United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one) | | | | | |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31,September 30, 2022
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
Stratus Properties Inc.
(Exact name of registrant as specified in its charter) | | | | | | | | |
Delaware | | 72-1211572 |
(State or other jurisdiction of | | (I.R.S. Employer Identification No.) |
incorporation or organization) | | |
| | | | | | | | | | | | | | | | | | | | |
212 Lavaca Street, Suite 300 | | | | |
Austin | | TX | | | | 78701 |
(Address of principal executive offices) | | | | (Zip Code) |
(512) 478-5788
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: | | | | | | | | |
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.
☑ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). ☑ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 filer | ☐
|
Non-accelerated filer | ☑ | Smaller reporting company | ☑ |
| | 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 ☑ No
On April 29,November 4, 2022, there were 8,180,292 issued and outstanding 8,273,268 shares of the registrant’s common stock, par value $0.01 per share.
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STRATUS PROPERTIES INC. |
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
STRATUS PROPERTIES INC.
CONSOLIDATED BALANCE SHEETS (Unaudited)
(In Thousands)
| | | March 31, 2022 | | December 31, 2021 | | September 30, 2022 | | December 31, 2021 |
ASSETS | ASSETS | | | | ASSETS | | | |
Cash and cash equivalents | Cash and cash equivalents | $ | 12,273 | | | $ | 24,229 | | Cash and cash equivalents | $ | 63,537 | | | $ | 24,229 | |
Restricted cash | Restricted cash | 10,859 | | | 18,294 | | Restricted cash | 13,776 | | | 18,294 | |
Real estate held for sale | Real estate held for sale | 1,773 | | | 1,773 | | Real estate held for sale | 1,773 | | | 1,773 | |
Real estate under development | Real estate under development | 206,191 | | | 181,224 | | Real estate under development | 224,813 | | | 181,224 | |
Land available for development | Land available for development | 34,816 | | | 40,659 | | Land available for development | 40,331 | | | 40,659 | |
Real estate held for investment, net | Real estate held for investment, net | 89,760 | | | 90,284 | | Real estate held for investment, net | 93,446 | | | 90,284 | |
| Lease right-of-use assets | Lease right-of-use assets | 10,460 | | | 10,487 | | Lease right-of-use assets | 10,910 | | | 10,487 | |
Deferred tax assets | Deferred tax assets | 4,843 | | | 6,009 | | Deferred tax assets | 47 | | | 6,009 | |
Other assets | Other assets | 22,621 | | | 17,214 | | Other assets | 14,204 | | | 17,214 | |
Assets held for sale - discontinued operations | Assets held for sale - discontinued operations | 151,172 | | | 151,053 | | Assets held for sale - discontinued operations | — | | | 151,053 | |
Total assets | Total assets | $ | 544,768 | | | $ | 541,226 | | Total assets | $ | 462,837 | | | $ | 541,226 | |
| LIABILITIES AND EQUITY | LIABILITIES AND EQUITY | | | | LIABILITIES AND EQUITY | | | |
Liabilities: | Liabilities: | | Liabilities: | |
Accounts payable | Accounts payable | $ | 14,573 | | | $ | 14,118 | | Accounts payable | $ | 13,187 | | | $ | 14,118 | |
| Accrued liabilities, including taxes | Accrued liabilities, including taxes | 19,682 | | | 22,069 | | Accrued liabilities, including taxes | 15,951 | | | 22,069 | |
Debt | Debt | 121,446 | | | 106,648 | | Debt | 124,170 | | | 106,648 | |
Lease liabilities | Lease liabilities | 14,135 | | | 13,986 | | Lease liabilities | 14,945 | | | 13,986 | |
Deferred gain | Deferred gain | 4,274 | | | 4,801 | | Deferred gain | 3,748 | | | 4,801 | |
Other liabilities | Other liabilities | 10,381 | | | 17,894 | | Other liabilities | 6,019 | | | 17,894 | |
Liabilities held for sale - discontinued operations | Liabilities held for sale - discontinued operations | 149,717 | | | 153,097 | | Liabilities held for sale - discontinued operations | — | | | 153,097 | |
Total liabilities | Total liabilities | 334,208 | | | 332,613 | | Total liabilities | 178,020 | | | 332,613 | |
| Commitments and contingencies | Commitments and contingencies | 0 | | 0 | Commitments and contingencies | |
| Equity: | Equity: | | | | Equity: | | | |
Stockholders’ equity: | Stockholders’ equity: | | | | Stockholders’ equity: | | | |
| Common stock | Common stock | 94 | | | 94 | | Common stock | 94 | | | 94 | |
Capital in excess of par value of common stock | Capital in excess of par value of common stock | 188,971 | | | 188,759 | | Capital in excess of par value of common stock | 195,123 | | | 188,759 | |
Accumulated deficit | (6,691) | | | (8,963) | | |
| Retained earnings (accumulated deficit) | | Retained earnings (accumulated deficit) | 47,559 | | | (8,963) | |
Common stock held in treasury | Common stock held in treasury | (22,205) | | | (21,753) | | Common stock held in treasury | (23,004) | | | (21,753) | |
Total stockholders’ equity | Total stockholders’ equity | 160,169 | | | 158,137 | | Total stockholders’ equity | 219,772 | | | 158,137 | |
Noncontrolling interests in subsidiaries | Noncontrolling interests in subsidiaries | 50,391 | | | 50,476 | | Noncontrolling interests in subsidiaries | 65,045 | | | 50,476 | |
Total equity | Total equity | 210,560 | | | 208,613 | | Total equity | 284,817 | | | 208,613 | |
Total liabilities and equity | Total liabilities and equity | $ | 544,768 | | | $ | 541,226 | | Total liabilities and equity | $ | 462,837 | | | $ | 541,226 | |
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 (Unaudited)
(In Thousands, Except Per Share Amounts)
| | | | | | | | | | | | | | | |
| | | Three Months Ended |
| | | March 31, |
| | | | | 2022 | | 2021 |
Revenues: | | | | | | | |
Real estate operations | | | | | $ | 19 | | | $ | 6,556 | |
Leasing operations | | | | | 3,080 | | | 4,818 | |
| | | | | | | |
| | | | | | | |
Total revenues | | | | | 3,099 | | | 11,374 | |
Cost of sales: | | | | | | | |
Real estate operations | | | | | 1,366 | | | 4,360 | |
Leasing operations | | | | | 984 | | | 2,052 | |
| | | | | | | |
| | | | | | | |
Depreciation | | | | | 873 | | | 1,586 | |
Total cost of sales | | | | | 3,223 | | | 7,998 | |
General and administrative expenses | | | | | 3,167 | | | 4,324 | |
| | | | | | | |
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Gain on sale of assets | | | | | (4,812) | | | (22,931) | |
Total | | | | | 1,578 | | | (10,609) | |
Operating income | | | | | 1,521 | | | 21,983 | |
Interest expense, net | | | | | (15) | | | (1,056) | |
Loss on extinguishment of debt | | | | | — | | | (63) | |
| | | | | | | |
Other income, net | | | | | 6 | | | 3 | |
Income before income taxes and equity in unconsolidated affiliates' loss | | | | | 1,512 | | | 20,867 | |
Benefit from (provision for) income taxes | | | | | 302 | | | (2,691) | |
Equity in unconsolidated affiliates' loss | | | | | (2) | | | (2) | |
Net income from continuing operations | | | | | 1,812 | | | 18,174 | |
Net income (loss) from discontinued operations | | | | | 375 | | | (2,508) | |
Net income and total comprehensive income | | | | | 2,187 | | | 15,666 | |
Total comprehensive loss (income) attributable to noncontrolling interests | | | | | 85 | | | (6,722) | |
Net income and total comprehensive income attributable to common stockholders | | | | | $ | 2,272 | | | $ | 8,944 | |
| | | | | | | |
Basic net income (loss) per share attributable to common stockholders: | | | | | | | |
Continuing operations | | | | | $ | 0.23 | | | $ | 1.39 | |
Discontinued operations | | | | | 0.05 | | | (0.30) | |
| | | | | $ | 0.28 | | | $ | 1.09 | |
| | | | | | | |
Diluted net income (loss) per share attributable to common stockholders: | | | | | | | |
Continuing operations | | | | | $ | 0.23 | | | $ | 1.38 | |
Discontinued operations | | | | | 0.04 | | | (0.30) | |
| | | | | $ | 0.27 | | | $ | 1.08 | |
| | | | | | | |
Weighted-average shares of common stock outstanding: | | | | | | | |
Basic | | | | | 8,251 | | | 8,223 | |
Diluted | | | | | 8,355 | | | 8,273 | |
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| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Revenues: | | | | | | | |
Real estate operations | $ | 6,887 | | | $ | 892 | | | $ | 14,831 | | | $ | 8,216 | |
Leasing operations | 3,090 | | | 5,376 | | | 9,370 | | | 15,057 | |
Total revenues | 9,977 | | | 6,268 | | | 24,201 | | | 23,273 | |
Cost of sales: | | | | | | | |
Real estate operations | 6,228 | | | 2,110 | | | 13,026 | | | 8,002 | |
Leasing operations | 1,350 | | | 2,237 | | | 3,204 | | | 6,481 | |
Depreciation | 907 | | | 1,472 | | | 2,664 | | | 4,624 | |
Total cost of sales | 8,485 | | | 5,819 | | | 18,894 | | | 19,107 | |
General and administrative expenses | 3,602 | | | 5,252 | | | 10,213 | | | 15,797 | |
Impairment of real estate | 720 | | | 625 | | | 720 | | | 625 | |
Gain on sale of assets | — | | | — | | | (4,812) | | | (22,931) | |
Total | 12,807 | | | 11,696 | | | 25,015 | | | 12,598 | |
Operating (loss) income | (2,830) | | | (5,428) | | | (814) | | | 10,675 | |
Interest expense, net | — | | | (855) | | | (15) | | | (2,690) | |
Net gain on extinguishment of debt | — | | | 3,680 | | | — | | | 3,454 | |
Other income, net | 680 | | | 70 | | | 766 | | | 74 | |
(Loss) income before income taxes and equity in unconsolidated affiliate's loss | (2,150) | | | (2,533) | | | (63) | | | 11,513 | |
Provision for income taxes | (420) | | | (121) | | | (159) | | | (290) | |
Equity in unconsolidated affiliate's loss | (4) | | | (2) | | | (8) | | | (11) | |
Net (loss) income from continuing operations | (2,574) | | | (2,656) | | | (230) | | | 11,212 | |
Net (loss) income from discontinued operations | — | | | (1,541) | | | 96,300 | | | (9,947) | |
Net (loss) income and total comprehensive (loss) income | (2,574) | | | (4,197) | | | 96,070 | | | 1,265 | |
Total comprehensive loss (income) attributable to noncontrolling interests | 214 | | | 433 | | | 463 | | | (6,248) | |
Net (loss) income and total comprehensive (loss) income attributable to common stockholders | $ | (2,360) | | | $ | (3,764) | | | $ | 96,533 | | | $ | (4,983) | |
| | | | | | | |
Basic net (loss) income per share attributable to common stockholders: | | | | | | | |
Continuing operations | $ | (0.29) | | | $ | (0.27) | | | $ | 0.03 | | | $ | 0.60 | |
Discontinued operations | — | | | (0.19) | | | 11.65 | | | (1.21) | |
| $ | (0.29) | | | $ | (0.46) | | | $ | 11.68 | | | $ | (0.61) | |
Diluted net (loss) income per share attributable to common stockholders: | | | | | | | |
Continuing operations | $ | (0.29) | | | $ | (0.27) | | | $ | 0.03 | | | $ | 0.60 | |
Discontinued operations | — | | | (0.19) | | | 11.47 | | | (1.21) | |
| $ | (0.29) | | | $ | (0.46) | | | $ | 11.50 | | | $ | (0.61) | |
| | | | | | | |
Weighted-average shares of common stock outstanding: | | | | | | | |
Basic | 8,275 | | | 8,239 | | | 8,266 | | | 8,232 | |
Diluted | 8,275 | | | 8,239 | | | 8,397 | | | 8,232 | |
| | | | | | | |
Dividends declared per share of common stock | $ | 4.67 | | | $ | — | | | $ | 4.67 | | | $ | — | |
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)
(In Thousands)
| | | Three Months Ended | | Nine Months Ended |
| | March 31, | | September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
Cash flow from operating activities: | Cash flow from operating activities: | | | | Cash flow from operating activities: | | | |
Net income | Net income | $ | 2,187 | | | $ | 15,666 | | Net income | $ | 96,070 | | | $ | 1,265 | |
Adjustments to reconcile net income to net cash used in operating activities: | Adjustments to reconcile net income to net cash used in operating activities: | | Adjustments to reconcile net income to net cash used in operating activities: | |
Depreciation | Depreciation | 873 | | | 3,002 | | Depreciation | 2,664 | | | 8,758 | |
Cost of real estate sold | Cost of real estate sold | — | | | 3,112 | | Cost of real estate sold | 7,510 | | | 4,028 | |
| Impairment of real estate | | Impairment of real estate | 720 | | | 625 | |
Gain on sale of discontinued operations | | Gain on sale of discontinued operations | (119,695) | | | — | |
Gain on sale of assets | Gain on sale of assets | (4,812) | | | (22,931) | | Gain on sale of assets | (4,812) | | | (22,931) | |
Loss on extinguishment of debt | — | | | 63 | | |
Net gain on extinguishment of debt | | Net gain on extinguishment of debt | — | | | (3,454) | |
Debt issuance cost amortization and stock-based compensation | Debt issuance cost amortization and stock-based compensation | 515 | | | 529 | | Debt issuance cost amortization and stock-based compensation | 1,898 | | | 1,468 | |
| Equity in unconsolidated affiliates' loss | 2 | | | 2 | | |
| Equity in unconsolidated affiliate’s loss | | Equity in unconsolidated affiliate’s loss | 8 | | | 11 | |
Deferred income taxes | Deferred income taxes | 1,167 | | | — | | Deferred income taxes | 5,962 | | | — | |
| Purchases and development of real estate properties | Purchases and development of real estate properties | (4,864) | | | (2,489) | | Purchases and development of real estate properties | (18,294) | | | (30,841) | |
| (Increase) decrease in other assets | (5,559) | | | 238 | | |
Decrease in accounts payable, accrued liabilities and other | (7,629) | | | (7,563) | | |
Decrease (increase) in other assets | | Decrease (increase) in other assets | 4,858 | | | (997) | |
(Decrease) increase in accounts payable, accrued liabilities and other | | (Decrease) increase in accounts payable, accrued liabilities and other | (26,213) | | | 5,699 | |
Net cash used in operating activities | Net cash used in operating activities | (18,120) | | | (10,371) | | Net cash used in operating activities | (49,324) | | | (36,369) | |
| Cash flow from investing activities: | Cash flow from investing activities: | | Cash flow from investing activities: | |
Proceeds from sale of discontinued operations | | Proceeds from sale of discontinued operations | 105,813 | | | — | |
Proceeds from sale of assets | | Proceeds from sale of assets | — | | | 59,488 | |
Capital expenditures | Capital expenditures | (14,724) | | | (1,009) | | Capital expenditures | (38,889) | | | (6,708) | |
Proceeds from sale of assets | — | | | 59,488 | | |
Payments on master lease obligations | Payments on master lease obligations | (182) | | | (270) | | Payments on master lease obligations | (742) | | | (1,019) | |
| Other, net | Other, net | — | | | (5) | | Other, net | (8) | | | 36 | |
Net cash (used in) provided by investing activities | (14,906) | | | 58,204 | | |
Net cash provided by investing activities | | Net cash provided by investing activities | 66,174 | | | 51,797 | |
| Cash flow from financing activities: | Cash flow from financing activities: | | Cash flow from financing activities: | |
Borrowings from credit facility | Borrowings from credit facility | 10,000 | | | 17,000 | | Borrowings from credit facility | 30,000 | | | 37,700 | |
Payments on credit facility | Payments on credit facility | — | | | (26,227) | | Payments on credit facility | (30,000) | | | (26,778) | |
Borrowings from project loans | Borrowings from project loans | 5,111 | | | 458 | | Borrowings from project loans | 25,798 | | | 39,445 | |
Payments on project and term loans | Payments on project and term loans | (1,172) | | | (28,708) | | Payments on project and term loans | (9,761) | | | (53,330) | |
| Payment of dividends | | Payment of dividends | (38,675) | | | — | |
Stock-based awards net payments | Stock-based awards net payments | (452) | | | (157) | | Stock-based awards net payments | (452) | | | (132) | |
Distributions to noncontrolling interests | Distributions to noncontrolling interests | — | | | (13,087) | | Distributions to noncontrolling interests | — | | | (13,227) | |
| Noncontrolling interests’ contributions | | Noncontrolling interests’ contributions | 15,032 | | | 27,977 | |
Purchases of treasury stock | | Purchases of treasury stock | (262) | | | — | |
Financing costs | Financing costs | (17) | | | (53) | | Financing costs | (1,356) | | | (1,645) | |
Net cash provided by (used in) financing activities | 13,470 | | | (50,774) | | |
Net decrease in cash, cash equivalents and restricted cash | (19,556) | | | (2,941) | | |
| Net cash (used in) provided by financing activities | | Net cash (used in) provided by financing activities | (9,676) | | | 10,010 | |
Net increase in cash, cash equivalents and restricted cash | | Net increase in cash, cash equivalents and restricted cash | 7,174 | | | 25,438 | |
Cash, cash equivalents and restricted cash at beginning of year | Cash, cash equivalents and restricted cash at beginning of year | 70,139 | | | 34,183 | | Cash, cash equivalents and restricted cash at beginning of year | 70,139 | | | 34,183 | |
Cash, cash equivalents and restricted cash at end of period | Cash, cash equivalents and restricted cash at end of period | $ | 50,583 | | | $ | 31,242 | | Cash, cash equivalents and restricted cash at end of period | $ | 77,313 | | | $ | 59,621 | |
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)
(In Thousands)
| | | | | Stockholders’ Equity | | | | | | Stockholders’ Equity | | | | |
| | | | Common Stock Held in Treasury | | Total | | | | Retained Earnings (Accumulated Deficit) | | Common Stock Held in Treasury | | Total | | Noncontrolling Interests in Subsidiaries | |
| | | Common Stock | | Capital in Excess of Par Value | | Accum-ulated Deficit | | | | Noncontrolling Interests in Subsidiaries | | | | Common Stock | | Capital in Excess of Par Value | | Retained Earnings (Accumulated Deficit) | Common Stock Held in Treasury | Total | Noncontrolling Interests in Subsidiaries | |
| | Number of Shares | | At Par Value | | | Number of Shares | | At Cost | | Total Equity | Total | | Number of Shares | | At Par Value | | | At Cost | | Total Equity |
Balance at December 31, 2021 | Balance at December 31, 2021 | | 9,388 | | | $ | 94 | | | $ | 188,759 | | | $ | (8,963) | | | | 1,143 | | | $ | (21,753) | | | $ | 158,137 | | | $ | 50,476 | | $ | 208,613 | | Balance at December 31, 2021 | 9,388 | | | $ | 94 | | | $ | 188,759 | | $ | (8,963) | | | 1,143 | | | $ | (21,753) | | $ | 158,137 | | $ | 50,476 | | | $ | 208,613 | |
| | Exercised and vested stock-based awards | Exercised and vested stock-based awards | | 39 | | | — | | | — | | | — | | | | — | | | — | | | — | | | — | | | — | | Exercised and vested stock-based awards | 39 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Stock-based compensation | Stock-based compensation | | — | | | — | | | 212 | | | — | | | | — | | | — | | | 212 | | | — | | | 212 | | Stock-based compensation | — | | | — | | | 212 | | | — | | | — | | | — | | | 212 | | | — | | | 212 | |
| Tender of shares for stock-based awards | Tender of shares for stock-based awards | | — | | | — | | | — | | | — | | | | 11 | | | (452) | | | (452) | | | — | | | (452) | | Tender of shares for stock-based awards | — | | | — | | | — | | | — | | | 11 | | | (452) | | | (452) | | | — | | | (452) | |
| Total comprehensive income (loss) | Total comprehensive income (loss) | | — | | | — | | | — | | | 2,272 | | | | — | | | — | | | 2,272 | | | (85) | | | 2,187 | | Total comprehensive income (loss) | — | | | — | | | — | | | 2,272 | | | — | | | — | | | 2,272 | | | (85) | | | 2,187 | |
Balance at March 31, 2022 | Balance at March 31, 2022 | | 9,427 | | | $ | 94 | | | $ | 188,971 | | | $ | (6,691) | | | | 1,154 | | | $ | (22,205) | | | $ | 160,169 | | | $ | 50,391 | | | $ | 210,560 | | Balance at March 31, 2022 | 9,427 | | | 94 | | | 188,971 | | | (6,691) | | | 1,154 | | | (22,205) | | | 160,169 | | | 50,391 | | | 210,560 | |
Stock-based compensation | | Stock-based compensation | — | | | — | | | 347 | | | — | | | — | | | — | | | 347 | | | — | | | 347 | |
Grant of restricted stock units (RSUs) under the Profit Participation Incentive Plan (PPIP) | | Grant of restricted stock units (RSUs) under the Profit Participation Incentive Plan (PPIP) | — | | | — | | | 5,292 | | | — | | | — | | | — | | | 5,292 | | | — | | | 5,292 | |
Total comprehensive income (loss) | | Total comprehensive income (loss) | — | | | — | | | — | | | 96,621 | | | — | | | — | | | 96,621 | | | (164) | | | 96,457 | |
Balance at June 30, 2022 | | Balance at June 30, 2022 | 9,427 | | | 94 | | | 194,610 | | | 89,930 | | | 1,154 | | | (22,205) | | | 262,429 | | | 50,227 | | | 312,656 | |
Exercised and vested stock-based awards | | Exercised and vested stock-based awards | 8 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Stock-based compensation | | Stock-based compensation | — | | | — | | | 513 | | | — | | | — | | | — | | | 513 | | | — | | | 513 | |
Common stock repurchases | | Common stock repurchases | | — | | | — | | | — | | | 34 | | | (799) | | | (799) | | | — | | | (799) | |
Cash dividend | | Cash dividend | — | | | — | | | (40,011) | | | — | | | — | | | (40,011) | | | — | | | (40,011) | |
Contributions from noncontrolling interests | | Contributions from noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 15,032 | | | 15,032 | |
Total comprehensive loss | | Total comprehensive loss | — | | | — | | | — | | | (2,360) | | | — | | | — | | | (2,360) | | | (214) | | | (2,574) | |
Balance at September 30, 2022 | | Balance at September 30, 2022 | 9,435 | | | $ | 94 | | | $ | 195,123 | | | $ | 47,559 | | | 1,188 | | | $ | (23,004) | | | $ | 219,772 | | | $ | 65,045 | | | $ | 284,817 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Balance at December 31, 2020 | | 9,358 | | | $ | 94 | | | $ | 186,777 | | | $ | (66,357) | | | | | 1,137 | | | $ | (21,600) | | | $ | 98,914 | | | $ | 10,850 | | | $ | 109,764 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Exercised and vested stock-based awards | | 19 | | | — | | | — | | | — | | | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Stock-based compensation | | — | | | — | | | 182 | | | — | | | | | — | | | — | | | 182 | | | — | | | 182 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Grant of restricted stock units under the Profit Participation Incentive Plan | | — | | | — | | | 1,162 | | | — | | | | | — | | | — | | | 1,162 | | | — | | | 1,162 | |
Tender of shares for stock-based awards | | — | | | — | | | — | | | — | | | | | 6 | | | (153) | | | (153) | | | — | | | (153) | |
Distributions to noncontrolling interests | | — | | | — | | | — | | | — | | | | | — | | | — | | | — | | | (13,087) | | | (13,087) | |
| | | | | | | | | | | | | | | | | | | | |
Total comprehensive income | | — | | | — | | | — | | | 8,944 | | | | | — | | | — | | | 8,944 | | | 6,722 | | | 15,666 | |
Balance at March 31, 2021 | | 9,377 | | | $ | 94 | | | $ | 188,121 | | | $ | (57,413) | | | | | 1,143 | | | $ | (21,753) | | | $ | 109,049 | | | $ | 4,485 | | | $ | 113,534 | |
STRATUS PROPERTIES INC.
