Stratus Properties Inc.

Good day, and welcome to the Stratus Properties second quarter 2022 financial and operational conference call. Earlier this morning, Stratus released its second quarter 2022 financial results and provided business updates, which are available on its 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 August 29, 2022. Anyone listening to the taped replay should note that all information presented is current as of today, August 15, 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, projected, or assumed in the forward-looking statements. please review and refer to the cautionary language included in Stratus' press release issued today and the risk factors described in Stratus' 2021 Form 10-K and second quarter 2022 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 and regulations, this non-GAAP financial measure is reconciled to its most comparable GAAP financial measure in a supplemental schedule of 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 conference call to review our second quarter 2022 financial and operational results. Our chief financial officer, Aaron Pickens, is here with me today. To start off, I'd like to say how proud I am of our team's hard work and execution in delivering another quarter of excellent financial performance. From our sale of Block 21 in late May to furthering progress on our development portfolio, we believe Stratus is well positioned to continue to maximize shareholder value. In fact, I'm proud to share that as of June 30th, 2022, Stratus' stockholders' equity was $262.4 million, which is an increase of over $150 million, or 165%, since the end of 2020. Stratus has generated $218.9 million of pre-tax earnings, or $172 million net of income taxes from the sales of the St. Mary, the Santal, and Block 21 over the last six quarters, and approximately $166 million of after-tax cash flow, including $6.9 million of proceeds from the Block 21 sale held in escrow for a year after the sale. I'd also like to share an exciting development for our shareholders. As we've mentioned before, Stratus' board of directors and management team have been evaluating opportunities for deploying the proceeds from the sale of Block 21 and other recent sales. I'm happy to report that as a result of this strategic planning process, Stratus' board has approved returning $50 million cash to shareholders subject to obtaining required consents from Comerica Bank. This return of capital could be in the form of share repurchases, dividends, or a combination of both. As part of these discussions, our directors have also been considering potential updates to Stratus' long-term business strategies. After streamlining Stratus's business through the sale of block 21, the board has decided to continue Stratus's successful development program with our team focusing on pure residential and residential focused mixed use projects in Austin and other attractive markets in Texas. Stratus plans to continue to develop properties using project level debt and third party equity capital. And we expect Stratus to reduce Stratus's reliance on its revolving credit facility and retain sufficient cash to operate its business, taking into account risks associated with changing market conditions. We are pleased with the shareholder value we are creating through our proven and consistent approach. We have refined our development program over the years and have made solid progress on our properties across our portfolio. The returns are clear, and I'm excited to see what more we can accomplish with our strong pipeline of opportunities. This momentum and progress are only possible due to our talented people. Stratus benefits from our team's knowledge, experience, and relationships in the markets where we operate, and this positions us to capitalize on the high housing demand we are currently experiencing in Austin and other Texas markets. As you likely saw from our recent announcement on July 21st, we raised a total of $33.4 million of third-party equity capital and $56.8 million of construction financing from Comerica Bank for the St. George project. We recently began construction of this 316-unit luxury wrap-style multifamily project located in an excellent north-central Austin location within minutes of the University of Texas, downtown employers, Apple's new north Austin campus, Q2 Stadium, and The Domain, which is an upscale retail office and residential center. Affirmed by our recent success with the St. George, we believe that we will be able to continue to attract project level third party equity and bank debt financing for our other projects in our pipeline as well. While residential demand remains strong in our markets, I also want to acknowledge that the increases in land construction and labor costs, supply chain constraints and rising interest rates are challenges facing the entire real estate industry right now. We are confident that the strength of our portfolio, the versatility of our team, and our strong financial position are key to succeeding in these uncertain market conditions. To manage these risks, we go through extensive pricing exercises culminating with competitive bids from reputable contractors based on final plans and specifications. Further, because we engage third-party general contractors to construct our projects on a fixed price or guaranteed maximum price basis, our exposure to cost increases on projects under construction is limited. To date, these rising costs have not had a material impact on our financial results as we have been able to realize higher