Q3 2021 Stratus Properties Inc Earnings Call

Good morning, and welcome to the Stratus properties third quarter 2021 conference call today <unk> issued a press release announcing its third quarter 2021 results. The press release is available on <unk> website at Stratus properties dotcom.

Following management's Xerox, we will host a question and answer session. Please note. This call is being recorded and will be available for replay on Stratasys website through November 29 2021.

Anyone listening to the replay should note that all information presented is current as of today November 15th 2021, and should be considered valid only as of this stage.

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 Stratasys press release issued today and the risk factors described in Stratasys 'twenty 'twenty Form 10-K, and third quarter 2021 Form 10-Q that could cause actual results to differ materially from those projected by stratus in.

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 Stratasys press release issued today.

I would now like to turn the conference over to Mr. Bell 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, Erin 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 culture, Aaron if you 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 Symphony 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 St. Paul and block 21 will result in stratus, receiving substantial cash proceeds, which we estimate to be approximately $145 million after tax.

Approximately $50 million relating to the same tau and 95 million related to block 21, 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 of Stratus as long term business strategy.

Potential uses of proceeds may include a combination of further deleveraging.

Turning cash to shareholders and reinvesting in our robust project pipeline.

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 strategy and 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 our ability to follow through on our commitment to optimizing value at each of our properties across market conditions.

Throughout the pandemic, we have continued to acquire develop and stabilized properties to sell refinance or whole release in this quarter is no different.

I will now address our two most recently announced potential sales stand tall and block 21.

First on September 20.

2021 we entered into an agreement to sell the sand sold for $152 million in cash.

The same tall as stratus as wholly owned 448 unit Garden style multifamily luxury complex located in sections and of the Barton Creek community.

Construction of the Sam told 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 pretax gain on the sale of approximately $80 million in the fourth quarter of 2021.

Checking on October 26, 2021, we announced that we entered into new agreements to sell block 21 to ryman hospitality properties for $260 million blocks.

Block 21 is our mixed use development in downtown Austin, comprising the W. Austin Hotel and retail office and entertainment space.

<unk> Austin city limits losses.

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 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 sale is expected to generate pre tax net proceeds of approximately $115 million before proration, and including $6 9 million to be escrowed for 12 months after closing.

Stripes expects to record a pretax 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.

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 Robbins 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 am confident that this Nashville based hotel resort Entertainment and media company is the right partner for block 21.

And we will continue to build on his legacy and the Austin music and travel space.

I'm also proud of our team's ability to maintain block 20 ones 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 Santo in block 21 would result in us receiving cash proceeds estimated to be approximately $145 million after tax.

Approximately 50 million relating to the same tall, 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, a new mixed use retail and residential developments. We are pleased to both contribute to and enjoyed the growth and development of this driving.

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 wanted to start with a residential property portfolio, where we have many compelling projects and opportunities and 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 <unk>.

Our proposed luxury high rise rental project in downtown Austin near the Texas State capital.

The antibody is expected to be a 400 foot tower with unobstructed 360 degree views of the capital downtown Austin and the University of Texas campus.

West Austin.

As planned the project consists of approximately 420000 square feet with 300 luxury multifamily units per lease and ground level retail.

The project also includes the renovation of the adjacent a O Watson historic residents, which is planned to offer amenities for any be residences in the neighborhood.

We expect to finalize development plans over the next 12 to 18 months.

The <unk> is one of our many developments focused on sustainability, we are dedicated to working with Austin energy to positioning the property to contribute positively to austin's environmental goals and make the city at 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 a financing we began the construction of the St. Jude.

182 unit multifamily project within the Amara subdivision in Barton Creek and Austin.

The first units are currently expected to be completed in the third quarter of 2022 with completion of the projects expected in the first quarter of 2023.

We also expect this property to achieve an Austin energy Green building rating.

Holton 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 of 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.

Currently expect to complete site work for phase, one which includes the construction of road utility drainage and other required infrastructure approximately 17 months from the issuance of our final permit.

We continue to move forward on securing financing for our holding his development.

Our projections anticipate that we will begin sales in Holton Hills in late 2022 or early 2023.

We may sell the developed home sites or may elect to build and sell or build out and lease homes on some or all of the home sites, depending on financing and market conditions.

Our Lantana place project was rezoned for 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 continued to move forward with the redesign of section in our mixed use project with a significant multifamily component located on 570 acres in Barton Creek.

I will discuss the commercial aspects of this properties 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.

<unk> strategy 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 Boston 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 2021, we announced new development plans and entered into a $14 $8 million construction loan should 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 totaling approximately 19000 square feet, all five pad sites and the road utility in drainage infrastructure necessary to support the entire development.

We are currently evaluating a sale of the land for the single family residential component.

Kingwood place is our HEB anchored mixed use project in the greater Houston Metropolitan area.

We have constructed approximately 152000 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 22021, we entered into a contract to sell the multifamily attractive land at Kingwood place for $5 $5 million.

Which is expected to close by mid 2022.

