Transcript
Good day, and welcome to the Stratus Properties Year Ended December 31, 2020 Financial and Operational Conference Call. Earlier this morning, Stratus issued a press release announcing its year ended December 31, 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 replay on Stratus’ website through March 20, 2021. Anyone listening to the taped replay should note that all information presented is current as of today, March 15, 2021 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 from those anticipated, expected, projected or assumed in the forward-looking statements. Please review and refer to the cautionary language included in Stratus’ press release issued today and the risk factors described in Stratus’ 2020 Form 10-K that could cause actual results to differ materially from those projected by Stratus.
Thank you for joining our year-end December 31, 2020 financial and operational conference call. Our Chief Financial Officer, Erin Pickens, is also here with me today. I would like to spend some time on today’s call briefly reviewing the impact we’ve experienced over the past year due to the COVID-19 pandemic. Announcements we have recently made, including the sale of The Saint Mary, Board composition refreshment, commentary on our multi-family retail and residential properties and strategies continued exploration of a potential REAP conversion. Erin will speak to our business segments and will provide an overview of our 2020 financial results. I will then close the call with some final remarks regarding our continued optimism around the Texas real estate market. Our world looks much different now than it did one year ago. At this time last year, restrictions on businesses and gatherings were being implemented across the U.S., leaving many people to work from home, far fewer people traveling, social distancing measures and local and state regulations to support the safety and health of our communities, employees and businesses. At the beginning of the COVID-19 pandemic, Stratus, like many other companies, quickly shifted to a near-term focus on managing its liquidity and evaluating options to support tenants by offering rent deferrals and other concessions as needed. Thankfully, our overall tenant delinquency rate during 2020 for our retail and multi-family portfolio was significantly lower than our original forecast. In fact, by supporting our existing tenants and finding new tenants, we generated record annual revenue from our leasing operations, primarily due to leases at The Saint Mary, Kingwood Place, and The Santal. We also significantly increased revenue from our real estate operations compared to 2019 due to the increased interest in single-family residential properties in Texas, which we believe was a result of home-centric trends from the pandemic.
Thank you, Bill. Please refer to the press release announcing our operational and financial results for the year ended December 31, 2020 issued this morning. Stratus consolidated revenues totaled $61 million in 2020 compared with $92.2 million in 2019. The decrease in revenue in 2020 primarily reflects the decrease in revenue from our hotel and entertainment segments caused by the COVID-19 pandemic, partially offset by an increase in revenues from real estate and leasing operations. Net loss attributable to common stockholders totaled $22.8 million, or $2.78 per share in 2020, compared to $2.5 million, or $0.30 per share in 2019. Losses resulting from the COVID-19 pandemic contributed to Stratus recording a $10.7 million non-cash tax charge in 2020 to record a valuation allowance for Stratus deferred tax assets. EBITDA totaled $9.5 million for 2020, compared with $21.1 million for 2019. I also want to provide an update on our NAV published this morning. Stratus reported an estimated after-tax NAV per share of $14.65 as of December 31, 2020, compared to $45.55 as of December 31, 2019. The decrease was primarily a result of the reduced valuation of Block 21 following lower travel and entertainment demand during the COVID-19 pandemic, and the terminated sale transaction. This drop in estimated value shows how hard hit the hotel and entertainment industries have been this past year. However, we expect to see the value of this iconic property rebound as demand for travel and entertainment recovers from the pandemic.
As we had discussed, Stratus continues to advance several promising development projects. And we continue to successfully execute upon our strategy of acquiring and developing properties and holding them for lease or selling them, such as we did with the sales of The Saint Mary. Our team's knowledge and deep relationships in the Texas markets have been critical to Stratus' success in identifying attractive opportunities and securing the necessary entitlements and permits. Additional support from our two new directors, Neville and Kate, will prove invaluable to our Board and Stratus as we move forward. Even during a pandemic that has significantly impacted our business and relevant industries, our teams have shown resiliency and have maintained strength in our strategy. Because of their hard work, dedication to our development projects, and focus on maximizing shareholder value, we believe we are well-positioned as the market recovers. Austin has continued to grow, particularly in its retail, single-family, and multi-family markets, and gain attention as a desirable place to live. Austin has always been key to our portfolio, and I'm even more encouraged to see an influx of tech powerhouses and other businesses moving to Austin. Apple is expanding its 133-acre campus in 2022, and Alphabet, Amazon, Oracle, and Facebook have expanded or announced plans to expand in the area. Tesla is building a new electric vehicle manufacturing plant for their popular Cybertruck and other products in Austin. Stratus indirectly benefits from these companies moving to Austin, and I'm looking forward to seeing what value we can create in the future. Thank you all for listening in. At this time, I will ask the operator to open the line for questions.
Good morning, Beau and Erin. I have a few questions for you. Is the structure of The Saint Mary that you recently sold a good example of future ownership structures and future developments?
Pardon me, this is the conference operator. It appears the speaker line has temporarily disconnected from their location, and I’ll get them back online, but please hold on to the line. Thank you. Pardon me, this is the conference operator, I was able to rejoin the speakers. Mr. Burtner, could you please repeat your question for them?
