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Edited Transcript of STRS earnings conference call or presentation 16-Mar-20 3:00pm GMT

·15 mins read

Q4 2019 Stratus Properties Inc Earnings Call Austin Apr 6, 2020 (Thomson StreetEvents) -- Edited Transcript of Stratus Properties Inc earnings conference call or presentation Monday, March 16, 2020 at 3:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Erin Davis Pickens Stratus Properties Inc. - Senior VP & CFO * William H. Armstrong Stratus Properties Inc. - Chairman of the Board, President & CEO ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good day, and welcome to the Stratus Properties Year-End 2019 Financial and Operational Conference Call. Earlier this morning, Stratus released its financial results, which are available on its website at stratusproperties.com. Following management's remarks, we will host a question-and-answer session. Please note that this call is being recorded and will be available for telephone replay on Stratus' website through March 21, 2020. Anyone listening to the taped replay should note that all information presented is current as of today, March 16, 2020, and should be considered valid only as of this date. As a reminder, today's press release and certain comments that will be made on this call include forward-looking statements, and actual results may differ materially. Please review and refer to the cautionary language included in Stratus' press release issued today and the risk factors described in Stratus' 2019 on Form 10-K that could cause actual results to differ materially from those projected by Stratus. In addition, management will discuss earnings before interest, taxes, depreciation and amortization, also referred to as EBITDA, which is a financial measure not recognized under U.S. general accepted accounting principles, also referred to as GAAP. As required by SEC rules and regulations, this non-GAAP financial measure is reconciled to its most comparable GAAP financial measure in a supplemental schedule of Stratus' press release issued today. I would now like to turn the conference over to Mr. Beau Armstrong, Chairman, President and Chief Executive Officer of Stratus Properties. -------------------------------------------------------------------------------- William H. Armstrong, Stratus Properties Inc. - Chairman of the Board, President & CEO [2] -------------------------------------------------------------------------------- Thank you for joining our year-end 2019 financial and operational conference call. Our Chief Financial Officer, Erin Pickens, is here with me today. Before I begin, I would like to say a quick word about what's top of mind for all of us. As I'm sure you can imagine, COVID-19 is having a significant impact on the hotel and entertainment industries worldwide. Due to the cancellation of South by Southwest here in Austin and the current restriction on gatherings, we recently received a significant number of hotel room cancellations. The situation is evolving rapidly, and we cannot yet estimate the financial impact on the company. We are closely monitoring the situation, working closely with the city and local health organizations and taking recommended preventative measures to keep our customers and employees safe. As a diversified real estate company, our long-term strategy is to acquire, develop and monetize properties in certain fast-growing Texas markets with the ultimate goal of creating value for our stockholders. Last quarter, we said that we were looking to sell or refinance our Block 21 property. And in December, we announced an agreement to sell Block 21 to Ryman Hospitality Properties for $275 million, representing an attractive return on our investment. We expect this transaction to close in the second quarter of 2020, subject to the satisfaction of customary closing conditions. Our history with Block 21 serves as an example of how our 4-step development process drives the growth and success of attractive properties. First, we identified and entered into a contract to acquire the land almost 12 years ago. Second, we designed the project, secured the necessary entitlements and permits, secured an operator for the hotel and developed a strategy for the music venue. Third, we constructed and subsequently opened the hotel and venue space on schedule and consistent with our plans, leased the office and retail space and sold all but one of the residences. Finally, we operated the project, producing strong cash flow for 10 years and positioned the property for either a sale or refinancing, ultimately refinancing the property in 2016, and we recouped most of our investment at that time. And then as an extra step to add value for our stockholders, we announced end of last year a definitive agreement to sell the property. The property and its components, including the 251-room W Austin Hotel, 159 luxury residences, Austin City Limits Live at the Moody Theater, the 3TEN ACL Live entertainment venue in business, Class A office space and retail space, created immense value for Stratus. The project yielded a 13.1% return over approximately 12 years compared to the Dow Jones Industrial Average 6.9% return and the S&P 500 Index 7.3% return over the same time frame through January 31, 2020. We believe closing the sale of Block 21 will place us in the strongest financial position we have held during our 28-year history. In their most recent conference call in February, Ryman stated that it considers Block 21 a coveted property and considers its acquisition critical to Ryman's long-term entertainment strategy. Ryman also indicated they will be combining 2 of the most renowned music markets in the United States, Austin and Nashville, and are working on a range of opportunities, including improving the W Hotel's utilization rate and maximizing the property's commercial and retail space as well as cross-promoting concerts, content and artists. In addition to announcing the agreement to sell Block 21, we were pleased to complete the refinancing of the fully leased Santal, generating $16 million of cash proceeds including reserves and reducing our remaining cash investment in the property to $3 million. We also sold Barton Creek Village for $7.7 million and the remaining completed Phase I Amarra Villas townhomes. Our other projects have also been progressing nicely across