STRS Q4 2017 Earnings Call
Operator: Welcome to the Stratus Properties Full Year 2017 Conference Call. Stratus' financial results were released earlier this morning and are available on its website at stratusproperties.com. Please note, this event is being recorded. I would now like to turn the call over to Mr. Beau Armstrong, Chairman, President and Chief Executive Officer of Stratus Properties.
Beau Armstrong: Thank you, Austin. And good morning, everyone. Joining me today is our Chief Financial Officer, Erin Pickens. As a reminder, today's press release and certain comments we will make on the call include forward-looking statements, and actual results may differ materially. I would like to refer everyone to the cautionary language included in Stratus’s pres release and to the risk factors described in Stratus’ Form 10-K and subsequent SEC filings. Today's press release and certain of our comments on the call also include certain financial measures, such as adjusted EBITDA, which is not recognized under US GAAP. As required by SEC Regulation G, reconciliations of these measures to a match reported in Stratus' consolidated financial statements are contained in the supplemental schedules of Stratus' press release, which are also available on our website. This morning we will cover highlights of our 2017 performance and the benefits of our active development plan, a summary of activities in our four operating segments, our financial results which Erin will discuss, and then I will finish with our outlook for 2018. Starting with highlights for 2017, both net income and adjusted EBITDA increased year-over-year. We achieved a substantial gain on the sale of our Oaks at Lakeway project showcasing the value of our full cycle development strategy. We returned capital to shareholders through $1 per share special cash dividend and we reduced our consolidated debt by 24% from year end 2016. These are tangible achievements that positively influenced Stratus’ total shareholder returns which compared favorably to peers as noted in our earnings release. Perhaps less visible but also important, we advanced our real estate portfolio, invested in additional development of projects last year. Capital expenditures for existing properties and development projects increased 13% to 48.5 million in 2017. As we add value and complete these projects for potential future sales, we expect to generate significant cash flows and returns for our shareholders. Our operations are diversified across four segments: Real estate operations, leasing operations, hotel and entertainment. As part of our overall strategy, we believe there are distinct advantages to having a broad view of retail, residential, office, hotel and entertainment properties within select growing markets. And we believe are more than 25-year history in Austin, gives us a unique understanding of the nuances of the Austin market in particular. In College Station, Magnolia and West Killeen, we benefit from HEB anchored retail projects. HEB is the largest private employer in Texas with a 100 plus year history in Texas, so I think it's fair to say that they have a solid grasp on retail dynamics across multiple markets in our state and we sincerely value this key relationship. Stratus creates value in different ways under each of our four operating segments, as I will describe by highlighting our 2017 accomplishments. The real estate operation segment included acreage that is under development as well as [indiscernible] and finished residential product. The Oaks at Lakeway that we sold in 2017 is a great example of how we quickly assembled multiple land parcels from various parties for an HEB anchored project that we entitled, developed, leased up and sold at a substantial gain. At year-end 2017, we had almost 1800 acres of commercial multi-family and single-family projects under development or undeveloped in held for future use. This translates into a development potential under current entitlements of more than 1.8 million square feet of commercial space, 2,100 multifamily units and 275 single-family home sites. This portfolio gives us not only the benefit of diversification, but also flexibility in terms of selectively investing in the next opportunity that we believe will generate the highest returns, given our view of the real estate markets. In 2017 we advanced our development projects by securing financing and commencing construction of the first phase of Lantana Place, a 320,000 square foot mixed use retail, hotel and office project. The first buildings will be completed early this summer; securing final building permits for the St. Mary a 240 unit multifamily project in the Circle C community; securing financing and commencing construction of the retail component of our Jones Crossing project and HEB anchored mix use development in College Station Texas, HEB will open early this fall; completing construction of our West Killeen retail development on schedule and under budget that was 60% leased at year end; creating a municipal utility district which, I’ll discuss in more detail in Magnolia Texas, where we owned land for a future HEB anchored mixed use development; initiating construction at the second phase of Santal, and successfully selling