STRS - NASDAQ

Good day and welcome to the Stratus Properties First Quarter 2022 Financial and Operational Conference Call. Earlier this morning Stratus released its first quarter 2022 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 replay on Stratus’ website through May 30, 2022. Anyone listening to the taped replay should note that all information presented is current as of today, May 16, 2022, 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 from those anticipated, projected or assumed in the forward-looking statements. Please review and refer to the cautionary language included in Stratus’ press release issued today and the risk factors described in Stratus’ 2021 Form 10-K and first quarter 2022 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 measures is reconciled to its most comparable GAAP financial measures in a supplemental schedule of Stratus' press release issued today. I would now like to turn the conference call over to Mr. Beau Armstrong, Chairman, President and Chief Executive Officer of Stratus Properties. Please go ahead.

Thank you for joining our first quarter 2022 financial and operational conference call. Our Chief Financial Officer, Erin Pickens is here with me today. I'd like to start the call by saying that throughout the first quarter, we have continued to successfully make progress on maximizing shareholder value by advancing projects at all levels of the development cycle. Our Texas markets continue to experience tremendous growth in demand. And we are working hard to capture these opportunities for our shareholders. For example, we're working toward completing construction on the Saint June the first phase of retail at Magnolia Place in Houston and the next phase of our Amarra Villas development here in Austin. We continue to advance the development of very exciting projects such as the Annie B and the Saint George, for which we purchased the land with joint venture partners last year. And we're advancing other exciting projects including our 306 unit Lantana multifamily project, now referred to as the Saint Julia, Holden Hills and Section N, which are some of the largest projects we have ever undertaken. We've also made progress towards completing the sale of Block 21 to Ryman Hospitality Properties for $260 million. Block 21 is our wholly-owned hotel, entertainment and office property located on a two acre city block in Downtown Austin. We remain confident that the transaction will close prior to June 1, 2022, although it remains subject to the timely satisfaction or waiver of various closing conditions. It is worth noting that both venues associated with Block 21, ACL Live and 3TEN ACL Live, are now operating at full capacity and our W Austin Hotel, which is also a part of Block 21 has experienced rising revenue with first quarter 2022 hotel revenue at approximately 70% of pre-pandemic hotel revenue in the first quarter of 2019. Our Board of Directors and management team remain engaged in a strategic planning process and are evaluating the uses of proceeds from our recent and pending sales in Stratus' long-term business strategy. We expect to provide additional information after the Block 21 transection has concluded and our board and management have had the opportunity to assess market conditions and the capital requirements for Stratus' development pipeline. We have proven our ability to implement our business plan to create value for our Shareholders. We focus on our ongoing projects and development pipeline by furthering projects at all stages of our development cycle, and we sustain momentum by remaining focused on execution and constantly seeking new best-in-class opportunities to add to our development pipeline. It has been a busy period for us. And on today's call, I'd like to provide updates on select residential, retail and commercial properties. Then I'll turn the call over to Erin to discuss our first quarter 2022 results. Starting with our residential projects. In the first quarter, we advanced development plans and continued construction on several of our promising residential developments. Overall, we are capitalizing on strong market condition as the demand to live and work in the markets in which we operate remains high. We also believe that housing demand will continue to outpace supply in the markets where we operate. The first units of our 182-unit luxury garden-style multifamily project within the Amarra development, The Saint June, are currently expected to be completed in the fourth quarter of 2022 with completion of the project plan for the first quarter of 2023. The Saint June will be comprised of multiple buildings featuring one, two and three bedroom units per lease with amenities, including a resort-style clubhouse, fitness center, pool and extensive green space. This property's design is consistent with the company's sustainability, wellness and conservation goals. As you may recall, we raised third-party equity capital for the project last year. We retained an approximate 34% equity interest with the opportunity for higher return and received some development fees and will receive management fees. We look forward to completing The Saint June and adding into our portfolio of innovative, sustainable properties. We continue planning for and obtaining entitlement and permanent approvals for The