate intangible assets, net	78.7			59.8
Real estate investments, net	1,715.0			1,542.5
Cash and cash equivalents	7.2			11.4
Restricted cash	0.2			223.5
Accounts receivable and retention, net	67.8			61.2
Inventories	23.9			26.5
Other property, net	131.4			135.5
Operating lease right-of-use assets	22.7			—
Goodwill	15.4			65.1
Other receivables	28.7			56.8
Prepaid expenses and other assets	109.4			102.7
Total assets	$	2,121.7		$	2,225.2
LIABILITIES AND EQUITY
Liabilities:
Notes payable and other debt	$	732.4		$	778.1
Accounts payable	15.0			34.2
Operating lease liabilities	23.0			—
Accrued pension and post-retirement benefits	31.4			29.4
Indemnity holdbacks	7.5			16.3
Deferred revenue	68.4			63.2
Accrued and other liabilities	107.7			87.8
Total liabilities	985.4			1,009.0
Commitments and Contingencies
Redeemable Noncontrolling Interest	7.9			7.9
Equity:
Common stock - no par value; authorized, 150 million shares; outstanding, 72.3 million and 72.0 million shares at September 30, 2019 and December 31, 2018, respectively	1,797.4			1,793.4
Accumulated other comprehensive income (loss)	(55.0		)	(51.9		)
Distributions in excess of accumulated earnings	(617.6		)	(538.9		)
Total A&B shareholders' equity	1,124.8			1,202.6
Noncontrolling interest	3.6			5.7
Total equity	1,128.4			1,208.3
Total liabilities and equity	$	2,121.7		$	2,225.2

See Notes to Condensed Consolidated Financial Statements.

1

ALEXANDER & BALDWIN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except per share amounts) (Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Operating Revenue:
Commercial Real Estate	$	42.7		$	35.9		$	118.6		$	104.9
Land Operations	8.5			24.0			82.4			72.6
Materials & Construction	37.9			59.5			126.6			167.3
Total operating revenue	89.1			119.4			327.6			344.8
Operating Costs and Expenses:
Cost of Commercial Real Estate	23.8			19.2			64.3			57.0
Cost of Land Operations	5.9			17.4			68.5			67.0
Cost of Materials & Construction	42.0			50.5			127.2			143.5
Selling, general and administrative	13.3			14.6			45.1			44.7
Goodwill impairment	49.7			—			49.7			—
Total operating costs and expenses	134.7			101.7			354.8			312.2
Gain (loss) on the sale of commercial real estate properties	—			—			—			49.8
Operating Income (Loss)	(45.6		)	17.7			(27.2		)	82.4
Income (loss) related to joint ventures	2.4			4.5			6.1			6.3
Interest and other income (expense), net (Note 2)	0.6			3.7			2.8			2.1
Interest expense	(8.2		)	(9.1		)	(25.4		)	(26.4		)
Income (Loss) from Continuing Operations Before Income Taxes	(50.8		)	16.8			(43.7		)	64.4
Income tax benefit (expense)	—			(1.0		)	1.1			1.8
Income (Loss) from Continuing Operations	(50.8		)	15.8			(42.6		)	66.2
Income (loss) from discontinued operations, net of income taxes	(0.1		)	(0.2		)	(0.8		)	(0.2		)
Net Income (Loss)	(50.9		)	15.6			(43.4		)	66.0
Loss (income) attributable to noncontrolling interest	1.1			(0.8		)	1.8			(1.4		)
Net Income (Loss) Attributable to A&B Shareholders	$	(49.8	)	$	14.8		$	(41.6	)	$	64.6
Basic Earnings (Loss) Per Share of Common Stock:
Continuing operations available to A&B shareholders	$	(0.69	)	$	0.21		$	(0.57	)	$	0.92
Discontinued operations available to A&B shareholders	—			—			(0.01		)	—
Net income (loss) available to A&B shareholders	$	(0.69	)	$	0.21		$	(0.58	)	$	0.92
Diluted Earnings (Loss) Per Share of Common Stock:
Continuing operations available to A&B shareholders	$	(0.69	)	$	0.20		$	(0.57	)	$	0.89
Discontinued operations available to A&B shareholders	—			—			(0.01		)	—
Net income (loss) available to A&B shareholders	$	(0.69	)	$	0.20		$	(0.58	)	$	0.89
Weighted-Average Number of Shares Outstanding:
Basic	72.3			72.0			72.2			70.2
Diluted	72.3			72.4			72.2			72.4
Amounts Available to A&B Shareholders (Note 4):
Continuing operations available to A&B shareholders	$	(49.7	)	$	15.0		$	(40.8	)	$	64.8
Discontinued operations available to A&B shareholders	(0.1		)	(0.2		)	(0.8		)	(0.2		)
Net income (loss) available to A&B shareholders	$	(49.8	)	$	14.8		$	(41.6	)	$	64.6

See Notes to Condensed Consolidated Financial Statements.

