Stratus Properties Inc (STRS) 2020 Q3 法說會逐字稿

Good day, and welcome to the Stratus Properties Third Quarter 2020 Financial and Operational Conference Call.

Earlier this morning, Stratus issued a press release announcing its third quarter 2020 financial results. The press release is available on Stratus' 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 telephone replay on Stratus' website through November 14, 2020. Anyone listening to the taped replay should note that all information presented is current as of today, November 9, 2020, 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. Please review and refer to the cautionary language included in Stratus' press release issued today and the risk factors described in Stratus' 2019 Form 10-K and third quarter 2020 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 and a supplemental schedule of Stratus' press release issued today.

I would now like to turn the conference call over to Mr. Beau Armstrong, Chairman, President and Chief Executive Officer of Stratus Properties.

Thank you for joining our third quarter 2020 financial and operational conference call. Our Chief Financial Officer, Erin 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 and 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 technical adjustments to our business, including additional focus on preserving liquidity and supporting our commercial and residential tenants. We believe these efforts will help to ensure the company's continued focus on its overall strategy while 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 REIT 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 similar to other hotel and 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 an approximately $130 million pretax gain based on December 31, 2019, balances. 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 COVID-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 continued to closely monitor the status of the pandemic and consequent economic conditions across Texas. With the recent increasing cases of COVID-19, our primary focus is to continue to follow state and local health guidelines and take actions that promote the health and safety of our employees in the communities where we operate.

I'm happy to say that our rental income properties continued 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 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 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. Once 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 Stratus' 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 in Barton Creek. In 2020 through the end of the third quarter, Stratus has 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 lots in Barton Creek. We have 2 town homes under construction in the Amarra Village 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 continued 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 St. Mary, subject to market conditions. This robust process has thus far generated positive interest. We are also considering selling the single-family residential component of the Magnolia Place project.

We are advancing the planning and permitting process for the development of future phases of Barton Creek, including residential section KLO and the mixed-use Section N. Despite the pandemic, we continued to have leasing activity at our properties. Rental rates remain steady and tenant retention has been good. All major construction projects have been completed, and no new construction is scheduled until the first quarter of 2021. At that time, we expect to begin work on The Saint June, a 182-unit multifamily project within the Amarra subdivision in Barton Creek.

We will closely monitor the market before initiating construction and may defer the start of construction if prudent.

In addition, while the pandemic continues to have an adverse impact on our business and operations, particularly on our hotel and entertainment sectors, we continued to implement cost controls, close routine asset sales and regularly communicate with our lenders and investor groups.

The last topic I want to briefly discuss with you all today is our September announcement of our Board's approval of an in-depth exploration of a potential conversion from a C-Corporation to a real estate investment trust or REIT. With support from our external financial tax, accounting and legal advisers, 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 Stratus and our shareholders, regular distributions of certain income to shareholders, which are, in fact, required to be qualified as a REIT, and increased access to a financial community focused on investments in REITS, which may improve the liquidity of Stratus' 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 and unexpectedly lost 2 directors, we may add 1 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 to a REIT will be made by our investors. If the Board decides to recommend conversion to a REIT, we will share appropriate information regarding our analysis with shareholders at that time.

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

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

Thank you, Beau. Earlier this morning, we issued a press release announcing our operational and financial results for the third quarter of 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. The COVID-19 pandemic has continued to adversely impact our hotel and entertainment operations. And we expect to experience continued impacts in future periods, while COVID-19 pandemic is ongoing. The decrease in revenues was partially offset by increases in revenue from our real estate and leasing operations.

Net loss attributable to common stockholders totaled $15.1 million or $1.84 per share in the third quarter of 2020 compared to a net loss attributable to common stockholders of $3 million or $0.36 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 Stratus' 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 COVID-19 pandemic.

EBITDA was negative $0.6 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 COVID-19 pandemic on Stratus' hotel and entertainment operations.

I will now provide brief commentary on our reporting segments. Revenue from our Real Estate Operations segment 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 in the third quarter of 2020, up from $211,000 in the third quarter of last year. We sold 4 Amarra Drive Phase III lots, including 2 premium hilltop lots for a total of $5 million during the recent quarter compared with the sales of 4 Amarra Drive Phase III lots for a total of $2.6 million during the third quarter of last year.

Subsequent to the end of the quarter and through November 2, 2020, Stratus sold 3 Amarra Drive Phase II lots for a total of $2 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, Kingwood Place and The Santal, 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 St. Mary and Kingwood Place.

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 $930,000 in the third quarter of last year. The decreases in both primarily result from the 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. The W Austin Hotel remains open, albeit with substantially reduced occupancy due to the significant reduction in business and leisure travel as a result of the COVID-19 pandemic.

In the third quarter of 2020, the hotel's average occupancy was approximately 16%, which is a slight increase since the second quarter average occupancy rate of 12%. We continued to work with the hotel operator on plans to gradually ramp up hotel operations to a breakeven point in the first half of 2021, health and market conditions permitting.

Entertainment revenues totaled $367,000 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 at ACL Live and 3TEN ACL Live as many events previously scheduled for the third quarter of 2020 were rescheduled or canceled due to the pandemic.

Mandatory restrictions remain in place in Texas. And while we were able to hold a few events, our events hosted in the third quarter of 2020 continued 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 space at our hotel and a separate music series inside ACL Live.

Turning now to our capital management. At September 30, 2020, consolidated debt totaled $368.6 million and consolidated cash totaled $13.4 million compared with consolidated debt of $365.7 million and consolidated cash of $19.2 million at December 31, 2019. As of September 30, 2020, Stratus had $24.5 million available under its $60 million 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 9 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 well as the purchase of an office building in Austin. This compares with $60 million for the first 9 months of last year, primarily related to the development of Kingwood Place, The St. Mary and Barton Creek properties.

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 a 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 St. 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 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 opportunities.

Thank you. And I will now turn the call back to Beau for his closing remarks.

Thank you, Erin. Stratus Properties has operated in Austin and other select fast-growing Texas markets, such as the Houston suburbs 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, and median family income levels in the area 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 will witness the most population growth.

In the meantime, while the pandemic continues to significantly impact our hotel and entertainment assets and communities, we believe our projects are important to our communities during these unprecedented times. Our mixed-use 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 very high-quality pipeline of opportunities and believe Stratus is well positioned to create value as the business environment continues to recover. This year has been filled with unanticipated challenges, and I urge everyone to 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.

(Operator Instructions) Ladies and gentlemen, this concludes our question-and-answer session and today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.