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Edited Transcript of STRS earnings conference call or presentation 9-Nov-18 4:00pm GMT

Q3 2018 Stratus Properties Inc Earnings Call

Austin Dec 19, 2018 (Thomson StreetEvents) -- Edited Transcript of Stratus Properties Inc earnings conference call or presentation Friday, November 9, 2018 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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* John Nouri

North & Webster - Analyst

* Fred Burtner

Burtner Investments - Analyst

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Presentation

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Operator [1]

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Welcome to the Stratus Properties' Third Quarter 2018 Earnings Conference Call. Stratus released its financial results earlier this morning, 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 through November 14, 2018. Anyone listening to a taped replay should note that all information presented is current as of today, November 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 in 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' 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 nor are they a solicitation of an offer to buy any securities.

In addition, we will 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 their most comparable GAAP measure in the supplemental schedules of Stratus' press release issued today. This morning we will cover today's announcement of the land purchase for our planned HEB-anchored project in New Caney, Texas just north of the Houston Metropolitan area, development progress updates, our recent successes with project-level equity financing structures; our third quarter and 9-month 2018 financial results, which Erin will discuss, and I will end the call with some brief final comments on our progress and strategy as we look to close out the year.

I'm happy to share that in a 50-50 partnership with Texas grocery chain, HEB, we purchased a 38-acre tract of land for approximately $9.5 million in October for a new mixed-use project in New Caney, Texas, a community in Montgomery County within the Woodlands area just north of the Houston Metropolitan area. This will be our seventh HEB-anchored project. The property is located at the intersection of 2 major roadway arterials and is within an opportunity zone established by the Tax Cuts and Jobs Act in 2017, which may provide some favorable tax treatment.

Montgomery is ranked among the top 10 counties in the entire nation when ranked by percentage population growth. This places New Caney right in our sweet spot of fast-growing markets in Texas being targeted for development projects. Subject to completion of development plans, we currently expect the New Caney development to be anchored by an HEB grocery store and will include approximately 145,000 square feet of retail space inclusive of HEB, 5 pad sites and a 10-acre multifamily parcel.

Upon completion of certain predevelopment work, we intend to enter into a lease with HEB and acquire HEB's interest in the property for the amount it invested. We are reviewing our plans for timing regarding when to initiate construction, which we currently expect to be in approximately 3 years.

Now let me turn to our development highlights from the third quarter 2018, which show a continuation of the positive developments from the second quarter. As you may recall, we announced the land purchase for our HEB-anchored Kingwood Place in the second quarter, site clearing is now complete and we have secured a construction loan commitment of $33 million from Comerica Bank and expect to begin construction later this month. We are already seeing healthy interest in our preleasing efforts. The HEB grocery store is anticipated to open in the third quarter of 2019.

Construction of Phase 1 of Lantana Place was completed as planned. The movie house and eatery that anchors the mixed-use development in Southwest Austin opened in May of 2018 and the project will be home to a Marriott A/C hotel. We have already signed leases for approximately 63% of the retail space and tenant improvement work is progressing well. We completed construction of our mixed-used development in College Station, Jones Crossing, the HEB opened in September 2018 as scheduled and leasing for the retail component has reached over 80%. We have initiated preliminary planning work on the phased 600-unit multifamily component.

West Killeen Market, our 44,000 square foot HEB-anchored project in Killeen Texas, is currently 68% leased. All tenants are now open for business and we have numerous prospects for the remaining space. We intend to explore opportunities to sell this property next year depending on leasing progress and market conditions. Santal Phase 2 is our 212 unit garden style multifamily project located adjacent to Santal Phase 1 in the upscale highly populated Barton Creek community. This project remains on schedule and on budget. The first Phase II units became available for occupancy in August of this year and the project is currently 20% leased. We plan to complete construction by the end of 2018. The 236 unit Santal Phase 1 is currently 97% leased and fully stabilized.

