Stratus Properties Inc. (NASDAQ:STRS) Q2 2019 Results Conference Call August 9, 2019 11:00 AM ET
Beau Armstrong - Chairman, President and Chief Executive Officer
Erin Pickens - Chief Financial Officer
Conference Call Participants
Fred Burtner - Burtner Investments
Welcome to the Stratus Properties' Second Quarter 2019 Financial and Operational Conference Call. Earlier this morning, Stratus released its financial results, which are available on its Web site 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 August 14, 2019. Anyone listening to the tape replay should note that all information presented is current as of today, August 9, 2019, 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' 2018 Form 10-K that could cause actual results to differ materially from those projected by Stratus.
In addition, management will discuss adjusted earnings before interest, taxes, depreciation and amortization, also referred to as adjusted 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 call over to Mr. Beau Armstrong, Chairman, President and Chief Executive Officer of Stratus Properties.
Thank you, everyone, for joining me on the second quarter 2019 financial and operational conference call. Our Chief Financial Officer, Erin Pickens, is here today as well. This morning, I will cover our operational highlights, which include exploring monetization opportunities for certain properties, either through a refinancing or sale. And Erin will discuss our second quarter 2019 financial results.
We are a diversified real estate company, and our goal is to create value for shareholders. As we have talked about previously, we follow a proven-development process that includes the following stages: first, we identify, enter into a contract for a property; next, we secure entitlements and necessary permits for our proposed project; then we construct and lease the project; and finally, we position the property for a capital event, such as a sale or refinancing depending on market conditions.
We currently have projects in each of these stages. This quarter, I would like to start by providing an update on our plans for our new Magnolia Place project in Houston, Texas. We are planning to proceed, subject to financing, with the first phase of development of Magnolia Place, a new mixed-use project in Magnolia, Texas, currently planned for 81,000 square feet of retail space; six pad sites, fronting FM 1488; 2 hotel sites; and 50 acres of residential land allowing up to 1,200 units. Magnolia Place will be shadow-anchored by a 95,000 square foot HEB Grocery store to be constructed by HEB on an adjoining 18-acre site owned by HEB.
The first phase of development is expected to consist of approximately 41,000 square feet of retail space, three pads for lease and three pads to be held for sale. We are currently in the process of securing a construction loan to finance the first phase of development and expect to begin site work and joint use road and utility infrastructure that will support the entire project, including future phases, in the third quarter of 2019. We expect substantially all of the infrastructure costs to be eligible for future reimbursement by the Magnolia East municipal utility district. The HEB Grocery store is currently expected to open by the third quarter of 2020.
We are encouraged by early interest from several tenants and pad users and are optimistic that this will be another successful project for Stratus. As you may have seen in our release issued this morning, we are currently exploring opportunities for our Santal multifamily project in Barton Creek and Block 21, our mixed-use development in downtown Austin, Texas, that contains the W Austin Hotel & Residences and office, retail and entertainment space. The combined 448 unit Santal property was fully leased and stabilized as of June 30, 2019, and we continue to explore options to sell or refinance this property subject to market conditions.
Whether we decide to sell or refinance this property, we recognize that Santal is a valuable asset that provides several good options for Stratus from either a short-term or long-term perspective. We also continue to explore various opportunities with respect to Block 21, which may include a possible sale, recapitalization or other venture subject to market conditions. Block 21, located in downtown Austin, is a high-profile asset with unique combination of hotel, entertainment and commercial uses. We are excited about the potential opportunities associated with these properties and expect to provide you with further updates in the near future.
Regarding our other properties, we have multiple active projects that continue to perform well, and leasing activity also remained strong. We expect to commence construction on four new Amarra Villas townhomes in the third quarter of this year. We have been incorporating design improvements to the townhomes based on buyer feedback. And with the Barton Creek resort opened after a two-year expansion and renovation, we are experiencing renewed interest in the area. We anticipate that the extensive resort improvements will positively impact the overall Barton Creek community.
