Stratus Properties Inc.

Good morning and welcome to the Stratus Properties year-ended December 31st, 2021 financial and operational conference call. Earlier this morning, Stratus issued a press release announcing its year-ended December 31st, 2021 financial 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 April 14, 2022. Anyone listening to the taped replay should note that all information presented is current as of today, March 31, 2022, 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, 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 2021 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, and net asset value, or NAV, and financial measures calculated by reference to NAV, including after-tax NAV and after-tax NAV per share, which are financial measures not recognized under U.S. generally accepted accounting principles, also referred to as GAAP. As required by SEC rules, these non-GAAP financial measures are reconciled to their most comparable GAAP financial measures and the supplemental schedules of Stratus' press release issued today. On March 25, 2022, the company published on its website under the Investors tab an update to its NAV. I would now like to turn the conference call over to Mr. Beau Armstrong, Chairman, President, and Chief Executive Officer of Stratus Properties. Please go ahead.

Thank you all for joining our year-ended December 31, 2021 Financial and Operational Conference Call today. Our Chief Financial Officer, Aaron Pickens, is also here with me today. I would like to start by spending some time acknowledging the tremendous year we had, which was only made possible by our incredibly talented and hardworking team here at Stratus. Then I will provide updates on the status of our current residential development project pipeline, as well as touch on a few of our new retail and commercial development activities, which we are excited about. Finally, I will pass the call to Aaron to review our 2021 financial results before wrapping up with remarks about the encouraging markets we operate in and our successful full cycle development strategy. To begin, our momentum is driven by our significant achievements last year, and I'm excited to share that 2021 produced record net earnings for Stratus. Our total stockholders' equity increased 60%, to $158.1 million at year end 2021 from year end 2020. And upon the completion of the pending sale of Block 21, we expect to record a pre-tax gain of approximately $120 million or $95 million after tax. The Block 21 transaction is also expected to be accretive to stockholders' equity. We had the most productive year in the history of our company in 2021, which included Executing the sales of the St. Mary and the Santal for a combined sales price of $212 million and a combined pre-tax gain of $106 million. Sourcing significant institutional equity capital with an attractive promote structure for Stratus to develop several new projects in our pipeline, including the St. June, the Annie B, and the St. George multifamily projects in Austin, and continuing to lease up our retail projects, including our newest shadow-anchored HEB in the Houston suburb of Magnolia, which is currently under construction. Separately, we also successfully achieved our board refreshment objectives to enhance the skills, experience, and diversity of the board through the appointments of three new directors over the past 18 months. Neville Roane, Jr., in December 2020, Kate Hendrickson in January 2021, and Lori Dotter in August 2021. I am proud of our team's success in entitling, designing, constructing, leasing, and ultimately selling the St. Mary and the Santal. Our team's continued work toward the Block 21 sale, the start of several new projects, and continued progress on substantial new opportunities in our existing development pipeline. In January 2021, we announced the sale of the St. Mary, a 240-unit luxury garden-style rental project in the Circle C community in Austin for $60 million, or $250,000 per unit. After closing costs and repayment of the project loan, the sale generated net proceeds of approximately $34 million, of which Stratus received $21.9 million, Stratus recognized a gain in the sale of $22.9 million with $16.2 million net of non-controlling interest in 2021. In December of 2021, we completed the sale of the Santal, a 448-unit garden-style multifamily luxury rental project located in Section N of Barton Creek for $152 million, generating net proceeds of approximately $74 million and a pre-tax gain on the sale of $83 million after closing costs and repayment of the project loan. A portion of the proceeds from the sale of the Santal enabled us to pay down in full our revolving credit facility with Comerica Bank. We are also continuing to work toward closing the sale of our Block 21 property to Ryman Hospitality Properties Inc. for $260 million. The transaction is expected to close prior to June 1, 2022, subject to the timely satisfaction or waiver of various closing conditions, including the consent of the loan servicers to Ryman's assumption of the existing mortgage loan, the consent of the hotel operator and affiliate of Marriott to Ryman's assumption of the hotel operating agreement, the absence of a material adverse effect, and other