STRS - NASDAQ

Good day and welcome to the Stratus Properties First Quarter 2020 Financial and Operational Conference Call. Earlier this morning, Stratus released its first quarter 2020 financial results and provided business updates, 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 on Stratus' website through June 30th, 2020. Anyone listening to the taped replay should note that all information presented is current as of today, June 25th, 2020, 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 and actual results may differ materially. Please review and refer to the cautionary language included in Stratus' press release issued today and the risk factors described in Stratus' 2019 Form 10-K and first quarter 2020 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 and regulations, this non-GAAP financial measure is reconciled to its most comparable GAAP financial measure and the 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 first quarter 2020 financial and operational conference call. Our Chief Financial Officer, Erin Pickens is here with me today. We hope that you and your families are staying safe and healthy. Given events over the last several months, we have a lot to cover on today's call. First, I'll provide an update on Block 21, our hotel and entertainment property in Downtown, Austin and discuss the impacts of the COVID-19 pandemic on our operations, and how we've responded since the pandemic started. I'll also provide updates on our development projects, and then I'll turn the call over to Erin to discuss our liquidity and first quarter 2020 results. On May 22, we announced that Ryman Hospitality Properties terminated its agreement to purchase Block 21 for $275 million. Ryman said that its decision was due to the capital markets and economic environment caused by the pandemic. We are disappointed that prevailing market conditions led Ryman to make this decision. However, we have tremendous respect for Ryman and wish them well throughout these difficult times. As required by the purchase agreements, Ryman forfeited its $15 million earnest money deposit to us. We used $13.8 million of this earnest money to pay down our Comerica credit facility and used the remaining $1.2 million for Block 21 debt service and required monthly reserves. We will record the $15 million as income in the second quarter of 2020. Block 21 continues to be a unique and valuable asset and we remain focused on its continued success in Austin. The W Hotel remains open, and we are working with the operator on plans to gradually ramp up operations over the next 12 months, health and market conditions permitting. We are also considering a modest renovation of the guest rooms and public spaces to enhance the property, subject to various approvals including from our lender in coordination with the hotel operator. We believe this is a good time to pursue the renovation given the expected favorable construction cost environment and lower-than-normal occupancy at the hotel. We expect to use approximately 7 million of reserves previously set aside for hotel improvements under our agreement with the hotel operator. As we have been watching the pandemic unfold and experiencing immense challenges in our own lives, COVID-19 continues to have an unprecedented impact on our company, our employees, and the communities where we operate. The pandemic has significantly impacted the financial and operational results of our company and industry peers. We expect that it will continue to impact our operations and financial results for the rest of the year and potentially longer. As a result of the pandemic, many of our retail leasing tenants other than grocery and liquor stores, closed or were operating at significantly reduced capacity beginning late in the first quarter of 2020. Meanwhile, our relationships with multifamily tenants have experienced only a minor impact. We analyzed potential impacts from COVID-19 on our tenants. In aggregate, our second quarter-to-date retail and multifamily rent collections are 15% less than scheduled rent. Beginning in April 2020, we agreed generally to provide 90-day base rent deferrals with the majority of our retail tenants. These rent deferrals have resulted in a reduction of scheduled base rent collections of approximately 30% for the second quarter through June 22, 2020. As of mid-June, most of our retail tenants have reopened. Uncertainty remains concerning the continued impact on our tenants. We will try to work with them to the best of our abilities during the pandemic. At our multifamily properties, we have granted rent deferral accommodations on a case-by-case basis, which in the second quarter, as of June 22, 2020, had resulted in a reduction of scheduled rent collections of approximately 2% of contractual rents with no material decline in occupancy. The pandemic is having a significant adverse impact on the hospitality industry. And as a result, our hotel and entertainment operations have also been adversely impacted. For example, while our hotel has remained open throughout the pandemic, average occupancy for the second quarter through June 21 was 12%, with June being the best month in the quarter, averaging 24% so far. We are working to make the hotel as safe and welcoming as possible in an uncertain environment. The city of Austin has extended the stay-at-home order through August 15. We cannot know how the market will progress, so we