Subject to market conditions and leasing progress, we plan to evaluate refinancing the combined 448 unit Santal property upon stabilization of Phase 2, which is currently expected by the end of 2019.

Construction for the 240 unit St. Mary is progressing and remains on budget. This will be our final apartment project in the desirable Circle C community. The first units are expected to be available for occupancy in the third quarter of 2019 with the project completion expected by the end of 2019. We closed the sale of one Amarra Villas townhome on November 1 and 2 more townhomes are currently under contract and scheduled to close before year-end. One of these is under construction and will be completed prior to the sale. This leaves 1 of our initial 7 Amarra Villas townhomes available for sale. We are preparing for construction of the next round of Amarra Villas.

In addition, we sold 1 Amarra Drive Phase 2 lot and 2 Amarra Drive Phase 3 lots, totaling $2 million in the third quarter, subsequent to the end of the third quarter 2018, we closed on the sale of 1 Amarra Drive Phase 2 lot and 1 Amarra Drive Phase 3 lot for a total of $1.5 million.

As you can see, our pipeline of active development project is progressing as planned. Before I turn it over to Erin to discuss our financial results, I'd like to discuss one more item. Our diverse portfolio of 1,800 acres of commercial multifamily and single family projects and management's extensive track record in successful Austin area real estate development support our ability to obtain attractive financing.

As we noted in our second quarter earnings call, we recently benefited from a new source of financing, $18 million of project-level equity capital from third-party investors for 2 of our development projects, Kingwood Place and The St. Mary. Project-level equity capital from highly qualified investors has enabled us to reduce risk and pursue new opportunities for Stratus. We believe this has allowed us to leverage our skill set and diversify our portfolio while protecting our balance sheet. I believe that this type of capital structure will be good for our partners and facilitate enhanced returns for Stratus and its shareholders.

Now I'll 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 [3]

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Thank you, Beau. Today, Stratus reported earnings for the Third Quarter 2018 as detailed in our press release issued this morning. The net loss attributable to common stockholders was $2.4 million or $0.29 per share in the third quarter of 2018 compared to net income attributable to common stockholders of $14.3 million or $1.75 per share in the third quarter of 2017. The income in 2017 included $24.3 million associated with the recognition of a portion of the deferred gain on the sale The Oaks at Lakeway, which closed in the first quarter of 2017. Adjusted EBITDA totaled $1.4 million in the third quarters of both 2018 and 2017.

Now I'll walk through the financial results of each of our operating segments. Real estate operations segment revenues decreased to $2.1 million from $3 million in the third quarter of 2017. Operating loss was $240,000 compared to operating income of $780,000 last year. This decrease relates to fewer developed property sales compared to the year ago quarter. Revenues for the first 9 months of 2018 increased by approximately $1 million, primarily as a result of the sales of higher priced residential units, including Amarra Villas townhomes and one W Austin Hotel & Residences condominium. Leasing operations segment revenues increased to $3 million, up from $2.1 million in the third quarter of 2017. This is due to the leasing activity at our recently completed retail properties Lantana Place, Jones Crossing and West Killeen Market. Operating income decreased to $900,000 compared to $25 million in the third quarter of 2017, which included the gain on the sale of The Oaks at Lakeway I mentioned earlier.

Revenue for the first 9 months of 2018 increased by approximately $1.2 million also primarily as a result of leasing activity at our recently completed properties. Hotel segment revenues increased to $8.2 million on the third quarter, up from $7.8 million a year ago. Operating income rose to $700,000, up from $200,000 in the third quarter of 2017. These increases reflect higher room revenues resulting from higher occupancy during the quarter.

RevPar or revenue per available room, increased to $214 in the third quarter of 2018 from $199 for the third quarter of last year. Hotel revenues decreased by approximately $800,000 during the first 9 months of 2018 compared with the first 9 months of 2017, primarily as a result of a lower number of reservations from large groups and lower food and beverage sales.