Saint George, our 316-unit luxury wrap style multi-family property to be constructed in North Central Austin. We also revised third-party equity capital for this project. We retained an approximately 10% equity interest with the opportunity through higher returns through a promote structure and will receive development fees and management fees. We purchased the land for the project in December and are currently negotiating the construction loan. We expect to begin construction in the second quarter of 2022 and anticipate we will achieve substantial completion by mid-2024, subject to the completion of entitlements and financing. We've also made progress advancing development plans for our 300 unit luxury high-rise apartment building, The Annie B, also here in Austin. The units are designed to take advantage of the unobstructed 360 degree views of the Capital, Downtown Austin, the University of Texas campus and West Austin. This project's design is also consistent with the company's sustainability, wellness and conservation goals. In addition, we are expanding the historic AO Watson House adjacent to the Tower to offer amenities that include a restaurant, bar, pool and garden, while preserving the property's unique historic and architectural features. We acquired the land for the Annie B last year through a joint venture with third party investors and currently retain a 31% interest in this initial land partnership phase of the project. We expect to receive development and management fees and promoted economics once the project reaches the development partnership phase. We have also advanced development plans for the multifamily component of Lantana Place, now call it The Saint Julia, our mixed-use project in Austin. Subject to securing an acceptable capital structure, we expect to begin construction in the third quarter of 2022 with an expected completion in mid-2024. We also have the next five-unit phase of the Amarra Village project under construction in Barton Creek. We continue to make progress on our development plans for Holden Hills, our final large residential development within the Barton Creek community. Holden Hills consists of 495 acres and is designed to feature 475 unique residences to be developed in multiple phases, also with a focus on health and wellness, sustainability and energy conservation. We currently expect to secure final permits to start construction in September 2022, subject to obtaining financing and other market conditions. Our current projections anticipate that we could begin closing sales of certain home sites in Holden Hills in late 2024. We have the flexibility to sell the developed home sites, build and sell or build in lease homes on some or all of the home sites depending on financing and market conditions. We are tracking market demand closely and are applying a conceptual approach similar to that used for Holden Hills in order to progress the development plans for Section N, which comprises our 570-acre track located along Southwest Parkway in the Southern portion of the Barton Creek community. If successful, this new project will be designed as a dense mid-rise mixed-use project surrounded by an extensive green space amenity, resulting in a significant potential increase in development density as compared to our prior plans. I'm very encouraged by the residential projects in our pipeline. All of these exciting developments and unique projects are expected to drive strong returns over the coming years, and we are eager to see our patience and thoughtful planning continue to payoff. Moving now to our retail and commercial updates. Construction continues on Magnolia Place, in HEB grocery shadow-anchored mixed-use project in Magnolia, Texas. Leveraging the proven playbook we have with HEB, this project is currently planned to consist of four retail buildings totaling approximately 35,000 square feet, five retail pad sites to be sold or ground leased, 194 single-family lots and approximately 500 multifamily units. The first two retail buildings are expected to be available for occupancy in the third quarter of 2022. HEB began construction on its 95,000 square foot grocery store on an adjoining 18-acre site in mid-2021, and it is expected to open in the fourth quarter of 2022. Kingwood Place, West Killeen Market and Jones Crossing are our three stabilized mixed-use projects anchored or shadow anchored by HEB grocery stores, and they continue to perform well and generate revenue for our company. We are currently exploring a potential sale or refinancing of these three retail properties. At Lantana Place, our partially developed mixed-use project in Austin, we had signed leases for approximately 85% of the retail space as of March 31, 2022. And as previously mentioned, are advancing development plans for the multifamily component referred to as The Saint Julia. We continue to monitor the construction cost environment, which is a challenging issue impacting our industry these days. We are working to manage price escalations and some supply chain delays that our contractors are experiencing for certain materials. Borrowing costs are also rising However, we are fortunate that our projects are located in markets with strong demand and growth. I will now turn the call over to Erin for a review of our first quarter 2022 financial results. Erin?

