UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-K
(Mark one) |
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UNITED STATES |
SECURITIES AND EXCHANGE COMMISSION |
Washington, D.C. 20549 |
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FORM 10-K |
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(Mark One) |
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2022
OR | | | | | |
For the fiscal year ended December 31, 2017☐ |
OR |
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from | | to |
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Commission File Number: 000-19989 |
For the transition period from to
Commission file number: 001-37716
Stratus Properties Inc.
(Exact name of registrant as specified in its charter)
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| Delaware | | 72-1211572 |
(State or other jurisdiction of
incorporation or organization)
| | (I.R.S. Employer Identification No.) |
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| 212 Lavaca St., Suite 300 | | | | |
Austin, Texas | | Texas | | | | 78701 |
| (Address of principal executive offices) | | | | (Zip Code) |
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(512) 478-5788 |
(Registrant's telephone number, including area code) |
(512) 478-5788
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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| 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 |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. o Yes þ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o Yes þ No
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. þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). þ Yes o No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” andfiler,” “smaller reporting company”company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. o Large accelerated filer þ Accelerated filer o Non-accelerated filer o Smaller reporting company o Emerging growth company | | | | | | | | | | | |
| 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. o
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b).☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). o☐ Yes þ No
The aggregate market value of common stock held by non-affiliates of the registrant was $146.4 million on February 28, 2018, and $149.3$171.3 million on June 30, 2017.2022.
Common stock issued and outstanding was 8,133,5027,979,164 shares on February 28, 2018, and 8,126,502 shares on June 30, 2017.March 27, 2023.
DOCUMENTS INCORPORATED BY REFERENCE | | |
| Portions of the registrant's proxy statement for its 2023 annual meeting of stockholders are incorporated by reference into Part III of this report. |
Portions of our proxy statement for our 2018 annual meeting of stockholders are incorporated by reference into Part III (Items 10, 11, 12, 13 and 14) of this report.
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| STRATUS PROPERTIES INC. |
| TABLE OF CONTENTS |
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PART I
Items 1. and 2. Business and Properties.Properties
Except as otherwise described herein or the context otherwise requires, all references to “Stratus,” “we,” “us” and “our” in this Form 10-K refer to Stratus Properties Inc. and all entities owned or controlled by Stratus Properties Inc. All of our periodic reports filed with or furnished to the United States (U.S.) Securities and Exchange Commission (SEC) pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available, free of charge, through our website, "stratusproperties.com," including our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports are available, free of charge, through our website, www.stratusproperties.com, or by submitting a written request via mail to Stratus Investor Relations, 212 Lavaca St., Suite 300, Austin, Texas, 78701.reports. These reports and amendments are available through our website or by request as soon as reasonably practicable after we electronically file such material with, or furnish such material with or to, the SEC. Our website is intended to provide information that may be of interest to investors and other stakeholders. None of the information on, or accessible through, our website is part of this Form 10-K or is incorporated by reference herein.
AllExcept as otherwise described herein or where the context otherwise requires, all references to "Stratus," “we,” “us” and “our” refer to Stratus Properties Inc. and all entities owned or controlled by Stratus Properties Inc. References to “Notes” herein refer to the Notes to Consolidated Financial Statements located in Part II,included herein (refer to Item 8.), and references to “MD&A” refer to Management’s Discussion and Analysis of this Form 10-K.Financial Condition and Results of Operations and Quantitative and Qualitative Disclosures About Market Risk included herein (refer to Items 7. and 7A.).
Overview
We are a diversified real estate company with headquarters in Austin, Texas. We are engaged primarily in the acquisition, entitlement, development, management, operationleasing and sale of commercial, hotel, entertainment, and multi-family and single-family residential real estate properties primarily locatedand commercial properties in the Austin, Texas area and also including projects in certain other select, fast-growing markets in Texas.
