Stratus Properties Inc.

Good morning and welcome to the Stratus Properties third quarter 2021 conference call. Today, Stratus issued a press release announcing its third quarter 2021 results. The press release is available on Stratus's 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's website through November 29th, 2021. Anyone listening to the replay should note that all information presented is current as of today, November 15, 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 and third quarter 2021 Form 10-Q 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, everyone, for joining our third quarter conference call today. our Chief Financial Officer, Aaron Pickens, is also here with me today. Before I provide updates on the status of our projects and development activities, I would like to discuss our two recently announced transactions and our thoughts on opportunities for use of the associated proceeds from those transactions. Then I will pass the call to Aaron to speak to our business segments and provide an overview of our third quarter 2021 financial and operational results. Lastly, I will close the call with some final remarks about our exciting outlook and the strength of our Texas markets. As you've seen in our recent transaction press releases, if completed, the sales of the Santal and Block 21 will result in STRAS receiving substantial cash proceeds, which we estimate to be approximately $145 million after tax. Approximately $50 million relating to the Santal and $95 million related to Block 21 will including the $6.9 million to be escrowed. The Stratus board and management team are engaged in a strategic planning process, which includes consideration of the use of proceeds from the sales and of Stratus' long-term business strategy. Potential uses of proceeds may include a combination of further deleveraging, returning cash to shareholders, and reinvesting in our robust project pipelines. These factors may impact our evaluation of a potential conversion to a REIT. These potential near-term cash proceeds and streamlined operations provide us with an exciting opportunity to shape the future of Stratus in one of the most attractive real estate markets in the country, where we have successfully operated for more than 30 years. Throughout the past several quarters, our dedicated team has continuously demonstrated demonstrated our ability to follow through on our commitment to optimizing value in each of our properties across market conditions. Throughout the pandemic, we have continued to acquire, develop, and stabilize properties to sell, refinance, or hold for lease, and this quarter is no different. I will now address our two most recently announced potential sales, the Santal and Block 21. First, On September 20, 2021, we entered into an agreement to sell the Santal for $152 million in cash. The Santal is Stratus' wholly-owned 448-unit garden-style multifamily luxury complex located in Section N of the Barton Creek community. Construction of the Santal commenced in January 2015, and today the property is fully leased and stabilized. the transaction is expected to close on or before December 10th, 2021, subject to the satisfaction of customary closing conditions. After closing costs and payment of the outstanding project loan, the sale is expected to generate pre-tax net proceeds of approximately $70 million. Stratus expects to record a pre-tax gain on the sale of approximately $80 million in the fourth quarter of 2021. Second, On October 26, 2021, we announced that we entered into new agreements to sell Block 21 to Ryman Hospitality Properties for $260 million. Block 21 is our mixed-use development in downtown Austin, comprising the W. Austin Hotel and Retail Office and Entertainment Space, including Austin City Limits Live. The transaction is targeted to close near year-end 2021, subject to satisfaction of certain closing conditions, including the consent of the loan servicer. The purchase price includes Ryman's assumption of approximately $138 million of existing mortgage debt and is subject to downward adjustments up to $5 million. After closing costs and assumption of the outstanding loan, the sale is expected to generate pre-tax net proceeds of approximately $115 million before prorations and including $6.9 million to be escrowed for 12 months after closing. Stratus expects to record a pre-tax gain of approximately $110 million upon the closing of the sale. As you may recall, we previously announced agreements to sell Block 21 to Ryman in 2019 for $275 million. The agreements were terminated by Ryman in May of 2020 due to uncertainties associated with the COVID-19 pandemic, and as a result, Stratus received $15 million in earnest money from Ryman. We were pleased to reach new agreements with Ryman and appreciate Ryman's dedication to adding Block 21 to its portfolio. Block 21 is a cultural hub for the community that hosts Austin's most prominent live music events, and Ryman is a great company that understands and respects the strong connection that exists between Austin and its music scene. I'm confident that this Nashville-based hotel, resort, entertainment, and media company is the right partner for Block 21 and will continue to build on its legacy in the Austin music and travel space. I'm also proud of our team's ability to maintain Block 21's value throughout the challenges of the pandemic when entertainment and hotel industries around the world have faced significant challenges. As I mentioned earlier, if completed, The sales of the Santal and Block 21 will result in us receiving cash proceeds estimated to be approximately $145 million after tax, approximately $50 million relating to the Santal and $95 million relating to Block 21, including the $6.9 million to be escrowed. We are excited by the opportunities this presents for our company and our shareholders. These achievements reflect our ability to execute our long-term strategic plan and take advantage of market opportunities at the right times to generate value for shareholders from our high-quality properties. We remain confident in the markets in which we operate. In particular, growth in the City of Austin remains robust as reflected by the continued population increase, influx of companies moving corporate headquarters to the region, and new mixed-use retail and residential development. We are pleased to both contribute to and enjoy the growth and development of this thriving city through supporting several impressive