2

ALEXANDER & BALDWIN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In millions) (Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Net Income (Loss)	$	(50.9	)	$	15.6		$	(43.4	)	$	66.0
Other Comprehensive Income (Loss), net of tax:
Unrealized interest rate hedging gain (loss)	(2.0		)	0.6			(5.5		)	3.0
Impact of reclassification adjustment to interest expense included in Net Income (Loss)	0.2			—			(0.1		)	—
Defined benefit pension plans:
Amortization of net loss included in net periodic pension cost	0.9			1.1			2.9			3.3
Amortization of prior service credit included in net periodic pension cost	(0.1		)	(0.2		)	(0.4		)	(0.5		)
Curtailment (gain)/loss	—			—			—			(0.4		)
Income taxes related to other comprehensive income (loss)	—			(0.4		)	—			(1.4		)
Other comprehensive income (loss), net of tax	(1.0		)	1.1			(3.1		)	4.0
Comprehensive Income (Loss)	(51.9		)	16.7			(46.5		)	70.0
Comprehensive (income) loss attributable to noncontrolling interest	1.1			(0.8		)	1.8			(1.4		)
Comprehensive Income (Loss) Attributable to A&B Shareholders	$	(50.8	)	$	15.9		$	(44.7	)	$	68.6

See Notes to Condensed Consolidated Financial Statements.

3

ALEXANDER & BALDWIN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions) (Unaudited)

	Nine Months Ended September 30,
	2019			2018
Cash Flows from Operating Activities:
Net income (loss)	$	(43.4	)	$	66.0
Adjustments to reconcile net income (loss) to net cash provided by (used in) operations:
Depreciation and amortization	36.6			31.6
Deferred income taxes	—			(2.4		)
Loss (gain) on asset transactions, net	(2.6		)	(62.1		)
Goodwill impairment	49.7			—
Share-based compensation expense	4.1			4.0
(Income) loss from affiliates, net of distributions of income	(3.5		)	2.0
Changes in operating assets and liabilities:
Trade, contracts retention, and other contract receivables	(6.9		)	(4.9		)
Inventories	2.6			(0.3		)
Prepaid expenses, income tax receivable and other assets	25.8			(4.1		)
Accrued pension and post-retirement benefits	4.6			2.5
Accounts payable	(10.3		)	(8.3		)
Accrued and other liabilities	6.6			(7.3		)
Real estate development for sale proceeds	48.5			41.0
Expenditures for real estate development for sale	(7.8		)	(20.0		)
Net cash provided by (used in) operations	104.0			37.7
Cash Flows from Investing Activities:
Capital expenditures for acquisitions	(218.4		)	(201.6		)
Capital expenditures for property, plant and equipment	(31.8		)	(40.0		)
Proceeds from disposal of property, investments and other assets	3.0			169.3
Payments for purchases of investments in affiliates and other investments	(3.3		)	(21.3		)
Distributions of capital from investments in affiliates and other investments	12.2			32.8
Net cash provided by (used in) investing activities	(238.3		)	(60.8		)
Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt	111.8			533.5
Payments of long-term debt and deferred financing costs	(155.3		)	(433.6		)
Borrowings (payments) on line-of-credit agreement, net	(5.1		)	(14.2		)
Distribution to noncontrolling interests	(0.3		)	(0.2		)
Cash dividends paid	(36.2		)	(156.6		)
Proceeds from issuance (repurchase) of common stock and other, net	(1.0		)	(1.3		)
Payment of deferred acquisition holdback	(7.1		)	—
Net cash provided by (used in) financing activities	(93.2		)	(72.4		)
Cash, Cash Equivalents and Restricted Cash:
Net increase (decrease) in cash, cash equivalents, and restricted cash	(227.5		)	(95.5		)
Balance, beginning of period	234.9			103.2
Balance, end of period	$	7.4		$	7.7