We remain positive on the long-term outlook of the W Austin Hotel due to population growth and increased tourism, although we expect to continue to increase in competition resulting from anticipated opening of new hotels in downtown Austin during the remainder of 2018 and 2019. Revenue for the entertainment segment increased slightly to $4.9 million in the third quarter from $4.7 million last year. This is due to higher ticket prices at ACL Live and an increase in revenue from sponsorships and sales of suites and personal seat licenses. Operating income decreased to $300,000 compared to $500,000 dollars a year ago. ACL Live hosted 49 events and sold approximately 48,000 tickets this past quarter compared to 43 events and the sale of approximately 56,000 tickets last year. In addition, 3TEN ACL Live hosted 55 events in the third quarter of 2018 compared with 47 events in third quarter of last year. The approximate $1.9 million decrease in entertainment revenue for the first 9 months of 2018 compared with the first 9 months of 2017, primarily reflect fewer events hosted and lower event attendance.

Turning now to capital management. On September 30, 2018, consolidated debt was $293.7 million and consolidated cash totaled $21.2 million compared with $221.5 million of consolidated debt and $14.6 million of consolidated cash on December 31, 2017. We believe that we will have sufficient sources of debt financing and cash from operations to meet our cash requirements. Purchases and development of real estate properties included in operating cash flows and capital expenditures included in investing cash flows, totaled $82.4 million for the first 9 months of 2018, primarily related to the purchase of the Kingwood Place land and development of the Santal Phase 2, Lantana Place, Jones Crossing and The St. Mary project. This compares with $25.6 million for the first 9 months of 2017, primarily related to the development of Barton Creek properties, Lantana Place, West Killeen Market and Jones Crossing. 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. I'll end the call by giving everyone a quick summary. We continue to carefully pursue new high-quality opportunities for Stratus as shown by our announcements of Kingwood Place and the land purchase for the New Caney in the last two quarter. Our development projects are being executed as planned and we intend to sell or refinance the properties when leasing and market conditions are good. And finally, we are finding better ways to leverage our expertise to minimize risk and increase shareholder value as evidenced by our recently completed project-level equity financing structures.

As you already know, our full-cycle process consists of securing and maintaining development entitlements, building mixed-use properties, stabilizing them in terms of occupancy, and finally, refinancing or selling the properties at appropriate times to maximize value for shareholders. We pursue our strategy strategically and thoughtfully and we follow a strong and stable process that we have refined over the last 30 years. We are always screening the market for new opportunities and believe that our full-cycle development process can be effectively replicated in high-growth Texas markets outside of Austin. Our strong track record in Austin is evidence that our process works, and we look forward to maximizing the value of our newest projects in other fast growing Texas markets.

We have many opportunities on the horizon for Stratus and our shareholders, and I look forward to closing a great year with all of you. 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) The first question comes from John Nouri with North & Webster.

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John Nouri, North & Webster - Analyst [2]

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For the Magnolia comments in HEB in Houston, what do guys approximate the square footage price?

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

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Excuse me, for the Magnolia project in Houston what do we estimate the square footage price for the land?

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John Nouri, North & Webster - Analyst [4]

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For leasing.

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

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For leasing?

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John Nouri, North & Webster - Analyst [6]

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Yes.

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William H. Armstrong, Stratus Properties Inc. - Chairman of the Board, President & CEO [7]

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Well, I would be guessing. That project is currently undeveloped but our -- if I were to use Kingwood, which is I guess reasonably comparable, our rental rates there are in the low to mid-30s on a triple net basis, and I would think that the 2 projects would be comparable.

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John Nouri, North & Webster - Analyst [8]

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Okay. My second question is for the Lantana Place, which is comprised of office hotel and retail. At 325,000 square feet, it seems 99,000 is being allocated for the movie house theater, and 140,000 is going to be office space. So what's the real break out for the remaining square footage?

