Stratus Properties Inc.

Good morning, and welcome to the Stratus Properties second quarter 2021 conference call. Today, Stratus issued a press release announcing its second quarter 2021 results. The press release is available on Stratus' 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 August 30, 2021. Anyone listening to the replay should note that all information presented is current as of today, August 16, 2021, 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, which speak only as of the date made, and actual results may differ materially from those anticipated, expected, projected, or assumed in the forward-looking statements. please review the cautionary language included in Stratus's press release issued today and the risk factors described in Stratus's 2020 Form 10-K 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, this non-GAAP financial measure is reconciled to its most comparable GAAP financial measure in the supplemental schedule to Stratus' press release issued today. I would now like to turn the conference over to Mr. Beau Armstrong, Chairman, President, and Chief Executive Officer of Stratus Properties.

Thank you for joining our second quarter 2021 conference call. Our Chief Financial Officer, Aaron Pickens, is also here with me today. As the impacts of the COVID-19 pandemic continued to lessen during the second quarter, we saw significant improvements across our markets, particularly with our hotel and entertainment businesses, which continued to improve during the second quarter. Our retail development projects performed well, and all our tenants remain open today and are paying rent. In general, across the Texas market, demand for residential properties remains very strong and currently exceeds supplies. We are particularly excited at Stratus considering the numerous residential properties we own, as well as the future opportunities this demand may create for us. For example, we recently started construction on the St. June multifamily property. We continue to work on our Holden Hills residential development and our mixed use projects have attractive residential components. We remain cautious, especially considering the uptick in COVID-19 cases from the Delta variant. However, overall we are very optimistic about the future of stratus we believe that our well-developed and proven strategy from acquiring land and necessary entitlements and permits to designing and constructing the properties to stabilizing the properties with the final goal to sell refinance or hold the properties for lease has allowed us to maintain our operations throughout the pandemic and will support us on the road to recovery Further, I'm pleased to share, as you may have seen from our August 12th, 2021 press release, that Stratasys Board of Directors has appointed Lori Dotter to our board. She brings more than 30 years of experience in the real estate investment industry and has significant public company board experience. I'm excited to welcome Ms. Dotter and look forward to working with her and guiding Stratasys strategic direction. I'll now turn to provide project development updates. Starting with our retail and mixed use portfolio, our projects are performing well, including Kingwood Place, Lantana Place, and Jones Crossing. Overall, we are 89% leased, and new tenant demand has been very encouraging. We are also pleased that these projects have attractive residential components, which will be valuable in the current high demand market. We have constructed approximately 152,000 square feet of retail space, including the HEB grocery store at Kingwood Place, located in the Houston metropolitan area. As of June 30, 2021, we have signed leases for approximately 85% of the retail space, including the HEB grocery store. We also continue to advance the potential multifamily project currently planned for approximately 275 units. Lantana Place is a partially developed mixed-use project located in southwest Austin. We are pleased to report that its anchor tenant movie house and eatery for which we had restructured its lease in June of last year has exercised its option to extend its lease to the original 20 year term at the original rent. This property includes a ground lease for an AC hotel by Marriott and the hotel owner expects to complete construction next month. Lampana place is also zoned for a potential multifamily development of up to 320 units. Jones Crossing is our HEB-anchored mixed-use development located in College Station, Texas. As of June 30, 2021, we had signed leases for substantially all the retail space of the first phase and continue to develop our plans, which may include a multifamily component. During the second quarter, we refinanced this project to improve loan terms and take advantage of the low interest rate market. We are collecting rent from all our retail tenants as we did before the pandemic began, and we believe we are on track to fully stabilize these properties over the next 12 months. In addition to these properties, we recently obtained debts financing and started construction on the first phase of development of Magnolia Place, our HEB grocery shadow-anchored mixed-use project in Magnolia, Texas, within the Houston metropolitan area. Magnolia Place is currently planned for 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 phase of development is expected to consist of two retail buildings totaling approximately 19,000 square feet, all five pad sites, and the road utility and drainage infrastructure necessary to support the entire development. HEB recently began construction on its 95,000-square-foot grocery store on an adjoining 18-acre site owned by HEB. We continue to evaluate the sale of the single-family component of the project. In addition to our retail and mixed-use properties, I have updates on several other of our properties. In July, we began construction on the St. June, our 182-unit multifamily project within the Amara subdivision of the Barton Creek community in Austin after we completed our financing. Erin will provide information on this financing later during this call. The first units of the St. June are currently expected to be completed in the third quarter of 2022, with the final completion of the project expected in the first quarter of 2023. Holden Hills, formerly known as Section KLO, is our final large residential development within the Barton Creek community and contains 495 acres designed to feature 475 unique residences. We plan to develop the community in multiple phases with a focus on sustainability and conservation. Subject to financing and board approval, we expect to obtain the permits required to start construction in the first quarter of 2022. We are in the process of sourcing financing for this project. We continue to progress the redesign of Section N, our commercial and multifamily property on 570 acres in Barton Creek. This project is expected to be designed as a dense, mid-rise, mixed-use project surrounded by an extensive green space amenity. Block 21, which comprises our W Austin Hotel and our AC Live and 310 ACL Live entertainment venues, continues to be well-positioned to benefit from the growing Austin market, particularly as businesses like Google and Tesla move to or expand in the city. Overall, we have a robust pipeline of opportunities across our portfolio, and we see strong momentum and growth ahead of us. I will now turn the call over to Erin for a review of our second quarter 2021 financial results. Erin?

