Stratus Properties, Inc. (NASDAQ:STRS) Q4 2018 Earnings Conference Call March 18, 2019 11:00 AM ET
Beau Armstrong - Chairman of the Board, President and Chief Executive Officer
Erin Pickens - Chief Financial Officer
Conference Call Participants
Fred Burtner - Burtner Investments
Welcome to the Stratus Properties Year-End 2018 Earnings Conference Call. Stratus released its financial results earlier this morning, 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 telephone replay through March 23, 2019. Anyone listening to a taped replay should note that all information presented is current as of today, March 18, 2019, and should be considered valid only as of this date.
I would now like to turn the call over to Mr. Beau Armstrong, Chairman, President and Chief Executive Officer of Stratus Properties.
Thank you, Andrea, and good morning, everyone. Joining me today is our Chief Financial Officer, Erin Pickens. As a reminder, today's press release and certain comments that we will make on this call include forward-looking statements and actual results may differ. I would like to refer everyone to the cautionary language included in Stratus' press release issued today into the risk factors described in Stratus' Form 10-K and subsequent SEC filings that could cause actual results to differ materially from those projected by us. Today's press release and certain of our comments on this call do not constitute an offer to sell nor are they a solicitation of an offer to buy any securities. In addition, we will discuss adjusted EBITDA, which is a financial measure not recognized under US GAAP. As required by SEC rules and regulations, non-GAAP financial measures are reconciled to their most comparable GAAP measure in the supplemental schedules of Stratus' press release issued today.
This morning, I will cover our operational highlights, including the progress of our active development projects. Erin will discuss our year-end 2018 financial results and we'll provide some color about our four operating segments, and I will end the call with some brief final comments about the markets in which we operate and our strategy for 2019. As you all know, part of our strategy at Stratus Properties is to focus on our full cycle active development program that includes: first, acquiring, securing and maintaining development entitlements; second, developing and stabilizing these properties; and third, preparing these properties for sale or refinancing depending on market conditions. We have projects in each of these stages.
As mentioned last quarter, our most recent acquisition was a 38-acre tract of land purchased in partnership with HEB for a future HEB-anchored mixed-use project in New Caney, Texas. This month, we entered into a lease for the HEB grocery store. Upon execution of the HEB lease, we acquired HEB's interest in the partnership for approximately $5 million. We currently plan to commence construction on this project no earlier than 2021.
Following the acquisition stage, we develop our properties and stabilize them. In 2018, we made significant progress in advancing our development projects. Our projects currently in this stage include our Kingwood Place project, which is an HEB-anchored mixed-use development project in Kingwood, Texas. We purchased a 54-acre tract of land, obtained project financing and commence construction. As of year-end 2018, the properties pre-leasing efforts were progressing and we have signed leases for approximately 77% of the retail space, including the HEB grocery store, which is currently anticipated to open this November.
Our Lantana Place project, which is a mixed-use development project in Southwest Austin. We committed years ago to developing mixed-use properties that allow people to live, work and play without getting in their cars and are seeing excellent returns on this approach in terms of very strong leasing activity. Within our retail offerings, broadly, we focus on leasing to businesses that offer immediate needed services that are less susceptible to Amazon type competition, like wellness and fitness services, food and beverage and other entertainment options.
At Lantana, specifically, our anchor tenant is Moviehouse & Eatery, which opened in May, 2018, and we have signed leases with tenants that fit this mold well, including Realty Austin, Marigold Market, Bella Spa, Enamel Dental, Westlake Dermatology and Orange Theory Fitness. We also have a new eatery known for its high-end stakes Carve American Grill owned by Perry's Restaurants. We have now signed leases for approximately 78% of the retail space, as well as ground lease for an AC Hotel by Marriott, which is anticipated to commence construction in April.