real estate projects. With that, I will now turn to discuss our projects and development activities for the third quarter. I want to start with our residential property portfolio, where we have many compelling projects and opportunities in one of the strongest markets for residential properties in Central Texas. In September of 2021, we announced plans for Block 150, now known as the NEB, a proposed luxury high-rise rental project in downtown Austin near the Texas State Capitol. The NEB is expected to be a 400-foot tower with unobstructed 360 degree views of the Capitol, downtown Austin, the University of Texas campus, and West Austin. As planned, the project consists of approximately 420,000 square feet with 300 luxury multifamily units per lease and ground level retail. The project also includes the renovation of the adjacent AO Watson historic residence, which is planned to offer amenities for the NEB residences and the neighborhood. We expect to finalize development plans over the next 12 to 18 months. The NEB is one of our many developments focused on sustainability. We are dedicated to working with the Austin energy to position the property, to contribute positively to Austin's environmental goals and make the city a more sustainable place for future generations. And we expect the property to achieve an Austin energy green building rating. This quarter, after the completion of financing, we began the construction on the St. June, a 182 unit multifamily project within the Amara subdivision in Barton Creek in Austin. The first units are currently expected to be completed in the third quarter of 2022, with completion of the project expected in the first quarter of 2023. We also expect this property to achieve an Austin Energy Green Building rating. Holden Hills is our final 495 acre residential development within the Barton Creek community, which has also attracted good press coverage for its commitment to being environmentally friendly. It is designed to feature 475 unique residences focused on health and wellness, sustainability, and energy conservation. We anticipate securing final permits to start construction in the first quarter of 2022 and currently expect to complete site work for Phase 1, which includes the construction of road, utility, drainage, and other required infrastructure approximately 17 months from the issuance of our final permits. We continue to move forward on securing financing for our Holden Hills development. Our projections anticipate that we would begin sales in Holden Hills in late 2022 or early 2023. We may sell the developed home sites or may elect to build and sell or build and lease homes on some or all of the home sites, depending on financing and market conditions. Our Lantana Place project was rezoned for a potential multifamily development of up to 320 units. We are in the process of finalizing our plans and expect to begin construction in the second quarter of 2022. We also continue to move forward with the redesign of Section N, our mixed-use project with a significant multifamily component located on 570 acres in Barton Creek. I will discuss the commercial aspects of this property in a moment. Overall, we believe that our immediate pipeline of multifamily units in Austin, including those currently under construction and expected to begin construction in the near term, position stratus to benefit from the tremendous growth in the area. Our retail commercial and mixed use projects are performing very well, and we are encouraged by the continued growth of Austin and our valued tenant relationships. All of our tenants are currently paying rent per their leases, and we are regularly receiving rent deferral payments as applicable, which were granted during the peak of the COVID-19 pandemic in 2020. We have a strong pipeline of exciting projects in various stages of development and stabilization. As you know, in August of 2021, we announced new development plans and entered into a $14.8 million construction loan to complete financing for the first phase of development of Magnolia Place, our HEB grocery shadow anchored mixed use project in Magnolia, Texas. We have also initiated construction on this first phase, which is expected to consist of two retail buildings, totally approximately 19,000 square feet, all five pad sides and the road utility and drainage infrastructure necessary to support the entire development. We are currently evaluating a sale of the land for the single family residential components. Kingwood place is our HEB anchored mixed use project in the greater Houston metropolitan area. We have constructed approximately 152,000 square feet of retail space to date, including an HEB grocery store. We have signed ground leases on two of the retail pad sites, and three pad sites remain available for lease. On September 20, 2021, we entered into a contract to sell the multifamily tract of land at Kingwood Place for $5.5 million, which is expected to close by mid-2022. Lantana Place is our partially developed mixed-use development project located in Southwest Austin. The project has a ground lease with the hotel operator, and the hotel is targeted to open later this week. As of September 30th, 2021, we had signed leases for approximately 85% of the retail space in the first phase, including the anchor tenant, movie house, and eatery. As of September 2021, we had signed leases for substantially all of the retail space for the first phase of Jones Crossing our HEB-anchored mixed-use development located in College Station, Texas. We also had signed leases for approximately 70% of the retail space at West Killeen Market, our retail project located in Killeen, Texas, shadow anchored by an adjacent HEB grocery store. In the third quarter of 2021, we sold one of our two remaining pad sites at West Killeen Market for $750,000. In addition to the multifamily component, Section N will also be designed as a dense, mid-rise, mixed-use project surrounded by an extensive green space amenity, resulting in a significant potential increase in development density as compared to our prior plans. Overall, and largely as a result of these remarkable projects, we are looking forward to continued success for Stratus and its shareholders. We are confident in our team's ability to capitalize on these opportunities and continue to drive growth. Thank you. And I will now turn the call over to our CFO, Erin Pickens, to discuss our third quarter 2021 financial and operational results. Erin?