Thank you, Bo. Today, we issued our press release announcing our second quarter 2021 results. Stratus consolidated revenues increased to $11.6 million in the second quarter of 2021, from $8.9 million in the second quarter of 2020, primarily due to increases in revenue in our hotel and entertainment segments. Net loss attributable to common stockholders totaled $10.2 million or $1.23 per share in the second quarter of 2021, compared to net income of $4.1 million or 50 cents per share in the second quarter of last year. The second quarter 2020 results included the $15 million in income from earnest money forfeited by Ryman in the terminated Block 21 transaction. EBITDA totals negative $4.4 million in the second quarter of 2021 compared to $12.3 million in the second quarter of last year, which also included the forfeited earnest money from Ryman. I will now provide brief commentary on our reporting segments. Revenue from our real estate operations segment in the second quarter of 2021 totaled $779,000 compared with $1.9 million in the second quarter of 2020. The segment's operating loss totaled $771,000 in the second quarter of 2021 compared with an operating loss of $46,000 in the second quarter of last year. The decrease in revenue and greater operating loss primarily reflect a decrease in the number of lots and homes sold during the second quarter of 2021 as available inventory decreased. Development of our Holden Hills project will add to our available inventory. Our real estate operations segment also includes residential land components of some mixed-use developments, and we may sell some of the undeveloped residential land. During the second quarter, we sold one Amara Drive Phase 3 lot for $0.6 million. As of June 30, 2021, we had only two unsold developed Amara Drive Phase 3 lots. Revenue from our leasing operations segment in the second quarter of 2021 totaled $5.5 million, compared with $5.9 million in the second quarter of last year. This decrease in leasing revenue primarily reflects the sale of the St. Mary, which had rental revenue of $0.7 million in the second quarter of 2020. You may recall that earlier this year we sold the St. Mary, our 240-unit luxury garden-style apartment project, at what we believe is the highest per-unit sale price ever recorded in the Austin MSA for similar properties. We recognized a gain on the sale of $22.9 million, or $16.2 million, net of non-controlling interest. The segment's operating income totaled $1.2 million in the second quarter of 2021, up from an operating loss of $174,000 in the second quarter of 2020. Redis Hotel revenues totaled approximately $4 million in the second quarter of 2021, which is an increase from $1 million in the second quarter of last year. The segment's operating loss totaled $776,000 compared to an operating loss of $1.7 million last year. The increase in revenue and reduced operating loss primarily reflect higher room reservations and food and beverage sales as the impact of the COVID-19 pandemic lessened during the second quarter of 2021. As Bo mentioned, we're pleased to see continued improvement in some of the key metrics of the W Austin Hotel during the second quarter. Specifically, weekend travel improved significantly. Revenue per available room, or REVPAR, was $95 in the second quarter of 2021 compared to $29 in the second quarter of last year. The hotel's average occupancy was 33% for the second quarter of 2021, which is an increase from the 12% occupancy rate in the second quarter of last year. Entertainment revenues increased to $1.7 million in the second quarter of 2021 from $289,000 in the second quarter of last year. The segment's operating loss was $359,000 in the second quarter of 2021, compared with an operating loss of $1.4 million in the second quarter of last year. This increase in revenue and reduced operating loss primarily reflect increases in the number of events hosted at ACL Live and 310 ACL Live as the impacts of the COVID-19 pandemic lessened during the second quarter of 2021. However, we are monitoring the situation as an increase in COVID-19 cases could impact future events. Turning now to capital management, at June 30th, 2021, consolidated debt totaled $352.1 million and consolidated cash totaled $15.3 million, compared with consolidated debt of $351.1 million and consolidated cash of $12.4 million at December 31st, 2020. As of June 30th, 2021, we had $14.3 million available under our $60 million Comerica Bank credit facility. As previously announced, we entered into an amendment to the Santal loan in April 2021 to, among other items, extend the maturity date from October 2022 to October 2024 and reduce the floor of the variable interest rate. In June 2021, we entered into a $24.5 million loan maturing in June 2026 to refinance the Jones Crossing project to improve the loan terms and take advantage of the low interest rate market. Proceeds were used to repay the original construction loan in full. Also in June 2021, we entered into a construction loan to borrow up to $30.3 million to finance approximately 55% of the estimated $55 million cost of the St. June. As of June 30th, 2021, No amounts were outstanding under this loan, which matures in October 2024. On July 1st, 2021, an unrelated equity investor contributed $16.3 million to the St. June Partnership in exchange for a 65.87% interest. We have a 34.13% interest in the partnership following our contribution of land, development to date, and cash of $1.1 million. Earlier this month, we entered into a $14.8 million three-year construction loan to finance the first phase of development of Magnolia Place. Purchases and development of real estate properties reflected in operating cash flows and capital expenditures reflected in investing cash flows totaled $7.3 million for the first six months of 2021, primarily related to the development of our Barton Creek properties, including Amara Villas, and the Lantana Place and Magnolia Place projects. This compares with $13.1 million for the first six months of 2020, primarily related to the development of Kingwood Place, Lantana Place, Jones Crossing, and Barton Creek properties. We continue to believe that we'll be able to meet our debt service and other cash obligations for at least the next 12 months. Thank you, and I'll now turn the call back to Beau for his closing remarks.

