Stratus Properties Inc.
Q1 2017 Earnings Call Transcript

Published: 10 May 2017

[Operator:]

Welcome to the Stratus Properties First Quarter 2017 Conference Call. Stratus' first quarter 2017 results were released earlier this morning, and a copy of the press release for today's call is available on Stratus' website at stratusproperties.com. Please note this event is being recorded. 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, Austin. Good morning, everyone, and thank you for your interest in Stratus Properties. It is my pleasure to welcome you to Stratus Properties' inaugural quarterly earnings call. We are hosting this call because of the ongoing interest in our company and we are excited to share several things with you today. Before we begin our comments, we would like to remind everyone that today's press release and certain of our comments in the 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 2016 Form 10-K and subsequent SEC filings. Today's press release and certain of our comments on the call also includes certain financial measures, such as net asset value, or NAV, adjusted EBITDA and debt to total asset value, which are not recognized under U.S. GAAP. As required by SEC Regulation G, reconciliations of these measures to match reported in Stratus consolidated financial statements are contained in the supplemental schedules of Stratus' press release, which are also available on Stratus' website at stratusproperties.com. With me this morning is Erin Pickens, Senior Vice President and Chief Financial Officer, who will provide an overview of our financial results following my remarks. Then we'll open the call for questions. This call is being recorded and a replay will be available through May 15. During the first quarter of 2017, Stratus Properties completed the sale of The Oaks at Lakeway for $114 million, resulting in a gain of $39.7 million that was deferred and will be recognized in future periods in accordance with accounting rules. We also completed $2.1 million in homesite sales, reduced debt by $91 million and declared a special cash dividend of $1 per share. We ended the quarter with a debt to total asset value of 33%. In April 2017, Stratus received $26.3 million in financing to develop the first phase of Lantana Place, a mixed-use project in Austin. This is a busy time for us. We are very proud of these accomplishments. We have a long history in the Austin area markets that we serve. We have strong relationships, and we believe that we have the financial flexibility to continue to grow and generate additional value for our shareholders. Our growth plans and our balanced portfolio, considered the cyclical nature of the real estate market, we have significant landholdings with promising long-term development opportunities in premiere fast-growing markets, where we offer diverse product types. Stratus' portfolio includes developed and undeveloped multi-family properties, high-end single-family residences and residential lots for sale. In addition, we own and develop commercial retail projects, which we lease and sale, when market conditions are ideal. Further our iconic W Hotel and ACL Live venue contributes stable, solid cash flow that helps support the company's future growth plans. Stratus reported slightly higher revenue during the quarter compared to first quarter 2016 and strong year-over-year improvement in operating income for all segments, excluding the impact of the sale of The Oaks at Lakeway. We are very pleased with the $114 million sales price of The Oaks, which was accretive to NAV and generated strong returns. The sale of The Oaks at Lakeway is an example of the company's ability to aggregate land parcels and propose and implement a development plan that regulators support and communities desire. Not included in the sale is approximately 35 acres adjacent to The Oaks that Stratus retained for future high-density residential development, which is currently in high demand. We are pleased with the results of our W Austin Hotel located in downtown Austin, a thriving area for visitors and entertainment. The first quarter revenue per available room, or RevPAR, of $299 is higher than RevPAR in the first quarter 2016 of $282. However we faced stiff competition with more upscale competitive hotel rooms being added to the market and we expect pricing pressure to continue. Last year, we put in place a $150 million 10-year non-recourse loan to refinance the hotel, allowing us to recoup most of our investment, which helps protect Stratus' ability to continue to develop real estate projects in accordance with our strategy. Loan payments are supported 100% by the operations of our Block 21 project, which includes the W Austin Hotel, the ACL Live performance venue, 3TEN at ACL Live in approximately 52,000 square feet of commercial space in the building. Recent hotel sales transactions in Austin have achieved high pricing and are a good indicator of the value of our W Hotel. A recent third-party appraisal value Block 21 at $234 million compared to our $144 million book basis at year-end 2016. Stratus' remaining cash investment in this asset is only $6.7 million and we continue to benefit from cash flow in excess of debt service. Block 21, the premiere entertainment block in Austin is also home to the Austin City Limits Live performance venue, which is the primary component of Stratus' entertainment segment. For those of you, like me, who grew up watching Austin City Limits on PBS, I can assure you that it is exciting to be a part of this legendary iconic course that is central to what draws residents and visitors from around the world to Austin. In the first quarter, ACL Live hosted multiple sold-out shows for artists including Louis C.K., Dave Chappelle, Sting and Don Henley. 