Stratus Properties Inc. (NASDAQ:STRS) Q2 2020 Earnings Conference Call August 10, 2020 11:00 AM ET
Beau Armstrong – Chairman, President & Chief Executive Officer
Erin Pickens – Chief Financial Officer
Conference Call Participants
Good day and welcome to the Stratus Properties’ Second Quarter 2020 Financial and Operational Conference Call. Earlier this morning, Stratus released a press release announcing it’s second 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 August 15, 2020. Anyone listening to the taped replay should note that all information presented is current as of today, August 10, 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 second 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 in a supplemental schedule of Stratus’ press release issued today.
I would now like to turn the conference over to. Mr. Beau Armstrong, Chairman, President and Chief Executive Officer of Stratus Properties.
Thank you for joining our second quarter 2020 financial and operational conference call. Our Chief Financial Officer, Erin Pickens is also here with me today.
As always, I hope that you and your families are staying safe and healthy during this time. I would like to begin the call by discussing trends we are seeing in the market and the related impacts on our business, then I will discuss our liquidity position in several of our focus areas to manage costs and liquidity during the pandemic. Lastly, I will reiterate how our long-term strategy remains intact, even in current market conditions.
We had hoped that the market in COVID-19 situation would have shown improvement during the course of the second quarter, but instead we have seen an increased rate of COVID-19 cases and renewed government mandated restriction across Texas. Although we remain very cautious given the uncertainties caused by this pandemic, we continue to progress several important projects through the entitlement phase of development, which is the least capital intensive portion of the development process, and where we believe the value is created. We will continue to move the entitlement processes along long [ph], but will only proceed with construction when we are confident that the market is ready.
Our W Hotel and ACL Live and 3TEN ACL Live venues have been and continue to be severely impacted by the pandemic. Last quarter, we mentioned that we had scheduled several events for the summer and fall. Unfortunately, many of these events have been canceled or rescheduled and we expect that most, if not all of our remaining events will also be canceled or rescheduled, unless health conditions improve.
Our W Hotel management team continues to develop programing ideas with the goal of capturing as much of the existing market as possible. Currently, we cannot operate our venues, as we normally would or with the usual concert [indiscernible]. We are providing creative options, while following local health recommendations such as promoting venue tours and hosting small local events. Although these events will not generate revenue in historical levels, they do enable us to remain engaged with the local community. Additionally, while utilization of the hotel is low, we are still considering proceeding with a modest renovation of the hotel guest rooms and public spaces using existing reserves to enhance the property, subject to various approvals, including coordination with the hotel operator.
Turning to our Leasing and Real Estate Operations, as mentioned last quarter, we conducted scenario planning for the impacts of the pandemic and previously forecasted a significant reduction in rent collections. However, we have been receiving rent collections higher than our downside forecast and our deferring payments at a lower rate than previously anticipated. Moving forward, we will continue to monitor the unpredictable and evolving market conditions and consider any future request for rent deferrals on a case-by-case basis.
Throughout the pandemic, the ongoing fairly strong demand for our single-family lots and multi-family units has been evidenced in multiple projects. First, we have seen continued progress and redesign of Sections KLO and N in Barton Creek. We expect to significantly increased density, while adhering to current development ordinances. We believe our strategy to combine the use of natural open space with sustainable design practices will create valuable long-term assets for our shareholders.
Second, we are advancing the construction of the next four Amarra Villas units in Barton Creek and we believe there is strong interest in this phase. Third, the Suburban Class A multi-family sector continues to perform well. We expect to have final approvals for 182 unit Amarra multi-family project by year-end and we are working on securing the appropriate capital structure expected to be finalized early next year.
Fourth, we are also advancing two other multi-family projects and approximately 350 unit property within the existing Lantana Place development, recently rezoned from [indiscernible] and 261 units within our HEB-anchored Kingwood Place project in the Houston area. We expect to move forward with the Lantana Place project when permits are secured, which we currently estimate to be late 2021 or early 2022.