the final lots at Meridian, 800 lot residential development in the Circle C community. Circle C is another one of our Austin area projects, entitlements permit us to build 675,000 square feet of commercial space and 296 multifamily units inclusive of the St. Mary project. Turning to our next segment, leasing operations. It generates rental revenue from office and retail space at our W Austin Hotel and retail space at Barton Creek Village and West Killeen market as well as a 236-unit garden style apartment complex at Santal Phase I which we completed in 2016 that is now approximately 95% leased. Given the success of this project, we began construction of Santal Phase II as I just mentioned in September last year which will add 212 additional units. A key theme here is that success in one project often leads to additional investments in follow-on projects in the same area. We are able to leverage our understanding of market demand and our fully entitled property to fill that demand. By doing so, we also reduced the risk profile of the overall portfolio. Our third segment hotel consist of luxury rooms and suites in the meeting space at the W Austin Hotel. Given the influx of new hotels opening in Austin, we are pleased with our performance during 2017. Revenue per available room of $253 for the W Austin Hotel, ranked fourth among all Texas hotels in 2017. And finally, our entertainment segment includes ACL Live, a state-of-the art music and entertainment venue and home of Austin City Limits the longest running music series in American television history. Our team did an amazing job in 2017, increasing revenues by 18% and operating income by 59%. We hosted 224 events and sold more than 221,000 tickets both new records. Sold out shows in 2017 included Dave Chappelle, Sting, Don Hanley, Zack Brown, Ed Sheeran, and Diana Ross. And our 3TEN ACL Live space that opened in 2016 to accommodate more intimate shows, hosted 228 events with attendance rising 59% year-over-year. The steadier cash flow streams from the hotel and entertainment leasing segment support investments in our longer-term development projects. We are increasing these investments not only due to our successful track record but also strong fundamentals in our growing markets. The Austin-Round Rock metropolitan area continues to see strong population growth and more and more companies are expanding in this city, such as Google, Facebook and Schwab, not to mention Amazon which is considering Austin for possible selection as its second headquarters. The Austin metro area is more than 2 million is now the 11th largest city in the US. Plus, we are seeing a rise in air travel. The Austin Bergstrom International Airport had a record year in 2017 with 13.8 million passengers. This surpasses the previous 2016 record by 11%. This creates incremental demand for our entertainment and hotel segments as well as retail and our leasing segment. Austin is a highly regulated municipality and a key component of our strategy is to capitalize on our valuable in-place entitlements and steer our development plans toward new trends and customer demand. Outside the Austin area, we are able to leverage our core resources, expertise and relationships to acquire and develop projects in select Texas markets. We do this in part through our relationship with HEB Grocery Company, the anchor tenant in many of our developments. This includes College Station, where Texas A&M University continues to add 2,000 students each year and where new businesses form to support this expansion. Magnolia, Texas another fast-growing market near ExxonMobil’s world headquarters in The Woodlands, Texas just North of Houston and West Killeen where we completed construction last year 44,000 square feet of total lease-able space adjacent to an HEB store. Killeen as you may know is home of Fort Hood. Successful previous projects with an HEB store that were sold at attractive returns included Escarpment Village in Circle C and the Oaks at Lakeway. Carefully managing key relationships in these communities where we invest and build is a major strength of our company. While there are many intangible benefits to our community relation efforts, one advantage that we can measure our municipal utility district reimbursements that we receive after we invest in critical infrastructure which is a win-win for the communities and for Stratus. For example, during 2017, we received 13.8 million related to Barton Creek infrastructure on top of 12.3 million that we collected in 2016, As noted in our earnings release, in November of 2017, the City of Magnolia in the State of Texas approved the creation of a MUD. This gives us an opportunity to recoup the cost of future road and utility infrastructure for our Magnolia, Texas development. These costs are currently estimated to total 26 million and reimbursement of these monies will facilitate further investment by us in the community. We have maintained a strong reputation in the markets we serve because of the dedication and talent of our employees and we thank them for their many contributions that led to our achievements in 2017. Now I would like to turn it over to our Chief Financial Officer, Erin Pickens for a review of the financial highlights.
