SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



~~UNITED STATES~~
~~SECURITIES AND EXCHANGE COMMISSION~~
~~Washington, D.C. 20549~~

~~FORM 10-Q~~

~~(Mark One)~~
~~[X]~~☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934

(Exact name of registrant as specified in its charter)



212 Lavaca ~~St.,~~Street, Suite 300	Austin
~~Austin, Texas~~TX		78701
(Address of principal executive offices)			(Zip Code)

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


~~(512) 478-5788~~
~~(Registrant's telephone number, including area code)~~Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.01 per share	STRS	The NASDAQ Stock Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files). þ☑Yes¨☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.



Large accelerated filer¨	☐			Accelerated filerþ	☑
Non-accelerated filer ¨	☐	Smaller reporting ~~compan~~y þcompany	☑
		Emerging growth company¨	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the ~~Exchange~~ Act). ¨☐ Yes þ☑ No

On ~~October~~July 31, ~~2018,~~2019, there were issued and outstanding ~~8,164,370~~8,179,111 shares of the registrant’s common stock, par value $0.01 per share.

PART I. FINANCIAL INFORMATION

STRATUS PROPERTIES INC.

CONSOLIDATED BALANCE SHEETS (Unaudited)

The accompanying Notes to Consolidated Financial Statements (Unaudited) are an integral part of these consolidated financial statements.

STRATUS PROPERTIES INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE ~~(LOSS) INCOME~~LOSS (Unaudited)

(In Thousands, Except Per Share Amounts)

The accompanying Notes to Consolidated Financial Statements (Unaudited) are an integral part of these consolidated financial statements.

STRATUS PROPERTIES INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

The accompanying Notes to Consolidated Financial Statements (Unaudited), which include information regarding noncash transactions, are an integral part of these consolidated financial statements.

STRATUS PROPERTIES INC.

CONSOLIDATED STATEMENTS OF EQUITY (Unaudited)

THREE MONTHS ENDED JUNE 30



	Stockholders’ Equity
										Common Stock Held in Treasury				Total Stockholders' Equity
	Common Stock			Capital in Excess of Par Value			Accum-ulated Deficit			Common Stock Held in Treasury							Noncontrolling Interests in Subsidiaries
	Number of Shares	At Par Value		Capital in Excess of Par Value			Accum-ulated Deficit			Number of Shares	At Cost						Noncontrolling Interests in Subsidiaries			Total Equity
Balance at March 31, 2019	9,305	$	93	$	186,424		$	(40,241	)	1,128	$	(21,360	)	$	124,916		$	18,076		$	142,992
Stock-based compensation	—	—		(90		)	—			—	—			(90		)	—			(90		)
Total comprehensive loss	—	—		—			(2,389		)	—	—			(2,389		)	(1		)	(2,390		)
Balance at June 30, 2019	9,305	$	93	$	186,334		$	(42,630	)	1,128	$	(21,360	)	$	122,437		$	18,075		$	140,512



Balance at March 31, 2018	9,277	$	93	$	185,592	$	(38,991	)	1,124	$	(21,260	)	$	125,434		$	80	$	125,514
Stock-based compensation	—	—		165		—			—	—			165			—		165
Noncontrolling interests contributions	—	—		—		—			—	—			—			7,000		7,000
Total comprehensive loss	—	—		—		(857		)	—	—			(857		)	—		(857		)
Balance at June 30, 2018	9,277	$	93	$	185,757	$	(39,848	)	1,124	$	(21,260	)	$	124,742		$	7,080	$	131,822

Stockholders’ Equity

Common Stock
Held in Treasury
Total Stockholders' Equity
Common Stock Capital in Excess of Par Value Accum-ulated Deficit Noncontrolling Interests in Subsidiaries

Number
of Shares

At Par
Value

Number
of Shares

At
Cost

Total
Equity
Balance at June 30, 2018 9,277
$ 93
$ 185,757
$ (39,848 ) 1,124
$ (21,260 ) $ 124,742
$ 7,080
$ 131,822
Exercised and vested stock-based awards 11
—
—
—
—
—
—
—
—
Stock-based compensation —
—
267
—
—
—
267
—
267
Noncontrolling interests contributions —
—
—
—
—
—
—
10,650
10,650
Total comprehensive loss —
—
—
(2,372 ) —
—
(2,372 ) —
(2,372 )
Balance at September 30, 2018 9,288
$ 93
$ 186,024
$ (42,220 ) 1,124
$ (21,260 ) $ 122,637
$ 17,730
$ 140,367

Stockholders’ Equity

Common Stock
Held in Treasury
Total Stockholders' Equity
Common Stock Capital in Excess of Par Value Accum-ulated Deficit Noncontrolling Interests in Subsidiaries

Number
of Shares

At Par
Value

Number
of Shares

At
Cost

Total
Equity
Balance at June 30, 2017 9,243
$ 93
$ 185,080
$ (44,563 ) 1,117
$ (21,057 ) $ 119,553
$ 83
$ 119,636
Cash dividend —
—
(94 ) —
—
—
(94 ) —
(94 )
Vested stock-based awards 7
—
—
—
—
—
—
—
—
Stock-based compensation —
—
198
—
—
—
198
—
198
Total comprehensive income —
—
—
14,308
—
—
14,308
—
14,308
Balance at September 30, 2017 9,250
$ 93
$ 185,184
$ (30,255 ) 1,117
$ (21,057 ) $ 133,965
$ 83
$ 134,048

Stockholders’ Equity

Common Stock
Held in Treasury
Total Stockholders' Equity
Common Stock Capital in Excess of Par Value Accum-ulated Deficit Noncontrolling Interests in Subsidiaries

Number
of Shares

At Par
Value

Number
of Shares

At
Cost

Total
Equity
Balance at December 31, 2016 9,203
$ 92
$ 192,762
$ (41,143 ) 1,105
$ (20,760 ) $ 130,951
$ 75
$ 131,026
Adjustment for cumulative effect of change in accounting for stock-based compensation —
—
—
143
—
—
143
—
143
Cash dividend —
—
(8,221 ) —
—
—
(8,221 ) —
(8,221 )
Exercised and vested stock-based awards 47
1
62
—
—
—
63
—
63
Stock-based compensation —
—
581
—
—
—
581
—
581
Tender of shares for stock-based awards —
—
—
—
12
(297 ) (297 ) —
(297 )
Total comprehensive income —
—
—
10,745
—
—
10,745
8
10,753
Balance at September 30, 2017 9,250
$ 93
$ 185,184
$ (30,255 ) 1,117
$ (21,057 ) $ 133,965
$ 83
$ 134,048

The accompanying Notes to Consolidated Financial Statements (Unaudited) are an integral part of these consolidated financial statements.

STRATUS PROPERTIES INC.

CONSOLIDATED STATEMENTS OF EQUITY (Unaudited)

SIX MONTHS ENDED JUNE 30



	Stockholders’ Equity
									Common Stock Held in Treasury				Total Stockholders' Equity
	Common Stock			Capital in Excess of Par Value		Accum-ulated Deficit			Common Stock Held in Treasury							Noncontrolling Interests in Subsidiaries
	Number of Shares	At Par Value		Capital in Excess of Par Value		Accum-ulated Deficit			Number of Shares	At Cost						Noncontrolling Interests in Subsidiaries			Total Equity
Balance at December 31, 2018	9,288	$	93	$	186,256	$	(41,103	)	1,124	$	(21,260	)	$	123,986		$	22,665		$	146,651
Exercised and vested stock-based awards	17	—		—		—			—	—			—			—			—
Stock-based compensation	—	—		78		—			—	—			78			—			78
Tender of shares for stock-based awards	—	—		—		—			4	(100		)	(100		)	—			(100		)
Purchase of noncontrolling interest in consolidated subsidiary	—	—		—		—			—	—			—			(4,589		)	(4,589		)
Total comprehensive loss	—	—		—		(1,527		)	—	—			(1,527		)	(1		)	(1,528		)
Balance at June 30, 2019	9,305	$	93	$	186,334	$	(42,630	)	1,128	$	(21,360	)	$	122,437		$	18,075		$	140,512



Balance at December 31, 2017	9,250	$	93	$	185,395	$	(37,121	)	1,117	$	(21,057	)	$	127,310		$	80	$	127,390
Vested stock-based awards	27	—		—		—			—	—			—			—		—
Stock-based compensation	—	—		362		—			—	—			362			—		362
Tender of shares for stock-based awards	—	—		—		—			7	(203		)	(203		)	—		(203		)
Noncontrolling interests distributions	—	—		—		—			—	—			—			7,000		7,000
Total comprehensive loss	—	—		—		(2,727		)	—	—			(2,727		)	—		(2,727		)
Balance at June 30, 2018	9,277	$	93	$	185,757	$	(39,848	)	1,124	$	(21,260	)	$	124,742		$	7,080	$	131,822

The accompanying Notes to Consolidated Financial Statements (Unaudited) are an integral part of these consolidated financial statements.

STRATUS PROPERTIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The accompanying unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, ~~2017,~~2018, included in Stratus Properties Inc.’s (Stratus) Annual Report on Form 10-K (Stratus ~~2017~~2018 Form 10-K) filed with the United States (U.S.) Securities and Exchange Commission. The information furnished herein reflects all adjustments that are, in the opinion of management, necessary for a fair statement of the results for the interim periods reported. ~~With the exception of the accounting for the deferred gain on the 2017 sale of The Oaks at Lakeway, all such adjustments are, in the opinion of management, of a normal recurring nature.~~ Operating results for the ~~nine-month~~six-month period ended ~~September~~June 30, ~~2018,~~2019, are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2018.~~2019.

Stratus’ ~~basic~~ net ~~(loss) income~~loss per share of common stock was calculated by dividing the net ~~(loss) income~~loss attributable to common stockholders by the weighted-average shares of common stock outstanding during the period. ~~A reconciliation of net (loss) income and~~The weighted-average shares exclude approximately 94 thousand shares of common stock for second-quarter 2019, 85 thousand shares for second-quarter 2018, 95 thousand shares for the first six months of 2019 and 96 thousand shares for the first six months of 2018 associated with restricted stock units and outstanding ~~for purposes~~stock options that were anti-dilutive because of ~~calculating diluted~~ net ~~(loss) income per share (in thousands, except per share amounts) follows:~~losses.

Add shares issuable upon exercise or vesting of dilutive stock options and restricted stock units (RSUs)^a

The Saint Mary, L.P.

On June 19, 2018, The Saint Mary, L.P., a Texas limited partnership and a subsidiary of Stratus, completed a series of financing transactions to develop The Saint Mary, a 240-unit luxury, garden-style apartment project in the Circle C community in Austin, Texas. The financing transactions included (1) a $26 millionconstruction loan with Texas Capital Bank, National Association ~~(see Note 6 for further discussion)~~ and (2) an $8.0 million private placement. ~~The Saint Mary, L.P. issued, in a private placement exempt from registration under federal and state securities laws, Class B limited partnership interests to a limited number~~As one of investors (the Saint Mary Class B limited partners), for $8.0 million (the Saint Mary Offering) resulting in the Saint Mary Class B limited partners owning an aggregate 49.1 percent equity interest in The Saint Mary, L.P.

In accordance with the terms of the Saint Mary Offering, Circle C Land, L.P., a Texas limited partnership and a subsidiary of Stratus and the sole Class A limited partner of The Saint Mary, L.P. (Circle C) purchased Class B limited partnership interests representing a 6.1 percent equity interest in The Saint Mary, L.P. for $1.0 million. Upon completion of the Saint Mary Offering, Stratus holds, in aggregate, a 57 percent indirect equity interest in The Saint Mary, L.P. Additionally, among the participants in the ~~Saint Mary Offering,~~private placement offering, LCHM Holdings, LLC (LCHM), a related party as a result of its greater than 5 percent beneficial ownership of Stratus’ common stock, ~~(LCHM),~~ purchased ~~Saint Mary~~

~~Class B~~ limited partnership interests representing a 6.1 percent equity interest in The Saint Mary, L.P. ~~for $1.0 million.~~

In connection with the Saint Mary Offering, The Saint Mary GP, L.L.C., a Texas limited liability company (the Saint Mary General Partner) and a subsidiary of Stratus, Circle C, and the Saint Mary Class B limited partners entered into an Amended and Restated Limited Partnership Agreement (the Saint Mary Partnership Agreement) effective as of June 18, 2018. The Saint Mary Partnership Agreement includes the following key provisions:

~~Circle C contributed an approximate 14.35 acre tract of land upon which The Saint Mary will be developed and constructed and $0.7 million of cash.~~

Stratus has performed evaluations and concluded that The Saint Mary, L.P. is a variable interest entity and that Stratus is the primary beneficiary. Stratus will continue to evaluate which entity is the primary beneficiary of The Saint Mary, L.P. in accordance with applicable accounting guidance. As of September 30, 2018, Stratus’ consolidated balance sheet includes the following assets and liabilities of The Saint Mary, L.P. (in thousands):

Stratus Kingwood Place, L.P.

On August 3, 2018, Stratus Kingwood Place, L.P., a Texas limited partnership and a subsidiary of Stratus (the Kingwood, L.P.), completed a $10.7 million private placement, approximately $7 million of which, combined with a $6.75 million loan from Comerica Bank, was used to purchase a 54-acre tract of land located in Kingwood, Texas for $13.5 million, for the development ~~subject to obtaining a construction loan and building permits,~~ of Kingwood Place, a new H-E-B, L.P. (HEB)-anchored mixed-use development project (Kingwood Place). ~~The development plan for Kingwood Place includes a 103,000-square-foot HEB store, 41,000 square feet~~As one of retail space, 6 retail pads, and an 11-acre parcel planned for approximately 300 multi-family units. The Kingwood, L.P. issued, in a private placement exempt from registration under federal and state securities laws, Class B limited partnership interests to a limited number of investors (the Kingwood Class B limited partners), for $10.7 million (the Kingwood Offering), representing approximately 70 percent of the projected partnership equity. Among the participants in the ~~Kingwood Offering,~~private placement offering, LCHM purchased ~~Kingwood Class B~~ limited partnership interests initially representing an 8.8 percent equity interest in the Kingwood, L.P. ~~for $1.0 million.~~

~~In connection with the Kingwood Offering, Stratus Northpark, L.L.C., a Texas limited liability company, a subsidiary of Stratus and the general partner~~Refer to Note 2 of the ~~Kingwood, L.P. (the Kingwood General Partner),~~ Stratus Properties Operating Co., L.P., a Delaware limited partnership, also a subsidiary of Stratus (the Class A limited partner), and the Kingwood Class B limited partners entered into an Amended and Restated Limited Partnership Agreement (the Kingwood Partnership Agreement) effective as of August 3, 2018. The Kingwood Partnership Agreement includes the following key provisions:2018 Form 10-K for further discussion.