We generate revenues and cash flows primarily from the sale of our developed properties, rental income from our leasedand undeveloped properties and fromthe lease of our hotelretail, mixed-use and entertainment operations.multi-family properties. 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 homeresidence already built on it.the lot or a property that has been developed for lease. In addition to our developed and leased properties, we have a development portfolio that consists of approximately 1,600 acres of commercial and multi-family and single-family residential projects under development or undeveloped land held for future use. We may sell properties under development, undeveloped properties or leased properties if opportunities arise that we believe will maximize overall asset value as part of our business plan. See belowstrategy. Our leasing operations primarily involve the lease of space at retail and Note 10mixed-use properties that we developed, and the lease of residences in multi-family properties that we developed. Tenants in our retail and mixed-use properties are diverse and include grocery stores, restaurants, healthcare services, fitness centers, a movie theater, and other retail products and services. Refer to “Business Strategy” in MD&A for further discussiondiscussion.
Recent Developments and Business Strategy
Over the last fiscal two years, we have generated substantial earnings and cash from the sale of the mixed-use real estate property Block 21, and the sales of multi-family properties The Santal and The Saint Mary, described in further detail below. In 2022, we produced record net income attributable to common stockholders of $90.4 million. Our total stockholders’ equity increased from $98.9 million at December 31, 2020 to $207.2 million at December 31, 2022.
After the sale of Block 21 in May 2022, which eliminated our Hotel and Entertainment segments, our Board of Directors (Board) and management team engaged in a strategic planning process, which included consideration of the uses of proceeds from our recent property sales, and of our operating segments.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. As of March 27, 2023, $8.7 million of our common stock had been repurchased under the program and $1.3 million remained available under the program.
Our principal executive offices are locatedBoard also 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 our company was incorporated under the laws of the state of Delaware on March 11, 1992. Stratus Properties Inc. was formed to hold, operate and develop the domestic real estate and oil and gas properties of our former parent company. We sold all of our oil and gas properties during the 1990s and have since focused solely on our real estate properties. Our overall strategy has been to enhanceenhancing 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.
Holden Hills. In first-quarter 2023, we entered into a limited partnership, obtained debt financing and commenced construction of Holden Hills, our final large residential development within the Barton Creek community in Austin, Texas. Holden Hills consists of 495 acres and the community is designed to feature 475 unique residences to be developed in two phases. We contributed to the partnership the Holden Hills land and related personal property at an agreed value of $70.0 million and our 50 percent partner contributed $40.0 million in cash. The partnership distributed and paid $35.8 million in cash to us in connection with these transactions. Refer to Note 11 for further discussion.
Sale of Block 21. On May 31, 2022, we completed the sale of Block 21 to 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. Our 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). We recorded a pre-tax gain on the sale of $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 eliminated 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-K. Refer to Note 4 for further discussion.
Sale of The Santal. In December 2021, one of our wholly owned subsidiaries sold The Santal, a 448-unit luxury garden-style multi-family project located in Barton Creek in Austin, Texas, for $152.0 million. After closing costs and payment of the outstanding project loan, the sale generated net proceeds of approximately $74 million. We recorded a pre-tax gain on sale of $83.0 million in 2021. Refer to Note 4 for further discussion.
Sale of The Saint Mary. In January 2021, one of our subsidiaries sold The Saint Mary, a 240-unit luxury garden-style multi-family project located in the Circle C community in Austin, Texas, for $60.0 million. After closing costs and payment of the outstanding construction loan, the sale generated net proceeds of approximately $34.0 million. 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 recorded a pre-tax gain on sale of $22.9 million ($16.2 million net of noncontrolling interests) in 2021. Refer to Note 4 for further discussion.
Continuing Operations
The following discussion describes the properties included in our Real Estate Operations and Leasing Operations segments. Refer to Note 10, the section “Properties” below, and MD&A for more detailed discussion of the properties.