customary closing conditions. Our outstanding achievements in 2021 reflect our team's continued success in developing properties from within our significant land portfolio, as well as sourcing new development opportunities to generate value for our shareholders. I am confident we have the development expertise, market knowledge, relationships, and focus to continue to thrive in Austin and other select fast-growing Texas markets where we operate. With that, I'm going to turn to provide updates on our residential projects. I want to start by first discussing our residential property portfolio. Our residential projects continue to thrive in 2021, positively impacted by home-centric trends resulting from the pandemic and increased attractiveness of Austin, which continued to drive demand higher than available supply. For the Annie B, the St. George, and the St. June, we raised $46.3 million of third-party equity capital in 2021, contributing to the 90% increase in total equity to $208.6 million at year-end 2021 from year-end 2020, and demonstrating our ability to source outside equity capital with promoted economics for the company, as we previously did with the St. Mary and Kingwood Place projects in 2018. I will now provide brief descriptions of each of these new projects. The NEB is our proposed luxury high-rise rental project in downtown Austin near the State Capitol, 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. The project consists of approximately 420,000 square feet with 300 luxury multifamily units for lease and ground-level retail and other unique amenities in the historic A.O. Watson House, which was part of the NEB land assemblage and will be fully renovated as part of this project. We closed the purchases in September 2021 and expect to finalize development plans and financing over the next 12 months. The St. George, is a proposed wrap-style multifamily rental project to be constructed on approximately four acres with about 317 units comprised of luxury studio, one- and two-bedroom units, and an attached parking garage along the Burnett Road corridor in north central Austin, which is near the new Austin FC soccer stadium. We closed the land purchase in December 2021. While we continue to plan the project, negotiate a construction loan, and obtain entitlements and permit approvals, we expect to begin construction by mid-2022 and achieve substantial completion by mid-2024. In the third quarter of 2021, we began construction on the St. June, a 182-unit luxury garden-style multifamily rental project within the Amara development in the Barton Creek community in Austin. The first units of the St. June are expected to be completed in the third quarter of this year, with completion of the project expected in the first quarter of 2023. In 2021, we also continue to make progress on several important long-term development projects, including Holden Hills and Section N at Barton Creek, with a particular focus on health and wellness, sustainability, and energy conservation. Sustainable development continues to be a guiding principle for the company. Holden Hills is our final large residential development within the Barton Creek community consisting of 495 acres and designed to feature 475 unique residences to be developed in multiple phases. We anticipate securing the final permits to initiate construction in September of this year and to begin to close the sales of home sites in mid-2024 subject to obtaining financing. Using a conceptual approach similar to Holden Hills, we are evaluating a redesign of Section N, an approximately 570-acre tract with a significant multifamily component in the southern portion of Barton Creek. At Lantana Place, south of our Barton Creek development, we are planning to begin construction on the 306-unit multifamily component of this project in the third quarter of this year with an expected completion at mid-2024. I will provide more detail on Lantana Place in a moment. Cost increases for our residential projects in 2021 reflect increased construction activity in line with increased demand, as well as industry-wide impacts of material and labor supply constraints. We continue to monitor and strategically advance on certain projects in line with current trends and future expectations, such as incorporation of more residential uses while also actively managing and monitoring design and construction costs. Our retail, commercial, and mixed-use projects are also continuing to perform well and have benefited from increased activity and foot traffic throughout 2021. We are continuing to lease up our retail projects, Kingwood Place, Lantana Place, West Killeen Market, and Jones Crossing. All four projects are producing positive cash flow after debt service. The Kingwood Place project in the greater Houston area includes approximately 152,000 square feet of retail lease space anchored by a 103,000 square foot HEB grocery store, five pad sites, of which four have been ground leased, and one is available. As of December 31, 2021, we assigned leases for approximately 85% of the completed retail space, including HEB. Kingwood Place also includes a 10-acre parcel currently planned for approximately 275 multifamily units. In September 2021, we entered into a contract to sell