Thank you, Beau. Today, we issued our press release announcing our first quarter 2020 results. Revenues totaled $3.1 million in the first quarter of 2022 compared with $11.4 million in the first quarter of 2021. The decrease in revenue primarily reflects that there were no sales from our real estate operations segment in the first quarter of 2022, as available inventory of developed properties in that segment is limited. In addition, leasing revenue decreased as a result of the sales of our multifamily projects The Saint Mary and the Santal in 2021. As a reminder, due to the pending sale of Block 21, our continuing operations include our real estate operations and leasing operations segments, while our discontinued operations include our hotel and entertainment operations as well as the leasing operations associated with Block 21. Net income attributable to common stockholders totaled $2.3 million or $0.27 per share in the first quarter of 2022 compared to $8.9 million or $1.08 per share in the first quarter of last year. The current year first quarter's results include a pretax gain of $4.8 million related to the reversal of accruals for costs to lease and construct buildings under a master lease arrangement that Stratus entered into in connection with the sale of The Oaks at Lakeway in 2017. The first quarter 2021 results included a $22.9 million pretax gain or $16.2 million, net of non-controlling interests on the January 2021 sale of The Saint Mary, partially offset by a $2.5 million net loss from discontinued operations as our hotel and entertainment operations were impacted by the COVID-19 pandemic. EBITDA totaled $2.4 million in the first quarter of 2022 compared to $23.5 million in the first quarter of 2021. I will now provide brief commentary on our reporting segments. Revenue from our real estate operations segment in the first quarter of 2022 totaled $23,000 compared to $6.6 million in the first quarter of 2021. Operating loss totaled $1.4 million in the first quarter of this year compared to operating income of $2.1 million last year. The decrease in revenue and the operating loss reflects that there were no sales in the segment in the first quarter of 2022, as available inventory of developed properties in our real estate operations segment is limited. Stratus is currently working towards completing the construction of five Amarra Villas homes, which will increase inventory for our real estate operations and generate revenue when they are sold. Revenue from our leasing operations segment in the first quarter of 2022 totaled $3.1 million compared with $4.8 million in the first quarter of last year. Operating income for the segment in the first quarter of 2022 totaled $6.1 million compared to $24.2 million in the first quarter of last year. The decrease in segment revenue in the first quarter of 2022 primarily reflects the sale of the Santal in December 2021, partly offset by increased revenue at Lantana Place. The decrease in operating income is primarily due to the gain on sale of The Saint Mary in January 2021. Now moving to our discontinued operations. As Beau mentioned, we expect the pending sale of Block 21 to Ryman to close prior to June 1, although it remains subject to closing conditions. The $260 million purchase price includes the purchaser’s assumption of approximately $137 million of existing mortgage debt and is subject to an expected downward adjustment of $5 million. After closing costs and the buyer's assumption of the outstanding Block 21 loan, the sale is expected to generate net pretax proceeds of approximately $115 million and after-tax proceeds of approximately $90 million before prorations, but including $6.9 million to be escrowed for 12 months after closing. Although we expect the sale to close soon, I would like to provide some information about how the discontinued operations performed during the first quarter of 2022. Hotel revenues totaled $5.9 million in the first quarter of 2022, up from $2.1 million in the first quarter of last year. The increase in revenue is primarily a result of higher room reservations and food and beverage sales as the first quarter 2021 results were significantly impacted by the COVID-19 pandemic. Revenue per available room or RevPAR was $165 in the first quarter of 2022, up from $51 in the first quarter of last year. We are pleased to see the rise in hotel revenues as the effects of the pandemic subside. Entertainment revenues increased to $5.3 million in the first quarter of 2022 compared to $0.6 million in the first quarter of 2021. The increase in entertainment revenue primarily reflects an increase in the number of events hosted at ACL Live and 3TEN ACL Live as the impacts of the COVID-19 pandemic had a significant impact on the first quarter of 2021 results. As Beau mentioned, ACL Live and 3TEN ACL Live are now operating at full capacity. Turning now to capital management, at March 31, 2022, consolidated debt totaled $121.4 million and consolidated cash totaled $12.3 million compared with consolidated debt of $106.6 million and consolidated cash of $24.2 million at December 31, 2021. Consolidated debt at both dates excluded the Block 21 loan of approximately $137 million. As of March 31, 2022, Stratus had $49.7 million available under its $60 million Comerica Bank credit facility with a total of $347,000 of letters of credit committed against the credit facility. In April 2022, Stratus borrowed $20 million on the credit facility the majority of which was used to make a U.S. federal tax payment for Stratus' 2021 tax liability. Purchases and development of real estate properties included in operating cash flows and capital expenditures included in investing cash flows totaled $19.6 million for the first three months of 2022, primarily related to the development of Magnolia Place, The Saint June and other Barton Creek properties, including Amarra Villas. This compares to $3.5 million for the first three months of 2021, primarily related to the development of Barton Creek properties. We project that Stratus will be able to meet its debt service and other cash obligations for at least the next 12 months. In May 2022, we are in the process of entering into an amendment to extend the maturity date of the Comerica Bank credit facility from September 27, 2022 to December 26, 2022. We are in discussions with the lender to remove Holden Hills from the collateral pool for the facility, finance the Holden Hills project under a separate loan agreement and enter into a revised revolving credit facility with a lower borrowing limit secured by the remaining collateral under the facility. We expect to be able to extend or refinance all our loans prior to their maturity dates. No assurances can be given that the results anticipated by our projections will occur. Thank you, and I will now turn the call back to Beau for his closing remarks.