Real Estate Operations. Our Real Estate Operations segment is comprised of our operations with respect to our properties under various stages of development: developed for sale, under development and available for development. As part of our real estate operations, we acquire, entitle, develop and sell properties, focused on the Austin, Texas area and other select, fast-growing markets in Texas. The current focus of our real estate operations is developing multi-family and single-family residential properties and residential-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 (refer to “Leasing Operations” below)
We develop properties on our own and also through joint ventures in which we partner with third-party equity investors, serve as general partner, receive fees for development and asset management and may receive a preferred return after negotiated returns are reached. We may develop projects on land we have owned for many
years, such as in Barton Creek in Austin, Texas, or on land that we purchase to develop in the near future, such as The Saint George and The Annie B projects described herein. We may enter into land purchase contracts in which we obtain the right, but not the obligation, to buy land at an agreed-upon price within a specified period of time. These contracts generally limit our financial exposure to our earnest money deposited into escrow and pre-acquisition diligence and planning costs we incur.
We engage and manage third-party general contractors to construct our projects typically on a fixed-price basis. Our employees oversee extensive work done by securingindividuals and maintaining developmentcompanies we engage as consultants for services including site selection, obtaining entitlements, architecture, engineering, landscaping and land preservation, design, sustainability, and developing and building real estate projects on these propertiesimplementing marketing and sales plans.
Revenue from our Real Estate Operations segment accounted for sale or investment. We have also pursued opportunities for new projects that offer the possibility of acceptable returns and risks. See "Business Strategy" in Part II, Items 7. and 7A. for further discussion.
Operations
A description66 percent of our four operating segments follows.total revenue for 2022 and 30 percent for 2021.
Real Estate Operations.
The acreage under development and undeveloped as of December 31, 2017,2022 that comprise our real estate operations other than real estate held for sale is presented in the following table.
•Acreage under development includes real estate for which infrastructure work over the entire property has been completed, is currently being completed or is able to be completed and for which necessary permits have been obtained. The undeveloped
•Undeveloped acreage shown in the table below is presented according to anticipated uses for multi-family units, single-family lots and commercial developmentspace based upon our understanding of the properties’ existing entitlements. However, because of the nature and cost of the approval and development process and uncertainty regarding market demand for a particular use, there is no assurance that the undeveloped acreage will ever be developed. Undeveloped acreage (i.e., planning, infrastructure or development work is not currently in progress on such property) includes vacant pad sites at Magnolia Place and Kingwood Place, as well as other real estate that can be sold “as is.”"
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| | Acreage Under Development | | Undeveloped Acreage | | |
| Single Family | | Multi-
family | | Commercial | | Total | | Single
Family | | Multi-
family | | Commercial | | Total | | Total
Acreage |
| Austin: | | | | | | | | | | | | | | | | | |
Barton Creek a | 11 | | | 36 | | | — | | | 47 | | | 512 | | | 215 | | | 394 | | | 1,121 | | | 1,168 | |
| Circle C | — | | | — | | | — | | | — | | | — | | | 21 | | | 216 | | | 237 | | | 237 | |
| Lantana | — | | | — | | | — | | | — | | | — | | | 12 | | | 5 | | | 17 | | | 17 | |
| The Annie B | — | | | — | | | — | | | — | | | — | | | 1 | | | — | | | 1 | | | 1 | |
| The Saint George | — | | | 4 | | | — | | | 4 | | | — | | | — | | | — | | | — | | | 4 | |
| Lakeway | — | | | — | | | — | | | — | | | — | | | 35 | | | — | | | 35 | | | 35 | |
Magnolia Place b | — | | | — | | | — | | | — | | | — | | | 29 | | | 48 | | | 77 | | | 77 | |
| Jones Crossing | — | | | — | | | — | | | — | | | — | | | 21 | | | 23 | | | 44 | | | 44 | |
| Kingwood Place | — | | | — | | | — | | | — | | | — | | | — | | | 11 | | | 11 | | | 11 | |
| | | | | | | | | | | | | | | | | |
| New Caney | — | | | — | | | — | | | — | | | — | | | 10 | | | 28 | | | 38 | | | 38 | |
| Total | 11 | | | 40 | | | — | | | 51 | | | 512 | | | 344 | | | 725 | | | 1,581 | | | 1,632 | |
a.Refer to "Properties – Barton Creek" below for a discussion of our properties within Barton Creek. The single-family undeveloped acreage includes 495 acres in Holden Hills on which we have commenced infrastructure construction during first-quarter 2023. The multi-family and commercial acreage includes approximately 570 acres representing our Section N project.
b.In October 2022, Stratus entered into a contract to sell approximately 11 acres planned for 275 multi-family units at Magnolia Place for $4.3 million, expected to close by the end of 2023.