3TEN at ACL Live, a smaller venue design for more intimate performances and events also had a strong quarter, with March being its best month ever. Overall attendance at ACL was nearly 72,000 people in the first quarter, compared to 54,000 in the first quarter 2016. Higher ticket prices and higher attendance continue to drive the strong performance of this one-of-a-kind asset that draws major any talent events. There are high barriers to entry in this market, and through our ownership of ACL, Stratus has made the necessary investments in music technology to support ACL strong reputation and maintain a leading market position. Before I talk about the performance of our other segments, I want to talk about market conditions and our net asset value, or NAV. The Austin real estate market is prosperous and continues to benefit from steady job and population growth. Austin's current population of approximately two million people is expected to double in size by 2040, the fastest growth rate in the nation among major metro areas. I'm told 129 people a day move to the Austin area in 2016. We've seen a surge in demand for all product types, including single and multi-family residential, retail and office, supporting these growth statistics. Stratus' real estate includes 1,664 total undeveloped acres in addition to the 29 acres we currently have underdevelopment. Austin is a highly regulated municipality and a key component of our overall strategy is our ability to take advantage of our legacy entitlements and adapt our development plans to meet the demands in the rapidly growing Austin area market. We have also been able to use the same resources, expertise and relationships to acquire and develop projects in select areas outside of Austin, primarily through our relationship with HEB Grocery Company. The computation of our NAV uses annual market appraisals conducted by third-party appraisers retained by our bank lenders, reflecting current market conditions. Our after-tax NAV at December 31, 2016, was $292.9 million, or $35.56 per share. Our real estate business model continues to deliver positive results, primarily due to the nature of our high-quality assets, and while quarterly real estate results will vary, NAV serves as an ongoing measure of our success. We are pleased with the continued strength of this important valuation metric. Our real estate operations segment, primarily include single-family lot and home sales in the Circle C and Barton Creek, including Amarra communities. Sales can vary significantly from quarter to quarter. We have built and will continue to build high-end multi-family units in the Barton Creek area, a highly desirable upscale residential area in Austin. Stratus has invested over $40 million of infrastructure in Barton Creek and maintains unique entitlements, which enable us to server this rapidly growing community. Our leasing operating segment, like real estate operations, will also have variable quarter to quarter results, reflecting periodic asset sales, which are a central component of our business model. Our leasing operations segment includes multi-family communities and retail projects. This includes our West Killeen Market in Killeen, Texas, which contains 44,000 of total leasable space and is nearing completion. We are actively evaluating other grocery store-anchored projects as an ongoing growth vehicle for Stratus. Now on the development front, I want to highlight a few projects and describe what we are doing and how we are adding value. We believe our projects contain a healthy and manageable mix of single and multi-family residential properties and commercial properties. Our Santal multi-family development is the only multi-family project of its kind in Barton Creek, which means that Stratus controls the pace and development of all multi-family inventory in the highly desirable Barton Creek community. Phase 1 includes 236 units, is 98% leased. It was completed within budget. We expect to receive construction financing to begin construction on Phase 2, which includes 212 units in the second quarter of 2017, with initial leasing currently expected to begin in 2018. We have approval to construct a total of 1,800 multi-family units in Barton Creek. We believe that Santal and our other multi-family developments will be a strong stable source of cash flow for Stratus going forward. On the commercial front, Stratus has certain competitive advantages that will support commercial development growth, both in and outside of Austin. As I mentioned earlier, just this past month, we received financing for the initial phase of our Lantana Place mixed use project. Lantana Place, which will be developed in two phases, totaling approximately 325,000 square feet, is located in the growing and vibrant Barton Creek area, close to our Santal multi-family project. Lantana Place will include convenient sought-after services and amenities, including a 12-screen high-quality dine-in movie theater, a hotel, restaurants and office buildings. We expect to break ground on the first phase of Lantana Place this month. The movie theater is presently expected to open in the second quarter of 2018. We continue to make progress on our Magnolia, Texas HEB-anchored retail project, our premier mixed use development that will include 10 pad sites, a 103,000 square feet of retail space, a hotel site and up to 1,200 multi-family units. In addition to our partnership with HEB, we have worked closely with the City of Magnolia to establish a Municipal Utility District, or MUD, covering our 124 acres and to secure entitlements for future hotel and residential development. ExxonMobil's relocation of its world headquarters to the Woodlands near Magnolia is one of the many reasons we are thrilled to be part of this area's fast growth. The HEB store is presently expected to open in the early part of 2019, and we expect to begin construction later this year. For those listeners new to our company, it is important for you to know that we are not structured as a REIT, nor do we intend to seek a REIT structure anytime soon. Given the current concerns regarding interest rates, potential tax reform and REIT regulations, we remain comfortable with our corporate structure and the nature of our diverse asset base. Our goal is to continue to focus our financing efforts on obtaining project-specific debt and to minimize debt at the parent company level. We have good relationships with our lenders, who understand our business and have been supportive of our projects and growth objectives. These relationships have led to a strong history of arranging successful project financings at attractive rates. I'm fortunate to work with a talented team that has strong real estate and development expertise. I want to thank our team members for the significant contribution that make every day to Stratus Properties into our community. Now I'd like to turn it over to our Chief Financial Officer, Erin Pickens, for a review of the financial highlights. Erin?