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William H. Armstrong, Stratus Properties Inc. - Chairman of the Board, President & CEO [9]

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Well, you're correct. The office component is 140,000 feet, the retail is 99,000 feet. That is not -- does not include the hotel piece. So all in, I don't think we fully got to the 350,000. I think we were a little bit short of that, but generally, it's the hotel -- I don't have the exact square footage of the hotel yet. That's a little bit still in flux but I think generally, the movie house is 38,000 feet of the 99,000. So that's the general breakdown.

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Operator [10]

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The next question comes from [Fred Burtner] with Burtner Investments.

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Fred Burtner, Burtner Investments - Analyst [11]

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Beau, with interest rates rising, what's your assessment of the health of the Austin market?

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

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Well, that's a good question Fred. I think it's been a long time since we've been in a rising rate environment. So it's something we're very mindful of around here. Obviously, if rates are rising that generally means that the economy is good and certainly, Austin is -- it's a boomtown. I've been here for almost 30 years and I've never seen it quite as active as it is now.

So we -- there's a tremendous amount of competition here now. We've got lots of, what I would say, big time developers that probably overlooked Austin years ago are showing up and trying to get involved with projects. So I think that's good on the one hand in that we've got a lot of interest in Austin.

From our standpoint it makes it difficult to source new deals just because it's gotten very, very competitive. But on the other hand, we still have tremendous high-quality landholdings here, so I think we've generally benefited from the growth and all the attention on Austin. I don't think rates yet have had any kind of a chilling impact on development but that could change. I guess the risk is, will cap rates move in tandem with underlying financing rates. I haven't really seen that yet but I think it's probably a little early to call.

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Fred Burtner, Burtner Investments - Analyst [13]

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My other question is, could you tell us a little about who the third-party investors are in your 2 new projects?

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William H. Armstrong, Stratus Properties Inc. - Chairman of the Board, President & CEO [14]

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Sure. They are -- they tend to be high net worth or very high net worth individuals. And what we've found is they would more typically have been investors in private equity funds. They would've just have invested in a -- say a Blackstone fund or a -- some other type of a private equity fund. And what we found is that by doing something direct with them, we can provide them better economics than they would've gotten through that fund structure. And then we have the same thing. We get money on better terms than we would've gotten through a private equity -- traditional private equity shop. So in many instances, we have essentially cut out the middleman. But obviously, there are limits to how much of this we can do just because of the time involved in that. But for these particular projects it's -- I think it's worked out very well. They -- like as I said, they get better economics as do we, so I think to the extent that we're successful, which we fully expect to be, I would think that these partners would continue to invest with us as we source new opportunities.

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Operator [15]

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The next question is a follow-up from John Nouri with North & Webster.

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John Nouri, North & Webster - Analyst [16]

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Beau, my follow-up question for you is for Magnolia Commons. It's split apart between home improvement and there's an HEB there and a movie theater as well. What do you think out of the 351,000 square feet, how would you allocate that to those categories?

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William H. Armstrong, Stratus Properties Inc. - Chairman of the Board, President & CEO [17]

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Well, I would assume HEB would be around 100,000 feet. And I would assume that if it ends up being a -- and again, this is -- I'm purely speculating here because we really are still formulating our plans there. But a secondary anchor like a home improvement would be these days, 60,000 to 80,000. And the movie theater is typically depending on obviously, how many screens but if it's the size of a 10 screen project, that's probably 30,000 to 50,000 feet. But we also are exploring if we're not successful in securing a home improvement store, the other strategy is a -- something like a T.J. Maxx, Marshalls, that type of a lineup, which they are back growing again. So we've got some optionality there. The key will be just who's in the market when we start moving on that project. And our timeline currently is beginning something next year with a 2020 kind of opening. Again, that still hasn't been confirmed yet but that's kind of our working timeline.

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John Nouri, North & Webster - Analyst [18]

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Perfect. I have several questions for Erin related to the balance sheet and the cash flow statement.

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Erin Davis Pickens, Stratus Properties Inc. - Senior VP & CFO [19]

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Okay.

