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Edited Transcript of STRS earnings conference call or presentation 9-Aug-18 3:00pm GMT

Q2 2018 Stratus Properties Inc Earnings Call

Austin Aug 14, 2018 (Thomson StreetEvents) -- Edited Transcript of Stratus Properties Inc earnings conference call or presentation Thursday, August 9, 2018 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Erin Davis Pickens

Stratus Properties Inc. - Senior VP & CFO

* William H. Armstrong

Stratus Properties Inc. - Chairman of the Board, President & CEO

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Presentation

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Operator [1]

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Welcome to the Stratus Properties Second Quarter 2018 Earnings Conference Call. Stratus released its financial results earlier this morning, which are available on its website at stratusproperties.com. (Operator Instructions) Please note this call is being recorded and will be available for telephone replay through August 14, 2018. Anyone listening to a taped replay should note that all information presented is current as of today, August 9, 2018, and should be considered valid only as of this date.

I would now like to turn the call over to Mr. Beau Armstrong, Chairman, President and Chief Executive Officer of Stratus Properties.

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William H. Armstrong, Stratus Properties Inc. - Chairman of the Board, President & CEO [2]

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Thank you and good morning, everyone. Joining me today is our Chief Financial Officer, Erin Pickens. As a reminder, today's press release and certain comments that we will make on this call including forward-looking statements, and actual results may differ materially. I would like to refer everyone to the cautionary language included in Stratus' press release and to the risk factors described in Stratus' Form 10-K and subsequent SEC filings that could cause actual results to differ materially from those projected by us.

Today's press release and certain of our comments on this call do not constitute an offer to sell or are they a solicitation of an offer to buy any securities. In addition, we include and discuss financial measures such as adjusted EBITDA which are not recognized under U.S. GAAP. As required by SEC regulations, non-GAAP financial measures are reconciled to the most comparable GAAP measure in the supplemental schedules of Stratus' press release.

This morning we will cover today's announcement of our new HEB Grocery-anchored mixed-use Kingwood development, our recent increase and extension of our revolving credit facility, development progress updates, project-level equity capital raising, our financial results, which Erin will discuss, and then I'll finish with some brief summary comments.

Before we get into the details, though, I want to provide some context around Stratus achieving some important new milestones. We've reached a new peak in terms of developments in progress, the number of markets we serve, and financing capacity under our revolving credit facility has been increased, providing us improved flexibility. Leasing activity remains strong, giving us the confidence to invest more, and the Texas markets we serve are thriving in terms of economic growth. Reaching these milestones didn't happen overnight, and I want to thank our dedicated employees, loyal tenants, bankers and the community of representatives we work with every day. Their support and hard work over many years has led to the high level of activity we now see in our business.

Our new Kingwood, Texas, development that we announced today is a great example. It is our 6th development project with HEB as an anchor. We are excited to be entering this growing community with the commitment of HEB, the #1 privately held employer in Texas. Kingwood is the largest master planned community in the Harris County area with excellent schools and is a short distance to downtown Houston.

We purchased a 54-acre tract of land in Kingwood, Texas, on August 6 that we plan to develop as Kingwood Place. This mixed-use development project will include a 103,000-square-foot HEB store and 41,000 square feet of retail space, 6 retail pads and an 11-acre parcel planned for a 300-unit multifamily community. The total projected investment for this project is approximately $50 million. We plan to break ground and initiate construction in November 2018, and HEB is scheduled to open its store in October 2019.

Initiating new development projects like Kingwood requires the support of our lenders, and we are fortunate to have the continued involvement of Comerica Bank in several of our development projects including Kingwood, and they provided a land loan to facilitate this purchase. As noted in our July 5, 2018, press release, we increased the borrowing base under our revolver by 33% to $60 million with a new 2-year term. This positive enhancement to our revolving credit facility reflects our longstanding relationship with Comerica and our successful track record.

Now let me turn to our second quarter 2018 highlights that show a continuation of the positive development and leasing momentum from the first quarter. At our Jones Crossing development in another rapidly growing community, College Station, Texas, we remain on schedule for HEB to open its new store this September. Construction of the full retail project continues to proceed under budget, and it's on schedule for a third quarter 2018 completion. Tenants for this mixed-use development include several restaurants and service-related retailers, and leasing is now at almost 80%. 3 tenants have already taken possession of their space to begin their finish out.

The clubhouse is now finished, and we are also on track to deliver the first units of Santal Phase 2 within the next few weeks, and the project remains on budget and on schedule. We initiated this investment due to the success of Phase 1 that is now more than 95% leased. The overall submarket is very strong and we have already begun to accept reservations for Phase 2.