4

Other Cash Flow Information:
Interest paid, net of capitalized interest	$	(25.2	)	$	(26.1	)
Income tax (payments)/refunds, net	$	25.8		$	1.9
Noncash Investing and Financing Activities:
Capital expenditures included in accounts payable and accrued expenses	$	2.6		$	2.0
Fair value of loan assumed in connection with acquisition	$	—		$	61.0
Issuance of shares for stock dividend	$	—		$	626.4
Right-of-use ("ROU") assets and corresponding lease liability recorded upon ASC 842 adoption	$	31.0		$	—
Lease liabilities arising from obtaining ROU assets	$	1.7		$	—
Reconciliation of cash, cash equivalents and restricted cash:
Beginning of the period
Cash and cash equivalents	$	11.4		$	68.9
Restricted cash	223.5			34.3
Cash, cash equivalents and restricted cash	$	234.9		$	103.2
End of the period
Cash and cash equivalents	$	7.2		$	7.5
Restricted cash	0.2			0.2
Cash, cash equivalents and restricted cash	$	7.4		$	7.7

See Notes to Condensed Consolidated Financial Statements.

5

ALEXANDER & BALDWIN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

For the Nine Months Ended September 30, 2019 and 2018

(In millions) (Unaudited)

	Total Equity
	Common Stock				Accumulated Other Compre- hensive Income (Loss)			(Distribution in Excess of Accumulated Earnings)			Non-Controlling Interest			Total			Redeem- able Non- Controlling Interest
	Shares	Stated Value
Balance, January 1, 2018	49.3	$	1,161.7		$	(42.3	)	$	(473.0	)	$	4.7		$	651.1		$	8.0
Net income (loss)	—	—			—			64.6			0.8			65.4			0.6
Impact of adoption of ASU 2014-09	—	—			—			(1.4		)	—			(1.4		)	—
Other comprehensive income (loss), net of tax	—	—			4.0			—			—			4.0			—
Stock dividend ($11.65 per share)	22.6	626.4			—			—			—			626.4			—
Distributions to noncontrolling interest	—	—			—			—			(0.2		)	(0.2		)	—
Adjustments to redemption value of redeemable noncontrolling interest	—	—			—			0.6			—			0.6			(0.6		)
Share-based compensation	—	4.0			—			—			—			4.0			—
Shares issued or repurchased, net	0.1	—			—			(1.3		)	—			(1.3		)	—
Balance, September 30, 2018	72.0	$	1,792.1		$	(38.3	)	$	(410.5	)	$	5.3		$	1,348.6		$	8.0
	Total Equity
	Common Stock				Accumulated Other Compre- hensive Income (Loss)			(Distribution in Excess of Accumulated Earnings)			Non-Controlling Interest			Total			Redeem- able Non- Controlling Interest
	Shares	Stated Value
Balance, January 1, 2019	72.0	$	1,793.4		$	(51.9	)	$	(538.9	)	$	5.7		$	1,208.3		$	7.9
Net income (loss)	—	—			—			(41.6		)	(1.8		)	(43.4		)	—
Other comprehensive income (loss), net of tax	—	—			(3.1		)	—			—			(3.1		)	—
Dividend on common stock ($0.50 per share)	—	—			—			(36.2		)	—			(36.2		)	—
Distributions to noncontrolling interest	—	—			—			—			(0.3		)	(0.3		)	—
Share-based compensation	—	4.1			—			—			—			4.1			—
Shares issued or repurchased, net	0.3	(0.1		)	—			(0.9		)	—			(1.0		)	—
Balance, September 30, 2019	72.3	$	1,797.4		$	(55.0	)	$	(617.6	)	$	3.6		$	1,128.4		$	7.9

See Notes to Condensed Consolidated Financial Statements.

6

ALEXANDER & BALDWIN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

For the Three Months Ended September 30, 2019 and 2018

(In millions) (Unaudited)

	Total Equity
	Common Stock			Accumulated Other Compre- hensive Income (Loss)			(Distribution in Excess of Accumulated Earnings)			Non-Controlling Interest			Total			Redeem- able Non- Controlling Interest
	Shares	Stated Value
Balance, July 1, 2018	72.0	$	1,790.8	$	(39.4	)	$	(426.0	)	$	5.0		$	1,330.4		$	8.0
Net income (loss)	—	—		—			14.8			0.3			15.1			0.5
Other comprehensive income (loss), net of tax	—	—		1.1			—			—			1.1			—
Adjustments to redemption value of redeemable noncontrolling interest	—	—		—			0.5			—			0.5			(0.5		)
Share-based compensation	—	1.3		—			—			—			1.3			—
Shares issued or repurchased, net	—	—		—			0.2			—			0.2			—
Balance, September 30, 2018	72.0	$	1,792.1	$	(38.3	)	$	(410.5	)	$	5.3		$	1,348.6		$	8.0
	Total Equity
	Common Stock			Accumulated Other Compre- hensive Income (Loss)			(Distribution in Excess of Accumulated Earnings)			Non-Controlling Interest			Total			Redeem- able Non- Controlling Interest
	Shares	Stated Value
Balance, July 1, 2019	72.2	$	1,795.9	$	(54.0	)	$	(554.0	)	$	4.7		$	1,192.6		$	7.9
Net income (loss)	—	—		—			(49.8		)	(1.1		)	(50.9		)	—
Other comprehensive income (loss), net of tax	—	—		(1.0		)	—			—			(1.0		)	—
Dividend on common stock ($0.19 per share)	—	—		—			(13.8		)	—			(13.8		)	—
Share-based compensation	—	1.4		—			—			—			1.4			—
Shares issued or repurchased, net	0.1	0.1		—			—			—			0.1			—
Balance, September 30, 2019	72.3	$	1,797.4	$	(55.0	)	$	(617.6	)	$	3.6		$	1,128.4		$	7.9

