Q3 2020 Stratus Properties Inc Earnings Call

Good day and welcome to the strongest properties third quarter, 2020 financial and operational conference call.

This morning, Shreyas issued a press release announcing its third quarter 2020 financial results Brett.

At least as a Billboard Stratasys Worksite, let's try this properties dot 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 telephone replay on Sean. This is work site through November 14 2020.

Anyone listening to the taped replay should note that all information presented is current as of today November nine 2020 and should be considered valid only as of the state.

As a reminder, today's press release and certain Congress will be made on this call include forward looking statements and actual results may differ materially. Please.

Please review and refer to the cautionary language included in <unk> Press release issued today isn't as factors described in short. This is 2019 form 10-K.

Third quarter 2014 form 10-Q.

Cause actual results to differ materially from those projected by Stratus.

In addition management will discuss earnings before interest taxes, depreciation and amortization.

We will refer to as EBITDA.

Just financial measure not recognized under U.S. generally accepted accounting principles.

So referred to as GAAP.

As required by FCC rules and regulations. This non-GAAP financial measure is reconciled to its most comparable GAAP financial measure and a supplemental schedule of shredded is press release issued today.

I would now like to turn the conference call over to Mr., Bill Armstrong, Chairman, President and Chief Executive Officer of shot its properties.

Thank you for joining our third quarter 2020 financial and operational conference call.

Our Chief Financial Officer, Eric Pickens is also here with me today.

We are nearing the end of a very unexpected year as the COVID-19 pandemic started to spread and Lockdowns commenced across Texas in the United States in the first half of the year.

We quickly made changes to the way we operate to protect the health and safety of our employees, while working to ensure that the communities and tenants. We serve remain confident in the safe operation of our properties.

We have made several tactical adjustments to our business, including additional focus on preserving liquidity and supporting our commercial and residential tenants we.

We believe these efforts will help to ensure the company's continued focus on its overall strategy well might maintaining its liquidity and financial flexibility.

I would like to provide an overview of the actions we are taking to manage the impacts from the COVID-19 pandemic.

Our ongoing activities to further stabilize and plan the development of certain of our properties and finally, an overview of our read exploration process announced in September.

Our long term strategy to deliver shareholder returns by selling refinancing and leasing our properties to position them for future monetization remains unchanged and we have continued to execute this strategy even throughout the pandemic.

We are of course experiencing challenges challenges similar to other hotel in live entertainment companies across the globe.

As evidenced by the terminated $275 million block 21 sale to Ryman hospitality properties, Inc.

If this block 21 transaction had taken place stratus could have expected to record and approximately $130 million pre tax gain based on December 31, 2019 balances. However.

However, with the terminated sale Ryman agreed to forfeit $15 million in earnest money in may of 2020.

We remain confident that we have the resources to withstand market challenges, resulting from the Cobi 19 pandemic and continue to capitalize on the vibrant economies in our chosen markets.

We have a deep understanding of our markets and are committed to continuing to act prudently and patiently to unlock the value in our portfolio.

Maximizing long term shareholder value through a range of activities based on market conditions.

We continue to closely monitor the status of the pandemic and consequent economic conditions across Texas.

With the recent increase in cases of COVID-19, our primary focus is to continue to follow state and local health guidelines and take actions that promote to health and safety of our employees and the communities where we operate.

I'm happy to say that our rental income properties continue to perform better than we forecasted at the outset of the pandemic back in March when we conducted scenario planning for the potential impacts of the pandemic, including rent collections versus rent deferrals.

As of quarter end, our total rent collections from for our retail properties are 84% of scheduled rents and 99% of our multifamily properties, which equates to 92% of our combined total scheduled rent from April through October 2020.

In addition, all.

All of our rental income properties are producing positive cash flow after expenses and debt service.

We understand that we are still in the midst of the pandemic with no definite end in sight. So we remain aware that our retail tenants may continue to experience consumer reluctance to enter their stores or restaurants. Therefore, we will continue to consider rent concessions on a case by case basis.

It's a rent deferral is provided to a tenant the tenant is then typically expected to make the full payment over a 12 or 24 month period, starting in 2021.

All of Stratasys retail tenants, who were opened prior to the pandemic have reopened although operating with capacity restrictions.

Also on a positive note sales of single family lots and homes have been strong and Barton Creek in 2020 through the end of the third quarter Stratasys sold $19 million of residential property and has an additional $4 million under contract at this point, we are essentially sold out of our developed single family loss in Barton Creek.

We have to town homes under construction in the Amar abilities project expected to be completed in mid 2021.

Despite the impacts of COVID-19, we remain confident that we will have sufficient liquidity to meet our financial obligations through 2021, and we believe the company is well positioned to continue to create value when the business environment recovers.

