Maui Land & Pineapple Co Inc: Form 10-Q for the period ended Jun 30, 2024

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, 2023 (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 as a Hawaii corporation. The Company reincorporated from Hawaii 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 under the ticker symbol “MLP.” The Company consists of a landholding and operating parent company, has a principal subsidiary, Kapalua Land Company, Ltd., and certain other subsidiaries

We own and steward a portfolio including over 22,300 acres of land on the island of Maui, Hawaii along with 266,000 square feet of commercial real estate. For over a century, we have built a legacy of authentic innovation through conservation, agriculture, community building and land management. To continue this legacy, we are driven by a renewed mission to strategically maximize our assets to be used to their fullest potential, resulting in added value to the Company and creating a more resilient community for future generations.

In April 2023, we began a leadership transition by appointing a new Chief Executive Officer and new Chairman of the Board, both of whom are experienced in real estate planning, development, and asset management. The development of our team continued with the addition of three executive leadership team members with planning, community development, land and natural resource stewardship and real estate expertise. In efforts to further establish and execute land utilization strategies, we continue to make investments to build a lean, experienced team with the most recent leadership additions including a Director of Engineering and Vice President of Land Productivity and Asset Management.

Under an initiative by the new leadership team, we have audited our diverse portfolio of assets. The initial results of this review identified a material opportunity to increase the level of utilization, occupancy, and stabilized income from our operating assets that will enable future growth.

At June 30, 2024, our commercial properties and land were occupied at the following levels:

After updating tenanting plans with a focus on thoughtful placemaking, we actively pursued new opportunities to optimize existing tenancy and execute new leases for available commercial spaces with a goal to improve our operating revenue. Despite the challenges following the 2023 Maui wildfires, this effort in the town centers resulted in a 24% improvement in overall occupancy over the past year. Due to this improved occupancy, recent land sales of non-strategic parcels, and operational improvements of resort amenities, the Company has experienced a 7.5 % growth in overall operating revenue. Paired with these placemaking efforts, we have begun executing land strategies for the surrounding, undeveloped areas adjacent to the town centers. We anticipate short-term fluctuations in earnings as we improve tenant occupancy and improve our buildings. Continual, long-term positive impacts to operating revenues are expected as the occupancy of our existing commercial real estate and utilization of our land holdings continue to improve.

Our primary goal is to execute our established strategies to activate our land holdings to meet the long-term needs of the community, including the provision of land for agriculture and housing in a supply-constrained market. We expect continued long-term positive changes in land development and sales revenues as we recently sold a non-strategic easement in West Maui and currently have four additional non-strategic parcels being marketed for sale to generate cash flow. We are also listing large tracts of agricultural land for lease.

Results of Operations

Three and Six Months Ended June 30, 2024 Compared to Three and Six Months Ended June 30, 2023

CONSOLIDATED

(unaudited)

(unaudited)

(in thousands)

(in thousands)

LAND DEVELOPMENT AND SALES

(unaudited)

(unaudited)

(in thousands)

(in thousands)

Land development and sales operating revenues include the sales of our real estate inventory. There was one sale of real estate during the six months ended June 30, 2024 amounting to $200,000 for a land easement in West Maui and no sales of real estate during the six months ended June 30, 2023. This is purposeful as the Company is evaluating its commercial assets and land holdings to determine the best utilization of its assets in West Maui and in Upcounty Maui in the town of Haliimaile to increase value.

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. The development plans for our real estate holdings remain subject to our review and evaluation. The Kapalua Central Resort project continues to be marketed for sale or joint venture and the application for the SMA permit extension remains ongoing.

In December 2023, we contributed approximately 30-acres of land in Upcountry Maui, valued at $1.6 million, to BRE2 LLC, a joint venture between the Company and Stone Properties, for the 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 land development and sales operating revenues. We anticipate sales of the ranch lots to total approximately $4.1 million, with approximately $2.2 million constituting our share of the sales proceeds, which we expect to occur between late 2024 to mid-2025.

Approximately $391,000 was spent towards real estate development expenditures during the six months ended June 30, 2024 for development efforts both in West Maui and Haliimaile. No significant expenditures were made during the six months ended June 30, 2023.

Land development and sales are cyclical and depend on several factors, such as interest rates and demand. Results from one period are not 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 Maui wildfire accelerated our efforts to get land into productive use to meet these critical needs.

LEASING

(unaudited)

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(in thousands)

(in thousands)

Operating revenues from leasing activities for the three months ended June 30, 2024, were comprised primarily of $1.9 million from commercial, industrial, and agricultural leases, and the remaining $0.3 million was comprised of $33,000 of licensing fees from our registered trademarks and trade names, $175,000 from potable and non-potable water system sales and $85,000 in grant revenue from the State of Hawai‘i for conservation management of our Pu‘u Kukui Watershed. Operating revenue from leasing activities for the three months ended June 30, 2023, were primarily comprised of $1.8 million from commercial, industrial, and agricultural leases, and the remaining $0.3 million was comprised of $33,000 of licensing fees from our registered trademarks and trade names, $183,000 from potable and non-potable water system sales and $72,000 in grant revenue from the State of Hawai‘i for conservation management of our Puu Kukui Watershed.

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 began to increase and these percentage rents, leasing revenues in general and land licensing from adventure tourism tenants were returning to pre-pandemic levels until the occurrence of the devastating Maui wildfires on August 8, 2023. The wildfires directly and critically impacted West Maui and took its toll on percentage rents and revenues for tourism based tenants. The $2.2 million of operating revenues from leasing activities for the three months ended June 30, 2024, compared to $2.2 million for the three months ended June 30, 2023 is an indication that tourism and visitor traffic is returning to pre-pandemic levels. The minimal increase in operating revenues at June 30, 2024 compared to June 30, 2023 is not reflective of our efforts to re-tenant and re-merchandise the tenant mix in the three commercial centers owned by the Company in the Kapalua Resort, Haliimaile Town and the Alaeloa Business Park. New tenant leases are being executed with an initial free rent period in lieu of expending funds towards tenant improvements and commercial leases are being renegotiated to reflect current market rental rates compared to the previous below market rates.