rents and sales prices. In addition to rigorous cost management, Stratus' strong balance sheet after the sale of Block 21 and receiving financing for the St. George position us to capitalize on strategic opportunities in the future. I'll now provide further updates on our pipeline. To begin, in the second quarter, we made progress on our development plans and construction efforts on several of our residential projects. The first units of the St. June, our 182-unit luxury garden-style multifamily project within the Amara development, are expected to be completed in the fourth quarter of this year with a target of first quarter 2023 for full project completion. St. June comprises multiple buildings featuring one-, two-, and three-bedroom units for lease with amenities that include a resort-style clubhouse, fitness center, pool, and extensive green space. We are excited for the completion of the St. June in the coming months, which will also be aligned with our sustainability, wellness, and conservation goals. We are advancing development plans for the Annie B, our luxury high rise apartment building in downtown Austin with unobstructed 360 degree views of the Capitol, downtown Austin, the University of Texas campus, and West Austin. We expect to begin construction in 2023, subject to obtaining financing and other market conditions. The NEB will be developed as a 400-foot tower consisting of approximately 440,000 square feet with 316 luxury multifamily units. Additionally, we are expanding and renovating the historic A.O. Watson House, which is located adjacent to the tower and will offer amenities including a restaurant, bar, pool, and garden, all while preserving the property's unique historic and architectural features. Construction on the last 12 Amaro Villas units in Barton Creek continues to progress, and as of August 12, 2022, three homes were under contract to sell, and nine Amaro Villa homes of the 20 of development remain available for sale. Similarly, we have also advanced development plans for the St. Julia and Holden Hills projects. The St. Julia is a 306 unit multifamily component of our Lantana Place project south of Barton Creek in Austin. We currently expect to begin construction on the St. Julia in 2023, subject to securing an acceptable capital structure and other market conditions remaining favorable. Golden Hills is our final large residential development within the Barton Creek community with 475 unique residences to be developed in multiple phases aligned with our sustainability, wellness, and conservation goals. We have obtained construction permits for phase one, and subject to obtaining financing and other market conditions, we currently expect to start infrastructure construction in late 2022. We expect to be in position to start building homes and or selling home sites in Holden Hills in late 2024. The last residential project I'll mention is section N, our 570-acre tract located along Southwest Parkway in the southern portion of the Barton Creek community. For this project, we are capitalizing on trends in consumer demand and are using a conceptual approach similar to that used for Holden Hills. If successful, Section N will be designed as a dense, mid-rise, mixed-use project surrounded by an expansive green space area, which would result in a significant potential increase in development densities. I'm looking forward to seeing the exciting residential projects in our pipeline develop further, meet the demands of residents in our target markets, and contribute to future strong returns for our shareholders. Retail and commercial updates. In addition to our residential projects, I'd like to share some updates on our retail and commercial projects. Construction continues on the first phase of our HEB grocery shadow anchored mixed use project, Magnolia Place. Development plans currently consist of 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 consists of two retail buildings with approximately 19,000 square feet, all five pad sites and road utility and drainage infrastructure necessary to support the entire development. Infrastructure construction was completed in the second quarter, and the two retail buildings were also completed this quarter and turned over to our retail tenants to begin their finish-out process. We expect HEB's 95,000 square foot grocery store to open by the end of 2022. In addition, we sold one completed pad site for $2.3 million in the second quarter, and recently closed on the sale of 28 acres of undeveloped residential land in Magnolia Place for $3.2 million in the third quarter. As of June 30, 2022, we had signed leases for approximately 90% of the retail space in our partially developed mixed-use project in Austin, Lantana Place, including the major anchor tenant movie house and eatery, and a ground lease for an AC hotel by Marriott. We are also exploring potential sale or refinancing of our stabilized mixed-use developments at Kingwood Place, Jones Crossing, and West Killeen Market, as previously disclosed, and are also pursuing other projects which may produce additional cash to return to shareholders subject to market conditions and obtaining any required consents. These projects are performing well in generating revenue, and we plan to take action when we believe the market is right to maximize value. Furthermore, we have undeveloped properties currently undergoing active planning, including our two large projects, Holden Hills and Section N. I will now turn the call over to Erin for a view of our second quarter 2022 financial results. Erin?