CONSOLIDATED STATEMENTS OF EQUITY (Unaudited) (Continued)
(In Thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Stockholders’ Equity | | | | |
| | | | | | | Retained Earnings (Accumulated Deficit) | | Common Stock Held in Treasury | | Total | | Noncontrolling Interests in Subsidiaries | | |
| Common Stock | | Capital in Excess of Par Value | | | | | | |
| Number of Shares | | At Par Value | | | | Number of Shares | | At Cost | | | | Total Equity |
Balance at December 31, 2020 | 9,358 | | | $ | 94 | | | $ | 186,777 | | | $ | (66,357) | | | 1,137 | | | $ | (21,600) | | | $ | 98,914 | | | $ | 10,850 | | | $ | 109,764 | |
Exercised and vested stock-based awards | 19 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Stock-based compensation | — | | | — | | | 182 | | | — | | | — | | | — | | | 182 | | | — | | | 182 | |
Grant of RSUs under the PPIP | — | | | — | | | 1,162 | | | — | | | — | | | — | | | 1,162 | | | — | | | 1,162 | |
Tender of shares for stock-based awards | — | | | — | | | — | | | — | | | 6 | | | (153) | | | (153) | | | — | | | (153) | |
Distributions to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (13,087) | | | (13,087) | |
Total comprehensive income | — | | | — | | | — | | | 8,944 | | | — | | | — | | | 8,944 | | | 6,722 | | | 15,666 | |
Balance at March 31, 2021 | 9,377 | | | 94 | | | 188,121 | | | (57,413) | | | 1,143 | | | (21,753) | | | 109,049 | | | 4,485 | | | 113,534 | |
Stock-based compensation | — | | | — | | | 202 | | | — | | | — | | | — | | | 202 | | | — | | | 202 | |
Total comprehensive loss | — | | | — | | | — | | | (10,163) | | | — | | | — | | | (10,163) | | | (41) | | | (10,204) | |
Balance at June 30, 2021 | 9,377 | | | 94 | | | 188,323 | | | (67,576) | | | 1,143 | | | (21,753) | | | 99,088 | | | 4,444 | | | 103,532 | |
Exercised and vested stock-based awards | 11 | | | — | | | 25 | | | — | | | — | | | — | | | 25 | | | — | | | 25 | |
Stock-based compensation | — | | | — | | | 205 | | | — | | | — | | | — | | | 205 | | | — | | | 205 | |
Distributions to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (140) | | | (140) | |
Contributions from noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 27,977 | | | 27,977 | |
Total comprehensive loss | — | | | — | | | — | | | (3,764) | | | — | | | — | | | (3,764) | | | (433) | | | (4,197) | |
Balance at September 30, 2021 | 9,388 | | | $ | 94 | | | $ | 188,553 | | | $ | (71,340) | | | 1,143 | | | $ | (21,753) | | | $ | 95,554 | | | $ | 31,848 | | | $ | 127,402 | |
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)
1.GENERAL
The unaudited consolidated financial statements and the accompanying notes are prepared in accordance with generally accepted accounting principles (GAAP) in the United States (GAAP)(U.S.) and should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2021, included in Stratus Properties Inc.’s (Stratus) Annual Report on Form 10-K for the year ended December 31, 2021 (Stratus 2021 Form 10-K) filed with the United States (U.S.)U.S. Securities and Exchange Commission.Commission on March 31, 2022. 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 and consist of normal recurring adjustments. OperatingThe results of operations for the first quarter of 2022any interim period are not necessarily indicative of the results that may be expectedof operations for the year ending December 31, 2022.any other future interim period or for a full fiscal year. Refer to Note 4 for a discussion of Stratus' discontinued operations.
Related Party Transactions. DuringThrough the first quarter of 2022, Stratus had an arrangement with Whitefish Partners, LLC (Whitefish Partners), formerly known as Austin Retail Partners, LLC, for services provided by a consultant of Whitefish Partners who is the son of Stratus' President and Chief Executive Officer. Payments to Whitefish Partners for the consultant's consulting services and expense reimbursements totaled $173 thousand in first-quarter 2022 and $37 thousand in first-quarter 2021. The first quarter of 2022 included a cash payment under Stratus’ Profit Participation Incentive Plan (PPIP). As of March 31, 2022, the consultant has one outstanding award under the PPIP. In addition, during first-quarter 2022, the Compensation Committee of Stratus' Board of Directors (the Compensation Committee) approved an award to be granted to the consultant under the PPIP related to another development project. Refer to Note 7 for discussion of the PPIP. In April 2022, Stratus hired the consultant as an employee at the samean annual salary as his compensation under the contract with Whitefish Partners.of $100 thousand. As an employee, he is eligible for the same health and retirement benefits provided to all Stratus employees.employees and is also eligible for annual incentive awards and for awards under Stratus’ Profit Participation Incentive Plan (PPIP). In the first nine months of 2022, he received $20 thousand as an annual incentive award for 2021 and a $135 thousand cash payment under the PPIP. As of September 30, 2022, the employee has two outstanding awards under the PPIP. Refer to Note 7 for discussion of the PPIP.
2. EARNINGS PER SHARE
Stratus’ basic net (loss) income per share of common stock was calculated by dividing the net (loss) income attributable to common stockholders by the weighted-average shares of common stock outstanding during the period. A reconciliation of net (loss) income and weighted-average shares of common stock outstanding for purposes of calculating diluted net (loss) income per share (in thousands, except per share amounts) follows:
| | | | | | | | | | | | | | | | | | |
| | | | | | | | |
| | | Three Months Ended | |
| | | March 31, | |
| | | | | 2022 | | 2021 | |
| | | | | | | | |
| | | | | | | | |
Income from continuing operations | | | | | $ | 1,812 | | | $ | 18,174 | | |
Net income (loss) from discontinued operations | | | | | 375 | | | (2,508) | | |
Net income | | | | | 2,187 | | | 15,666 | | |
Net loss (income) attributable to noncontrolling interests in subsidiaries | | | | | 85 | | | (6,722) | | |
Net income attributable to Stratus common stockholders | | | | | $ | 2,272 | | | $ | 8,944 | | |
| | | | | | | | |
Basic weighted-average shares of common stock outstanding | | | | | 8,251 | | | 8,223 | | |
Add shares issuable upon exercise or vesting of dilutive stock options and restricted stock units (RSUs)a | | | | | 104 | | | 50 | | |
| | | | | | | | |
Diluted weighted-average shares of common stock outstanding | | | | | 8,355 | | | 8,273 | | |
| | | | | | | | |
Basic net income (loss) per share attributable to common stockholders | | | | | | | | |
Continuing operations | | | | | $ | 0.23 | | | $ | 1.39 | | |
Discontinued operations | | | | | 0.05 | | | (0.30) | | |
| | | | | $ | 0.28 | | | $ | 1.09 | | |
| | | | | | | | |
Diluted net income (loss) per share attributable to common stockholders | | | | | | | | |
Continuing operations | | | | | $ | 0.23 | | | $ | 1.38 | | |
Discontinued operations | | | | | 0.04 | | | (0.30) | | |
| | | | | $ | 0.27 | | | $ | 1.08 | | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Net (loss) income from continuing operations | $ | (2,574) | | | $ | (2,656) | | | $ | (230) | | | $ | 11,212 | |
Net (loss) income from discontinued operations | — | | | (1,541) | | | 96,300 | | | (9,947) | |
Net (loss) income and total comprehensive (loss) income | (2,574) | | | (4,197) | | | 96,070 | | | 1,265 | |
Total comprehensive loss (income) attributable to noncontrolling interests | 214 | | | 433 | | | 463 | | | (6,248) | |
Net (loss) income and total comprehensive (loss) income attributable to common stockholders | $ | (2,360) | | | $ | (3,764) | | | $ | 96,533 | | | $ | (4,983) | |
| | | | | | | |
Basic weighted-average shares of common stock outstanding | 8,275 | | | 8,239 | | | 8,266 | | | 8,232 | |
Add shares issuable upon vesting of dilutive restricted stock units (RSUs) a | — | | | — | | | 131 | | | — | |
Diluted weighted-average shares of common stock outstanding | 8,275 | | | 8,239 | | | 8,397 | | | 8,232 | |
| | | | | | | |
Basic net (loss) income per share attributable to common stockholders: | | | | | | | |
Continuing operations | $ | (0.29) | | | $ | (0.27) | | | $ | 0.03 | | | $ | 0.60 | |
Discontinued operations | — | | | (0.19) | | | 11.65 | | | (1.21) | |
| $ | (0.29) | | | $ | (0.46) | | | $ | 11.68 | | | $ | (0.61) | |
| | | | | | | |
Diluted net (loss) income per share attributable to common stockholders: | | | | | | | |
Continuing operations | $ | (0.29) | | | $ | (0.27) | | | $ | 0.03 | | | $ | 0.60 | |
Discontinued operations | — | | | (0.19) | | | 11.47 | | | (1.21) | |
| $ | (0.29) | | | $ | (0.46) | | | $ | 11.50 | | | $ | (0.61) | |
a.Excludes 46 thousand shares for the first nine months of 2022 of common stock for the three months ended March 31, 2022, and 16 thousand shares of common stock for the three months ended March 31, 2021, associated with RSUs that were anti-dilutive. Excludes 296 thousand shares for third-quarter 2022, 145 thousand shares for third-quarter 2021 and 134 thousand shares for the first
Tablenine months of Contents2021 of common stock associated with RSUs that were anti-dilutive as a result of net losses.
3. LIMITED PARTNERSHIPS
Stratus has entered into strategic partnerships for certain development projects. Stratus, through its subsidiaries, is a partner in the following limited partnerships: The Saint George Apartments, L.P., Stratus Block 150, L.P., The Saint June, L.P., Stratus Kingwood Place, L.P. and The Saint Mary, L.P. For additional information regarding Stratus' partnerships, refer to Note 2 in the Stratus 2021 Form 10-K.
The Saint George Apartments, L.P. In July 2022, The Saint George Apartments, L.P. entered into a construction loan agreement to finance construction of The Saint George, a 316-unit luxury wrap-style, multi-family project located in north-central Austin, Texas. Refer to Note 6 for further discussion of the loan agreement. In connection with closing the construction financing, Stratus made an additional capital contribution of $1.7 million and the unaffiliated Class B limited partner made an additional capital contribution of $15.0 million, bringing Stratus’ total capital contributions to $3.7 million and the Class B limited partner’s total capital contributions to $33.4 million. As of September 30, 2022, Stratus holds a 10.0 percent indirect controlling equity interest in The Saint George Apartments, L.P.
Stratus Block 150, L.P. In the first quarter offirst-quarter 2022, pursuant to the limited partnership agreement, wholly owned subsidiaries of Stratus contributed an additional $1.4 million in cash to Stratus Block 150, L.P. No additional capital contributions are required to be made by the partners. As of March 31,September 30, 2022, Stratus holds, in the aggregate, a
31.0 percent indirect controlling equity interest in Stratus Block 150, L.P. As of March 31,September 30, 2022, JBM Trust, a related party to Stratus, holds a 5.9 percent equity interest in Stratus Block 150, L.P. For additional information regarding Stratus' related parties, including JBM Trust, refer to Notes 1 and 2 in the Stratus 2021 Form 10-K.
Accounting for Limited Partnerships. Stratus has performed evaluations and concluded that The Saint George Apartments, L.P., Stratus Block 150, L.P., The Saint June, L.P., Stratus Kingwood, L.P. and The Saint Mary, L.P. are variable interest entities and that Stratus is the primary beneficiary. Accordingly, the partnerships’ results are consolidated in Stratus’ financial statements. Stratus will continue to evaluate which entity is the primary beneficiary of these partnerships in accordance with applicable accounting guidance.
Stratus’ consolidated balance sheets include the following assets and liabilities of the partnerships (in thousands):
| | | March 31, 2022 | | December 31, 2021 | | September 30, 2022 | | December 31, 2021 |
Assets: | Assets: | | | | | Assets: | | | |
Cash and cash equivalents | Cash and cash equivalents | | $ | 8,504 | | | $ | 7,432 | | Cash and cash equivalents | $ | 17,621 | | | $ | 7,432 | |
Restricted cash | Restricted cash | | 5,170 | | | 11,809 | | Restricted cash | — | | | 11,809 | |
Real estate under development | Real estate under development | | 72,776 | | | 62,692 | | Real estate under development | 93,586 | | | 62,692 | |
Land available for development | Land available for development | | 7,702 | | | 7,641 | | Land available for development | 8,286 | | | 7,641 | |
Real estate held for investment | Real estate held for investment | | 31,417 | | | 31,399 | | Real estate held for investment | 30,955 | | | 31,399 | |
Other assets | Other assets | | 3,159 | | | 3,160 | | Other assets | 4,723 | | | 3,160 | |
Total assets | Total assets | | 128,728 | | | 124,133 | | Total assets | 155,171 | | | 124,133 | |
Liabilities: | Liabilities: | | | | | Liabilities: | | | |
Accounts payable and accrued liabilities | Accounts payable and accrued liabilities | | 9,894 | | | 6,661 | | Accounts payable and accrued liabilities | 10,151 | | | 6,661 | |
| Debt | Debt | | 46,334 | | | 46,096 | | Debt | 56,366 | | | 46,096 | |
Total liabilities | Total liabilities | | 56,228 | | | 52,757 | | Total liabilities | 66,517 | | | 52,757 | |
Net assets | Net assets | | $ | 72,500 | | | $ | 71,376 | | Net assets | $ | 88,654 | | | $ | 71,376 | |
4. ASSET SALES
Block 21 Pending Sale - Discontinued Operations. On May 31, 2022, Stratus completed the previously announced sale of Block 21 isto Ryman Hospitality Properties, Inc. (Ryman) for $260.0 million, subject to certain purchase price adjustments, and including Ryman’s assumption of $136.2 million of existing mortgage debt, with the remainder paid in cash. Stratus’ net proceeds of cash and restricted cash totaled $112.3 million (including $6.9 million of post-closing escrow amounts to be held for 12 months after the closing, subject to a longer retention period with respect to any required reserve for pending claims). Stratus recorded a pre-tax gain on the sale of $119.7 million in second-quarter 2022 included in net (loss) income from discontinued operations. Block 21 was Stratus’ wholly owned mixed-use real estate property in downtown Austin, Texas. Block 21 contains the 251-room W Austin Hotel and is home to Austin City Limits Live at the Moody Theater, a 2,750-seat entertainment venue that serves as the location for the filming of Austin City Limits, the longest running music series in American television history. Block 21 also includes Class A office space, retail space and the 3TEN ACL Live entertainment venue and business.
In December 2019, Stratus announced that it had agreed to sell Block 21 to Ryman Hospitality Properties, Inc. (Ryman) for $275.0 million. Ryman deposited $15.0 million in earnest money to secure its performance under the agreements governing the sales. In May 2020, Ryman delivered a termination letter, which was agreed to and accepted by Stratus, terminating the agreements to sell Block 21 and authorizing the release of Ryman’s $15.0 million in earnest money to Stratus, which Stratus recorded as operating income in 2020.
In October 2021, Stratus entered into new agreements to sell Block 21 to Ryman for $260.0 million. The purchase price includes Ryman’s assumption of approximately $137 million of existing Block 21 mortgage debt and is subject to an expected downward adjustment of $5.0 million. The remainder of the purchase price will be paid in cash. The transaction is expected to close prior to June 1, 2022, but remains subject to the timely satisfaction or waiver of various closing conditions, including the consent of the loan servicer to the purchaser’s assumption of the existing mortgage loan; the consent of the hotel operator, an affiliate of Marriott, to the purchaser’s assumption of the hotel operating agreement; the absence of a material adverse effect; and other customary closing conditions. The Block 21 purchase agreement will terminate if all conditions to closing are not satisfied or waived by the parties. Ryman has deposited $5.0 million in earnest money to secure its performance under the agreements governing the sale. Of the total purchase price, $6.9 million will be held in escrow for 12 months after the closing, subject to a longer retention period with respect to any required reserve for pending claims.