Fifth, The Saint Mary, our multi-family project, consisting of 204 units in the Circle C community was approximately 80% leased as of June 30, 2020 and we anticipate reaching stabilization within the next few months. Sixth, during the second quarter we sold three Amarra Drive single-family lots generating $1.8 million revenue. And finally, our grocery store-anchored projects have performed well in this challenging economic environment. And so, we also continue to evaluate potential new sites for HEB-shadowed and anchored projects.
We expect the impact of the pandemic to continue during and beyond the third quarter 2020, and we cannot predict its future impact on our Company with any certainty. At this time, we believe that we have ample liquidity to meet our debt service and other cash obligations for at least the next 12 months, without taking any extraordinary measures. We also extended our $60 million credit facility to September 2022, which will further support our liquidity position throughout this pandemic.
We have identified several focus areas to manage cost and liquidity as we navigate this pandemic such as focusing on protecting our existing cash flows derived from our Leasing operations and increasing revenue by promoting lot sales and leasing; striving to remain prudent in our spending and evaluating cost savings initiatives; monitoring activity at Block 21 and planning for a gradual ramp-up of its operations to a breakeven point in the first half of 2021, health and economic conditions permitting; enhancing entitlements and pursuing entitlement permits consistent with our well-established business strategy; evaluating options to monetize our prior investments through selling or refinancing certain assets in the ordinary course of business consistent with our established business strategy, and selectively assessing new opportunities for future projects that align with our long-term objectives.
Despite the recent and ongoing uncertainty during this pandemic, Stratus’ long-term strategy remains intact. We own and operate unique properties. We have a proven strategy and operating model and we have created valuable relationships and partnerships, which allow us to develop properties that provide value to communities across Texas. Going forward, we will continue to selectively assess new opportunities for longer-term projects that are consistent with our business model.
I will now turn the call over to Erin for a review of our second quarter 2020 financial results.
Thank you, Beau. Earlier this morning, we issued a press release announcing our operational and financial results for the second quarter of 2020.
Stratus revenue and cash flow were adversely impacted by COVID-19 late in the first quarter of 2020, and as anticipated throughout the second quarter of 2020. However, in the second quarter, we benefited from $15 million in income from forfeited earnest money related to the terminated agreement to sell Block 21. As a result of this additional income and the pandemic’s impact on our business, our second quarter 2020 results will not be comparable to past performance or indicative of future performance.
I will now discuss Stratus consolidated results for the second quarter 2020. Consolidated revenues totaled $8.9 million in the second quarter of this year, which was down from $23.7 million in the second quarter of 2019. This decrease primarily reflects the pandemic’s impact on our hotel and entertainment segments, partially offset by an increase in Leasing operations revenue year-over-year.
Net income attributable to common stockholders was $4.1 million or $0.50 per share in the second quarter of 2020 compared to a net loss attributable to common stockholders of $2.4 million or $0.29 per share in the second quarter of 2019. Net income in the 2020 second quarter primarily resulting from the $15 million in earnest money received as a result of the terminated Block 21 agreement, partially offset by operating losses in all of our operating segments, primarily as a result of the pandemic and higher net interest expense resulting from a decrease in capitalized interest as projects under development are being completed.
EBITDA totaled $12.3 million for the second quarter of 2020, including the $15 million in forfeited earnest money previously mentioned, compared to $3 million for the second quarter of last year.
Stratus segment results include the following. Revenue from our Real Estate Operations segment in the second quarter of 2020 totaled $1.9 million, down from $4.1 million last year. Operating loss in this segment was $46,000 in the second quarter of 2020 compared to operating income of $274,000 in the second quarter of last year. The decrease in revenue primarily reflects fewer sales of developed properties in the second quarter of 2020. We sold two Amarra Drive Phase II lots and one Amarra Drive Phase III lot for a total of $1.8 million in the second quarter of this year compared to the sales of four Amarra Drive Phase III lots and one Amarra Villa’s townhome for a total of $4 million during the second quarter of last year.