At Lantana Place, the anchor tenant, Moviehouse & Eatery, opened in May 2018, and we entered into a ground lease for a Marriott AC hotel with construction scheduled to commence in early 2019. Leasing for the retail space has been very active, and the tenant mix is exactly what we had hoped for, with multiple service providers including a cosmetic dermatology center, a dental office and a veteran local restaurateur. Construction of the initial phase of the project is scheduled to be completed in the third quarter.

For the St. Mary, a new multifamily development we announced earlier this year, we secured financing and broke ground as scheduled during the quarter. This 240-unit luxury garden-style apartment project is the last multifamily site in the Circle C community. Construction is on track and we benefit not only from a strong submarket, but also a limited number of new starts from competitors due to the complexities of securing new permits in the area.

With regard to West Killeen Market, our 44,000 square feet of inline space adjacent to a 90,000-square-foot HEB store, is approximately 70% leased. As noted in our press release, we plan to explore opportunities to sell this property later this year as part of our full-cycle development strategy, assuming positive leasing and market conditions.

Developed property sales totaled $6.9 million in the second quarter, including 2 Amarra Villas townhomes, 1 W Hotel Residence, and 3 Amarra Drive Phase 3 lots. Since the end of the second quarter, we've sold another Amarra Drive Phase 3 lot for $700,000. Additionally, 2 more Amarra Villas townhomes, 11 Amarra Drive Phase 3 lots and 1 Amarra Drive Phase 2 lot are under contract and scheduled to close through March 2019.

Before I turn it over to Erin, I want to touch on 2 more items. First, as we noted in our earnings release, we have recently benefited from a new funding source. Given our track record, we have raised project-level equity capital from third-party limited partners. We have accessed this new funding source for the St. Mary development and more recently for the Kingwood Place project.

Second, we recently announced a new long-term compensation program that instills an ownership culture in the company by motivating and rewarding those employees who contribute the most to the long-term success of our development projects.

Now I'll turn the call over to our Chief Financial Officer, Erin Pickens, for a review of the financial highlights.

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Erin Davis Pickens, Stratus Properties Inc. - Senior VP & CFO [3]

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Thank you, Beau. Today Stratus reported earnings for second quarter 2018 as detailed in our press release issued this morning. The net loss attributable to common stockholders was $0.9 million or $0.11 per share in the second quarter of both 2018 and 2017. Adjusted EBITDA increased 38% to $2.8 million in the second quarter of 2018, up from $2.1 million in the second quarter last year.

Now I'll walk through each of our operating segments. Real estate operations segment revenues increased to $7 million, up from $4 million in second quarter 2017. Operating income rose to $1.4 million from $0.1 million last year. These increases relate to developed property sales Beau mentioned earlier.

Leasing operations segment revenues increased to $2.6 million, up 26% from $2 million in second quarter 2017. This increase was driven by West Killeen Market and Santal Phase 1. Operating income in the second quarter of both 2018 and 2017 was $0.5 million.

Hotel segment operating revenues declined slightly to $9.6 million from $9.8 million a year ago, while operating income was unchanged at $1.6 million.

Revenue for the entertainment segment declined to $4.5 million from $5.9 million last year. Operating income decreased to $0.5 million from $1.1 million a year ago. ACL Live hosted 45 events and sold approximately 29,000 tickets in second quarter 2018, down from 60 events with approximately 51,000 tickets sold in second quarter 2017. Revenue for the entertainment segment can fluctuate as a result of factors such as the days on which holidays fall and which bands are currently touring, which can influence the number of events hosted and tickets sold.

Turning now to capital management, at the end of the second quarter, consolidated debt was $265.9 million compared with $221.5 million at the end of 2017. This increase coincides with new investments in development projects. Capital expenditures, including purchases and development expenditures included in operating cash flows, totaled $50.7 million for the first 6 months of 2018 compared with $13.1 million for the first 6 months of 2017. This increase was due to the development of Barton Creek properties, including Santal Phase 2, Lantana Place, and Jones Crossing.

As Beau mentioned, Stratus entered into a modified loan agreement with Comerica Bank on June 29, 2018, to increase and extend our existing revolving credit facility. The loan agreement provides for a 33% increase in the revolving credit facility from $45 million to $60 million, a $7.5 sublimit for letters of credit and an extension of the maturity date to June 29, 2020. Proceeds from the revolving credit facility may be used to fund Stratus' working capital needs. Importantly, with the extension of our revolving credit facility, our debt maturity schedule improves, as we now have no significant debt maturities until 2020.

Now I'll turn it back to Beau.

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William H. Armstrong, Stratus Properties Inc. - Chairman of the Board, President & CEO [4]

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Thank you, Erin. To recap, our development program is very robust, financing is in place to facilitate further investments, leasing is strong and as development properties stabilize, we will have opportunities to monetize these assets consistent with our full-cycle development strategy. Our positive momentum has continued and we look forward to the rest of the year. Austin and our other markets are booming with new residents and tourists, presenting major opportunities for Stratus. Serving these communities in multiple ways, from developing places for families and individuals to live, to providing them greater access to prominent retail goods and service providers, to conceiving places where they can socialize is what Stratus is all about. We will continue to capitalize on our strategic position to maximize value for our shareholders.

