STRS - NASDAQ

Good day, and welcome to the Stratus Properties' Year-End 2019 Financial and Operational Conference Call . Earlier this morning, Stratus released its financial results, which are available on its Web site at stratusproperties.com. Following management's remarks, we will host a question-and-answer session. Please note that this call is being recorded and will be available for telephone replay on Stratus' Web site through March 21 of 2020. Anyone listening to the taped replay should note that all information presented is current as of today, March 16, 2020, and should be considered valid only as of this date. [Technical difficulty] that will be made on this call include forward-looking statements and actual results may differ materially. Please review and refer the cautionary language included in Stratus' press release issued today and the risk factors described in Stratus' 2019 on 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 [technical difficulty] 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 conference over to Mr. Beau Armstrong, Chairman, President, and Chief Executive Officer of Stratus Properties.

Thank you for joining our year-end 2019 financial and operational conference call. Our Chief Financial Officer, Erin Pickens is here with me today. Before I begin, I would like to say a quick word about what's top of mind for all of us. As I'm sure you can imagine COVID-19 is having a significant impact on the hotel and entertainment industries worldwide. Due to the cancellation of South -- by Southwest here in Austin and the current restriction on gatherings, we recently received a significant [technical difficulty] evolving rapidly, and we cannot yet estimate the financial impact on the company. We are closely monitoring the situation, working closely with the city and local health organizations, and taking recommended preventative measures to keep our customers and employees safe. As a diversified real estate company, our long-term strategy is to acquire, develop, and monetize properties in certain fast-growing Texas markets with the ultimate goal of creating value for our stockholders. Last quarter, we said that we were looking to sell or refinance our Block 21 property; and in December, we announced an agreement to sell Block 21 to Ryman Hospitality Properties for $275 million, representing an attractive return on our investment. We expect this transaction to close in the second quarter of 2020 subject to the satisfaction of customary closing conditions. Our history with Block 21 serves as an example of [technical difficulty] of attractive properties. First, we identified and entered into a contract to acquire the land almost 12 years ago. Second, we designed the project, secured the necessary entitlements and permits, secured an operator for the hotel, and developed a strategy for the music venue. Third, we constructed and subsequently opened the hotel and venue space on schedule in consistent with our plans, leased the office and retail space, and sold all but one of the residences. Finally, we operated the project producing strong cash flow for 10 years, and positioned the property for either a sale or refinancing; ultimately refinancing the property in 2016, and we recouped most of our investment at that time. Then, as an extra step to add value for our stockholders, we announced end of last year a definitive agreement to sell the property. The property and its components, including the 251 room W Austin Hotel, 159 luxury residences, Austin City Limits Live at the Moody Theater, The 3TEN ACL Live Entertainment Venue and Business, Class A office space and retail space created immense value for Stratus. The project yielded a 13.1% return over approximately 12 years, compared to the Dow Jones Industrial Average 6.9% return and the S&P 500 Index 7.3% return [technical difficulty] for 2020. We believe closing the sale of Block 21 will place us in the strongest financial position we have held during our 28-year history. In their most recent conference call on February, Ryman stated that it considers Block 21 a coveted property and considers its acquisition critical to Ryman's long-term entertainment strategy. Ryman also indicated they will be combining two of the most renowned music markets in the United States, Austin and Nashville, and are working on a range of opportunities including [technical difficulty] and maximizing the property's commercial and retail space, as well as cross promoting concerts, content, and artists. In addition to announcing the agreement to sell Block 21, we were pleased to complete the refinancing of the fully-leased Santal generating $16 million of cash proceeds including reserves, and reducing our remaining cash investment in the property to $3 million. We also sold Barton Creek Village for $7.7 million, and the remaining completed Phase I Amarra Villa's townhomes. Our other projects have also been progressing nicely across our development cycle. In October, the City of Austin and Travis County approved initial subdivision permit applications for Barton Creek's primarily residential Sections KLO, which is expected to approximately double the density of the development. We expect two of our next important initiatives at Stratus to involve Barton Creek, subject to financing and market conditions. First, we plan to complete the permitting process for KLO, and second, we are evaluating additional density in initial planning phases for Section N. Sections KLO and N are the last two remaining undeveloped land tracks we have in Barton Creek. Our four active retail projects: West Killeen, Jones Crossing, Lantana Place, and Kingwood Place are currently 84% leased in aggregate as [technical difficulty] and are generating cash flow in excess of debt service. All tenants are open for business at West Killeen market in Killeen Texas, and we have seen increased interest in leasing the remaining vacant retail space and pad sites. At our Jones Crossing development in College Station, Texas, 19 leases have been signed for approximately 95% of the completed retail space as of December 31, 2019, including HEB and 15 of those tenants are open for business. We have one ground lease for Chick-fil-A, which since opening last September has attracted significant traffic to the site and generated new interest in remaining pad sites. We continue to evaluate options for the multifamily component of this project. At Lantana Place in Austin as of December 31, 2019, we have signed leases for approximately 80% of the retail space, including the anchor tenant Moviehouse & Eatery and a ground lease for an AC Hotel by Marriott. [Technical difficulty] both tenants are open for business and construction of the AC Hotel by Marriott is underway. The HEB at Kingwood Place had a successful grand opening in November 2019. At December 31 2019, we had two additional tenants open for business, and in the January we commenced construction on a third retail building, which includes Starbucks and Pacific Dental. As of December 31, 2019, [technical difficulty], including HEB, and we have two signed ground leases with the Chase Bank and HEB's digital delivery program. We are currently evaluating plans to develop the multifamily component. We completed construction of the 240-unit Saint Mary in December of last year. As of December 31, 2019, 60% of the units were leased, and this has since increased to 65%. We expect to explore opportunities to sell the Saint Mary upon stabilization subject to market conditions. We began site framework for the first phase of our next HEB shadow anchored project, Magnolia Place located in Magnolia, Texas, which will consist of approximately 33,000 square feet of retail space, four pads for lease, and three pads to be held for sale. Plans for future phase include two limited service hotels, 96 single family lots, 588 multifamily units and 100,000 square feet of additional commercial space. We have broad latitude on used under the existing entitlements, which will allow us to react to changing market conditions. We're currently evaluating various options for the multifamily component of this property. I will now turn the call over to our Chief Financial Officer, Erin Pickens for a review of the financial details. Erin?

