Stratus Properties Inc. (NASDAQ:STRS) Q3 2019 Results Conference Call November 12, 2019 11:00 AM ET
Beau Armstrong - Chairman, President and Chief Executive Officer
Erin Pickens - Chief Financial Officer
Conference Call Participants
Sam Kidston - North & Webster
Welcome to the Stratus Properties' Third Quarter 2019 Financial and Operational Conference Call.
Earlier this morning, Stratus released its financial results, 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 on Stratus' website through November 17, 2019. Anyone listening to the taped replay should note that all information presented is current as of today, November 12, 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 US 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 in 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 our third quarter 2019 financial and operational conference call. Our Chief Financial Officer, Erin Pickens is here with me today. As we have previously stated, our goal as a diversified real estate company in the fast growing Texas markets is to follow a development process that creates value for our stockholders. This process includes the following stages. First, we identify attractive properties and then negotiate an acquisition. Second, we prepare development plans and secure entitlements and permits for the project. Third, we construct and lease project. And lastly, we position the project for a capital event which may include a sale or refinancing depending on market conditions. Our pipeline is full of opportunities and our projects are progressing as planned.
On today's call, although I will not cover all of our current projects. I would like to focus on three of them, namely Magnolia Place, The Santal and Block 21. Afterwards, Erin will discuss our third quarter financial results. Last quarter, I shared that we were in the process of securing construction loan to finance the first phase of Magnolia Place, a new mixed-use project in Magnolia, Texas which is northwest of Houston. All state of Texas Highway Department Roadway work and City of Magnolia utility work is now complete.
We are fine tuning our development budget and continuing our pre-leasing and development financing efforts. We currently expect to begin site clearing within the next eight weeks to 10 weeks. The first phase of this project consists of retail and multifamily development. The retail component will have a shadow-anchored HEB and 41,100 square feet of retail space. Three pads for lease and three pads to be held for sale.
We are currently evaluating the initial phase of multifamily development as well. The full development is currently planned for 81,000 square feet of retail, six pad sites, two hotel sites and 50 acres of residential land allowing up to 1200 multifamily units. We believe that this property will create value for a number of reasons, including, we have experience and are knowledgeable in the Houston area market. This is our third project with HEB in the Houston area.
The project is well located and designed, large mixed use properties remain attractive to both tenants and institutional buyers. And we expect substantially all of the infrastructure costs to be eligible for future reimbursement by the Magnolia East Municipal Utility District. We believe Magnolia Place was bought at the right time for Stratus and that there are favorable opportunities available to us related to this property.
We look forward to working to increase the value of Magnolia Place in the future. Two of our key properties are in the fourth phase of our development cycle, which is the stage in which we position the property for a capital event such as a sale or refinancing. As previously announced in the beginning of October of this year, we considered a sale of The Santal in Barton Creek but chose to refinance the property as we believe this option will provide long-term value to Stratus and the shareholders. Erin will provide further details regarding this refinancing structure shortly.
Refinancing this high-quality asset provided us with the tax efficient return of capital and allows us to maintain ownership of an asset that continues to produce positive cash flow. We believe that The Santal will continue to appreciate in value and the choice to refinance the property allows us to maintain the option to consider a future sale should we decide the timing, market conditions and value are right. Separately, we previously announced that we are exploring various opportunities with respect to Block 21, our mixed use development in downtown Austin, Texas that contains a 251 room luxury hotel, 159 residential condominium units and office retail and entertainment space. That process is continuing.
The Austin market continues to be an attractive market for Stratus to invest in. Block 21 is a trophy asset for Stratus and our shareholders and continues to perform well. As I mentioned earlier, while I'm not going to discuss each project specifically, our pipeline is full of high quality development opportunities and our projects are progressing as planned.
Leasing remains strong for many of our projects, such as The Saint Mary and Lantana Place and tenants have begun finish out at Kingwood Place, HEB plans to open tomorrow, November 13 in Kingwood. Specifically at our Jones Crossing development in College Station, Chick-fil-A signed a ground lease for one of the pad sites, its grand opening was held on September 19 of this year and we believe that this restaurant chain will bring significant traffic to the site and attract additional leasing activity. We are also currently evaluating initial phase of multifamily development at Jones Crossing.
