Earnings Transcript for STRS - Q1 Fiscal Year 2021

Operator: Good day, and welcome to the Stratus Properties’ First Quarter 2021 Conference Call. Yesterday, Stratus issued a press release announcing its first quarter 2021 results. The press release is available on Stratus’ 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 replay on Stratus’ website through May 25, 2021. Anyone listening to the replay should note that all information presented is current as of today, May 11, 2021 and should be considered valid only as of this date. As a reminder, yesterday’s press release and certain comments that will be made on this call include forward-looking statements, which speak only as of the date made and actual results may differ materially from those anticipated, expected, projected or assumed in the forward-looking statements. Please review the cautionary language included in Stratus’ press release issued yesterday and the risk factors described in Stratus’ 2020 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. Generally Accepted Accounting Principles, also referred to as GAAP. As required by SEC rules these non-GAAP financial measures are reconciled to their most comparable GAAP financial measures in the supplemental schedules of Stratus’ press release issued yesterday. I would now like to turn the conference over to Mr. Beau Armstrong, Chairman, President and Chief Executive Officer of Stratus Properties.

Beau Armstrong: Thank you for joining our first quarter 2021 conference call. Our Chief Financial Officer, Erin Pickens is also here with me today. Before I provide updates on our retail and residential properties, I would like to briefly comment on the COVID-19 pandemic and its continued impact on Stratus. As you know, at the outset of the pandemic last year, we quickly responded by managing our liquidity, taking care of our people and tenants and ensuring our positioning to thrive as businesses reopen and the economy recovered. Our W Austin hotel has remained open, and we have worked closely with our hotel operator to implement prudent cost containment measures. We are now beginning to experience the benefits of these efforts. We are entering a hopeful season. The communities where we operate including Austin in the Houston area continue to grow and thrive with increasingly more job opportunities and activity. The vaccine is becoming more widely available. Capacity restrictions are relaxing in our markets, and the public is becoming more comfortable with travel and venturing out to restaurants in events. According to the Austin Business Journal, Austin’s population average an increase of 146 people per day from 2019 to 2020. And in terms of raw population growth, Austin is the fourth fastest growing city in the country, after Phoenix, Dallas and Houston. So, three of the four of these quickly growing cities are based in Texas. We are well positioned to take advantage of opportunities in these growing markets. We are focused on creating and maintaining a portfolio that meets the evolving tastes of our community members, both those who are originally from these areas and newcomers looking for new opportunities for themselves and their families. As we have emphasized before, at Stratus, we aim to manage a diversified regionally focused portfolio, including projects across multiple stages of our full cycle development strategy. From acquiring land, securing and maintaining development entitlements, and designing and developing properties, as we are currently accomplishing with new projects The Saint June and Holden Hills, which I will describe in more detail in a moment. To stabilizing properties, as we are doing with Lantana Place and Kingwood Place into ultimately selling, refinancing or holding properties as part of our leasing operations, as we have done with two refinancings of The Santal loan and The Saint Mary in the first quarter of this year. While the past year was unusual, we remain focused on executing our successful full cycle development strategy and capitalizing on the prosperous Texas markets. I will now turn to discussion in some of our active projects. We continue to benefit from well located retail properties often anchored or shadow anchored by the beloved Texas grocery store HEB. Our strong relationship with partner such as HEB allow us to collaborate with our communities and build long-term value. We have multiple opportunities to develop properties with HEB in our pipeline that are various stages of development. Magnolia Place for example will be shadow anchored by HEB and is plan for 18,410 square feet of commercial space. Nine pad sites and 194 single-family lots and 495 multi-family units. New Caney our mixed use project will also be anchored by HEB and as planned to include retail restaurants five pad site and 10 acres of multi-family space. Jones Crossing, the HEB grocery-anchor mixed-use development in College Station, Texas is another great example, showing how we follow a thorough development cycle process