General
In addition to historical information, this report contains forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. These statements are based on management's current expectations about its
businesses and the markets in which the Company operates. Such forward-looking
statements are not guarantees of future performance and involve known and
unknown risks, uncertainties or other factors which may cause actual results,
performance or achievements of the Company to be materially different from any
future results, performance or achievements expressed or implied by such
forward-looking statements. Actual operating results may be affected by various
factors including, without limitation, the effect of geopolitical, economic and
market conditions in Hawaii and globally, including heightened inflation, slower
growth or recession, changes to fiscal and monetary policy, higher interest
rates and currency fluctuations, competitive market conditions, uncertainties
and costs related to the imposition of conditions on receipt of governmental
approvals and costs of material and labor, the effect of the outbreak of the
COVID-19 virus, actual versus projected timing of events, and the factors
described in Part I, Item 1A of our Annual Report on Form 10-K for the year
ended December 31, 2021, all of which may cause such actual results to differ
materially from what is expressed or forecast in this report.
The Commission on Water Resource Management ("CWRM") officially designated all
six Aquifer System Areas of the Lahaina Aquifer Sector, Maui, as Ground Water
Management Areas and notified the Company that they would need to apply for
ground and surface water use permits to continue the Company's use of 16 certain
wells that are integral to the Company's entire operations. One possible result
of the designation is a potential inability to secure permits from CWRM for
future water use in a timely fashion or in amounts to avoid disruption and
delays impacting the Company's business development. In the event permits
adequate to the Company's plans are not received or not received timely, there
could be negative impacts on the west Maui real estate market as a whole and the
development and sale of the Company's lands on the Island of Maui, thereby
materially and adversely affecting the Company's operations, land sales, land
values, results, and financial position.
The primary business of Kaanapali Land is the investment in and development of
the Company's assets on the Island of Maui. The various development plans will
take many years at significant expense to fully implement. Proceeds from land
sales and the planned distribution of surplus Pension Plan assets are the
Company's only source of significant cash proceeds and the Company's ability to
meet its liquidity needs is dependent on the timing and amount of such proceeds.
The Company's operations have in recent periods been primarily reliant upon the
net proceeds of sales of developed and undeveloped land parcels.
Liquidity and Capital Resources
The Company had cash and cash equivalents of approximately $21 million and $17
million as of September 30, 2022 and December 31, 2021, respectively, which is
available for, among other things, working capital requirements, including
future operating expenses, and the Company's obligations for engineering,
planning, regulatory and development costs, drainage and utilities,
environmental remediation costs on existing and former properties, potential
liabilities resulting from tax audits, and existing and possible future
litigation. To the extent the Company is not delayed by certain regulatory
agencies, the Company expects the distribution of surplus Pension Plan assets to
enhance the Company's liquidity. The Company does not anticipate making any
distributions for the foreseeable future.
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Although the Company does not currently believe that it has significant
liquidity problems over the near term, should the Company be unable to satisfy
its liquidity requirements from its existing resources and future property
sales, it will likely pursue alternate financing arrangements. However it cannot
be determined at this time what, if any, financing alternatives may be available
and at what cost.
Mortgage Note Payable
Certain subsidiaries of Kaanapali Land are jointly indebted to Kaanapali Land
pursuant to a certain Secured Promissory Note in the principal amount of $70
million, dated November 14, 2002, and due September 30, 2029, as extended. Such
note had an outstanding balance of principal and accrued interest as of
September 30, 2022 and December 31, 2021 of approximately $90 million and $91
million, respectively. The interest rate currently is 0.39% per annum and
compounds semi-annually. The note, which is prepayable, is secured by
substantially all of the remaining real property owned by such subsidiaries,
pursuant to a certain Mortgage, Security Agreement and Financing Statement,
dated as of November 14, 2002 and placed on record in December 2002. The note
has been eliminated in the consolidated financial statements because the
obligors are consolidated subsidiaries of Kaanapali Land.
Cash Flows
Net cash provided by operating activities for the nine months ended
September 30, 2022 was approximately $4 million and was primarily due to the lot
sale in Kaanapali Coffee Farms. Net cash flows used in investing activities for
the nine months ended September 30, 2022 was approximately $1.2 million and was
primarily due to the effect of deconsolidating the LOA, as well as, the costs of
project planning and engineering, primarily relating to KCF Mauka and Puukolli
Village Mauka. Net cash provided by financing activities for the nine months
ended September 30, 2022 was approximately $0.4 million and represented
Kaanapali Coffee Farms lot owners' contributions to the LOA prior to the
deconsolidation of the LOA.