In accordance with accounting guidance, Stratus reported the results of operations of Block 21 as discontinued operations in the consolidated statements of comprehensive (loss) income because the disposal represents a strategic shift that had a major effect on operations, and presented the assets and liabilities of Block 21 as held for sale - discontinued operations in the consolidated balance sheets for all periods presented. Block 21 did not have any other comprehensive income and Stratus' consolidated statements of cash flows are reported on a combined basis without separately presenting discontinued operations.
The carrying amounts of Block 21's major classes of assets and liabilities in the consolidated balance sheetssheet at December 31, 2021, follow (in thousands):
| | | | | | | | | | | | | | |
| | March 31, 2022 | | December 31, 2021 |
Assets: | | | | |
Cash and cash equivalents | | $ | 9,509 | | | $ | 9,172 | |
Restricted casha | | 17,942 | | | 18,444 | |
Real estate held for investment, net | | 120,634 | | | 120,452 | |
Other assets | | 3,087 | | | 2,985 | |
Total assets | | $ | 151,172 | | | $ | 151,053 | |
Liabilities: | | | | |
Accounts payable and accrued liabilities, including taxes | | $ | 4,268 | | | $ | 6,200 | |
Debtb | | 136,054 | | | 136,684 | |
Other liabilities | | 9,395 | | | 10,213 | |
Total liabilities | | $ | 149,717 | | | $ | 153,097 | |
| | | | | |
| |
Assets: | |
Cash and cash equivalents | $ | 9,172 | |
Restricted cash a | 18,444 | |
Real estate held for investment, net | 120,452 | |
Other assets | 2,985 | |
Total assets | $ | 151,053 | |
Liabilities: | |
Accounts payable and accrued liabilities, including taxes | $ | 6,200 | |
Debt | 136,684 | |
Other liabilities | 10,213 | |
Total liabilities | $ | 153,097 | |
a.Most restricted cash would bewas received by Ryman upon the closing of the sale.
b.In 2016, Stratus completed the refinancing of the W Austin Hotel & Residences. Goldman Sachs Mortgage Company provided a $150.0 million, ten-year, non-recourse term loan with a fixed interest rate of 5.58 percent per annum and payable monthly based on a 30-year amortization. Balances include net reductions for unamortized debt issuance costs of $0.5 million at March 31, 2022, and $0.6 million at December 31, 2021.
Block 21’s results of operations in the consolidated statements of comprehensive (loss) income consistsconsist of the following (in thousands):
| | | | | | | | | | | | | | | | Three Months Ended | | Nine Months Ended | |
| | Three Months Ended March 31, | | | September 30, | | September 30, | |
| | 2022 | | 2021 | | | 2022 | | 2021 | | 2022 | | 2021 | |
Revenues:a | Revenues:a | | | | | | Revenues: a | | | | | | | | |
Hotel | Hotel | | $ | 5,871 | | | $ | 2,118 | | | Hotel | $ | — | | | $ | 5,199 | | | $ | 12,653 | | | $ | 11,251 | | |
Entertainment | Entertainment | | 5,340 | | | 608 | | | Entertainment | — | | | 3,657 | | | 9,990 | | | 5,923 | | |
Leasing operations and other | Leasing operations and other | | 726 | | | 414 | | | Leasing operations and other | — | | | 356 | | | 932 | | | 1,124 | | |
Total revenue | Total revenue | | 11,937 | | | 3,140 | | | Total revenue | — | | | 9,212 | | | 23,575 | | | 18,298 | | |
Cost of sales: | Cost of sales: | | | Cost of sales: | | |
Hotel | Hotel | | 4,743 | | | 2,901 | | | Hotel | — | | | 4,312 | | | 9,230 | | | 11,076 | | |
Entertainment | Entertainment | | 4,139 | | | 1,279 | | | Entertainment | — | | | 2,749 | | | 7,763 | | | 5,559 | | |
Leasing operations and other | Leasing operations and other | | 471 | | | 337 | | | Leasing operations and other | — | | | 196 | | | 802 | | | 871 | | |
Depreciation | | — | | b | 1,416 | | | |
Depreciation b | | Depreciation b | — | | | 1,360 | | | — | | | 4,134 | | |
Total cost of sales | Total cost of sales | | 9,353 | | | 5,933 | | | Total cost of sales | — | | | 8,617 | | | 17,795 | | | 21,640 | | |
General and administrative expenses | General and administrative expenses | | 100 | | | 220 | | | General and administrative expenses | — | | | 170 | | | 236 | | | 568 | | |
| Gain on sale of assets | | Gain on sale of assets | — | | | — | | | (119,695) | | | — | | |
Operating income (loss) | Operating income (loss) | | 2,484 | | | (3,013) | | | Operating income (loss) | — | | | 425 | | | 125,239 | | | (3,910) | | |
Interest expense, net | Interest expense, net | | (1,945) | | | (1,979) | | | Interest expense, net | — | | | (2,005) | | | (3,236) | | | (5,976) | | |
| (Provision for) benefit from income taxes | | (164) | | | 2,484 | | | |
Net income (loss) | | $ | 375 | | | $ | (2,508) | | | |
Benefit from (provision for) income taxes | | Benefit from (provision for) income taxes | — | | | 39 | | | (25,703) | | | (61) | | |
Net (loss) income from discontinued operations | | Net (loss) income from discontinued operations | $ | — | | | $ | (1,541) | | | $ | 96,300 | | | $ | (9,947) | | |
a.In accordance with accounting guidance, amounts are net of eliminations of intercompany sales totaling $321$286 thousand in first-quarterthird-quarter 2021, $510 thousand for the first nine months of 2022, and $262$822 thousand in first-quarterfor the first nine months of 2021.
b.In accordance with accounting guidance, depreciation is not recognized subsequent to classification as assets held for sale, which occurred in the fourth quarter of 2021.
Capital expenditures associated with discontinued operations totaled $182$210 thousand in first-quarterthird-quarter 2021, $213 thousand for the first nine months of 2022 and $107$475 thousand in first-quarterthe first nine months of 2021.
The Oaks at Lakeway. In 2017, Stratus sold The Oaks at Lakeway to FHF I Oaks at Lakeway, LLC for $114.0 million in cash. The Oaks at Lakeway is an H-E-B, L.P.-anchored retail project located in Lakeway, Texas. The parties entered into three master lease agreements at closing: (1) one covering unleased in-line retail space, with a 5-year term (the In-line Master Lease), (2) one covering the hotel pad with a 99-year term (the Hotel Master Lease) and (3) one covering four unleased pad sites, three of which have 10-year terms, and one of which has a
15-year term (the Pad Site Master Lease). For additional information, refer to Note 9 in the Stratus 2021 Form 10-K under the heading “Deferred Gain on Sale of The Oaks at Lakeway.”
The In-Line Master Lease expired in February 2022 and the Hotel Master Lease was terminated in November 2020. As such, Stratus has no further obligations under these two master leases. With respect to the Pad Site Master Lease, Stratus has leased the one pad site with a 15-year term, reducing the monthly rent payment net of rent collections for this pad site to approximately $2,500. Stratus may assign this lease to the purchaser and terminate the obligation under the Pad Site Master Lease for this pad site with a payment of $560,000$560 thousand to the purchaser. The lease term for the remaining three unleased pad sites under the Pad Site Master Lease expires in February 2027. To the extent leases are executed for the remaining three unleased pad sites, tenants open for business, and the leases are then assigned to the purchaser, the master lease obligation could be reduced further.
In the first quarter offirst-quarter 2022, Stratus reassessed its plans with respect to construction of the remaining buildings on the three remaining unleased pad sites and determined that, rather than execute leases and build the buildings, it is less costly to continue to pay the monthly rent (approximately $77$71 thousand per month) pursuant to the Pad Site Master Lease until the lease expires in February 2027. In connection with this determination, Stratus reversed an accrual of costs to lease and construct these buildings, resulting in recognition of an additional $4.8 million of gain in first-quarterduring the first nine months of 2022. A contract liability of $4.3$3.7 million is presented as a deferred gain in the consolidated balance sheets at March 31,September 30, 2022, compared with $4.8 million at December 31, 2021. The reduction in the deferred gain balance primarily reflects master leasePad Site Master Lease payments. The remaining deferred gain balance is expected to be reduced primarily by future master leasePad Site Master Lease payments.
The Saint Mary. In January 2021, The Saint Mary, L.P. sold The Saint Mary for $60.0 million. After closing costs and payment of the outstanding construction loan, the sale generated net proceeds of approximately $34 million. In first-quarter 2021, after establishing a reserve for remaining costs of the partnership, Stratus received $20.9 million from the subsidiary in connection with the sale and $12.9 million of the net proceeds were distributed to the noncontrolling interest owners. Stratus recognized a pre-tax gain on the sale of $22.9 million ($16.2 million net of noncontrolling interests) in first-quarterfor the first six months of 2021. Stratus also recognized a $63 thousand loss on extinguishment of debt in first-quarterfor the first six months of 2021 related to the repayment of The Saint Mary construction loan.
The Saint Mary had rental revenue of $0.1 million in first-quarter 2021 prior to the sale. Interest expense, net of capitalized amounts, related to The Saint Mary construction loan was less than $0.1 million in first-quarter 2021.
Kingwood Place Pending Land Sale. Land.In September 2021, Stratus entered into a contract to sell the multi-family tract of land at Kingwood Place, which was planned for approximately 275 multi-family units, for $5.5 million. The sale closed in October 2022. Upon entering into the contract, Stratus recorded a $625 thousand impairment charge in third-quarter 2021 to reduce the carrying value of the land to its fair value based on the contractual sale price less estimated selling costs. In third-quarter 2022, Stratus recorded a $70 thousand impairment charge due to selling costs in excess of the previous estimate.
Amarra Villas. In February 2021, Stratus entered into a contract to sell one of the Amarra Villas homes for $2.4 million. The sale, if consummated, is expectedset to close by mid-2022.in first-quarter 2023. Stratus recorded a $650 thousand impairment charge in third-quarter 2022 because the estimated total project costs and costs of sale for the home under construction exceed its contractual sale price.
5. FAIR VALUE MEASUREMENTS
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' debt follows (in thousands): | | | March 31, 2022 | | December 31, 2021 | | September 30, 2022 | | December 31, 2021 |
| | Carrying Value | | Fair Value | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
| Liabilities: | Liabilities: | | | | | | | | Liabilities: | | | | | | | |
Debt | Debt | $ | 121,446 | | | $ | 122,747 | | | $ | 106,648 | | | $ | 108,091 | | Debt | $ | 124,170 | | | $ | 125,855 | | | $ | 106,648 | | | $ | 108,091 | |
|
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.
6. DEBT AND EQUITY
The components of Stratus' debt follow (in thousands): | | March 31, 2022 | | December 31, 2021 | | |
| | | | September 30, 2022 | | December 31, 2021 | |
Comerica Bank credit facility | Comerica Bank credit facility | $ | 10,000 | | | $ | — | | | Comerica Bank credit facility | $ | — | | | $ | — | | |
Jones Crossing loan | Jones Crossing loan | 24,067 | | | 24,042 | | | Jones Crossing loan | 24,118 | | | 24,042 | | |
The Annie B land loan | The Annie B land loan | 13,877 | | | 13,847 | | | The Annie B land loan | 13,939 | | | 13,847 | | |
New Caney land loan | New Caney land loan | 4,262 | | | 4,496 | | | New Caney land loan | 4,043 | | | 4,496 | | |
Paycheck Protection Program loan | Paycheck Protection Program loan | 38 | | | 156 | | | Paycheck Protection Program loan | — | | | 156 | | |
Construction loans: | Construction loans: | | Construction loans: | | |
Kingwood Place | Kingwood Place | 32,457 | | | 32,249 | | | Kingwood Place | 32,657 | | | 32,249 | | |
| Lantana Place | Lantana Place | 21,997 | | | 22,098 | | | Lantana Place | 21,776 | | | 22,098 | | |
The Saint June | | The Saint June | 9,770 | | | — | | |
Magnolia Place | Magnolia Place | 6,542 | | | 2,077 | | | Magnolia Place | 6,314 | | | 2,077 | | |
West Killeen Market | West Killeen Market | 6,040 | | | 6,078 | | | West Killeen Market | 5,979 | | | 6,078 | | |
Amarra Villas credit facility | Amarra Villas credit facility | 2,166 | | | 1,605 | | | Amarra Villas credit facility | 5,574 | | | 1,605 | | |
| Total debta | Total debta | $ | 121,446 | | | $ | 106,648 | | | Total debt a | $ | 124,170 | | | $ | 106,648 | | |
a.Includes net reductions for unamortized debt issuance costs of $1.1$1.2 million at March 31,September 30, 2022, and $1.2 million at December 31, 2021. Total debt at December 31, 2021, does not include debt associated with Block 21, which is reflected in liabilities held for sale.sale - discontinued operations. Refer to Note 4 for further discussion.
Comerica Bank credit facility. AsUsing proceeds from the sale of March 31, 2022,Block 21, Stratus had $49.7 million availablerepaid the outstanding amount under its $60.0 million Comerica Bank credit facility with lettersin June 2022. As of September 30, 2022, Stratus had $49.0 million available under the credit facility. Letters of credit, totaling $347 thousand committed against the credit facility. In April 2022, Stratus borrowed $20.0$11.0 million, onhave been issued under the credit facility, of whichand secure the majority of the funds were usedcompany’s obligation to make a U.S. Federal tax payment for Stratus’ 2021 tax liability.build certain roads and utilities facilities benefiting Holden Hills and Section N. In May 2022, Stratus and Comerica Bank entered into an amendment to extend the maturity date of the Comerica Bank credit facility from September 27, 2022, to December 26, 2022, increase the letter of credit sublimit from $7.5 million to $11.5 million and change the benchmark rate from the London Interbank Offered Rate (LIBOR) to the Bloomberg Short-Term Bank Yield Index (BSBY) Rate. Advances under the credit facility now bear interest at the one-month BSBY Rate (with a floor of 0.0 percent) plus 4.0 percent. In November 2022, Stratus entered into an amendment to extend the maturity date of the credit facility from December 26, 2022, to March 27, 2023.
New Caney land loan. In March 2022, Stratus extended the maturity of the New Caney land loan for an additional 12 months to March 8, 2023, which required a principal payment of $0.2 million in March 2022 and will require a second principal payment of $0.2 million in September 2022. Stratus also entered into an amendment to the New Caney land loan to convert the benchmark rate from LIBOR to the Term Secured Overnight Financing Rate (SOFR)(Term SOFR). The loan now bears interest at Term SOFR plus 3.0 percent, subject to the applicable margin adjustment.percent.
PPP loan. In April 2020, Stratus received a $4.0 million loan under the Paycheck Protection Program (PPP loan) of the Coronavirus Aid, Relief, and Economic Security Act, which was signed into law on March 27, 2020. The PPP loan matured and the remaining balance was repaid by Stratus onin April 15, 2022. Of the original loan amount, $3.7 million was forgiven in August 2021.
Lantana Place construction loan. In JanuaryAugust 2022, Stratus entered into an amendment toand Southside Bank amended the Lantana Place construction loanloan. Pursuant to extendthe agreement, the date through which Stratus can request advances under the loan was extended through December 31, 2022.2023, the interest rate for the loan was changed to Term SOFR plus 2.40 percent, subject to a 3.0 percent floor, and the maturity date of the loan was extended to July 1, 2027. In addition, the land planned for The Saint Julia, a proposed multi-family project at Lantana Place, was released from the collateral for the loan.
Payments of interest only on the construction loan are due monthly through July 1, 2023. Beginning August 1, 2023, monthly payments of principal and interest based on a 30-year amortization are due, with the outstanding principal due at maturity.
The debt service coverage ratio was also changed to 1.25 to 1.00, and Stratus was released as guarantor under the related guaranty.
West Killeen Market construction loan. In June 2022, Stratus and Southside Bank amended the West Killeen Market construction loan. Pursuant to the agreement, the principal amount of the loan is fully advanced and funded at an amount of $6.0 million, the interest rate for the loan was changed to Term SOFR plus 2.75 percent, subject to a 3.0 percent floor, and the maturity date of the loan was extended three years to July 31, 2025. Principal and interest payments based on a 30-year amortization are due monthly and the remaining balance is payable at maturity.
Amarra Villas credit facility. In MarchJune 2022, Stratus subsidiaries and Comerica Bank agreedentered into a modification agreement pursuant to an extensionwhich the commitment amount of the Amarra Villas credit facility was increased from $15.0 million to $18.0 million, the interest rate was changed to the one-month BSBY Rate (with a floor of 0.0 percent) plus 3.0 percent, and the maturity date was extended to June 19, 2024.
The Saint George construction loan. In July 2022, while they negotiateThe Saint George Apartments, L.P., a modificationStratus subsidiary entered into a $56.8 million loan with Comerica Bank to provide financing for the construction of The Saint George multi-family project. The construction loan has a maturity date of July 19, 2026, with two options to extend the maturity for an additional 12 months, subject to satisfying specified conditions, including the applicable debt service coverage ratios, and the payment of an extension fee for each extension. Advances under the construction loan bear interest at the one-month BSBY Rate (with a floor of 0.0 percent) plus 2.35 percent.
Payments of interest only on the construction loan are due monthly through July 19, 2026, with the outstanding principal due at maturity. During any extension periods, the principal balance of the construction loan will be payable in monthly installments of principal and interest based on a 30-year amortization calculated at 6.50 percent with the outstanding principal due at maturity. The construction loan may be prepaid without premium or penalty.
Borrowings on the construction loan are secured by The Saint George project and are guaranteed by Stratus. Stratus provided a full completion guaranty and 25 percent repayment guaranty, which will be eliminated once the project meets specified conditions including a debt service coverage ratio of at least 1.20 to 1.00 and confirmation that the loan-to-value ratio does not exceed 65 percent. Notwithstanding the foregoing, Stratus remains liable for customary carve-out obligations and environmental indemnity. The loan agreement contains financial covenants, including a requirement that Stratus maintain a net asset value, as defined in the agreement, of $125.0 million and an aggregate debt-to-gross asset value of less than 50 percent. The Saint George Apartments, L.P. is not permitted to make distributions to its partners until The Saint George project is completed and achieves a debt service coverage ratio of at least 1.20 to 1.00. No amounts were outstanding on this facility.loan as of September 30, 2022.
For additional information regarding Stratus' debt, refer to Note 6 in the Stratus 2021 Form 10-K.
Interest Expense and Capitalization. Interest costs (before capitalized interest) totaled $1.1$1.8 million in first-quarterthird-quarter 2022, $2.2 million in third-quarter 2021, $4.4 million for the first nine months of 2022 and $2.3$6.6 million in first-quarterfor the first nine months of 2021. Stratus' capitalized interest totaled $1.1$1.8 million in first-quarterthird-quarter 2022, and $1.3 million in first-quarterthird-quarter 2021, $4.3 million for the first nine months of 2022 and $3.9 million for the first nine months of 2021. Capitalized interest is primarily related to development activities at Barton Creek (primarily Section N), The Annie B, The Saint George and Magnolia Place.
Equity. The Comerica Bank credit facility, Amarra Villas credit facility, The Annie B land loan, The Saint George construction loan and Kingwood Place construction loan require Comerica Bank’s prior written consent for any common stock repurchases in excess of $1.0 million or any dividend payments. On September 1, 2022, after receiving written consent from Comerica Bank, Stratus’ Board of Directors (Board) declared a special cash dividend of $4.67 per share (totaling $40.0 million) on Stratus’ common stock, which was paid on September 29, 2022, to shareholders of record as of September 19, 2022. Accrued liabilities as of September 30, 2022, included $1.3 million representing dividends accrued for unvested RSUs in accordance with the terms of the awards. The accrued dividends will be paid to the holders of the RSUs, if and when they vest. Stratus’ Board also approved a new share repurchase program, which authorizes repurchases of up to $10.0 million of Stratus’ common stock. The repurchase program authorizes Stratus, in management’s discretion, to repurchase shares from time to time, subject to market conditions and other factors. In third-quarter 2022, Stratus acquired 33,958 shares of its common stock under the share repurchase program for a total cost of $0.8 million at an average price of $23.49 per share. Through November 4, 2022, Stratus has acquired 105,415 shares of its common stock for a total cost of $2.6 million at an average price of $25.02 per share, and $7.4 million remains available for repurchases under the program.