Erin Pickens: Thank you, Beau. Today Stratus reported earnings for 2017 as shown in our earnings release. Net income attributable to common stockholders was $3.9 million or $0.47 per share compared with a net loss of $6 million or $0.74 per share in 2016. Factors that influenced the year-over-year comparison include, $2.01 per share in 2017 related to recognizing the majority of the gain on the sale of The Oaks at Lakeway, partially offset by a $0.93 per share non-cash tax charge recorded in the fourth quarter of 2017, related to US tax reform legislation which will benefit Stratus’ tax rate beginning in 2018. Full year adjusted EBITDA increased to $9.7 million in 2017 from $9.3 million a year ago. Turning now to capital management. During 2017, our Board declared and paid $1 per share special cash dividend to shareholders following the sale of The Oaks at Lakeway. Even with the special dividend payment, the company was able to reduce its consolidated debt by 24%. As noted in our press release, we also extended the maturity of our Comerica credit facility by one year to November 2018 and the company continues to have a very manageable debt maturity schedule. We are in the process of negotiating the modification and a longer-term extension of our credit facility to give us even more financial flexibility. Our cash balance on December 31st was $14.6 million and we had $19.2 million available under our credit facility at year end giving us ample liquidity. A key aspect of our disciplined capital management strategy is to secure project financing for our developments before we begin construction. By strengthening our financial position during 2017, we have increased our flexibility to invest further in high growth and high return projects which Beau just described. Through our strategic real estate development and disciplined capital management, we strive to increase shareholder returns. Now I’ll turn it back to Beau.
Beau Armstrong: Thank you, Erin. As we enter 2018, we are fortune to have an economic tailwind in the U.S. and in our Texas markets specifically. For example, the unemployment rate in Austin is just 2.5% well below the national average of 4.1%, which itself is at historic lows. The unemployment rate in Magnolia and College Station are also far below the national average at just 3.7% and 2.6% respectively. These unemployment levels have been achieved even with the strong population growth that we have experienced in these markets. This provides a very favorable backdrop to develop lease and sell our properties. In a nutshell, Stratus is in the right place at the right time, with the right properties and a very strong team. Given demand for Premier real estate, we intend to explore opportunities to sell certain properties later this year including West Killeen market in the 22,366 square foot retail complex in the first phase of Barton Creek Village, subject of course to leasing progress and market conditions. The new tax law is also beneficial, it will have a positive impact on bottom line profit in our net asset value beginning in 2018. We are also hopeful that the new tax law will increased economic activity that drives further demand for our residential retail hotel and entertainment properties. Our confidence to initiate several new development projects, in advance of these macro tailwinds put Stratus in a great position. We intent to leverage our competitive strengths for the benefit of shareholders in 2018 and beyond. Now, we’ll open the call for a few questions.
Operator: [Operator instructions]. And our first question will come from Fred [Buettner] with [Buettner] Investments. Please go ahead.
Unidentified Analyst: Hi Beau and Erin. On your retail business, longer term where do you see it going and you touched on HEB somewhat, is there more you want to say about your HEB relationship versus using other supermarket chains?
Beau Armstrong: Thank you, Fred, it’s a very good question. We have I think a very good relationship with HEB right now and we’ve continue to evaluate projects that involve them and we also feel strongly that they are far and away the leader in the grocery business in Texas and certainly the markets that we operate in, so I don’t see us changing that strategy. We are mindful of some of the trends in the retail world these days and as you know we stay away from the big box tenants that are under a lot of pressure from Amazon. And so, we really don’t invest in that space. Our centers tend to be entertainment and dining focused with health wellness and fitness and medical component and even a housing or multifamily or certainly [for sale] [ph] housing in the immediate area. So again, we stay away from soft goods and things that have a lot of pressure from Amazon and stick to things that really are I wouldn’t ever say internet proof, but certainly internet resistant at this point.
Unidentified Analyst: Thank you. I have one other question. In your press release it showed that you had a big uptick in lot sales in Barton Creek and it looks like indication for future sales this year, what caused the change?
Beau Armstrong: Well I think, when we look at our lot sales historically, they go up and down and we actually have a lot of data to support that, so we were anticipating a bit of an upswing and I guess I would attribute to a couple of factors. We have had some improvements done to the Barton Creek club which I think it been viewed favorably by prospective residents. We had the Lantana Place retail development that we’re building, I think it’s had a positive impact that area has been a little devoid of entertainment options and amenities and having that underway I think has been helpful. Obviously, Austin is a very hot market and unlike many of the other Texas markets, we are supply constrained given our -- the way our city deals with the permitting process. So, a lot of those things contributed to it. And we’ve had a couple of the builders at builder Barton Creek that really had a lot of success and we’ve introduced actually a couple of new products out there. So, I think the culmination of all of those things has really benefited our Barton Creek lot sales activity towards the end of the year and even going into this year.
Operator: [Operator Instructions]. And this will conclude our question-and-answer session as well as today’s conference. We thank you for attending today’s presentation. And at this time, you may disconnect your lines.