Stratus Properties Inc.

Good day, and welcome to the Stratus Properties third quarter 2022 financial and operational conference call. Earlier this morning, Stratus released its third 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 November 28, 2022. Anyone listening to the taped replay should note that all information presented is current as of today, November 14, 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's press release issued today and the risk factors described in Stratus's 2021 Form 10-K and third 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 third 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 operating performance. The successful sales of the St. Mary and the Santal in 2021 and Block 21 earlier this year were completed at an opportune time in the market and have generated $166 million of after-tax cash flow to Stratus. We also successfully completed our recent commitments to return cash to shareholders through our cash dividend and share repurchase program. Looking ahead to our promising development pipeline, we believe Stratus is well positioned to continue to maximize shareholder value. Last quarter, we announced our Board's decision to deliver on our commitment to return cash to shareholders. reflecting confidence in our business strategy and development program. Since then, we have returned significant cash to shareholders by paying out approximately $40 million, or $4.67 per share, in the special cash dividend on September 29th and implementing a $10 million open market stock repurchase program in the third quarter. We continue to make progress with our buybacks toward that $10 million figure, and through November 4th, 2022, We have purchased approximately 105,000 shares for $2.6 million, or about $25 per share. After the sale of Block 21, Stratus is focused on continuing to streamline its business. As you know, we announced last quarter that the Board remains determined to continue Stratus' successful development program, focusing on pure residential and residential-centric mixed-use projects. Our team is knowledgeable about and experienced in Austin and other growing markets in Texas where we operate, including the greater Houston area where we have several HEB mixed-use projects. We plan to continue to evaluate opportunities in these fast-growing markets. We plan to continue to develop properties using project-level bank debt and promoted third-party capital. This structure has proved to be successful for us. We have also completely paid off our revolving credit facility and have no significant funding commitments or near-term debt maturities. As a result, we have significant liquidity to support our current and future projects. This is not a good time to be over-leveraged, and we intend to limit our use of the revolver in this environment. During the quarter, we have substantially completed construction on the first phase of development of Magnolia Place, where the HEB grocery store opened earlier this month. We also continued to make progress on construction on the St. June, the St. George, and Amara Villas residential properties. We also sold the last remaining pad site at West Killeen Market for $1 million, a completed pad site at the Magnolia Place project for $1.1 million, a 0.3-acre tract of land in Austin for $1.6 million, and 28 acres of undeveloped residential land in Magnolia Place for $3.2 million. Subsequent to quarter-end in October 2022, we closed on the sale of a multifamily tract of land at Kingwood Place for $5.5 million. Our mixed-use HEB-anchored projects, Kingwood Place and Jones Crossing, as well as our HEB shadow-anchored project, West Killeen Market, are all stabilized and performing well. Our fourth stabilized mixed-use project, Land Katana Place, is also showing strong performance. We have decided to retain our Kingwood Place, Jones Crossing, and West Killeen market properties until the investment sales market is more stable. At this time, we continue to advance several significant projects through the design and entitlement process. This is the least capital-intensive part of the development process, and now is a great time to secure entitlements and prepare for the next part of the cycle. We remain focused on pure residential and residential-focused mixed-use projects and are confident in our strategy for the long term. While the market and economy have been challenging, we believe our strong balance sheet will allow us to monetize our properties and take advantage of opportunities when the time is right. Overall, I'm pleased with the shareholder value we have created and cash returns we have delivered through our proven and consistent approach. With the hard work and dedication of our team, I'm excited to see what the coming months will bring as our strong pipeline of opportunities comes to fruition. I'll now provide updates on our projects. We expect to complete the St. June, our 182-unit luxury garden-style multifamily project within the Amara development by the end of the first quarter of 2023. In July 2022, we began construction on the St. George, our 316-unit multifamily project on Burnett Road, which is expected to be substantially completed by mid-2024. Both the St. June and the St. George generally remain on budget and on schedule. We continue to advance development plans for the NEB, our luxury high-rise rental project in downtown Austin. With unobstructed 360-degree views of the capital, downtown Austin, the University of Texas campus, and West Austin, our goal is to begin construction in late 2023 or early 2024, depending on obtaining financing and other market conditions. The NEB will be developed as a 400-foot tower, consisting of approximately 420,000 square feet with 316 luxury multifamily units. Additionally, we continue to progress the expansion and renovation of the adjacent historic A.O. Watson House, which is next 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. We have also advanced development plans for Holden Hills and the St. Julia Projects. Holden Hills is our final large residential development within the Barton Creek community, with 475 unique residences to be developed in multiple phases. Located near the Barton Creek Greenbelt, the new community is designed to focus on sustainability, energy conservation, and wellness, both inside and outside of the home. We have obtained construction permits for phase one, and subject to obtaining financing in other market conditions, We currently expect to start infrastructure construction later this year. Our projections anticipate that we could start building homes or selling home sites in late 2024 or early 2025. The St. Julia is our 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 2024 at the earliest. The project remains subject to securing acceptable capital structure and market conditions. Regarding our Amara Villas homes, we are continuing construction on the 12 remaining homes, and as of November 4, 2022, three homes were under contract to sell, and nine Amara Villa homes of the 20-year development program remain available for sale. We continue to progress our development plans for Section N. our 570-acre tract located along Southwest Parkway in the southern portion of the Barton Creek community. Our goal is to design Section N as a dense, mid-rise, mixed-use project surrounded by an expansive green space area. The design would result in a significant potential increase in development density. In addition, similar to Holden Hills, the project is focused on environmentally sensitive and sustainable living. We are very excited about this project's potential for Austin and our company. 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. In addition to our residential projects, I'd like to share some updates on our retail and commercial projects. We have signed ground leases on four of the five retail pads and 95 percent of the retail space at Kingwood Place. our HEB grocery anchored mixed-use project in Kingwood, Texas. One pad side currently remains available for lease. The sale of the multifamily tract for $5.5 million closed in October. During the third quarter, Stratus substantially completed construction on the first phase of development of Magnolia Place, our HEB grocery shadow anchored mixed-use project in Magnolia, Texas. The first phase of development 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. HEB opened its 95,000-square-foot grocery store on an adjoining 18-acre site on November 2nd. We have signed leases for approximately 75% of the retail space at West Killeen Market. During the third quarter of 2022, we sold the last remaining pad site for $1 million. As of September 30th, We had signed leases for approximately 90% of the retail space in our partially developed mixed-use project, Lantana Place, including the major anchor tenant, Movie House and Eatery, and a ground lease for an AC hotel by Marriott, which opened last year. I will now turn the call over to Erin for a review of the third quarter financial results. Erin?

