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Edited Transcript of STRS earnings conference call or presentation 10-May-19 3:00pm GMT

Q1 2019 Stratus Properties Inc Earnings Call

Austin May 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Stratus Properties Inc earnings conference call or presentation Friday, May 10, 2019 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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Good day, everyone, and welcome to Stratus Properties First Quarter 2019 Earnings Conference Call. (Operator Instructions) At this time, I'd like to turn the conference call over to Mr. Armstrong.

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Unidentified Company Representative, [2]

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Welcome to the Stratus Properties' First Quarter 2019 Earnings Conference Call. Earlier this morning, Stratus released its financial results, which are available on its website at stratusproperties.com. Following management's remarks, we'll host a question-and-answer session. Please note, this call is being recorded and will be available for telephone replay through May 15, 2019. Anyone listening to the taped replay should note that all information presented is current as of today, May 10, 2019, 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 [3]

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Thank you, everyone, for joining me on this first quarter 2019 earnings conference call. Our Chief Financial Officer, Erin Pickens, is here today as well.

As a reminder, today's press release and certain comments that we will make on this call include forward-looking statements, and actual results may differ materially. I would like to refer everyone to the cautionary language included in Stratus' press release issued today and to the risk factors described in Stratus' 2018 Form 10-K and subsequent SEC filings that could cause actual results to differ materially from those projected by us.

In addition, we will discuss adjusted earnings before interest, taxes, depreciation and amortization, also referred to as EBITDA, and after-tax net asset value, which are financial measures not recognized under U.S. generally accepted accounting principles, also referred to as GAAP. As required by SEC rules and regulations, these non-GAAP financial measures are reconciled to their most comparable GAAP financial measures in the supplemental schedules of Stratus' press release issued today.

This morning, I will cover our operational highlights, including the status of current projects in our development program. Erin will discuss our first quarter 2019 financial results and updated after-tax net asset value. And I will end the call with some brief comments about our business strategy and outlook.

As a reminder, part of our strategy at Stratus Properties is to focus on our active development program that includes 3 stages: first, acquiring, securing and maintaining development entitlements; second, constructing and stabilizing these properties; and third, preparing these properties for a capital event, either a sale or a refinancing, depending on market conditions. We currently have projects in each of these stages.

Our future HEB-anchored mixed-use project in New Caney, Texas is in the first stage of our development process, which typically includes formulating our development plans and preparing preliminary budgets. Since our last call, we finalized the lease for the New Caney HEB store in March 2019 and acquired HEB's interest in the partnership at par, which was approximately $5 million. We currently do not anticipate commencing construction on New Caney prior to 2021.

Following the acquisition stage, we develop our properties and then lease to stabilization, which is approximately 90% occupancy. The first quarter of 2019 featured significant development and stabilization activity. Construction of our Kingwood Place project, an HEB-anchored mixed-use project in Kingwood, Texas, is progressing on schedule and on budget. The retail space, including the space for the HEB Grocery store, was 79% leased as of March 31, 2019. And the HEB Grocery store is currently anticipated to open this November. The first retail buildings are expected to be turned over to tenants to begin tenant finish-out in August 2019.

Construction of the first phase of Lantana Place, our mixed-use real estate project in Southwest Austin, was completed in 2018. As of March 31, 2019, we had signed leases for approximately 78% of the retail space, including Moviehouse & Eatery, and a ground lease for an AC Hotel by Marriott. Construction of the hotel is currently anticipated to begin this month.

As of March 31, 2019, we had signed leases for approximately 89% of the first phase of retail space at Jones Crossing, an HEB-anchored mixed-use development project located in College Station, Texas. Construction of Phase I was completed in the third quarter of 2018. The HEB-anchored West Killeen Market completed in 2017 was 68% leased as of March 31, 2019.

Construction of The Saint Mary multifamily project located in the Circle C community is currently ahead of schedule and on budget. The first units are expected to be delivered later this month with project completion currently expected in the fourth quarter of 2019.

In January, we completed construction of Santal Phase II, our 212-unit multifamily project located directly adjacent to the previously completed Santal Phase I multifamily project in Barton Creek. We are pleased that Phase I and Phase II are 95% leased.

We also expect to begin construction on the next 5 Amarra Villas townhomes midyear. Erin will provide an update on the sales of our Amarra Villas properties in a moment.

The third stage of our development program is the preparation of our projects for sale or refinancing. Santal Phase I, our garden-style multifamily project located in the upscale Barton Creek community, was fully leased and stabilized as of March 31, 2019. We are actively exploring options to sell or refinance the combined 448-unit Santal property.