Thank you, Erin. Our team remains committed to executing our proven development strategy. Each quarter, the benefits of having a team with the right knowledge, roots and relationships within the Austin community and the other Texas markets where we operate have proven to be immensely helpful as we look for new opportunities in these markets that create value while balancing active management and monitoring of costs. I want to share an interesting fact noted by the Austin Business Journal in March. According to the U.S. Census Bureau, in 2021, on average, 116 net new residents moved to the Austin Metro every single day. We are well positioned to both benefit from and take advantage of this growth through our existing properties and development plans. We have a lot of exciting development projects in the works that we are optimistic about and I'm eager to see our team's continued progress on these projects in the coming months. At this time, I will ask the operator to open the line for questions. Thank you all very much for participating today.

We will now being the question-and-answer session. [Operator Instructions] Our first question is from Chris Mooney with Wedbush Securities.

Good morning. You noted a sort of -- some sort of a change in what you're thinking on Block N. Could you give a little more color to that? And what type of development are you thinking of building there?

Good morning, Chris. So Section N is our last big commercial track at Barton Creek. And as you and many others know, we've owned that property for 30 years since the inception of the company. Section N has always been planned for commercial and multifamily, and it was previously permitted under an earlier ordinance. And our strategy now is to take advantage of some changes in the ordinaries that are beneficial, such that we can get more density than initially planned but in a more compact scheme. So rather than having two story offices that spread out with surface parking as an example, we would look to build taller buildings with structured parking. And that works now because the economics in Austin have changed so dramatically over the last 30 years that the more dense product type is just more desirable and certainly achievable given that location. So there's been no real change in the use. Our strategy just is to add additional density under kind of a different entitlement scheme. I mean there's a lot more too, and I'm trying to make it simple. But essentially, it's really a good thing in that we're able to get more density under current regulations but it's really more a function of just how dramatically different this market is now than it was in the '90s, early '90s when we initially plotted the property.

Okay. Do you anticipate getting any being approached by any corporate entities to build them an office facility in that location?

Well, that's a great question. So I do actually. I think that Barton Creek, given its proximity to kind of the western suburbs, proximate downtown, the airport, the existing roadway infrastructure, the fact that Stratus controls the utility infrastructure out there. So all those things make it -- it's not a dream to think that, that product could be on the ground in a reasonable period of time. And then, of course, Lantana, which is right across the street from us is -- I think there's four million, 5 five million square feet of office there now, all well tenanted, a good group of tenants out there. AMD, for example, has their Austin quarters, if you will, right there. So I would think that just given the fact that there really isn't anything else out there, but the property that we control that we would be certainly a candidate for an expansion. In fact, we're in the market already. I mean we've had some interest over the years. It just wasn't ready a couple of years ago just because of the timing of utility infrastructure and the permitting process in Austin. But I think when we get these plans out there with a definite timeline that we will see significant interest in the -- certainly in the office component. And again, it's intended to be a mixed-use project. So it would be heavy residential, enough retail to support both the residential and the office and then some amenities. We will have -- by virtue of developing under current code, we'll have several hundred acres of green space that we would look to amenitize in some fashion such that it has created value for the overall development. In fact, that property, ultimately, you can weave your way up hiking through the green belt, and you can get to the Barton Creek Green Belt, which goes all the way into town. So it really is a special property and we've been carefully planning it and have made a ton of progress over the last 24 months and expect to be kind of moving things through the city here sometime later this year.

And do you have any financing partners on that? Or is it owned entirely on Stratus?

At this time it's owned entirely by Stratus. We would likely have to -- would like to bring on a partner at some point, just given that it's -- I mean it's a huge undertaking and we don't have the resources to do it all on our own. And again, I feel very confident, just given the quality of the project, the location that we'll have several opportunities to choose from, several options, I should say.

Great. Quick question. Kingwood Place, West Killeen and Jones Crossing. How much of the existing debt is related to those properties?

I'd have to ask, Erin, I don't have the number at my fingertips.

There’s project level debt on all three of them?

It is. There's project level financing, construction loans on all three of them. We have -- I think in 1 instance, we've refinanced it with another kind of floating rate bank loan, but all of those are -- can be paid off without any kind of additional cost. But they are all project loans. I just don't know the exact number, Chris. Maybe we can follow up if Erin doesn't have it at a fingertip.

Okay. No worries. And then just one more quick one for me. The NEB and The Saint George, have you started any demolition on either of those projects?

We have. The Annie B we pulled our demo permit. I want to say, perhaps last week, and we started demolition there, and that was an easy job. It was just a single-story brick structure, and that's probably -- [indiscernible] of the weekend. I think we're pretty much in line. The Saint George, that permit hasn't been issued yet, but we're anticipating having that in hand by the end of the month.

Okay, thank you.

Thank you, Chris.