Don’t Mess With Texas

05/03/2007 12:00 am EST

Focus: STOCKS

Richard Young

Editor, Young's Intelligence Report

Richard Young, founder of Young Research and Publishing, and Jeremy Jones, editor of Distressed Securities and Takeover Candidates, say a real estate developer in the Lone Star State’s capital offers good growth prospects and may be a takeover candidate.

Stratus Properties (NASDAQ: STRS) develops and operates real estate in the booming city of Austin, Texas. In March 1992, Stratus Properties was formed as a spin-off from Freeport-McMoran to hold, operate, and develop the domestic real estate and oil and gas properties of its former parent. Stratus sold all of its oil and gas properties in the early 1990s. The company now focuses exclusively on real estate.

The company owns over 1,600 acres of premium residential land and over 1,000 acres of high-value commercial land in Austin, Texas. Most of Stratus’ residential land is in a luxury development in Austin where the average home sells for $1,000,000. A meaningful number of homes in the development are listed at over $4,000,000.

Austin, [the capital of Texas and the location of the University of Texas’ main campus], is one of the fastest-growing large cities in the country. The local economy is booming, and people are relocating to the city in droves. New job growth in Austin is over 3.5%, more than twice the national rate. A strong and growing labor market is an attractive safety net for the local real estate market.

Austin, which did not participate in the national surge in prices over the past few years, is playing catch-up now. Real estate price growth in Austin lagged the national average from 2000 until 2005. As the national real estate market started to slow, the Austin market plowed ahead.

For the 12 months ending December 31, 2006, home prices in Austin increased by 5%, while the national average home price decreased by 2.6%. Anecdotal evidence suggests that demand is growing, supply is shrinking and prices are on their way up in Austin. With an investment in Stratus, we see a desirable real estate portfolio and a management team looking to take advantage of unprecedented strength in the local real estate market.

In a mid-March earnings announcement, Stratus announced it retained J.P. Morgan to explore strategic alternatives, including a possible sale of the company.  In the words of the CEO, William H. Armstrong III, “we believe that it is in the best interests of our shareholders to explore all possible strategic alternatives to maximize shareholder value.”

What strategic alternatives could the company possibly be exploring when the current strategy has resulted in a compound annual return for shareholders of more than 20% since this decade began? A change in business strategy, debt reduction, maybe a new management team?

We don’t think so. Our money is on a takeover, and yours should be, too. We can earn a juicy premium from a takeover or end up with an attractive real estate portfolio in one of the healthiest markets in the country.

We are setting an initial buy price below $38.50. (It closed at $37 Wednesday—Editor.)

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