See Notes to Condensed Consolidated Financial Statements.

7

Alexander & Baldwin, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. DESCRIPTION OF BUSINESS

Alexander & Baldwin, Inc. ("A&B" or the "Company") is a real estate investment trust ("REIT") headquartered in Honolulu, Hawai‘i. The Company operates three segments: Commercial Real Estate ("CRE"); Land Operations; and Materials & Construction ("M&C").  As of September 30, 2019, the Company's CRE improved real estate consisted of twenty-two retail centers, ten industrial assets and four office properties in Hawai‘i, representing a total of 3.9 million square feet of gross leasable area. The Company also owns a portfolio of ground leases in Hawai‘i that comprised 154 acres as of September 30, 2019.

2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The interim condensed consolidated financial statements are unaudited. Because of the nature of the Company's operations, the results for interim periods are not necessarily indicative of results to be expected for the year. While these condensed consolidated financial statements reflect all normal recurring adjustments that are, in the opinion of management, necessary for fair presentation of the results of the interim period, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America ("GAAP") for complete financial statements. Therefore, the interim condensed consolidated financial statements should be read in conjunction with the consolidated balance sheets as of December 31, 2018 and 2017, and the related consolidated statements of operations, comprehensive income (loss), equity, and cash flows for each of the three years in the period ended December 31, 2018, 2017 and 2016, respectively, and the notes thereto included in the Company's Annual Report filed on Form 10-K for the year ended December 31, 2018 ("2018 Form 10-K"), and other subsequent filings with the U.S. Securities and Exchange Commission ("SEC").

Rounding: Amounts in the condensed consolidated financial statements and notes are rounded to the nearest tenth of a million. Accordingly, a recalculation of some per-share amounts and percentages, if based on the reported data, may result in differences.

Significant Accounting Policies: The Company's significant accounting policies are described in Note 2 to the consolidated financial statements included in Item 8 of the Company's 2018 Form 10-K. Changes to significant accounting policies are included herein.

Reclassifications

Unclassified Balance Sheet: During the first quarter of 2019, the Company changed the presentation of its balance sheet to be unclassified in order to be comparable with other REIT peers. The change was applied to all periods presented retrospectively.

Gain on Sale of Properties: In November 2018, the SEC finalized the Disclosure Update Simplification Project, which eliminated Rule 3-15(a)(1) reporting of Gain or Loss on Sale of Properties by REITs. To conform with Accounting Standards Codification ("ASC") 360 and the SEC rule change, the Company has classified the gain on dispositions of real estate assets in operating income in the Company's condensed consolidated statements of operations. The Company reclassified the prior period to conform to the current year presentation. This change resulted in an increase of $49.8 million in operating income during the nine months ended September 30, 2018.

Recently adopted accounting pronouncements

In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842) ("ASU 2016-02"). The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 and should be implemented using a modified retrospective approach, with the option to apply the guidance at the effective date or the beginning of the earliest comparative period. The Company adopted the guidance on January 1, 2019 and elected to use the effective date as the date of initial application. Consequently, financial information was not updated and the disclosures required under the new standard are not provided for dates and periods before January 1, 2019. Additionally, the Company elected the "package of practical expedients," which permits the Company to not reassess prior conclusions about lease identification, lease classification and initial direct costs.

The new guidance did not have a material impact on the accounting treatment of the Company's triple-net tenant leases, which are the primary source of our CRE revenues. However, starting in the current year there were certain changes to the guidance under ASC 842 which will have an impact on future operating results, including initial direct costs associated with the execution

8

of lease agreements such as legal fees and certain transaction costs will no longer be capitalizable and instead are expensed in the period incurred.

