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Edited Transcript of STRS earnings conference call or presentation 12-Nov-19 4:00pm GMT

Q3 2019 Stratus Properties Inc Earnings Call

Austin Dec 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Stratus Properties Inc earnings conference call or presentation Tuesday, November 12, 2019 at 4:00:00pm 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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Conference Call Participants

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* Samuel A. Kidston

North & Webster, LLC - Founder

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Presentation

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Operator [1]

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Welcome to the Stratus Properties' Third Quarter 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, this call is being recorded and will be available for telephone replay on Stratus' website through November 17, 2019. Anyone listening to the taped replay should note that all information presented is current as of today, November 12, 2019, 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 the Stratus' 2018 Form 10-K that could cause actual results to differ materially from those projected by Stratus.

In addition, management will discuss adjusted earnings before interest, taxes, depreciation and amortization, also referred to as adjusted EBITDA, which is a financial measure not recognized under U.S. generally 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 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, everyone, for joining our Third Quarter 2019 Financial and Operational Conference Call. Our Chief Financial Officer, Erin Pickens, is here with me today.

As we have previously stated, our goal as a diversified real estate company in the fast-growing Texas markets is to follow a development process that creates value for our stockholders. This process includes the following stages: first, we identify attractive properties and then negotiate an acquisition; second, we prepare development plans in securing entitlements and permits for the project; third, we construct and lease the project; and lastly, we position the project for a capital event which may include a sale or refinancing depending on market conditions.

Our pipeline is full of opportunities and our projects are progressing as planned. On today's call, although I will not cover all of our current projects, I would like to focus on 3 of them, namely Magnolia Place, the Santal and Block 21.

Afterwards, Erin will discuss our third quarter financial results.

Last quarter, I shared that we were in the process of securing construction loan to finance the first phase of Magnolia Place, a new mixed-use project in Magnolia, Texas, which is northwest of Houston.

All State of Texas Highway Department Roadway work and City of Magnolia utility work is now complete. We are fine-tuning our development budget, and continuing our pre-leasing and development financing efforts. We currently expect to begin site-clearing within the next 8 to 10 weeks.

The first phase of this project consists of retail and multifamily development. The retail component will have a shadow-anchored HEB in 41,100 square feet of retail space, 3 pads for lease and 3 pads to be held for sale. We are currently evaluating the initial phase of multifamily development as well.

The full development is currently planned for 81,000 square feet of retail, 6 pad sites, 2 hotel sites and 50 acres of residential land, allowing up to 1,200 multifamily units.

We believe that this property will create value for a number of reasons, including we have experience and are knowledgeable in Houston area market. This is our third project with HEB in the Houston area. The project is well located and designed. Large mixed-use properties remain attractive to both tenants and institutional buyers. And we expect substantially all of the infrastructure cost to be eligible for future reimbursement by the Magnolia East Municipal Utility District.

We believe Magnolia Place was bought at the right time for Stratus and that there are favorable opportunities available to us related to this property. We look forward to working to increase the value of Magnolia Place in the future.

Two of our key properties are in the fourth phase of our development cycle, which is the stage in which we position the property for a capital event, such as a sale or refinancing.

As previously announced, in the beginning of October of this year, we considered a sale of the Santal and Barton Creek, but chose to refinance the property as we believe this option will provide long-term value to Stratus and the shareholders. Erin will provide further details regarding this refinancing structure shortly.

Refinancing this high-quality asset provided us with a tax-efficient return of capital, and allows us to maintain ownership of an asset that continues to produce positive cash flow.

We believe that the Santal will continue to appreciate in value and the choice to refinance the property allows us to maintain the option to consider a future sale, should we decide the timing, market conditions and value are right.

Separately, we previously announced that we are exploring various opportunities with respect to Block 21, our mixed-use development in downtown Austin, Texas, that contains a 251-room luxury hotel, 159 residential condominium units and office, retail and entertainment space. That process is continuing. The Austin market continues to be an attractive market for Stratus to invest in. Block 21 is a trophy asset for Stratus and our shareholders, and continues to perform well.

As I mentioned earlier, while I'm not going to discuss each project specifically, our pipeline is full of high-quality development opportunities, and our projects are progressing as planned.

Leasing remained strong for many of our projects, such as the Saint Mary and Lantana Place. And tenancy began to finish out at Kingwood Place. HEB plans to open tomorrow, November 13, in Kingwood.

Specifically, at our Jones Crossing development in College Station, Chick-fil-A signed a ground lease for one of the pad sites. Its grand opening was held on September 19 of this year, and we believe that this restaurant chain will bring significant traffic to the site and attract additional leasing activity. We are also currently evaluating the initial phase of multifamily development at Jones Crossing.