from acquiring 72 acres of land in 2017 through a 99-year ground lease. Coordinating with the relevant agencies to obtain the necessary permits and it entitlements, completing construction of the first phase of the retail component in the third quarter of 2018 with the HEB grocery store opening in September of that year, and stabilizing the property with approximately 90% leased by the end of 2018 and substantially all leased currently. In addition, we have approximately 23 undeveloped acres at Jones Crossing, with estimated development potential of approximately 104,750 square feet of commercial space in five vacant pad sites. We continue to evaluate options for the multi-family component of this project as well. At the same time, we regularly review multiple options from refinancing, selling or holding the property for our leasing operations. Currently, we are considering a refinancing to Jones Crossing project to improve loan terms and take advantage of the low interest rate market. We have already been able to capitalize on the current low interest rate environment, we recently refinanced The Santal loan and we’re able to lower the interest rate floor by 140 basis points effective April 15, 2021. The annual interest rate on the loan was reduced to 3.4%, resulting in annual interest savings of approximately $1.1 million based on current rates. We plan to continue to explore further project refinancing on other properties. I would like to walk through another project that successfully follows our development cycle. Kingwood Place, this HEB grocery-anchored mixed-use development is located in Kingwood, Texas, a northeast suburb of Houston. The 54-acre tract of land was acquired in August 2018, Stratus’ team acquired the permits and developed and designed to include a 103,000 square foot HEB grocery store with 49,000 square feet of retail space, five-retail pads, and a 10-acre parcel plan for a 275-unit multi-family community. We secured a construction loan from one of our key lenders Comerica Bank and construction began in December of 2018. Throughout the duration of the construction process, we remain on schedule and on budget. The completed retail space was approximately 80% lease by the end of 2019, with HEB opening in November of that year. In 2020, we focused on continuing to lease up the property, which is approximately 85% lease now and planning for the 275-unit multi-family component. We continue to consider multiple paths to this property with the goal of optimizing its value for the company and our shareholders. As I’m sure you are aware, the ongoing trend toward online shopping has accelerated during the COVID-19 pandemic. We have been adjusting to these retail trends by incorporating more multi-family residential space, and more food and beverage and entertainment space into our development plans. We believe that evolution in this mix of our tenants will preserve the economics of these projects for Stratus overtime. Now, turning to our residential portfolio. In January, we sold The Saint Mary, a 240-unit garden style apartment complex in the Circle C community in Austin for $60 million. This was a record per unit price for similar properties in the Austin MSA. I would like to emphasize how those properties another great example of our successful development program. The land for this development was part of our legacy real estate assets in the Circle C community in Austin. Our Stratus team worked with relevant parties to obtain the necessary permits. Our team thoughtfully designed the project to feature contemporary design, targeted to appeal to the technology-based workforce in Southwest Austin, amenities include a fitness center, infinity-edge pool, and nearby recreational options, including popular hiking spots, The Barton Creek Greenbelt and Slaughter Creek Trail. This project was approved for the Austin Energy Green Building Program. We raised third party equity capital and arrange bank financing. Construction commenced in June 2018. It was completed in December 2019. The first tenant took occupancy in July 2019, and the project was approximately 85% leased on the date of sale on January, 2021. In short, our team finance the project oversaw construction expedited lease up and manage and close the sale at a record price during a pandemic in all in less than three years. We are continuing to witness our other residential properties thrive in the Austin market. We have completed reworking our plans for Holden Hills, formerly known as Section KLO and believe that now is the right time to pursue the development of this property given the booming Austin market. As mentioned in our April 28 press release this new community is our final residential development within community Barton Creek. This project consists of 495 acres of classic, Hill Country escarpment abutting the popular Barton Creek Greenbelt, and is designed to feature 475 unique residences in multiple phases. This project will focus on sustainability, energy conservation