Stratus ~~has~~ performed evaluations and concluded that The Saint Mary, L.P. and the Kingwood, L.P. ~~is a~~are variable interest ~~entity~~entities and that Stratus is the primary beneficiary. Stratus will continue to evaluate which entity is the primary beneficiary of The Saint Mary, L.P. and the Kingwood, L.P. in accordance with applicable accounting guidance. ~~As of September 30, 2018,~~ Stratus’ consolidated balance ~~sheet includes~~sheets include the following combined assets and liabilities of The Saint Mary, L.P. and the Kingwood, L.P. (in thousands):



	June 30, 2019		December 31, 2018
Assets:
Cash and cash equivalents	$	601	$	1,939
Restricted cash	—		2,284
Real estate under development	53,576		27,928
Real estate held for investment	7,060		—
Other assets	953		792
Total assets	$	62,190	$	32,943
Liabilities:
Accounts payable and accrued liabilities	$	6,246	$	3,484
Debt	29,608		6,125
Total liabilities	$	35,854	$	9,609
Net assets	$	26,336	$	23,334

September 30, 2018
Assets:
Cash and cash equivalents $ 3,197
Real estate held under development 15,080
Total assets $ 18,277
Liabilities:
Accounts payable $ 213
Accrued liabilities, including taxes 171
Debt 6,664
Total liabilities 7,048
Net assets $ 11,229

~~The Oaks at Lakeway.~~ On ~~February 15, 2017,~~January 17, 2019, Stratus sold ~~The Oaks at Lakeway~~a retail pad subject to ~~FHF I Oaks at Lakeway, LLC~~a ground lease located in the Circle C community for ~~$114.0 million in cash. Net cash proceeds were $50.8 million after repayment of the Lakeway construction loan.~~$3.2 million. Stratus used ~~a portion~~proceeds from the sale to repay $2.5 million of ~~these net cash proceeds to pay indebtedness outstanding under the~~its Comerica Bank credit facility. The parties entered into three master lease agreements at closing: (1) one covering unleased in-line retail space, with a 5-year term, (2) one covering four unleased pad sites, three of which have 10-year terms,facility borrowings and, one of which has a 15-year term, and (3) one covering the hotel pad with a 99-year term. As specified conditions are met, primarily consisting of the tenant executing a lease, commencing payment of rent and taking occupancy, leases will be assigned to the purchaser and the corresponding property will be removed from the master lease, reducing Stratus' master lease payment obligations. Stratus' master lease payment obligation, which currently approximates $180 thousand per month, is expected to decline over time until leasing is complete and all leases are assigned to the purchaser.

Stratus agreed to guarantee the obligations of its selling subsidiary under the sales agreement, up to a liability cap of two percent of the purchase price. This cap does not apply to Stratus' obligation to satisfy the selling subsidiary's indemnity obligations for its broker commissions or similar compensation or Stratus' liabilityafter adjustments recorded in guaranteeing the selling subsidiary's obligations under the master leases. To secure its obligations under the master leases, Stratus has provided a $1.5 million irrevocable letter of credit with a three-year term.

At the date of sale, Stratus allocated the purchase price for The Oaks at Lakeway between two performance obligations based on the relative fair values of each. The first performance obligation, to deliver the completed and leased portion of the property, was performed on the date of sale. The second performance obligation was to complete construction of the remaining buildings and leasing of the vacant space. The obligations under master leases were considered variable consideration and are recorded as reductions to the contract liability. The hotel pad was leased to a hotel operator under a ground lease at the date of sale. However, the hotel tenant had not commenced rent payments or construction of the hotel. At the date of the sale, primarily because of the uncertainty related to the hotel tenant’s performance under its ground lease, the probability-weighted estimate of the obligations under the master leases reduced the sale consideration such that no gain was recognized on the sale.

Once the hotel tenant began paying rent in May 2017 and obtained construction financing and commenced construction of the hotel in August 2017, the probability-weighted estimate of Stratus’ obligations under the master leases was significantly reduced, and a gain of $24.3 million related to the first performance obligation was recognized in third-quarter 2017. A contract liability of $9.9 million is presented as a deferred gain in the

consolidated balance sheets at September 30, 2018, compared with $11.3 million at December 31, 2017. The reduction in the deferred gain balance primarily reflects master lease payments. The contract liability, as reduced by future master lease payments, will be recognized as additional gain as Stratus fulfills the remaining performance obligation.

Upon the sale of The Oaks at Lakeway, HEB earned a profit participation of $2.5 million (of which $2.2 million was paid at closing), which is presented separately in the consolidated statements of comprehensive (loss) income.

Fair value accounting guidance includes a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 inputs) and the lowest priority to unobservable inputs (Level 3 inputs).

The carrying value for certain Stratus financial instruments (i.e., cash and cash equivalents, restricted cash, accounts payable and accrued liabilities) approximates fair value because of their short-term nature and generally negligible credit losses.

A summary of the carrying amount and fair value of Stratus' other financial instruments follows (in thousands):

Debt. Stratus' debt is recorded at cost and is not actively traded. Fair value is estimated based on discounted future expected cash flows at estimated current market interest rates. Accordingly, Stratus' debt is classified within Level 2 of the fair value hierarchy. The fair value of debt does not represent the amounts that will ultimately be paid upon the maturities of the loans.

Interest Rate Swap Agreement. The interest rate swap agreement does not qualify for hedge accounting and changes in its fair value are recorded in the consolidated statements of comprehensive ~~(loss) income.~~loss. Stratus evaluated the counterparty credit risk associated with the interest rate swap agreement, which is considered a Level 3 input, but did not consider such risk to be significant. Therefore, the interest rate swap agreement is classified within Level 2 of the fair value hierarchy. The interest rate swap agreement with Comerica Bank was entered into in 2013, is effective through December 31, 2020, and has a fixed interest rate of 2.3 percent compared to the variable rate based on the one-month London Interbank Offered Rate (LIBOR). As of June 30, 2019, the agreement had a notional amount of $15.5 million, which amortizes to $14.8 million by the end of the agreement, and as of December 31, 2018, the agreement had a notional amount of $15.8 million.

~~Debt.~~ The components of Stratus' debt are as follows (in thousands):



	June 30, 2019		December 31, 2018
Goldman Sachs loan	$	142,222	$	143,250
Comerica Bank credit facility	48,658		50,221
Santal Phase I construction loan	32,672		32,622
Santal Phase II construction loan	24,975		19,867
Lantana Place construction loan	22,372		18,416
Jones Crossing construction loan	19,574		11,784
The Saint Mary construction loan	16,015		—
Kingwood Place construction loan	13,593		6,125
West Killeen Market construction loan	7,093		6,636
Amarra Villas credit facility	5,323		3,326
New Caney land loan	4,888		—
Barton Creek Village term loan	3,237		3,284
Total debt^a	$	340,622	$	295,531

On March 19, 2019, two Stratus ~~maintains a net asset value of $125 million and an aggregate promissory note debt-to-gross asset value of less than 50 percent.~~

~~As discussed in Note 3, on June 19, 2018,~~On March 8, 2019, a Stratus subsidiary entered into a ~~$26~~$5.0 million ~~construction~~land loan with Texas Capital ~~Bank (The Saint Mary construction loan)~~Bank. Proceeds from the loan were used to ~~finance~~fund the ~~initial phase~~acquisition of HEB's portion of the New Caney partnership in which Stratus and HEB purchased a tract of land for the future development of an HEB-anchored mixed-use project in New Caney, Texas. The ~~Saint Mary. Stratus will fully guaranty~~loan matures on March 8, 2021, and may be extended for 12 months, subject to certain conditions. The Saint Mary construction loan. The repayment guaranty will be reduced to 50 percent upon issuance of a certificate of occupancy for The Saint Mary and will be eliminated when the project debt service coverage ratio equals or exceeds 1.25:1.0. Interest is variableloan bears interest at ~~the one-month~~ LIBOR plus 3.0 percent. ~~Payments of interest only will be due and payable monthly, and outstanding principal is payable at maturity of June 19, 2021. Outstanding amounts will be~~Borrowings are secured by the New Caney land. The ~~Saint Mary and all subsequent improvements. The construction~~ loan agreement ~~and related document contain affirmative and negative~~contains customary financial covenants ~~usual and customary for loan agreements~~including a requirement that Stratus maintain a net asset value of this nature. Stratus may extend the maturity of this loan for up to two additional 12-month periods if certain conditions are met, including debt service coverage ratio thresholds. As of September 30, 2018, no amounts were drawn on The Saint Mary construction loan.$125 million.

For a description of Stratus' other debt, refer to Note 65 in the Stratus ~~2017~~2018 Form 10-K.

~~Equity.~~ Stratus' Comerica Bank credit facility requires the bank's prior written consent to pay a dividend on Stratus' common stock. On March 15, 2017, Stratus' Board of Directors (the Board), after receiving written consent from Comerica Bank, declared a special cash dividend of $1.00 per share ($8.1 million), which was paid on April 18, 2017, to stockholders of record on March 31, 2017. The special cash dividend was declared after the Board’s consideration of the results of the sale of The Oaks at Lakeway. Comerica Bank’s consent to the payment of this special dividend is not indicative of the bank’s willingness to consent to the payment of future dividends. The declaration of future dividends is at the discretion of the Board, subject to the restrictions under Stratus' Comerica Bank credit facility, and will depend on Stratus' financial results, cash requirements, projected compliance with covenants in its debt agreements, outlook and other factors deemed relevant by the Board.

Table of Contents


7.	PROFIT PARTICIPATION INCENTIVE PLAN

OnIn July ~~11,~~ 2018, the ~~Stratus~~ Compensation Committee of the Board of Directors (the Committee) unanimously adopted the Stratus Profit Participation Incentive Plan (the Plan), which provides participants with economic incentives tied to the success of the development projects designated by the Committee as approved projects under the Plan. ~~Under the Plan, 25 percent~~Refer to Note 7 of the ~~profit~~Stratus 2018 Form 10-K for ~~each approved project following a capital transaction (as defined in~~further discussion.

As of June 30, 2019, there were no significant changes to the ~~Plan) will be set aside in a pool. The Committee will allocate participation interests in each pool to select executi~~

~~Table of Contents~~

~~ves, other employees and consultants determined to be instrumental in the success~~fair value of the ~~project. The profit is equal~~awards or the assumptions used to determine the fair values of the awards at December 31, 2018. Estimates related to the ~~net proceeds~~awards may change over time due to ~~Stratus from a capital transaction after Stratus has received a return of its~~differences between projected and actual development progress and costs, and expenses and any capital contributions and a preferred return of 10 percent per year on the approved project. Provided the applicable service conditions are met, each participant is eligible to earn a bonus equal to his or her allocated participation interest in the applicable profit pool. Bonuses under the Plan are payable in cash prior to March 15th of the year following the capital transaction, unless the participant is an executive officer, in which case annual cash payouts under the Plan are limited to no more than four times the executive officer’s base salary, and any amounts due under the Plan in excess of that amount will be converted to an equivalent number of stock-settled restricted stock units with a one-year vesting period.

If a capital transaction has not occurred prior to the third anniversary of the date an approved project is substantially complete (a valuation event), the Committee will obtain a third-party appraisal of the approved project as of the valuation event. Based on the appraised value, the Committee will determine if any profit would have been generated after applying the hurdles described above, and if so, the amount of any bonus that would have been attributable to each participant. Any such amount will convert into an equivalent number of stock-settled restricted stock units that will vest in annual installments over a three-year period, provided that the participant satisfies the applicable service conditions.

On August 2, 2018, the Committee designated seven existing development projects as approved projects under the Plan, and allocated participation interests in each pool to certain executives, employees and consultants. As of September 30, 2018, one of those approved projects was substantially complete.

~~Because of uncertainty in estimating future~~ market conditions and ~~development plans and costs for approved projects,~~ the timing of capital transactions or valuation events.

During second-quarter 2019, Stratus accrued $0.2 million to project development costs and ~~amount~~$0.2 million in general and administrative expense related to the Plan. During the six months ended June 30, 2019, Stratus accrued $0.4 million to project development costs and $0.5 million in general and administrative expense related to the Plan. The accrued liability for the Plan totaled $1.7 million at June 30, 2019, and $0.8 million at December 31, 2018 (included in other liabilities). As of ~~bonus awards~~June 30, 2019, no amounts had been paid to participants under the Plan cannot currently be reliably determined. As such, no amounts have been recorded for bonus awards under the Plan as of September 30, 2018. Stratus will record estimates of such amounts for an approved project when they can be reliably determined, which is currently expected to be at the time a capital transaction is announced or when a valuation event occurs.Plan.


8.	INCOME TAXES

Stratus’ accounting policy for and other information regarding its income taxes is further described in Notes 1 and 76 in the Stratus ~~2017~~2018 Form 10-K.

Stratus had deferred tax assets (net of deferred tax liabilities) totaling ~~$12.5~~$11.9 million at ~~September~~June 30, ~~2018~~2019, and~~$11.5~~ $11.8 million at December 31, ~~2017~~2018. ~~Stratus’ income tax benefit for the first nine months of 2018 includes a deferred tax benefit of $1.1 million, partly offset by income tax expense of $0.1 million.~~ Stratus’ future results of operations may be negatively impacted by an inability to realize a tax benefit for future tax losses or for items that will generate additional deferred tax assets.

The difference between Stratus' consolidated effective income tax rate for the first ~~nine~~six months of ~~2018 and the first nine months of 2017,~~2019 and the U.S. Federal statutory income tax rate of 21 percent, was primarily attributable to the Texas state margin tax and the Tax Cuts and Jobs Act's executive compensation limitation. The difference between Stratus' consolidated effective income tax rate for the first six months of 2018 and 35the U.S. Federal statutory income tax rate of 21 percent, ~~for 2017,~~ was primarily attributable to the Texas state margin tax.


9.	BUSINESS SEGMENTS

Stratus currently has four operating segments: Real Estate Operations, Leasing Operations, Hotel and Entertainment.