our development cycle. In October, the city of Austin and Travis County approved initial subdivision permit applications for Barton Creek's primarily residential Sections KLO, which is expected to approximately double the density of the development. We expect 2 of our next important initiatives at Stratus to involve Barton Creek, subject to financing and market conditions. First, we plan to complete the permitting process for KLO. And second, we are evaluating additional density in initial planning phases for Section N. Sections KLO and N are the last 2 remaining undeveloped land tracks we have in Barton Creek. Our 4 active retail projects, West Killeen, Jones Crossing, Lantana Place and Kingwood Place, are currently 84% leased in aggregate as of December 31, 2019, and are generating cash flow in excess of debt service. All tenants are open for business at West Killeen Market in Killeen, Texas. And we have seen increased interest in leasing the remaining vacant retail space and pad sites. At our Jones Crossing development in College Station, Texas, 19 leases have been signed for approximately 95% of the completed retail space as of December 31, 2019, including H-E-B. And 15 of those tenants are open for business. We have 1 ground lease with Chick-fil-A, which since opening last September, has attracted significant traffic to the site and generated new interest in remaining pad sites. We continue to evaluate options for the multifamily component of this project. At Lantana Place in Austin, as of December 31, 2019, we had signed leases for approximately 80% of the retail space, including the anchored tenant, Moviehouse & Eatery, and a ground lease for an AC Hotel by Marriott. Carve American Grille had its grand opening in December. Both tenants are open for business and construction of the AC Hotel by Marriott is underway. The H-E-B at Kingwood Place had a successful grand opening in November 2019. At December 31, 2019, we had 2 additional tenants open for business. And in January, we commenced construction on a third retail building which includes Starbucks and Pacific Dental. As of December 31, 2019, we have signed leases for approximately 80% of the in-line shop space, including H-E-B, and we have 2 signed ground leases with Chase Bank and H-E-B's digital delivery program. We are currently evaluating plans to develop the multifamily component. We completed construction of the 240-unit Saint Mary in December of last year. As of December 31, 2019, 60% of the units were leased. And this has since increased to 65%. We expect to explore opportunities to sell the same area upon stabilization, subject to market conditions. We began site-clearing work for the first phase of our next H-E-B shadow-anchored project, Magnolia Place, located in Magnolia, Texas, which will consist of approximately 33,000 square feet of retail space, 4 pads for lease and 3 pads to be held for sale. Plans for future phases include 2 limited service hotels, 96 single-family lots, 588 multifamily units and 100,000 square feet of additional commercial space. We have broad latitude on use under the existing entitlements, which will allow us to react to changing market conditions. We are currently evaluating various options for the multifamily component of this property. I will now turn the call over to our Chief Financial Officer, Erin Pickens, for a review of the financial details. Erin? -------------------------------------------------------------------------------- Erin Davis Pickens, Stratus Properties Inc. - Senior VP & CFO [3] -------------------------------------------------------------------------------- Thank you, Beau. Earlier this morning, we issued a press release announcing our operational and financial results for year-end 2019. Our results for Block 21 are reported as discontinued operations due to the pending sale. For the full year, our financial results from continuing operations include revenues totaling $30 million in 2019, up from $25 million the prior year. An increase in leasing operations revenues was partially offset by a reduction in real estate revenues; a net loss attributable to common stockholders of $2.5 million or $0.30 per share for 2019 compared to a net loss of $4 million or $0.49 per share in 2018; and EBITDA of $6.8 million for 2019 compared to a loss of $3 million for 2018, both amounts are adjusted to exclude the results from the Block 21 discontinued operations. The impact of accounting for the pending Block 21 sale as a discontinued operation reduced EBITDA by $14.4 million in 2019 and $15.2 million in 2018. Historically, we have reported 4 operating segments: Real Estate Operations, Leasing Operations, hotel and entertainment. Moving forward, due to the pending sale of Block 21, our continuing operations include our real estate and leasing segments while our discontinued operations include hotel, entertainment and a portion of leasing. Revenue in our Real Estate Operations segment in 2019 totaled $13.8 million, down from $16.8 million last year. The decrease primarily reflects lower revenues from the sale of higher-priced residential units, including Amarra Villas townhomes and a W Austin Hotel & Residences condominium sold in 2018. Operating income in the segment totaled $4.1 million in 2019, which was an increase from $1.1 million in 2018. The increase primarily reflects $3.4 million of income related to Travis County MUD reimbursement of infrastructure costs incurred for the development of Barton Creek. We sold 2 Amarra Drive Phase II lots, 14 Amarra Drive Phase III lots and 2 Amarra Villas townhomes for a total of $13.5 million during 2019. Revenue in our Leasing Operations segment totaled $16.2 million in 2019, up from $8.2 million last year. The increase primarily reflects the commencement of leases at our recently completed properties. Operating income in this segment in 2019 increased to $8.3 million from $1.9 million last year, which primarily reflects the 2019 recognition of $5.7 million of pretax gains on sales of Barton Creek Village and a retail pad subject to a ground lease located in the Circle C community. The decrease in income from discontinued operations in 2019 compared with 2018 was primarily a result of lower hotel revenues. Hotel revenues totaled $35.2 million in 2019 compared to $37.9 million in 2018. The decrease was primarily a result of reduced group business