Maui Land & Pineapple Co Inc: Form 10-Q for the period ended Sep 30, 2023

The following discussion and analysis of our unaudited condensed consolidated interim financial condition and results of operations should be read in conjunction with our annual audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2022 (our “Annual Report") and the unaudited condensed consolidated interim financial statements and related notes included in this Quarterly Report on Form 10-Q (this “Quarterly Report”). 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 Quarterly 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. The Company consists of a landholding and operating parent company, its principal subsidiary, Kapalua Land Company, Ltd. and certain other subsidiaries of the Company. On June 29, 2022, the Company’s shareholders voted to approve a proposal to change the state of incorporation of the Company from Hawaii to Delaware. The reincorporation was effected through a plan of conversion completed on July 18, 2022. Total authorized capital stock provided by the Delaware certificate of incorporation include 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. No change in ownership resulted as each outstanding share of common stock previously issued when the Company was incorporated in Hawaii was automatically converted into one share of the reincorporated Company. The name of the Company after reincorporation remains Maui Land & Pineapple Company, Inc. and shares of common stock continue to be listed on the New York Stock Exchange under the ticker symbol “MLP.”

We own and steward approximately 22,000 acres of land on the island of Maui, Hawaii along with approximately 260,000 square feet of commercial properties. 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 October, 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, our mission is to meet the critical needs of the community by carefully ensuring our assets are actively used to their fullest potential.

As an initial step by the new leadership team, we have audited our assets under management and available for development. The initial results of this review identified a material opportunity to increase the level of utilization, occupancy, and stabilized income from our operating assets.

At September 30, 2023, our commercial properties and land were occupied at the following levels:

Asset Management Summary (a non-GAAP financial measurement): Q3 2023

To improve the stable operating revenue from our buildings and lands, we have developed updated tenanting plans for our properties, with a focus on placemaking in our town centers. Short-term impacts to earnings may be anticipated as tenant improvements are performed in order to improve occupancy and reposition spaces and land with tenancies at market rents. Long-term positive impacts to operating revenues are intended as the occupancy of our existing land and commercial real estate portfolio is improved.

To establish and execute our land utilization strategies, investments will be made internally to reposition our team with the necessary capabilities along with market research, planning, and engineering services. 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. Long-term positive changes in land development and sales revenues should be expected as non-strategic lands are identified for sale and strategic land developments are advanced to completion.

Results of Operations

Three and Nine Months Ended September 30, 2023 compared to Three and Nine Months Ended September 30, 2022

CONSOLIDATED

(unaudited)

(unaudited)

(in thousands except per share amounts)

REAL ESTATE

(unaudited)

(unaudited)

(in thousands)

There were no sales of real estate during the three and nine months ended September 30, 2023. During the nine months ended September 30, 2022, we sold approximately 50 acres in West Maui for $2.0 million and a 646-acre parcel in Upcountry Maui for $9.6 million.

In December 2021, we entered into an agreement to sell the Kapalua Central Resort project for $40.0 million. On May 13, 2022, terms of the agreement were amended to include a closing condition requiring the Maui Planning Commission to approve a five-year extension of a Special Management Area (SMA) permit issued by the County of Maui. We allowed the agreement to expire on April 11, 2023. Approximately $19,000 previously held in escrow was returned to us due to the termination of the sale agreement. The development plans for our real estate holdings are currently being reviewed and evaluated in conjunction with our leadership transition. We continue to manage the application process of the SMA permit extension for the Central Resort project while the project continues to be marketed for sale or joint venture.

Operating expenses for the nine months ended September 30, 2023 include $0.4 million of transition costs related to the separation from employment of our former Vice President. For the nine months ended September 30, 2022, we recognized $0.9 million related to the cost of land parcels sold.

Property and development costs capitalized during the nine months ended September 30, 2023 totaled $0.2 million. There were no significant real estate development expenditures during the nine months ended June 30, 2022.

Real estate development and sales are cyclical and depend on a number of factors. Results for one period are therefore not necessarily indicative of future performance trends in this business segment. Uncertainties associated macroeconomic market conditions, including increases in interest rates and fears of a recession, may reduce demand for real estate and impair prospective purchasers’ ability to obtain financing, which would adversely affect revenues from our real estate operations.

LEASING

(unaudited)

(unaudited)

(in thousands)

Visitor traffic was returning to pre-pandemic levels until the occurrence of the Maui wildfires on August 8, 2023 and devastated the Island of Maui, in particular the West Maui town of Lahaina which is the island’s major tourist attraction. Income from our leasing operations decreased during the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, directly due to impact of the Maui wildfires and the loss of percentage rents for the months of August and September 2023.

Operating expenses increased for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, resulting from increases in premiums from our property insurance policies and higher costs to maintain our water delivery systems.

Our leasing operations face substantial competition from other property owners in Maui and Hawaii.

RESORT AMENITIES AND OTHER

(unaudited)

(unaudited)

(in thousands)

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 a private pool-side dining beach club. The Kapalua Club does not operate any resort amenities and the dues collected are primarily used to pay the contracted fees for member access to the spa, beach club, golf courses and other resort amenities.

Lower membership levels during the nine months ended September 30, 2023 were offset by an annual increase in dues rates and a decrease in operational costs as all the amenities closed as a result of the Maui wildfires from August 8, 2023 to the end of the third fiscal quarter. Revenues during the current year’s three months ended September 30, 2023 decreased as a result of the suspension of club fees due to the impacts of the Maui wildfires.