and wellness and meets the growing demand for sustainable housing. The Holden Hills property will incorporate extensive use of renewable energy, including solar to minimize the community’s carbon footprint in the buildings will use non-toxic materials for a healthier indoor living space. The properties will also embrace the natural setting of Barton Creek, including hillsides, waterways, rock outcroppings and existing trees, creating a community connected to its surroundings. We are receiving support from the local environmental leaders, which is encouraging as we move forward with our plans. Now, turning to our multi-family properties. We previously announced that in March, we commence site clearing on The Saint June, which is a 182-unit multi-family project within the Amarra subdivision in Barton Creek. That work has been completed, and we expect to initiate construction later in the second quarter of 2021 subject to completion of financing. Additional multi-family projects, we are pursuing include 320 multi-family units within Lantana Place 275 multi-family units in Lakeway, and other multi-family projects that we are not yet ready to disclose. Each of these sites as well located and supports our residential development goals. Separately, we continue to make progress on session in, which is the commercial and multi-family project adjacent to Holden Hills in the Barton Creek community. We are evaluating and redesign of our approximately 570-acre tract is a dense, mid rise mixed-use project surrounded by an extensive green space amenity. Similar to Holden Hills, we will focus on sustainable design to ensure we incorporate Barton Creek’s beautiful natural surroundings. I will now turn the call over to Erin for review our first quarter 2021 financial results. Erin?

Erin Pickens: Thank you, Beau. Yesterday, we issued our press release announcing our first quarter 2021 results. Stratus consolidated revenues totaled $14.5 million in the first quarter of 2021 compared with $28.1 million in the first quarter of 2020. Net income attributable to common stockholders totaled $8.9 million or $1.08 per share in the first quarter of 2021 compared to a net loss of $1.1 million, or $0.13 per share in the first quarter of last year. The recent quarter’s results include the gain on the sale of The Saint Mary of $22.9 million partially offset by operating losses from Stratus’ hotel and entertainment segments resulting from the ongoing COVID-19 pandemic. EBITDA totaled $15.2 million in the first quarter of 2021, and compared favorably to $4 million in the first quarter of 2020. This increase is also due to the gain on the sale of The Saint Mary. I’ll now provide a brief commentary on our reporting segments. Revenue from our Real Estate Operations segment in the first quarter of 2021 totaled $6.6 million, compared with $12.3 million in the first quarter of 2020. This decrease primarily reflects a decrease in the number of lots and homes sold during the first quarter 2021 as available inventory has decreased. And while revenues decreased, operating income increased moderately from $2.1 million last year to $2.2 million in the first quarter of this year. During the first quarter, we sold two Amarra Drive Phase III lots at five-acre multi-family tract of land and Amarra Drive, and our last condominium unit at the W Austin residences for a total of $6.5 million. As of March 31 2021, we had only three unsold developed lots at Amarra Drive, one of which was under contract and sold for $0.6 million subsequent to the end of the first quarter. As we have mentioned previously, we believe that our real estate operations and our multi-family properties and our leasing operations continue to benefit from pandemic driven home centric trends and from continued recognition of Austin as a desirable place to live. Revenues from our Leasing Operations segment in the first quarter of 2021 totaled $5.4 million, compared to $6 million in the first quarter of last year. This decrease in leasing revenue primarily reflects the sale of The Saint Mary, which reported rental revenue for the first quarter only through the sale on January 11, generating $0.1 million in revenue for the first 11 days in January, compared with $0.7 million in the full first quarter of last year. Operating income and in our Leasing Operations segment in the recent quarter increased to $24.2 million, including the $22.9 million gain on the sale of The Saint Mary from $0.8 million in the first quarter of last year. Despite the pandemic, we have retained substantially all of our pre-pandemic retail tenants and have added new tenants and all of our tenants are currently paying rent for their leases, as well as monthly payments pursuant to previously disclosed base rent deferral arrangements. Stratus’ hotel revenues totaled $2.2 million in the first quarter of 2021, which was a decrease from $6 million in the first quarter of last year, which is not affected by the COVID-19 pandemic until late in the quarter. This