Sure. Is the structure - is the sale of The Saint Mary a structure typical of what we'll see in terms of future developments?
Good morning, Fred. I apologize for getting cut off earlier. To recap, the Circle C multi-family land asset is something we acquired in the early 90s and have held for many years while waiting for the right time to develop it. In this case, we raised third-party equity capital on a promoted basis, which led to an equity multiple of about 3.9. Our internal rate of return was in the mid-60s, which are impressive returns. We aim to replicate this model in the future, as we have the team and resources to do so. We considered both refinancing and selling the asset and, after evaluation, decided that selling was the better option. We expect to realize about a $14 million gain from this sale, which will be subject to C Corp taxation. Despite that, we believe this decision makes sense, and I see this as a potential template for our future endeavors.
Thank you. My next question is, you spoke about how the Austin market is strengthening with all these tech companies moving in. How is that impacting Stratus' operations and future development opportunities?
Well, the headlines that I spoke about are quite compelling names like Facebook, Google, Tesla; indeed, those are obviously huge growth companies, and these are the type of businesses that really all cities are trying to attract. So it's good for Austin, and I think Austin has historically been clearly a growth market, and I think this is just continuing with that. As far as how it impacts the various kind of what we call food groups, 2020 was a very challenging year; if I were just to go through each of the kind of the segments. If you look at office, it was, I think, a down year. I mean, obviously, if people weren't going to the office, I think leasing was anemic at best. I think our - even for the year, I want to say that we had negative absorption; there were some sublease deals. But for the most part, I would say that the office market in Austin in 2020 was not a good year. Retail was probably flat overall. I think much like us, I think most people were able to hang on to their tenants through concessions or just working with them on some basis. So I think retail was flat; again, it depends on the type of property. But if you had, for example, grocery stores, like we've had, I think you did pretty well. But I think the retail has been quicker to come back than the office. Obviously, hospitality and hotels are just terrible. I mean, that's unlikely to be a challenge. Certainly, some of these larger city center hotels, I think, will face challenges through this year until the big events come back. The W is a little different in that we have a bit of a transient business. So I think we're able to attract the weekend crowd and the transient business during the week. But I still think 2020 was going to be a challenge until large groups are gathering. And then, of course, on the music venue, I would say the same. We are building shows for the second and third quarter. But just that business is unfortunately slower to come back than we would like. And we want to do it in such a way that we create confidence among our patrons and our performers, such that we just don't have any setbacks. And then the real bright spot has been the residential market. I've been in Austin since I went to school here, and I think I've been through four cycles. And I've never seen the residential market as hot as it is now. It is extraordinary. I mean, the prices people are paying, the lack of inventory; so I think when you open the paper and you see, Austin, hot, hot, hot, I think a lot of that, really, that anecdotal evidence emanates from the residential component of our real estate market and not so much the commercial stuff. Now, the commercial stuff, as I said, will come back, which is 2020 was a challenging year and we're all kind of slowly building out of it.
With some of the airline companies in the U.S. talking about advanced bookings looking somewhat better, are you seeing any evidence of that in advance bookings at the hotel?
We monitor pace reports very closely, and many people who had events scheduled last year have deferred or moved their events to 2021. There was a tendency to postpone decisions as the pandemic continued. However, it seems that despite the ongoing challenges, there is reason for optimism, and people are actively rebooking these events. On the private events side, large corporate events are also rebooking and we are witnessing onsite tours starting to happen again. This uptick is beginning to have a positive financial impact for us in the third and fourth quarters.
Thank you. In terms of the REIT conversion, could you elaborate beyond what you've already said about why the conversion is good for Stratus?
I want to be cautious as we are still in the evaluation process, which can be quite complex. Nevertheless, we remain optimistic that this could be a beneficial option for the company. Ultimately, our shareholders will decide whether this is the right move. Our responsibility now is to present the opportunity and then take it to the shareholders. One notable point, Fred, is that the corporate tax rate currently stands at 21%, and there are discussions about raising it to 28%. This is not competitive for a real estate company like ours. REITs, which we don't directly compete with, have a different taxation scheme, which puts us at a disadvantage. We would like to eliminate that second layer of taxation for our shareholders. There are associated requirements, such as income distribution that come with being a REIT, but we believe it's worth pursuing this option. We will keep our shareholders updated on this matter in the coming weeks and months. From a tax perspective, this approach certainly appears to be logical.
Okay. My last question is, is adding diverse directors a priority for the company?
Fred, that's a very good question. I will tell you that the company's philosophy is that there is strength in diversity, and that a variety of perspectives, backgrounds, life experiences, et cetera leads to really good decision-making. So in a word, yes, that is something that we as a company, as a Board, believe strongly in. As it pertains to Neville and Kate, our two newest directors, they are both very thoughtful, well-educated, seasoned real estate investor operators. We're excited to have them join the Board. But thank you, that’s a very topical question and something that we feel very strongly about Stratus.
Thank you. I appreciate that. Keep going on. Keep doing the good work for us.
Thank you, Fred. Nice to hear your voice, sir.
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.