We also anticipate additional phases of this type product in future sections of Barton Creek. Construction at The Saint Mary, a 240-unit luxury garden-style apartment project in the Circle C community, is progressing ahead of schedule and on budget. The clubhouse and first three apartment buildings have been completed and 19 units have been leased. The first tenant took occupancy during July, and we expect to complete construction in the fourth quarter of this year. Construction of Kingwood Place, our HEB-anchored mixed-use development in Kingwood, Texas, is progressing on schedule and on budget.
And we had signed leases for approximately 80% of the retail space, including the HEB store as of June 30, 2019. The HEB store is scheduled to be open in November 2019, and the first retail buildings are expected to be turned over to tenants to begin construction of their interior spaces later this month. Construction of the first phase of Lantana Place and mixed-use development project located in Southwest Austin was completed in 2018.
As of June 30, 2019, we had signed leases for approximately 80% of the retail space, including the anchor tenant, Moviehouse & Eatery and several other high-quality tenants and a ground lease for an AC Hotel by Marriott. Construction of the hotel began in May 2019. As of June 30, 2019, Jones Crossing, our HEB-anchored mixed-use development in College Station, Texas, had signed leases for approximately 90% of the first round of retail space; and West Killeen Market, our retail project in Killeen, Texas, shadow-anchored by an HEB Grocery store, had signed leases for approximately 70% of the retail space.
Now I will turn the call over to our Chief Financial Officer, Erin Pickens, who will review the second quarter financial highlights.
Thank you, Beau. Today, Stratus reported financial results for the second quarter of 2019 as detailed on our press release issued this morning. Stratus reported a net loss attributable to common stockholders of $2.4 million or $0.29 per share in the second quarter of 2019, compared with a net loss attributable to common stockholders of $0.9 million or $0.11 per share in the second quarter of 2018.
Our second quarter revenues in 2019 totaled $23.7 million compared with $23.3 million for the second quarter of 2018. The increase in revenues primarily reflects higher revenues for our leasing operations and entertainment segments, partly offset by lower revenues from our real estate operations and hotel segments. Adjusted EBITDA for the second quarter of 2019 totaled $3.3 million, which was a 16% increase from $2.8 million in the second quarter of 2018.
Our real estate operation segment revenues decreased to $4.1 million in the second quarter of 2019, from $7 million in the second quarter of 2018. This decrease primarily reflects fewer sales of developed properties in the recent quarter. Operating income also decreased in the second quarter of 2019 to $0.3 million compared with $1.4 million in the second quarter of 2018. Stratus sold 4 Amarra Drive Phase III lots and the last completed Amarra Villas townhome for a total of $4 million during the second quarter of 2019, compared with the sales of 3 Amarra Drive Phase III lots, 2 Amarra Villas townhomes and 1 W Austin Hotel & Residences condominium for a total of $6.9 million during the second quarter of 2018.
Since the end of the second quarter of 2019, we closed on the sale of 2 Amarra Drive Phase III lots for a total of $1.3 million. And as of August 5, 2019, 6 Amarra Drive Phase III lots were under contract. Our leasing operations segment revenues increased to $4.6 million in the second quarter of 2019, up from $2.6 million a year ago. Operating income increased to $2.6 million in the second quarter of 2019 from $0.5 million in the second quarter of 2018. The increases in revenue and operating income primarily reflect the commencement of new leases at our recently completed properties, Santal Phase II, Lantana Place and Jones Crossing.
Our hotel segment revenues in the second quarter of 2019 decreased to $9 million compared with $9.6 million last year, and operating income decreased to $1.3 million from $1.6 million in the second quarter of 2018. These decreases are primarily a result of reduced transient weekend business and lower food and beverage sales. Revenue per available room was $242 for the second quarter of 2019 compared with $254 for the second quarter of 2018.
While we remain optimistic about the long-term outlook of the W Austin Hotel based on office growth downtown, continued population growth and increased tourism in the Austin market, a continued increase in competition resulting from the anticipated opening of additional hotel rooms in Downtown, Austin, during the second half of 2019 and throughout 2020, is expected to have an ongoing impact on our hotel revenues. Our entertainment segment revenues increased to $6.3 million in the second quarter of 2019, up from $4.5 million in the second quarter of 2018. Our operating income increased to $1.3 million from $0.5 million in the second quarter of 2018.