As of June 30, 2020, pursuant to a previously disclosed contract with a homebuilder, we had contracts to sell Amarra Drive lots totaling $3.2 million, not yet recognized in revenue. Since June 30, 2020 and through August 4, 2020, we signed new contracts for Amarra Drive lot sale for a total of $1.5 million, bringing the total contracts up to $4.7 million.
Revenue from our Leasing operations segment totaled $5.9 million in the second quarter of 2020, up from $4.6 million last year. The increase primarily reflects commencement of new leases at The Saint Mary, Kingwood Place and The Santal properties. Operating loss in the second quarter 2020 was $174,000 compared to operating income of $642,000 in the second quarter of 2019. The decrease primarily reflects a charge of $1.4 million for estimated uncollectible rents receivable and unrealizable deferred costs.
Hotel revenues totaled $1 million in the second quarter of 2020 compared to $9 million in the year-ago period. Our operating loss was $1.7 million in the second quarter of this year compared to operating income of $1.3 million in the second quarter of last year. The decrease in revenue and operating income was primarily the result of lower room reservations and food and beverage sales as a result of the COVID-19 pandemic. Revenue per available room or RevPAR was $29 in the second quarter of 2020 compared to $242 in the second quarter of 2019. While the hotel currently remains open, average occupancy for the second quarter of 2020 was 12%.
Entertainment revenues totaled $289,000 in the second quarter of 2020 compared to $6.3 million in the second quarter of 2019. Operating loss was $1.4 million in the second quarter of 2020 compared to operating income of $1.3 million in the year-ago period. The decrease in both revenue and operating income primarily reflects the fact that ACL Live did not host any events in the second quarter of 2020 compared with the 69 events and the sale of approximately 68,000 tickets in the second quarter of last year. 3TEN ACL Live hosted 15 events in the second quarter of 2020 compared with 52 events and the sale of approximately 7,000 tickets in the second quarter of 2019.
Turning now to our capital management. At June 30, 2020, consolidated debt totaled $363.8 million and consolidated cash totaled $16.1 million, compared with consolidated debt of $365.7 million and consolidated cash of $19.2 million at December 31, 2019. Purchases and development of real estate properties reflected in operating cash flows, and capital expenditures reflected in investing cash flows, totaled $13.1 million for the first six months of 2020, primarily related to the development of Kingwood Place, Lantana Place, Jones Crossing and Barton Creek properties. This compares with $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.
We had a strong financial position prior to the COVID-9 pandemic and we extended the maturity of our $60 million credit facility to September 2022 to support our liquidity position throughout this pandemic. As of June 30, 2020 approximately $26 million was available to be drawn under the credit facility. In addition, we have no significant principal maturities of debt during the remainder of this year.
Based on our current forecast, we project that we will have the ability to meet our debt service and other cash obligations for at least the next 12 months, without taking any extraordinary measures. We will continue to closely evaluate the health conditions and market environment throughout Texas and take additional actions where appropriate.
I will now turn the call back to Beau for his closing remarks.
Thank you, Erin. There is no denying that this year has been challenging. As the pandemic continues to impact communities across the United States, including in our Texas markets, we must carefully manage our business in order to successfully navigate the ongoing economic impacts and the potential prolonged recovery.
Our single-family and multi-family markets remain fairly strong and we are able to continue our longer-term value creation efforts such as land planning, engineering and permitting activities. We remain optimistic about the Texas markets where we operate, our diverse and unique portfolio and our team’s resilience and ability to perform. I cannot thank our Board and employees enough for their continued dedication to our Company and communities. Thank you for participating.
At this time, I will ask the operator to open the line for questions.
End of Q&A
We will now begin the question-and-answer session. [Operator Instructions] Showing no questions. The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.