and transient weekend business and lower food and beverage sales. Revenue per available room was $235 in 2019 compared to $245 in 2018. Entertainment revenues totaled $24.6 million in 2019 compared to $22.5 million in 2018. The increase was due to the increase in the number of events hosted and higher event attendance at ACL Live. ACL Live hosted 264 events and sold approximately 260,000 tickets in 2019, up from 240 events and the sale of approximately 214,000 tickets in 2018. Moving forward to our capital management. At December 31, 2019, excluding debt and cash included in the Block 21 discontinued operations, consolidated debt increased by $72.3 to $224.6 million and consolidated cash totaled $8.8 million compared with consolidated debt of $152.3 million and consolidated cash of $7.9 million at December 31, 2018. Purchases and development of real estate properties, included in operating cash flows, and capital expenditures, included in investing cash flows, totaled $73.8 million for 2019, primarily related to the development of The Saint Mary, Kingwood Place, The Santal and other Barton Creek properties. This compares to $105.6 million for 2018, primarily related to the purchase of the Kingwood Place land and development of The Santal, Lantana Place, Jones Crossing and The Saint Mary. We expect the sale of Block 21 to generate net proceeds before taxes of approximately $120 million and after-tax proceeds of approximately $100 million. After using some of the net proceeds to fully pay the balance of our $60 million Comerica Bank credit facility, we expect to have approximately $60 million of cash and the full $60 million of availability under the revolver, which matures in June of this year. Thank you. I will now turn the call back to Beau for his closing remarks. -------------------------------------------------------------------------------- William H. Armstrong, Stratus Properties Inc. - Chairman of the Board, President & CEO [4] -------------------------------------------------------------------------------- Thank you, Erin. We believe that 2019 was a good year for Stratus. As I've mentioned, we refinanced The Santal and signed a definitive agreement to sell Block 21. These 2 transactions are a testament to the success of our development cycle, the talented team at Stratus and our devotion to returning value to our shareholders with stability and reliability our key to our strategy. I'm excited for all the opportunities that lie ahead for Stratus, including several new Austin area opportunities with H-E-B as an anchor as well as further add-on development opportunities at all of our projects. Finally, the COVID-19 outbreak is a rapidly evolving and challenging situation that makes forecasting the future very difficult, especially in the short term. We have been through difficult times before and are focused on working with our customers, employees, suppliers and communities to address the challenges before us today successfully. At this time, I will ask the operator to open the line for questions. Thank you for participating. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) And our first question will come from [Fred Burtner of Burtner Investments]. -------------------------------------------------------------------------------- Unidentified Analyst, [2] -------------------------------------------------------------------------------- I have just a couple of questions. Once the deal with Ryman closes, should we expect over time the growth rate of your net asset value for the corporation to start accelerating as you do an accelerated number of new projects? -------------------------------------------------------------------------------- William H. Armstrong, Stratus Properties Inc. - Chairman of the Board, President & CEO [3] -------------------------------------------------------------------------------- Well, that's a good question, Fred. I hope you're healthy and taking care of yourself. I would expect our NAV to continue to grow. I wouldn't expect any acceleration out of the norm. And as you know, we continue to work on plans for our remaining assets at Barton Creek, which will require a significant amount of capital. We have our ongoing developments with H-E-B. All of those are funded at the moment. But I wouldn't expect anything out of the ordinary other than just normal course of business growth within our portfolio. I hope I answered that correctly. -------------------------------------------------------------------------------- Unidentified Analyst, [4] -------------------------------------------------------------------------------- Yes. Well, that's a good answer. And then a question related to your stock itself. If Howard Hughes Corporation, when they put themselves up for sale within the last year, could not get a buyer at an acceptable price and they're a larger company, why will your stock ever go up? I don't mean that negatively. I'm just trying to learn. -------------------------------------------------------------------------------- William H. Armstrong, Stratus Properties Inc. - Chairman of the Board, President & CEO [5] -------------------------------------------------------------------------------- Well, I think you raise a good point. I think if you look at the universe of public development companies, it has traditionally been a challenging space. I'm not as conversant with the particulars of Howard Hughes. I think they have great assets in particular markets. I think it's a well-run company, but I'm not immersed in the details of the company. But I do think that Stratus is a little different in that we're much smaller. We have -- I think there's visibility into all of our properties. So I think because of that, that perhaps gives us -- perhaps makes us a little different. But it is, as you point out, it is a -- public development companies have historically been a challenge. Our goal around here is to turn these assets into cash on a prudent basis, but do that quickly and then determine the best way to return that to the shareholders. -------------------------------------------------------------------------------- Operator [6] -------------------------------------------------------------------------------- This concludes our question-and-answer as well as our conference call for today. Thank you for attending today's presentation. You may now disconnect.