As mentioned on our last call, during first quarter of 2019, we also completed the sale of a CVS retail pad subject to a ground lease located in the Circle C community for $3.2 million.

We continuously evaluate the development and sale potential of our properties, and we'll continue to consider opportunities to enter into transactions involving our properties, including a sale, joint venture or other arrangements.

In addition, we received $4.6 million of bond proceeds in the first quarter related to Travis County MUD reimbursements of infrastructure costs incurred in the development of Barton Creek. As a reminder, the city of Magnolia in the state of Texas also approved the creation of a MUD for our Magnolia HEB project in November 2017. This provides us with an opportunity to recoup approximately $26 million over the life of the project for future road and utility infrastructure costs to be incurred in connection with the development.

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

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Erin Davis Pickens, Stratus Properties Inc. - Senior VP & CFO [4]

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Thank you, Beau. Today Stratus reported earnings for the first quarter of 2019 as detailed in our press release issued this morning. Stratus reported net income attributable to common stockholders of $0.9 million or $0.10 per share in the first quarter of 2019 compared to a net loss attributable to common stockholders of $1.9 million or $0.23 per share in the first quarter of 2018.

In the first quarter of 2019, our revenues totaled $19.7 million, up from $17.8 million a year ago. The increase in revenues this quarter primarily reflects higher revenues from single-family residential property sales and increased revenues associated with execution of new leases for recently completed properties, partly offset by reduced hotel group business and entertainment event attendance. Adjusted EBITDA for the first quarter of 2019 totaled $0.8 million compared with $1 million in the first quarter of 2018.

Our real estate operation segment revenues increased to $3 million in the first quarter of 2019, up from $1.2 million in the first quarter of 2018. Operating income increased to $2.8 million from a loss of $0.4 million. The increase in revenues from the first quarter of 2018 reflects the sale of an Amarra Villas townhome in the first quarter of 2019. During the first quarter of 2019, we sold 2 Amarra Drive Phase III lots and 1 Amarra Villas townhome for a total of $2.8 million, compared to the sale of one Amarra Drive Phase II lot and one Amarra Drive Phase III lot for a $1.2 million during the first quarter of 2018. Operating income in the first quarter of 2019 also included $3.4 million of the bond proceeds related to Travis County MUD reimbursements that Beau mentioned earlier.

Subsequent to the end of the first quarter of 2019, Stratus closed on the sale of the last completed Amarra Villas townhome and 2 Amarra Drive Phase III lots for a total of $2.8 million, and currently 8 Amarra Drive Phase III lots are under contract. The first 7 Amarra Villas townhomes have now been sold, and we plan to begin construction of the next 5 in mid-2019.

Our leasing operations segment revenues increased to $3.9 million in the first quarter of 2019, up from $2.3 million a year ago. Similarly, operating income increased to $2.4 million in the first quarter of 2019 from $0.4 million in the first quarter of 2018. The increase in revenues primarily reflects the commencement of new leases on our recently completed properties, including Lantana Place, Jones Crossing and Santal Phase II. The increase in operating income primarily reflects the recognition of $2.1 million gain in the first quarter of 2019 on the sale of a retail pad subject to a ground lease in the Circle C community.

Our hotel segment revenues in the first quarter of 2019 were $8.4 million compared to $9.4 million a year ago, and operating income was $0.8 million compared to $1.5 million in the first quarter of 2018. These decreases primarily reflect reduced group business and lower food and beverage sales in the first quarter of 2019. Revenue per available room was $238 compared with $262 for the first quarter of 2018.

The continued increase in competition in downtown Austin may have an ongoing impact on our hotel revenues. However, we remain optimistic about the long-term outlook for the W Austin Hotel to contribute meaningfully to our business based on continued population growth and increased tourism in the Austin market.

Our entertainment segment revenues were $4.8 million in the first quarter of 2019 compared to $5.3 million for the same period last year. Operating income increased to $0.8 million, up from $0.7 million last year. Entertainment revenue primarily reflects the results of operations for ACL Live, including ticket sales, revenue from private events, sponsorships, personal seat license and suite sales and sales of concessions and merchandise. The decrease in revenue in the first quarter of 2019 primarily reflects a lower event attendance at the ACL Live venue for this year's event. ACL Live hosted 64 events and sold approximately 49,000 tickets in the first quarter of 2019 compared with 57 events and the sale of approximately 55,000 tickets in the first quarter of last year. Our 3TEN ACL Live venue hosted 50 events and sold approximately 5,000 tickets this first quarter, which was similar to last year's activity.