7. PROFIT PARTICIPATION INCENTIVE PLAN
In July 2018, the Compensation Committee unanimously adopted the PPIP, which provides participants with economic incentives tied to the success of the development projects designated by the Compensation Committee as approved projects under the PPIP. Estimates related to the awards may change over time as a result of differences between projected and actual development progress and costs, market conditions and the timing of capital transactions or valuation events. During the first quarter of 2022, the Compensation Committee designated The Saint June as an approved project under the PPIP although no awards for this project were granted as of March 31, 2022. Refer to Note 8 of the Stratus 2021 Form 10-K for further discussion.
The sale of The Saint Mary in January 2021 was a capital transaction under the PPIP. During February 2022, $2.1 million was paid in cash to eligible participants.
In September 2021, Lantana Place reached a valuation event under the PPIP. The profit pool was $3.9 million, of which $0.2 million was paid in cash during February 2022. The2022 and the remaining accrued liability under the PPIP related to Lantana Place totaledof $3.7 million at March 31, 2022, and is expected to bewas settled in RSUs with a three-year vesting period awarded to eligible participants in the first halfduring second-quarter 2022 following stockholder approval of 2022.Stratus’ new stock incentive plan.
The sale of The Santal in December 2021 was a capital transaction under the PPIP. During February 2022,The profit pool was $6.7 million, of which $5.0 million was paid in cash to eligible participants subject to the PPIP’sduring February 2022. The PPIP contains limits on cash compensation paid to certain officers. Amountsofficers and amounts due under the PPIP above the limits are converted to an equivalent number of RSUs with a one-year vesting period. The remaining accrued liability under the PPIP related to The Santal totaled $1.7$1.6 million at March 31, 2022, and is expected to bewas settled in RSUs awarded to eligible participantsone participant during second-quarter 2022 following stockholder approval of Stratus’ new stock incentive plan.
During first-quarter 2022, the Compensation Committee designated The Saint June as an approved project under the PPIP, and the awards were granted in the first half ofAugust 2022.
Under the terms of the PPIP, the number of RSUs granted in connection with settlement of approved projects is determined by reference to the 12-month trailing average stock price for the year the project reaches a payment event, whereas the grant date fair value of the RSUs for accounting purposes is based on the grant date closing price. For the RSUs awarded in connection with Lantana Place and The Santal, the aggregate grant date value was $2.1 million greater than the accrued liability for the two projects as a result of this different valuation methodology. During second-quarter 2022, Stratus transferred the $5.3 million accrued liability balance under the PPIP for Lantana Place and The Santal that was settled in RSUs to capital in excess of par value and is amortizing the $2.1 million balance of the grant-date value with a charge to general and administrative expenses and a credit to capital in excess of par value over the three-year or one-year vesting periods of the related RSUs.
A summary of PPIP costs follows (in thousands):
| | | | | Three Months Ended March 31, | | | | | | | | | | | | | | | | | | | | | | |
| | | | 2022 | | 2021 | | | Three Months Ended | | Nine Months Ended | |
| | | September 30, | | September 30, | |
| | | 2022 | | 2021 | | 2022 | | 2021 | |
Charged to general and administrative expense | Charged to general and administrative expense | | | $ | 15 | | | $ | 495 | | | Charged to general and administrative expense | $ | 135 | | | $ | 2,751 | | | $ | 269 | | | $ | 3,495 | | |
Capitalized to project development costs | Capitalized to project development costs | | | 51 | | | 224 | | | Capitalized to project development costs | 107 | | | (60) | | | 209 | | | 367 | | |
Total PPIP costs | Total PPIP costs | | | $ | 66 | | | $ | 719 | | | Total PPIP costs | $ | 242 | | | $ | 2,691 | | | $ | 478 | | | $ | 3,862 | | |
|
The accrued liability for the PPIP totaled $7.9$2.9 million at March 31,September 30, 2022, and $15.2 million at December 31, 2021 (included in other liabilities).
8. INCOME TAXES
Stratus’ accounting policy for and other information regarding its income taxes are further described in Notes 1 and 7 in the Stratus 2021 Form 10-K.
Stratus had deferred tax assets (net of deferred tax liabilities) totaling $11.3$6.3 million at March 31,September 30, 2022, and $12.4 million at December 31, 2021. Stratus' deferred tax assets had valuation allowances totaling $6.5$6.3 million at March 31,September 30, 2022, and $6.4 million at December 31, 2021. Management hasPrior to the sale of Block 21, management concluded that the pending sale of Block 21 iswas sufficient positive evidence to support the ability to realize certain deferred tax assets expected to be realized from the sale, which resulted in Stratus recording a $4.2 million non-cash tax credit in the fourth quarter offourth-quarter 2021 to reduce the related valuation allowance. Stratus continues to maintain a valuation allowance on its remaining deferred tax assets. Stratus plans to make a federal income tax payment of approximately $10 million in December 2022 to satisfy estimated taxes due associated with current year taxable income, including the gain on the sale of Block 21.
In evaluating the recoverability of the remaining deferred tax assets, management considered available positive and negative evidence, giving greater weight to the uncertainty regarding projected future financial results. Upon a change in facts and circumstances, management may conclude that sufficient positive evidence exists to support a reversal of, or decrease in, the valuation allowance in the future, which would favorably impact Stratus' results of operations. 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 that are not more likely than not to be realized.
The difference between Stratus' consolidated effective income tax rate for the first nine months of (20) percent in first-quarter 2022 and the U.S. Federal statutory income tax rate of 21 percent was primarily attributable to state income taxes, noncontrolling interests in subsidiaries, the presence of a valuation allowance against certain U.S. Federal deferred tax assets as of September 30, 2022, and the release of a reserve on uncertain tax positions related to the 2015 through 2017 U.S. Federal tax audit, which was closed in the first quarter offirst-quarter 2022. The difference between Stratus' consolidated effective income tax rate of 133 percent in first-quarterfor the first nine months of 2021 and the U.S. Federal statutory income tax rate of 21 percent was primarily attributable to noncontrolling interests in subsidiaries, the presence of a full valuation allowance against certain U.S. Federal deferred tax assets as of March 31,September 30, 2021, and the Texas state margin tax.
On August 16, 2022, the Inflation Reduction Act of 2022 (the IR Act) was enacted in the United States. Among other provisions, the IR Act imposes a new 1 percent excise tax on the fair market value of net corporate stock repurchases made by covered corporations, effective for tax years beginning after December 31, 2022. Stratus is assessing the potential impacts of the IR Act, but does not expect the IR Act to have a material impact on its consolidated financial statements.
9. BUSINESS SEGMENTS
As a result of the pending sale of Block 21, Stratus has 2two operating segments: Real Estate Operations and Leasing Operations. Block 21, which encompassed Stratus’ hotel and entertainment segments, along with some leasing operations, is reflected as discontinued operations.operations through its sale in May 2022.
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 (including Section N, Holden Hills, Amarra multi-family and commercial land, Amara Villas, The Saint June and other vacant land in the Barton Creek community; the Circle C community; the Lantana community, including a portion of Lantana Place planned for a multi-family phase now known as The Saint Julia,Julia; The Saint George; and the land for The Saint George and The Annie B); in Lakeway, Texas, located in the greater Austin area (Lakeway); in College Station, Texas (a portion of Jones Crossing and vacant pad sites); in Killeen, Texas (one vacant pad site at West Killeen Market); and in Magnolia, Texas (Magnolia Place), Kingwood, Texas (land for future multi-family development, for which a sale is pending,closed in October 2022, and a vacant pad site) and New Caney, Texas (New Caney), located in the greater Houston area.
The Leasing Operations segment is comprised of Stratus’ real estate assets, both residential and commercial, that are leased or available for lease and includes West Killeen Market, Lantana Place, Kingwood Place and the completed portion of Jones Crossing. The segment also included The Saint Mary until its sale in January 2021 and The Santal until its sale in December 2021.
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 Contracts with Customers. Stratus' revenues from contracts with customers follow (in thousands):
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2022 | | 2021 |
Real Estate Operations: | | | | | | | |
Developed property sales | | | | | $ | — | | | $ | 4,040 | |
Undeveloped property sales | | | | | — | | | 2,500 | |
Commissions and other | | | | | 19 | | | 16 | |
| | | | | 19 | | | 6,556 | |
Leasing Operations: | | | | | | | |
Rental revenue | | | | | 3,080 | | | 4,818 | |
| | | | | 3,080 | | | 4,818 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Total revenues from contracts with customers | | | | | $ | 3,099 | | | $ | 11,374 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Real Estate Operations: | | | | | | | |
Developed property sales | $ | — | | | $ | — | | | $ | 2,382 | | | $ | 4,615 | |
Undeveloped property sales | 6,887 | | | 750 | | | 12,331 | | | 3,250 | |
Commissions and other | — | | | 142 | | | 118 | | | 351 | |
| 6,887 | | | 892 | | | 14,831 | | | 8,216 | |
Leasing Operations: | | | | | | | |
Rental revenue | 3,090 | | | 5,376 | | | 9,370 | | | 15,057 | |
| 3,090 | | | 5,376 | | | 9,370 | | | 15,057 | |
| | | | | | | |
Total revenues from contracts with customers | $ | 9,977 | | | $ | 6,268 | | | $ | 24,201 | | | $ | 23,273 | |
Financial Information by Business Segment. Summarized financial information by segment for the three months ended September 30, 2022, based on Stratus’ internal financial reporting system utilized by its chief operating decision maker, follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Real Estate Operations a | | Leasing Operations | | Corporate, Eliminations and Other b | | Total |
Revenues: | | | | | | | |
Unaffiliated customers | $ | 6,887 | | | $ | 3,090 | | | $ | — | | | $ | 9,977 | |
| | | | | | | |
Cost of sales, excluding depreciation | 6,232 | | | 1,350 | | | (4) | | | 7,578 | |
Depreciation | 24 | | | 887 | | | (4) | | | 907 | |
General and administrative expenses | — | | | — | | | 3,602 | | | 3,602 | |
Impairment of real estate c | 720 | | | — | | | — | | | 720 | |
Operating (loss) income | $ | (89) | | | $ | 853 | | | $ | (3,594) | | | $ | (2,830) | |
Capital expenditures and purchases and development of real estate properties | $ | 6,203 | | | $ | 11,314 | | | $ | — | | | $ | 17,517 | |
Total assets at September 30, 2022 | 274,397 | | | 111,938 | | | 76,502 | | | 462,837 | |
a.Includes sales commissions and other revenues together with related expenses.
Financial Informationb.Includes consolidated general and administrative expenses and eliminations of intersegment amounts.
c.Includes a $650 thousand impairment charge for one of the Amarra Villas homes that is under contract to sell for $2.4 million and a $70 thousand impairment charge for the multi-family tract of land at Kingwood Place that sold for $5.5 million in October 2022.
Summarized financial information by Business Segment. The following segment information was preparedfor the three months ended September 30, 2021, based on the same basis as Stratus’ consolidatedinternal financial statementsreporting system utilized by its chief operating decision maker, follows (in thousands).:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Real Estate Operationsa | | Leasing Operations | | | | | | Corporate, Eliminations and Otherb | | Total |
Three Months Ended March 31, 2022: | | | | | | | | | | | |
Revenues: | | | | | | | | | | | |
Unaffiliated customers | $ | 19 | | | $ | 3,080 | | | | | | | $ | — | | | $ | 3,099 | |
Intersegment | 4 | | | — | | | | | | | (4) | | | — | |
Cost of sales, excluding depreciation | 1,366 | | | 984 | | | | | | | — | | | 2,350 | |
Depreciation | 25 | | | 852 | | | | | | | (4) | | | 873 | |
| | | | | | | | | | | |
General and administrative expenses | — | | | — | | | | | | | 3,167 | | c | 3,167 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Gain on sale of assets | — | | | (4,812) | | d | | | | | — | | | (4,812) | |
Operating (loss) income | $ | (1,368) | | | $ | 6,056 | | | | | | | $ | (3,167) | | | $ | 1,521 | |
| | | | | | | | | | | |
Capital expenditures and purchases and development of real estate properties | $ | 4,864 | | | $ | 14,542 | | | | | | | $ | 182 | | | $ | 19,588 | |
| | | | | | | | | | | |
Total assets at March 31, 2022 | 254,212 | | | 106,652 | | | | | | | 183,904 | | e | 544,768 | |
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| | | | | | | | | | | |
| | | | | | | | | | | |
Three Months Ended March 31, 2021: | | | | | | | | | | | |
Revenues: | | | | | | | | | | | |
Unaffiliated customers | $ | 6,556 | | | $ | 4,818 | | | | | | | $ | — | | | $ | 11,374 | |
Intersegment | 4 | | | — | | | | | | | (4) | | | — | |
Cost of sales, excluding depreciation | 4,360 | |
| 2,052 | | | | | | | — | | | 6,412 | |
Depreciation | 64 | | | 1,544 | | | | | | | (22) | | | 1,586 | |
General and administrative expenses | — | | | — | | | | | | | 4,324 | | | 4,324 | |
| | | | | | | | | | | |
Gain on sale of assets | — | | | (22,931) | | f | | | | | — | | | (22,931) | |
Operating income (loss) | $ | 2,136 | | | $ | 24,153 | | | | | | | $ | (4,306) | | | $ | 21,983 | |
Capital expenditures and purchases and development of real estate properties | $ | 2,489 | | | $ | 902 | | | | | | | $ | 107 | | | $ | 3,498 | |
Total assets at March 31, 2021 | 161,488 | | | 180,758 | | g | | | | | 159,625 | | e | 501,871 | |
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| | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Real Estate Operations a | | Leasing Operations | | Corporate, Eliminations and Other b | | Total |
Revenues: | | | | | | | |
Unaffiliated customers | $ | 892 | | | $ | 5,376 | | | $ | — | | | $ | 6,268 | |
| | | | | | | |
Cost of sales, excluding depreciation | 2,134 | | | 2,238 | | | (25) | | | 4,347 | |
Depreciation | 37 | | | 1,449 | | | (14) | | | 1,472 | |
General and administrative expenses c | — | | | — | | | 5,252 | | | 5,252 | |
Impairment of real estate d | 625 | | | — | | | — | | | 625 | |
Operating (loss) income | $ | (1,904) | | | $ | 1,689 | | | $ | (5,213) | | | $ | (5,428) | |
Capital expenditures and purchases and development of real estate properties | $ | 25,962 | | | $ | 4,120 | | | $ | 210 | | | $ | 30,292 | |
Total assets at September 30, 2021 e | 211,423 | | | 180,057 | | | 167,620 | | | 559,100 | |
a.Includes sales commissions and other revenues together with related expenses.
b.Includes consolidated general and administrative expenses and eliminations of intersegment amounts.
c.The decrease in first-quarter 2022, compared to first-quarter 2021, is primarily the result of $0.8Includes $2.8 million incurred in first-quarter 2021 for consulting, legal and public relation costs for Stratus' successful proxy contest and the real estate investment trust exploration process as well as a $0.5 million decrease in employee incentive compensation costs associated with the PPIP.PPIP resulting primarily from an increased valuation for The Santal.
d.Includes a $625 thousand impairment charge for the multi-family tract of land at Kingwood Place.
e.Leasing operations includes $67.3 million of assets held for sale related to the December 2021 sale of The Santal. Corporate, eliminations and other includes $147.8 million of assets held for sale associated with discontinued operations at Block 21.
Summarized financial information by segment for the nine months ended September 30, 2022, based on Stratus’ internal financial reporting system utilized by its chief operating decision maker, follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Real Estate Operations a | | Leasing Operations | | Corporate, Eliminations and Other b | | Total |
Revenues: | | | | | | | |
Unaffiliated customers | $ | 14,831 | | | $ | 9,370 | | | $ | — | | | $ | 24,201 | |
Intersegment | 6 | | | — | | | (6) | | | — | |
Cost of sales, excluding depreciation | 13,030 | | | 3,204 | | | (4) | | | 16,230 | |
Depreciation | 73 | | | 2,604 | | | (13) | | | 2,664 | |
General and administrative expenses | — | | | — | | | 10,213 | | | 10,213 | |
Gain on sale of assets c | — | | | (4,812) | | | — | | | (4,812) | |
Impairment of real estate d | 720 | | | — | | | — | | | 720 | |
Operating income (loss) | $ | 1,014 | | | $ | 8,374 | | | $ | (10,202) | | | $ | (814) | |
Capital expenditures and purchases and development of real estate properties | $ | 18,294 | | | $ | 38,676 | | | $ | 213 | | | $ | 57,183 | |
a.Includes sales commissions and other revenues together with related expenses.
b.Includes consolidated general and administrative expenses and eliminations of intersegment amounts.
c.Represents a pre-tax gain recognized on the reversal of accruals for costs to lease and construct buildings under a master lease arrangement that Stratus entered into in connection with its sale of The Oaks at Lakeway in 2017.
e.d.Includes assets helda $650 thousand impairment charge for saleone of the Amarra Villas homes that is under contract to sell for $2.4 million and a $70 thousand impairment charge for the multi-family tract of land at Kingwood Place that sold for $5.5 million in October 2022.
Summarized financial information by segment for the nine months ended September 30, 2021, based on Stratus’ internal financial reporting system utilized by its chief operating decision maker, follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Real Estate Operations a | | Leasing Operations | | Corporate, Eliminations and Other b | | Total |
Revenues: | | | | | | | |
Unaffiliated customers | $ | 8,216 | | | $ | 15,057 | | | $ | — | | | $ | 23,273 | |
Intersegment | 9 | | | — | | | (9) | | | — | |
Cost of sales, excluding depreciation | 8,026 | |
| 6,482 | | | (25) | | | 14,483 | |
Depreciation | 149 | | | 4,525 | | | (50) | | | 4,624 | |
General and administrative expenses c | — | | | — | | | 15,797 | | | 15,797 | |
Gain on sale of assets d | — | | | (22,931) | | | — | | | (22,931) | |
Impairment of real estate e | 625 | | | — | | | — | | | 625 | |
Operating (loss) income | $ | (575) | | | $ | 26,981 | | | $ | (15,731) | | | $ | 10,675 | |
Capital expenditures and purchases and development of real estate properties | $ | 30,841 | | | $ | 6,233 | | | $ | 475 | | | $ | 37,549 | |
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 $3.8 million incurred for consulting, legal and public relation costs for Stratus' successful proxy contest and the real estate investment trust exploration process as well as $3.5 million in employee incentive compensation costs associated with discontinued operations at Block 21, which totaled $151.2 million at March 31, 2022, and $140.5 million at March 31, 2021.the PPIP resulting primarily from an increased valuation for The Santal.
f.d.Represents the pre-tax gain on the January 2021 sale of The Saint Mary.
g.e.Includes $68.5 milliona $625 thousand impairment charge for the multi-family tract of assets held for sale related to The Santal, which was sold in the fourth quarter of 2021.land at Kingwood Place.
10. SUBSEQUENT EVENTS
On October 20, 2022, Stratus closed on the sale of a multi-family tract of land at Kingwood Place, an H-E-B grocery anchored, mixed-use project in Kingwood, Texas for $5.5 million. In connection with the sale, Stratus made a $5.0 million principal payment on the Kingwood Place construction loan.
Stratus evaluated events after March 31,September 30, 2022, 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.
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 and accompanying notes, 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, 2021 (2021 Form 10-K) filed with the United States (U.S.) Securities and Exchange Commission (SEC) and the unaudited consolidated financial statements and accompanying notes included in this Form 10-Q. 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” and Part II, Item 1A. “Risk Factors” herein and Part I, Item 1A. “Risk Factors” of our 2021 Form 10-K for further discussion). All subsequent references to “Notes” refer to Notes to Consolidated Financial Statements (Unaudited) located in Part I, Item 1. “Financial Statements” herein, unless otherwise stated.