As I mentioned, we continue to execute our strategy and we are evaluating a range of opportunities for our properties, including refinancing opportunities for our larger and more stabilized assets to take advantage of historically low interest rates. For example, we are currently evaluating a sale or refinancing of the Saint Mary subject to me.

Market conditions.

This robust process has thus far generated positive interest. We're also considering selling the single family residential component of the Magnolia placed project.

We are advancing the planning and permitting process for the development of future phases of Barton Creek, including residential section kalo in the mixed use section and this.

Despite the pandemic, we continue to have leasing activity our properties.

Rental rates remained steady and tenant retention has been good.

All major construction projects have been completed and no new construction is scheduled into the first quarter of 2021 at that time, we expect to begin work on the same June a 182 unit multifamily project within your more subdivision in Barton Creek we.

We will closely monitor the market before initiating construction and may differ the start of construction at prudent.

In addition, while the pandemic continues to have an adverse impact on our business.

In operations, particularly on our hotel and entertainment sectors, we continue to implement cost controls close routine asset sales and regularly communicate with our lenders and investor groups.

The last topic I want to briefly discussed with you. All today is our September announcement of our boards approval of an in depth exploration of a potential conversion from a C Corp to a real estate investment Trust right.

With support from our external financial tax accounting and legal advisors, a preliminary analysis revealed a number of potential benefits, which encouraged us to pursue a more in depth evaluation.

As a recap these benefits may include.

Significant tax benefits for Stratasys and our shareholders right.

Regular distributions of certain income to shareholders, which are in fact required to be qualified as read.

And increased access to a financial community focused on investments in retail, which may improve the liquidity of stratasys stock broaden our shareholder base and improve our ability to raise capital.

We also plan to complete a holistic review of our governance practices and board composition.

Given that we recently an unexpectedly lost two directors, we may add one or more directors prior to completing our overall governance review.

This in depth evaluation has only just begun so we have much to accomplish and expect to continue a thoughtful review into 2021.

I would like to emphasize that if our board in fact determines that conversion to a REIT would be in the best interest of our shareholders.

We will move forward only if we receive shareholder approval in other words. The final decision to convert you read will be made by our investors. If the board decides to recommend conversion to read we will share appropriate information regarding our analysis with shareholders at that time.

Additionally, we will need consent from our major lenders and other third parties as such the evaluation process is expected to take several quarters and we would not expect to conversion to take place until 2022.

I will now turn the call over to Erin for review of our third quarter 2020 financial results Eran.

Thank you both.

Earlier. This morning, we issued a press release announcing our operational and financial results for the third quarter 2020.

Consolidated revenues totaled $12.8 million in the third quarter of 2020.

Compared with $22.3 million in the third quarter of last year.

Okay 19 pandemic has continued to adversely impact impact our hotel and entertainment operations.

We expect to experience continued impacts in future periods.

19 pandemic is ongoing.

The decrease in revenues was partially offset by increases in revenues from our real estate and leasing operation.

Net loss attributable to common stockholders totaled $15.1 million or $1.84 per share instead.

In the third quarter of 2020 compared to a net loss attributable to common stockholders of $3 million or 36 cents per share.

In the third quarter of 2019.

The higher net loss this quarter is primarily due to a $9.6 million noncash tax charge to record a valuation allowance on stratasys deferred tax assets related to past and potential future losses, resulting from the pandemic.

And not being able to recognize anticipated gains from the sale of block 21.

And operating losses from our hotel and entertainment segments in the 2020 periods, primarily as a result of the kinds of 19 pandemic.

EBITDA was negative point $6 million in the third quarter of 2020 compared to positive $2.7 million in the third quarter of last year.

This decrease primarily reflects the impacts of the kind of the 19 pandemic Stratasys Hotel and entertainment operations.

I will now provide brief commentary on our reporting segment.

Revenue from our real estate operations segment, and then in the third quarter of 2020 totaled $5 million up from $2.6 million a year ago.

Operating income in the segment was $1.4 million another quarter of 2020.

Up from $211000 in the third quarter of last year.

We sold four Amar I drive phase three lots, including two premium hilltop lot for a total of $5 million during the recent quarter compared with the sales at four am I Gonna drive phase three lots for a total of $2.6 million during the third quarter of last year.

Subsequent to the ended the quarter and through November 2nd 2020.

Strata, so three Amar drive phase two lots for a total of $10 million.

Revenue from our leasing operations segment totaled $6 million in the third quarter of 2020 up from $5.2 million last year.

Operating income in the third quarter of 2020 totaled $1.2 million compared with $1.3 million in the third quarter of 2019.

The increase in revenue primarily reflects the commencement of new leases at the St_mary keenly plays and the phone Tal.

Whereas the slight decrease in operating income primarily reflects increased costs and depreciation as a result of the completion of construction and the start of leasing operations at the Saint Merian King would play.

