Stratus Properties Inc.
Q2 2017 Earnings Call Transcript

Published: 9 Aug 2017

[Operator:]

Welcome to the Stratus Properties Second Quarter 2017 Conference Call. Stratus' second 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 and Chief Executive Officer of Stratus Properties.

[Beau Armstrong:]

Thank you, Austin. Good morning and welcome to the Stratus Properties' second quarter 2017 earnings conference call. 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 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. Following our remarks, we will open the call for questions. This is being recorded and replay will be available through August 14th. Today, in addition to releasing second quarter results, we are pleased to announce a new project Jones Crossing, a to be built grocery-anchored mixed use development in College Station, Texas, home to Texas A&M University. This is a great opportunity for Stratus and we will be impactful to the local community. Jones Crossing will be anchored by an HEB. It will be located on 72 acres in a highly developed area and is on an established student bus route, less than two miles from the Texas A&M campus. One key competitive benefit of Jones Crossing lies in the mixed-use nature of this project. The commercial component is anchored by a 106,000 square foot HEB grocery store with an additional 87,000 square feet of retail space, plus nine pad sites which will include restaurants, services, entertainment, fitness, and local shop space. The HEB store is currently anticipated to open in August 2018. The project will also include 600 units of student-focused multifamily housing. Consistent with other Stratus projects, Jones Crossing combines our expertise in commercial and residential development and is consistent with our goal of developing projects in areas experiencing steady population growth. Texas A&M is adding approximately 2,000 students every year with the current student body size of approximately 60,000 students. Jones Crossing is very well located and will provide an attractive living space for students with direct access to HEB, restaurants, entertainment, and other amenities and services. We expect to break ground this quarter immediately following the closing of our construction loan. I'm very pleased that we continue our successful collaboration with HEB Grocery Company. This will be our fourth project together. Stratus remains focused on creating shareholder value by executing our business plan. The company is committed to creating long-term value for our shareholders. The Austin area continues to experience rapid growth with the addition of large high profile tenants like Google, Schwab, Facebook, Oracle, and Indeed; increasing the city's employment base and demand across all product types. Our development projects outside the Austin area are located in targeted high population growth areas where we can apply our entitlement and development expertise. Now, I'd like to talk about the highlights during the quarter. Stratus reported higher revenue for the second quarter and first six months of 2017 in comparison to the same periods in 2016. Overall during the second quarter, we were very pleased to see strong execution in our operating segments as well as solid progress on our development programs. Operating income was up in our entertainment segment, primarily resulting from an increase in the number of events hosted in higher ticket sales for both our ACL Live and 3TEN venues. Operating income was also up in our real estate operations segment. We noted in our first quarter call that competition from new hotels in the Downtown Austin area will continue to impact RevPAR which was down this quarter versus the prior year. However, our W Austin Hotel's RevPAR ranked number three in the State of Texas in the first quarter of 2017, which is the most recent period for which this information is available. Since the hotel opened in 2011, the W. Austin is consistently among the top rated W Hotels and guest satisfaction. Our remaining investment in the W Hotel project is less than $5 million and we are very pleased with our current return on investment and cash flow from this asset, which fully supports our %146 million non-recourse loan. We continue to maintain our leading market position in our entertainment segment and have 172 events booked at ACL Live for 2017 and 182 events for TEN. We will continue to book remaining venue capacity in 2017 and we are actively working on events for 2018, 2019, and beyond. Our 3TEN venue, which has been open for just over a year and was designed to meet market demand for performances in a more intimate setting and act as a feeder to the larger ACL Live venue, had very strong ticket sales this quarter. Although, June began the seasonally soft summer for entertainment overall, we have an exciting line up in the near-term including Ringo Starr Fleet Foxes, Harry Styles of One Direction, Comedian Jim Gaffigan, Jason Isbell, [Indiscernible], and Father John Misty to name just a few. Our real estate operations segment reflects resident sales and developments in Barton Creek, a long-term asset of Stratus, conveniently located eight miles southwest of Downtown Austin. We've received strong interest in a Maravillas, which is an upscale development of 20 townhomes and closed the sale of the first townhome this quarter. We have posted photos of this project on our website, which we encourage you to view. I mentioned in last quarter's call that as the residential market shifts Stratus' development entitlements include the flexibility to adjust future residential projects in the Barton Creek area to respond to changing market demands. We are currently seeing an increased demand for smaller homes with high quality finishes and extensive outdoor living spaces. We are adjusting our development plans to take advantage of this. Our leasing operations segment reflects tenant income from the office and retail component of our W Austin Hotel project and the consistent income from the first phase of our Santal multi-family project in Barton Creek. West Killeen market which was completed in June also contributed income to the leasing segment in the second quarter. We have executed leases for 46% of the retail space in Killeen and interest from prospective tenants for the remaining space is strong. Last year our leasing segment included revenue from the Oaks at Lakeway, which was sold in the first quarter. Turning to our growth projects, it's an exciting and busy time for Stratus. Our pipeline of opportunities in addition to Jones Crossing includes commercial multifamily and residential projects. Phase I of Santal, a multi-family development in the upscale highly populated Barton Creek community remains 98% least in construction of Phase II is expected to begin in the third quarter upon closing of our construction financing. Planning efforts are ongoing for future phases of multi-family and commercial within Barton Creek as well, which will provide strong prospects for growth for the company in future years. We have utility capacity in place to support significant additional development. On the commercial product, we broke ground as scheduled on Lantana Place, a 320,000 square foot mixed use project in Southwest Austin at the intersection of two major roadways. The first phase will be anchored by a 12 screen movie house, a state-of-the-art movie theater that provides a high quality dining experience. Lantana Place will have a strong competitive advantage because this densely populated area currently has limited services and restaurants. This project is a good example of Stratus' ability to grow by employing valuable entitlements in an area where the city entitlements are severely restricted. Future phases of this project are expected to include a hotel and two office buildings. The movie theater is expected to be complete in the second quarter of 2018. We've posted architectural drawings of this project on our website as well. Our Magnolia, Texas mixed-use development project also continues to move forward. We have worked closely with the City of Magnolia and the State of Texas to create a municipal utility district, or MUD, which will provide an opportunity to recoup future road and utility infrastructure costs. We anticipate completing this extensive MUD creation process later this year and expect to begin construction early next year. This project is anchored by an HEB Grocery store and is scheduled to open in 2019. Stratus purchased 124 acres of land to further develop this mixed-use tract in a growing area near the World Headquarters of ExxonMobil. In closing, I want to thank our talented team for the contribution they make every day to Stratus Properties and our community. Their efforts every day contribute to our success. Now, I'd like to turn it over to Erin for a review of the financial highlights.