Thank you, Beau. Earlier this morning, we issued a press release [technical difficulty] 2019. Our results for Block 21 are reported as discontinued operations due to the pending sale. For the full-year, our financial results from continuing operations include revenues totaling $30 million in 2019, up from $25 million the prior-year, an increase in leasing operations revenues was partially offset by a reduction in real estate revenues, and net loss attributable to common stockholders [technical difficulty] a loss of $4 million, or $0.49 per share in 2018, and EBITDA of $6.8 million for 2019, compared to the loss of $3 million for 2018. Those amounts are adjusted to exclude the results from the Block 21 discontinued operations, and the impact of accounting for the pending Block 21 sale as a discontinued operation reduced EBITDA by $14.4 million in 2019 [technical difficulty]. Historically, we have reported four operating segments, Real Estate Operations, Leasing Operations, Hotel and Entertainment. Moving forward due to the pending sale of Block 21, our continuing operations include our Real Estate and Leasing Segments, while our discontinued operations include hotel, entertainment and a portion of leasing. Revenue in our Real Estate Operations segment in 2019 totaled $13.8 million, down from [technical difficulty]. The decrease primarily reflects lower revenues from the sale of higher priced residential units, including Amarra Villas' townhomes and W Austin Hotel & Residences condominium sold in 2018. Operating income in the segment totaled $4.1 million in 2019, which was an increase from $1.1 million in 2018. The increase primarily reflects $3.4 million of income related to Travis County MUD reimbursements of infrastructure costs incurred for the development of Barton Creek. We sold two Amarra Drive Phase II lots, 14 Amarra Drive Phase III lots, and 2 Amarra Villas townhomes for a total of $13.5 million during 2019. Revenue and our Leasing Operations segment totaled $16.2 million in 2019, up from $8.2 million last year, the increase primarily reflect the commitment of [technical difficulty]. Operating income in the segment in 2019 increased to $8.3 million from $1.9 million last year, which primarily reflects the 2019 recognition of $5.7 million of pre-tax gains on sales of Barton Creek village, and a retail pad subject to a ground lease located in the Circle C community. The decrease in income from discontinued operations in 2019 [technical difficulty] was primarily a result of lower hotel revenue. Hotel revenues totaled $35.2 million in 2019 compared to $37.9 million in 2018. The decrease was primarily a result of reduced group business and transient weekend business and lower food and beverage sales. Revenue per available room was $235 in 2019 compared to $245 in 2018. Entertainment revenues totaled $24.6 million in 2019, compared to $22.5 million in 2018. The increase was due to the increase in the number of events hosted and higher event attendance at ACL Live. ACL Live hosted 264 events and sold approximately 260,000 tickets in 2019, up from 240 events and the sale of approximately 214,000 tickets in 2018. Moving forward to our capital management, at December 31, 2019, excluding debt and cash included in the Block 21 discontinued operations, consolidated debt increased by $72.3 million to $224.6 million and consolidated cash totaled $8.8 million compared with consolidated debt of $152.3 million, and consolidated cash of $7.9 million on December 31, 2018. Purchases and development of real estate properties included in operating cash flows, and capital expenditures included in investing cash flows totaled $73.8 million for 2019, primarily related to the development of The Saint Mary, Kingwood Place, The Santal, and other Barton Creek properties. This compares to $105.6 million for 2018, primarily related to the purchase of The Kingwood Place land and development of The Santal [technical difficulty] and The Saint Mary. We expect the sale of Block 21 to generate net proceeds before taxes of approximately $120 million, and after tax proceeds of approximately $100 million. After using some of the net proceeds to fully pay the balance of our $60 million Comerica Bank credit facility, we expect to have approximately $60 million of cash and the full $60 million of availability under the revolver, which matures in June of this year. Thank you. I will now turn the call back to Beau for his closing remarks.