The Real Estate Operations segment is comprised of Stratus’ real estate assets (developed for sale, under development and available for development), which consists of its properties in Austin, Texas (the Barton Creek ~~community, including portions of Santal Phase II;~~community; the Circle C community, including The Saint Mary; the Lantana community, including a portion of Lantana ~~Place;~~Place still under development and vacant pad sites; and one condominium unit at the W Austin Hotel & Residences); in Lakeway, Texas, located in the greater Austin area (Lakeway); in College Station, Texas ~~(Jones Crossing)~~(a portion of Jones Crossing and vacant pad sites); in Killeen, Texas (vacant pad sites at West Killeen Market); and in Magnolia, Texas (Magnolia) ~~and~~, Kingwood, Texas (Kingwood Place) and New Caney, Texas (New Caney), ~~both~~ located in the greater Houston area.

The Leasing Operations segment includes the office and retail space at the W Austin Hotel & Residences, ~~a retail building in~~ Barton Creek Village, Santal Phase I ~~the~~and Phase II, West Killeen Market in Killeen, Texas, and completed portions of the ~~Santal Phase II,~~ Lantana Place and Jones Crossing projects.

The Hotel segment includes the W Austin Hotel located at the W Austin Hotel & Residences in downtown Austin, Texas.

~~Table of Contents~~

The Entertainment segment includes ACL Live, a live music and entertainment venue, and ~~production studio, and~~ 3TEN ACL Live, both located at the W Austin Hotel & Residences. In addition to hosting concerts and private events, ACL Live is the home of Austin City Limits, athe longest running music series in American television ~~program showcasing popular music legends. The Entertainment segment also includes revenues and costs associated with events hosted at other venues.~~history.

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Stratus uses operating income or loss to measure the performance of each segment. General and administrative expenses, which primarily consist of employee salaries, wages and other costs, are managed on a consolidated basis and are not allocated to Stratus' operating segments. The following segment information reflects management determinations that may not be indicative of what the actual financial performance of each segment would be if it were an independent entity.

Revenues ~~From~~from Contracts with Customers. Stratus' revenues from contracts with customers ~~for the third quarters and the first nine months of 2018 and 2017~~ follow (in thousands):



	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
Real Estate Operations:
Developed property sales	$	4,048	$	6,856	$	6,882	$	8,011
Commissions and other	81		123		195		162
	4,129		6,979		7,077		8,173
Leasing Operations:
Rental revenue	4,413		2,331		8,042		4,335
	4,413		2,331		8,042		4,335
Hotel:
Rooms, food and beverage	8,445		8,908		16,182		17,602
Other	517		685		1,105		1,313
	8,962		9,593		17,287		18,915
Entertainment:
Event revenue	5,598		3,729		9,822		8,378
Other	622		678		1,194		1,274
	6,220		4,407		11,016		9,652

Total Revenues from Contracts with Unaffiliated Customers	$	23,724	$	23,310	$	43,422	$	41,075

Three Months Ended September 30, Nine Months Ended September 30,
2018 2017 2018 2017
Real Estate Operations:
Developed property sales $ 2,025
$ 2,860
$ 10,036
$ 8,436
Undeveloped property sales —
—
—
544
Commissions and other 75
63
237
128
2,100
2,923
10,273
9,108
Leasing Operations:
Rental revenue 2,813
1,923
7,148
6,015
2,813
1,923
7,148
6,015
Hotel:
Rooms, food and beverage 7,554
7,143
25,156
26,054
Other 618
595
1,931
1,763
8,172
7,738
27,087
27,817
Entertainment:
Event revenue 4,154
4,010
12,532
14,520
Other 684
628
1,958
1,855
4,838
4,638
14,490
16,375

Total Revenues from Contracts with Unaffiliated Customers $ 17,923
$ 17,222
$ 58,998
$ 59,315

Financial Information by Business Segment. The following segment information was prepared on the same basis as Stratus’ consolidated financial statements (in thousands).


	Real Estate Operations^a			Leasing Operations		Hotel		Entertainment		Eliminations and Other^b			Total			Real Estate Operations^a		Leasing Operations			Hotel		Entertainment		Corporate, Eliminations and Other^b			Total
Three Months Ended September 30, 2018:
Three Months Ended June 30, 2019:
Revenues:
Unaffiliated customers	$	2,100		$	2,813	$	8,172	$	4,838	$	—		$	17,923		$	4,129	$	4,413		$	8,962	$	6,220	$	—		$	23,724
Intersegment	8			227		72		21		(328		)	—			4		229			80		45		(358		)	—
Cost of sales, excluding depreciation	2,279			1,235		6,639		4,154		(168		)	14,139			3,795		2,451			6,868		4,585		(185		)	17,514
Depreciation	65			863		886		391		(34		)	2,171			64		1,388			899		396		(44		)	2,703
General and administrative expenses	—			—		—		—		2,650			2,650			—		—			—		—		2,919			2,919
Operating (loss) income	$	(236	)	$	942	$	719	$	314	$	(2,776	)	$	(1,037	)
Loss on sale of assets																—		161		^c	—		—		—			161
Operating income (loss)																$	274	$	642		$	1,275	$	1,284	$	(3,048	)	$	427
Capital expenditures and purchases and development of real estate properties	$	21,201		$	10,334	$	128	$	24	$	—		$	31,687		$	2,458	$	15,391		$	156	$	—	$	—		$	18,005
Total assets at September 30, 2018	183,857			157,706		102,069		36,377		8,047			488,056
Total assets at June 30, 2019																225,084		167,008			98,063		45,491		7,085			542,731



Three Months Ended June 30, 2018:
Revenues:
Unaffiliated customers	$	6,979		$	2,331	$	9,593	$	4,407	$	—		$	23,310
Intersegment	8			225		50		44		(327		)	—
Cost of sales, excluding depreciation	5,560		^d	1,331		7,184		3,560		(167		)	17,468
Depreciation	64			738		894		392		(35		)	2,053
General and administrative expenses	—			—		—		—		3,015			3,015
Operating income (loss)	$	1,363		$	487	$	1,565	$	499	$	(3,140	)	$	774
Capital expenditures and purchases and development of real estate properties	$	4,087		$	18,486	$	97	$	23	$	—		$	22,693
Total assets at June 30, 2018	207,437			95,954		101,487		36,263		7,547			448,688

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																	Real Estate Operations^a			Leasing Operations				Hotel		Entertainment		Corporate, Eliminations and Other^b			Total
	Real Estate Operations^a		Leasing Operations				Hotel		Entertainment		Eliminations and Other^b			Total
Three Months Ended September 30, 2017:
Six Months Ended June 30, 2019:
Revenues:
Unaffiliated customers	$	2,923	$	1,923			$	7,738	$	4,638	$	—		$	17,222		$	7,077		$	8,042			$	17,287	$	11,016	$	—		$	43,422
Intersegment	115		222				57		17		(411		)	—			9			459				127		74		(669		)	—
Cost of sales, excluding depreciation	2,204		1,100				6,678		3,799		(144		)	13,637			3,841		^e	4,595				13,566		8,192		(341		)	29,853
Depreciation	57		739				886		384		(35		)	2,031			125			2,795				1,799		790		(176		)	5,333
General and administrative expenses	—		—				—		—		2,220			2,220			—			—				—		—		6,118			6,118
Gain on sales of assets	—		(24,306		)	^c	—		—		—			(24,306		)
Gain on sale of assets																	—			(1,952		)	^c	—		—		—			(1,952		)
Operating income (loss)	$	777	$	24,612			$	231	$	472	$	(2,452	)	$	23,640		$	3,120		$	3,063			$	2,049	$	2,108	$	(6,270	)	$	4,070
Capital expenditures and purchases and development of real estate properties	$	3,222	$	9,066			$	15	$	182	$	—		$	12,485		$	5,756		$	44,611			$	254	$	125	$	—		$	50,746
Total assets at September 30, 2017	183,643		71,041				103,560		36,888		15,332			410,464
Municipal utility district (MUD) reimbursements applied to real estate under development^e																	920			—				—		—		—			920



Six Months Ended June 30, 2018:
Revenues:
Unaffiliated customers	$	8,173		$	4,335	$	18,915	$	9,652	$	—		$	41,075
Intersegment	16			476		122		58		(672		)	—
Cost of sales, excluding depreciation	7,126		^d	2,521		14,222		7,696		(352		)	31,213
Depreciation	125			1,371		1,789		780		(70		)	3,995
General and administrative expenses	—			—		—		—		5,996			5,996
Operating income (loss)	$	938		$	919	$	3,026	$	1,234	$	(6,246	)	$	(129	)
Capital expenditures and purchases and development of real estate properties	$	7,699		$	42,285	$	336	$	361	$	—		$	50,681

Nine Months Ended September 30, 2018:
Revenues:
Unaffiliated customers $ 10,273
$ 7,148
$ 27,087
$ 14,490
$ —
$ 58,998
Intersegment 24
703
194
79
(1,000 ) —
Cost of sales, excluding depreciation 9,405
^d
3,756
20,861
11,850
(520 ) 45,352
Depreciation 190
2,234
2,675
1,171
(104 ) 6,166
General and administrative expenses —
—
—
—
8,646
8,646
Operating income (loss) $ 702
$ 1,861
$ 3,745
$ 1,548
$ (9,022 ) $ (1,166 )
Capital expenditures and purchases and development of real estate properties $ 28,900
$ 52,619
$ 464
$ 385
$ —
$ 82,368

Nine Months Ended September 30, 2017:
Revenues:
Unaffiliated customers $ 9,108
$ 6,015
$ 27,817
$ 16,375
$ —
$ 59,315
Intersegment 136
653
230
142
(1,161 ) —
Cost of sales, excluding depreciation 8,048
3,773
21,323
12,756
(528 ) 45,372
Depreciation 171
2,070
2,654
1,137
(104 ) 5,928
General and administrative expenses —
—
—
—
8,462
8,462
Profit participation —
2,538
—
—
—
2,538
Gain on sales of assets —
(25,421 )
^c
—
—
—
(25,421 )
Operating income (loss) $ 1,025
$ 23,708
$ 4,070
$ 2,624
$ (8,991 ) $ 22,436
Capital expenditures and purchases and development of real estate properties $ 11,196
$ 13,845
$ 273
$ 245
$ —
$ 25,559


a.	Includes sales commissions and other revenues together with related expenses.


b.	Includes consolidated general and administrative expenses and eliminations of intersegment amounts.


c.	~~Includes $24.3 million associated with recognition~~Relates to the first-quarter 2019 sale of a ~~portion of~~retail pad subject to a ground lease located in the ~~deferred gain on the sale of The Oaks at Lakeway.~~Circle C community, including adjustments recorded in second-quarter 2019.


d.	Includes $0.4 million of reductions to cost of sales associated with collection of prior-years' assessments of properties in Barton Creek.

Stratus received $4.6 million of bond proceeds related to MUD reimbursements of infrastructure costs incurred for development of Barton Creek. Of the total amount, Stratus recorded $0.9 million as a reduction of real estate under development on the consolidated balance sheets, and $3.4 million as a reduction in real estate cost of sales and $0.3 million in other income, net in the consolidated statements of comprehensive loss. Refer to Note 1 of the Stratus 2018 Form 10-K for further discussion of Stratus' accounting policy for MUD reimbursements.


10.	NEW ACCOUNTING STANDARDS

~~Revenue Recognition.~~ ~~In May 2014, the Financial Accounting Standards Board (FASB) issued a new~~Leases. Effective January 1, 2019, Stratus adopted an Accounting Standards Update (ASU) ~~related to revenue recognition. Stratus adopted this standard effective January 1, 2018, under the modified retrospective approach applied to contracts~~ that remain in force at the adoption date. The adoption of this standard did not result in any changes to Stratus' revenue recognition policies or processes (refer to Note 1 of Stratus' 2017 Form 10-K for disclosure of Stratus' revenue recognition policy) except as follows:

Revenue or gains on sales of real estate are recognized when control of the asset has been transferred to the buyer if collection of substantially all of the consideration to which Stratus will be entitled is probable and Stratus has satisfied all other performance obligations under the contract. Consideration is allocated among multiple performance obligations or distinct nonfinancial assets to be transferred to the buyer based on relative fair value.

~~Table of Contents~~

~~Financial Instruments.~~ In January 2016, FASB issued an ASU that amends the guidance on the classification and measurement of financial instruments. This ASU makes limited changes to prior guidance and amends certain disclosure requirements. Stratus adopted this ASU effective January 1, 2018, and such adoption did not have a material impact on its financial statements.

~~Leases.~~ ~~In February 2016, FASB issued an ASU that will require~~requires lessees to recognize most leases on the balance sheet. ~~This ASU allows lessees~~Stratus elected the practical expedients allowing it to ~~make~~(i) apply the provisions of the updated lease guidance at the effective date, without adjusting the comparative periods presented, and (ii) not reassess lease contracts, lease classification and initial direct costs of leases existing at adoption. Stratus also elected an accounting policy ~~election~~ to not recognize a lease asset and liability for leases with a term of 12 months or less and ~~do not have~~ a purchase option that is not expected to be exercised. ~~For public entities,~~

Stratus' most significant lease is a 99-year ground lease for approximately 72 acres of land in College Station, Texas on which it is developing the Jones Crossing project. Stratus also leases various types of assets, including office space, vehicles and office equipment under non-cancelable leases. All of Stratus' leases are considered operating leases under the ASU. Adoption of this ASU resulted in the recognition of lease right-of-use assets of $11.9 million and lease liabilities of $12.0 million as of January 1, 2019.

Operating lease costs were $0.4 million in second-quarter 2019 and $0.7 million for the first six months of 2019. Total lease costs were $0.4 million in second-quarter 2018 and $0.8 million for the first six months of 2018.

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During the first six months of 2019, Stratus paid $108 thousand for lease liabilities recorded in the consolidated balance sheet (included in operating cash flows in the consolidated statements of cash flows). As of June 30, 2019, the weighted-average discount rate used to determine the lease liabilities was 6.0 percent and the weighted-average remaining lease term was 94.1 years.