Our Jones Crossing project is another HEB-anchored mixed-use development project in College Station, Texas. The HEB grocery store opened in September 2018, as mentioned in last quarter's call, and leasing for the retail space, including the HEB grocery store, had reached 87% as of December 31, 2018. Our St. Mary multi-family project is a 240-unit multi-family property located in the Circle C community. We received all development approvals and obtained financing for this project with a combination of third-party capital through a private placement and a construction loan with Texas Capital Bank. Construction is well under way and this project is currently on schedule and on budget. The first units are expected to be available for occupancy by July of this year with project completion currently expected by the end of 2019.
Santal Phase II is our 212-unit multi-family project located adjacent to Santal Phase I in the upscale, highly populated Barton Creek community. We substantially completed construction of this project and we now have 65% of the total Phase 2 units leased as of today, the last 44 units or 20% were completed in January 2019. We are actively planning and permitting our Magnolia project and HEB-anchored retail project in the greater Houston area. We expect to begin construction later this year with an anticipated opening of the HEB grocery store in August 2020. Our West Killeen Market project is an HEB-anchored retail project in Killeen, Texas. Currently, 68% of the space is leased and all current tenants are now open for business. We intend to explore opportunities to sell this property in 2019, subject to leasing progress and market conditions.
The third stage of our full cycle development program is the preparation of our projects for sale or refinancing. Santal Phase I is now 93% leased and stabilized. As such, we plan to evaluate a sale or refinancing of the combined 448-unit Santal property upon the stabilization of Phase II, which is expected by the end of 2019, subject to market conditions and leasing progress.
In January 2019, we completed the sale of the CVS store ground lease for a subdivided retail pad located in the Circle C community for $3.2 million. Once we sell or refinance a property, our focus shifts to repeating the full cycle. Austin is our primary market and we have a strong presence here, but there are also opportunities for Stratus in other select fast growing markets in Texas, as shown through our purchases of the New Caney and Kingwood Place properties in the Houston area.
I would like to add one final comment before turning it over to Erin. As a reminder, obtaining and maintaining adequate financing, is a critical component of our business strategy. In addition to the traditional methods of obtaining capital such as bank loans and credit facilities, in 2018, we secured third-party project level equity financing through private placements for certain of our projects to support our growth. By parting with the right investors, we seek to reduce our risk and protect our balance sheet, while pursuing a larger portfolio of new opportunities for Stratus.
Now I'll turn the call over to our Chief Financial Officer, Erin Pickens, for a review of the financial highlights. Erin?
Thank you, Beau. Today, Stratus reported earnings for year ended 2018 as detailed in our press release issued this morning. The net loss attributable to common stockholders totaled $4 million, or $0.49 per share for 2018, compared with net income attributable to common stockholders of $3.9 million, or $0.47 per share in 2017. Total revenues were $87.6 million in 2018, up from $80.3 million in 2017. Adjusted EBITDA totaled $10.8 million for 2018, up from $9.7 million for 2017.
Now I'll walk through the financial results for each of our operating segments. Real estate operations segment revenues increased by 51% to $16.8 million in 2018 from $11.1 million in 2017. Revenue from this segment accounted for 19% of our total revenue in 2018, compared to 14% for 2017. Operating income for this segment increased by 150% to $1.3 million, up from $0.5 million last year. This increase in revenue and operating income primarily reflects the sales of higher priced residential units, including Amarra Villas townhomes and the W Austin Hotel & Residences condominium.
In 2018, we sold three Amarra Drive Phase II lots for a total of $2 million; nine Amarra Drive Phase III lots for a combined $5.9 million; and four Amarra Villas townhomes for a combined $7.5 million. We sold one Amarra Villas townhome this month for $1.7 million, and the final remaining completed townhome is currently under contract for $1.7 million. We anticipate beginning construction of the next five Amarra Villas townhomes in the second quarter of this year. Also in 2018, we sold one W Austin Hotel & Residences condominium unit for $1.1 million. And as of December 31st, 2018, one condominium unit, which has been under a long-term lease remained unsold.