The increase in leasing operating costs and expenses for the six months ended June 30, 2024, compared to the six months ended June 30, 2023, can be attributed to higher property maintenance costs for our commercial leasing portfolio properties, which had been deferred in prior years, hiring a property management and leasing firm to grow our leasing portfolio, and the start-up costs and fees associated with our efforts to increase tenant occupancy and to improve the tenant composition in our leasing portfolio.

Our leasing operations face substantial competition from other property owners in Maui and Hawai‘i.

RESORT AMENITIES AND OTHER

(unaudited)

(unaudited)

(in thousands)

(in thousands)

Our Resort Amenities segment includes the operations of the Kapalua Club, a private, non-equity club that provides its members special programs and 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 increase in operating revenues for the six months ended June 30, 2024, compared to the six months ended June 30, 2023, was due to new memberships being sold for the first time since 2019 and the Kapalua Club management team focusing on offering fee-based club events to members.

Contracted fee expenses decreased for the six months ended June 30, 2024, compared to the six months ended June 30, 2023, due to decreased fees for access and utilization of golf privileges.

The Kapalua Club was restructured in 2023. Its revised policies and practices have been implemented to reduce the impact of the amenity fees and to better align club dues and club expenses. The Kapalua Club began to accept new membership applications beginning late 2023.

GENERAL AND ADMINISTRATIVE COSTS, SHARE-BASED COMPENSATION

General and administrative costs and share-based compensation for the six months ended June 30, 2024 amounted to $4.8 million, compared to $3.8 million for the six months ended June 30, 2023.

Share-based compensation costs and share-based compensation for the six months ended June 30, 2024 amounted to $2.6 million, compared to $1.8 million for the six months ended June 30, 2023. The $0.8 million increase is due to option valuation expenses attributable to the option granted to our Chief Executive Officer in January 2024 and also options granted to directors in May 2024 at a higher valuation from the options granted to directors in May 2023. These differences are explained in the paragraphs below. Shared based compensation expenses for the six months ended June 30, 2024 included options for the Chairman of the board issued in March 2023, the options issued to directors in May 2023, options issued to the Chief Executive Officer in January 2024, the options issued to directors in May 2024, fiscal year 2024 Directors stock compensation/retainer and employees’ incentive share vesting. Share based compensation expenses for the six months ended June 30, 2023 included options for the Chairman of the board issued in March 2023, the options issued to directors in May 2023, employees’ incentive share vesting and incentive share vesting for the former Chief Executive Officer upon separation from the Company on March 31, 2023.

An option to purchase 400,000 shares of the Company’s common stock under the 2017 Equity and Incentive Award Plan (the Plan) was granted to the Company's Chief Executive Officer during the three months ended March 31, 2024, none of these options shares vested during this period. Additional information of the option issuance to the Chief Executive Officer is detailed in Note 11 of the financial statements. During the six months ended June 30, 2024, 325,709 shares of stock options vested which were comprised of 82,000 option shares to the Directors issued in May 2023, 110,375 option shares issued to directors in May 2024 and 133,334 option shares issued to the Chairman of the board in March 2023. During the six months ended June 20, 2023, 82,000 option shares were vested under options issued to directors in March 2023.

OTHER INCOME

Other income of $0.2 million and $0.5 million was earned during the six month period ended June 30, 2024 and 2023, respectively. During the 6 months ended June 30, 2024, other income was due to interest earned on savings and dividends earned on a investment bond fund of varying maturities. For the six month period ended June 30, 2023, $0.3 million was earned interst on savings and dividends on an investment bond fund of varying maturities and $0.2 million was earned on a refund of captive insurance funds from a now defunct joint venture the Company was a partner in. 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 $3.7 million and $5.7 million (audited) at June 30, 2024 and December 31, 2023, respectively.

We also had investments in a bond fund with varying maturities in the amount of $3.2 million and $3.1 million at June 30, 2024 and December 31, 2023, respectively. Our investments consist of corporate bond securities maturing on various dates through November 2025. These bond investments yield approximately 5.7% at June 30, 2024. We intend to hold our bond securities until maturity.

At June 30, 2024, $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 in the Credit Facility) 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 June 30, 2024. We may borrow under our credit facility to invest in, and build value in, our assets and fund working capital if economic conditions are negatively impacted in future periods.

Cash Flows

Net cash flows used in our operating activities for the six months ended June 30, 2024 were $0.5 million and $0.4 million for the six months ended June 30, 2023.

There was one sale of real estate during the six months ended June 30, 2024 in the amount of $0.2 million for a land easement in West Maui and no sales of real estate during the six months ended June 30, 2023.

Interest income earned from our money market and bond investments was $0.2 million for the six months ended June 30, 2024, and $0.2 million for the six months ended June 30, 2023.

The outstanding balance of our Credit Facility remained zero at June 30, 2024. There were no interest payments due on our Credit Facility during the six months ended June 30, 2024.

No contributions are required to be made to our defined benefit pension plan in 2024.

Capital Resources

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 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 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

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 titled Critical Accounting Policies and Estimates in Part II, Item 7, within our Annual Report. There have been no material changes to the critical accounting policies and key estimates and assumptions disclosed in our Annual Report.

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 six months ended June 30, 2024 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 six months ended June 30, 2024 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.