These increases primarily reflect an increase in the number of events hosted and higher event attendance at ACL Live. ACL Live hosted 69 events and sold approximately 68,000 tickets in the second quarter of 2019, which is an increase from the 45 events and approximately 29,000 tickets sold in the second quarter of 2018. Additionally, 3TEN ACL Live hosted 52 events and sold approximately 7,000 tickets in the second quarter of 2019 compared with 57 events and the sale of approximately 8,000 tickets in the second quarter of 2018.
Turning now to capital management. At June 30, 2019, consolidated debt totaled $340.6 million and consolidated cash totaled $18.1 million compared with consolidated debt of $295.5 million and consolidated cash of $19 million at December 31, 2018. Purchases and development of real estate properties included in operating cash flows and capital expenditures included in investing cash flows totaled $50.7 million for the first six months of 2019, primarily related to the development of Kingwood Place, The Saint Mary and Barton Creek properties. This was in line with the $50.7 million for the first six months of 2018, which was primarily related to the development of Barton Creek properties, including Santal Phase II, Lantana Place and Jones Crossing.
Thank you. And I will now turn the call back to Beau for his closing remarks.
Thank you, Erin. We continually evaluate new markets in our current portfolio and believe that Austin and other select fast-growing markets in Texas continue to provide attractive investment opportunities for Stratus. Our model generally begins with an unentitled piece of property and ends with a fully stabilized, institutional quality real estate asset. Ultimately, our goal is to maximize the risk-adjusted returns to our shareholders generally over a three to five year period.
As you already know, Austin is a booming city offering further opportunities to Stratus. Although we have and will continue to have increased competition, we are uniquely positioned in the city and are encouraged by the increasing population, job opportunities and the types of employers that continue to join us in Central Texas. Jobs and population growth are and will continue to be the major factor that drives the real estate business. And Stratus Properties is a prime beneficiary of growth on both of these vectors here in Texas.
Now we are happy to take any questions you may have.
[Operator Instructions] Our first question comes from Fred Burtner with Burtner Investments. Please go ahead.
Good morning, I have a few questions. The first is, can you elaborate beyond what you've said about the status of your planning efforts for the remaining sections in Barton Creek?
Sure. Good morning Fred, it's Beau. We have -- our last two sections at Barton Creek, we call K, L, O and N. K, L, N and O is basically a mostly residential uses, and we have been working those permits through the city for probably the last 24 months. As you know, Austin has a bit of a complicated entitlement process. Our base level entitlements for both sections K, L, O and N have been established many, many years ago. And now, we basically have to kind of further refine those through other city kind of processes.
But nonetheless, we have been pursuing our entitlements for K, L and O for the last -- I must say, its two years and we're getting close. I think we expect to have our next round of permits by the end of the year, maybe into early next year, and then we would begin the construction work. So that would allow us to perhaps have salable product sometime later next year or early 2021. As far as Section N goes, that's primarily commercial and multifamily, and that is a little bit behind K, L and O, but we have been actively going back and forth with the city on our permits there.
And I would expect maybe to have something the first phase approved sometime mid-next year and then to begin kind of the associated infrastructure work sometime later next year, which again we would have product available sometime 2021. As everyone knows, Austin relative to the other major markets in Texas, has a very, very cumbersome entitlement process. It's good and bad. It to some extent has created some artificial barriers to entry. But going through the process, it can often be just frustrating. But we've done it for many, many years and have a good track record, but nonetheless it does -- it takes a lot of patience that can be trying. Hope that was helpful.
It was. Next question was, you mentioned Santal Phase I and II, I did not hear you say anything that's Phase III construction. What's the status of that?
Well, we don't -- Santal only had two phases, it's a total of 448 units, and so that's fully built and stabilized. Now Santal is essentially within Section N that I previously spoke about, and there are additional multifamily entitlements associated with Section N, and that's something we're currently working through the city process on right now. And I'll just add one kind of caveat about Section N. We are -- and they call the city's ETJ, which is their extraterritorial jurisdiction. And what that means is, we have to comply with certain things like water quality and road geometry and health and safety matters, but we do not have -- we're not subject to the city's zoning authority.