Land Development
In September 2014, Kaanapali Land Management Corp. ("KLMC"), pursuant to a
property and option purchase agreement with an unrelated third party, closed on
the sale of an approximately 14.9 acre parcel in West Maui. The purchase price
was $3.3 million, paid in cash at closing. The agreement (as subsequently
amended) commits KLMC to fund up to $0.6 million, depending on various factors,
for off-site roadway, sewer and electrical improvements that will also provide
service to other KLMC properties. Although certain offsite construction has
begun at the site, the commitment remains outstanding as construction of such
improvements does not yet trigger such funding. In conjunction with the property
and option purchase agreement, the Company retains certain approval rights
relating to the uses and designs of the site to ensure the uses and designs are
aligned with the Company's planned master development. If such uses result in a
dispute with the developer of the site, such dispute could delay the development
of the site. The 14.9 acre site is intended to be used for a critical access
hospital, assisted living facility, and independent living facility.
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The Company is in the planning stages for the development of a 295-acre parcel
in the region mauka of Kaanapali Coffee Farms ("KCF Mauka"). The parcel is to be
comprised of 61 agricultural lots that will be offered to individual buyers. The
Company expects to develop the parcel in phases and all phases have been
submitted to the County of Maui (the "County") for subdivision approval. The
Company is working with the County to resolve certain of the County's comments
relating to the subdivision. Upon final subdivision approval and receipt of
final plat of the first phase from the County, which requires a bond in the
amount of the cost to develop the first phase, the Company can pre-sell the
undeveloped lots in the first phase. The Company expects to market the lots in
the first phase upon receiving final approvals from the County, subject to
various contingencies, including, but not limited to, governmental and market
factors and the availability of a bond to secure the first phase of the
development. Therefore, there can be no assurance the Company will be able to
meet such timetable, that the subdivision will ultimately be approved or that
the lots will sell for prices deemed advantageous by the Company.
The Company is in the planning stages for the development of a 241-acre
residential development site in the region south of Kaanapali Coffee Farms known
as Puukolii Village. The conceptual master plan is comprised of 20 developable
parcels planned for 940 units including a mix of affordable and market priced
homes, both single and multi-family, mixed use commercial, parks, school, and
community facilities. Puukolii Village is fully entitled. In conjunction with
the potential development of Puukolii Village and in coordination with the
possible development by an unrelated third party of the 14.9 acre site to be
used for a critical access hospital, the Company entered into a contract to
install a sewer line from the Puukolii Village site to the critical care
hospital site. The developer of the critical access hospital site is obligated
to share in the sewer line cost for the portion of the sewer line fronting the
critical care hospital site.
At its June 14, 2022 meeting, the State of Hawaii Commission on Water Resource
Management ("CWRM") unanimously voted to accept Findings of Fact and the
Chairperson's recommendation to Designate the Lahaina Aquifer Sector Area as
both a Surface Water and Ground Water Management Area including the Honokohau,
Honolua, Honokahua, Kahana, Honokowai, Wahikuli, Kahoma, Kaua`ula, Launiupoko,
Olowalu, and Ukumehame Groundwater Hydrologic Units, Island of Maui, Hawaii. By
accepting the recommendation, CWRM thereby established administrative control
over the ground and surface waters in the Lahaina Aquifer Sector Area. The
intended purpose of that designation was described by the CWRM staff as serving
to "ensure protection and reasonable beneficial use of" those waters. The
Lahaina Aquifer Sector includes the Honokowai hydrologic unit from which the
Company currently derives almost all of its non-potable water. The designation
means that the Company and all users of water in the Lahaina Aquifer Sector Area
will be required to apply for water use permits pursuant to a
"yet-to-be-determined process" that will call for the water purveyors (and
potentially their end-users) to demonstrate that their existing uses meet the
"reasonable beneficial use" standards adopted by CWRM. Applications for permits
to use water for future uses likely will be considered only after existing users
have completed their applications based on existing uses. One possible result of
the designation is a potential inability to secure permits from CWRM for future
uses.
By letters dated October 28, 2022, CWRM officially designated all six Aquifer
System Areas of the Lahaina Aquifer Sector, Maui, as Ground Water Management
Areas, as of August 6, 2022. CWRM notified the Company that by August 5, 2023,
the Company would need to apply for ground and surface water use permits to
continue the Company's use of 16 certain wells that are integral to the
Company's entire operations. The permits, when applied for and granted and
subject to various conditions, would preserve the Company's existing water uses
as of August 6, 2022.
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One possible result of the designation is a potential inability to secure
permits from CWRM for future water use in a timely fashion or in amounts to
avoid disruption and delays impacting the Company's business development. In the
event permits adequate to the Company's plans are not received or not received
timely, there could be negative impacts on the west Maui real estate market as a
whole and the development and sale of the Company's lands on the Island of Maui,
thereby materially and adversely affecting the Company's operations, land sales,
land values, results, and financial position.