Leasing operations segment revenues increased by 28% to $11.3 million in 2018, up from $8.9 million in 2017 as leases commenced at our recently completed properties; Lantana Place, West Killeen Market, Santal Phases I and II and Jones Crossing. Revenue from our leasing operations segment accounted for 12% of our total revenue for 2018, up from 10% for 2017. We expect revenues from our leasing operations to increase further as additional tenants take occupancy and begin to pay rent.
Operating income for this segment was $2.9 million in 2018, compared to $24.2 million in 2017. The 2017 income included $24.3 million, representing recognition of a portion of the deferred gain associated with the sale of The Oaks at Lakeway in February 2017. In addition, in 2017, we had a $2.5 million profit participation charge, partly offset by a $1.1 million gain on the sale of a 3,085-square foot bank building and an adjacent 4.1 acre undeveloped tract of land in Barton Creek. We compete for tenants primarily based on property location, rent charged, design and amenities of the property.
Hotel segment revenues of $38.2 million in 2018 were comparable to $38.7 million a year ago. The slight decrease was primarily due to reduced large group business. Revenues from our hotel segment accounted for 43% of our total revenue for 2018, compared to 47% for 2017. Operating income was $6.3 million in 2018, compared to $6.6 million in 2017. For the full year, RevPar or revenue per available room was $245 in 2018, compared to $253 for 2017. According to a report published by the city of Austin's hotel and motel association, between 2010, which was the year that the W Austin Hotel opened and 2018, the central business district room count increased from 6,226 to 10,660, or by 71%.
In the hotel industry, we compete with the quality and consistency of rooms, availability of restaurant and meeting facilities and services and attractiveness of location and price, among other factors. Our hotel segment finished the year with comparable result to 2017, despite increased competition in the downtown Austin area, while we are attuned to the increased level of hotel development in the downtown Austin area, we are also encouraged by recent decisions from major companies expanding in the Austin area, which we believe will result in increased demand for hotel rooms and facilities.
Revenue for the entertainment segment decreased slightly to $22.7 million in 2018 from $23.2 million last year, primarily due to lower event attendance, which varies from period-to-period. Revenue from our entertainment segment accounted for 26% of our total revenue in 2018, compared to 29% in 2017. Operating income decreased to $3.4 million, compared to $4 million a year ago. Overall, we are pleased with how the entertainment segment has performed over the years. We have a very unique property that creates great synergies for our W Austin Hotel.
ACL Live hosted 240 events in 2018, with approximately 286,000 tickets sold, compared to 224 events in 2017, with approximately 297,000 tickets sold. As of February 28th, 2019, ACL Live had events booked through December 2020. 3TEN ACL Live hosted 216 events in 2018 with an estimated attendance of 38,000, compared to 228 events in 2017 with an estimated attendance of 41, 000. As of February 28th, 2019, 3TEN ACL live had events booked through December 2019, including Vampire Weekend, Diane Cook and Brian Farrey.
We are pleased with the outlook of our entertainment segment. We compete favorably with larger venues by providing a higher quality of live music experience and promoting our ACL Live entertainment space to the broadcast of Austin City Limits, by KLRU, a local public television station. In 2018, we extended our agreement with KLRU and Austin City Limits for another 10 years.
Turning now to capital management. At December 31st, 2018, our debt totaled $295.5 million and we had consolidated cash and cash equivalents of $19 million with $7.6 million available under our credit facility, compared with debt of $221.5 million and consolidated cash of $14.6 million at December 31st, 2017. We have significant recurring costs including overhead, property taxes, maintenance and marketing and believe that we will have sufficient sources of debt financing and cash from operations to meet our cash requirements. Purchases and development of real estate properties included in operating cash flows and capital expenditures included in investing cash flows increased to $105.6 million in 2018, up from $48.5 million in 2017. The increase primarily reflects the purchase of the Kingwood Place land and the development of Santal Phase II, Lantana Place, Jones Crossing and the St. Mary.
