By Margie Brown, CIRI president and CEO
Alaska has been weathering the national recession better than most of the country because our state’s economy is based on a resilient mix of oil and natural gas development, U.S. military presence, tourism and income from other natural resources. Consequently, Alaska real estate markets are steady, relatively few Alaskans have lost their jobs and business confidence is generally positive.
Nevertheless, most forecasters predict that the national recession will end Alaska’s 20- year streak of continuous economic growth this year, but our economy should remain stable. This news is good for CIRI’s Alaska business interests because it means our Tikahtnu Commons project should remain on schedule and our tourism, heavy construction, energy development and real estate management businesses should be secure.
However, CIRI also has significant business and investment interests outside of Alaska that have been impacted by the recession.
Our Texas real estate sales and development projects, for example, have slowed, though not as significantly as similar projects elsewhere in the country. We are delaying plans to build three office towers at our Sonterra project in San Antonio until market trends become clearer. But our partner, InterMountain Management LLC, has started construction on the Sonterra Hyatt Place hotel at the same site.
CIRI’s sizable marketable securities portfolio has been hit hard and, like the Alaska Permanent Fund and our state’s constitutional budget reserve, millions of dollars in value were lost when Wall Street and the banking industry collapsed. Because of the severity of the decline, no entity with these types of investments escaped losses.
We are still calculating CIRI’s final 2008 profits and losses and will release those figures in our annual report in April, but we already know the company suffered a net loss in 2008 caused almost exclusively by the financial markets’ collapse.
This recession has raised serious challenges for companies throughout the United States and probably the rest of the world. We must be solemn and cautious about the possible depth and length of this recession, but we must not be paralyzed. I have no doubt that the country will resolve its financial difficulties and the stock market will eventually rebound, raising the value of CIRI’s marketable securities portfolio.
Despite these market troubles, CIRI is a very healthy company. Its operating units performed well in 2008 and the company has little long-term debt and strong cash reserves. CIRI and its subsidiaries are protecting themselves by carefully managing their 2009 operating costs to match revenue. CIRI Alaska Tourism Corp., for example, anticipates reduced visitor traffic and is adjusting staffing levels and optimizing boat schedules to reduce costs by filling tours and leaving empty boats at the dock.
Depending upon future Board decisions, CIRI’s 2008 losses should have a relatively small impact on shareholder dividend payments. In 2007 the Board of Directors adopted a policy that sets dividend payments at 3.25 percent of the total shareholders’ equity, calculated as of Dec. 31 of the prior year. This formula is designed to reduce the volatility of dividends over policies based on annual net income or income averaging.
This recession has caused sobering losses, but it may also produce opportunities for CIRI’s future growth and profitability. Experience shows that businesses can earn significant profits after a recession if they make savvy investments in emerging businesses or distressed assets while prices are down. I believe CIRI is well positioned to find and benefit from these types of investments.
1) CIRI has longstanding relationships with trusted private equity fund managers and is using these connections to place monies in several funds that are now forming. The investments acquired by these funds will be at distressed values, but their worth should increase as the economy rebounds.
2) Many companies overextended and borrowed too much money during the past few years and are now cash-strapped and forced to sell assets, often at great discounts, to stay in business. We are searching for suitable asset acquisitions that could boost CIRI’s long-term growth and performance. These assets may include prime real estate parcels.
3) The federal government’s economic stimulus package could produce opportunities, particularly in the government contracting arena around the infrastructure rebuilding efforts.
I believe that the stock market will rebound and CIRI’s marketable securities portfolio will rise with the market. In the meantime, CIRI will aggressively pursue new business opportunities and, in accordance with Board strategy, expects to use them to emerge from this recession as a stronger, more profitable company than it was before the financial markets crashed.