The Company recorded right-of-use ("ROU") assets and corresponding lease liabilities of approximately $31.0 million on the condensed consolidated balance sheet for certain leases in which it is the lessee. The adoption of ASC 842 had no impact on the Company's lease expense.

In August 2017, the FASB issued ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company adopted the guidance on January 1, 2019. The guidance amends the hedge accounting model in ASC 815 to enable entities to better portray the economics of their risk management activities in the financial statements and enhance the transparency and understandability of hedge results. The amendments expand an entity's ability to hedge nonfinancial and financial risk components and reduce complexity in fair value hedges of interest rate risk. This ASU eliminates the requirement to separately measure and report hedge ineffectiveness and requires the earnings effect of the hedging instrument to be presented in the same income statement line as the hedged item. The adoption of this standard did not have an impact on the Company's financial position or results of operations.

In June 2018, the FASB issued ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company adopted the guidance on January 1, 2019. The guidance expands the scope of ASC 718 to include share-based payment transactions with the exception of specific guidance related to the attribution of compensation cost. The guidance also clarifies that any share-based payment awards granted in conjunction with selling goods or services to customers should be evaluated under ASC 606. The adoption of this standard did not have an impact on the Company's financial position or results of operations.

Recently issued accounting pronouncements

In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments, which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. The guidance replaces the existing incurred loss impairment model with an expected loss methodology, which will result in more timely recognition of credit losses. This ASU is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2019. The FASB has subsequently issued other related ASUs, which amend ASU 2016-13 to provide clarification and additional guidance. The Company is currently assessing the impact that adopting this new accounting standard will have on its condensed consolidated financial statements and footnote disclosures.

In August 2018, the FASB issued ASU 2018-13, Changes to the Disclosure Requirements for Fair Value Measurement. The guidance amends and removes several disclosure requirements including the valuation processes for Level 3 fair value measurements. This ASU also modifies some disclosure requirements and requires additional disclosures for changes in unrealized gains and losses included in other comprehensive income for recurring Level 3 fair value measurements and requires the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. This ASU is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. The Company is currently assessing the impact that adopting this new standard will have on its condensed consolidated financial statements and footnote disclosures.

In August 2018, the FASB issued ASU 2018-14, Changes to the Disclosure Requirements for Defined Benefit Plans. The guidance clarifies current disclosures and removes several disclosure requirements including accumulated other comprehensive income expected to be recognized over the next fiscal year and amount and timing of plan assets expected to be returned to the employer. This ASU also requires additional disclosures as well as explanations for significant gains and losses related to changes in the benefit plan obligation. This ASU is effective for fiscal years beginning after December 15, 2020. The Company is currently assessing the impact that adopting this new standard will have on its condensed consolidated financial statements and footnote disclosures.

In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other: Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract. The guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). Accordingly, the amendments require an entity (customer) in a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40 to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. The amendments also require the entity (customer) to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement, which includes reasonably certain renewals. This ASU is effective for fiscal years beginning after December 15, 2019 and the amendments can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company is

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currently assessing the impact that adopting this new standard will have on its condensed consolidated financial statements and footnote disclosures.

Leases

Lessee: The Company determines if an arrangement is a lease at inception by considering whether that arrangement conveys the right to use an identified asset for a period of time in exchange for consideration. Operating leases are included in operating lease ROU assets and operating lease liabilities in the Company's condensed consolidated balance sheets.

ROU assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The Company uses the implicit rate when readily determinable. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

The Company has also elected, for all classes of underlying assets, to not recognize lease liabilities and lease assets for leases with a term of 12 months or less.

Lessor: The Company reviews its contracts to determine if they qualify as a lease. A contract is determined to be a lease when the right to substantially all of the economic benefits and to direct the use of an identified asset is transferred to a customer over a defined period of time for consideration. During this review, the Company evaluates among other items, asset specification, substitution rights, purchase options, operating rights and control over the asset during the contract period.

The Company has lease agreements with lease and non-lease components, which are generally accounted for separately under ASC 606, Revenue from Contracts with Customers. The Company has elected to not separate non-lease components from lease components for all classes of underlying assets where the component follows the same timing and pattern as the lease component. Non-lease components included in rental revenue primarily consist of tenant reimbursements for common area maintenance and other services paid for by the lessor and utilized by the lessee.