There are many activities currently under way for the Company. For additional details regarding leasing and other information, please review our third quarter Form 10-Q. I will now turn the call over to our Chief Financial Officer, Erin Pickens for a review of the third quarter financial highlights. Erin?
Thank you, Beau. We reported our financial results for the third quarter of 2019 in our press release issued this morning. In the third quarter of this year compared to last year's quarter, Stratus reported revenues totaling $22.3 million up from $17.9 million last year. The increase in our revenues is primarily due to the commencement of leases at our recently completed properties and an increase in the number of events and higher event attendance at ACL Live and net loss attributable to common stockholders of $3 million versus $2.4 million last year, which is primarily the result of higher interest expense related to higher average debt and adjusted EBITDA totaling $2.9 million in the third quarter of 2019, up from $1.4 million last year.
Stratus reports financial results for four operating segments, including our Real Estate Operations, Leasing Operations, Hotel and Entertainment segment. In the third quarter, all four operating segments earned increased revenues and operating income on a year-over-year basis. Our Real Estate Operations segment revenues and operating income increased this quarter compared with the same quarter last year, the $2.6 million and $0.2 million respectively, primarily due to higher sales of developed properties. In the recent quarter, we sold four Amarra Drive Phase III lots for a total of $2.6 million compared with sales of one Amarra Drive Phase II lot and two Amarra Drive Phase III lots for a total of $2 million in the third quarter of last year. Since quarter-end, we have closed on the sale of one Amarra Drive Phase II lot and two Amarra Drive Phase III lots for a total of $2.2 million and as of November 8, eight Amarra Drive Phase III lots were under contract.
Our Leasing Operations segment revenues and operating income increased this quarter compared with the quarter last year to $5.2 million and $1.3 million respectively, which primarily reflect revenue from newly executed leases in connection with increases in occupancy for The Santal and The Saint Mary multifamily properties, as well as Lantana Place and Jones Crossing
Our Hotel segment revenues and operating income increased to $8.8 million and $0.9 million respectively in the third quarter of this year compared to the third quarter of last year, primarily due to higher food and beverage sales and increased weekday group and transient business. Revenue per available room was $222, this recent quarter compared to $214 in the third quarter of last year. We expect a continued increase in hotel competition in the surrounding downtown Austin area during the remainder of 2019 and throughout 2020, which could have an impact on Stratus' hotel revenues.
However, we are optimistic about the long-term outlook of the W Austin Hotel based on increased office space growth in downtown Austin, continued population growth and increased tourism. Lastly, our Entertainment segment revenues and operating income increased to $6.2 million and $1.1 million respectively in the recent quarter compared to the same quarter last year primarily due to an increase in the number of events hosted and higher event attendance at ACL Live.
ACL Live hosted 59 events and sold approximately 61,000 tickets in the third quarter of 2019, compared to 49 events and approximately 48,000 tickets in the quarter last year. 3TEN ACL Live, hosted 46 events and sold approximately 6,000 tickets in the third quarter of 2019, compared with 55 events and approximately 5,000 tickets in the third quarter of last year. Our most popular events, some of which were sold out included performances by Chicago, Martin Luther, Live Levit, Bryan Ferry and Vampire Weekend. Please review the earnings release that was issued this morning for additional information relating to segment financials in the third quarter of 2019 compared to the third quarter of 2018.
Moving forward to our capital management. Consolidated debt totaled $367.4 million and consolidated cash totaled $32.5 million at September 30, 2019. This represents increases from $295.5 million and $19 million respectively at December 31, 2018. As a part of the refinancing of The Santal property, we entered into a $75 million loan on September 30 with ACRC Lender LLC and we used approximately $57.9 million of the proceeds to repay The Santal construction loans. Remaining proceeds, after paying transaction costs were approximately $16 million inclusive of reserves presented in restricted cash.
We used $13 million proceeds to reduce the balance on our Comerica credit facility in October. Purchases and development of real estate properties included in operating cash flows, and capital expenditures included in investing cash flows totaled $60 million for the first nine months of 2019, primarily related to the development of Kingwood Place, The Saint Mary and Barton Creek properties, compared with $82.4 million for the first nine months of 2018, primarily related to the purchase of the Kingwood Place land and the development of The Santal, Lantana Place, Jones Crossing and The Saint Mary. Thank you for listening. I will turn the call back to Beau for his closing remarks.