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William H. Armstrong, Stratus Properties Inc. - Chairman of the Board, President & CEO [20]

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Sure.

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John Nouri, North & Webster - Analyst [21]

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My first question is, Erin, what do you think at this current day based off today's press release, the balance of restricted cash, what is that pertaining to? A little bit of Jones Crossing maybe or if not like what would that be comprised of?

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Erin Davis Pickens, Stratus Properties Inc. - Senior VP & CFO [22]

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Well, it's primarily cash held in escrow accounts, such as we have reserves for the Block 21 project. There is an escrow related to the College Station project but I think that balance is -- it's pretty small at this point, maybe $1 million. I think that's primarily it.

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John Nouri, North & Webster - Analyst [23]

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And what do you think the balance of the mud is of current day press release?

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Erin Davis Pickens, Stratus Properties Inc. - Senior VP & CFO [24]

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The balance of the mud reimbursables?

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John Nouri, North & Webster - Analyst [25]

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Yes.

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William H. Armstrong, Stratus Properties Inc. - Chairman of the Board, President & CEO [26]

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$5-ish million.

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Erin Davis Pickens, Stratus Properties Inc. - Senior VP & CFO [27]

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I think $4 million or $5 million.

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William H. Armstrong, Stratus Properties Inc. - Chairman of the Board, President & CEO [28]

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And that's a bit of a dynamic number because as we have ongoing projects that have eligible mud facilities that moves up and down, but I think generally, we -- it's -- what's unreimbursed currently, it's approximately $4 million to $5 million.

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John Nouri, North & Webster - Analyst [29]

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Makes sense. And for the accounts payable, what do you think that figure pertains to predominantly? Like -- outside of the numbers, what is making up the accounts receivable -- I mean accounts payable?

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Erin Davis Pickens, Stratus Properties Inc. - Senior VP & CFO [30]

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Well, part of the reason, accounts payable is a large number is any time we have construction projects we've got retainage and until -- so each -- maybe you already understand this but whenever the contractor submits an application for payment, we hold back usually 10%, and that's not paid out until the project is complete and certain things are done. So I don't really have the details of the number in front of me but I think that's the reason that the number is fairly large.

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William H. Armstrong, Stratus Properties Inc. - Chairman of the Board, President & CEO [31]

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And just a little color on that. The retainage typically is just -- that's our leverage to make sure we get everything done properly. We hold that until we've fully accepted the project. So it -- when we have as much development as we have going right now that tends to be a fairly large number.

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John Nouri, North & Webster - Analyst [32]

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Okay. Just for the cash flow statements, the operating section, why is cost of real estate being added back?

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Erin Davis Pickens, Stratus Properties Inc. - Senior VP & CFO [33]

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Cost of real estate sold?

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John Nouri, North & Webster - Analyst [34]

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Yes.

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Erin Davis Pickens, Stratus Properties Inc. - Senior VP & CFO [35]

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Well, that is -- that's actually a noncash figure. When we record revenue on real estate sales, lots and Amarra Villas townhomes, and the W condominium. We charge the cost of sales, the amount that was accumulated, the cost I guess of building that asset. And then there's also -- in our cost of sales, there is also commissions and closing costs but of course, those are paid in cash but the write-off of the inventory cost or the cost of the asset is a noncash charge. So it gets added back here. But then you can see further down where we have purchases and development of real estate properties, that's where the cash flow for the expenditures to develop and build the asset are reflected.

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John Nouri, North & Webster - Analyst [36]

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And what about increase and decrease in deposits? Why is that in the offering section?

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Erin Davis Pickens, Stratus Properties Inc. - Senior VP & CFO [37]

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I'm trying to think what sort of deposits we have in there. I mean it's -- I'm afraid I'm going to have to get back with you on the answer to that question off-line because I can't really recall what's in there to be able to explain it to you well. It definitely wouldn't be in investing or financing activity.

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Operator [38]

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