this land for $5.5 million, and if consummated, the sale is expected to close in mid-2022. Lantana Place is a partially developed mixed-use real estate development project. As of December 31, 2021, We had signed leases for approximately 85% of the 99,379 square feet of retail space, including the acre tenant, movie house and eatery, and a ground lease for an AC by Marriott hotel. As mentioned earlier, we expect to begin construction of the multifamily development in the third quarter. This site within that land tenant place was recently rezoned from office use to multifamily use. As of December 31, 2021, We had executed leases for approximately 70% of the retail space at West Killeen Market, our HEB-anchored retail shopping center in Killeen, Texas. During 2021, we sold a pad site at West Killeen Market for $750,000 and only one unsold pad site remains. We are also continuing to lease up our Jones Crossing property. Jones Crossing is an HEB-anchored mixed-use project located in College Station, Texas. As of December 31, 2021, we had signed leases for approximately 95% of the completed retail space, including HEB. Also, as of December 31, 2021, we had approximately 23 undeveloped acres with estimated development potential of approximately 104,750 square feet of commercial space and five vacant pad sites. In 2021, we also announced new development plans obtain debt financing, and commence construction on the first phase of development for Magnolia Place, a mixed-use development shadow-anchored by HEB in the greater Houston area. The development is planned to consist of four retail buildings, five retail pad sites to be sold or leased, 194 single-family lots, and approximately 500 multifamily units. We have signed three leases for 40% of the in-line retail space, and are in discussions with additional potential tenants. The HEB is expected to open the second quarter of 2022, and the first two retail buildings are expected to be available for occupancy in the third quarter of 2022. Our design plans for New Caney, an HEB-anchored mixed-use project including restaurants and retail services, remain underway. We currently plan to commence construction no earlier than 2024. We expect the new Caney project will total approximately 145,000 square feet, five pad sites, and a 10-acre multifamily parcel plant for approximately 275 multifamily units. Overall, we are pleased with the performance of our existing properties. I'm encouraged by the activity in our pipeline and our team's proven ability to create value through the development process. Thank you, and I will now turn the call over to our CFO, Aaron Pickens, for a review of the 2021 financial results. Erin?

Thank you, Beau. Today we reported our year-ended December 31st, 2021 financial results in our press release issued this morning. Stratus's consolidated revenues totaled $28.2 million for 2021, compared with $44.3 million for 2020, primarily reflecting the decrease in revenue from our real estate operations segment as our available inventory of developed lots decreased. Net income attributable to common stockholders totaled $57.4 million, or $6.90 per diluted share for 2021, compared to a net loss of $22.8 million, or $2.78 per diluted share for 2020. Net income for 2021 versus net loss for 2020 is primarily the result of gains recognized on the sales of the Santal and the St. Mary, totaling $106 million combined on a pre-tax basis. EVDA totals $90.7 million for 2021, which was a significant increase over $1.1 million for 2020, also primarily attributable to the gains recognized on the sales of the Santal and the St. Mary. Historically, we have reported four operating segments, real estate operations, leasing operations, hotel, and entertainment. Moving forward, due to the pending sale of Block 21, Our continuing operations include our real estate operations and leasing operations segments, while our discontinued operations include hotel, entertainment, as well as the leasing operations associated with Block 21. Revenue from our real estate operations segment in 2021 totaled $8.5 million, compared with $22.6 million in 2020. The segment's operating loss totaled $3.3 million in 2021, compared with operating income of $3.7 million in 2020. This decrease in revenue and the operating loss primarily reflect a decrease in the number of lots sold during 2021 as our available inventory decreased. Revenue from our real estate operations accounted for 30% of our total revenue in 2021 and 51% in 2020. The operating loss also includes impairment charges of $700,000 for two Amara Villas homes under construction and under contract, $625,000 for the multifamily tract of land at Kingwood Place, for which a sale is pending, and $500,000 for an office building in Austin that Stratus is renovating and may occupy as its headquarters upon closing of the sale of Block 21. As of December 31, 2021, Stratus had only two unsold developed Amara Drive Phase III lots, Also in 2021, Stratus sold its last condominium at the W. Austin Residences at Block 21. Revenue from our leasing operations segment in 2021 totals $19.8 million compared to $21.8 million in 2020. The decrease primarily reflects the sale of the St. Mary, partially offset by increased revenue at Lantana