Thank you, Erin. The execution of our development process in select fast growing Texas markets including Austin and Houston continues to provide value to us and our shareholders. Our multi-use properties continue to be strong assets for Stratus and we are proud to work with native Texas companies such as HEB. As we have discussed in our previous calls and as we continue to witness, the Austin and Houston markets offer strong job opportunities, which allows for continued population growth. There may be additional competition regarding our Hotel and Entertainment segments but we welcome the increased activity. We continue to see value and invest in these areas as we follow our full development process and focus on generating strong returns for both the Company and its shareholders. Thank you for listening. Erin and I are happy to answer any questions you may have.
We will now begin the question-and-answer session [Operator Instructions]
Our first question comes from Sam Kidston with North & Webster. Please go ahead.
Hey. Hey guys, how are you today? Just a couple of quick questions, one is could you just comment a little bit further on the process around Block 21 and maybe when you think that that process, you might have something to announce one way or another?
Good morning, Sam. As you can appreciate that process is ongoing and I'm reluctant to get into any details, but I'll tell you that what I can say is that we've had very strong interest. But it is again preliminary to discuss specifics, but my -- the process will be, we will conclude this process that Savills has been running. I will kind of lay out the opportunities for the Board and they'll direct me on a path forward. But I think again, I don't want to get into too much detail, but I would think, it's probably in the next 30 days, we will at least be able to bring something to closure for our Board to consider.
Great, great. And then just any -- anything you could talk about on the activity around the deferred gain burning that down?
I'll let Erin answer that, if that's OK, Sam.
Hi, Sam. The deferred gain is -- there hasn't really been much movement in that in some time, and that's because there is -- it's related to additional buildings that could be built couple of build-to-suits and one building on a pad site. So it's probably -- probably be until, unless and until, we build those properties that we would recognize any more gain.
Right. And then any comment on the marketing on those -- marketing process on those?
We're very active, I mean, nothing really to I guess disclose at this point, but those are very active projects and we are constantly assessing opportunities out there. So it's nothing that we feel that there is any trouble there at all. It's just kind of finding the right -- the right match with the tenant for the property.
Sure, sure. All right, well thank you, guys.
The rest of the center -- and the rest of the center -- I'll just add, the rest of center is performing very well. So just, I think, it's just kind of a matter of time before we can -- begin the way we deal there.
Sure, all right, thank you guys for the time.
The next question is from Fred Burtner a Private Investor. Please go ahead.
Thank you. Beau, I have two questions. The hotel was -- I was pleasantly surprised on its growth in the quarter. And the press release spoke about what caused the upturn. Is the upturn expected to continue in the near term?
Well, Fred, I -- that's always, it's difficult to predict the future, but I would tell you that there has been a lot of new supply in Austin. I know that that has had people worried but we continue to also expand our visitor base. So it's all good. So I think that those out there that thought that we were approaching overbuild situation. I don't think that has materialized. And I can tell you that there still is considerable demand from hotel investors to either buy existing or to consider development opportunities.
So I am optimistic that we will continue on this favorable trend. I think, we've had, I can tell you that with respect to our property, we did have a little bit of, there was a transition from Starwood to Marriott and an accounting system, and a reservation system issues and that I don't have the particular details about. It's not that there were some issues there that did impact our first half of the year results, but I feel as though those have been addressed, and we're back where we want to be.
So perhaps a long answer to your question, but I do think that Austin in general is performing very well. I think, our hotel is extraordinary and its complement of -- of different uses. So I feel that we're in a good -- in good shape to continue to compete well in the Austin market.
Thank you. And my other question is, what are your thoughts on cash distributions to common shareholders?
Well that ultimately is a Board decision, Fred and I don't think, right now, we're in a position to do that right this minute, but we, we've done one in the past when we've had a big capital event. So I think that to the extent that we -- we have the resources to do that. I think the Board has demonstrated a willingness in the past to do that. But first things first, we would like to at least have a capital event that would enable us to do that.
Okay, thank you very much.
Thank you, Fred.
This concludes our question and answer session. And the conference is also now concluded. Thank you for attending today's presentation. You may now disconnect.