Turning now to capital management. At March 31, 2019, consolidated debt totaled $320.9 million and consolidated cash totaled $19 million compared to consolidated debt of $295.5 million and consolidated cash of $19 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 $32.7 million for the first quarter of 2019, primarily related to the development of The Saint Mary, Kingwood Place and Santal Phase II projects. This compares to $28 million in the first quarter of 2018, primarily for the development of Lantana Place, Jones Crossing and Barton Creek properties, which include Santal Phase II.

I am pleased to share that our after-tax net asset value increased to $326.1 million or $39.58 per share as of December 31, 2018, up from $314 million or $38.08 per share as of December 31, 2017. The increase was primarily driven by development activity at the Santal Phase II, The Saint Mary, Lantana Place, Kingwood Place, Magnolia and Jones Crossing projects. You can find the related presentation, dated March 26, 2019, on our website.

I will now turn it back to Beau for his closing remarks.

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

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Thank you, Erin. We were pleased to report that our after-tax net asset value, or NAV, increased year-over-year. We believe this measure is meaningful for our shareholders as it is an assessment of the value we are creating. On an annual basis, Stratus' lenders engaged independent appraisers to perform appraisals of our properties, which provides the basis of our NAV calculation. I am encouraged by the success of our current projects, our future pipeline, the opportunities that Austin and the surrounding markets continue to offer and the continued growth of net asset value.

As a diversified real estate company with approximately 1,800 acres of commercial, multifamily and single-family residential projects in various stages of development in Texas, Stratus creates shareholder value by significantly enhancing the value of its properties through a disciplined development program. We expect to sustain our momentum throughout this year by stabilizing our properties and preparing them for potential sale or refinancing.

We believe that Austin and other select fast-growing markets in Texas where we operate, including the greater Houston area, continue to be desirable locations to apply our strategy and maximize value for Stratus' shareholders. In addition, as Austin continues to grow, we remain in position at Stratus to thoughtfully leverage our experience, relationships and access to capital to continue delivering steady returns for our shareholders.

Now we are happy to take any questions you may have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question today comes from [Fred Burtner from Burtner Investments].

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Unidentified Analyst, [2]

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I'm curious what parts of Stratus are unappreciated and misunderstood by investors and what parts are doing less well than you would like?

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

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Fred, thank you for that. I'll start with the second part, the what parts are doing less well. I think generally, this is obviously a very good moment in the real estate business. All aspects of our business are performing very well. I would say that as it relates to our situation specifically, the transition to Marriott has been disruptive for us. We saw some weakness in the first quarter that was independent of the market. It had to do with the rollout of a new reservation system. And while I think they have it under control, it has been a bit disruptive for us. I guess the only other thing I would add is the time it takes to get things done these days continues to stretch out, whether it's leases or permitting. Leases, which used to take maybe a month, now takes 90 days. Our permitting process in Austin has always been challenging, but with the growth in Austin, it just has become even more difficult to stick to a schedule, given the workload at the city. So again, those are minor things. But those are a couple of things that are on my mind. Relative to what's underappreciated or misunderstood, you and I talked about this before. I think that our sizable land portfolio can be challenging for people to fully understand. We talked a little bit earlier about our NAV process, and we think that, that is a very good way for people to understand the value because those are the third-party appraisals that we play no role in and that is an independent assessment. But we have amazing property in a highly regulated market, much of it we've owned for almost 30 years. And it's been expensive to carry this land all that time, but we believe we have a low basis and are -- have positioned those properties for them to be sold or developed on a very favorable basis. But for the -- I think for most investors, certainly, most real estate investors, they tend to -- it's much easier to look at an income property and apply a cap rate, and that's just something you can't do with land. So I think that while our land holdings are extraordinary and, we think, extremely valuable, they don't produce cash flow like traditional real estate investments. And I think therefore, perhaps, they're a little bit underappreciated and misunderstood.

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Operator [4]

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(Operator Instructions) And ladies and gentlemen, at this time, I'm showing no additional questions. I would like to turn the conference call back over to management for any closing remarks.

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

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Thank you, Jamie. I believe we're all set. Thank you. Thanks for those who participated this morning.

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Operator [6]

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Ladies and gentlemen, that does conclude today's conference call. We do thank you for participating. You may now disconnect your lines.