I have two more items to share with you. First, we're working on our updated net asset value presentation. Appraisals are in process and we will be ready to share the presentation later this month. Second, the cumulative stockholder return of 45% on Stratus' common stock over the five years ended December 31st, 2018, was comparable to the returns of the S&P 500 Index at 50% and the Dow Jones US Real Estate Index at 47% and significantly exceeded the returns of a group of peer real estate-related companies which had a 24% loss. This list of peers can be found in the press release issued this morning. The comparison assumes $100 invested at December 31st, 2013, with all dividends reinvested. Our historical stock price performance is not necessarily indicative of future performance, but we are pleased with this result.
Now I'll turn it back to Beau.
Thank you, Erin. We were able to add two new high quality development opportunities to our portfolio last year, while continuing to develop and lease our existing portfolio. Our projects are on schedule and on budget and we plan to maintain this full cycle strategy in Austin, as well as in our newly entered markets this year. In addition, depending on market and leasing conditions, we intend to explore opportunities to sell or refinance properties subject to market conditions in order to close the full cycle and maximize value for our shareholders.
In the current Austin market, it is difficult to find prime locations for new developments. We operate in highly competitive markets and we attempt to differentiate our properties primarily in the basis of community design, quality, uniqueness, amenities, location, developer reputation and increasingly sustainability principles. We have successfully expand to other attractive growth markets as a method of diversifying our portfolio in ensuring that we can continue to develop projects such as our multiple HEB-anchored mixed-use properties.
Despite the increased competition, Austin continues to be a great opportunity for us. Since 2009, the city's population has grown at least 29% because of growing interest in Austin's expanding job opportunities, particularly in the tech sector and the median family income has risen approximately 22%. Demand for residential housing, commercial office space and retail services continues to increase. In addition, Google recently signed a lease for 800,000 square feet of office space within walking distance of our W Hotel and other high profile tech expansions are happening in Austin, including Apple, Facebook, Oracle and Indeed. We believe there will be more to come as more and more companies and people realize this city's advantages and opportunities.
Now we will open up the call for questions.
We will now begin the question-and-answer session. [Operator Instructions]. And our first question comes from Fred Burtner of Burtner Investments. Please go ahead.
Thank you. Beau, I had two questions. First is, in spite of what you said about the retail shopping centers, I'm getting mixed signals about the health of shopping centers. So what do you think that Stratus will be able to overcome some of those negative indicators one hears about?
Well, Fred, that's a good question. And as you know, we focus more on the neighborhood retail space as opposed to the big box, which is all, but kind of dead in my view, and then the malls, which is even a more complicated picture. So the neighborhood retail, what it is evolved to in our view is a strong grocery anchor, which of course HEB is, and we couple that with somewhere between 50,000 and 100,000 square feet of -- kind of -- I don't want to say Amazon proof, but that's kind of how we try to look at it, such that it's entertainment, wellness, fitness, food, beverage and you know, other entertainment uses and immediate need things like a cellphone store. So we're very cognizant of the pressure that Amazon is putting on the space. We don't think retail is going to go away. We just think it's going to evolve into something a little bit different, a little bit smaller and things that you just simply can't get from Amazon.
Okay. Thank you. And my other question is, with the stock price so low relative to the company's intrinsic value per share, what if any thoughts do you have about possibly doing the tender offer for a piece of the shares?
Well, that's something that the Board -- it's a Board decision, number one, as you can appreciate. It's something that we have considered and are evaluating. I think it's premature for me to say exactly what we're going to do, but we do watch the stock price. And we do think that it would be a good arbitrage for us to consider something like that. So, let me just say that it's certainly on our radar. And I hope to be able to say something one way or another in the coming weeks or sooner.
[Operator Instructions]. This concludes our question-and-answer session. The conference has now also concluded. Thank you for attending today's presentation. You may now disconnect.