Lantana place is are partially developed mixed use development project located in southwest Austin the.

The project has a ground lease with the hotel operator.

The hotel is targeted to open later this week.

As of September 32021, we had signed leases for approximately 85% of the retail space in the first phase, including the anchor tenant movie House an eatery.

As of September 2021, we have 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 clean, 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 $750000.

In addition to the multifamily component.

Section and will also be designed as a dense mid rise mixed use projects 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're 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 Eric.

Thank you Bo.

Today, we reported our financial results for the third quarter of 2021, and 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 the third quarter of 2020.

Primarily due to the recovery in revenues from our hotel and entertainment segments.

Net loss attributable to common stockholders totaled $3 $8 million or <unk> 46 per share in the third quarter of 2021.

The net loss of $16 $1 million or $1 84 per share.

Third quarter of last year.

But 2020 results included a $9 $6 million noncash tax charge to record a valuation allowance on stratus deferred tax assets.

The third quarter of 2021 results included a gain on extinguishment of debt of $3 $7 million related to the forgiveness of substantially all of Stratasys Paycheck protection program loan.

Partly offset by $625000 impairment charge for the multifamily tracked to plan at Kingwood place currently under contract.

EBITDA totaled $2 million in the third quarter of 2021, which is an increase compared to the third quarter of last year, when EBITDA was $6 million below breakeven.

I will now provide brief commentary on our four operating segments.

Note that if we close the proposed 21 transaction.

<unk> operations with therefore thereafter include.

Only our real estate and leasing segments.

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 2000 and tunnel.

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 reflects the decrease in the number of lots sold during the third quarter of 2021.

As available inventory decreased.

Development of Holden House will add to our available inventory made in Portland, 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 32021 status had only two unsold developed <unk> drive phase III lots.

I mentioned earlier in the third quarter of 2021.

So the retail pad site, the west Killeen market for $750000, leaving only one chance that remaining on 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 Saint Mary in the first quarter of 2021.

Offset by an increase in revenue that lantana place.

The St Mary had rental revenues 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 first quarter of 2020.

The increase in operating income primarily reflects the absence of costs and depreciation associated with the Saint Mary. After this property was sold in the first quarter of 2021.

As I mentioned all of our tenants are currently paying ran credit releases as well as monthly payments pursuant to previously disclosed base rent deferral arrangements as applicable.

<unk> 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 experience greater impacts from the pandemic.

The segment's operating income totaled $46000 in the recent quarter compared to an operating loss of $2 $6 million last year.

The increase in revenue and a positive operating income primarily reflects higher room reservations and food and beverage sales as a result of the lessened impact of the COVID-19 pandemic turn to third quarter of 2021.

Revenue per available room, or Revpar was $121 in the third quarter of 2021.

Paired with $36 in the third quarter of last year.

The hotel's average occupancy was 40% for the third quarter 2021, which is an increase over the 16% average occupancy in the third quarter of last year.

33% average occupancy in the second quarter of this year.

Entertainment revenues increased to $3 $7 million in the third quarter of 2021 from $367000 in the third quarter of last year.

<unk> operating income was $409000 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 a positive operating income reflects increased attendance and an increased number of events has ACL live <unk> ACL live.

China's 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 Stratasys 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.

September 30th 2021, consolidated debt totaled $295 $4 million.

Consolidated cash totaled $23 $2 million.

Paired with consolidated debt of $276 $7 million and consolidated cash of $12 $4 million at December 31, 2020.

Consolidated debt amount that does.

Exclude the santal loan of approximately $75 million.

December 31st 2020 also excludes the Saint Mary line of approximately $25 million as a result of these properties being classified as held for sale at those dates.

As of September 32021, we had $5 $6 million available under our $60 million Comerica Bank credit facility.

And no noted earlier is 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 S. Greg 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 32021, now announce for outstanding under this line.

In September 2021, we completed financing transactions.

A portion of the proceeds were used to purchase the land for the NTP.

The proceeds will also be used to fund pre development costs for the project.

These financing transactions included.

$14 million landline and $11 $7 million from our private placement offering along with $3 $9 million in cash and pursuit costs contributed by wholly on subsidiaries of Stratus.

Upon completion of a private placement offering stratus holds in the aggregate a 25% indirect equity capital interest in the limited partnership.

Purchases and development of our real estate property is reflected in operating cash flows and capital expenditures reflected in investing cash flows totaled $37 $5 million for the first nine months of 2021 Pri.

Primarily related to the purchase of the land for the M D.

And development of the Saint Jean Other Barton Creek properties, including Tomorrow, 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 Bill 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 a 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 development and continued growth in Boston and other select Texas markets in which we operate as well as consumer confidence has vaccinations drive an increase in travel events and activities.

We have two large pending sales Santo in block 21.

Several stabilized and fully or nearly fully leased projects and several projects under construction are 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 get 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 youre using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two at.

At this time, we will pause momentarily to assemble our roster.

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Yeah.

Again Star then one to join the queue.

Yeah.

We have no one queue 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.

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