Thank you, Bo. Today we reported our financial results for the third quarter of 2021 in our press release issued this morning. Stratus consolidated revenues increased to $15.5 million in the third quarter of 2021 compared to $12.8 million in the third quarter of 2020. primarily due to the recovery in revenues from our hotel and entertainment segments. Net loss attributable to common stockholders totals $3.8 million, or 46 cents per share, in the third quarter of 2021, compared to a net loss of $15.1 million, or $1.84 per share, in the third quarter of last year. The 2020 results included a $9.6 million non-cash tax charge to record a valuation allowance on Stratus deferred tax assets. The third quarter 2021 results included a gain on extinguishment of debt of $3.7 million related to the forgiveness of substantially all of Stratus' Paycheck Protection Program loan, partly offset by a $625,000 impairment charge for the multifamily tract of land at Kingwood Place currently under contract. EBITDA totaled $2 million in the third quarter of 2021, which was an increase compared to the third quarter of last year when EBITDA was $0.6 million below breakeven. I will now provide brief commentary on our four operating segments. Note that if we close the proposed Block 21 transaction, our continuing operations would thereafter include only our real estate and leasing segments, and we would no longer have our hotel and entertainment segments. Revenue from our real estate operations segment in the third quarter of 2021 totaled $1 million, compared with $5 million in the third quarter of 2020. The segment's operating loss totaled $1.7 million in the third quarter of 2021, compared with operating income of $1.4 million in the third quarter of last year. The decrease in revenue and the operating loss primarily reflect a decrease in the number of lots sold during the third quarter of 2021 as available inventory decreased. Development of Holden Hills will add to our available inventory moving forward, and we may sell some of the undeveloped residential land in our portfolio in addition to the pending sale of the multifamily tract of land in Kingwood Place. As of September 30th, 2021, Stratus had only two unsold developed Amaro Drive Phase 3 lots. As Bo mentioned earlier, in the third quarter of 2021, Stratus sold a retail pad site at West Killeen Market for $750,000, leaving only one pad site remaining in this project. Revenue from our leasing operations segment in the third quarter of 2021 totaled just under $6 million, which remains relatively in line with the results from the third quarter of last year, The slight decrease in leasing revenue primarily reflects the sale of the St. Mary in the first quarter of 2021, partly offset by an increase in revenue at Lantana Place. The St. Mary had rental revenue of $.9 million in the third quarter of 2020. The segment's operating income totaled $1.8 million in the third quarter of 2021, up from $1.2 million in the third quarter of 2020. The increase in operating income primarily reflects the absence of costs and depreciation associated with the St. Mary after this property was sold in the first quarter of 2021. As Beau mentioned, all of our tenants are currently paying rent for their leases, as well as monthly payments pursuant to previously disclosed base rent deferral arrangements as applicable. Stratus hotel revenues grew to $5.2 million in the third quarter of 2021, a significant increase from $1.6 million in the third quarter of last year when the hotel experienced greater impacts from the pandemic. The segment's operating income totaled $46,000 in the recent quarter compared to an operating loss of $2.6 million last year. The increase in revenue and the positive operating income primarily reflect higher room reservations in food and beverage sales, as a result of the lessened impact of the COVID-19 pandemic during the third quarter of 2021. Revenue per available room, or REVPAR, was $121 in the third quarter of 2021, compared with $36 in the third quarter of last year. The hotel's average occupancy was 40% for the third quarter of 2021, which is an increase over the 16% average occupancy in the third quarter of last year, and the 33% average occupancy in the second quarter of this year. Entertainment revenues increased to $3.7 million in the third quarter of 2021 from $367,000 in the third quarter of last year. The segment's operating income was $409,000 in the third quarter of 2021, compared with an operating loss of $1.3 million in the third quarter of last year. The increase in revenue and the positive operating income reflect increased attendance and an increased number of events hosted at ACL Live and 310 ACL Live. CHUD has hosted a