Stratus Properties Inc.
Q1 2018 Earnings Call Transcript

Published: 13 May 2018

[Operator:]

Welcome to the Stratus Properties First Quarter 2018 Earnings Conference Call. Stratus' released its financial results earlier this morning, 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 through May 15, 2018. Anyone listening to a taped replay should note that all information presented is current as of today May 10, 2018 and should be considered valid only as of this date. I would now like to turn the call over to Mr. Beau Armstrong, Chairman, President and Chief Executive Officer of Stratus Properties.

[Beau Armstrong:]

Thank you and good morning, everyone. Joining me today is our Chief Financial Officer, Erin Pickens. As a reminder, today's press release and certain comments that we will make on this call include forward-looking statements, and actual results may differ materially. I would like to refer everyone to the cautionary language included in Stratus’ press release and to the risk factors described in Stratus’ Form 10-K and subsequent SEC filings that could cause actual results to differ materially from those projected by us in our forward-looking statements. Today's press release and certain of our comments on the call include financial measures, such as adjusted EBITDA and after-tax net asset value, which are not recognized under U.S. GAAP. As required by SEC regulations, these non-GAAP financial measures are reconciled to the most comparable GAAP financial measures in the supplemental schedules of Stratus’ press release. This morning we will cover highlights of our first quarter 2018 performance, our recently published after-tax net asset value, or NAV that underscores the value we create through our active development strategy. Operational update since our last earnings call, our financial results, which Erin will discuss, and then I'll finish with some brief comments on real estate market conditions. Starting with the first quarter 2018 highlights. The positive momentum we saw in our real estate development and leasing businesses during 2017 continued into the first quarter for our commercial and residential properties. We finalized our development plans for our fully permitted St. Mary project and expect to start construction during the second quarter for the 240 unit multifamily properties in the Circle C community, subject to completion of project financing. Our Lantana Place development is progressing well with the anchored tenant, Moviehouse & Eatery, scheduled to open this month ahead of schedule. We have also entered into a ground lease with the franchisee that will build a Marriott A/C Hotel, which we anticipate will begin construction in early 2019. Jones Crossing in College Station is also moving along well with many new leases being negotiated as HEB is scheduled to open this September. The second phase of Santal is advancing on schedule and we expect to begin leasing the first units in July and be substantially complete by year end. Our West Killeen development were 68% leased at the end of the first quarter and we expect to explore opportunities to sell this property later this year depending upon reaching stabilized occupancy and market conditions. Finally, thus far in the second quarter, we have sold two of Amarra Villas homes and we have one scheduled to close in June bringing the total to three for the second quarter alone and we have one more under contract scheduled to close later this year. Given this demand, we intend to begin construction in the next phase in the very near future. I'll discuss some of these highlights in more detail, but first I'd like to spend some time reviewing our after-tax net asset value calculation, or NAV, that is described in detail in the recently published investor presentation on our website, which includes reconciliation to GAAP stockholders' equity. Our after-tax NAV was $38.08 per share as of December 31, 2017. The NAV calculation is an important internal metric used by our executive team and board incorporates current market values derived from independent third-party appraisals prepared by firms that are chosen primarily by our lenders as required under our financing arrangements. In short NAV is a key valuation measure used within the real estate industry because it includes the current market value of our properties as opposed to GAAP caring value that reflects the historical cost basis of assets less depreciation. While operating results can fluctuate, sometimes significantly based on the level of asset sales in any one quarter, after-tax NAV serves as an important metric to gauge the cumulative long term-value created by Stratus’ active development programs. We seek to create value for shareholders through our development process. It starts with pursuing quality properties in attractive markets, purchasing real estate at the right time in the right price, securing entitlements by navigating government and neighborhood regulations and processes, arranging competitive financing, managing the contractors who are responsible for the construction, forging relationship with tenant and key stakeholders, marketing the properties to target customers at rental rates consistent with our projections and finally selling opportunistically when demand is high, so that we may reinvest the proceeds in another project or alternatively refinancing and maximizing cash flow. Our active development plan also allows us to return capital to shareholders as we did last year with the $1 per share special cash dividend. As noted in our investor presentation, NAV reflects the estimated built-in gains that totaled more than $190 million for our properties as of year-end. By contrast these gains are not reflected in our GAAP financials until they completed sale. A good example of this was The Oaks at Lakeway. The unrealized gain for this property was not captured in our GAAP financial statements until we sold it last year. As a remainder the substantial cash proceeds from this sale not only helped us to fund a special cash dividend, but also substantially reduce our debt during 2017. Stratus Properties’s after-tax net asset value as of year end grew 7% to $38.8 per share primarily resulting from the lower federal tax rate of 21% as detailed in our disclosure. Now since I've provided a fairly comprehensive update on our year-end earnings call just a couple of months ago, I’ll drill down on just two development projects that we initiated since our last earnings call. We are very pleased to announce that we expect Q4 with our St. Mary project is a 240 multiunit multifamily property in the Circle C community in the very near term. This is the last multifamily site within the original community. The same area project is fully permitted, subject to completing the financing we expect to initiate construction in the second quarter. We plan to deliver the first units in mid 2019 and we have got a detailed marketing plan in place to capture demand for rental residential property in this community given the strong population growth, very low unemployment and constrained supply. This development is close to the employment centers of Southwest Austin and offers residents a range of living space options. Once we begin the groundbreaking process, we will post full details for the project on our website. Construction continues on the next phase of Amarra Villas at Barton Creek also just a short drive from downtown Austin. This townhome project consists of 20 new developments of lock and lead properties averaging approximately 4,400 square feet with all the amenities of Barton Creek available to members including golf court access. During 2017, we completed construction of the first five townhomes and commenced construction of two more. Since three of are even sold and two more are under contract, we plan to begin building four more units within the next three months. Overall, during the quarter, we invested an incremental $28 million in capital expenditures into our development projects. Property sales which can fluctuate significantly from quarter to quarter were – in the first quarter as we sold just two lots in Amarra Drive for combined $1.2 million. Thus far in the second quarter, one Amarra Drive lot has been sold and currently 14 Amarra Drive lots are under contract. Now, I’d like to turn it over to our Chief Financial Officer, Erin Pickens, for a review of the financial highlights.