The future minimum payments for leases recorded on the consolidated balance sheet at June 30, 2019, follow (in thousands):



Remaining six months of 2019	$	115
2020	199
2021	145
2022	434
2023	497
Thereafter	110,548
Total payments	111,938
Present value adjustment	(99,557		)
Present value of net minimum lease payments	$	12,381

The adoption of this ASU did not materially impact Stratus' accounting for contracts in which it is ~~effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. In July 2018, FASB issued a practical expedient allowing for entities~~the lessor. Refer to ~~apply the provisions~~Note 8 of the ~~updated lease guidance at the January 1, 2019, effective date, without adjusting the comparative periods presented.~~ Stratus ~~continues to review the impact~~2018 Form 10-K for further disclosure of ~~the new guidance on its financial reporting and disclosures, including the impact~~minimum rental income under non-cancelable long-term leases as of ~~the College Station ground lease.~~December 31, 2018.

~~Statement of Cash Flows: Restricted Cash.~~ In November 2016, FASB issued an ASU that changes the classification and presentation of restricted cash and restricted cash equivalents on the statement of cash flows. The ASU requires that a statement of cash flows include the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. Stratus adopted this ASU effective January 1, 2018, and adjusted its consolidated statement of cash flows for the nine months ended September 30, 2017, to include restricted cash (Stratus has no restricted cash equivalents) with cash and cash equivalents.

~~The impact of adopting this ASU for the nine months ended September 30, 2017, follows (in millions):~~

Previously Reported Impact of Adoption Current Presentation
Net increase in cash, cash equivalents and restricted cash $ 2,555
$ 11,859
$ 14,414
Cash, cash equivalents and restricted cash at beginning of year 13,597
11,892
25,489
Cash, cash equivalents and restricted cash at end of period $ 16,152
$ 23,751
$ 39,903

11. SUBSEQUENT EVENTS

In October 2018, Stratus, in partnership with HEB, purchased a 38-acre tract of land for approximately $9.5 million in New Caney, Texas, for the future development of an HEB-anchored, mixed-use project. Stratus and HEB entered into a new partnership agreement in which each party owns a 50 percent interest in the partnership and each funded half of the land purchase. Subject to completion of development plans, Stratus currently expects the New Caney project will be anchored by an HEB grocery store, and will include approximately 145,000 square feet of retail space (inclusive of the HEB grocery store), 5 pad sites, and a 10-acre multi-family parcel. Upon completion of certain pre-development work, which is currently underway, Stratus intends to enter into a lease with HEB, at which time Stratus will acquire HEB’s interest in the partnership for the amount of HEB’s investment. Stratus is reviewing its plans for timing of commencement of construction, which Stratus currently expects to be in approximately three years.

Stratus evaluated events after ~~September~~June 30, ~~2018,~~2019, and through the date the financial statements were issued, and determined any events or transactions occurring during this period that would require recognition or disclosure are appropriately addressed in these financial statements.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

In Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A), “we,” “us,” “our” and "Stratus" refer to Stratus Properties Inc. and all entities owned or controlled by Stratus Properties Inc. You should read the following discussion in conjunction with our consolidated financial statements, related MD&A and discussion of our business and properties included in our Annual Report on Form 10-K for the year ended December 31, 2018 (2018 Form 10-K) filed with the United States (U.S.) Securities and Exchange Commission (SEC). The results of operations reported and summarized below are not necessarily indicative of future operating results, and future results could differ materially from those anticipated in forward-looking statements (refer to “Cautionary Statement” for further discussion). All subsequent references to “Notes” refer to Notes to Consolidated Financial Statements (Unaudited) located in Part I, Item 1. “Financial Statements” of this Form 10-Q, unless otherwise stated.

We are a diversified real estate company with headquarters in Austin, Texas. We are engaged primarily in the acquisition, entitlement, development, management, operation and sale of commercial, and multi-family and single-family residential real estate properties, real estate leasing, and the operation of hotel and entertainment businesses located in the Austin, Texas area, and other select, fast-growing markets in Texas. We generate revenues and cash flows from the sale of our developed properties, rental income from our leased properties and from our hotel and entertainment operations. See Note 9 for further discussion of our operating segments.

BUSINESS STRATEGY

Our development portfolio consists of approximately 1,800 acres of commercial, multi-family and single-family residential projects under development or undeveloped and held for future use. Our W Austin Hotel and our ACL Live and 3TEN ACL Live entertainment venues are located in downtown Austin and are central to the city's world renowned, vibrant music scene.

Our primary business objective is to create value for stockholders by methodically developing and enhancing the value of our properties and then selling them profitably. Our development program of acquiring properties, securing and maintaining development entitlements, constructing and stabilizing the properties, and then preparing them for sale or refinancing is a key element of our strategy. We currently have projects in each of these stages as described below in “Development Activities - Current Residential Activities” and “Development Activities - Current Commercial Activities.”

We believe that Austin and other select, fast-growing markets in Texas continue to be desirable locations. Many of our developments are in locations where development approvals have historically been subject to regulatory constraints, which has made it difficult to obtain entitlements. Our Austin properties, which are located in desirable areas with significant regulatory constraints, are entitled and have utility capacity for full buildout. As a result, we believe that through strategic planning, development and marketing, we can maximize and fully realize their value.

Our development plans require significant capital, which we may pursue through joint ventures or other arrangements. Our business strategy requires us to rely on cash flow from operations and debt financing as our primary sources of funding for our liquidity needs. We have also, from time to time, relied on project-level equity financing of our subsidiaries. We have formed strategic relationships as part of our overall strategy for particular development projects and may enter into other similar arrangements in the future.

~~OVERVIEW~~BUSINESS STRATEGY

~~In Management’s Discussion and Analysis~~Our development portfolio consists of Financial Condition and Results of Operations (MD&A), “we,” “us,” “our” and "Stratus" refer to Stratus Properties Inc. and all entities owned or controlled by Stratus Properties Inc. You should read the following discussion in conjunction with our consolidated financial statements, related MD&A and discussion of our business and properties included in our Annual Report on Form 10-K for the year ended December 31, 2017 (2017 Form 10-K) filed with the United States (U.S.) Securities and Exchange Commission (SEC). The results of operations reported and summarized below are not necessarily indicative of future operating results, and future results could differ materially from those anticipated in forward-looking statements (refer to “Cautionary Statement” for further discussion). All subsequent references to “Notes” refer to Notes to Consolidated Financial Statements (Unaudited) located in Part I, Item 1. “Financial Statements” of this Form 10-Q, unless otherwise stated.

~~We are a diversified real estate company engaged primarily in the acquisition, entitlement, development, management, operation and sale~~approximately 1,800 acres of commercial, ~~hotel, entertainment, and~~ multi-family and single-family residential ~~real estate properties, primarily~~projects under development or undeveloped and held for future use. Our W Austin Hotel and our ACL Live and 3TEN ACL Live entertainment venues are located in downtown Austin and are central to the ~~Austin, Texas area,~~city's world renowned, vibrant music scene.

Our primary business objective is to create value for stockholders by methodically developing and ~~also including~~enhancing the value of our properties and then selling them profitably. Our development program of acquiring properties, securing and maintaining development entitlements, constructing and stabilizing the properties, and then preparing them for sale or refinancing is a key element of our strategy. We currently have projects in ~~certain~~each of these stages as described below in “Development Activities - Current Residential Activities” and “Development Activities - Current Commercial Activities.”

We believe that Austin and other select, fast-growing markets in Texas. We generate revenues and cash flows from the sale of developed properties, rental income from our leased properties and from our hotel and entertainment operations. See Note 9 for further discussionTexas continue to be desirable locations. Many of our ~~operating segments.~~

~~Developed property sales can include an individual tract of land that~~developments are in locations where development approvals have historically been subject to regulatory constraints, which has ~~been developed~~made it difficult to obtain entitlements. Our Austin properties, which are located in desirable areas with significant regulatory constraints, are entitled and ~~permitted~~have utility capacity for ~~residential use,~~full buildout. As a developed lot with a home already built on it or condominium units at the W Austin Residences. We may sell properties under development, undeveloped properties or leased properties, if opportunities arise thatresult, we believe ~~will~~that through strategic planning, development and marketing, we can maximize ~~overall asset values~~and fully realize their value.

~~Our acreage under~~overall strategy for particular development projects and ~~undeveloped as of September 30, 2018, is presented~~may enter into other similar arrangements in the ~~following table.~~

future.

Under Development Undeveloped

Single
Family

Multi-
family
Commercial Total
Single
family
Multi-family Commercial Total
Total
Acreage
Austin:
Barton Creek 4
32
—
36
512
266
394
1,172
1,208
Circle C —
15
—
15
—
21
216
237
252
Lantana —
—
—
—
—
—
39
39
39
Other —
—
—
—
7
—
—
7
7
Lakeway —
—
—
—
35
—
—
35
35
Magnolia —
—
—
—
—
—
124
124
124
Jones Crossing —
—
—
—
—
—
48
48
48
Kingwood Place —
—
54
54
—
—
—
—
54
Camino Real, San Antonio —
—
—
—
—
—
2
2
2
Total 4
47
54
105
554
287
823
1,664
1,769

In third-quarter 2018, our revenues totaled $17.9 million and our net loss attributable to common stockholders totaled $2.4 million, compared with revenues of $17.2 million and net income attributable to common stockholders of $14.3 million for third-quarter 2017. During the first nine months of 2018, our revenues totaled $59.0 million and our net loss attributable to common stockholders totaled $5.1 million, compared with revenues of $59.3 million and net income attributable to common stockholders of $10.7 million for the first nine months of 2017.

The increase in revenues in third-quarter 2018, compared with third-quarter 2017, primarily reflects increased revenue from the Leasing Operations segment, partially offset by lower developed property sales. The decrease in revenues for the first nine months of 2018, compared with the first nine months of 2017, primarily reflects lower revenues from the Entertainment and Hotel segments, partially offset by higher revenue from the Leasing Operations segment and developed property sales.

~~The results for third-quarter 2017andthe first nine months of 2017 include a gain on the sale of assets totaling $24.3 million ($15.7 million to net income attributable to common stockholders) associated with recognition of a~~

~~Table of Contents~~

portion of the deferred gain on the sale of The Oaks at Lakeway. The results for the first nine months of 2017 also include a $2.5 million charge ($1.6 million to net income attributable to common stockholders) for profit participation costs and a $0.5 million loss ($0.3 million to net income attributable to common stockholders) on early extinguishment of debt, both related to our sale of The Oaks at Lakeway, partly offset by a $1.1 million gain ($0.7 million to net income attributable to common stockholders) on the sale of a bank building and an adjacent undeveloped 4.1 acre tract of land at Barton Creek.

At September 30, 2018, we had total debt of $293.7 million and total cash and cash equivalents of $21.2 million, compared with total debt of $221.5 million and cash and cash equivalents of $14.6 million at December 31, 2017. We have significant recurring costs, including property taxes, maintenance and marketing, and we believe we will have sufficient sources of debt financing and cash from operations to meet our cash requirements. See “Capital Resources and Liquidity” ~~below and “Risk Factors” included in Part 1, Item 1A. of our 2017 Form 10-K for further discussion.~~

BUSINESS STRATEGY

Our ~~overall strategy has been to manage~~development portfolio consists of approximately 1,800 acres of commercial, multi-family and single-family residential projects under development or undeveloped and held for future use. Our W Austin Hotel and our ~~diverse asset base of residential, commercial, hotel~~ACL Live and entertainment real estate located in the premier Austin, Texas market and in other select, fast-growing Texas markets. We enhance the value of our residential and commercial properties by securing and maintaining development entitlements and developing and building real estate projects on these properties for sale or investment. Our hotel and3TEN ACL Live entertainment venues ~~including ACL Live,~~ are located in downtown Austin and are central to the city's world renowned, vibrant music scene.

~~We are continuing our successful program~~

Our primary business objective is to create value for stockholders by methodically developing and enhancing the value of ~~actively developing~~ our properties and then selling them profitably. Our development program of acquiring properties, securing and maintaining development entitlements, constructing and stabilizing the properties, and then preparing them for sale or refinancing ~~or marketing and selling developed assets at appropriate times to maximize stockholder value. Our active development plan includes completion~~is a key element of ~~both residential and commercial projects. Our portfolio consists~~our strategy. We currently have projects in each of approximately 1,800 acres of commercial, multi-family and single-family projects under development or undeveloped and held for future use. We believe that our portfolio, along with management’s extensive experience in Austin-area real estate development, support our ability to obtain project financing and/or seek joint venture partners including for the development projectsthese stages as described below in “Development Activities - ~~Residential”~~Current Residential Activities” and “Development Activities - ~~Commercial”.~~Current Commercial Activities.”

OVERVIEW

Our developed property sales can include an individual tract of land that has been developed and permitted for residential use, a developed lot with a residence already built on it or condominium units at the W Austin Residences. We may also sell properties under development, undeveloped properties or leased properties, if opportunities arise that we believe will maximize overall asset values as part of our business strategy.

In second-quarter 2019, our revenues totaled $23.7 million and our net loss attributable to common stockholders totaled $2.4 million, compared with revenues of $23.3 million and a net loss attributable to common stockholders of $0.9 million in second-quarter 2018. During the first six months of 2019, our revenues totaled $43.4 million and our net loss attributable to common stockholders totaled $1.5 million, compared with revenues of $41.1 million and a net loss attributable to common stockholders of $2.7 million for the first six months of 2018.

Table of Contents

The increase in revenues in the second quarter and the first six months of 2019, compared to the 2018 periods, primarily reflects increased revenues associated with the commencement of leases at our recently completed properties and an increase in the number of events hosted and higher event attendance at ACL Live, partly offset by lower revenues from single-family residential property sales and the Hotel segment.

We received $4.6 million of bond proceeds in the first six months of 2019 related to Travis County municipal utility district (MUD) reimbursements of infrastructure costs incurred for development of Barton Creek. Of the total amount, we recorded $0.9 million as a reduction of real estate under development on the consolidated balance sheet, and $3.4 million as a reduction in real estate cost of sales and $0.3 million in other income, net in the consolidated statement of comprehensive loss for the first six months of 2019. The first six months of 2019 also included a gain on the sale of assets totaling $2.0 million, primarily related to the sale of a retail pad subject to a ground lease located in the Circle C community.

At June 30, 2019, we had total debt of $340.6 million and consolidated cash of $18.1 million. We have significant recurring costs, including property taxes, maintenance and marketing, and we believe we will have sufficient sources of debt financing and cash from operations to meet our cash requirements. See “Capital Resources and Liquidity” below and “Risk Factors” included in Part 1, Item 1A. of our 2018 Form 10-K for further discussion.