Thank you, Beau. Today we issued our press release announcing our second quarter 2022 results. Before I begin, I'd like to acknowledge the unparalleled execution of the Stratus team, which is enabling us to create value for our shareholders. As Bo mentioned, Stratus' total stockholder equity increased to $262.4 million at June 30, 2022, which is a 165% increase from $98.9 million at December 31, 2020, primarily as a result of gains realized on the sales of Block 21, the Santal, and the St. Mary. Revenues totaled $11.1 million in the second quarter of 2022, compared with $5.6 million in the second quarter of 2021. The significant increase in revenues in the second quarter of 2022 is primarily a result of the opportunistic sales of undeveloped real estate properties, as well as a completed Amara Villas home in our real estate operations segment, partially offset by a decrease in leasing revenue resulting from the sale of the Santal in late 2021. Net income attributable to common stockholders totaled $96.6 million, or $11.53 per diluted share, in the second quarter of 2022, compared to a net loss of $10.2 million, or $1.23 per diluted share, in the same quarter last year. The second quarter 2022 results included net income from discontinued operations associated with Block 21 of $95.9 million, including a $100 million $19.7 million pretax gain on the sale or $94.1 million net of taxes compared to a net loss from discontinued operations of $5.9 million in the second quarter of last year. EBITDA totaled $1.5 million in the second quarter of 2022 compared to negative $4.5 million in the second quarter of 2021. I'll now provide brief commentary on our reporting segments. Following our sale of Block 21 in May, Stratus' reporting segments now include only real estate and leasing operations as we no longer have entertainment and hotel operations. Revenue from our real estate operations segment in the second quarter of 2022 totaled $7.9 million compared to $773,000 in the second quarter of 2021. Operating income totaled $2.5 million in the second quarter of this year compared to an operating loss of $807,000 last year. The increase in revenue and operating income from the real estate operations segment in the second quarter of 2022 compared to the same quarter in 2021 reflects the second quarter of 2022 sales of an Amara Villas home for $2.4 million and several undeveloped properties, including a six-acre multifamily tract of land in Amara Drive for $2.5 million, a completed padside at Magnolia Place for $2.3 million, and attractive land in Austin for $0.6 million. Revenue from our leasing operations segment in the second quarter of 2022 totaled $3.2 million compared with $4.9 million in the second quarter of last year. The decrease in revenue from the leasing operations segment in the second quarter of 2022 when compared to the second quarter of last year primarily reflects the December 2021 sale of the Santal, which had rental revenue of $2.3 million in the second quarter of 2021, partly offset by increased revenue at Lantana Place. Operating income for the segment in the second quarter of 2022 totals $1.5 million compared to $1.1 million in the second quarter of last year. Operating income in the segment increased due to the lower rental cost of sales and depreciation, primarily as a result of the sale of the Santal. On May 31st, 2022, we closed the sale of Block 21 to Ryman Hospitality Properties, Inc. for $260 million, subject to certain purchase price adjustments and including Ryman's assumption of $136 million of existing mortgage debt with the balance of the sale price paid in cash. Stratus' net proceeds of cash and restricted cash totaled $112.3 million, including $6.9 million of the purchase price escrowed and to be held for 12 months, subject to a longer retention period with respect to any required reserve for pending claims. Stratus recorded a pre-tax gain on the sale of $119.7 million in the second quarter of 2022, which is included in net income from discontinued operations. Turning now to capital management, at June 30th, 2022, consolidated debt totaled $114.6 million and consolidated cash totaled $102.4 million compared with consolidated debt of $106.6 million and consolidated cash of $24.2 million at December 31st, 2021. Note that consolidated debt at December 31st, 2021 excluded the Block 21 loan of approximately $137 million, which was presented in liabilities held for sale discontinued operations. Using the proceeds from the sale of Block 21, Stratus repaid the outstanding amount under its $60 million Comerica Bank credit facility prior to the end of the quarter. And at June 30th, 2022, Stratus had $49 million available under the credit facility. Letters of credit totaling $11 million have been issued under the credit facility to secure Stratus' obligation to build certain roads and utilities facilities, benefiting our Holden Hills and Section N projects. As Bo mentioned, in July, a Stratus subsidiary entered into a $56.8 million loan with Comerica Bank to finance the construction of the St. George multifamily project. In connection with the closing of the construction loan, we also received the final funding commitment from our equity partner, which provided an additional $15 million of capital. Our partner's contributions now total $33.4 million for this project. also made additional capital contributions of $1.7 million, bringing our total capital contributions to $3.7 million for this project. Purchases and development of real estate properties included in operating cash flows and capital expenditures included in investing cash flows totaled $39.7 million for the first six months of 2022, which primarily related to the development of Barton Creek properties, including the St. June and Amara Villas and Magnolia Place. This compares to $7.3 million for the first six months of 2021, primarily related to the development of Barton Creek properties, including Amara Villas, Lantana Place, and Magnolia Place. Thank you, and I will now turn the call back to Beau for his closing remarks.