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| | Under Development | | Undeveloped | | |
| | Single Family | | Multi-
family | | Commercial | | Total | | Single Family | | Multi- family | | Commercial | | Total | | Total Acreage |
| Austin: | | | | | | | | | | | | | | | | | |
| Barton Creek | 4 |
| | 38 |
| | — |
| | 42 |
| | 512 |
| | 262 |
| | 394 |
| | 1,168 |
| | 1,210 |
|
| Circle C | — |
| | — |
| | — |
| | — |
| | — |
| | 36 |
| | 216 |
| | 252 |
| | 252 |
|
| Lantana | — |
| | — |
| | 11 |
| | 11 |
| | — |
| | — |
| | 44 |
| | 44 |
| | 55 |
|
| Other | — |
| | — |
| | — |
| | — |
| | 7 |
| | — |
| | — |
| | 7 |
| | 7 |
|
Lakewaya | — |
| | — |
| | — |
| | — |
| | 35 |
| | — |
| | — |
| | 35 |
| | 35 |
|
| Magnolia | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 124 |
| | 124 |
| | 124 |
|
| Jones Crossing | — |
| | — |
| | 72 |
| | 72 |
| | — |
| | — |
| | — |
| | — |
| | 72 |
|
| Camino Real, San Antonio | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2 |
| | 2 |
| | 2 |
|
| Total | 4 |
| | 38 |
| | 83 |
| | 125 |
| | 554 |
| | 298 |
| | 780 |
| | 1,632 |
| | 1,757 |
|
a. On February 15, 2017, we sold The Oaks at Lakeway, which included 52 acres of land under development at December 31, 2016, but we retained 34.7 acres of undeveloped land adjacent to the project (see "Properties - The Oaks at Lakeway" below and Note 11).
Revenue from our real estate operations segment accounted for 14 percent of our total revenue for 2017, 13 percent for 2016 and 18 percent for 2015.
The following table summarizes the estimated development potential including 212 multi-family units and 252,913 square feet of commercial space currentlyour acreage under development of ourand undeveloped acreage as of December 31, 2017:2022:
| | | | | | | | | | | | | | | | | |
| | Single Family | | Multi-family | | Commercial |
| | (lots) | | (units) | | (gross square feet) |
Barton Creek a | 498 | | | 1,594 | | | 1,648,891 | |
| Circle C | — | | | 56 | | | 660,985 | |
| Lantana | — | | | 306 | | | 160,000 | |
| The Annie B | — | | | 316 | | | 8,325 | |
| The Saint George | — | | | 316 | | | — | |
| Lakeway | — | | | 270 | | | — | |
Magnolia Place b | — | | | 875 | | | 15,000 | |
| Jones Crossing | — | | | 275 | | | 104,750 | |
| New Caney | — | | | 275 | | | 145,000 | |
| Other | — | | | — | | | 7,285 | |
| Total | 498 | | | 4,283 | | | 2,750,236 | |
|
| | | | | | | | |
| | | | | | |
| | Single Family | | Multi-family | | Commercial |
| | (lots) | | (units) | | (gross square feet) |
| Barton Creek | 175 |
| | 1,794 |
| | 88,081 |
|
| Lakeway | 100 |
| | — |
| | — |
|
| Circle C | — |
| | 297 |
| | 674,942 |
|
| Lantana | — |
| | — |
| | 480,000 |
|
| Magnolia | — |
| | — |
| | 351,000 |
|
| Jones Crossing | — |
| | — |
| | 258,000 |
|
| Flores Street | — |
| | 6 |
| | — |
|
| Total | 275 |
| | 2,097 |
| | 1,852,023 |
|
b.In October 2022, Stratus entered into a contract to sell approximately 11 acres planned for 275 multi-family units at Magnolia Place for $4.3 million, expected to close by the end of 2023.