cannot say for certain how the market will affect our hotel in the coming months. Additionally, our entertainment venue, ACL Live remains closed, and 3TEN ACL Live is open at limited capacity. Many events previously scheduled to take place this year have been rescheduled or canceled. As we look across the entertainment industry, we continue to see depressed demand due to governmental restrictions and consumer health precautions. On the other hand, we believe many of our patrons are eager for entertainment, provided it can be done safely. Our ACL Live venue and W Hotel have collaborated on organizing a room and on-site festival package targeted to major Texas cities within driving distance of Austin. We are working to schedule several of these events during the summer, and we are holding a relatively strong show calendar for the fall. Our scheduled programs will occur only to the extent health and safety conditions and regulations permit. We have seen great support from our communities regarding this creative utilization of our unique property and have also received strong support from the Austin Convention & Visitors Bureau, our local tourism board. We, of course, continue to maintain and improve appropriate property-wide health and safety protocols to help protect our guests and employees. As a result of the pandemic, we are deferring progress on development projects, including our previously announced Magnolia Place project, pending improvements in health and market conditions, but we continue to advance our land planning, engineering, and permitting activities. We have been successful in making progress in these areas of our development projects so far this year. For example, we successfully rezoned a portion of the Lantana Place project that was previously an office site for a potential multifamily development of up to 350 units, which we believe is a significant increase in value for Stratus and another high-quality development opportunity. We are continuing to advance the planning and permitting process for development of future phases of Barton Creek, including Residential Section KLO and Commercial and Multifamily Section N. Our expected residential density for Section KLO continues to increase as we refine our engineering and land plan, and we currently expect to settle on approximately 420 home sites, which is an increase from the approximately 150 home sites currently entitled. And with respect to Barton Creek Section N, we are also evaluating a redesign of this 570-acre project, using a conceptual approach similar to the one we are using for Section KLO. If successful, the project would be a dense mid-rise, mixed-use project surrounded by an extensive green space amenity. In response to the pandemic, we have implemented measures such as increased sanitizing, physical distancing, and remote work arrangements with the goal of protecting our employees, tenants, guests, customers, and suppliers. We maintain regular communications with our lenders; and as Erin will explain, we believe Stratus has adequate liquidity to meet all of our debt service and other cash obligations for at least the next 12 months. Our current plans call for us to focus on continuing our planning activities for our development projects including Barton Creek and its sections KLO and N, ramping up operations at Block 21, and assessing new opportunities for future projects. I will now turn the call over to Erin for a review of the first quarter 2020 financial results and comments on our liquidity. Erin?

Thank you, Beau. Earlier this morning, we issued a press release announcing our operational and financial results for the first quarter of 2020. While we would normally be discussing our first quarter 2020 results in mid-May, due to this COVID-19 pandemic, we relied on the SEC's order providing conditional relief to delay the filing effort of our first quarter 2020 Form 10-Q. Before I begin, I would like to discuss our liquidity position, which we believe will enable us to navigate the current pandemic. We have strong relationships with our lenders and have maintained regular communication with them. We have recently enhanced our liquidity position by taking the following steps: we received $15 million from Ryman related to the terminated Block 21 transaction and used $13.8 million of these funds to pay down our Comerica revolver; we recently finalized the two-year extension of our $60 million Comerica revolver that extended the maturity of the facility to September 2022; and we received a $4 million Paycheck Protection Program loan. Our projections reflect that we will be able to meet our debt service and other cash obligations for at least the next 12 months without any significant asset sales or reduction in general and administrative expenses. Our projections are based on many detailed and complex underlying assumptions, and we cannot assure you that the results anticipated by our projections will occur. Our financial results for the first quarter of 2020 include revenues totaling $28.1 million in the first quarter of 2020, up from $19.7 million in the first quarter of 2019. This increase primarily reflects the sales of two homes built on Amarra Drive Phase III lots and an increase in lot sales along with an increase in revenue from leasing operations. The overall increase in revenues was net of declines in revenues in our hotel and entertainment segments caused by the COVID-19 