[Erin Pickens:]

Thank you, Beau. Today Stratus reported a first quarter 2017 net loss attributable to common stockholders of $2.7 million, or $0.33 per share, compared with the first quarter 2016 net loss attributable to common stockholders of $1.7 million, or $0.21 per share. Stratus first quarter 2017 net loss includes a $1.6 million charge for profit participation and a $0.3 million loss on early extinguishment of debt, both related to the sale of The Oaks at Lakeway. These were partly offset by a $0.7 million gain on the sale of a bank building and 4.1 acres of adjacent undeveloped land in Barton Creek. A $39.7 million gain on the sale of The Oaks at Lakeway was required to be deferred under accounting rules, and will be reflected in future earnings, net of future master lease payments after Stratus' continuing involvement ends or substantially all of the risks and rewards of ownership have transferred to the buyer and any remaining obligation for Stratus' is support under the master leases is less than the deferred gain. Stratus closed the quarter with $27 million in cash. The company's special dividend announced in March was paid in April using $8.1 million of cash on hand. Our cash, along with the $18 million available under our revolving line of credit, remain available for operations and funding early stage development projects, prior to obtaining another financing. Our total debt of $199.9 million at quarter end is mostly direct project financing, which reflects the use of proceeds from the sale of The Oaks at Lakeway to pay off the Lakeway construction loan and balances under our Comerica Bank credit facility. Approximately 75% of our debt is fixed-rate and non-recourse, including the $147.8 million loan supported by the cash flows of our Block 21 project. Beau mentioned earlier that Stratus has invested $40 million in infrastructure in Barton Creek. Of this amount, approximately $29.5 million is eligible for reimbursement from Barton Creek MUD. As of March 31, 2017, we have received reimbursements of these costs totaling $17.8 million, including $1.6 million received in first quarter 2017. We expect to receive the remaining $11.7 million in future periods. It is important to note that, as with prior quarters, the timing of our asset sales as well as capital accretion for our real estate activities will directionally drive our earnings and cash flows throughout the year and from year-to-year. This effect is reduced by the stable income in cash flows we received from our hotel and entertainment segments, and expect from our multi-family developments going forward. This concludes my comments. Now I'll turn it back to Beau.

[Beau Armstrong:]

Thank you, Erin. To close, the continued performance of our asset base is driven by a seasoned team, our unique ownership of legacy land assets that include entitlements in Austin, Texas, and our ability to develop residential, multi-family and commercial real estate projects and sell those projects at an opportune time. By aggregating these assets, we have built a business that allows our shareholders to participate in the upside of real estate in this favorable and highly profiled community in Austin and benefit from the stable cash flows produced from our hotel and entertainment segments. We expect growth to continue as we take advantage of the multi-family trend in Austin and the important partnerships and we maintain, which will allow us to continue to expand beyond the boundaries of Austin. We appreciate you listening into our call, and we'll now open the call for a few questions.

[Operator:]

We will now begin the question-and-answer session. [Operator Instructions]. At this time, we will pause momentarily to assemble our roster. [Operator Instructions]. Our first question comes from Fred Burtner [ph] with - a Private Investor, excuse me. Please go ahead sir.

[Unidentified Analyst:]

Hi Beau. Could you discuss your longer term opportunity in grocery store-anchored centers beyond Magnolia?

[Beau Armstrong:]

Thank you, Mr. Burtner [ph]. As you know, we've had a successful relationship with the HEB. They certainly have a number of developers they work with, so I would not want to somehow infer that we have any type of exclusive with them. But we are looking at other opportunities in Central Texas with them. But at this point they are really more speculative and we don't really have anything solid at this point to discuss.

[Unidentified Analyst:]

Thank you. I have a question on the W. Knowing how competitive the market is at this time, how are you able to increase revenue per available room?

[Beau Armstrong:]

Well, I'd have to - I guess, I would have to complement the Starwood or Marriott team. Our general manager has been here since we opened the hotel and he has a very good sense of how we compete in this community. He just does a great job. So really it's more hats off and compliments to Drew McQuade and his team. But specifically for the first quarter, our group business was up, and as you know, it's very cyclical and we have - just its business that goes from the transient to the group business. In the first quarter, we just had a good run of group business. But as you pointed out, it's very competitive. Austin continues to attract other developers, more supply. So we were very mindful of that new supply, but for the time being, we feel that we are in a pretty good position to compete.

[Unidentified Analyst:]

Okay. Thank you.

[Beau Armstrong:]

Thank you, sir.

[Operator:]

At this time, I'm showing no further questions, so I would like to conclude today's Q&A, as well as the call. We thank you for attending today's presentations, and you may now disconnect your lines.