segment’s operating loss totaled $1.6 million, compared to an operating loss of $1.1 million last year. Revenue per available room or RevPAR was $51 in the first quarter of 2021 compared with $150 in the first quarter of last year. The hotel’s average occupancy was 21% for the first quarter of 2021, up from 13% for the fourth quarter of 2020. Saturday night occupancy rates have all been above 50% for several weekends with a high of 98% one recent Saturday due to a group event. This certainly shows a return to stronger regional travel, and we hope to see continued increases in our weekday business as well. Entertainment revenues declined $2.6 million in the first quarter of 2021 from $4.2 million in the first quarter of last year. The segment’s operating loss was $1.2 million in the first quarter of 2021 compared with operating income of $0.5 million in the first quarter of last year. Our talented and dedicated employees at Stratus continue to create innovative programming at our ACL Live and 3TEN ACL Live entertainment venues. We currently expect to see improved results as schedules are filled and capacity increases over time. In fact, Austin City Limits recently taped its first show with a live audience in over a year. Turning now to capital management. At March 31, 2021, consolidated debt totaled $339.2 million, and consolidated cash totaled $12.6 million compared with consolidated debt of $351.1 million and consolidated cash at $12.4 million at December 31, 2020. As of March 31, 2021, we had $25.8 million available under our $60 million Comerica Bank credit facility. Subsequent to quarter-end, as Beau mentioned, Stratus completed a modification of The Santal loan to extend the maturity date to October 5, 2024, as well as to reduce the interest rate resulting in annual interest savings of approximately $1.1 million based on current rates. Purchases and development of real estate properties reflected in operating cash flows, and capital expenditure is reflected in investing cash flows totaled $3.5 million for the first three months of 2021 primarily related to the development of Barton Creek properties, including Amarra Villas. This compares to $8.6 million for the first three months of 2020 primarily related to the development of Lantana Place, Kingwood Place, Jones Crossing, and Barton Creek properties. We continue to believe that we will be able to meet our debt service and other cash obligations for at least the next 12 months. Thank you and I’ll now turn the call back to Beau for his closing remarks.

Beau Armstrong: Thank you, Erin. I continue to feel encouraged by several important facts as we continue forward into the second quarter. First, the growth of Austin’s population is outstanding and has resulted in a significant demand for housing at a wide range of prices. Second, our company is resilient and operates in strong markets and we are witnessing a steady recovery from the impacts of the pandemic. We are now through with the pandemic yet, but we are experiencing positive improvement. We will continue to prudently manage our costs including cost increases in certain construction materials, particularly lumber that we take advantage of new opportunities. Our retail centers are drawing strong tenant demand; our multi-family property is fully occupied. And we have sold almost all of our single-family lot inventory at Barton Creek at a premium. And Stratus, we’re committed to evaluating all strategic initiatives that could create value for shareholders, including our previously announced evaluation of a potential REIT conversion. As a reminder, if the board recommends a REIT conversion strategy, our shareholders will ultimately decide whether Stratus converts to a REIT or remains the C-corporation. Further, before we open up the call to Q&A, I would like to remind you that the company its directors, and certain of its executive officers are participants in the solicitation of proxies from the company shareholders in connection with the company’s 2021 Annual Meeting. On April 12 2021, the company filed a definitive proxy statement and WHITE Proxy Card with the SEC in connection within solicitation proxies for the 2021 Annual Meeting. Shareholders of the company are strongly encouraged to read the proxy statement, the accompanying Proxy Card and all other documents filed with the SEC carefully in their entirety as they contain important information. Information regarding the identity of company participants and their direct or indirect interest by security holdings, or otherwise, is set forth in the proxy statement in other materials filed by the company with the SEC, which can be found for free through the company’s website, www.stratusproperties.com in the section investors or through the SECs website at www.sec.gov. We will not comment on the proxy contest with Oasis on this call. Thank you all for listening. At this time, I’ll ask the operator to open the line for questions.

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