Now we will open up the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from [Fred Burtner] with [Burtner Partners].

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Unidentified Analyst, [2]

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My first question is on Santal. What are your plans for Santal 1 and 2 when you've completed the second one and it's stabilized?

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William H. Armstrong, Stratus Properties Inc. - Chairman of the Board, President & CEO [3]

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Our general plan -- first of all, Phase 1, as we noted in our filings, is basically full. It's better than 95% leased and occupied, which is about as good as it gets. So in second phase, we'll deliver the first. The clubhouse is done, of course, but the first building for occupancy will be delivered probably later this month or early next month, but we're on track for that. I think generally, I would like to perhaps keep those assets. We haven't really made a decision on that yet. But given where it is and the additional -- the significant amount of acreage we have around it -- I think it would make sense to consider refinancing those properties and keeping them for an intermediate period of time. Again, there's been no decision around that yet, but that's one thing that I do think is worthy of considering holding for a longer term.

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Unidentified Analyst, [4]

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Erin, you spoke about the entertainment segment. Is this just a fluke that there were fewer events sold this quarter?

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Erin Davis Pickens, Stratus Properties Inc. - Senior VP & CFO [5]

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I don't know if I would call it a fluke. I think that it's just the way the calendar lays out from year to year will affect the timing of certain shows, and then again, which artists are touring in a given year will affect the events that we host. So I think just a certain amount of fluctuation is just to be expected.

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William H. Armstrong, Stratus Properties Inc. - Chairman of the Board, President & CEO [6]

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Yes, as an example, [Fred], we've had just -- we're -- the 4th of July fell, I guess, on a Wednesday, and that can just impact...

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Erin Davis Pickens, Stratus Properties Inc. - Senior VP & CFO [7]

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The whole week.

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William H. Armstrong, Stratus Properties Inc. - Chairman of the Board, President & CEO [8]

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The whole week. Where Easter sometimes falls can affect things. So -- and then which bands are out on the road, just a lot of different factors. But overall, we're not concerned about the venue or the entertainment business at all. In fact, the third and fourth quarters are -- certainly, through the rest of the year is looking very strong. So I'm pretty comfortable we're going to be where we expect to be by the time the year's up.

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Unidentified Analyst, [9]

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So you're not losing market share to your competitors?

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William H. Armstrong, Stratus Properties Inc. - Chairman of the Board, President & CEO [10]

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No. In fact, I think it's just the opposite, [Fred]. In Austin, what we read about all the time and what we know from our business is that a lot of these -- some of these competing clubs and -- have just gone away. They've been replaced by other developments. For example, there's a -- our former biggest competitor was the Austin Music Hall, which was about a 3,500-seat facility that was -- we were always -- ours was far superior, but they had a little bit more capacity, and that was who we competed against a lot. That's been knocked down, and now there's a 40-story office building going up in its place. So we've seen a lot of that around town, so I think that as there's been more hotel competition, which we all understand, the music business has really gone the other way. So in many respects, we have -- the music venue has benefited from additional hotel rooms, but hotel has been subject to more competition. But overall, I think the uniqueness of the venue will continue to reflect itself in the financial performance when the year's all done.

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Unidentified Analyst, [11]

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And my last question is, are there any longer-term implications to your move into Houston, whereas before you were primarily an Austin-based developer?

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William H. Armstrong, Stratus Properties Inc. - Chairman of the Board, President & CEO [12]

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Well, as I've told you privately, we really have never felt comfortable going to Orlando or Chicago or Phoenix or other markets. We'd rather do more things in Austin, a market we understand, and we're just not experts in other markets. However, our Houston activity has been really limited to HEB-anchored projects, and we are very comfortable following them or participating with them in their program, just because we understand it so well. According to our friends at Bank of America, we watched this -- we watch the employment growth closely, and Houston ranks second behind Dallas in year-over-year growth, with something like 85,000 new jobs between April of last year and April of this year. So population growth, in my view, is perhaps the most important driver of our business. So that's -- those are very positive trends. And then as I've said before, HEB really does their homework on new sites. We feel very comfortable with their process and how they execute their business strategy. So I wouldn't think -- we're not going to go to Houston and try to become a -- develop office buildings or multifamily, but we really like to -- we like our relationship with HEB and we want to be alongside them as they continue to grow in the Houston market.

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Operator [13]

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(Operator Instructions) At this time I'm seeing no further questions, so this concludes our question-and-answer session as well as today's conference. Thank you for attending today's presentation. You may now disconnect.