Thank you, Erin. We believe the 2019 year was a good year for Stratus. As I've mentioned, we refinanced The Santal and signed a definitive agreement to sell Block 21. These two transactions are a testament to the success of our development cycle [technical difficulty] talented team at Stratus, and our devotion to returning value to our shareholders. Stability and reliability are keys to our strategy. I'm excited for all [technical difficulty] several new Austin area opportunities with HEB as an anchor, as well as further add on development opportunities at all of our projects. Finally, the COVID-19 outbreak is a rapidly evolving and challenging situation that makes forecasting the future very difficult, especially in the short-term. We have been through difficult times before and are focused on working with our customers, employees, suppliers, and community to address the challenges before us today successfully. At this time, I will ask the Operator to open the line for questions. Thank you for participating.

Thank you. We will now begin the question and answer session. [Operator Instructions] And our first question will come from Fred Burtner of Burtner Investments. Please [technical difficulty]

I have just a couple of questions. Once the deal with Ryman closes, should we expect over time the growth rate of your net asset value for the corporations to start accelerating as you do an accelerated number of new projects?

Well, that's a good question, Fred. Good morning. I hope you're helping and taking care of yourself. [Technical difficulty] maybe to continue to grow, I wouldn't expect any acceleration out of the norm, and as you know, we continue to work on plans for our remaining assets at Barton Creek, which will require a significant amount of capital. We have our ongoing developments with HEB, all of those are funded at the moment, but I wouldn't expect anything out of ordinary other than just normal course of business growth within our portfolio. I hope I answered that correctly.

Yes. Well, that's a good answer. And then a question related to your stock itself, if I would use corportion, when they put themselves up for sale within the last year, could not get a buyer at an acceptable price and they are a larger company, why will your stock ever go up? I don't mean that negatively, I'm just trying learn.

Well, I think you raised a good point. I think if you look at the universe of public development companies, it has traditionally been a challenging space. I'm not as conversant with the particulars of Howard Hughes. I think they have great assets in particular markets. I think it's a well-run company, but I'm not immersed in the details of their company, but I do think that [technical difficulty] we have, I think there is visibility into all of our properties. So, I think because of that, that perhaps makes us a little different, but it is, as you pointed out, it is a -- public development companies have historically been at a challenge. Our goal around here is to turn these assets into cash, you know, on a prudent basis but do that quickly and then determine the best way to return that to the shareholders.

Okay, thank you very much.

Thank you, Fred.

And keep up the good work.

Thank you, sir.