DEVELOPMENT ACTIVITIES

~~Residential.~~ ~~As of September 30, 2018, the number of our multi-family and single-family residential developed lots/units, lots under development and lots for potential development by area are shown below:~~

Residential Lots/Units
Developed
Under
Development

Potential Development^a
Total
Barton Creek:
Amarra Drive:
Phase II 10
—
—
10
Phase III 32
4
—
36
Amarra Villas 3
14
—
17
Other townhomes —
—
170
170
Section N multi-family:
Santal Phase I 236
—
—
236
Santal Phase II 64
148
—
212
Other Section N —
—
1,412
1,412
Other Barton Creek sections —
—
156
156
Circle C multi-family:
The Saint Mary —
240
—
240
Tract 102 —
—
56
56
Lakeway —
—
100
100
Other —
—
7
7
W Austin Residences 1
—
—
1
Total Residential Lots/Units 346
406
1,901
2,653

~~Table of Contents~~



a.	Our development of the properties identified under the heading “Potential Development” is dependent upon the approval of our development plans and permits by governmental agencies, including the City of Austin (the City) and other cities in our Texas markets. Those governmental agencies may not approve one or more development plans and permit applications related to such properties or may require us to modify our development plans. Accordingly, our development strategy with respect to those properties may change in the future. While we may be proceeding with approved infrastructure projects or planning activities for some of these properties, they are not considered to be “under development” for disclosure in this table until construction activities have begun.

Current Residential Activities.

In ~~March 2018,~~second-quarter 2019, we ~~entered into a contract to sell one Amarra Drive Phase II lot and eight~~sold four Amarra Drive Phase III lots, two of which were included in the contract discussed below, for a total of ~~$5.9~~$2.3 million, and during the first six months of 2019, we sold six Amarra Drive Phase III lots, four of which were included in the contract discussed below, for a total of $3.4 million. As of June 30, 2019, 25 developed Amarra Drive Phase III lots and 9 developed Amarra Drive Phase II lots remained unsold.

Subsequent to June 30, 2019, and through August 5, 2019, we ~~closed on the sale of the one Amarra Drive Phase II lot included in the agreement discussed above, and~~sold two Amarra Drive Phase III lots, which were subject to the homebuilder contract, for a total of ~~$2.0~~$1.3 million. ~~During the first nine months~~As of ~~2018, we sold~~August 5, 2019, two ~~Amarra Drive Phase II lots, six~~ Amarra Drive Phase III lots ~~two Amarra Villas townhomes and one W Austin Hotel Residence for a total of $10.0 million.~~

Subsequent to third-quarter 2018 and through November 8, 2018, we closed on the sale of one Amarra Villas townhome, one Amarra Drive Phase II lot and one Amarra Drive Phase III lot. As of November 8, 2018, one Amarra Drive Phase III lot waswere under contract, in addition to the remaining ~~eight~~four Amarra Drive Phase III lots subject to the ~~contract discussed above. Also as~~homebuilder contract.

The Villas at Amarra Drive (Amarra Villas) townhome project is a 20-unit development for which we completed construction of ~~November 8, 2018,~~the first seven townhomes during 2017 and 2018. In second-quarter 2019, we sold the last completed townhome for $1.8 million and during the first six months of 2019 we sold two townhomes for $3.5 million. We expect to begin construction of the next four Amarra Villas townhomes ~~were under contract, including one currently under construction,~~during third-quarter 2019.

As of June 30, 2019, Santal, a garden-style, multi-family project located in the upscale Barton Creek Community, was fully leased and ~~are expected to close later this year.~~

~~Construction of~~stabilized. The first Santal Phase II ~~a 212-unit garden style, multi-family project~~units, located directly adjacent to ~~Santal~~the Phase I ~~in the upscale, highly populated Barton Creek community is continuing to advance on schedule and on budget. The first Phase II~~ units, became available for occupancy in August 2018 and we ~~plan to substantially complete~~completed construction ~~by year-end 2018. As of September 30, 2018, 28~~ of the ~~Phase II~~remaining units ~~were leased and the 236-unit Phase I was 96 percent leased and stabilized.~~during first-quarter 2019. We ~~currently plan~~continue to ~~evaluate refinancing~~explore options to sell or refinance the combined 448-unit Santal property, ~~upon stabilization of Phase II, which is currently expected by the end of 2019,~~ subject to market ~~conditions and leasing progress.~~ conditions.

In June 2018, we obtained project financing for, and commenced construction of The Saint Mary, a 240-unit luxury garden-style apartment project in the Circle C Community. The project ~~remains~~is progressing ahead of schedule and on ~~budget,~~budget. The clubhouse and ~~the~~ first ~~units are expected to be available for~~two apartment buildings were completed in June 2019 and leasing activity has commenced. The first tenants took occupancy in ~~third-quarter 2019, with projected completion expected by the end of~~July 2019. ~~Refer~~We expect to ~~Notes 3 and 6 for further discussion.~~complete construction in fourth-quarter 2019.

For further discussion of our multi-family and single-family residential properties, ~~listed in the table above,~~ see MD&A in our ~~2017~~2018 Form 10-K.

~~Commercial.~~ As of September 30, 2018, the number of square feet of our commercial property developed, under development and our remaining entitlements for potential development (excluding property associated with our unconsolidated joint venture with Tramell Crow Central Texas Development, Inc. relating to Crestview Station in Austin, and the W Austin Hotel and ACL Live entertainment venue) are shown below:

Commercial Property
Developed Under Development
Potential Development^a
Total
(in square feet)
Barton Creek:
Barton Creek Village 22,366
—
—
22,366
Entry corner —
—
5,000
5,000
Amarra retail/office —
—
83,081
83,081
Section N —
—
1,500,000
1,500,000
Circle C —
—
674,942
674,942
Lantana:
Lantana Place 99,379
—
220,621
320,000
Tract G07 —
—
160,000
160,000
W Austin Hotel & Residences:
Office 38,316
—
—
38,316
Retail 18,327
—
—
18,327
Magnolia —
—
351,000
351,000
West Killeen Market 44,493
—
—
44,493
Jones Crossing 154,117
—
104,750
258,867
Kingwood Place —
143,767
—
143,767
Total Square Feet 376,998
143,767
3,099,394
3,620,159

Current Commercial Activities.

We have executed leases for 68 percent of the retail space at West Killeen Market as of September 30, 2018, and all tenants are currently open for business. Leasing activities for the vacant space are ongoing. We intend to explore opportunities to sell West Killeen Market in 2019 depending on leasing progress and market conditions.

Construction of ~~the retail component of Jones Crossing,~~Kingwood Place, an H-E-B, L.P., (HEB)-anchored, mixed-use development in ~~College Station,~~Kingwood, Texas, is ~~complete. We have~~progressing on schedule and on budget. As of June 30, 2019, we had signed leases for approximately 80 percent of the retail space, including the HEB ~~lease.~~grocery store. The HEB grocery store ~~opened~~is currently anticipated to open in ~~September 2018, as scheduled.~~ November 2019, and the first retail buildings are expected to be turned over to tenants to begin construction of their interior spaces in August 2019. See Note 3 for further discussion of project financing.

In ~~addition,~~March 2019, we ~~have begun preliminary planning work~~finalized the lease for the HEB store at New Caney, an HEB-anchored, mixed-use development in New Caney, Texas, and acquired HEB's interests in the partnership for approximately $5 million. We currently do not anticipate commencing construction on the ~~phased 600-unit multi-family component.~~

~~We completed construction~~New Caney project prior to 2021. See Note 6 for further discussion of the ~~99,379 square-foot~~land loan.

Construction of the first phase of Lantana Place, a mixed-use development project located in southwest Austin ~~consisting~~was completed in 2018. As of June 30, 2019, we had signed leases for approximately ~~320,000 square feet~~80 percent of the retail ~~hotel and office~~ space, ~~in third-quarter 2018. The~~including the anchor tenant, Moviehouse & Eatery, ~~opened in May 2018. We also entered into~~and a ground lease for ~~a Marriott A/C~~an AC Hotel ~~which is anticipated to commence construction~~by Marriott. Construction of the hotel began in ~~early~~May 2019. ~~We have~~

As of June 30, 2019, we had signed leases for 61approximately 90 percent of the retail space asat the first phase of ~~September 30, 2018,~~Jones Crossing, an HEB-anchored, mixed-use development located in College Station, Texas, and ~~tenant improvement work is progressing.~~

~~Occupancy of the 22,366 square-foot retail complex in Barton Creek Village was~~ approximately 70 percent as of ~~September 30, 2018, and leasing activities for~~ the ~~vacant space are ongoing. We intend to market Barton Creek Village for sale in 2019, subject to market conditions and leasing progress.~~

On August 6, 2018, we purchased a 54-acre tract of land in Kingwood, Texas to be developed as Kingwood Place, a new mixed-use development project. The Kingwood project is expected to total approximately 144,000 square feet of retail lease space, anchored by a 103,000-square-foot HEB grocery store, 41,000 square feet of retail space 6at West Killeen Market, our retail ~~pads and an 11-acre parcel planned for approximately 300 multi-family units. Site clearing is complete and construction is expected to begin~~project located in ~~November 2018 subject to closing of construction financing. The HEB grocery store is anticipated to open in third-quarter 2019. Refer to Notes 3 and 6 for further discussion.~~

~~In October 2018, Stratus, in partnership with HEB, purchased a 38-acre tract of land for approximately $9.5 million in New Caney,~~Killeen, Texas, ~~for the future development of an HEB-anchored, mixed-use project. Subject to completion of development plans, we currently expect the New Caney project will be anchored~~shadow-anchored by an HEB grocery store, and will include restaurants, retail services, and shop space, totaling approximately 145,000 square feet of retail space (inclusive of the HEB grocery store), 5 pad sites, and a 10-acre multi-family parcel. Refer to Note 11 for further discussion.store.

For further discussion of our commercial properties, ~~listed in the table above,~~ see MD&A in our ~~2017~~2018 Form 10-K.

Projects in Planning.

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; two 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 MUD. Refer to Note 1 in our 2018 Form 10-K for further discussion of this MUD and our accounting policy for MUD reimbursements. The HEB grocery store is currently expected to open by third-quarter 2020.

We are advancing the planning and permitting process for development of future phases of Barton Creek, including residential Section KLO and commercial and multi-family Section N. We have submitted initial permit applications to the City of Austin and Travis County for Section KLO and are awaiting approval, which is currently expected in late 2019 or early 2020. We have also submitted permit applications to the City of Austin and Travis County for initial road infrastructure in Section N and currently expect approval by early 2020. These potential development projects require extensive permitting and will be capital intensive and dependent on market conditions. Because of the nature and cost of the approval and development process and uncertainty regarding market demand for a particular use, there is no assurance that we will be able to develop these properties in accordance with our current development plans. In addition, our development plans for Section KLO and Section N will require significant capital, which we may pursue through joint venture, commercial, partner or other arrangements.

RESULTS OF OPERATIONS

We are continually evaluating the development and sale potential of our properties and will continue to consider opportunities to enter into transactions involving our properties, including possible joint ventures or other arrangements. As a result, and because of numerous other factors affecting our business activities as described herein and in our ~~2017~~2018 Form 10-K, our past operating results are not necessarily indicative of our future results. We use operating income or loss to measure the performance of each operating segment. Corporate, eliminations and other includes consolidated general and administrative expenses, which primarily consist of employee salaries and other costs.

The following table summarizes our results (in thousands):

Three Months Ended September 30, Nine Months Ended September 30,
2018 2017 2018 2017
Operating (loss) income:
Real estate operations $ (236 ) $ 777
$ 702
$ 1,025
Leasing operations 942
24,612
1,861
23,708
Hotel 719
231
3,745
4,070
Entertainment 314
472
1,548
2,624
Corporate, eliminations and other (2,776 ) (2,452 ) (9,022 ) (8,991 )
Operating (loss) income $ (1,037 ) $ 23,640
$ (1,166 ) $ 22,436
Interest expense, net $ (2,150 ) $ (1,577 ) $ (5,451 ) $ (5,060 )
Net (loss) income attributable to common stockholders $ (2,372 ) $ 14,308
$ (5,099 ) $ 10,745



	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Operating income (loss):
Real Estate Operations	$	274		$	1,363		$	3,120		$	938
Leasing Operations	642			487			3,063			919
Hotel	1,275			1,565			2,049			3,026
Entertainment	1,284			499			2,108			1,234
Corporate, eliminations and other	(3,048		)	(3,140		)	(6,270		)	(6,246		)
Operating income (loss)	$	427		$	774		$	4,070		$	(129	)
Interest expense, net	$	(2,911	)	$	(1,742	)	$	(5,483	)	$	(3,301	)
Net loss attributable to common stockholders	$	(2,389	)	$	(857	)	$	(1,527	)	$	(2,727	)

Real Estate Operations

The following table summarizes our Real Estate Operations results (in thousands):

Three Months Ended September 30, Nine Months Ended September 30,
2018 2017 2018 2017
Revenues:
Developed property sales $ 2,025
$ 2,860
$ 10,036
$ 8,436
Undeveloped property sales —
—
—
544
Commissions and other 83
178
261
264
Total revenues 2,108
3,038
10,297
9,244
Cost of sales, including depreciation 2,344
2,261
9,595
^a
8,219
Operating (loss) income $ (236 ) $ 777
$ 702
$ 1,025



	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
Revenues:
Developed property sales	$	4,048	$	6,856	$	6,882	$	8,011
Commissions and other	85		131		204		178
Total revenues	4,133		6,987		7,086		8,189
Cost of sales, including depreciation	3,859		5,624		3,966		7,251
Operating income	$	274	$	1,363	$	3,120	$	938

Three Months Ended September 30,
2018 2017
Lots/Units Revenues Average Cost Per Lot/Unit Lots Revenues Average Cost Per Lot/Unit
Barton Creek
Amarra Drive:
Phase II 1
$ 670
$ 211
1
$ 560
$ 193
Phase III 2
1,355
289
2
1,475
316

Circle C
Meridian —
—
—
3
825
156

Total Residential 3
$ 2,025
6
$ 2,860



	Six Months Ended June 30,
	2019					2018
	Lots/Units	Revenues		Average Cost Per Lot/Unit		Lots/Units	Revenues		Average Cost Per Lot/Unit
Barton Creek
Amarra Drive:
Phase II	—	$	—	$	—	1	$	605	$	209
Phase III	6	3,432		229		4	2,445		263
Amarra Villas	2	3,450		1,607		2	3,821		1,670

W Austin Hotel & Residences Project
Condominium Units	—	—		—		1	1,140		726
Total Residential	8	$	6,882			8	$	8,011

~~Real Estate Revenue and Operating (Loss) Income.~~ ~~Revenue and operating income from our Real Estate Operations segment decreased in third-quarter 2018, compared with third-quarter 2017, primarily as a result~~

The following table summarizes our Leasing Operations results (in thousands):

Rental Revenue. Rental revenue ~~for 2018~~ primarily includes revenue from Santal Phase I and Phase II, the office and retail space at the W Austin Hotel & Residences, West Killeen Market, Lantana Place, Jones Crossing and ~~retail space at~~ Barton Creek Village. Rental revenue for 2017 primarily included revenue from Santal Phase I, the office and retail space at the W Austin Hotel & Residences, retail space at Barton Creek Village, and The Oaks at Lakeway prior to its sale in February 2017. The increase in rental revenue in third-quarter 2018, compared with third-quarter 2017, primarily reflects activity at our recently completed retail properties, Lantana Place, Jones Crossing and West Killeen Market. The increase in rental revenue for the ~~first nine months of 2018,~~2019 periods, compared with the ~~first nine months of 2017,~~2018 periods, primarily reflects ~~activity~~the commencement of new leases at Santal Phase II, Lantana Place ~~West Killeen Market, Santal Phase I~~ and Jones ~~Crossing, partially offset by the sale of The Oaks at Lakeway.~~Crossing.