And that's important because it gives us a lot of flexibility with respect to uses. And as you know, we have our own utility system, these Barton Creek MUDs, as we call them. So we don't have to worry about getting utility service from the city either. So we were in a bit of enviable position that we control our own -- certainly the utilities is a major thing. But we still have to go through city process, it's just fortunately doesn't require zoning, which can be even more difficult than just the standard process. But those additional multifamily phases will be coming with the next round of entitlements of Section N.
And on Block 21, are you able to tell us what the level of interest is from buyers?
Well, we're really just getting starting. And the timing -- obviously, the dead of summer is not an ideal time to kind of roll out something like this. And our advisors are -- have been having some kind of, I would call -- we're characterizing those more strategic conversations with a handful of potential buyers, but they're really targeting to get their major kind of effort out there after Labor Day. But so far, Austin, as we all know, is high in everybody's list. So we've had some pretty good interest. It's just too hard to tell whether any of this will result in something that makes sense for us.
And we're in a -- having had recovered essentially all of our investment, we have low basis and a very good asset that produces pretty good cash flow, so we'll -- we can afford to be somewhat, I guess, picky about it, if you will. But what's interesting is, having had -- we've been operating the property now for 10 years, our agreement with Marriott allows for a reflagging of the property after 10 years in connection with the sale of 51% of the property.
And that is an attractive option for a lot of people they would like to, whether they control their own brand or would like to bring in a different brand, so that wrinkle has generated, I think, a fair amount of interest among other hotel operators. So again, little early to be able to report anything substantive, but just given how the high-profile nature of the asset, how successful it's been, coupled with -- just with the overall interest in Austin, I'm hopeful that we'll have some good opportunities to bring forth to the Board and then hopefully put something good together.
If you are able to cash out or refinance it again, do you have more incremental opportunities from future investments deals -- from future projects?
Well, we'd like to say there's no shortage of opportunities out there. We're trying to -- we've got a couple of things. As you know, we have our -- just our existing portfolio, Section N, K, L and O that we discussed, that certainly requires capital to move those projects forward. So that is always a good use of our money. This HEB retail business that's been very successful for us, we continue to evaluate new opportunities in that line of work. And so again, those are two things that are capital-intensive that we would certainly -- would be high on our list to redeploy that capital. And then, obviously, any time we would have if getting -- I don't want to get ahead of myself, but if we had -- if we were able to monetize, whether it's the W or even anything else big, somehow returning that money to shareholders is another thing that the Board often evaluates.
So I think the general range of things is to just reinvest in good opportunities, whether it's something within our current portfolio or something new or -- or and/or, I should say, returning some of that money to our shareholders is another thing that is always strongly consider. But first things first, we want to get -- find a deal that makes sense for the property.
I appreciate it. My last question is, can you give us an update on the master-lease agreements at The Oaks at Lakeway?
I don't have the detailed details, but I can tell you that we continue to be on plan, if you will. I mean we continue to work down our obligation there. I think the next -- there's a hotel out there that has been -- really it's very close to being finally opened, that there has some delays over permit related. But we are -- even though that tenant has been paying rent to us, we were still technically on the master-lease obligation for that piece of property, and it has a 99-year term. So it's a pretty big number, even though we see no practical risk associated with it, but we'll be getting off of that part soon.
And we've had a couple other leases out there that have reduced our obligation. But again, I don't want to guess, but I know that where we expected to be at this point and, unfortunately, the tenants that are there are all doing well. HEB continues to post very strong sales numbers. Our remaining challenge or opportunity out there, I would say, there's some additional land in the back -- behind the shopping center that has been as part of our PUD agreement with the City of Lakeway, is planned for residential uses. We had it under contract. That contract has fell out. We're evaluating that. That's a really very attractive asset. So we're trying to -- we're in the middle trying to figure out exactly what to do with that.
Lakeway is, again, a very attractive market. It's got limited, just as only so much land there to develop. So we're trying to work with the city to see if we can perhaps get a little more density than our current plans allow for. But that is probably our last big opportunity with that Lakeway asset. And as you pointed out, we have these master lease obligations that we're currently working through, but it's where we expect it to be.
This concludes our question-and-answer session and the conference has also now concluded. Thank you for attending today's presentation. You may now disconnect.