[Erin Pickens:]

Thank you, Beau. Today Stratus reported earnings for first quarter 2018 as detailed in our press release issued this morning. The net loss attributable to common stockholders was $1.9 million, or $0.23 per share, compared with a net loss of $2.7 million, or $0.33 per share a year ago. Factors that influenced the year-over-year comparison include, fewer lots sales in 2018 than in 2017 and lower revenue and operating income from W Austin Hotel and our entertainment segment. As Beau mentioned, 14 Amarra Drive lots are under contract and these sales are expected to close between June of this year and March of next year. Following the items we reported in first quarter 2017, a $2.5 million or $0.20 per share charge for profit participation costs and $0.5 million or $0.04 per share loss on the early extinguishment of debt, both related to the sale of The Oaks at Lakeway, partly offset by $1.1 million, or $0.09 per share, gain on the sale of the bank building, an adjacent land at Barton Creek. Adjusted EBITDA was $1 million in the first quarter of 2018 compared with $2.1 million a year ago. Looking at each of our operating segments, as Beau mentioned, we sold only two lots in the first quarter and real estate operations had an operating loss of $425,000 compared with operating income of $144,000 last year. Leasing operations had operating income of $432,000, up from a loss of $1.4 million a year ago, which is influenced by large profit participation expense to HEB. Hotel segment operating income was $1.5 million, down from $2.2 million last year as increased competition in the downtown Austin hotel market, pressures large group reservation. Also Revenue per available room, or RevPAR, declined to $262 from $299 in the first quarter of 2017. Operating income for our entertainment segment was $735,000 down from $1.1 million last year mostly related to lower concession revenues and fewer private events that are ACL Live and 3TEN ACL Live venues. Turning now to capital management, at the end of the first quarter, consolidated debt was $249 million compared with $222 million at year end as we drew down on lending facilities to invest an incremental $28 million of capital expenditures into our development project. We are in the process of finalizing an extension to our credit facility that matures in November of this year with the goal of increasing the revolver that may enhance our financial flexibility. We are confident that we’ll renew the revolver soon under favorable terms. We have net cash investment requirements for all of our current development projects and we expect to generate additional revenue from currently scheduled property sales. Our capital management supports the strategic real estate development program that Beau just described. Now, I'll turn it back to Beau.