The following table summarizes our Hotel results (in thousands):

While we remain ~~positive on~~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 ~~remainder~~second half of ~~2018~~2019 and ~~2019 is~~throughout 2020 are expected to have an ongoing impact on our hotel revenues.

We continue to explore various opportunities with respect to Block 21, our mixed-use development in downtown Austin, Texas, that contains the W Austin Hotel & Residences and office, retail and entertainment space, which may include, but are not limited to, a possible sale, recapitalization or other venture. Any transaction is subject to market conditions and there can be no assurance that any transaction will be pursued or consummated.

The following table summarizes our Entertainment results (in thousands):

Entertainment Revenue. Entertainment revenue primarily reflects the results of operations for ACL Live, including ticket sales, revenue from private events, sponsorships, personal seat license ~~sales~~ and suite sales, and sales of concessions and merchandise. Entertainment revenue also reflects revenues associated with events hosted at ~~venues other than ACL Live, including~~ 3TEN ACL Live. Revenues from the Entertainment segment ~~will~~ vary from period to period as a result of factors such as the price of tickets and number of tickets sold, as well as the number and type of events hosted at ACL Live and 3TEN ACL Live. ~~The increase~~Entertainment revenues increased in ~~Entertainment revenue in third-quarter~~the 2019 periods, compared to the 2018 ~~compared with third-quarter 2017,~~periods, primarily ~~reflects higher ticket prices at ACL Live and~~as a result of an increase in ~~revenue from sponsorships and sales~~the number of ~~suites and personal seat licenses. The decrease in Entertainment revenue for the first nine months of 2018, compared with the first nine months of 2017, primarily reflects fewer~~ events hosted and ~~lower~~higher event ~~attendance.~~attendance at ACL Live.

Certain key operating statistics specific to the concert and event hosting industry are included below to provide additional information regarding our ACL Live and 3TEN ACL Live operating performance.

Entertainment Cost of Sales. Entertainment cost of sales, excluding depreciation, totaled ~~$4.2~~$4.6 million in second-quarter 2019 and $8.2 million for ~~third-quarter~~the first six months of 2019, compared to $3.6 million in second-quarter 2018 ~~compared with $3.8~~and $7.7 millionfor ~~third-quarter 2017,~~the first six months of 2018, primarily ~~reflects an increase~~reflecting substantial increases in the number of events ~~hosted. Entertainment cost of sales, excluding depreciation, totaled $11.9 million~~at ACL Live (53 percent increase for the ~~first nine months of 2018~~, ~~compared with $12.8 million~~quarterly period and 30 percent increase for the ~~first nine months~~six-month period).

Corporate, Eliminations and Other

Corporate, eliminations and other (see Note 9) includes consolidated general and administrative expenses, which primarily consist of employee salaries and other costs. Consolidated general and administrative expenses totaled ~~$2.7~~$2.9 million ~~for third-quarter 2018~~ in second-quarter 2019and ~~$8.6~~$6.1 million for the first ~~nine~~six months of ~~2018,~~2019, compared with ~~$2.2~~$3.0 million ~~for third-quarter 2017~~ insecond-quarter 2018and ~~$8.5~~$6.0 million for the first ~~nine~~six months of ~~2017. The increase in general and administrative expenses in third-quarter 2018, compared to third-quarter 2017, primarily reflects increases in compensation and legal fees.~~2018. Corporate, eliminations and other also includes eliminations of intersegment amounts incurred by the four operating segments.

Non-Operating Results

Interest Expense, Net. Interest costs (before capitalized interest) of ~~$4.3~~$5.1 million ~~for third-quarter 2018~~ in second-quarter 2019and ~~$11.4~~$9.7 million for the first ~~nine~~six months of ~~2018~~2019 were higher, compared with ~~$3.1~~$3.8 million ~~for third-quarter 2017~~in second-quarter 2018 and ~~$9.3~~$7.2 million for the first ~~nine~~six months of ~~2017,~~2018, primarily reflecting higher average debt ~~balances.~~to finance development activities.

Capitalized interest totaled $2.1 million ~~for third-quarter 2018~~in second-quarter 2019 and ~~$6.0 millionfor the first nine months of 2018~~, ~~compared with$1.5 million for third-quarter 2017 and $4.3~~$4.2 million for the first ~~nine~~six months of ~~2017,~~2019, compared with $2.0 million in second-quarter 2018 and $3.9 million for the first six months of 2018, and is primarily related to development activities at Barton Creek.

~~Gain on Interest Rate Derivative Instruments.~~ ~~We recorded gains of $0.1 million for third-quarter 2018 and $0.3 million for the first nine months of 2018, compared with $0.1 million for third-quarter 2017 and the first nine months of 2017,~~ The 2019 periods also included capitalized interest costs associated with ~~changes in the fair values of our interest rate derivative instruments.~~development activities at Kingwood Place.

~~Loss on Early Extinguishment of Debt.~~ ~~We recorded losses on early extinguishment of debt of $0.5 million for the first nine months of 2017 associated with the repayment of The Oaks at Lakeway loan.~~

~~Equity in Unconsolidated Affiliates' Income (Loss).~~ We account for our interests in our unconsolidated affiliates, primarily Crestview Station, using the equity method. Our equity in the net income (loss) of these entities totaled $210 thousand for third-quarter 2018 and $204 thousand for the first nine months of 2018, compared with $(5) thousand for third-quarter 2017 and $(24) thousand for the first nine months of 2017. The increase in the third-quarter and first nine months of 2018 reflects profit from the sale of Crestview's last tract of land in July 2018.

Benefit from (Provision for) Income Taxes. We recorded a benefit from (provision for) income taxes of ~~$0.5~~$0.2 million for ~~third-quarter 2018~~second-quarter 2019 and ~~$1.0~~$(0.2) million for the first ~~nine~~six months of ~~2018,~~2019, compared with a ~~provision~~benefit of ~~$(7.8)~~less than $0.1 million~~for third-quarter 2017~~ in second-quarter 2018 and~~$(6.2)~~ $0.4 million for the first ~~nine~~six months of ~~2017. Both the 2018 and 2017 periods also include the Texas state margin tax.~~2018. The difference between Stratus' consolidated effective income tax rate for the first six months of 2019 and the U.S. Federal statutory income tax rate of 21 percent, ~~for 2018 and 35 percent for 2017 is~~was primarily attributable to the Texas state margin ~~tax. We had deferred~~ tax ~~assets (net~~and the Tax Cuts and Jobs Act's executive compensation limitation. The difference between Stratus' consolidated effective income tax rate for the first six months of ~~deferred~~2018 and the U.S. Federal statutory income tax ~~liabilities) totaling $12.5 million at September 30, 2018~~, ~~and$11.5 million at December 31, 2017.~~rate of 21 percent, was primarily attributable to the Texas state margin tax.

CAPITAL RESOURCES AND LIQUIDITY

Volatility in the real estate market, including the markets in which we operate, can impact sales of our properties from period to period. However, we believe that the nature and location of our assets will provide us positive cash flows over time.

Comparison of Cash Flows for the ~~Nine~~Six Months Ended ~~September~~June 30, ~~2018~~2019 and ~~2017~~2018

Operating Activities. Cash used in operating activities totaled ~~$26.6~~$1.6 million for the first ~~nine~~six months of ~~2018,~~2019, compared with ~~$12.9~~$8.7 million for the first ~~nine~~six months of ~~2017.~~2018. Expenditures for purchases and development of real estate properties totaled ~~$28.9~~$5.8 million for the first ~~nine~~six months of ~~2018, compared with $11.2~~2019 and $7.7 million for the first ~~nine~~six months of ~~2017. The increase~~2018, primarily related to development of our Barton Creek properties. During the first six months of 2019, our operating cash flows included MUD reimbursements totaling $4.6 million related to infrastructure costs incurred in Barton Creek (of which $3.7 million reduced the ~~2018~~net loss for the period and $0.9 million was applied to real estate under development).

Investing Activities. Cash used in investing activities totaled $47.2 million for the first six months of 2019 and $44.0 million for the first six months of 2018. Capital expenditures totaled $45.0 million for the first six months of 2019, primarily ~~reflects the purchase~~related to development of the Kingwood Place ~~land.~~

~~We have received MUD reimbursements relating to substantially all of the infrastructure costs incurred to date in Barton Creek, including $2.2~~and The Saint Mary projects, and $43.0 million received in the first nine months of 2017. In November 2017, the city of Magnolia and the state of Texas approved the creation of a MUD, which will provide an opportunity for us to recoup approximately $26 million over the life of the project for future road and utility infrastructure costs incurred in connection with our development of the Magnolia project.

~~Investing Activities.~~ ~~Cash (used in) provided by investing activities totaled $(54.6) million~~ for the first ~~nine months of 2018, compared with $101.2 million for the first nine months of 2017. Capital expenditures totaled $53.5 million for the first nine~~six months of 2018, primarily related to development of the Santal Phase II, Lantana Place ~~Jones Crossing and The Saint Mary projects, and $14.4 millionfor the first nine months of 2017, primarily related to development of the Lantana Place, West Killeen Market~~ and Jones Crossing projects. ~~The first nine months of 2017 included $117.3 million in proceeds from the sales of The Oaks at Lakeway and a bank building and an adjacent undeveloped 4.1 acre tract of land in Barton Creek.~~

~~Stratus~~We also made payments totaling $0.8 million for the first six months of 2019 and $0.9 million for the first six months of 2018 under ~~its~~our master lease obligations associated with the 2017 sale of The Oaks at ~~Lakeway~~Lakeway.

We recorded a purchase of noncontrolling interest totaling ~~$1.5~~$4.6 million for the first ~~nine~~six months of ~~2018~~2019 as a result of our acquisition of HEB's interests in the New Caney partnership in which we and ~~$1.7~~HEB collectively purchased a tract of land for the future development of an HEB-anchored mixed-use project in New Caney, Texas.

Financing Activities. Cash provided by financing activities totaled $43.5 million for the first ~~nine~~six months of ~~2017.~~

~~Financing Activities.~~ ~~Cash provided by (used in) financing activities totaled $88.9~~2019 and $50.6 million for the first ~~nine~~six months of ~~2018, compared with $(73.9) million for the first nine months of 2017.~~2018. During the first ~~nine~~six months of ~~2018,~~2019, net ~~borrowings~~repayments on the Comerica Bank credit facility totaled ~~$26.3~~$1.6 million, compared with net ~~repayments~~borrowings of ~~$8.5~~$18.1 million for the first ~~nine~~six months of ~~2017. Net borrowings for the first nine months of~~ 2018, ~~were used~~ primarily to fund development projects and capital expenditures. Net ~~repayments in the first nine months of 2017 were primarily from the proceeds from the sale of the Oaks at Lakeway after repaying the related term loan. Net~~ borrowings on other project and term loans totaled ~~$46.3~~$45.4 million for the first ~~nine~~six months of 2019, primarily for The Saint Mary, Kingwood Place, Jones Crossing and New Caney, compared with net borrowings of $26.7 million for the first six months of 2018, primarily ~~for the Santal Phase II,~~

for Lantana Place, Jones Crossing and ~~Jones Crossings projects, compared with net repayments of $55.5 million for the~~Santal Phase II. The first ~~nine~~six months of ~~2017, primarily for~~2018 also include $7.0 million of capital contributions from the Class B limited partners in The ~~Oaks at Lakeway term loan.~~Saint Mary limited partnership (see Note 3). See ~~also~~ “Credit Facility and Other Financing Arrangements” below for a discussion of our outstanding debt at ~~September~~June 30, ~~2018. The first nine months of 2018 also included $17.7 million of capital contributions from the Class B limited partners in the Kingwood Place and Saint Mary limited partnerships (see Note 3).~~

On March 15, 2017, we announced that our Board, after receiving written consent from Comerica Bank, declared a special cash dividend of $1.00 per share, which was paid on April 18, 2017, to stockholders of record on March 31, 2017. The special cash dividend was declared after the Board’s consideration of the results of the sale of The Oaks at Lakeway. The declaration of future dividends is at the discretion of our Board subject to the restrictions contained in our Comerica credit facility, which prohibit us from paying a dividend on our common stock without the bank's written consent. Comerica's approval of the special dividend declared in March 2017 is not indicative of the bank's willingness to approve future dividends.2019.