Hotel revenues totaled $1.6 million in the third quarter of this year compared with $8.8 million in the third quarter of 2019.

Our operating loss amounted to $2.6 million compared with operating income of $930000 in the third quarter of last year.

The decreases in both primarily result from lower room occupancy and food and beverage sales as a result of the COVID-19 pandemic.

Revenue per available room, or Revpar was $36 in the third quarter of 2020 compared with $222 in the third quarter of last year.

That any Austin hotel remains open, albeit with substantially reduced occupancy due to the significant reduction in business and leisure travel.

As a result of the kind of 19 pandemic.

In the third quarter of 2020, the hotels average occupancy was approximately 16%, which is a slight increase since the second quarter average occupancy rate of 12%.

We continue to work with the hotel operator on plans to gradually ramp up hotel operations to that breakeven point in the first half of 2021 health and market conditions permitting.

Entertainment revenues totaled $367000 in the third quarter of 2020.

Compared with $6.2 million in the third quarter of 2019.

Operating loss was $1.3 million compared with operating income of $1.1 million in the third quarter of last year.

The decreases in the revenue and operating income primarily reflect a decrease in the number of events hosted a sale live in 310 AC alive.

As many of its previously scheduled for the third quarter of 2020 or rescheduled or cancelled or does it depend Dennis.

Mandatory restrictions remain in place in Texas, and while we are able to hold a few events. Our events hosted in the third quarter of 2020 continue to be subject to capacity restrictions.

We are still unable to provide music programming as before.

However, we have scheduled a small series using the outdoor spaces at our hotel and a separate music series inside AC alive.

Turning now to our capital management at September Thirtyth 2020.

Consolidated debt totaled $368.6 million.

And consolidated cash totaled $13.4 million.

Paired with consolidated debt of $365.7 million and consolidated cash of $19.2 million at December 31, 2019.

As of September Thirtyth, 2020, Stratus had $24.5 million available under its 60 million dollar Comerica Bank credit facility.

Purchases and development of real estate properties reflected in operating cash flows and capital expenditures reflected in investing cash flows totaled $16.9 million for the first nine months of 2020.

Most of which was incurred prior to the pandemic and primarily related to the development of Kingwood place Lantana place and Barton Creek properties as.

As well as the purchase of an office building in Austin.

This compares to $60 million for the first nine months of last year, primarily related to the development of King would play the Saint Mary and Barton Creek property.

We believe that we will be able to meet our debt service and other cash obligations for at least the next 12 months.

Our projections are based on many detailed and complex underlying assumptions, including operating income from our block 21 businesses will gradually ramp up to that breakeven point in the first half of 2021.

And that block 21 will generate sufficient cash to cover debt service by late 2021.

Current conditions in our leasing operations will not further deteriorate materially.

We will continue to close on routine asset sales.

And we will sell or refinance the Saint Mary on terms consistent with our expectations.

No assurances can be given that the results anticipated by our projections will occur.

Many years ago, we established an important revolving credit facility with Comerica Bank and have established strong relationships with other project lenders I.

I believe by creating these strong relationships and performing as we have we will continue to work with them for many years to come enabling us to pursue many valuable opportunity.

Thank you and I will now turn the call back to both for his closing remarks.

Thank you Aaron.

Stratus properties is operated in Austin, and other select fast growing Texas markets, such as Houston suburb for more than 30 years.

We believe that our properties are located in the prominent real estate locations across Texas and that Austin in particular will continue to be among the strongest real estate markets in the United States. In fact, the Austin area population has grown significantly by 33% from 2009 through 2018, the median family income levels in the air.

<unk> increased by 30% in the same time period.

We are following these trends and as you've seen we are developing properties, where we believe we witnessed the most population growth.

In the meantime, while the pandemic continues to significantly impact our hotel entertainment assets in communities. We believe our projects are important to our communities. During these unprecedented times our mixed used properties provide people with a place to sleep eat live and grow with their friends and families regardless of the macro market situation our strategy remains sound.

And we have a we have a very high quality pipeline of opportunities and believe stratasys is well positioned to create value as the business environment continues to recover.

This year's been filled with unanticipated challenges in Irish everyone's remain safe and healthy as we work together to get through this pandemic.

Thank you for listening in at this time I will ask the operator to open the line for questions.

Thank you we will now begin the question answer session well.

Of course remember starving one.

Oh.

If you are using a speakerphone. Please proceed.

A key.

Withdraw your question. Please press Star then too.

Well pause momentarily.

Yes.

And as a reminder, ladies and gentlemen, you booked to ask a question. Please press Star then one.

[laughter].

This is all this concludes our question and answer session ancillary softened. So we thank you all for joining todays presentation. You may now disconnect your lines and have a wonderful.

[noise] [noise].