Place. Notably, revenue from our leasing operations segment accounted for 70% of our total revenue for 2021 versus 49% for 2020. The segment's operating income was $111.4 million in 2021 compared to operating income of $3.1 million in 2020. This significant increase reflects the gains recognized on the sales of the Santals and St. Mary, which, as I mentioned earlier, totaled $106 million combined pre-tax. Despite the COVID-19 pandemic, Stratus has retained substantially all pre-pandemic retail tenants and added new tenants, and all of our tenants are currently paying rent for their leases, as well as monthly payments pursuant to previously disclosed base rent deferral arrangements. Moving now to results for our discontinued operations. Stratus's hotel revenues increased to $18.3 million in 2021, up from $9.9 million in 2020. which is primarily a result of higher room occupancy in food and beverage sales as the impacts of the COVID-19 pandemic continued to lessen throughout 2021. Revenue per available room, or REVPAR, was $155 in 2021 compared with $61 in 2020. Entertainment revenues increased to $12.9 million in 2021 compared to $5.2 million in 2020 primarily reflecting the increase in the number of events hosted at ACL Live and 310 ACL Live. Seating capacity remained limited at Stratus' entertainment venues until opening up to full capacity in August 2021. After closing costs and Ryman's assumption of the outstanding Block 21 loan, the sale of Block 21 is expected to generate net pre-tax proceeds of approximately $115 million and after-tax proceeds of approximately $90 million, before prorations and including $6.9 million to be escrowed for 12 months after closing. We expect to report a pre-tax gain of approximately $120 million upon the closing of the sale or $95 million after tax. Our general and administrative expenses included in corporate eliminations and other increased to $24.5 million in 2021 compared to $13.6 million in 2020. primarily reflecting a $7.4 million increase in employee incentive compensation costs associated with the profit participation incentive plan, primarily for the Santal and Lantana Place projects, and $2.7 million increase in consulting, legal, and public relation costs for Stratus' successful proxy contest. Turning to capital management, at December 31st, 2021, consolidated debt totaled $106.6 million and consolidated cash totaled $24.2 million. This is compared with consolidated debt of $137.7 million and consolidated cash of $9.3 million at December 31st, 2020. Consolidated debt amounts at both dates exclude the Block 21 loan of approximately $138 million and at December 31, 2020, also excluded the Santal loan of approximately $75 million and the St. Mary construction loan of approximately $25 million as a result of these properties being classified as held for sale at those dates. After using a portion of the proceeds from the sale of the Santal to repay the balance under our $60 million Comerica Bank credit facility, as of December 31, 2021, we had $59.7 million available under the credit facility with letters of credit totaling $347,000 committed against the credit facility. Purchases and development of real estate properties included in operating cash flows and capital expenditures included in investing cash flows totaled $72.3 million for 2021, primarily related to the purchases of the land for the St. George and the NEB, the development of the St. June and other Barton Creek properties, including Amara Villas, and the Magnolia Place and Lantana Place projects. This compares with $20 million for 2020, primarily related to the development of Kingwood Place, Lantana Place, and Barton Creek properties, and the purchase of an office building in Austin. We project that Stratus will be able to meet its debt service and other cash obligations for at least the next 12 months. Our $60 million revolving credit facility with Comerica Bank matures on September 27, 2022. We're in discussions with the lender to remove Holden Hills from the collateral pool for the facility finance the Holden Hills project under a separate loan agreement, and enter into a revised revolving credit facility with a lower borrowing limit secured by the remaining collateral under the facility. If these discussions are not concluded timely, we expect to be able to extend or refinance the facility prior to the maturity date. No assurances can be given that the results anticipated by our projections will occur. Finally, before I pass the call back to Beau, I would like to discuss Stratus's updated NAV, A presentation of our calculations can be found on Stratus's website. Stratus's total stockholder's equity was $158.1 million at December 31, 2021, compared with $98.9 million at December 31, 2020. Stratus's after-tax NAV increased to $408.9 million, or $48.80 per share, as of December 31, 2021. This compares with $337.3 million, or $40.65 per share, as of December 31, 2020. The increase in the after-tax NAV was primarily driven by the increase in the gross value of Block 21, which as of December 31, 2020, was determined using an appraisal obtained during the COVID-19 pandemic and is currently determined using the contract price with Ryman. Thank you. I will now turn the call back to Beau for his closing remarks.