Credit Facility and Other Financing Arrangements

At ~~September~~June 30, ~~2018, we had~~2019, the total principal amount of our outstanding debt ~~based on the principal amounts outstanding of $296.2~~was $343.8 million, compared with ~~$223.6~~$298.4 million at December 31, ~~2017. The principal amounts~~2018. We had borrowings of ~~our debt outstanding at September 30, 2018, consisted of the following:~~

~~$32.8 million under the construction loan with Comerica Bank to fund Phase I~~See Note 5 in our 2018 Form 10-K for further discussion of ~~the multi-family development in Section N of Barton Creek (the Santal Phase I loan).~~

Several of our financing instruments contain customary financial covenants. The ~~Santal Phase I and Phase II loans, the Amarra Villas credit facility and the~~ West Killeen Market construction loan ~~include~~includes a requirement that we maintain a minimum total stockholders’ equity balance of $110.0 million. As of ~~September~~June 30, ~~2018,~~2019, Stratus' total stockholders' equity was ~~$122.6~~$122.4 million. The Comerica credit facility, the Goldman Sachs loan, the Lantana Place construction loan, the Jones Crossing construction loan, The Saint Mary construction loan, the Santal Phase I and Phase II construction loans, the Amarra Villas credit facility, the Kingwood Place loan and the New Caney land loan include a requirement that we maintain a net asset value, as defined in the agreements, of $125 million. The Comerica credit facility, the Santal Phase I and Phase II construction loans, the Amarra Villas credit facility and the Kingwood Place construction loan also include a requirement that we maintain a promissory note debt-to-gross asset value, as defined in the agreement, of less than 50 percent. In addition, our Comerica Bank credit facility and the Amarra Villas credit facility require Comerica's prior written consent ~~is required~~ for any common stock repurchases in excess of $1.0 million in aggregate or dividend payments. Our Barton Creek Village term loan includes a requirement that Stratus' subsidiary maintain a minimum debt service coverage ratio, as defined in the agreement, of 1.35 to 1.00. As of December 31, 2018, and June 30, 2019, the subsidiary's minimum debt service coverage ratio calculated in accordance with the Barton Creek Village term loan agreement was not in compliance with this requirement. PlainsCapital Bank waived the subsidiary's obligation to comply with the minimum debt service coverage ratio from December 31, 2018, through September 30, ~~2018,~~2019. As of June 30, 2019, Stratus was in compliance with all other financial covenants.

Stratus Kingwood Place, L.P. has secured a commitment to modify its loan agreement with Comerica Bank to increase the original commitment from $6.75 million to $32.9 million, guaranteed by us, to finance a portion of the construction of Kingwood Place. The loan modification is expected to close in November 2018.

~~See Note 6 in our 2017 Form 10-K for further discussion of our outstanding debt.~~

Comerica Bank credit facility^a

Santal Phase I loan^b

Santal Phase II loan^b

Kingwood Place construction loan^b

New Caney land loan^c

CONTRACTUAL OBLIGATIONS

There have been no material changes in our contractual obligations since December 31, ~~2017.~~2018. Refer to Part II, Items 7. and 7A. in our ~~2017~~2018 Form 10-K, for further information regarding our contractual obligations.

NEW ACCOUNTING STANDARDS

Refer to Note 10 for discussion of a recently adopted accounting standards update.

OFF-BALANCE SHEET ARRANGEMENTS

There have been no material changes in our off-balance sheet arrangements since December 31, ~~2017.~~2018. See Note 98 in our ~~2017~~2018 Form 10-K for further information.

CAUTIONARY STATEMENT

MD&A contains forward-looking statements in which we discuss factors we believe may affect our future performance. Forward-looking statements are all statements other than statements of historical ~~facts,~~fact, such as statements regarding ~~the implementation,~~ projections or expectations related to the ~~future~~planning, financing, development, construction, completion and ~~completion~~stabilization of our development projects, ~~and potential results of our active development plan, projections~~plans to sell or ~~expectations related to operational and financial performance or liquidity, reimbursements for infrastructure costs, financing and regulatory matters, development plans and sales of~~refinance properties ~~including,~~(including, but not limited to, Amarra Drive lots, ~~and~~Amarra Villas townhomes, ~~exploring opportunities to sell~~ West Killeen Market, ~~and~~ the retail ~~complex in~~building at Barton Creek Village, ~~evaluating refinancing of~~The Saint Mary, Santal ~~Phase I~~ and ~~II,~~Block 21), operational and financial performance, expectations regarding future cash flows, MUD reimbursements for infrastructure costs, regulatory matters, leasing activities, estimated costs and timeframes for ~~development, capital~~ expenditures, financing plans, possible joint venture, partnership, strategic relationships or other relationships or other arrangements, our projections with respect to our obligations under the master lease agreements entered into in connection with the sale of The Oaks at Lakeway in 2017, ~~and~~ other plans and objectives of management for future operations and ~~activities, and~~development projects, future dividend ~~payments.~~payments and share repurchases. The words “anticipate,” “may,” “can,” “plan,” “believe,” “potential,” “estimate,” “expect,” “project,” "target," “intend,” “likely,” “will,” “should,” “to be” and any similar expressions and/or statements that are not historical facts are intended to identify those assertions as forward-looking statements. ~~Nothing contained in MD&A should be construed as an offer to sell or the solicitation of an offer to buy any securities.~~

Under our loan ~~agreement~~agreements with Comerica Bank, we are not permitted to pay dividends on common stock without ~~Comerica’s~~Comerica Bank’s prior written consent. The declaration of dividends is at the discretion of our Board, ~~of Directors (Board),~~ subject to restrictions under our loan ~~agreement~~agreements with Comerica Bank,

and will depend on our financial results, cash requirements, projected compliance with covenants in our debt agreements, outlook and other factors deemed relevant by the Board.

We caution readers that forward-looking statements are not guarantees of future performance and actual results may differ materially from those anticipated, expected, projected or assumed in the forward-looking statements. Important factors that can cause our actual results to differ materially from those anticipated in the forward-looking statements include, but are not limited to, our ability to refinance and service our debt, ~~and~~ the availability and terms of financing for development projects and other corporate purposes, our ability to enter into and maintain joint venture, partnership, strategic relationships or other arrangements, our ability to effect our business strategy, including our ability to sell properties at prices our Board considers acceptable, market conditions or corporate developments that could preclude, impair or delay any opportunities with respect to plans to sell or refinance properties (including, but not limited to, Amarra Drive lots, Amarra Villas townhomes, West Killeen Market, the retail building at Barton Creek Village, the Saint Mary, Santal and Block 21), our ability to obtain various entitlements and permits, a decrease in the demand for real estate in the Austin, Texas area and other select markets in Texas ~~markets~~ where we operate, changes in economic, market and business conditions, reductions in discretionary spending by consumers and corporations, competition from other real estate developers, hotel operators and/or entertainment venue operators and promoters, challenges associated with booking events and selling tickets and event cancellations at our entertainment venues, the termination of sales contracts or letters of intent ~~due to,~~because of, among other factors, the failure of one or more closing conditions or market changes, ~~the failure to attract customers for our developments or such customers' failure to satisfy their purchase commitments,~~ our ability to secure qualifying tenants for the space subject to the master lease agreements entered into in connection with the sale of The Oaks at Lakeway in 2017 and to assign such leases to the purchaser and remove the corresponding property from the master leases, the failure to attract customers or tenants for ~~its~~our developments or such ~~customers’~~customers' or tenants' failure to satisfy their purchase commitments or leasing obligations, increases in interest rates and the phase out of the London Interbank Offered Rate, declines in the market value of our assets, increases in operating costs, including real estate taxes and the cost of ~~construction~~building materials and labor, changes in external perception of the W Austin Hotel, unanticipated issues experienced by the third-party operator of the W Austin Hotel, changes in consumer preferences, industry risks, changes in laws, regulations or the regulatory environment affecting the development of real estate, opposition from special interest groups or local governments with respect to development projects, weather-related risks, loss of key personnel, cybersecurity incidents and other factors described in more detail under the heading “Risk Factors” in Part I, Item 1A. of our ~~2017~~2018 Form 10-K. ~~In addition, forward-looking statements and estimates regarding the effects~~

Investors are cautioned that many of the assumptions upon which our forward-looking statements are based are likely to change after the forward-looking statements are made. Further, we may make changes to our business plans that could affect our results. We caution investors that we do not intend to update our forward-looking statements more frequently than quarterly notwithstanding any changes in our assumptions, business plans, actual experience, or other changes, and we undertake no obligation to update any forward-looking statements.

We derive our revenue from the acquisition, entitlement, development, management, operation and sale of our commercial, hotel, entertainment and multi-family and single-family residential real estate properties. Our results of operations can vary significantly with fluctuations in the market prices of real estate, which are influenced by numerous factors, including interest rate levels. Changes in interest rates also affect interest expense on our debt.Not applicable.

At September 30, 2018, $148.1 million of the $296.2 million principal amount of debt outstanding bears interest at variable rates. An increase of 100 basis points in annual interest rates for this variable-rate debt would increase our annual interest costs by $1.5 million.

There have been no material changes in our market risks since December 31, 2017. For additional information on our market risks, refer to “Disclosures About Market Risks” included in Part II, Items 7. and 7A. of our 2017 Form 10-K.

PART II. OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

There were no unregistered sales of equity securities during the three months ended ~~September~~June 30, ~~2018.~~2019.

In November 2013, our Board of Directors approved an increase in our open-market share purchase program from 0.7 million shares to 1.7 million shares of our common stock. There were no purchases under this program in ~~third~~second quarter

~~2018.~~2019. As of ~~September~~June 30, ~~2018,~~2019, a total of 991,695 shares of our common stock remain available for repurchase under this program. The program does not have an expiration date.

Our Comerica Bank credit facility ~~requires~~and Amarra Villas credit facility require lender approval of ~~any~~ common stock ~~repurchases.~~repurchases in excess of $1.0 million in the aggregate.

For a discussion of ~~limitations~~restrictions on our ability to pay dividends, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Capital Resources and Liquidity" in Part I, Item 2. of this quarterly report on Form 10-Q.



			Incorporated by Reference
Exhibit Number	Exhibit Title	Filed with this Form 10-Q	Form	File No.	Date Filed

2.1	Agreement of Sale and Purchase, dated February 15, 2017, between Stratus Lakeway Center, LLC and FHF I Oaks at Lakeway, LLC.		8-K	001-37716	2/21/2017

3.1	Composite Certificate of Incorporation of Stratus Properties Inc.		8-A/A	000-19989	8/26/2010

3.2	Second Amended and Restated By-Laws of Stratus Properties Inc., as amended effective August 3, 2017.		10-Q	001-37716	8/9/2017

Incorporated by Reference

Exhibit

Number

Exhibit Title

Filed with this Form 10-Q

Form

File No.

Date Filed

4.1

Investor Rights Agreement by and between Stratus Properties Inc. and Moffett Holdings, LLC dated as of March 15, 2012.

8-K

000-19989

3/20/2012

4.2

Assignment and Assumption Agreement by and among Moffett Holdings, LLC, LCHM Holdings, LLC and Stratus Properties Inc., dated as of March 3, 2014.

13D

000-19989

3/5/2014

~~10.1~~10.1*

~~Amended and Restated Limited Partnership Agreement~~Form of ~~Stratus Kingwood Place, L.P. entered into by and among Stratus Northpark, L.L.C.,~~Notice of Grant of Restricted Stock Units under the Stratus Properties ~~Operating Co., L.P., and several Class B Limited Partners.~~Inc. 2017 Stock Incentive Plan (adopted May 2019).

10-Q

~~001-37716~~000-19989

~~8/9/2018~~5/10/2019

10.2*10.2

~~Stratus Properties Inc. Profit Participation Incentive Plan~~Third Modification Agreement by and ~~Form of Award Notice.~~

between Santal I, L.L.C., as borrower, and Comerica Bank, as lender, dated April 23, 2019

~~10-Q~~

~~001-37716~~

~~8/9/2018~~

31.1

Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a).

31.2

Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a).

32.1

Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350.

32.2

Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350.

101.INS

XBRL Instance ~~Document.~~Document - the XBRL Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH

Inline XBRL Taxonomy Extension Schema.

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase.

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase.

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase.

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase.

_______________________

* Indicates management contract or compensatory plan or arrangement.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

STRATUS PROPERTIES INC.

By: /s/ Erin D. Pickens

----------------------------------------

		~~For the quarterly period ended September 30, 2018~~
	or
~~[ ]~~☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934
	~~For the transition period from to~~
	~~Commission File Number: 001-37716~~



Delaware		72-1211572
(State or other jurisdiction of ~~incorporation or organization)~~		(I.R.S. Employer Identification No.)
incorporation or organization)



STRATUS PROPERTIES INC.
TABLE OF CONTENTS


	Page

Part I. Financial Information	2

Item 1. Financial Statements	2

Consolidated Balance Sheets (Unaudited)	2

Consolidated Statements of Comprehensive ~~(Loss) Income~~Loss (Unaudited)	3

Consolidated Statements of Cash Flows (Unaudited)	4

Consolidated Statements of Equity (Unaudited)	5

Notes to Consolidated Financial Statements (Unaudited)	7

Item 2. Management’s Discussion and Analysis of Financial Condition
and Results of Operations	1614

Item 3. Quantitative and Qualitative Disclosures About Market Risk	2823

Item 4. Controls and Procedures	2823

Part II. Other Information	2823

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	2823

Item 6. Exhibits	2823

Signature	S-1


	September 30, 2018			December 31, 2017			June 30, 2019			December 31, 2018
ASSETS
Cash and cash equivalents	$	21,182		$	14,611		$	18,073		$	19,004
Restricted cash	25,910			24,779			15,566			19,915
Real estate held for sale	18,980			22,612			17,897			16,396
Real estate under development	136,645			118,484			142,854			136,678
Land available for development	23,947			14,804			37,787			24,054
Real estate held for investment, net	234,796			188,390			272,274			253,074
Lease right-of-use assets							11,692			—
Deferred tax assets	12,542			11,461			11,873			11,834
Other assets	14,054			10,852			14,715			15,538
Total assets	$	488,056		$	405,993		$	542,731		$	496,493

LIABILITIES AND EQUITY
Liabilities:
Accounts payable	$	20,976		$	22,809		$	16,461		$	20,602
Accrued liabilities, including taxes	10,428			13,429			9,239			11,914
Debt	293,739			221,470			340,622			295,531
Lease liabilities							12,381			—
Deferred gain	9,926			11,320			8,647			9,270
Other liabilities	12,620			9,575			14,869			12,525
Total liabilities	347,689			278,603			402,219			349,842

Commitments and contingencies

Equity:
Stockholders’ equity:
Common stock	93			93			93			93
Capital in excess of par value of common stock	186,024			185,395			186,334			186,256
Accumulated deficit	(42,220		)	(37,121		)	(42,630		)	(41,103		)
Common stock held in treasury	(21,260		)	(21,057		)	(21,360		)	(21,260		)
Total stockholders’ equity	122,637			127,310			122,437			123,986
Noncontrolling interests in subsidiaries	17,730			80			18,075			22,665
Total equity	140,367			127,390			140,512			146,651
Total liabilities and equity	$	488,056		$	405,993		$	542,731		$	496,493


