Results of Operation
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, changes in international, national and
Hawaiian economic conditions, 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 event, 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 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 $22 million and $17
million as of June 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.
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.
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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 June 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 six months ended June 30, 2022
was approximately $5 million and was primarily due to a lot sale in Kaanapali
Coffee Farms. Net cash flows used in investing activities for the six months
ended June 30, 2022 was approximately $0.2 million and was due to costs of
project planning and engineering, primarily relating to KCF Mauka and Puukolli
Village Mauka. Net cash provided by financing activities for the six months
ended June 30, 2022 was approximately $0.4 million and represented Kaanapali
Coffee Farms lot owners' contributions to 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.
The Company is in the planning stages for the development of a 295-acre parcel
in the region mauka of the 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.
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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 expects to enter into a
contract to install a sewer line from the Puulolii 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.
In January 2021, the Company entered into agreements with an unrelated third
party for that third party to prepare plans to develop Puukolii Village Mauka
and another subdivision on the Company's property. The plans were to include
development segments and timeline, offsite and onsite infrastructure,
construction cost analysis, proposed budgets and proforma financial statements.
After discussion and negotiation, the Company and the third party were unable to
agree on the plans and the agreements were terminated.
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 derive 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. This could negatively impact the west Maui real estate market 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,
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. After distribution of Pension Plan benefits
to participants, remaining surplus Pension Plan assets are expected to be
distributed from the Pension Plan in accordance with the requirements of the
Internal Revenue Code of 1986 (as amended) by certain regulatory deadlines.
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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 June 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 June 30, 2022 as compared to December 31, 2021
is primarily due to insurance recoveries related to the Waipio site received in
March 2022.
The increase in accounts payable and accrued expenses at June 30, 2022 as
compared to December 31, 2021 is primarily due to payables related to legal
services in connection with D/C bankruptcy and CWRM water regulations.
The decrease in other liabilities at June 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 six
months ended June 30, 2022 as compared to the six months ended June 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 six months
ended June 30, 2022 as compared to the six months ended June 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 six months
ended June 30, 2022 and 2021.
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 and a .75% rate increase in July 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.
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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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KAANAPALI LAND, LLC 