There are many activities currently underway for the company. For additional details regarding leasing and other information, please review our third quarter Form 10-Q.

I will now turn the call over to over Chief Financial Officer, Erin Pickens, for a review of the third quarter financial highlights. Erin?

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

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Thank you, Beau. We reported our financial results for the third quarter of 2019 in our press release issued this morning. In the third quarter of this year, compared to last year's quarter, Stratus reported revenues totaling $22.3 million, up from $17.9 million last year. The increase in our revenues is primarily due to the commencement of leases at our recently completed properties and an increase in the number of events and higher event attendance at ACL Live. And net loss attributable to common stockholders of $3 million versus $2.4 million last year, which is primarily the result of higher interest expense related to higher average debt. And adjusted EBITDA totaling $2.9 million in the third quarter of 2019, up from $1.4 million last year.

Stratus reports financial results for 4 operating segments, including our real estate operations, leasing operations, hotel and entertainment segment. In the third quarter, all 4 operating segments earned increased revenues and operating income on a year-over-year basis.

Our real estate operations segment revenues and operating income increased this quarter compared with the same quarter last year to $2.6 million and $0.2 million, respectively, primarily due to higher sales of developed properties.

In the recent quarter, we sold 4 Amarra Drive Phase 3 lots for a total of $2.6 million, compared with sales of 1 Amarra Drive Phase 2 lot and 2 Amarra Drive Phase 3 lots for a total of $2 million in the third quarter of last year.

Since quarter end, we have closed on the sale of one Amarra Drive Phase 2 lot and 2 Amarra Drive Phase 3 lots for a total of $2.2 million; and as of November 8, 8 Amarra Drive Phase 3 lots were under contract.

Our leasing operations segment revenues and operating income increased this quarter compared with the quarter last year to $5.2 million and $1.3 million, respectively, which primarily reflect the revenues from newly executed leases in connection with increases in occupancy for the Santal and the Saint Mary multifamily properties as well as Lantana Place and Jones Crossing.

Our hotel segment revenues and operating income increased to $8.8 million and $0.9 million, respectively, in the third quarter of this year compared to the third quarter of last year, primarily due to higher food and beverage sales and increased weekday group and transient business.

Revenue per available room was $222 this recent quarter compared to $214 in the third quarter of last year.

We expect a continued increase in hotel competition in the surrounding downtown Austin area during the remainder of 2019 and throughout 2020, which could have an impact on Stratus' hotel revenues.

However, we are optimistic about the long-term outlook of the W Austin Hotel based on increased office space growth in downtown Austin, continued population growth and increased tourism.

Lastly, our entertainment segment revenues and operating income increased to $6.2 million and $1.1 million, respectively, in the recent quarter compared to the same quarter last year, primarily due to an increase in the number of events hosted and higher event attendance at ACL Live.

ACL Live hosted 59 events and sold approximately 61,000 tickets in the third quarter of 2019 compared to 49 events and approximately 48,000 tickets in the quarter last year.

3TEN ACL Live hosted 46 events and sold approximately 6,000 tickets in the third quarter of 2019, compared with 55 events and approximately 5,000 tickets in the third quarter of last year.

Our most popular events, some of which were sold out, included performances by Chicago, Mark Knopfler, Lyle Lovett, Bryan Ferry and Vampire Weekend.

Please review the earnings release that was issued this morning for additional information relating to segment financials in the third quarter of 2019 compared to the third quarter of 2018.

Moving forward to our capital management. Consolidated debt totaled $367.4 million, and consolidated cash totaled $32.5 million at September 30, 2019. This represents increases from $295.5 million and $19 million, respectively, at December 31, 2018.

As a part of the refinancing of the Santal property, we entered into a $75 million loan on September 30 with ACRC Lender LLC, and we used approximately $57.9 million of the proceeds to repay the Santal construction loans.

Remaining proceeds after paying transaction costs were approximately $16 million, inclusive of reserves presented in restricted cash. We used $13 million of these proceeds to reduce the balance on our Comerica credit facility in October.

Purchases and development of real estate properties included in operating cash flows and capital expenditures included in investing cash flows totaled $60 million for the first 9 months of 2019, primarily related to the development of Kingwood Place, the Saint Mary and Barton Creek properties, compared with $82.4 million for the first 9 months of 2018, primarily related to the purchase of the Kingwood Place land and the development of the Santal, Lantana Place, Jones Crossing and the Saint Mary.