pandemic, and net loss attributable to common stockholders of $1.1 million or $0.13 per share in the first quarter of 2020, compared to net income attributable to common stockholders of $0.9 million or $0.10 per share in the first quarter of 2019. The decline in profitability was primarily related to municipal utility district reimbursements and a gain on sale of assets being recognized in the first quarter of 2019, and higher interest expense related to higher average debt in the first quarter of 2020. EBITDA was $4 million for the first quarter of 2020 compared to $6.5 million for the first quarter of last year. Stratus' revenue, operating income, and cash flow in its hotel and entertainment segments were adversely impacted in the first quarter of 2020 and are expected to be more adversely impacted in the second quarter of 2020 and may continue to be impacted beyond the second quarter of 2020. As Beau mentioned, the company is deferring progress on development projects, pending improvements in health [ph] and market conditions, but we continue to advance our land planning, engineering, and permitting activities. Our first quarter 2020 results will not be comparable to past performance or indicative of future performance. Revenue in our Real Estate Operations segment in the first quarter of 2020 totaled $12.3 million, up from $3 million last year. The increase primarily reflects the sales of two homes built on Amarra Drive Phase III lots, and an increase in lot sales in the first quarter of 2020. Operating income in the segment totaled $2 million in the first quarter of 2020 compared to $2.8 million in the first quarter of last year. Last year's quarter included $3.4 million of income from municipal utility district reimbursements. We sold two Amarra Drive Phase II lots, six Amarra Drive Phase III lots, and two homes built on Amarra Drive Phase III lots for a total of $12.3 million in the first quarter of 2020. Since the end of the first quarter and through June 22, 2020, Stratus closed on the sale of one Amarra Drive Phase III lot for $650,000 and one Amarra Drive Phase II lot for $632,000. Revenue in our leasing operations segment totaled $6 million in the first quarter of 2020, up from $3.9 million last year. The increase primarily reflects the commencement of leases at The Saint Mary, Kingwood Place, The Santal, Jones Crossing, and Lantana Place. Operating income in the first quarter of 2020 totaled $0.8 million compared to $2.4 million in the first quarter of 2019. The decrease primarily reflects increased costs and depreciation due to the completion of construction and the start of leasing operations at The Saint Mary and Kingwood Place. In addition, our first quarter 2019 results included a $2.1 million gain on the sale of a retail pad located in the Circle C community. Hotel revenues totaled $6 million in the first quarter of 2020 compared to $8.4 million in the first quarter of 2019. Our operating loss was $1 million in the first quarter of this year, compared to operating income of $0.7 million in the first quarter of last year. The decrease in revenue and operating income was primarily the result of lower room reservations and food and beverage sales as a result of the COVID-19 pandemic. Revenue per available room, or RevPAR was $150 in the first quarter of 2020, compared to $238 in the first quarter of 2019. Entertainment revenues totaled $4.2 million in the first quarter of 2020 compared to $4.8 million in the first quarter of 2019. Operating income was $0.5 million in the first quarter of 2020 compared to $0.8 million in the first quarter of last year. The decrease in both revenue and operating income primarily reflect a decrease in the number of events hosted at ACL Live, many of which were rescheduled or cancelled due to the pandemic. ACL Live hosted 38 events and sold approximately 38,000 tickets in the first quarter of 2020 compared with 64 events and the sale of approximately 49,000 tickets in the first quarter of last year. Moving forward to our capital management; at March 31, 2020, consolidated debt totaled $373.1 million and consolidated cash totaled $23.9 million compared with consolidated debt of $365.7 million and consolidated cash of $19.2 million at December 31, 2019. Purchases and development of real estate properties included in operating cash flows and capital expenditures included in investing cash flows, totaled $8.6 million for the first quarter of 2020, primarily related to the development of Lantana Place, Kingwood Place, Jones Crossing and Barton Creek properties. This compares with $32.7 million for the first 3 months of 2019, primarily related to the development of the Saint Mary, Kingwood Place, the Santal and other Barton Creek properties. Thank you. I will now turn the call back to Beau for his closing remarks.

Thank you, Erin. In closing, I want to recognize the resiliency of our team and our company. We continue to have the talent, reputation, relationships, proven strategy and portfolio of properties that set Stratus apart. I want to thank our Board of Directors and employees for their focus and dedication that have enabled us to navigate the pandemic. I believe these efforts will enable us to continue to operate effectively in the current market and have positioned us to perform well when economic conditions recover. At this time, I will ask the operator to open the line for questions. Thank you for participating.