OVERVIEW
We are a diversified real estate company with headquarters in Austin, Texas. We are engaged primarily in the acquisition, entitlement, development, management, leasing and sale of commercial, and multi-family and single-family residential real estate properties and real estate leasingcommercial properties 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 and undeveloped properties and the lease of our retail, mixed-use and multi-family properties. Our portfolio consists of approximately 1,700 acres of undeveloped acreage and acreage under development for commercial and multi-family and single-family residential projects, as well as several completed commercial and residential projects. Refer to Note 9 for discussion of our operating segments and “Business Strategy” below for a discussion of our business strategy.
BUSINESS STRATEGY
Results of Our Strategic Planning Process; Updates
Over the last seven quarters, we have generated pre-tax earnings of $218.9 million and after-tax cash flow of approximately $166 million from the sales of Block 21 is(including $6.9 million of proceeds held in escrow for a year after the sale), The Santal, a 448-unit luxury garden-style multi-family project located in Barton Creek in Austin, Texas and The Saint Mary, a 240-unit luxury garden-style multi-family project in the Circle C community. Our Board of Directors (Board) and management team engaged in a strategic planning process, which included consideration of the uses of proceeds from the sale of Block 21 and other recent sales in 2021, and of our long-term business strategy. On September 1, 2022, after receiving written consent from Comerica Bank, our Board declared a special cash dividend of $4.67 per share (totaling $40.0 million) on our common stock, which was paid on September 29, 2022, to shareholders of record as of September 19, 2022. Our Board also approved a new share repurchase program, which authorizes repurchases of up to $10.0 million of our common stock. The repurchase program authorizes us, in management’s discretion, to repurchase shares from time to time, subject to market conditions and other factors.
After streamlining our business through the sale of Block 21 in May 2022, our Board has decided to continue our successful development program, with our proven team focusing on pure residential and residential-centric mixed-use projects in Austin and other select markets in Texas, which we believe continue to be attractive locations. We believe by methodically developing and enhancing the value of our properties and then selling them or holding them for lease, we can create long-term value for our stockholders. As part of re-focusing our business, during third-quarter 2022, we completed the sale of substantially all of our non-core assets.
We do not currently have any material commitments to contribute additional cash to our joint venture projects or wholly owned mixed-use real estate property locateddevelopment projects. However, our development plans for future projects require significant additional capital. We plan to continue to develop properties using project-level debt and third-party equity capital through joint ventures in which we receive development management fees and asset management fees, with our potential returns increasing above our relative equity interest in each project as negotiated return hurdles are achieved. Our investment strategy focuses on projects that we believe will provide attractive long-term returns, while limiting our financial risk.
As previously disclosed, we recently explored a two-acre city blockpotential sale or refinancing of Kingwood Place, Jones Crossing and West Killeen Market. Subsequently, we have decided to retain these cash-flowing properties given current market conditions.
We expect to reduce our reliance on our revolving credit facility and retain sufficient cash to operate our business, taking into account risks associated with changing market conditions and the variability in downtowncash flows from our business. Our main source of revenue and cash flow is expected to come from sales of our properties to third parties or to joint ventures in which we participate, the timing of and proceeds from which are difficult to predict and depend on market conditions and other factors. We also generate cash flow from rent in our leasing operations and from development and asset management fees received from our properties. Due to the nature of our development-focused business, we do not expect to generate sufficient recurring cash flow to cover our general and administrative expenses each period. However, we believe that the unique nature and location of our assets, and our team’s ability to execute successfully on development projects, will provide us with positive cash flows and net income over time, as evidenced by our recent sales of The Saint Mary, The Santal and Block 21 described above. Further, we believe our investment strategy, current liquidity and pipeline of projects provide us with many years of opportunities to increase long-term value for our stockholders.
Given challenging market conditions discussed in more detail below, we are currently focused on successfully completing our projects under construction, managing our capital expenditures, advancing other projects through the planning, designing and entitlement process, maximizing cash flow from stabilized assets, controlling costs as much as possible in this inflationary environment, and continuing to source third-party equity capital. We have undeveloped properties currently undergoing active planning, including our two large projects Holden Hills and Section N. Refer to “Recent Development Activities” below for a discussion of these projects. While uncertainty in the market, primarily due to the increasing costs of construction materials and labor, and also rising interest rates, is currently causing a pause in some sales processes and the start of new development projects, we believe there continues to exist strong demand for residential and residential-centric mixed use projects in Austin that containsand the W Austin Hotel, consistingother markets in Texas where we operate, combined with limited supply. We will re-evaluate our strategy as development progresses on the projects in our pipeline, and as market conditions stabilize.
OVERVIEW OF FINANCIAL RESULTS
On May 31, 2022, we completed the previously announced sale of a 251-room luxury hotel, and office, retail and entertainment space. In October 2021, we entered into new agreements to sell Block 21 to Ryman Hospitality Properties, Inc. (Ryman) for $260.0 million, subject to an expected downward adjustmentcertain purchase price adjustments, and including Ryman’s assumption of $5.0 million. The transaction is expected$136.2 million of existing mortgage debt, with the remainder paid in cash. Our net proceeds of cash and restricted cash totaled $112.3 million (including $6.9 million of post-closing escrow amounts to close prior to June 1, 2022, but remainsbe held for 12 months after the closing, subject to a longer retention period with respect to any required reserve for pending claims). We recorded a pre-tax gain on the timely satisfaction or waiversale of various closing conditions.$119.7 million in second-quarter 2022. Block 21 was our wholly owned mixed-use real estate property in downtown Austin, Texas. Block 21 contains the 251-room W Austin Hotel and is home to Austin City Limits Live at the Moody Theater, a 2,750-seat entertainment venue that serves as the location for the filming of Austin City Limits, the longest running music series in American television history. Block 21 also includes Class A office space, retail space and the 3TEN ACL Live entertainment venue and business. The sale of Block 21 would eliminateeliminated our Hotel and Entertainment segments. As a result, our hotel and entertainment operations, as well as the leasing operations associated with Block 21, are reported as discontinued operations for all periods presented in the financial statements included in this Form 10-Q. Refer to "Results of Operations - Discontinued Operations" and Note 4 for further discussion.
BUSINESS STRATEGY
Our portfolio consists of approximately 1,700 acres of undeveloped acreage and acreage under development for commercial and multi-family and single-family residential projects, as well as several completed commercial and residential projects.
Our primary business objective is to create value for stockholders by methodically developing and enhancing the value of our properties and then selling them or holding them for lease. Our full cycle development program of acquiring properties, securing and maintaining development entitlements, developing and stabilizing properties, and selling them or holding them as part of our leasing operations is a key element of our strategy. We may also seek to refinance properties, in order to benefit from the increased value of the property, from lower interest rates or in connection with holding them for lease once the properties have been completed and stabilized.
We believe that Austin and other select, fast-growing markets in Texas continue to be attractive 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 or change entitlements. Most of 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 additional 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. However, we have increasingly relied on project-level equity financing of our subsidiaries. We have formed and expect to continue to pursue strategic relationships as part of our overall strategy for particular development projects and may enter into similar equity financing arrangements in the future. See Note 3 for further discussion.
As described in this report and in our 2021 Form 10-K, in December 2021, one of our wholly owned subsidiaries sold The Santal multi-family property for $152.0 million, which after closing costs and payment of the outstanding project loan, generated net proceeds of approximately $74 million. In January 2021, one of our subsidiaries sold The Saint Mary multi-family property for $60.0 million of which we received approximately $21.9$20.9 million after closing costs, payment of the construction loan, reserves for remaining costs of the partnership and distributions to noncontrolling interest owners. Net proceeds offrom the sales were used to pay down the balance of our $60.0 million Comerica Bank credit facility and for other corporate purposes.
As previously mentioned, the sale of Block 21 is expected to close prior to June 1, 2022, but remains subject to the timely satisfaction or waiver of various closing conditions. If completed, the sale of Block 21 will result in substantial additional cash proceeds of approximately $115 million pre-tax and $90 million after-tax (before prorations, but including post-closing escrow amounts).
Our Board of Directors (Board) and management team are engaged in a strategic planning process, which includes consideration of the uses of proceeds from sales in 2021 and the pending sale of Block 21, and of our long-term business strategy. Potential uses of proceeds may include a combination of further deleveraging, returning cash to shareholders and reinvesting in our project pipeline. We expect to provide additional information after the Block 21 transaction is concluded and our Board and management have had the opportunity to assess market conditions and the capital requirements for our development pipeline.
OVERVIEW OF FINANCIAL RESULTS FOR FIRST-QUARTER 2022As a result of the pending sale of Block 21, we have two operating segments: Real Estate Operations and Leasing Operations. Block 21, which encompassed our hotel and entertainment segments, along with some leasing operations, is reflected as discontinued operations. We operate primarily in Austin, Texas and in other select, fast-growing markets in Texas.
Our Real Estate Operations encompass our activities associated with our acquisition, entitlement, development and sale of real estate. The current focus of our real estate operations is multi-family and single-family residential properties and retail andresidential-centric mixed-use properties. We may sell or lease the real estate we develop, depending on market conditions. Real estate that we develop and then lease becomes part of our Leasing Operations. Revenue in our Real Estate Operations may be generated from the sale of properties that are developed,
undeveloped or under development, depending on market conditions. Developed property sales can include an individual tract of land that has been developed and permitted for residential use or a developed lot with a residence already built on it. In addition to our developed properties, we have a development portfolio that consists of approximately 1,700 acres of commercial and multi-family and single-family residential projects under development or undeveloped land held for future use.
Revenue in our Leasing Operations is generated from the lease of space at retail and mixed-use properties that we developed and the lease of residences in the multi-family projects that we developed. We also generate income from the sale of our leased properties, depending on market conditions.
Our total stockholders’ equity increased to $219.8 million at September 30, 2022, from $158.1 million at December 31, 2021, and $98.9 million at December 31, 2020, primarily as a result of gains realized on the sale of Block 21 in May 2022 and our sales of The Santal and The Saint Mary in December 2021 and January 2021, respectively.
Our revenues totaled $3.1$10.0 million in first-quarterthird-quarter 2022 and $24.2 million for the first nine months of 2022, compared with $11.4$6.3 million in first-quarterthird-quarter 2021 and $23.3 million for the first nine months of 2021. The decreaseincrease in revenues in first-quarterthird-quarter 2022, compared tofirst-quarter third-quarter 2021, is primarily a result of nothe sales of undeveloped real estate sales occurring in first-quarter 2022 because of a decrease in available inventory of developed properties in our Real Estate Operations segment andin third-quarter 2022, partially offset by a decrease in leasing revenue as a result of the sale of The Santal multi-family project in late 2021. The increase in revenues for the first nine months of 2022, compared to the first nine months of 2021, is primarily a result of the sales of undeveloped real estate properties as well as a completed Amarra Villas home in our Real Estate Operations segment partially offset by a decrease in leasing revenue following the sales of The Saint Mary and The Santal multi-family projects in 2021. Refer to "Results of Operations" below for further discussion of our segments.
Our net loss attributable to common stockholders totaled $2.4 million, or $0.29 per diluted share in third-quarter 2022, compared to a net loss of $3.8 million, or $0.46 per diluted share, in third-quarter 2021. During the first nine months of 2022 our net income attributable to common stockholders totaled $2.3$96.5 million, or $0.27$11.50 per diluted share, in first-quarter 2022, compared to $8.9a net loss attributable to common stockholders of $5.0 million, or $1.08$0.61 per diluted share, in first-quarterduring the first nine months of 2021. Our results for first-quarterthe first nine months of 2022 includedinclude a $119.7 million pre-tax gain on the sale of Block 21. Refer to Note 4 under the heading “Block 21 - Discontinued Operations” for additional discussion. The results during the first nine months of 2022 also include a $4.8 million pre-tax gain recognized on the reversal of accruals for costs to lease and construct buildings under a master lease arrangement that Stratus entered into in connection with its sale of The Oaks at Lakeway in 2017. Refer to Note 4 under the heading “The Oaks at Lakeway” for additional discussion. Net incomeOur net losses attributable to common stockholders in first-quarterthe 2021 periods include net losses from discontinued operations of $1.5 million and $9.9 million for third-quarter 2021 and the first nine months of 2021, respectively, as our former hotel and entertainment operations included ain Block 21 were impacted by the COVID-19 pandemic. Our results for the first nine months of 2021 were positively impacted by the $22.9 million pre-tax gain ($16.2 million net of noncontrolling interests) on the January 2021 sale of The Saint Mary, a 240-unit luxury garden-style multi-family projectMary. Our net losses attributable to common stockholders in the Circle C community,2021 periods also include (i) increases in charges to general and administrative expenses for incentive compensation costs associated with our Profit Participation Incentive Plan (PPIP) resulting primarily from an increased valuation for the Santal (third-quarter and nine-month periods), and for consulting, legal and public relation costs incurred in connection with our successful proxy contest and our real estate investment trust (REIT) exploration process (nine-month period), partially offset by (ii) a $2.5$3.7 million net loss from discontinued operations asgain related to forgiveness of substantially all of our hotelPaycheck Protection Program (PPP) loan (third-quarter and entertainment operations were impacted by the COVID-19 pandemic.nine-month periods).
Market Conditions
Our industry has continued to experience cost increases primarily in construction materials and labor, along with supply chain constraints. In addition, interest rates have been rising and bank credit has been tightening in our industry. These factors are having an adverse impact on the projected profitability of our new projects, have delayed projects under construction and the commencement of construction on new projects, have adversely impacted our ability to raise equity capital on attractive terms in our desired time frame, and have adversely impacted our ability to sell some properties at attractive prices in our desired time frame. In addition, on completed projects, we are experiencing increased borrowing costs on our variable rate debt and increased operating costs due to inflation. To manage these risks, we go through extensive pricing exercises culminating with competitive bids from reputable contractors based on final plans and specifications. Because we typically engage third-party general contractors to construct our projects on a fixed-price or guaranteed maximum price basis, our exposure to cost increases on
projects under construction is limited; however, rising costs and delays in delivery of materials may increase the risk of default by contractors and subcontractors. Refer to “Risk Factors” included in Part II, Item 1A. herein.
RECENT DEVELOPMENT ACTIVITIES
Current Residential Activities
Barton Creek
In first-quartersecond-quarter 2022, we sold no residential units or lots.a six-acre undeveloped multi-family tract of land in Barton Creek for $2.5 million. As of March 31,September 30, 2022, two developed Amarra Drive Phase III lots remained unsold.
The Villas at Amarra Drive (Amarra Villas) project is a 20-unit development in the Barton Creek community for which we completed construction and sale of the first seven homes duringbetween 2017 and 2018. We sold the last two completed homes in 2019. We began construction on the next two Amarra Villas homes during the first quarterfirst-quarter 2020, one of 2020, which are expected to bewas completed and sold for $2.4 million in mid-2022.second-quarter 2022. In 2021, we began construction of one additional home and in March 2022, we began construction on another two homes. AsWe began construction on the remaining eight homes in second-quarter 2022. Construction on the last 12 units continue to progress, and as of May 13,November 4, 2022, two3 homes were under contract to sell (one which we began construction on in 2020 and one which we began construction on in 2021). As of May 13, 2022, a total of 11 units (3 of which are under construction and 8 of which construction has not started)9 Amarra Villas homes remain available for sale of the initial 20-unit project.
In third-quarter 2021, we began construction on The Saint June, a 182-unit luxury garden-style multi-family project within the Amarra development. The Saint June is expected to be comprised of multiple buildings featuring one, two and three bedroom units for lease with amenities that include a resort-style clubhouse, fitness center, pool and extensive green space. The first units of The Saint June are currentlyproject is expected to be completed in fourth-quarter 2022 with completion of the project expected in first-quarter 2023. This project is being built consistent with our sustainability, wellness and conservation goals.
We continue to progress the development plans for Holden Hills, our final large residential development within the Barton Creek community consisting of 495 acres and designed to feature approximately 475 unique residences to be developed in multiple phases with a focus on health and wellness, sustainability and energy conservation. We currently expect to secure finalhave obtained construction permits to start construction in September 2022. Subjectfor Phase I, and subject to obtaining financing and other market conditions, we currently expect to start infrastructure construction in late 2022 and to complete site work for Phase I, including the construction of road, utility, drainage and other required infrastructure, approximately 1720 to 22 months from the issuancestart of our final permits.construction. Accordingly, our current projections anticipate that we could begin closing sales of certainstart building homes and/or selling home sites in Holden Hills in late 2024.2024 or 2025. We may sell the developed home sites, or may elect to build and sell, or build and lease, homes on some or all of the home sites, depending on financing and market conditions.
Using a conceptual approach similar to that used for Holden Hills, we continue to progress the development plans for Section N, our approximately 570-acre tract located along Southwest Parkway in the southern portion of the Barton Creek community. If successful, this new project would be designed ascommunity adjacent to Holden Hills. We are designing a dense, mid-rise, mixed-use project surrounded by an extensive greenspace amenity, resulting in a significant potential increase in development density, as compared to our prior plans.
The Annie B
In September 2021, we purchased the land and announced plans for The Annie B, a proposed luxury high-rise rental project in downtown Austin to be developed as a 400-foot tower, consisting of approximately 420,000 square feet with approximately 300316 luxury multi-family units for lease and ground level retail.lease. We currently expectcontinue to work to finalize our development plans secure developmentwith a goal of beginning construction in late 2023 or 2024, subject to obtaining financing and begin construction by late 2022 or early 2023. This project will be built consistent with our sustainability, wellness and conservation goals.other market conditions.
The Saint George
In December 2021, we purchased the land for The Saint George, a proposed 316-unit luxury wrap-style, multi-family project to be constructed in north-central Austin. While we continue the planningWe entered into a construction loan for thethis project in July 2022 and obtaining the entitlement and permit approvals, we currently expect to beginbegan construction in the second quarter of 2022 andthird-quarter 2022. We currently expect to achieve substantial completion by mid-2024. We are negotiating a construction loan for the project.
Lantana Multi-Family, Magnolia Place, Jones Crossing, Kingwood Place and Other Residential
We have advanced development plans for the multi-family component of Lantana Place, a partially developed, mixed-use development project located south of Barton Creek in Austin, and, subject to securing an acceptable capital structure and other market conditions, currently expect to begin construction in third-quarter 2022 with expected completion in mid-2024.Austin. The multi-family component is now known as The Saint Julia and is expected to consist of 306 units. We currently do not expect to begin construction prior to 2024, and the project remains subject to financing and market conditions.
We are evaluatingIn second-quarter 2022, we sold an undeveloped tract of land in Austin for $0.6 million. In third-quarter 2022, we sold a sale0.3 acre undeveloped tract of a portionland in Austin for $1.6 million and 28 acres of theundeveloped residential land for the single-family and multi-family residential components of$3.2 million at Magnolia Place, an H-E-B, L.P (H-E-B) grocery shadow-anchored, mixed-use project in Magnolia, Texas. We also continue to evaluate options for the multi-family component of Jones Crossing, an H-E-B grocery anchored, mixed-use development located in College Station, Texas.
In September 2021, we entered into a contract to sell a multi-family tract of land currently planned for approximately 275 multi-family units for $5.5 million at Kingwood Place, an H-E-B grocery anchored, mixed-use project in Kingwood, Texas. If consummated,We closed on the sale is expected to close in third-quarteron October 20, 2022. In connection with the sale, we made a $5.0 million principal payment on the Kingwood Place construction loan.
For further discussion of our multi-family and single-family residential properties, refer to MD&A and the related sections in Items 1. and 2. “Business and Properties” in our 2021 Form 10-K.