	Nine Months Ended						Six Months Ended
	September 30,						June 30,
	2018			2017			2019			2018
Cash flow from operating activities:
Net (loss) income	$	(5,099	)	$	10,753
Adjustments to reconcile net (loss) income to net cash used in operating activities:
Net loss							$	(1,528	)	$	(2,727	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation	6,166			5,923			5,333			3,995
Cost of real estate sold	5,780			5,086			4,324			5,053
Gain on sale of assets	—			(25,421		)	(1,952		)	—
Gain on interest rate derivative contracts	(314		)	(136		)
Loss (gain) on interest rate derivative contracts							182			(258		)
Loss on early extinguishment of debt	—			532			16			—
Debt issuance cost amortization and stock-based compensation	1,389			1,227
Equity in unconsolidated affiliates' (income) loss	(204		)	24
Increase (decrease) in deposits	1,242			(145		)
Amortization of debt issuance costs and stock-based compensation							546			791
Equity in unconsolidated affiliates' loss							13			6
Increase in deposits							185			588
Deferred income taxes	(1,081		)	(1,264		)	(38		)	(653		)
Purchases and development of real estate properties	(28,900		)	(11,196		)	(5,756		)	(7,699		)
Municipal utility district reimbursement	—			2,172
Municipal utility district reimbursements applied to real estate under development							920			—
Increase in other assets	(2,965		)	(160		)	(1,636		)	(2,297		)
Decrease in accounts payable, accrued liabilities and other	(2,607		)	(320		)	(2,187		)	(5,505		)
Net cash used in operating activities	(26,593		)	(12,925		)	(1,578		)	(8,706		)

Cash flow from investing activities:
Capital expenditures	(53,468		)	(14,363		)	(44,990		)	(42,982		)
Proceeds from sale of assets	—			117,261			3,170			—
Payments on master lease obligations	(1,476		)	(1,653		)	(766		)	(932		)
Purchase of noncontrolling interest in consolidated subsidiary							(4,589		)	—
Other, net	378			(49		)	(4		)	(87		)
Net cash (used in) provided by investing activities	(54,566		)	101,196
Net cash used in investing activities							(47,179		)	(44,001		)

Cash flow from financing activities:
Borrowings from credit facility	32,436			45,200			14,086			22,336
Payments on credit facility	(6,112		)	(53,651		)	(15,648		)	(4,225		)
Borrowings from project loans	50,062			8,725			51,006			29,948
Payments on project and term loans	(3,799		)	(64,228		)	(5,619		)	(3,266		)
Cash dividend paid	—			(8,133		)
Cash dividend paid for stock-based awards							(17		)	—
Stock-based awards net payments	(203		)	(234		)	(100		)	(203		)
Noncontrolling interests contributions	17,650			—
Noncontrolling interests' contributions							—			7,000
Financing costs	(1,173		)	(1,536		)	(231		)	(976		)
Net cash provided by (used in) financing activities	88,861			(73,857		)
Net increase in cash, cash equivalents and restricted cash	7,702			14,414
Net cash provided by financing activities							43,477			50,614
Net decrease in cash, cash equivalents and restricted cash							(5,280		)	(2,093		)
Cash, cash equivalents and restricted cash at beginning of year	39,390			25,489			38,919			39,390
Cash, cash equivalents and restricted cash at end of period	$	47,092		$	39,903		$	33,639		$	37,297


	Three Months Ended						Nine Months Ended						Three Months Ended						Six Months Ended
	September 30,						September 30,						June 30,						June 30,
	2018			2017			2018			2017			2019			2018			2019			2018
Revenues:
Real estate operations	$	2,100		2,923			$	10,273		$	9,108		$	4,129		$	6,979		$	7,077		$	8,173
Leasing operations	2,813			1,923			7,148			6,015			4,413			2,331			8,042			4,335
Hotel	8,172			7,738			27,087			27,817			8,962			9,593			17,287			18,915
Entertainment	4,838			4,638			14,490			16,375			6,220			4,407			11,016			9,652
Total revenues	17,923			17,222			58,998			59,315			23,724			23,310			43,422			41,075
Cost of sales:
Real estate operations	2,279			2,204			9,405			8,048			3,795			5,560			3,841			7,126
Leasing operations	1,227			1,091			3,732			3,749			2,447			1,323			4,586			2,505
Hotel	6,625			6,676			20,803			21,277			6,831			7,149			13,506			14,178
Entertainment	4,008			3,666			11,412			12,298			4,441			3,436			7,920			7,404
Depreciation	2,171			2,031			6,166			5,928			2,703			2,053			5,333			3,995
Total cost of sales	16,310			15,668			51,518			51,300			20,217			19,521			35,186			35,208
General and administrative expenses	2,650			2,220			8,646			8,462			2,919			3,015			6,118			5,996
Profit participation in sale of The Oaks at Lakeway	—			—			—			2,538
Gain on sale of assets	—			(24,306		)	—			(25,421		)
Loss (gain) on sale of assets													161			—			(1,952		)	—
Total	18,960			(6,418		)	60,164			36,879			23,297			22,536			39,352			41,204
Operating (loss) income	(1,037		)	23,640			(1,166		)	22,436
Operating income (loss)													427			774			4,070			(129		)
Interest expense, net	(2,150		)	(1,577		)	(5,451		)	(5,060		)	(2,911		)	(1,742		)	(5,483		)	(3,301		)
Gain on interest rate derivative instruments	56			54			314			136
(Loss) gain on interest rate derivative instruments													(123		)	80			(182		)	258
Loss on early extinguishment of debt	—			—			—			(532		)	—			—			(16		)	—
Other income, net	17			6			39			24			12			11			311			22
(Loss) income before income taxes and equity in unconsolidated affiliates' income (loss)	(3,114		)	22,123			(6,264		)	17,004
Equity in unconsolidated affiliates' income (loss)	210			(5		)	204			(24		)
Loss before income taxes and equity in unconsolidated affiliates' loss													(2,595		)	(877		)	(1,300		)	(3,150		)
Equity in unconsolidated affiliates' loss													(13		)	(3		)	(13		)	(6		)
Benefit from (provision for) income taxes	532			(7,810		)	961			(6,227		)	218			23			(215		)	429
Net (loss) income and total comprehensive (loss) income	(2,372		)	14,308			(5,099		)	10,753
Total comprehensive income attributable to noncontrolling interests in subsidiaries	—			—			—			(8		)
Net (loss) income and total comprehensive (loss) income attributable to common stockholders	$	(2,372	)	$	14,308		$	(5,099	)	$	10,745
Loss from continuing operations													(2,390		)	(857		)	(1,528		)	(2,727		)
Total comprehensive loss attributable to noncontrolling interests in subsidiaries													1			—			1			—
Net loss and total comprehensive loss attributable to common stockholders													$	(2,389	)	$	(857	)	$	(1,527	)	$	(2,727	)

Basic net (loss) income per share attributable to common stockholders	$	(0.29	)	$	1.76		$	(0.63	)	$	1.32
Diluted net (loss) income per share attributable to common stockholders	$	(0.29	)	$	1.75		$	(0.63	)	$	1.32
Basic and diluted net loss per share attributable to common stockholders													$	(0.29	)	$	(0.11	)	$	(0.19	)	$	(0.33	)

Weighted average common shares outstanding:
Basic	8,156			8,128			8,149			8,119
Diluted	8,156			8,172			8,149			8,169

Dividends declared per share of common stock	$	—		$	—		$	—		$	1.00
Basic and diluted weighted-average common shares outstanding													8,177			8,153			8,172			8,145



a.	Excludes approximately 97 thousand shares of common stock for third-quarter 2018, 30 thousand shares for third-quarter 2017, 96 thousand shares for the first nine months of 2018 and 23 thousand shares for the first nine months of 2017 associated with restricted stock units and outstanding stock options that were anti-dilutive.



	September 30, 2018
Assets:
Cash and cash equivalents	$	11
Restricted cash	6,001
Real estate held under development	6,550
Other assets	748
Total assets	$	13,310
Liabilities:
Accounts payable	$	1,466
Accrued liabilities, including taxes	16
Total liabilities	1,482
Net assets	$	11,828


	September 30, 2018				December 31, 2017				June 30, 2019				December 31, 2018
	Carrying Value		Fair Value		Carrying Value		Fair Value		Carrying Value		Fair Value		Carrying Value		Fair Value
Assets:
Interest rate swap agreement	$	179	$	179	$	—	$	—	$	—	$	—	$	53	$	53
Liabilities:
Debt	$	293,739	$	297,246	$	221,470	$	224,632	340,622		345,180		295,531		299,531
Interest rate swap agreement	—		—		134		134		129		129		—		—


a.	Includes net reductions for unamortized debt issuance costs of ~~$2.4~~$3.1 million at ~~September~~June 30, ~~2018,~~2019, and ~~$2.1~~$2.8 million at December 31, ~~2017.~~2018.



	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Real Estate Operations:
Developed property sales	$	2,025	$	2,860	$	10,036	$	8,436
Undeveloped property sales	—		—		—		544
Commissions and other	75		63		237		128
	2,100		2,923		10,273		9,108
Leasing Operations:
Rental revenue	2,813		1,923		7,148		6,015
	2,813		1,923		7,148		6,015
Hotel:
Rooms, food and beverage	7,554		7,143		25,156		26,054
Other	618		595		1,931		1,763
	8,172		7,738		27,087		27,817
Entertainment:
Event revenue	4,154		4,010		12,532		14,520
Other	684		628		1,958		1,855
	4,838		4,638		14,490		16,375

Total Revenues from Contracts with Unaffiliated Customers	$	17,923	$	17,222	$	58,998	$	59,315



Nine Months Ended September 30, 2018:
Revenues:
Unaffiliated customers	$	10,273		$	7,148	$	27,087	$	14,490	$	—		$	58,998
Intersegment	24			703		194		79		(1,000		)	—
Cost of sales, excluding depreciation	9,405		^d	3,756		20,861		11,850		(520		)	45,352
Depreciation	190			2,234		2,675		1,171		(104		)	6,166
General and administrative expenses	—			—		—		—		8,646			8,646
Operating income (loss)	$	702		$	1,861	$	3,745	$	1,548	$	(9,022	)	$	(1,166	)
Capital expenditures and purchases and development of real estate properties	$	28,900		$	52,619	$	464	$	385	$	—		$	82,368



Nine Months Ended September 30, 2017:
Revenues:
Unaffiliated customers	$	9,108	$	6,015			$	27,817	$	16,375	$	—		$	59,315
Intersegment	136		653				230		142		(1,161		)	—
Cost of sales, excluding depreciation	8,048		3,773				21,323		12,756		(528		)	45,372
Depreciation	171		2,070				2,654		1,137		(104		)	5,928
General and administrative expenses	—		—				—		—		8,462			8,462
Profit participation	—		2,538				—		—		—			2,538
Gain on sales of assets	—		(25,421		)	^c	—		—		—			(25,421		)
Operating income (loss)	$	1,025	$	23,708			$	4,070	$	2,624	$	(8,991	)	$	22,436
Capital expenditures and purchases and development of real estate properties	$	11,196	$	13,845			$	273	$	245	$	—		$	25,559



	Previously Reported		Impact of Adoption		Current Presentation
Net increase in cash, cash equivalents and restricted cash	$	2,555	$	11,859	$	14,414
Cash, cash equivalents and restricted cash at beginning of year	13,597		11,892		25,489
Cash, cash equivalents and restricted cash at end of period	$	16,152	$	23,751	$	39,903



	Under Development				Undeveloped
	Single Family	Multi- family	Commercial	Total	Single family	Multi-family	Commercial	Total	Total Acreage
Austin:
Barton Creek	4	32	—	36	512	266	394	1,172	1,208
Circle C	—	15	—	15	—	21	216	237	252
Lantana	—	—	—	—	—	—	39	39	39
Other	—	—	—	—	7	—	—	7	7
Lakeway	—	—	—	—	35	—	—	35	35
Magnolia	—	—	—	—	—	—	124	124	124
Jones Crossing	—	—	—	—	—	—	48	48	48
Kingwood Place	—	—	54	54	—	—	—	—	54
Camino Real, San Antonio	—	—	—	—	—	—	2	2	2
Total	4	47	54	105	554	287	823	1,664	1,769


1.	GENERAL


2.	EARNINGS PER SHARE


3.	RELATED PARTY TRANSACTIONS


4.	DISPOSITIONS



	Residential Lots/Units
	Developed	Under Development	Potential Development^a	Total
Barton Creek:
Amarra Drive:
Phase II	10	—	—	10
Phase III	32	4	—	36
Amarra Villas	3	14	—	17
Other townhomes	—	—	170	170
Section N multi-family:
Santal Phase I	236	—	—	236
Santal Phase II	64	148	—	212
Other Section N	—	—	1,412	1,412
Other Barton Creek sections	—	—	156	156
Circle C multi-family:
The Saint Mary	—	240	—	240
Tract 102	—	—	56	56
Lakeway	—	—	100	100
Other	—	—	7	7
W Austin Residences	1	—	—	1
Total Residential Lots/Units	346	406	1,901	2,653



	Commercial Property
	Developed	Under Development	Potential Development^a	Total
	(in square feet)
Barton Creek:
Barton Creek Village	22,366	—	—	22,366
Entry corner	—	—	5,000	5,000
Amarra retail/office	—	—	83,081	83,081
Section N	—	—	1,500,000	1,500,000
Circle C	—	—	674,942	674,942
Lantana:
Lantana Place	99,379	—	220,621	320,000
Tract G07	—	—	160,000	160,000
W Austin Hotel & Residences:
Office	38,316	—	—	38,316
Retail	18,327	—	—	18,327
Magnolia	—	—	351,000	351,000
West Killeen Market	44,493	—	—	44,493
Jones Crossing	154,117	—	104,750	258,867
Kingwood Place	—	143,767	—	143,767
Total Square Feet	376,998	143,767	3,099,394	3,620,159


a.	~~Includes $0.4 million of reductions to cost of sales associated with collection of prior-years' assessments of properties in Barton Creek.~~


a.	See Note 6 for further information regarding our Comerica Bank credit facility.


b.	We have the option to extend the maturity date for two additional twelve-month periods, subject to certain debt service coverage conditions.