The Company's Pension Plan has excess assets of approximately $20 million. On
January 15, 2022, Pacific Trail Holdings LLC, the manager of the Company,
adopted a plan to freeze the benefit accruals under and close participation in
the Pension Plan and terminate the Pension Plan on June 1, 2022. Effective
February 7, 2022, the Level 1 and Level 2 plan asset investments were
reallocated to a money market fund. Benefit accruals were frozen on March 31,
2022. The Company paid $420 in benefits to participants during October 2022. The
remaining surplus Pension Plan assets are expected to be distributed in 2023
from the Pension Plan in accordance with the requirements of the Internal
Revenue Code of 1986 (as amended), which includes an excise tax of up to 50%, by
certain regulatory deadlines.
Adverse macroeconomic conditions and the COVID-19 pandemic continue to cause
economic uncertainty and market volatility. Heightened inflation, slower growth
or recession, changes to fiscal and monetary policy, higher interest rates,
currency fluctuations, challenges in the supply chain and other adverse
macroeconomic conditions, along with disruptions caused by the COVID-19
pandemic, may continue. The evolving nature of the COVID-19 pandemic, including
the severity and rate of incidence of the virus, the emergence of new variants,
and the administration and continued effectiveness of vaccines (and boosters),
public health restrictions, or a resurgence of COVID-19 or a new, significant
variant could negatively impact the Maui real estate market, which could have an
adverse effect on the Company's results of operations and financial position.
Comparison of Results of Operations
Property, net decreased at September 30, 2022 as compared to December 31, 2021
due to the sale of a lot during first quarter 2022.
The decrease in other assets at September 30, 2022 as compared to December 31,
2021 is primarily due to insurance recoveries related to the Waipio site
received in March 2022.
The decrease in other liabilities at September 30, 2022 as compared to December
31, 2021 is due to the reversal of a contingency reserve pursuant to the
settlement payment made in March 2022 related to the Waipio site.
The increase in sales and the related increase in costs of sales for the nine
months ended September 30, 2022 as compared to the nine months ended
September 30, 2021 is primarily due to sale of one lot during the first quarter
2022, as compared to no lot sales during the first quarter 2021.
The decrease in selling, general and administrative expenses for the nine months
ended September 30, 2022 as compared to the nine months ended September 30, 2021
is due to the insurance recoveries related to asbestos claims offset by the
adjustment of the loss contingency during first quarter 2021.
See also notes to the condensed consolidated financial statements for additional
discussion of items addressing comparability between the three and nine months
ended September 30, 2022 and 2021.
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Inflation
As a result of increasing signs of inflation in recent months, the Federal
Reserve approved a .25% rate increase in March 2022, a .5% rate increase in May
2022, a .75% rate increase in June 2022, a .75% rate increase in July 2022, a
.75% rate increase in September 2022, and a .75% rate increase in November 2022.
High rates of inflation may adversely affect real estate development generally
because of their impact on interest rates. High interest rates not only increase
the cost of borrowed funds to the Company, but can also have a significant
effect on the affordability of permanent mortgage financing to prospective
purchasers. However, high rates of inflation may permit the Company to increase
the prices that it charges in connection with real property sales, subject to a
slow down in sales and increase in home construction costs and to general
economic conditions affecting the real estate industry and local market factors.
Critical Accounting Estimates
The discussion and analysis of the Company's financial condition and results of
operations are based upon the Company's unaudited condensed consolidated interim
financial statements, which have been prepared in accordance with U.S. GAAP. The
preparation of these unaudited condensed consolidated interim financial
statements requires management to make estimates, assumptions, and judgments
that affect the reported amounts of assets, liabilities, revenues and expenses,
and related disclosures of contingent assets and liabilities. These estimates
are based on historical experience and on various other assumptions that
management believes are reasonable under the circumstances; additionally
management evaluates these results on an on-going basis. Management's estimates
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Different
estimates could be made under different assumptions or conditions, and in any
event, actual results may differ from the estimates. The impact of a change in
these estimates, assumptions, and judgments could materially affect the amounts
reported in the Company's consolidated financial statements.
Certain accounting policies involve significant judgements and estimates by
management, and the Company considers these accounting policies to be critical
accounting policies. There have been no material changes to the critical
accounting polices disclosed in 2021 Form 10-K, except as described in Note 1 to
the condensed consolidated financial statements.
Recently Adopted Accounting Pronouncements
For a description of recently issued accounting pronouncements, see Note 1 to
the condensed consolidated financial statements.
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