Rental revenue is primarily derived from operating leases and, therefore, is generally recognized on a straight-line basis over the term of the lease. Fixed contractual payments from the Company's leases are recognized on a straight-line basis over the terms of the respective leases. Straight-line rental revenue commences when the customer assumes control of the leased premises. Accrued straight-line rents receivable represents the amount by which straight-line rental revenue exceeds rents currently billed in accordance with lease agreements. Certain of the Company's lease agreements include terms for contingent rental revenue (e.g. percentage rents based on tenant sales volume) and tenant reimbursed property taxes, which are both accounted for as variable payments.

Certain of the Company's leases include termination and/or extension options. Termination options allow the customer to terminate the lease prior to the end of the lease term under specific circumstances. The Company's extension options generally require a re-negotiation with the customer at market rates. Initial direct costs, primarily commissions, related to the leasing of properties are capitalized on the balance sheet and amortized over the lease term. All other costs to negotiate or arrange a lease are expensed as incurred.

Accounts receivable related to leases are regularly evaluated for collectability, considering factors including, but not limited to, the credit quality of the customer, historical trends of the customer, and changes in customer payment terms. Upon determination that the collectability of a customer receivable is not probable, the Company will record an allowance for such receivable and a corresponding reduction to revenue previously recognized. Subsequent revenue is recorded on a cash basis until collectability on related billings becomes probable.

Changes in estimates on construction contracts

Revenue on the Company's long-term construction contracts are recognized using the percentage of completion, cost-to-cost, input method. Due to the nature of the work required to be performed, estimating total revenue and cost at completion of the contract is complex, subject to many variables and requires significant judgment. Such estimates of contract revenue and cost are dependent on a number of factors that may change during a contract performance period, resulting in changes to estimated contract profitability. These factors include, but are not limited to, the completeness and accuracy of the original bid; changes in the timing of scheduled work; change orders; unusual weather conditions; changes in costs of labor and/or materials; changes in productivity

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expectations; and the expected, or actual, resolution terms for claims. Management evaluates changes in estimates on a contract by contract basis and uses the cumulative catch-up method to account for the changes in the period in which they are determined.

Interest and other income (expense), net

Interest and other income (expense), net for the nine months ended September 30, 2019 was primarily composed of interest income of $2.9 million. Interest and other income (expense), net for the nine months ended September 30, 2018 was primarily composed of a $4.2 million net gain on the sale of the Company's joint venture interest in the Ka Milo real estate development-for-sale project. For the nine months ended September 30, 2019 and 2018, other expense was primarily composed of pension and postretirement benefit expense of $3.4 million and $2.2 million, respectively.

Discontinued operations

In December 2016, the Company completed its final sugar harvest and ceased its sugar operations. Costs related to the cessation of sugar operations are presented as discontinued operations in the condensed consolidated statements of operations. Liabilities related to the cessation of sugar operations are presented within Accrued and other liabilities in the condensed consolidated balance sheets. For the nine months ended September 30, 2019, the Company recorded a loss from discontinued operations of $0.8 million primarily related to an increase in cessation related accruals and a reserve for bad debt against outstanding receivables deemed uncollectible in the first quarter of 2019.

3. COMMITMENTS AND CONTINGENCIES

Commitments, Guarantees and Contingencies: Commitments and financial arrangements not recorded on the Company's condensed consolidated balance sheet included standby letters of credit and bonds. As of September 30, 2019, standby letters of credit issued by the Company's lenders under the Company's revolving credit facilities totaled $1.7 million. These letters of credit primarily relate to the Company's real estate activities, and if drawn upon the Company would be obligated to reimburse the issuer.

As of September 30, 2019, bonds related to the Company's construction and real estate activities totaled $440.8 million. Approximately $421.7 million represents the face value of construction bonds issued by third party sureties (bid, performance and payment bonds), and the remainder is related to commercial bonds issued by third party sureties (permit, subdivision, license and notary bonds). In the event the bonds are drawn upon, the Company would be obligated to reimburse the surety that issued the bond for the amount of the bond, reduced for the work completed to date. As of September 30, 2019, the Company's estimated remaining exposure, assuming defaults on all existing contractual construction obligations, was approximately $79.8 million.

Indemnity Agreements: For certain real estate joint ventures, the Company may be obligated under bond indemnities to complete construction of the real estate development if the joint venture does not perform. These indemnities are designed to protect the surety in exchange for the issuance of surety bonds that cover joint venture construction activities, such as project amenities, roads, utilities, and other infrastructure, at its joint ventures. Under the indemnities, the Company and its joint venture partners agree to indemnify the surety bond issuer from all losses and expenses arising from the failure of the joint venture to complete the specified bonded construction. The maximum potential amount of aggregate future payments is a function of the amount covered by outstanding bonds at the time of default by the joint venture, reduced by the amount of work completed to date. The recorded amounts of the indemnity liabilities were not material individually or in the aggregate.