Real estate under development as of December 31, 2022 in the table above included two multi-family properties under construction in Austin, Texas: The Saint June, a 182-unit luxury garden-style project within the Amarra development, and The Saint George, a 316-unit luxury wrap-style project. These properties are expected to be reclassified into the Leasing Operations. Our principal leasing operationsOperations segment upon their completion, which is expected in third-quarter 2023 for The Saint June and mid-2024 for The Saint George.
The development potential of our undeveloped acreage at December 31, 2017,2022 also included the following, which are not reflected in the table above:
•one retail pad site at Kingwood Place;
•approximately 13 acres planned for up to seven retail pad sites at Magnolia Place; and
•four retail pad sites at Jones Crossing.
For additional information regarding the estimated development potential for each of our properties under development and undeveloped properties, please refer to “Recent Development Activities” in MD&A.
Real estate held for sale includes developed properties in the Real Estate Operations segment and at December 31, 2022 consisted of (1) 38,316 square feettwo residential lots in Amarra Drive Phase III.
Leasing Operations. Our Leasing Operations segment primarily involves the lease of office space, including 9,000 square feet occupied by our corporate office, and 18,327 square feet of retail space at retail and mixed-use properties that we developed and the W Austin Hotel & Residences, (2)lease of residences in multi-family projects that we developed. We engage third-party leasing and property management companies to manage our leased operations. Tenants in our retail and mixed-use projects are diverse and include grocery stores, restaurants, healthcare services, fitness centers, a 22,366-square-footmovie theater and other retail complexproducts and services.
Our principal properties in our Leasing Operations segment at December 31, 2022 consisted of:
•a 154,117-square-foot retail property representing the first phase of Barton Creek Village, (3) Jones Crossing;
•a 44,000-square-foot151,855-square-foot mixed-use project at Kingwood Place;
•a 99,379-square-foot mixed-use development representing the first phase of Lantana Place;
•a 44,493-square-foot retail complex at West Killeen MarketMarket; and (4)
•a 18,582-square-foot retail property representing the Santal Phase I multi-family project, a garden-style apartment complex consistingfirst phase of 236 units. In February 2017,Magnolia Place.
As discussed above, in December 2021 we sold The Oaks at Lakeway, the Barton Creek Village bank buildingSantal and an adjacent undeveloped 4.1 acre tract of land.in January 2021 we sold The Saint Mary, which were both multi-family projects included in our leasing operations.
Revenue from our leasing operationsLeasing Operations segment accounted for 1034 percent of our total revenue for 2017, 122022 and 70 percent for 20162021. Refer to the charts below for our leasing operations revenue by property during 2022 and 7 percent for 2015.
Hotel. The W Austin Hotel, which is part of the W Austin Hotel & Residences, includes 251 luxury rooms and suites, a full service spa, gym, rooftop pool and 9,750our developed square feet of meeting space. We have an agreement with Starwood Hotels & Resorts Worldwide, Inc.,retail space by geographic location as of December 31, 2022.
Our retail leasing properties had average rentals of $20.27 per square foot as of December 31, 2022, compared to $20.86 per square foot as of December 31, 2021. Our scheduled expirations of leased retail square footage as of December 31, 2022 as a subsidiarypercentage of Marriott International, Inc. (Starwood) for the management of hotel operations at the W Austin Hotel. Revenue per available room for the W Austin Hotel, whichtotal space leased is calculated by dividing total room revenue by the average total rooms available during the year, was $253 for 2017, $259 for 20162 percent in 2023, 4 percent in 2024, 1 percent in 2025, none in 2026, 2 percent in 2027 and $279 for 2015.91 percent thereafter.
Revenue from our hotel segment accounted for 47 percent of our total revenue for 2017 and 51 percent for each of 2016and2015.