[Erin Pickens:]

Thank you, Beau. Today Stratus reported the second quarter 2017 net loss attributable to common stockholders of $0.9 million or $0.11 per share compared with the second quarter 2016 net loss attributable to common stockholders of $2.5 million or $0.31 per share. As noted in our press release, our improved results partly relate to expenses incurred last year in connection with our successful proxy fight. Stratus continues to monitor the progress towards meeting the requirements to begin recognizing all or a portion of the deferred gain from the February sale of Oaks at Lakeway in which the company received $170 million and significantly reduced debt. The deferred gain as of June 30th, 2017 was $38.7 million. Stratus closed the quarter with $14.8 million in cash available to fund operations and early stage development project prior to obtaining project loans and $30 million of availability remaining on the Comerica revolving loan. We extended the maturity of the Comerica credit facility for three months to November 30th, 2017, while we continue to work on a modification and longer term extension. We appreciate the positive relationship we've developed with Comerica over the years and we expect to have the modification and renewal in place by the November 2017 maturity. We remain in compliance with loan covenant. Net interest expense of $1.5 million for the second quarter of 2017 was lower than a year ago period reflecting the debt pay down following the sale of Oaks at Lakeway. Stratus' debt at the end of June was $205.8 million of which $147.3 million or 72% is non-recourse and $58.5 million or 28% is recourse to the company. Stratus' debt to total asset value remains relatively low and is currently only 34.4%. Debt to total asset value is an important metric for us and we believe we have ample capacity to add construction financing for future projects in addition to the construction loans for Jones Crossing and the second Phase of Santal anticipated to close in the third quarter. 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 our unique ownership of legacy assets that include entitlements from Austin Texas and our expertise and ability to plan, entitle, and develop high quality projects and sell those projects at favorable values. We have built a business that allows our shareholders to participate in the upside of real estate in the highly desirable Austin market and high population growth areas outside of Austin. Our hotel and entertainment segments produce stable cash flows that serve to support continued growth. We appreciate you listening to our call and will now open the call for a few questions. Austin? Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Alex Shoghi with Oasis. Please go ahead.

[Alex Shoghi:]

Hi guys, and congratulations on the quarter. Given a lot of the headlines on the retail landscape and some of the disruption even that's happening in grocery. Maybe you could take us through your thoughts on tenant selection and anchor selection on a go-forward basis for some of the developments? Thank you.

[Operator:]

We have temporarily lost the connection of our speakers. Please hold while we attempt to reconnect. Thank you. We have reconnected with our speakers. Mr. Shoghi, you may proceed with your question. Thank

[Alex Shoghi:]

Thank you very much. My question was regarding the retail landscape. Given a lot of the disruption that we've seen in both retail and e-commerce and even now what's anticipated in grocery, I was hoping you could take us through your thoughts on both anchor selection and tenant mix and how you guys are looking at the landscape on a go-forward basis?

[Beau Armstrong:]

That's a great question. We all are aware of the dominance of Amazon and the destruction that they have had on the retail landscape, but specifically to your question, HEB, obviously, is our preferred anchor. We have a lot of confidence in HEB. As far as I know, they've never had a bad store. They certainly dominate this region. So, we're very comfortable working with them on site selection and having them anchor our projects. Beyond that, we simply avoid things that you can get on the Internet; soft goods, home goods, things like that, and tend to focus more on services such as restaurants, entertainment, fitness, immediate need things like a doctor's offices, regional clinics, AT&T stores, or phone stores, so, things like that. But we are very mindful of the potential to have disruption because of the Internet and how easy it is to get things online. So, we we've really to steer away from those categories.

[Alex Shoghi:]

Great. Thank you very much.

[Operator:]

[Operator Instructions]. At this time, I'm showing no further questions. That will conclude our question-and-answer session as well as today's conference. We thank you for attending today's presentation and you may now disconnect your lines.