The Company is a guarantor of indebtedness for certain of its unconsolidated joint ventures' borrowings with third party lenders, relating to the repayment of construction loans and performance of construction for the underlying project. As of September 30, 2019, the Company's limited guarantees on indebtedness related to one of its unconsolidated joint ventures totaled $3.1 million.

Other than obligations described above and those described in the Company's 2018 Form 10-K, obligations of the Company's joint ventures do not have recourse to the Company, and the Company's "at-risk" amounts are limited to its investment.

Legal Proceedings and Other Contingencies: Prior to the sale of approximately 41,000 acres of agricultural land on Maui to Mahi Pono Holdings, LLC ("Mahi Pono") in December 2018, A&B, through East Maui Irrigation Company, LLC ("EMI"), also owned approximately 16,000 acres of watershed lands in East Maui and also held four water licenses to approximately 30,000 acres owned by the State of Hawai‘i in East Maui. The sale to Mahi Pono includes the sale of a 50% interest in EMI (which closed February 1, 2019), and provides for A&B and Mahi Pono, through EMI, to jointly continue the existing process to secure long-term leases from the State for delivery of irrigation water to Mahi Pono for use in Central Maui.

The last of these water license agreements expired in 1986, and all four agreements were then extended as revocable permits that were renewed annually. In 2001, a request was made to the State Board of Land and Natural Resources (the "BLNR")

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to replace these revocable permits with a long-term water lease. Pending the completion by the BLNR of a contested case hearing it ordered to be held on the request for the long-term lease, the BLNR has kept the existing permits on a holdover basis. Three parties filed a lawsuit on April 10, 2015 (the "4/10/15 Lawsuit") alleging that the BLNR has been renewing the revocable permits annually rather than keeping them in holdover status. The lawsuit asked the court to void the revocable permits and to declare that the renewals were illegally issued without preparation of an environmental assessment ("EA"). In December 2015, the BLNR decided to reaffirm its prior decisions to keep the permits in holdover status. This decision by the BLNR was challenged by the three parties. In January 2016, the court ruled in the 4/10/15 Lawsuit that the renewals were not subject to the EA requirement, but that the BLNR lacked legal authority to keep the revocable permits in holdover status beyond one year. The decision was appealed to the Intermediate Court of Appeals ("ICA") of the State of Hawai‘i.

In May 2016, while the appeal of the 4/10/15 Lawsuit was pending, the Hawai‘i State Legislature passed House Bill 2501, which specified that the BLNR has the legal authority to issue holdover revocable permits for the disposition of water rights for a period not to exceed three years. The governor signed this bill into law as Act 126 in June 2016. Pursuant to Act 126, the annual authorization of the existing holdover permits was sought and granted by the BLNR in December 2016, November 2017 and November 2018 for calendar years 2017, 2018 and 2019. No extension of Act 126 was approved by the Hawai‘i State Legislature in 2019.

In June 2019, the ICA vacated the lower court’s ruling in the 4/10/15 Lawsuit that the BLNR lacked authority to keep the revocable permits in holdover status beyond one year and remanded the case to the trial court to determine whether the holdover status of the permits was both (a) "temporary" and (b) in the best interest of the State, as required by statute. The plaintiffs have filed a motion with the ICA for reconsideration of its decision, which was denied on July 5, 2019. On September 30, 2019, Plaintiffs filed a request with the Supreme Court of Hawai‘i to review and reverse the ICA’s ruling. On October 11, 2019, the BLNR took up the renewal of all the existing water revocable permits in the state, acting under the ICA's ruling, and approved the continuation of the four East Maui water revocable permits for another one-year period through December 31, 2020.

In a separate matter, on December 7, 2018, a contested case request filed by the Sierra Club contesting the BLNR's November 2018 approval of the 2019 revocable permits was denied by the BLNR. On January 7, 2019, Sierra Club filed a lawsuit in the circuit court of the first circuit in Hawai‘i against BLNR, A&B, and EMI, seeking to invalidate the extension of the revocable permits for, among other things, failure to perform an EA. The count alleging failure to perform an EA was recently ordered to be dismissed based on the ICA ruling in the 4/10/15 Lawsuit. The lawsuit also seeks to enjoin the diversion by EMI of more than 25 million gallons a day pending the imposition by BLNR of conditions that Sierra Club alleges should be imposed on the revocable permits. In connection with A&B’s obligation to continue the existing process to secure long-term water leases from the State, A&B and EMI will defend against the claims made by the Sierra Club.