Current Commercial Activities
Magnolia Place
In August 2021, we began construction on the first phase of development of Magnolia Place, our H-E-B grocery shadow-anchored, mixed-use project in Magnolia, Texas. Magnolia Place is currently planned to consist of 4 retail buildings totaling approximately 35,000 square feet, 5 retail pad sites to be sold or ground leased, 194 single-family lots and approximately 500 multi-family units. The first phase of development consists of 2 retail buildings totaling 18,987 square feet, all 5 pad sites and the road, utility and drainage infrastructure necessary to support the entire development. TheInfrastructure construction was completed in second-quarter 2022. In third-quarter 2022, we substantially completed construction on the first phase of development and the two retail buildings are expectedwere turned over to be available for occupancy in third-quarter 2022.our retail tenants to begin their finish-out process. In mid-2021, H-E-B began construction on its 95,000-square-foot grocery store on an adjoining 18-acre site owned by H-E-B, which is expected to openopened on November 2, 2022. During second-quarter 2022, we sold one completed pad site for $2.3 million and sold another completed pad site in fourth-quarter 2022.third-quarter 2022 for $1.1 million.
Lantana Place
As of March 31,September 30, 2022, we had signed leases for approximately 8590 percent of the retail space at Lantana Place, including the anchor tenant, Moviehouse & Eatery, and a ground lease for an AC Hotel by Marriott. Lantana Place is our partially developed, mixed-use development project within the Lantana community south of Barton Creek in Austin, Texas.
Kingwood Place
Kingwood Place is our H-E-B-anchored, mixed-use development project in Kingwood, Texas (in the greater Houston area). We have constructed approximately 152,000 square feet of retail space at Kingwood Place, including an H-E-B grocery store, and we have signed ground leases on four of the retail pads. One pad site remains available for lease. As of March 31,September 30, 2022, we had signed leases for approximately 8595 percent of the retail space, including the H-E-B grocery store. We are exploringrecently explored a potential sale or refinancing of Kingwood Place.Place, but have decided to retain this cash-flowing property given current market conditions.
Jones Crossing
As of March 31,September 30, 2022, we had signed leases for substantially all of the retail space at the first phase of Jones Crossing. Jones Crossing is our H-E-B-anchored, mixed-use project in College Station, Texas. We are exploringrecently explored a potential sale or refinancing of Jones Crossing.Crossing, but have decided to retain this cash-flowing property given current market conditions.
West Killeen Market
As of March 31,September 30, 2022, we had signed leases for approximately 7075 percent of the retail space at West Killeen Market, our retail project located in Killeen, Texas, shadow-anchored by an adjacent H-E-B grocery store. Only one unsoldDuring third-quarter 2022, we sold the last remaining pad site remains at West Killeen Market.for $1.0 million. We are exploringrecently explored a potential sale or refinancing of West Killeen Market.Market, but have decided to retain this cash-flowing property given current market conditions.
For further discussion of our commercial properties, refer to MD&A and the related sections in Items 1. and 2. “Business and Properties” in our 2021 Form 10-K.
Potential Development Projects and Pipeline
Our development plans for theThe Annie B, Holden Hills, Section N and The Saint Julia will require significant additional capital, which we currently intend to pursue through bankproject-level debt and third-party equity capital arrangements through joint ventures in which we receive development management fees and weasset management fees, and with our potential returns increasing above our relative equity interest in each project as negotiated return hurdles are negotiating a loan for The Saint George project.achieved. We are also pursuing other development projects. These potential development projects and projects in our pipeline require extensive additional permitting and will be dependent on market conditions and financing. Because of the nature and cost of the approval and development
process and uncertainty regarding market demand for a particular use, there is uncertainty regarding the nature of the final development plans and whether we will be able to successfully execute the plans.
Supply Chain Disruptions
Supply chain disruptions impacting our industry have begun to delay some of our projects under construction, and may impact the timing of projects on which we plan to start construction in the future. Our contractors have experienced delays on our projects primarily related to delivery of certain residential electrical components and laminated structural wood materials. We understand that suppliers are taking actions to try to mitigate the delays; however, their efforts may not be successful. While these constraints have not had a material impact on the expected timing or cost of our projects under construction, that may change in the future. Because we engage third-party general contractors to construct our projects on a fixed-price or guaranteed maximum price basis, our exposure to cost increases on projects under construction is limited; however, supply constraints may increase our costs of or delay future projects. Refer to “Risk Factors” included in Part II, Item 1A. herein.
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 sales, joint ventures or other arrangements. As a result, and because of numerous factors affecting our business activities as described herein and in our 2021 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 eachour operating segment.segments. Corporate, eliminations and other includes consolidated general and administrative expenses, which primarily consist of employee compensation and other costs described herein.
The following table summarizes our operating results for the first quarters of 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, | |
| | | | |
| | | | | 2022 | | 2021 | |
Operating (loss) income: | | | | | | | | |
Real Estate Operationsa | | | | | $ | (1,368) | | | $ | 2,136 | |
|
Leasing Operations | | | | | 6,056 | | b | 24,153 | | c |
| | | | | | | | |
| | | | | | | | |
Corporate, eliminations and otherd | | | | | (3,167) | | | (4,306) | | |
Operating income | | | | | $ | 1,521 | | | $ | 21,983 | | |
Interest expense, net | | | | | $ | (15) | | | $ | (1,056) | | |
Net income from continuing operations | | | | | $ | 1,812 | | | $ | 18,174 | | |
Net income (loss) from discontinued operations | | | | | $ | 375 | | | $ | (2,508) | | |
| | | | | | | | |
| | | | | | | | |
Net income attributable to common stockholders | | | | | $ | 2,272 | | | $ | 8,944 | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Operating (loss) income: | | | | | | | |
Real Estate Operations a | $ | (89) | | | $ | (1,904) | | | $ | 1,014 | | | $ | (575) | |
Leasing Operations b | 853 | | | 1,689 | | | 8,374 | | | 26,981 | |
Corporate, eliminations and other c | (3,594) | | | (5,213) | | | (10,202) | | | (15,731) | |
Operating (loss) income | $ | (2,830) | | | $ | (5,428) | | | $ | (814) | | | $ | 10,675 | |
Interest expense, net | $ | — | | | $ | (855) | | | $ | (15) | | | $ | (2,690) | |
Net (loss) income from continuing operations | $ | (2,574) | | | $ | (2,656) | | | $ | (230) | | | $ | 11,212 | |
Net (loss) income from discontinued operations d | $ | — | | e | $ | (1,541) | | | $ | 96,300 | | | $ | (9,947) | |
| | | | | | | |
Total comprehensive loss (income) attributable to noncontrolling interests | $ | 214 | | | $ | 433 | | | $ | 463 | | | $ | (6,248) | |
Net (loss) income attributable to common stockholders | $ | (2,360) | | | $ | (3,764) | | | $ | 96,533 | | | $ | (4,983) | |
a.Includes sales commissions and other revenues together with related expenses. For both periods of 2022, includes a $650 thousand impairment charge for one of the Amarra Villas homes that is under contract to sell for $2.4 million and a $70 thousand impairment charge for the multi-family tract of land at Kingwood Place that sold for $5.5 million in October 2022. For both periods of 2021, includes a $625 thousand impairment charge for the multi-family tract of land at Kingwood Place.
b.IncludesThe first nine months of 2022 includes a $4.8 million pre-tax gain recognized on the reversal of accruals for costs to lease and construct buildings under a master lease arrangement that Stratus entered into in connection with its sale of The Oaks at Lakeway in 2017. Refer to Note 4 under the heading “The Oaks at Lakeway” for additional discussion.
c.Includes The first nine months of 2021 includes a $22.9 million pre-tax gain on the January 2021 sale of The Saint Mary.
d.c.Includes consolidated general and administrative expenses and eliminations of intersegment amounts. The decreases in 2022 from the comparable prior year periods are primarily the result of $3.8 million incurred for the first nine months of 2021 for consulting, legal and public relation costs for our successful proxy contest and the REIT exploration process in addition to $2.8 million incurred in third-quarter 2021 and $3.5 million incurred during the first nine months of 2021 for employee incentive compensation costs associated with the PPIP resulting primarily from an increased valuation for The Santal.
d.The first nine months of 2022 includes a $119.7 million pre-tax gain on the May 2022 sale of Block 21.
As a result of the pendingMay 2022 sale of Block 21, we currently have two operating segments: Real Estate Operations and Leasing Operations (refer to Note 9). The following is a discussion of our operating results by segment.
Real Estate Operations
The following table summarizes our Real Estate Operations results (in thousands):
| | | | Three Months Ended March 31, | | | Three Months Ended | | Nine Months Ended |
| | | September 30, | | September 30, |
| | | 2022 | | 2021 | | | 2022 | | 2021 | | 2022 | | 2021 |
Revenues: | Revenues: | | | | | | Revenues: | | | | | | | |
Developed property sales | Developed property sales | | $ | — | | | $ | 4,040 | | | Developed property sales | $ | — | | | $ | — | | | $ | 2,382 | | | $ | 4,615 | |
Undeveloped property sales | Undeveloped property sales | | — | | | 2,500 | | | Undeveloped property sales | 6,887 | | | 750 | | | 12,331 | | | 3,250 | |
Commissions and other | Commissions and other | | 23 | | | 20 | | | Commissions and other | — | | | 142 | | | 124 | | | 360 | |
Total revenues | Total revenues | | 23 | | | 6,560 | | | Total revenues | 6,887 | | | 892 | | | 14,837 | | | 8,225 | |
Cost of sales, including depreciation | Cost of sales, including depreciation | | 1,391 | | | 4,424 | |
| Cost of sales, including depreciation | 6,256 | | | 2,171 | | | 13,103 | | | 8,175 | |
| Impairment of real estate | | Impairment of real estate | 720 | | | 625 | | | 720 | | | 625 | |
Operating (loss) income | Operating (loss) income | | $ | (1,368) | | | $ | 2,136 | | | Operating (loss) income | $ | (89) | | | $ | (1,904) | | | $ | 1,014 | | | $ | (575) | |
Developed Property Sales. The following table summarizes our developed property sales (dollars in thousands): | | | Three Months Ended March 31, | | Nine Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| | Lots/Units | | Revenues | | Average Cost Per Lot/Unit | | Lots/Units | | Revenues | | Average Cost Per Lot/Unit | | Homes | | Revenues | | Average Cost Per Home | | Lots/Units | | Revenues | | Average Cost Per Lot/Unit |
Barton Creek | Barton Creek | | | | | | | | | | | | Barton Creek | | | | | | | | | | | |
| Amarra Drive: | Amarra Drive: | | Amarra Drive: | |
| Amarra Villas homes | | Amarra Villas homes | 1 | | | $ | 2,382 | | | $ | 2,382 | | | — | | | $ | — | | | $ | — | |
Phase III lots | Phase III lots | — | | | $ | — | | | $ | — | | | 2 | | | $ | 1,640 | | | $ | 332 | | Phase III lots | — | | | — | | | — | | | 3 | | | 2,215 | | | 299 | |
| | W Austin Residences at Block 21: | | |
Condominium unit | — | | | — | | | — | | | 1 | | | 2,400 | | | 1,721 | | |
W Austin Hotel & Residences Project | | W Austin Hotel & Residences Project | |
Condominium Unit | | Condominium Unit | — | | | — | | | — | | | 1 | | | 2,400 | | | 1,721 | |
Total Residential | Total Residential | — | | | $ | — | | | 3 | | | $ | 4,040 | | | Total Residential | 1 | | | $ | 2,382 | | | 4 | | | $ | 4,615 | | |
|
There were no developed property sales in third-quarter 2022 or 2021. The decrease in revenues infirst-quarterfrom developed property sales for the first nine months of 2022, compared to first-quarterthe first nine months of 2021, reflects no lot sales in first-quarterthe 2022 period, as available inventory of developed properties in our Real Estate Operations segment is limited. In addition, the first nine months of 2021 included revenue from the sale of our last condominium unit at the W Austin Hotel & Residences.
Undeveloped Property Sales.In first-quarterthird-quarter 2022, we closed $6.9 million of undeveloped property sales consisting of (i) 28 acres of residential land for $3.2 million at Magnolia Place, (ii) a 0.3 acre tract of land in Austin for $1.6 million, (iii) a pad site at Magnolia Place for $1.1 million, and (iv) a pad site at West Killeen Market for $1.0 million. During the first nine months of 2022, we also closed $5.4 million of undeveloped property sales consisting of (i) a six-acre multi-family tract of land in Amarra Drive for $2.5 million, (ii) a completed pad site at Magnolia Place for $2.3 million and (iii) a tract of land in Austin for $0.6 million. In third-quarter 2021, we sold a pad site at West Killeen Market for $750 thousand. During the first nine months of 2021, we also sold a five-acre multi-family tract of land in Amarra Drive for $2.5 million.
Real Estate Cost of Sales.Sales and Depreciation. Cost of sales includes costs of property sold, project operating and marketing expenses and allocated overhead costs, partly offset by reductions for certain municipal utility district (MUD) reimbursements. Cost of sales decreasedincreased to $1.4$6.3 million in first-quarterthird-quarter 2022 from $4.4and $13.1 million for the first nine months of 2022, compared to $2.2 million in first-quarterthird-quarter 2021 and $8.2 million for the first nine months of 2021, primarily reflecting higher real estate revenues in the absence of sales in first-quarter 2022.2022 periods.
Impairment of Real Estate. In September 2021, we entered into a contract to sell the multi-family tract of land at Kingwood Place, which was planned for approximately 275 multi-family units, for $5.5 million. The sale closed in October 2022. Upon entering into the contract, we recorded a $625 thousand impairment charge in third-quarter
2021 to reduce the carrying value of the land to its fair value based on the contractual sale price less estimated selling costs. In third-quarter 2022, we recorded an additional $70 thousand impairment charge as a result of the selling costs exceeding the previous estimate.
In February 2021, we entered into a contract to sell one of the Amarra Villas homes for $2.4 million. The sale, if consummated, is set to close in first-quarter 2023. We recorded a $650 thousand impairment charge in third-quarter 2022 because the currently estimated total project costs and costs of sale for the home under construction exceed its contractual sale price.
Leasing Operations
The following table summarizes our Leasing Operations results (in thousands): | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, | |
| | | | | 2022 | | 2021 | |
Rental revenue | | | | | $ | 3,080 | | | $ | 4,818 | | |
Rental cost of sales, excluding depreciation | | | | | 984 | | | 2,052 | | |
Depreciation | | | | | 852 | | | 1,544 | | |
| | | | | | | | |
| | | | | | | | |
Gain on sale of assets | | | | | (4,812) | | | (22,931) | | |
Operating income | | | | | $ | 6,056 | | | $ | 24,153 | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Rental revenue | $ | 3,090 | | | $ | 5,376 | | | $ | 9,370 | | | $ | 15,057 | |
Rental cost of sales, excluding depreciation | 1,350 | |
| 2,238 | | | 3,204 | | | 6,482 | |
Depreciation | 887 | | | 1,449 | | | 2,604 | | | 4,525 | |
| | | | | | | |
| | | | | | | |
Gain on sale of assets | — | | | — | | | (4,812) | | | (22,931) | |
Operating income | $ | 853 | | | $ | 1,689 | | | $ | 8,374 | | | $ | 26,981 | |
Rental Revenue. Rental revenue primarily includes revenue from Lantana Place, Jones Crossing, Kingwood Place and West Killeen Market, and until their sales in December 2021 and January 2021, respectively, our multi-family projects The Santal and The Saint Mary. The decrease in rental revenue in first-quarterthe 2022 periods, compared with first-quarterthe 2021 periods, primarily reflects the sale of The Santal in December 2021, partly offset by increased revenue at Lantana Place and Kingwood Place. The Santal had rental revenue of $2.2$2.3 million in first-quarterthird-quarter 2021 and $6.8 million during the first nine months of 2021.
Rental Cost of Sales and Depreciation. Rental cost of sales and depreciation expense decreased in first-quarterthird-quarter 2022 and the first nine months of 2022, compared with the first-quarter 2021 periods, primarily as a result of the sale of The Santal.
Gain on Sale of Assets. InFor the first quarternine months of 2022, we recognized a gain on the reversal of accruals for costs to lease and construct buildings under a master lease arrangement that Stratuswe entered into in connection with itsour sale of The Oaks at Lakeway in 2017. Refer to Note 4 under the heading “The Oaks at Lakeway” for further discussion.
In January 2021, one of our subsidiaries sold The Saint Mary for $60.0 million. After closing costs and payment of the outstanding construction loan, the sale generated net proceeds of approximately $34 million. In first-quarter 2021, after establishing a reserve for remaining costs of the partnership, we received $20.9 million from the subsidiary in connection with the sale and $12.9 million of the net proceeds were distributed to the noncontrolling interest owners. We recognized a pre-tax gain on the sale of $22.9 million ($16.2 million net of noncontrolling interests) in first-quarterfor the first nine months of 2021.
Corporate, Eliminations and Other
Corporate, eliminations and other (refer to Note 9) includes consolidated general and administrative expenses, which primarily consist of employee compensation and other costs. Consolidated general and administrative expenses decreased to $3.2$3.6 million in first-quarterthird-quarter 2022 from $4.3and $10.2 million for the first nine months of 2022, compared to $5.3 million in first-quarterthird-quarter 2021 and $15.8 million for the first nine months of 2021primarily reflecting $0.8as a result of $2.8 million incurred in first-quarterthird-quarter 2021 and $3.5 million incurred during the first nine months of 2021 for employee incentive compensation costs associated with the PPIP resulting primarily from an increased valuation for The Santal and $3.8 million incurred for the first nine months of 2021 for consulting, legal and public relation costs for Stratus'our successful proxy contest and the real estate investment trustREIT exploration process as well as a $0.5 million decrease in employee incentive compensation costs associated with the Profit Participation Incentive Plan.process.
Non-Operating Results
Interest Expense, Net. Interest costs (before capitalized interest) totaled $1.1$1.8 million in first-quarterthird-quarter 2022 and $4.4 million for the first nine months of 2022, compared with $2.3$2.2 million in first-quarterthird-quarter 2021 and $6.6 million for the first nine months of 2021. Interest costs in first-quarterthe 2022 periods were lower, compared to first-quarterthe 2021 periods, primarily
reflecting reductions in average debt balances, including the lowerrepayment of the outstanding balance on the Comerica Bank credit facility and the repayment of The Santal loan.loan partially offset by rising interest rates. As of September 30, 2022, all of our debt was variable-rate debt, and for all of such debt, the interest rates have increased for the first nine months of 2022 and may continue to rise in the future if prevailing market interest rates continue to climb.
Capitalized interest totaled $1.1$1.8 million in first-quarterthird-quarter 2022 and $4.3 million for the first nine months of 2022, compared to $1.3 million in first-quarterthird-quarter 2021 and $3.9 million for the first nine months of 2021. Capitalized interest is primarily related to development activities at Barton Creek (primarily Section N), The Annie B, The Saint George and Magnolia Place.
LossNet Gain on Extinguishment of Debt. We recorded a $63 thousand lossnet gain on extinguishment of debt totaling $3.7 million in first-quarterthird-quarter 2021 and $3.5 million for the first nine months of 2021 primarily associated with the forgiveness of substantially all of our PPP loan in third quarter 2021. This gain was partly offset by losses on the extinguishment of debt associated with the repayment of The Saint Mary construction loan upon the sale of the property.property in first-quarter 2021 and the refinancing of the Jones Crossing construction loan in second-quarter 2021, which resulted in the write-off of unamortized deferred financing costs.
Benefit from (Provision for)Provision for Income Taxes. We recorded a benefit from income taxes of $0.3 million in first-quarter 2022, compared to a provision for income taxes of $2.7$0.4 million in first-quarterthird-quarter 2022 and $0.2 million for the first nine months of 2022, compared to $0.1 million in third-quarter 2021 and $0.3 million for the first nine months of 2021. Refer to Note 8 for further discussion of income taxes.
Net Income (Loss) from Discontinued Operations. Net income (loss) from discontinued operations totaled $96.3 million for the first nine months of 2022, compared to $(9.9) million for the first nine months of 2021. As a result of the sale of Block 21 in May 2022, we did not have any net income from discontinued operations in third-quarter 2022 compared to $(1.5) million in third-quarter 2021. The net income for the first nine months of 2022 primarily reflects a $119.7 million pre-tax gain on the sale of Block 21. The net losses in the 2021 periods reflect the negative impacts that the COVID-19 pandemic had on the hotel and entertainment operations within our discontinued operations.