Thank you, Erin. I am pleased with the momentum we have built during the second quarter and with the improving performance of our portfolio. Our business remains strong as Texas, and particularly Austin, continue to experience outsized growth. Demand for residential properties continues to be especially strong throughout Texas. Our properties are well positioned to benefit from this growth, and our development experience and market relationships will continue to be important assets for Stratus. Austin was certainly buzzing in the second quarter as people increasingly left their homes to enjoy live events, as businesses continued to move to Austin, and as travel picked up. We will, of course, continue to monitor the impact of the recent increase in COVID-19 cases due to the Delta variant, although we remain hopeful that this uptick will be short-lived. We maintained our focus during the worst of the pandemic last year and believe we are starting to see our efforts pay off. We will continue to pursue our strong pipeline of opportunities in future quarters. Thank you all for listening. At this time, I will ask the operator to open the line for questions.

We will now begin the question and answer session. To ask a question, you may press star, then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster. Again, if you have a question, please press star then 1. Our first question comes from Fred Bertner, a private investor. Please go ahead.

Hi, Bo. I just had one or two questions. You're gearing up with more projects. As you come up with more future projects to start up, how much financing is theoretically available from limited partners?

Good morning, Fred. Nice to hear your voice. Thank you for participating. We are, you know, we have always had a fairly robust pipeline of development opportunities, as you're aware of. And given the success of St. Mary, for one, and also the ongoing success of our Kingwood Place project, we have been able to access additional, what we call LP, limited partner capital, as evidenced by the St. June. And then couple that with just the interest in Austin, Texas, as well as our, you know, we've got some extraordinary assets there, as we're all aware. So I think when you add all those factors together, I think that we will continue to be able to source LP capital to the extent that we can continue to kind of put forth attractive opportunities. So I guess generally I'm optimistic in our ability to do that, both from an equity side, LP side, as well as, through the debt markets is evidenced by the same June. But again, we're all, you know, we're all subject to the same market conditions that can change that. But, you know, even through this pandemic, Austin has performed very well, both from the, you know, certainly the housing side and to a lesser extent, the retail side. As Aaron pointed out in our call, you know, the hospitality business has been challenged for reasons we all know, but generally Austin is, It is expected to continue to be a good market. We're in a good space there. So I think, to answer your question, I think we'll be able to continue to raise capital for good projects.

Thank you. My other question is, in the second quarter, when business was coming back at Block 21, was there a resurfacing of potential buyers who might want to invest in Block 21 projects?

That's a great question, Fred. I would characterize it as the interest during that period or prior to the second quarter, I would say, would be more opportunistic buyers. And our board made a decision that we didn't need to entertain pricing or offers at what we would call opportunistic levels. So we decided that we were going to fight through it and get When things normalized, we would again revisit the idea of selling the hotel. I think we've made it clear that it's not core to what we do, and we would like to sell at the right time, much like we did with Ryman. So as things started to rebound, certainly we've had some continuing inbound interest, and I think it has shifted a little bit just because the market has picked up. Austin's so hot. Again, all the things you'd expect. So I don't think it's to the level yet where we were able to transact. I think, you know, we're still not making money at the hotel. It's, you know, I guess breaking even at the property level or close to it or expected to as the, you know, again, this is a very fluid situation, but we're expecting to be at a breaking level at the property level, you know, perhaps this quarter. So we really feel like that needs to normalize a bit more before we're going to be able to attract the kind of capital and the kind of pricing where we would like to transact. But, Fred, the market is, you know, Austin is hot. There hasn't been, you know, I think when we were selling to Ryman a couple years ago, there was a lot of concern about new supply. I think supply was one of the big factors that I guess was a bit of a mitigating factor. But, you know, obviously there's been very little happening in the hospitality space, and it takes a long time to to get a new project off the ground. So hopefully that limit on supply will be helpful when things do pick up and we see, you know, the hotel performing where it was in 2019.

Okay, Bo, thank you for answering my questions, and keep up the good work.

Thank you, Fred. This concludes our question and answer session, and the conference is also now concluded. Thank you for attending today's presentation. You may now disconnect.