[Beau Armstrong:]

Thank you, Erin. I'll conclude as I started by saying that the positive momentum we saw in 2017 in our development projects has continued into 2018. Our focus is simply to execute on the multiple ongoing development projects we just discussed. Over a period of many years, we set the company up for success by purchasing land for development, securing permits, building a talented team, establishing solid relationships with tenants and the financial community, so that we could fully capitalize on the robust real estate environment we have today. The regions we serve retail, office and residential properties are all attracting growing populations with the lowest unemployment rate we’ve seen in years. And Austin has increasingly become a travel destination for business people government officials, students, vocationers like supporting our hotel and entertainment properties. You know this as I mentioned on our last call, I believe Stratus is in the right place and at the right time with the right properties, and we will continue to capitalize on our strategic position for the benefit of our shareholders. This may include opportunistic sales of certain properties later this year including West Killeen Market and the retail complex in the first phase of Barton Creek Village subject to our assessment of leasing progress and market conditions. We expect that these potential sales will have a positive impact on our financial results. Now, we will open the call for a few questions.

[Operator:]

We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Fred Buettner, a Private Investor. Please go ahead.

[Fred Buettner:]

Hi, Beau. How are you?

[Beau Armstrong:]

I am very well, Fred, nice to hear your voice.

[Fred Buettner:]

Same here. My first question is about net asset value. Over the next five years, what rate should we expect net asset value to grow?

[Beau Armstrong:]

Fred, I don’t think that we – I don't know that I'm in a position to disclose that. Our – obviously, we expected to increase. I don't know that we have – I know that we do not have a target, but I can tell you that we certainly expected to increase and where that comes from is as we stabilize these properties and sell it much like Lakeway that’s where we will see the increase in NAV when these things are stabilized and ultimately sold.

[Fred Buettner:]

Okay, thank you. Also in terms of the master lease obligation at Lakeway, can you discuss the leasing trends that have allowed those payments to be reduced?

[Beau Armstrong:]

Sure, we have – as everyone knows, when we sold that property we had a master lease obligation to the buyer and we have continued to reduce our exposure by as we lease space and then there were – there's another element to it just as there was a time – timeframes where some of these other leases burned off so to speak that allowed us to reduce our liability. But since our last call, we have a couple new leases out there that have just further reduced our exposure. We do have two fairly big pads out there that we had always projected that would – we really wouldn’t see a lot of activity until the hotel is open. The hotel is well underway and I believe it will be scheduled to open in the first quarter – end of this year or first quarter of next year. So we’ve seen some increased activity and interest in those two remaining pad sites out there, but again all that activity was modeled and what I can tell you is that we are on track for the way we had modeled it at the time of the sale.

[Fred Buettner:]

Thanks. I appreciate…

[Beau Armstrong:]

I’ll further add that that HEB has reported very, very strong sales in their store and that's generally a very good barometer of traffic and just overall interest in the property.

[Fred Buettner:]

Thank you, Beau.

[Beau Armstrong:]

Thank you, Fred.

[Operator:]

[Operator Instructions] And at this time, I'm showing no further questions. I would like to conclude the question-and-answer session as well as today's conference. We thank you for attending today’s presentation and you may disconnect your lines at this time.