Total Comprehensive Loss (Income) Attributable to Noncontrolling Interests in Subsidiaries. Our partners' share of losses (income) totaled $0.1$0.2 million in first-quarterthird-quarter 2022 and $0.5 million for the first nine months of 2022, compared to $(6.7)$0.4 million in first-quarterthird-quarter 2021 and $(6.2) million for the first nine months of 2021. In first-quarterFor the first nine months of 2021, our partners were allocated $6.7 million of the gain from the sale of The Saint Mary.
Discontinued Operations
Block 21 is our wholly owned mixed-use real estate property located on a two-acre city block in downtown Austin that contains the W Austin Hotel, consisting of a 251-room luxury hotel, and office, retail and entertainment space. The hotel is managed by W Hotel Management, Inc. a subsidiary of Starwood Hotels & Resorts Worldwide, Inc., which is a subsidiary of Marriott International, Inc. The entertainment space is occupied by Austin City Limits Live at the Moody Theater (ACL Live) and 3TEN ACL Live. ACL Live is a 2,750-seat live music and entertainment venue and production studio that serves as the location for the filming of Austin City Limits, the longest running music series in American television history. 3TEN ACL Live, which opened in March 2016, has a capacity of approximately 350 people and is designed to be more intimate than ACL Live.
As a result of our October 2021 entry into new agreements to sell Block 21 to Ryman for $260.0 million, our hotel and entertainment operations, as well as the leasing operations associated with the Block 21 property, are reported as discontinued operations for all periods presented in the accompanying financial statements. Refer to Note 4 for further discussion.
The transaction is expected to close prior to June 1, 2022, but remains subject to the timely satisfaction or waiver of various closing conditions, including the consent of the loan servicers to the purchaser’s assumption of the existing mortgage loan, the consent of the hotel operator, an affiliate of Marriott, to the purchaser’s assumption of the hotel operating agreement, the absence of a material adverse effect, and other customary closing conditions. The Block
21 purchase agreement will terminate if all conditions to closing are not satisfied or waived by the parties. Ryman has deposited $5.0 million in earnest money to secure its performance under the agreements governing the sale. Of the total purchase price, $6.9 million will be held in escrow for 12 months after the closing, subject to a longer retention period with respect to any required reserve for pending claims. We expect to record a pre-tax gain of approximately $120 million upon closing of the sale (approximately $95 million after-tax). The purchase price is payable by the assumption of the Block 21 loan with the balance to be paid in cash. We expect the net sale proceeds before taxes to be approximately $115 million and the after-tax proceeds to be approximately $90 million before prorations, but including post-closing escrow amounts.
Net income (loss) from discontinued operations totaled $0.4 million in first-quarter 2022 and $(2.5) million in first-quarter 2021. We reported higher hotel and entertainment revenue in first-quarter 2022 as the impacts of the COVID-19 pandemic had a significant impact on first-quarter 2021 results.
The following is a discussion of our key operating results within discontinued operations.
Hotel Revenue. Hotel revenue primarily includes revenue from W Austin Hotel room reservations and food and beverage sales. Hotel revenues were $5.9 million in first-quarter 2022 and $2.1 million in first-quarter 2021. The increase in Hotel revenues in first-quarter 2022, compared to first-quarter 2021, is primarily a result of higher room reservations and food and beverage sales as the impacts of the COVID-19 pandemic had a significant impact on first-quarter 2021 results. First-quarter 2022 Hotel revenue was approximately 70 percent of pre-pandemic Hotel revenue in first-quarter 2019. Revenue per available room (RevPAR), which is calculated by dividing total room revenue by the average total rooms available, was $165 in first-quarter 2022, compared with $51 in first-quarter 2021.
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 3TEN ACL Live. Revenues from the Entertainment segment 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. Entertainment revenues totaled $5.3 million in first-quarter 2022 and $0.6 million in first-quarter 2021. The increase in entertainment revenue primarily reflects an increase in the number of events hosted at ACL Live and 3TEN ACL Live as the impacts of the COVID-19 pandemic had a significant impact on first-quarter 2021 results. First-quarter 2022 Entertainment revenue was approximately 10 percent greater than pre-pandemic Entertainment revenue in first-quarter 2019. As of August 2021, ACL Live and 3TEN ACL Live are operating at full capacity.
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.
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2022 | | 2021 |
ACL Live | | | | | | | |
Events: | | | | | | | |
Events hosted | | | | | 48 | | | 28 | |
Estimated attendance | | | | | 53,882 | | | 3,416 | |
| | | | | | | |
Ticketing: | | | | | | | |
Number of tickets sold | | | | | 54,947 | | | 3,710 | |
Gross value of tickets sold (in thousands) | | | | | $ | 2,964 | | | $ | 373 | |
| | | | | | | |
3TEN ACL Live | | | | | | | |
Events: | | | | | | | |
Events hosted | | | | | 44 | | | 22 | |
Estimated attendance | | | | | 7,100 | | | 1,828 | |
| | | | | | | |
Ticketing: | | | | | | | |
Number of tickets sold | | | | | 3,413 | | | 114 | |
Gross value of tickets sold (in thousands) | | | | | $ | 99 | | | $ | 3 | |
CAPITAL RESOURCES AND LIQUIDITY
Volatility in the real estate market, including the markets in which we operate, can impact the timing of and proceeds received from sales of our properties, which may cause uneven cash flows from period to period. However, we believe that the unique nature and location of our assets will provide us positive cash flows over time.
Comparison of Cash Flows for the ThreeNine Months Ended March 31,September 30, 2022 and 2021
Operating Activities. Cash used in operating activities totaled $18.1$49.3 million in first-quarterfor the first nine months of 2022, compared with $10.4$36.4 million infirst-quarterfor the first nine months of 2021. Expenditures for purchases and development of real estate properties totaled $4.9$18.3 million in first-quarterfor the first nine months of 2022 and $2.5$30.8 million infirst-quarterfor the first nine months of 2021, both primarily related to development of our Barton Creek properties, particularly Amarra Villas and, to a lesser extent, Holden Hills. The cash outflowsoutflow resulting from the decrease in accounts payable, accrued liabilities and other in first-quarter 2022 and first-quarter 2021 are primarily related toduring the timingfirst nine months of property tax payments. The cash outflow resulting from the increase in other assets in first-quarter 2022 is primarily related to a $4.0 million deposit that we delivered to the citypayment of Austin to secure our obligation to construct certain subdivision improvements related toawards under the Holden Hills project.PPIP and the timing of tax payments, including property taxes.
Investing Activities. Cash (used in) provided by investing activities totaled $(14.9)$66.2 million in first-quarterfor the first nine months of 2022 and $58.2$51.8 million infirst-quarter 2021. Capital expenditures totaled $14.7 million in first-quarter 2022, primarily for The Saint June and Magnolia Place projects, and $1.0 million infirst-quarter 2021, primarily for the Magnolia Place and Lantana Place projects.
Infirst-quarterfirst nine months of 2021. During the first nine months of 2022, we received net proceeds from the sale of Block 21 of $105.8 million (excluding the release of reserves previously presented as restricted cash but including $6.9 million of post-closing escrow amounts to be held for 12 months after the closing, subject to a longer retention period with respect to any required reserves for pending claims). During the first nine months of 2021, we received proceeds, net of closing costs, from the sale of The Saint Mary of $59.5 million.
Capital expenditures totaled $38.9 million for the first nine months of 2022, primarily for The Saint June, The Saint George and Magnolia Place projects, and $6.7 million for the first nine months of 2021, primarily for The Saint June, Lantana Place and Magnolia Place projects.
Financing Activities. Cash provided by (used in)used in financing activities totaled $13.5$9.7 million in first-quarterfor the first nine months of 2022 and $(50.8)cash provided by financing activities totaled $10.0 million infirst-quarterfor the first nine months of 2021. In first-quarterDuring the first nine months of 2022, we had no net borrowings on the Comerica Bank credit facility, totaled $10.0 million, compared with net repaymentsborrowings of $9.2$10.9 million in first-quarter 2021, primarily using proceeds fromfor the salefirst nine months of The Saint Mary. In first-quarter2021. During the first nine months of 2022, net borrowings on other project and term loans totaled $3.9$16.0 million, primarily reflecting borrowings on the Magnolia Place and The Saint June construction loan. In first-quarterloans. During the first nine months of 2021, net repayments on other project and term loans totaled $28.3$13.9 million, primarily reflecting the repayment of The Saint Mary construction loan.loan upon the sale of the project. Refer to “Credit“Liquidity Outlook, Credit Facility and Other Financing Arrangements and Liquidity Outlook”Arrangements” below for a discussion of our outstanding debt at March 31,September 30, 2022.
In first-quarterDuring the first nine months of 2022, we received contributions from noncontrolling interest owners of $15.0 million, related to The Saint George partnership. No distributions to noncontrolling interest owners were paid during the first nine months of 2022. During the first nine months of 2021, we paid distributions to noncontrolling interest owners of $13.1$13.2 million, primarily related to the sale of The Saint Mary.Mary, and received contributions from noncontrolling interest owners of $28.0 million, related to The Saint June and Block 150 limited partnerships.
On September 1, 2022, after receiving written consent from Comerica Bank, our Board declared a special cash dividend of $4.67 per share (totaling $40.0 million) on our common stock which was paid on September 29, 2022, to shareholders of record as of September 19, 2022. Our Board also approved a new share repurchase program, which authorizes repurchases of up to $10.0 million of our common stock, which replaced our prior share repurchase program. The repurchase program authorizes us, in management’s discretion, to repurchase shares from time to time, subject to market conditions and other factors. As of September 30, 2022, we repurchased 33,958 shares of our common stock for a total of $0.8 million at an average price of $23.49. Through November 4, 2022, we have acquired 105,415 shares of our common stock for a total cost of $2.6 million at an average price of $25.02 per share, and $7.4 million remains available for repurchases under the program.
The timing, price and number of shares that may be repurchased under the program will be based on market conditions, applicable securities laws and other factors considered by management. Share repurchases under the program may be made from time to time through solicited or unsolicited transactions in the open market, in privately negotiated transactions or by other means in accordance with securities laws. The share repurchase program does not obligate us to repurchase any specific amount of shares, does not have an expiration date, and may be suspended, modified or discontinued at any time without prior notice.
Liquidity Outlook, Credit Facility and Other Financing Arrangements
We had $63.5 million in cash and Liquidity Outlookcash equivalents at September 30, 2022. We believe that our current cash and cash equivalents, financing arrangements and cash generated from operations will provide us with sufficient liquidity to satisfy our anticipated working capital needs, debt service requirements, expected capital expenditures, project funding commitments, income taxes and the share repurchase program for at least the next 12 months. We expect to be able to extend or refinance all of our loans prior to their maturity dates. No assurances can be given that the results anticipated by our projections will occur. Refer to “Risk Factors” included in Part I, Item 1A. and Note 6 in our 2021 Form 10-K.
At March 31,September 30, 2022, we had total debt of $122.5$125.4 million based on the principal amounts outstanding, compared with $107.9 million at December 31, 2021. Consolidated debt at both datesDecember 31, 2021, excluded the Block 21 loan of approximately $137 million. Ourmillion, which was presented in liabilities held for sale - discontinued operations. Using proceeds from the sale of Block 21, we repaid the outstanding amount under our $60.0 million Comerica Bank credit facility which is comprised of a $60.0 million revolving line of credit,prior to June 30, 2022. At September 30, 2022, we had $49.7$49.0 million available at March 31, 2022, net of lettersunder the credit facility. Letters of credit, totaling $347 thousand committed against the credit facility. In April 2022, we borrowed $20.0$11.0 million, onhave been issued under the credit facility, of which the majority of the funds were usedand secure our obligation to make a U.S. Federal tax payment for our 2021 tax liability.build certain roads and utilities facilities benefiting Holden Hills and Section N. Refer to “Debt Maturities and Other Contractual Obligations” below for a table illustrating the timing of principal payments due on our outstanding debt as of March 31,September 30, 2022. We plan to make a federal income tax payment of approximately $10 million in December 2022 to satisfy estimated taxes due associated with current year taxable income, including the gain on the sale of Block 21.
Our debt agreements require compliance with specified financial covenants. Refer to MD&A in our 2021 Form 10-K and Note 6 for a discussion of the financial covenants in our debt agreements. As of March 31,September 30, 2022, we were in compliance with all of our financial covenants; however, for each quarter since second-quarter 2020 our Block 21 subsidiary did not pass the debt service coverage ratio financial test under the Block 21 loan, which, though not a financial covenant, caused the Block 21 subsidiary to enter into a “Trigger Period” as discussed below.covenants.
Stratus’ and its subsidiaries’ debt arrangements contain significant limitations that may restrict Stratus’ and its subsidiaries’ ability to, among other things: borrow additional money or issue guarantees; pay dividends, repurchase equity or make other distributions to equityholders; make loans, advances or other investments; create liens on assets; sell assets; enter into sale-leaseback transactions; enter into transactions with affiliates; permit a change of control; sell all or substantially all of its assets; and engage in mergers, consolidations or other business combinations. Our Comerica Bank credit facility, andAmarra Villas credit facility, The Annie B land loan, The Saint George construction loan and Kingwood Place construction loan require Comerica Bank’s prior written consent for any common stock repurchases in excess of $1.0 million or any dividend payments.payments, which was obtained in connection with the special cash dividend and share repurchase program. Any future declaration of dividends or decision to repurchase our common stock is at the discretion of our Board, subject to restrictions under our Comerica Bank debt agreements, and will depend on our financial results, cash requirements, projected compliance with covenants in our debt agreements, outlook and other factors deemed relevant by our Board. Our future debt agreements, future refinancings of or amendments to existing debt agreements or other future agreements may restrict our ability to declare dividends or repurchase shares.
The Block 21 loan agreement, which is excluded from consolidated debt and presented within liabilities held for sale, is secured by the Block 21 assets and contains financial tests that we must meet in order to avoid a “Trigger Period." Specifically, we must maintain (i) a net worth in excess of $125 million and (ii) liquid assets having a market value of at least $10 million, each as defined in the Block 21 loan agreement. Additionally, our Block 21 subsidiary must maintain a trailing-12-month debt service coverage ratio, tested quarterly, as defined in the Block 21 loan agreement. If any of these financial tests are not met, a “Trigger Period”, which is not a default, results. As a result of the pandemic, our Block 21 subsidiary has not met the debt service coverage ratio test each quarter beginning with the June 30, 2020, test date, resulting in a "Trigger Period." During a "Trigger Period," any cash generated from the Block 21 project in excess of amounts necessary to fund loan obligations, budgeted operating expenses and specified reserves would not be available to be distributed to us until after we meet a higher debt service coverage ratio requirement for two consecutive quarters.
Although the Block 21 loan agreement is a non-recourse loan, we may contribute cash to our Block 21 subsidiary in order to prevent our Block 21 subsidiary from defaulting under the Block 21 loan agreement. Additionally, under our Block 21 subsidiary's hotel operating agreement, the hotel operator may, and has, requested funds from us when it reasonably determines that such funds are required in order to fund the operation of the hotel and specified reserves. Pursuant to such provisions, we contributed $13.7 million in 2021, $2.5 million in first-quarter 2022 and, depending on the timing of the sale of Block 21, we expect additional contributions to total as much as $0.6 million in second-quarter 2022.
We project that we will be able to meet our debt service and other cash obligations for at least the next 12 months. In May 2022, we entered into an amendment with Comerica Bank to extend the maturity date of the Comerica Bank credit facility from September 27, 2022, to December 26, 2022.2022, and in November 2022, Comerica Bank extended the maturity date from December 26, 2022, to March 27, 2023. We are in discussions with the lender to remove Holden Hills from the collateral pool for the facility, finance the Holden Hills project under a separate loan agreement and enter into a revised revolving credit facility with a lower borrowing limit secured by the remaining collateral under the facility. We expect to be able to extend or refinance all of our loans prior to their maturity dates. No assurances can be given that the results anticipated by our projections will occur. Refer to “Risk Factors” included in Part I, Item 1A. and Note 6 in our 2021 Form 10-K.
Our ability to meet our cash obligations over the longer term, including our significant debt maturities in 2023, will depend on our future operating and financial performance and cash flows, including our ability to sell or lease properties profitably and extend or refinance debt as it becomes due, which is subject to economic, financial, competitive and other factors beyond our control, including risks related to the COVID-19 pandemic.
DEBT MATURITIES AND OTHER CONTRACTUAL OBLIGATIONS
The following table summarizes our debt maturities based on the principal amounts outstanding as of March 31,September 30, 2022 (in thousands), excluding debt related to Block 21 included in liabilities held for sale::
| | | 2022 | | 2023 | | 2024 | | 2025 | | 2026 | | | Total | | |
| | | | | 2022 | | 2023 | | 2024 | | 2025 | | 2026 | | Thereafter | | Total | |
Comerica Bank credit facilitya | Comerica Bank credit facilitya | $ | 10,000 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | | $ | 10,000 | | | Comerica Bank credit facility a | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | |
| Jones Crossing loan | Jones Crossing loan | — | | | — | | | — | | | — | | | 24,500 | | | | 24,500 | | | Jones Crossing loan | — | | | — | | | — | | | — | | | 24,500 | | | — | | | 24,500 | | |
The Annie B land loan | The Annie B land loan | — | | | 14,000 | | | — | | | — | | | — | | | | 14,000 | | | The Annie B land loan | — | | | 14,000 | | | — | | | — | | | — | | | — | | | 14,000 | | |
New Caney land loan | New Caney land loan | — | | | 4,275 | | | — | | | — | | | — | | | | 4,275 | | | New Caney land loan | — | | | 4,050 | | | — | | | — | | | — | | | — | | | 4,050 | | |
PPP loan | 38 | | | — | | | — | | | — | | | — | | | | 38 | | | |
| Construction loans: | Construction loans: | | | | Construction loans: | | |
Kingwood Placeb | Kingwood Placeb | 32,586 | | | — | | | — | | | — | | | — | | | | 32,586 | | | Kingwood Place b | 32,689 | | | — | | | — | | | — | | | — | | | — | | | 32,689 | | |
| Lantana Place | Lantana Place | 604 | | | 21,454 | | | — | | | — | | | — | | | | 22,058 | | | Lantana Place | — | | | 103 | | | 259 | | | 276 | | | 290 | | | 20,951 | | | 21,879 | | |
The Saint June | | The Saint June | — | | | — | | | 10,135 | | | — | | | — | | | — | | | 10,135 | | |
West Killeen Market | West Killeen Market | 6,052 | | | — | | | — | | | — | | | — | | | | 6,052 | | | West Killeen Market | 8 | | | 32 | | | 33 | | | 5,917 | | | — | | | — | | | 5,990 | | |
Magnolia Place | Magnolia Place | — | | | — | | | 6,827 | | | — | | | — | | | | 6,827 | | | Magnolia Place | — | | | — | | | 6,540 | | | — | | | — | | | — | | | 6,540 | | |
Amarra Villas credit facility | Amarra Villas credit facility | 2,166 | | | — | | | — | | | — | | | — | | | | 2,166 | | | Amarra Villas credit facility | — | | | — | | | 5,574 | | | — | | | — | | | — | | | 5,574 | | |
| Total | Total | $ | 51,446 | | | $ | 39,729 | | | $ | 6,827 | | | $ | — | | | $ | 24,500 | | | | $ | 122,502 | | | Total | $ | 32,697 | | | $ | 18,185 | | | $ | 22,541 | | | $ | 6,193 | | | $ | 24,790 | | | $ | 20,951 | | | $ | 125,357 | | |
a.In May 2022, we entered into an amendment to extend the maturity date of the $60.0 million Comerica Bank credit facility from September 27, 2022, to December 26, 2022, and have entered into another extension of the maturity date from December 26, 2022, to March 27, 2023, pending completion of our discussions with the lender to amend the facility in connection with the financing of Holden Hills as discussed elsewhere in this report.
b.Matures December 6, 2022. We expect to extend the maturity date for an additional 12-month period. Following the extension, we have the option to extend the maturity date for a second additional 12-month period, subject to certain conditions. The sale of the multi-family tract closed in October 2022 and resulted in a principal paydown of $5.0 million.
b.MaturesThe following table summarizes the interest rate of each loan, all of which have variable rates, as of September 30, 2022, and December 6, 2022. We have the option to extend the maturity date for two additional 12-month periods, subject to certain debt service coverage conditions, which we expect to meet for the first extension period after an approximate $5.1 million paydown upon the closing of the pending sale of the multi-family tract.31, 2021:
| | | | | | | | | | | | | | |
| | Interest Rate at |
| | September 30, 2022 | | December 31, 2021 |
Comerica Bank credit facility | | 6.40 | % | | 5.00 | % |
Jones Crossing loan | | 4.91 | | | 2.40 | |
The Annie B land loan | | 5.56 | | | 3.50 | |
New Caney land loan | | 5.28 | | | 3.10 | |
Construction loans: | | | | |
Kingwood Place | | 5.06 | | | 2.60 | |
Lantana Place | | 5.00 | | | 3.00 | |
The Saint June | | 5.31 | | | — | |
West Killeen Market | | 5.35 | | | 3.00 | |
Magnolia Place | | 5.88 | | | 3.50 | |
Amarra Villas credit facility | | 5.40 | | | 3.10 | |
Other than the debt transactions discussed in Note 6, there have been no material changes in our contractual obligations since December 31, 2021. Refer to MD&A in our 2021 Form 10-K for further information regarding our contractual obligations.