The decrease in operating costs for the three and nine months ended September 30, 2023, compared to the three and nine months ended September 30, 2022, was primarily due to the closure of the golf courses and club amenities as a result of the Maui wildfires.

GENERAL AND ADMINISTRATIVE COSTS, SHARE-BASED COMPENSATION

The increase in general and administrative costs and share-based compensation for the three and nine months ended September 30, 2023 compared to the three and nine months ended September 30, 2022 was attributable to expenses related to the transition of director and management personnel. General and administrative costs increased to $0.8 million for the nine months ended September 30, 2023 primarily due to one-time expenses related to our executive transition. Additionally, all outstanding stock grants of resigned executive personnel, including the Company’s former Chairman and Chief Executive Officer, became fully vested during the nine months ended September 30, 2023.

During the nine months ended September 30, 2023, options to purchase shares of common stock under our Equity Plan were granted to directors. The number of common shares subject to option for annual board service, board committee service, and continued service of the Chairman of the Board were 250,000 shares, 78,000 shares, and 400,000 shares, respectively. For the three and nine months ended September 30, 2023, 82,000 and 164,000 share options vested to directors for annual board and committee service. Total share-based compensation expense, including vesting of restricted common stock, was $0.7 million and $0.3 million for the three months ended September 30, 2023 and 2022, respectively, and $2.5 million and $1.0 million for the nine months ended September 30, 2023 and 2022, respectively.

OTHER INCOME

Interest income of $0.1 million and $0.4 million was earned on our money market and bond investment portfolio during the three and nine months ended September 30, 2023, respectively. We also recognized $0.2 million of cash collateral returned from an owner-controlled insurance program of a former partnership interest. The Company does not maintain or possess any off balance sheet financing nor transactions.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity

Our cash and cash equivalents were $6.8 million and $8.5 million (audited) at September 30, 2023 and December 31, 2022, respectively.

We also had investments of $3.1 million and $3.0 million at September 30, 2023 and December 31, 2022, respectively. Our investments consist of corporate bond securities maturing on various dates through January 2025. These bond investments yield approximately 5.5% at September 30, 2023. We intend to hold our bond securities until maturity.

At September 30, 2023, $15.0 million was available from our revolving line of credit facility (“Credit Facility”) with First Hawaiian Bank (“Bank”). The Credit Facility, which matures on December 31, 2025, provides for revolving or term loan borrowing options. Interest on revolving loan borrowings is calculated using 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 of our Credit Facility at September 30, 2023. If economic conditions are negatively impacted in future periods, we may borrow under our Credit Facility.

Cash Flows

Net cash flow used in our operating activities for the nine months ended September 30, 2023 was $0.2 million, and $6.1 million for the nine months ended September 30, 2022.

There were no sales of real estate during the nine months ended September 30, 2023. In the nine months ended September 30, 2022, we collected $2.0 million and $9.6 million from the sales of 50 acres in West Maui and 646 acres in Upcountry Maui, respectively.

Interest income earned from our money market and bond investments was $0.4 million for the nine months ended September 30, 2023.

The outstanding balance of our Credit Facility remained zero at September 30, 2023. There were no interest payments on our Credit Facility due during the nine months ended September 30, 2023.

No contributions are required to be made to our defined benefit pension plan in 2023. In August 2022, we made a $5.7 million voluntary contribution to the plan.

Capital Resources

Our business initiatives include investing in our operating infrastructure, and continued planning and entitlement efforts on our development projects. This may require borrowing under our Credit Facility or other indebtedness, repayment of which may be dependent on selling our real estate assets at acceptable prices in condensed timeframes. We believe that our cash on-hand and cash received from operations, together with borrowing capacity under our Credit Facility, will provide sufficient financial flexibility to meet working capital requirements and to fund capital expenditures through the next twelve months and the foreseeable future.

Our indebtedness, if drawn upon, 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

The preparation of the unaudited condensed consolidated interim financial statements in conformity with GAAP requires the use of accounting estimates. Changes in these estimates and assumptions are considered reasonably possible and may have a material effect on the unaudited condensed consolidated interim financial statements and thus actual results could differ from the amounts reported and disclosed herein. For additional information regarding our critical accounting policies, see the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates” contained within our Annual Report. Stock options granted to directors during the nine months ended September 30, 2023 were accounted for in accordance with ASC Topic 718, Compensation – Stock Compensation.

We have no material exposure to changes in interest rates related to our borrowing and investing activities used to maintain liquidity and to fund business operations. We have no material exposure to foreign currency risks.

We are subject to potential changes in consumer behavior and regulatory risks through travel and social distancing restrictions due to our location as a vacation destination. Potential deferrals and abatements may impact our rental income.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission’s (“SEC”) rules and forms, and that such information is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

In designing and evaluating the disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by Rules 13a-15(b) and 15d-15(b) under the Exchange Act, we carried out an evaluation, under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures at the end of the fiscal quarter covered by this report. Based upon the foregoing, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective during the nine months ended September 30, 2023 to provide reasonable assurance that information required to be disclosed by us in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in applicable SEC rules and forms.

Changes in Internal Controls Over Financial Reporting

There have been no significant changes in our internal controls over financial reporting (as such term is defined in Exchange Act Rule 13a-15(f) or 15d-15(f)) during the nine months ended September 30, 2023 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.