Entertainment. The entertainment space at the W Austin Hotel & Residences is occupied by Austin City Limits Live at the Moody Theater (ACL Live) and includes a live music and entertainment venue and production studio with a maximum capacity of approximately 3,000 people. In addition to hosting concerts and private events, ACL Live is the home of Austin City Limits, a television program showcasing popular music legends. ACL Live hosted 224 events in 2017 with estimated attendance of 297,100, compared with 223 events in 2016 with estimated attendance of 237,000 and 210 events in 2015 with estimated attendance of 245,000. As of February 28, 2018, ACL Live has events booked through September 2019. Entertainment revenue also reflects revenues associated with events hosted at venues other than ACL Live, including 3TEN ACL Live. The 3TEN ACL Live venue, which is located on the site of the W Austin Hotel & Residences, opened in March 2016 and has a capacity of approximately 350 people. The 3TEN ACL Live venue hosted 228 events in 2017 with estimated attendance of 40,600 and 162 events in 2016 with estimated attendance of 25,500. As of February 28, 2018, 3TEN ACL Live has events booked through August 2019.
Revenue from our entertainment segment accounted for 29 percent of our total revenue for 2017 and 24 percentfor both2016 and 2015.
For further information about our operating segments seerefer to “Results of Operations” in Part II, Items 7. and 7A. SeeMD&A. Refer to Note 10 for a summary of our revenues, operating income and total assets by operating segment.
Properties
Our properties are primarily located in the Austin, Texas area, but include properties in other select markets in Texas. Substantially all of our properties are encumbered pursuant to the terms of our debt agreements. Refer to Note 6 for further discussion. Our Austin-area properties include the following:
Barton Creek
We have several properties that are located in the Barton Creek community, which is a 4,000-acre upscale community located southwest of downtown Austin.
Amarra Drive. Amarra Drive is a subdivision featuring lots ranging from one to over five acres.
In 2008,2015, we substantially completed the development of Amarra Drive Phase II, which consists of 35 lots on 51 acres. During each of 2017 and 2016, we sold one Phase II lot. As of December 31, 2017, 12 Phase II lots remain unsold. During January 2018, one Phase II lot was sold.
In first-quarter 2015, we substantially completed the development of Amarra Drive Phase III subdivision, which consists of 64 lots on 166 acres. In 2017,2021, we identified four lots on which to build homes and began construction on two homes. We sold six Phase III lots during each of 2017 and 2016.three lots. As of December 31, 2017, 382022, two developed Phase III lots remained unsold.
In March 2018, we entered into a contract to sell one Amarra Drive Phase II lotMulti-family and eightCommercial. We also have multi-family and commercial lots in the Amarra Drive Phase III lots for a totaldevelopment of $5.9 million. In accordance with the contract, the partiesBarton Creek. The Amarra Villas and The Saint June, both described below, are required to closebeing developed on the saletwo of these lots ratably beforemulti-family lots. During 2021, we sold a five-acre multi-family tract of land, and during 2022, we sold a six-acre multi-family tract of land. As of December 31, 2018. If the purchaser fails to close on the sale2022, we have one remaining undeveloped multi-family lot of the minimum number of lots by any of the specified closing dates, we may elect to terminate the contract but would retain the related $45 thousand earnest money. In addition, as of February 28, 2018, six Phase III lots were under contract,approximately 11 acres and one of which closed in March.undeveloped 22-acre commercial lot.
Amarra Villas. The Villas at Amarra Drive (Amarra Villas) townhome project is a 20-unit development for which we completed sitework in late 2015.project within the Amarra development. The townhomeshomes average approximately 4,400 square feet and are being marketed as "lock“lock and leave"leave” properties, with golf course access and cart garages. During 2017,We completed construction and sale of the first five townhomesseven homes between 2017 and
2019. We began construction on the next two Amarra Villas homes in first-quarter 2020, one of which was completed and sold for $2.4 million in second-quarter 2022. In 2021, we began construction of one additional home and in 2022, we began construction on the nextremaining ten homes. In fourth-quarter 2022, we completed and sold one home for $3.6 million. In March 2023, we completed and sold of one home for $2.5 million. Construction on the last ten units continues to progress, and as of March 27, 2023, one home was under contract to sell and nine homes remain available for sale.