CRITICAL ACCOUNTING ESTIMATES
There have been no changes in our critical accounting estimates from those discussed in our 2021 Form 10-K.
NEW ACCOUNTING STANDARDS
No new accounting standards in 2022 have had a material impact on us.
OFF-BALANCE SHEET ARRANGEMENTS
There have been no material changes in our off-balance sheet arrangements since December 31, 2021. Refer to Note 9 in our 2021 Form 10-K for further information.
CAUTIONARY STATEMENT
This Quarterly Report on Form 10-Q 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 fact, such as plans, projections or expectations related to whether and when the sale of Block 21 will be completed, our estimated gain and net cash proceeds from the sale of Block 21 and potential uses of such proceeds, potential results of our Board and management’s strategic planning process, the impacts of the COVID-19 pandemic, the impact of inflation and interest rate changes, supply chain constraints and tightening bank credit, our ability to meet our future debt service and other cash obligations, future cash flows and liquidity, our expectations about the Austin and Texas real estate markets, the planning, financing, development, construction, completion and stabilization of our development projects, plans to sell, recapitalize, or refinance properties, future operational and financial performance, MUD reimbursements for infrastructure costs, regulatory matters, leasing activities, tax rates, the impact of inflation and interest rate changes, future capital expenditures and financing plans, possible joint ventures, partnerships, or other strategic relationships, other plans and objectives of management for future operations and development projects, and future dividend paymentscash returns to stockholders, including the timing and amount of repurchases under our share repurchases.repurchase program. 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 are intended to identify those assertions as forward-looking statements.
Under our Comerica Bank credit facility,debt agreements, we are not permitted to repurchase our common stock in excess of $1.0 million or pay dividends on our common stock without Comerica Bank's prior written consent. Theconsent, which was obtained in connection with the special cash dividend and share repurchase program. Any future declaration of dividends or decision to repurchase our common stock is at the discretion of our Board, subject to restrictions under our Comerica Bank credit facility,debt agreements, and will depend on our financial results, cash requirements, projected
compliance with covenants in our debt agreements, outlook and other factors deemed relevant by theour Board. Our future debt agreements, future refinancings of or amendments to existing debt agreements or other future agreements may restrict our ability to declare dividends or repurchase shares.
We caution readers that forward-looking statements are not guarantees of future performance, and our 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, the occurrence of any event, change or other circumstance that could delay the closing of the sale of Block 21, or result in the termination of the agreements to sell Block 21, the results of our Board and management’s strategic planning process, the ongoing COVID-19 pandemic and any future major public health crisis, increases in inflation and interest rates, supply chain disruptions,constraints, declines in the market value of our assets, increases in operating and construction costs, including real estate taxes and the cost of building materials and labor, defaults by contractors and subcontractors, our ability to pay or refinance our debt, extend maturity dates of our loans or comply with or obtain waivers of financial and other covenants in debt agreements and to meet other cash obligations, our ability to collect anticipated rental payments and close projected asset sales, the availability and terms of financing for development projects and other corporate purposes, our ability to enter into and maintain joint ventures, partnerships, or other strategic relationships, including risks associated with such joint ventures, our ability to implement our business strategy successfully, including our ability to develop, construct and sell or lease properties on terms our Board
considers acceptable, market conditions or corporate developments that could preclude, impair or delay any opportunities with respect to plans to sell, recapitalize or refinance properties, our ability to obtain various entitlements and permits, a decrease in the demand for real estate in select markets in Texas where we operate, changes in economic, market, tax and business conditions, including as a result of the war in Ukraine, reductions in discretionary spending by consumers and businesses, competition from other real estate developers, the termination of sales contracts or letters of intent because of, among other factors, the failure of one or more closing conditions or market changes, the failure to attract customers or tenants for our developments or such customers’ or tenants’ failure to satisfy their purchase commitments or leasing obligations, changes in consumer preferences, potential additional impairment charges, 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- and climate-related risks, loss of key personnel, environmental and litigation risks, cybersecurity incidents and other factors described in more detail under the heading “Risk Factors” in Part I, Item 1A. of our 2021 Form 10-K, filed with the SEC, and “Risk Factors” included in Part II, Item 1A. herein.
Investors are cautioned that many of the assumptions upon which our forward-looking statements are based are likely to change after the date 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 undertake no obligation to update our forward-looking statements, which speak only as of the date made, notwithstanding any changes in our assumptions, business plans, actual experience, or other changes.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item 4. Controls and Procedures.
(a) Evaluation of disclosure controls and procedures. Our Chief Executive Officer and Chief Financial Officer, with the participation of management, have evaluated the effectiveness of our “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this quarterly report on Form 10-Q. Based on this evaluation, they have concluded that our disclosure controls and procedures were effective as of March 31,September 30, 2022.
(b) Changes in internal control over financial reporting. There was no change in our internal control over financial reporting that occurred during the quarter ended March 31,September 30, 2022, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1A. Risk Factors.
We are supplementing the risk factors described under Part I, Item 1A. “Risk Factors” of our 2021 Form 10-K with the risk factor set forth below, which should be read in conjunction with the risk factors and other disclosures in this report and in our 2021 Form 10-K.
SupplyIncreases in construction and labor costs, supply chain constraints, may further delay completionhigher borrowing costs and tightening of our projects under construction, maybank credit are having an adverse impact the timing of projects we plan to start in the future,on us and may increase our costs.continue to do so.
Supply chain disruptions impactingAs discussed in more detail in Part I, Item 2. under the heading “Overview of Financial Results - Market Conditions,” our industry have begun to delay some of our projects underhas been experiencing construction and may impact the timing of projects on which we plan to start construction in the future. Our industry has also continued to experience increases in costs of land, construction materials and labor. Because we engage third-party general contractors to construct our projects on a fixed-price or guaranteed maximum price basis, our exposure tolabor cost increases, on projects under construction is limited; however, supply chain constraints, may increasehigher borrowing costs and tightening bank credit, which have increased our costs, of,delayed projects, adversely impacted our ability to raise equity capital on attractive terms and in our desired time frame and our ability to sell some properties at attractive prices in our desired time frame; these trends may continue or delay, future projects.worsen. In addition, rising costs and delays in delivery of materials may increase the risk of default by contractors and subcontractors. Accordingly, time delayssubcontractors on ongoing construction projects. If we are unable to offset rising costs by value engineering or increasesraising rents and sales prices, our profitability and cash flows would be adversely impacted, and we may be required to recognize additional impairment charges in construction costs resulting from supply chain disruptionsthe future. Further, these factors have caused and may impactcontinue to cause a decline in demand for our ability to realize anticipated returns on projects and have a material adverse impact onreal estate, which could harm our cash flow and profits. Refer to Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further discussion.business.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
There were no unregistered sales of our equity securities and no repurchases of common stock during the three months ended March 31,September 30, 2022.
The following table provides a summary of repurchases of shares of our common stock by our company and any “affiliated purchaser” as defined by the SEC during the three months ended September 30, 2022, and the approximate dollar value of shares (in thousands) that may yet be purchased pursuant to our share repurchase program as of September 30, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Period | | Total Number of Shares Purchased | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programsa | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs a |
July 1, 2022 through July 31, 2022 | | — | | | $ | — | | | — | | $ | — | |
August 1, 2022 through August 31, 2022 | | — | | | $ | — | | | — | | $ | — | |
September 1, 2022 through September 30, 2022 | | 33,958 | | | $ | 23.49 | | | 33,958 | | | $ | 9,201 | |
Total | | 33,958 | | | $ | 23.49 | | | 33,958 | | | |
Item 5. a.Other Information.On September 2, 2022, we announced that our Board approved a new share repurchase program authorizing repurchases of up to $10.0 million of our common stock. The timing, price and number of shares that may be repurchased under the program will be based on market conditions, applicable securities laws and other factors considered by management. Share repurchases under the program may be made from time to time through solicited or unsolicited transactions in the open market, in privately negotiated transactions or by other means in accordance with securities laws. The share repurchase program does not obligate us to repurchase any specific amount of shares, does not have an expiration date, and may be suspended, modified or discontinued at any time without prior notice. The new program replaces our prior share repurchase program. Through November 4, 2022, we have acquired 105,415 shares of our common stock for a total cost of $2.6 million at an average price of $25.02 per share, and $7.4 million remains available for repurchases under the program.
As previously reported, on March 9, 2022, C. Donald Whitmire, Jr., Stratus’ principal accounting officer, informed StratusTable of his intention to retire effective June 30, 2022. On May 12, 2022, Stratus’ Board appointed Erin D. Pickens as Stratus’ principal accounting officer, effective upon Mr. Whitmire’s retirement on June 30, 2022. Ms. Pickens will continue to serve as Stratus’ Senior Vice President and Chief Financial Officer. Ms. Pickens’ employment information and compensatory arrangements are incorporated herein by reference as set forth in Stratus’ 2021 Form 10-Kunder the heading "Information About Our Executive Officers" and Definitive Proxy Statement on Schedule 14A filed with the SEC on April 8, 2022, under the heading "Executive Officer Compensation."Contents
On May 13, 2022, Stratus and certain of its wholly-owned subsidiaries, Stratus Properties Operating Co., L.P., a Delaware limited partnership, Circle C Land, L.P., a Texas limited partnership, Austin 290 Properties, Inc., a Texas corporation, The Villas at Amarra Drive, L.L.C., a Texas limited liability company, and Stratus Lakeway Center, L.L.C., a Texas limited liability company (collectively with Stratus, the Borrowers), as borrowers, and Comerica Bank (Comerica), as lender, entered into the Third Modification Agreement (the Third Modification) and Amended and Restated Revolving Promissory Note (the Amended Note and collectively with the Third Modification, the Modification Documents), which amend that certain Loan Agreement and Revolving Promissory Note, respectively, each dated June 29, 2018, by and between Borrowers, another two of Stratus’ wholly-owned subsidiaries, 210 Lavaca Holdings, L.L.C., a Texas limited liability company, and Magnolia East 149, L.L.C., a Texas limited liability company (the Released Borrowers), and Comerica (the Original Loan Documents). The Original Loan Documents were previously amended by that certain Modification Agreement, effective April 14, 2020, and that certain Second Modification Agreement, effective June 12, 2020, each by and between Borrowers, the Released Borrowers and Comerica (as amended, the Loan Documents). The Loan Documents provide for a $60.0 million secured revolving credit facility.
The Modification Documents amend the Loan Documents to (i) extend the maturity date of the credit facility from September 27, 2022, to December 26, 2022, (ii) increase the letter of credit sublimit from $7.5 million to $11.5 million, (iii) effect the removal of the Released Borrowers’ property from the collateral pool for the facility and (iv) change the benchmark rate from the London Interbank Offered Rate to the Bloomberg Short-Term Bank Yield Index (BSBY) Rate. Advances under the credit facility now bear interest at the one-month BSBY Rate (with a floor of 0.0 percent) plus 4.0 percent.
Stratus is in discussions with Comerica to remove Holden Hills from the collateral pool for the facility, finance the Holden Hills project under a separate loan agreement and enter into a revised revolving credit facility with a lower borrowing limit secured by the remaining collateral under the facility. However, there can be no assurance that Stratus will obtain any additional amendments to the Loan Documents.
The foregoing description of the Modification Documents does not purport to be complete and is qualified in its entirety by reference to the full text of the Amended Note and the Third Modification, respectively, copies of which are attached hereto as Exhibits 10.2 and 10.5, and are incorporated herein by reference.
Item 6. Exhibits. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Incorporated by Reference | |
Exhibit Number | | Exhibit Title | | Filed with this Form 10-Q | | Form | | File No. | | Date Filed | |
| | | | | | | | | | | |
| | 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 | |
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| | Agreement of Sale and Purchase, dated October 26, 2021 between Stratus Block 21, L.L.C. and Ryman Hospitality Properties, Inc. | | | | 10-K | | 001-37716 | | 3/31/2022 | |
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Exhibit Number | | Exhibit Title | | Filed with this Form 10-Q | | Form | | File No. | | Date Filed | |
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| | Membership Interest Purchase Agreement, dated October 26, 2021 between Stratus Block 21 Investments, L.P. and Ryman Hospitality Properties, Inc. | | | | 10-K | | 001-37716 | | 3/31/2022 | |
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| | Agreement of Sale and Purchase, by and between Santal, L.L.C., as seller, and BG-QR GP, LLC, as purchaser, dated as of September 20, 2021. | | | | 10-Q | | 001-37716 | | 11/15/2021 | |
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| | First Amendment to Agreement of Sale and Purchase, by and between Santal, L.L.C., as seller, and BG-QR GP, LLC, as purchaser, effective as of October 13, 2021. | | | | 10-Q | | 001-37716 | | 11/15/2021 | |
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| | Second Amendment to Agreement of Sale and Purchase, by and between Santal, L.L.C., as seller, and Berkshire Multifamily Income Realty-OP, L.P., as purchaser, dated as of November 3, 2021. | | | | 10-Q | | 001-37716 | | 11/15/2021 | |
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| | Composite Certificate of Incorporation of Stratus Properties Inc. | | | | 8-A/A | | 001-37716 | | 8/13/2021 | |
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| | Second Amended and Restated By-Laws of Stratus Properties Inc., as amended effective August 3, 2017. | | | | 10-Q | | 001-37716 | | 8/9/2017 | |
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| | 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 | |
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| | Assignment and Assumption Agreement by and among Moffett Holdings, LLC, LCHM Holdings, LLC and Stratus Properties Inc., dated as of March 3, 2014. | | | | 13D | | 005-42652 | | 3/5/2014 | |
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| | Loan Agreement by and between Stratus Properties Inc., certain of its subsidiaries and Comerica Bank, dated as of June 29, 2018. | | | | 8-K | | 001-37716 | | 7/5/2018 | |
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| | Amended and Restated Revolving Promissory Note by and between Stratus Properties Inc., certain of its subsidiaries and Comerica Bank, dated as of May 13, 2022. | | X | | | | | | | |
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| | Modification Agreement by and between Stratus Properties Inc., certain of its subsidiaries and Comerica Bank, effective as of April 14, 2020. | | | | 8-K | | 001-37716 | | 4/17/2020 | | | |
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| | Second Modification Agreement by and between Stratus Properties Inc., certain of its subsidiaries and Comerica Bank, effective as of June 12, 2020. | | | | 8-K | | 001-37716 | | 6/15/2020 | | | |
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| | Third Modification Agreement by and between Stratus Properties Inc., certain of its subsidiaries and Comerica Bank, effective as of May 13, 2022. | | X | | | | | | | |
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| | Construction Loan Agreement by and between The Saint George Apartments, L.P., as borrower, and Comerica Bank, as lender, dated July 19, 2022. | | | | 8-K | | 001-37716 | | 7/21/2022 | |
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| | Amended and Restated Installment Note by and between The Saint George Apartments, L.P. and Comerica Bank dated July 19, 2022. | | | | 8-K | | 001-37716 | | 7/21/2022 | |
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| | Guaranty Agreement by Stratus Properties Inc. for the benefit of Comerica Bank dated July 19, 2022 related to The Saint George Construction Loan Agreement. | | | | 8-K | | 001-37716 | | 7/21/2022 | |
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| | Construction Loan Agreement by and between Lantana Place, L.L.C., as borrower, and Southside Bank, as lender, dated April 28, 2017. | | | | 8-K | | 001-37716 | | 5/3/2017 | |
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| | Promissory Note by and between Lantana Place, L.L.C. and Southside Bank dated April 28, 2017. | | | | 10-K | | 001-37716 | | 3/31/2022 | |
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| | First Amendment to Construction Loan Agreement by and between Lantana Place, L.L.C., as borrower, and Southside Bank, as lender, dated December 13, 2017. | | | | 10-K | | 001-37716 | | 3/16/2018 | |
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| | Loan Modification Agreement by and between Lantana Place, L.L.C., as borrower, and Southside Bank, as lender, effective as of June 19, 2020. | | | | 10-Q | | 001-37716 | | 6/25/2020 | |
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Exhibit Number | | Exhibit Title | | Filed with this Form 10-Q | | Form | | File No. | | Date Filed | |
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| | Second Loan Modification Agreement by and between Lantana Place, L.L.C. and Southside Bank, effective as of January 4, 2021. | | | | 10-K | | 001-37716 | | 3/15/20202021 | |
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| | Loan Modification Agreement by and between Lantana Place, L.L.C. and Southside Bank, effective as of January 13, 2022. | | | | 10-K | | 001-37716 | | 3/31/2022 | |
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| | GuarantyLoan Modification Agreement by Stratus Properties Inc. in favor ofand between Lantana Place, L.L.C. and Southside Bank, dated April 28, 2017. | | | | 10-K | | 001-37716 | | 3/31/2022 | |
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| | Amended and Restated Limited Partnership Agreementeffective as of Stratus Block 150, L.P. entered into by and among The Stratus Block 150 GP, L.L.C., Stratus Properties Operating Co., L.P., and several Class B Limited Partners. | | | | 10-Q | | 001-37716 | | 11/15/2021 | |
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| | First Amendment to the Amended and Restated Limited Partnership Agreement of Stratus Block 150, L.P.August 26, 2022. | | X | | | | | | | |
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| | Severance and Change of Control Agreement between Stratus Properties Inc. and William H. Armstrong III, effective April 1, 2022. | | | | 10-K | | 001-37716 | | 3/31/2022 | |
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| | Severance and Change of Control Agreement between Stratus Properties Inc. and Erin D. Pickens, effective April 1, 2022. | | | | 10-K | | 001-37716 | | 3/31/2022 | |
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| | Stratus Properties Inc. 2022 Stock Incentive Plan. | | | | 8-K | | 001-37716 | | 5/13/2022 | |
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| | Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a). | | X | | | | | | | |
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| | Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a). | | X | | | | | | | |
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| | Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350. | | X | | | | | | | |
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| | Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350. | | X | | | | | | | |
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101.INS | | XBRL Instance Document - the XBRL Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | | X | | | | | | | |
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101.SCH | | Inline XBRL Taxonomy Extension Schema. | | X | | | | | | | |
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101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase. | | X | | | | | | | |
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101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase. | | X | | | | | | | |
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101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase. | | X | | | | | | | |
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101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase. | | X | | | | | | | |
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104 | | Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101). | | X | | | | | | | |
* Indicates management contract or compensatory plan or arrangement.
† Certain identified information has been excluded from this exhibit because it is both not material and is the type that the registrant customarily and actually treats as private or confidential.
SIGNATURE
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
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Erin D. Pickens
Senior Vice President and
Chief Financial Officer
(authorized signatory and
Principal Financial Officer and
Principal Accounting Officer)
Date: May 16,November 14, 2022