Thank you, Bo. Today we issued our press release announcing our third quarter 2022 results. Before I begin, I'd like to acknowledge the outstanding work of the Stratus team, which is enabling us to create value for our shareholders. As Bo mentioned, Stratus's board was pleased to declare a special cash dividend of $4.67 per share, totaling approximately $40 million, which was paid on September 29th to shareholders of record as of September 19th. Our total stockholders' equity increased to $219.8 million, at September 30, 2022 from $158.1 million at December 31, 2021 and $98.9 million at December 31, 2020, primarily as a result of gains realized on the sale of Block 21 in May 2022 and our sales at the Santal and the St. Mary in December 2021 and January 2021, respectively. Revenues totaled $10 million in the third quarter of 2022, compared with $6.3 million in the third quarter of 2021. The increase in revenues is primarily a result of the sales of undeveloped properties in our real estate operations segment in the recent quarter, partially offset by a decrease in leasing revenue as a result of the sale of the Santal multifamily project in late 2021. Net loss attributable to common stockholders totaled $2.4 million or 29 cents per diluted share in the third quarter of 2022 compared to a net loss of $3.8 million or 46 cents per diluted share in the same quarter of last year. I will now provide a brief commentary on our reporting segments. Revenue from our real estate operations segment in the third quarter of 2022 totaled $6.9 million compared to $892,000 in the third quarter of 2021. Operating loss totaled $89,000 in the third quarter of this year, compared to an operating loss of $1.9 million in the third quarter of last year. The increase in revenue and lower operating loss in third quarter 2022 reflects undeveloped property sales in the third quarter of 2022 for $6.9 million previously described by Boe. There were no developed property sales in the third quarter of 2022 or 2021. Revenue from our leasing operations segment in the third quarter of 2022 totaled $3.1 million compared with $5.4 million in the third quarter of 2021. Operating income for the segment in the third quarter of 2022 totaled $853,000 compared to $1.7 million in the third quarter of last year. The decrease in revenue and operating income primarily reflect the sale of the Santal in December 2021, partly offset by increased revenue at Lantana Place and Kingwood Place. The Santal had rental revenue of $2.3 million in the third quarter of 2021. Turning now to capital management, at September 30th, 2022, consolidated debt totaled $124.2 million and consolidated cash and cash equivalents totaled $63.5 million compared with consolidated debt of $106.6 million and consolidated cash and cash equivalents 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 liability sell 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 in June. As of September 30th, 2022, Stratus had a zero balance on its $60 million Comerica revolver, exclusive of letters of credit of $11 million committed against the facility, to secure Stratus' obligation to build certain roads and utilities facilities benefiting Holden Hills and Section N. In November 2022, Comerica Bank extended the maturity date of Stratus' credit facility from December 26, 2022 to March 27, 2023. Stratus is 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. Stratus plans to make a federal income tax payment of approximately $10 million in December 2022 to satisfy estimated taxes due associated with current year taxable income, including the gain on the sale of Block 21. Purchases and development of real estate properties included in our operating cash flows and capital expenditures included in our investing cash flows totaled $57.2 million for the first nine months of 2022, which was primarily related to the development of Barton Creek properties, including the St. June and Amara Villas, the St. George and Magnolia Place. This compares to $37.5 million for the first nine months of 2021, primarily related to the purchase of land for the NEB and development of Barton Creek properties, including the St. June and Amara Villas and Magnolia Place. Thank you, and I'll now turn the call back to Bo for his closing remarks.

Thank you, Erin. Our momentum and progress are only possible due to our fantastic team. I've said this before, but Stratus benefits from our team's knowledge, experience, and relationships in the markets where we operate. and this positions us to capitalize on the continued growth and resulting housing demand in Austin and our other select Texas markets. We intend to continue to focus on the residential segment of the market and have a strong pipeline of well-located projects in fast-growing markets. Our timely sales at the St. Mary, the Santal, and Block 21 allowed us to significantly deleverage our company and return capital to our shareholders. Despite the current economic news, We remain optimistic about our pipeline of projects and have the resources necessary to bring them to fruition for the benefit of our partners and shareholders. At this time, I will ask the operator to open the line for questions. Thank you all very much for participating today.

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 two. At this time, we will pause momentarily to assemble our roster. Again, if you have a question, please press star, then one. Showing no questions, this concludes our question and answer session. I would like to turn the conference back over to Beau Armstrong for any closing remarks.

Thank you, Gary. It's all we have today.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.