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Earnings Transcript for STRS - Q3 Fiscal Year 2021

Operator: Good morning and welcome to the Stratus Properties Third Quarter 2021 Conference Call. Today, Stratus issued a press release announcing its third 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 November 29, 2021. Anyone listening to the replay should note that all information presented is current as of today, November 15, 2021, 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, 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 today and the risk factors described in Stratus' 2020 Form 10-K and third quarter 2021 Form 10-Q 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, this non-GAAP financial measure is reconciled to its most comparable GAAP financial measure in the supplemental schedule to 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.
Beau Armstrong: Thank you, everyone, for joining our third quarter conference call today. Our Chief Financial Officer, Erin Pickens, is also here with me today. Before I provide updates on the status of our projects and development activities, I would like to discuss our 2 recently announced transactions and our thoughts on opportunities for use of the associated proceeds from those transactions. Then I will pass the call to Erin to speak to our business segments and provide an overview of our third quarter 2021 financial and operational results. Lastly, I will close the call with some final remarks about our exciting outlook and the strength of our Texas markets. As you've seen in our recent transaction press releases, if completed, the sales of The Santal and Block 21 will result in Stratus receiving substantial cash proceeds, which we estimate to be approximately $145 million after tax
Erin Pickens: Thank you, Beau. Today, we reported our financial results for the third quarter of 2021 in our press release issued this morning. Stratus consolidated revenues increased to $15.5 million in the third quarter of 2021 compared to $12.8 million in the third quarter of 2020, primarily due to the recovery in revenues from our hotel and entertainment segments. Net loss attributable to common stockholders totaled $3.8 million or $0.46 per share in the third quarter of 2021 compared to a net loss of $15.1 million or $1.84 per share in the third quarter of last year. The 2020 results included a $9.6 million noncash tax charge to record a valuation allowance on Stratus deferred tax assets. The third quarter 2021 results included a gain on extinguishment of debt of $3.7 million related to the forgiveness of substantially all of Stratus' Paycheck Protection Program loan, partly offset by a $625,000 impairment charge for the multifamily tract of land at Kingwood Place currently under contract. EBITDA totaled $2 million in the third quarter of 2021, which was an increase compared to the third quarter of last year when EBITDA was $0.6 million below breakeven. I will now provide brief commentary on our 4 operating segments. Note that if we close the proposed Block 21 transaction, our continuing operations would thereafter include only our real estate and leasing segments and we would no longer have our hotel and entertainment segments. Revenue from our Real Estate Operations segment in the third quarter of 2021 totaled $1 million compared with $5 million in the third quarter of 2020. The segment's operating loss totaled $1.7 million in the third quarter of 2021 compared with operating income of $1.4 million in the third quarter of last year. The decrease in revenue and the operating loss primarily reflect a decrease in the number of lots sold during the third quarter of 2021 as available inventory decreased. Development of Holden Hills will add to our available inventory moving forward, and we may sell some of the undeveloped residential land in our portfolio in addition to the pending sale of the multifamily tract of land in Kingwood Place. As of September 30, 2021, Stratus had only 2 unsold developed Amarra Drive Phase III lots. As Beau mentioned earlier, in the third quarter of 2021, Stratus sold a retail pad site at West Killeen Market for $750,000, leaving only one pad site remaining in this project. Revenue from our Leasing Operations segment in the third quarter of 2021 totaled just under $6 million, which remains relatively in line with the results from the third quarter of last year. The slight decrease in leasing revenue primarily reflects the sale of The Saint Mary in the first quarter of 2021, partly offset by an increase in revenue at Lantana Place. The Saint Mary had rental revenue of $0.9 million in the third quarter of 2020. This segment's operating income totaled $1.8 million in the third quarter of 2021, up from $1.2 million in the third quarter of 2020. The increase in operating income primarily reflects the absence of costs and depreciation associated with The Saint Mary after this property was sold in the first quarter of 2021. As Beau mentioned, all of our tenants are currently paying rent per their leases as well as monthly payments pursuant to previously disclosed base rent deferral arrangements as applicable. Stratus hotel revenues grew to $5.2 million in the third quarter of 2021, a significant increase from $1.6 million in the third quarter of last year when the hotel experienced greater impacts from the pandemic. The segment's operating income totaled $46,000 in the recent quarter compared to an operating loss of $2.6 million last year. The increase in revenue and the positive