series of well-attended concerts over the summer with ticket sales at those events returning to levels experienced before the pandemic. Our venues are now operating at full capacity. Our general and administrative expenses increased to $5.4 million in the third quarter of 2021. compared to $2.9 million in the third quarter of last year, primarily reflecting a $2.6 million increase in employee incentive compensation costs associated with Stratus' profit participation incentive plan, resulting primarily from an increased valuation for the Santal. Additional expense of up to $4 million may be recognized upon the closing of the sale of the property. Turning to our capital management, At September 30th, 2021, consolidated debt totaled $295.4 million and consolidated cash totaled $23.2 million, compared with consolidated debt of $276.7 million and consolidated cash of $12.4 million at December 31st, 2020. Consolidated debt amounts at both dates exclude the Santal loan of approximately $75 million And that December 31st, 2020 also excludes the St. Mary loan of approximately $25 million as a result of these properties being classified as held for sale at those dates. As of September 30th, 2021, we had $5.6 million available under our $60 million Comerica Bank credit facility. As Beau noted earlier, if completed, the sales of the Santal and Block 21 will result in us receiving substantial cash proceeds estimated to be approximately $145 million after tax and including $6.9 million of the Block 21 purchase price to be escrowed for 12 months after closing. In August 2021, we entered into a $14.8 million three-year construction loan to finance the first phase of development of Magnolia Place. As of September 30th, 2021, No amounts were outstanding under this loan. In September 2021, we completed financing transactions from which a portion of the proceeds were used to purchase the land for the Annie B. The proceeds will also be used to fund pre-development costs for the project. These financing transactions included a $14 million land loan and $11.7 million from a private placement offering along with $3.9 million in cash and pursuit costs contributed by wholly owned subsidiaries of Stratus. Upon completion of the private placement offering, Stratus holds, in the aggregate, a 25% indirect equity capital interest in the limited partnership. Purchases and development of real estate properties reflected in operating cash flows and capital expenditures reflected in investing cash flows totaled $37.5 million in for the first nine months of 2021, primarily related to the purchase of the land for the NEB and development of the St. June, other Barton Creek properties, including Amara Villas and Lantana Place and Magnolia Place. This compares with $16.9 million for the first nine months of 2020, primarily related to the development of Kingwood Place, Lantana Place and Barton Creek properties and the purchase of an office building in Austin. Thank you. I'll now turn the call back to Beau for his closing remarks.

Thank you, Erin. I am pleased with our performance this quarter and specifically want to call attention to our team's knowledge, skill set, and relationships within the community that drive our success. We have the right people and the right expertise to be able to move these development projects forward and create value across our business. The momentum we have built this quarter combined with the pipeline of opportunities for our carefully selected high quality and high performing portfolio contributes to our improved outlook and increased confidence as we head into 2022. Our projects are supported by increasing demand for residential and retail developments and continued growth of Austin and other select Texas markets in which we operate, as well as consumer confidence as vaccinations drive an increase in travel events and activities. We have two large pending sales, the Santal and Block 21, several stabilized and fully or nearly fully leased projects, and several projects under construction or at various stages of development. As we continue to realize the value that we have created in our properties, we are focused on determining how best to deliver that value to our shareholders. Thank you all for joining. At this time, I would like to ask the operator to open the line for questions.

We will now begin the question and answer session. To ask a question, press star then one on a touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster.

Again, star then 1 to join the queue.

We have no one queued for questions, so this concludes our question and answer session, which also concludes today's conference call. Thank you for attending today's presentation. You may now disconnect.