Thank you for listening. I will turn the call back to Beau for his closing remarks.

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

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Thank you, Erin. The execution of our development process in select fast-growing Texas markets, including Austin and Houston, continues to provide value to us and our shareholders.

Our multi-use properties continue to be strong assets for Stratus, and we are proud to work with native Texas companies such as HEB.

As we've discussed in our previous calls, and as we continue to witness, the Austin and Houston markets offer strong job opportunities, which allows for continued population growth. There may be additional competition regarding our hotel and entertainment segments, but we welcome the increased activity.

We continue to see value in investing in these areas as we follow our full development process and focus on generating strong returns for both the company and its shareholders.

Thank you for listening. Erin and I are happy to answer any questions you may have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Sam Kidston with North & Webster.

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Samuel A. Kidston, North & Webster, LLC - Founder [2]

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Just a couple of quick questions. One is, could you just comment a little bit further on the process around Block 21? And maybe when you think of that process, you might have something to announce one way or another?

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

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As you can appreciate, that process is ongoing, and I'm reluctant to get into any details. But I'll tell you that, what I can say is that we've had very strong interest, but it is, again, preliminary to discuss specifics, but my -- the process will be -- we'll conclude this process that Stratus has been running. I will kind of lay out the opportunities for the Board, and they'll direct me on a path forward. But I think -- again, I don't want to get into too much detail, but I would think it's -- probably in the next 30 days, we'll at least be able to bring something to closure for our Board to consider.

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Samuel A. Kidston, North & Webster, LLC - Founder [4]

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Great. Great. And then just anything you could talk about on the activity around the deferred gain burning that down?

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William H. Armstrong, Stratus Properties Inc. - Chairman of the Board, President & CEO [5]

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I'll let Erin answer that, if that's okay. Sam?

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Erin Davis Pickens, Stratus Properties Inc. - Senior VP & CFO [6]

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Sam, the deferred gain is -- there hasn't really been much movement in that in some time and that's because there is -- it's related to additional buildings that could be built, couple of build to suits and one building on a pad site.

So it's probably be until -- unless and until we build those properties that we would recognize anymore gain.

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Samuel A. Kidston, North & Webster, LLC - Founder [7]

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Right. And any comment on the marketing on those -- marketing process on those?

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

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We're very active. Nothing really to, I guess, disclose at this point. But those are very active projects, and we're constantly assessing opportunities out there. So it's nothing that we feel that there's any trouble there at all. Just kind of finding the right match or the tenant of the property. And the rest of the center -- I'll just add, the rest of the center is performing very well. So just I think it's kind of a matter of time before we can get in a way of the deal there.

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Operator [9]

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The next question is from [Fred Burtner], a private investor.

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Unidentified Participant, [10]

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Beau, I have 2 questions. The hotel, I was personally surprised on its growth in the quarter. And the press release spoke about what caused the upturn. Is the upturn expected to continue in the near term?

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William H. Armstrong, Stratus Properties Inc. - Chairman of the Board, President & CEO [11]

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Well, Fred, that's always difficult to predict the future, but I would tell you that there's been a lot of new supply in Austin. I know that, that has had people worried. But we continue to also expand our visitor base. So it's all good. So I think that those out there that thought that we were approaching an overbuilt situation, I don't think that, that's materialized. And I can tell you that there still is considerable demand from hotel investors to either by existing or to consider development opportunities.

So I am optimistic that we will continue on this favorable trend. I think we've had -- I can tell you that, with respect to our property, we did have a little bit of -- there was a transition from Starwood to Marriott and in the accounting system and the reservation system issues and that I don't have the particular details about. It's not that there were some issues there that did impact our first half of the year results, but I feel as though those have been addressed and we're back where we want to be.

So perhaps a long answer to your question, but I do think that Austin, in general, is performing very well. I think our hotel is extraordinary and it's complement of different uses. So I feel that we're in a good -- in good shape to continue to compete well in the Austin market.

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Unidentified Participant, [12]

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And my other question is, what are your thoughts on cash distributions to common shareholders?

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William H. Armstrong, Stratus Properties Inc. - Chairman of the Board, President & CEO [13]

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Well, that ultimately is a Board decision, Fred. And I don't think, right now, we're in a position to do that right this minute. But we've done one in the past when we've had a big capital event. So I think that to the extent that we have the resources to do that, I think the Board has demonstrated a willingness in the past to do that. But first thing's first, we'd like to at least have a capital event that would enable us to do that.

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Operator [14]

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This concludes our question-and-answer session. And the conference has also now concluded. Thank you for attending today's presentation. You may now disconnect.