A&B is a party to, or may be contingently liable in connection with, other legal actions arising in the normal conduct of its businesses, the outcomes of which, in the opinion of management after consultation with counsel, would not have a material effect on A&B's consolidated financial statements as a whole.

4. EARNINGS PER SHARE ("EPS")

Basic earnings per common share excludes dilution and is calculated by dividing net earnings allocated to common shares by the weighted-average number of common shares outstanding for the period. Diluted earnings per common share is calculated by dividing net earnings allocated to common shares by the weighted-average number of common shares outstanding for the period, as adjusted for the potential dilutive effect of non-participating share-based awards as well as adjusted by the number of additional shares, if any, that would have been outstanding had the potentially dilutive common shares been issued.

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The following table provides a reconciliation of income (loss) from continuing operations to income (loss) from continuing operations available to A&B shareholders and net income (loss) available to A&B shareholders (in millions):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Income (loss) from Continuing Operations	$	(50.8	)	$	15.8		$	(42.6	)	$	66.2
Less: (Income) loss attributable to noncontrolling interest	1.1			(0.8		)	1.8			(1.4		)
Income (loss) from continuing operations attributable to A&B shareholders	(49.7		)	15.0			(40.8		)	64.8
Income (loss) from discontinued operations available to A&B shareholders, net of income taxes	(0.1		)	(0.2		)	(0.8		)	(0.2		)
Net income (loss) available to A&B shareholders	$	(49.8	)	$	14.8		$	(41.6	)	$	64.6

The number of shares used to compute basic and diluted earnings per share is as follows (in millions):

	Three Months Ended September 30,		Nine Months Ended September 30,
	2019	2018	2019	2018
Denominator for basic EPS - weighted average shares outstanding	72.3	72.0	72.2	70.2
Effect of dilutive securities:
Non-participating stock options and restricted stock unit awards	—	0.4	—	0.4
Special Distribution	—	—	—	1.8
Denominator for diluted EPS - weighted average shares outstanding	72.3	72.4	72.2	72.4

There were 0.4 million shares of anti-dilutive securities outstanding during the three and nine months ended September 30, 2019. There were 0.1 million shares of anti-dilutive securities outstanding during the three and nine months ended September 30, 2018.

5. FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair value of the Company's cash and cash equivalents, accounts receivable, and notes receivable with remaining terms less than 12 months approximate their carrying values due to the short-term nature of the instruments. The fair value of the Company's notes receivable with remaining terms greater than 12 months is estimated using a discounted cash flow analysis in which the Company uses unobservable inputs such as market interest rates determined by the loan to value and market capitalization rates related to the underlying collateral at which management believes similar loans would be made and classified as Level 3 in the fair value hierarchy. The fair value of these notes approximates the carrying amount of $15.7 million at September 30, 2019. The fair value and carrying value of these notes was $16.3 million at December 31, 2018.

The carrying amount and fair value of the Company's debt at September 30, 2019 was $732.4 million and $753.8 million, respectively, and $778.1 million and $758.0 million at December 31, 2018, respectively. The fair value of debt is calculated by discounting the future cash flows of the debt at rates based on instruments with similar risk, terms and maturities as compared to the Company's existing debt arrangements (Level 2).

The Company carries its interest rate swaps at fair value. See Note 15 for fair value information regarding the Company's derivative instruments.

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6. INVENTORIES

Inventories are stated at the lower of cost (principally first-in, first-out basis) or net realizable value. Inventories as of September 30, 2019 and December 31, 2018 were as follows (in millions):

	September 30, 2019		December 31, 2018
Asphalt	$	9.7	$	9.4
Processed rock and sand	7.5		9.5
Work in progress	3.2		4.0
Retail merchandise	2.1		2.0
Parts, materials and supplies inventories	1.4		1.6
Total	$	23.9	$	26.5

7. SHARE-BASED PAYMENT AWARDS

The 2012 Incentive Compensation Plan ("2012 Plan") allows for the granting of stock options, restricted stock units and common stock. The shares of common stock authorized to be issued under the 2012 Plan may be drawn from the shares of the Company's authorized but unissued common stock or from shares of its common stock that the Company acquires, including shares purchased on the open market or private transactions.

The following table summarizes the Company's stock option activity for the nine months ended September 30, 2019 (in thousands, except weighted-average exercise price and weighted-average contractual life):

	2012 Plan Stock Options	Weighted- Average Exercise Price		Weighted- Average Contractual Life	Aggregate Intrinsic Value
Outstanding, January 1, 2019	580.1	$	12.91
Exercised	(225.8)	$	11.29