Stratus Properties Inc.
Q3 2017 Earnings Call Transcript

Published: 11 Nov 2017

[Operator:]

Welcome to the Stratus Properties Third Quarter 2017 Conference Call. Stratus' third quarter 2017 results were released earlier today and a copy of the press release for today's call is available on Stratus' website at stratusproperties.com. 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 and welcome to the Stratus Properties’ third quarter 2017 earnings 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 including 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 www.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 November 14. Stratus Properties’ third quarter was marked by the continued advancement of our real estate development strategy and strong performance in our entertainment segment, offset by lower than expected results from the hotel, due to cancellations associated with Hurricane Harvey. The first nine months of 2017 demonstrated the Company's ability to create shareholder value with our development strategy. We sold our Oaks at Lakeway project for a significant gain and used the sales proceeds to pay a special dividend of $1 per share and to reduce debt. We also commenced two new mixed use development projects, Lantana Place and Jones Crossing. The site work and building construction for the retail components of both of these new projects are currently proceeding on schedule and within budget. Following our success with Santal Phase 1, we also recently broke ground on Phase 2, a 212-unit garden style, multi-family development located adjacent to Phase 1 in Barton Creek. The Austin area continues to experience significant population growth and we believe that our land holdings and development activities, as well as our leasing, hotel and entertainment assets in Austin are well-positioned to create additional value for our shareholders. Our long track record of successful residential and commercial development in Austin has generated demand for our development expertise. This has enabled us to expand beyond the boundaries of Austin and into other high population growth areas in Texas such as Killeen, College Station and Magnolia. We are confident that this geographic diversification will help generate value for our shareholders. Before I get into quarterly highlights, I'd like to first provide some insight into the disciplined approach we applied to our Real Estate Development Program, which is our primary growth engine. The business model that supports our strategy includes acquiring land sites and building commercial retail, and multi-family and single-family residential projects. We design our development projects to meet the needs of our target consumer and to generate a market rate of return. We work with all regulatory authorities to secure the necessary entitlements, we competitively bid all construction work and closely oversee the development and construction process. And we work closely with our third-party leasing and management teams to lease and stabilize our projects. We have a highly experienced team executing this process and I'm grateful for their dedication and contribution to our company. Stratus has earned a solid reputation of developing Class A desirable projects on schedule and within budget. Our projects attract the attention of reputable anchors such as HEB Grocery Company and ultimately generate strong interest from buyers. Once a project nears completion, we evaluate market conditions. And if the conditions so dictate, we implement a marketing strategy and competitive sales process that maximizes value for our shareholders. Purchasers of our projects have included REITs and institutional investors. The sale of The Oaks at Lakeway earlier this year confirms the success of our business model. We sold the development before it was fully leased, further supporting the market's demand for thoughtfully designed retail projects and generated a very strong return. Stratus designed The Oaks at Lakeway with consumer demand in mind, including a hotel site, restaurants, and other amenities and services that attract and serve the local community. I’d now like to talk about our operational highlights from the quarter. During the quarter, our Entertainment segment experienced normal seasonality as there are fewer non-festival touring performances during the summer months. The most active months are typically during the first and fourth quarters. Our entertainment brand, Austin City Limits, is unique and remains a stable core business of the company. The venue in the W. Austin Hotel are located in the same block, which we refer to as Block 21 in the same building. Our venue and hotel businesses are highly complimentary and create real synergies. Last year’s edition of three tenants at ACL venue, which provides a smaller stage alternative to the large venue, showed early success, further enhancing the synergies and competitive advantage of Block 21. Our W. Hotel in downtown Austin was ranked number two in the State of Texas in RevPar for the first nine months of this year, with the previous ranking of number three through June. While we remain very pleased with our efforts to provide our guests with top notch hospitality, we expect continued pressure on RevPar, given the ongoing addition of new hotels in the downtown Austin area. We are planning to upgrade all rooms next year and have been setting aside funds annually since we opened the hotel seven years ago to support the refurbishment. As a reminder, our basis in the W. Hotel is less than $5 million. Our real estate operations include the sale of lots and residences mostly in Barton Creek. We have a significant pipeline of entitled residential projects also primarily located in the Barton Creek area. Development plans for these new residential projects focus on smaller home and a lot sizes that meet current market demand with extensive amenities including parks, and pedestrian and bicycle trails in a natural, environmentally, friendly setting. We have only 52 remaining developed lots for sale in Amarra Drive in Barton Creek. And the last two lots of the 800 Meridian development in the Circle C community are currently under contract. We began development of Meridian in 2005 and we are pleased to see the successful conclusion of this project. In some cases we have identified and secured unique single family residential development opportunities such as Amarra Villas and the W. Hotel condominiums, but overall our investments in retail and multifamily development far outweigh single-family residential development. Our significant land holdings and entitlements in the Barton Creek area will continue to be a significant asset for future growth. Within our leasing segment, our Santal Phase 1 multi-family project is now fully stabilized, with occupancy consistently in the range of 95% to 100%. We expect to begin receiving rental income from Santal Phase 2 later next year as buildings are completed and available for lease. We are encouraged with the performance of our West Killeen market projects. During the quarter leasing increased from 46% to approximately 60% and we have strong prospects for the remaining space. Now I would like to turn it over to Erin for a review of the financial highlights.

[Erin Pickens:]

Thank you, Beau. Today Stratus reported third quarter 2017 net income attributable to common stockholders of $14.3 million or $1.75 per share, compared with the third quarter 2016 net loss attributable to common stockholders of $1.7 million or $0.20 per share. Our third quarter 2017 results include the recognizing of a portion of the deferred gain from the February sale of Oaks at Lakeway. Stratus recognized a non-cash, pretax gain of $24.3 million during the quarter. The remaining deferred gain as of September 30, 2017 totalled $11.9 million. Stratus closed the quarter with $16.1 million in cash available to fund operations and early stage development projects prior to obtaining project loans and $6.9 million of availability on the Comerica revolving loan. We remain in compliance with all loan covenants as of September 30, 2017. Net interest expense of $1.6 million for the third quarter of 2017 is consistent with the amount reported in the second quarter of 2017. Interest expenses were lower than the corresponding 2016 periods, primarily reflecting the debt pay down following the sale of Oaks at Lakeway. Stratus' debt at the end of September was $227.9 million somewhat higher than the sort of that reported at the end of the second quarter due to draws on our Comerica credit facility to fund equity requirements for our recently begun development project. Stratus' debt to total asset value remains relatively low, currently 38%, compared to 34% in February of 2017. We carefully monitor our ratio of debt to total asset values and our focus on maintaining ample capacity to secure construction financing for future development projects. This concludes my comments and now I'll turn it back to Beau.

[Beau Armstrong:]

Thank you Erin. We appreciate you listening to our call. And we now like to open the call for few questions. Austin?

[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]

[Operator:]

At this time I'm showing no questions, so I’d like to 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.