operating income primarily reflects higher room reservations and food and beverage sales as a result of the lessened impacts of the COVID-19 pandemic during the third quarter of 2021. Revenue per available room, or RevPAR, was $121 in the third quarter of 2021 compared with $36 in the third quarter of last year. The hotel's average occupancy was 40% for the third quarter of 2021, which is an increase over the 16% average occupancy in the third quarter of last year and a 33% average occupancy in the second quarter of this year. Entertainment revenues increased to $3.7 million in the third quarter of 2021 from $367,000 in the third quarter of last year. The segment's operating income was $409,000 in the third quarter of 2021 compared with an operating loss of $1.3 million in the third quarter of last year. The increase in revenue and the positive operating income reflect increased attendance and an increased number of events hosted at ACL Live and 3TEN ACL Live. Stratus hosted a series of well-attended concerts over the summer with ticket sales at those events returning to levels experienced before the pandemic. Our venues are now operating at full capacity. Our general and administrative expenses increased to $5.4 million in the third quarter of 2021 compared to $2.9 million in the third quarter of last year, primarily reflecting a $2.6 million increase in employee incentive compensation costs associated with Stratus' Profit Participation Incentive Plan, resulting primarily from an increased valuation for The Santal. Additional expense of up to $4 million may be recognized upon the closing of the sale of the property. Turning to our capital management. At September 30, 2021, consolidated debt totaled $295.4 million and consolidated cash totaled $23.2 million compared with consolidated debt of $276.7 million and consolidated cash of $12.4 million at December 31, 2020. Consolidated debt amounts at both dates exclude The Santal loan of approximately $75 million and at December 31, 2020, also excludes The Saint Mary loan of approximately $25 million as a result of these properties being classified as held-for-sale at those dates. As of September 30, 2021, we had $5.6 million available under our $60 million Comerica Bank credit facility. And as Beau noted earlier, if completed, the sales of The Santal and Block 21 will result in us receiving substantial cash proceeds estimated to be approximately $145 million after tax and including $6.9 million of the Block 21 purchase price to be escrowed for 12 months after closing. In August 2021, we entered into a $14.8 million 3-year construction loan to finance the first phase of development of Magnolia Place. As of September 30, 2021, no amounts were outstanding under this loan. In September 2021, we completed financing transactions from which a portion of the proceeds were used to purchase the land for The Annie B. The proceeds will also be used to fund predevelopment costs for the project. These financing transactions included a $14 million land loan and $11.7 million from a private placement offering, along with $3.9 million in cash and pursuit costs contributed by wholly owned subsidiaries of Stratus. Upon completion of the private placement offering, Stratus holds in the aggregate a 25% indirect equity capital interest in the limited partnership. Purchases and development of real estate properties reflected in operating cash flows and capital expenditures reflected in investing cash flows totaled $37.5 million for the first 9 months of 2021, primarily related to the purchase of the land for The Annie B and development of The Saint June; other Barton Creek properties, including Amarra Villas; and Lantana Place and Magnolia Place. This compares with $16.9 million for the first 9 months of 2020, primarily related to the development of Kingwood Place, Lantana Place and Barton Creek properties and the purchase of an office building in Austin. Thank you. I'll now turn the call back to Beau for his closing remarks.
Beau Armstrong : Thank you, Erin. I am pleased with our performance this quarter and specifically want to call attention to our team's knowledge, skill set and relationships within the community that drive our success. We have the right people and the right expertise to be able to move these development projects forward and create value across our business. The momentum we have built this quarter, combined with the pipeline of opportunities for our carefully selected high-quality and high-performing portfolio, contributes to our improved outlook and increased confidence as we head into 2022. Our projects are supported by increasing demand for residential and retail development and continued growth of Austin and other select Texas markets in which we operate as well as consumer confidence as vaccinations drive an increase in travel, events and activities. We have 2 large pending sales with Santal and Block 21, several stabilized and fully or nearly fully leased projects and several projects under construction or at various stages of development. As we continue to realize the value that we have created in our properties, we are focused on determining how best to deliver that value to our shareholders. Thank you all for joining. And at this time, I would like to ask the operator to open the line for questions.
Operator:
Operator: We have no one queued for questions. So this concludes our question-and-answer session, which also concludes today's conference call. Thank you for attending today's presentation. You may now disconnect.