The Saint June. 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 being built on approximately 36 acres and is comprised of multiple buildings featuring one, two townhomes began. Oneand three bedroom units for lease with amenities that include a resort-style clubhouse, fitness center, pool and extensive green space. The project is expected to be completed in third-quarter 2023. We own this project through a limited partnership with a third-party equity investor. Refer to Note 2 for further discussion.
Holden Hills. Our final large residential development within the Barton Creek community, Holden Hills, consists of 495 acres and the community is designed to feature 475 unique residences to be developed in two phases with a focus on health and wellness, sustainability and energy conservation. Phases I and II of the completed townhomes was sold during 2017. AsHolden Hills development plan encompass the development of February 28, 2018, two townhomes, currently under construction, were under contract.
Santal. The Santalthe home sites. Phase I multi-familyis expected to consist of 337 luxury residence sites to be developed in nine distinct communities or “pods,” and 12 single-family platted home sites or “estate lots,” and includes related amenities and infrastructure. Phase I also includes the Tecoma Improvements, described below. Phase II is expected to consist of 63 luxury residence sites to be developed in five distinct communities or “pods,” and 63 single-family platted home sites or “estate lots,” and includes related amenities and infrastructure. The luxury residences are expected to range in size from 2,000 square feet to 4,600 square feet. The estate lots are expected to range in size from 0.9 acres to 2.7 acres.
We entered into a limited partnership agreement with a third-party investor for this project in January 2023 (the Holden Hills partnership) and in February 2023 obtained construction financing for Phase I of the project and commenced infrastructure construction. We expect to complete site work for Phase I, including the construction of road, utility, drainage and other required infrastructure in late 2024. Accordingly, our current projections anticipate that we could start building homes and/or selling home sites in late 2024 or 2025. We may sell the developed pods and estate lots, or may elect to build and sell, or build and lease, homes on some or all of the pods and estate lots, depending on financing and market conditions. Pods and estate lots may also be acquired from the Holden Hills partnership by a garden-style apartment complex, was completed within budgetlimited partner for further development under procedures approved by the partners.
We entered into a development agreement with the Holden Hills partnership (Development Agreement) that provides that, as part of Phase I, the Holden Hills partnership will construct certain street, drainage, water, sidewalk, electric and gas improvements in August 2016order to extend the Tecoma Circle roadway on Section N land owned by Stratus from its current terminus to Southwest Parkway, estimated to cost approximately $14.7 million (the Tecoma Improvements). The Tecoma Improvements will enable access and consistsprovide utilities necessary for the development of 236 units. As of February 28, 2018, approximately 95both Holden Hills and Section N. Pursuant to the Development Agreement, we will reimburse the Holden Hills partnership for 60 percent of the units were leased. During 2017, we obtained financingcosts of the Tecoma Improvements.
The Holden Hills partnership is expected to be eligible to be reimbursed in the future by Travis County Municipal Utility Districts (MUD) for a portion of future costs of the Tecoma Improvements and began constructionalso for a portion of Santal Phase II,future costs related only to the Holden Hills project, with such MUD reimbursements currently estimated to be up to a 212-unit garden style, multi-family developmentmaximum of $6.4 million for the Tecoma Improvements and $8.0 million for only the Holden Hills project. The amount and timing of MUD reimbursements depends upon, among other factors, the amount and timing of future actual costs incurred, the MUD having a sufficient tax base within its district to issue bonds and obtaining the necessary state approval for the sale of the bonds. Accordingly, the amount and timing of the receipt of MUD reimbursements is uncertain.
Refer to Note 11 for further discussion.
Section N. Section N is Stratus’ wholly-owned approximately 570-acre tract located along Southwest Parkway in the southern portion of the Barton Creek community, adjacent to Santal Phase I.
Barton Creek Village. The first phase of Barton Creek Village includesHolden Hills. Using an entitlement strategy similar to that used for Holden Hills, we continue to progress the development plans for Section N. We are designing a 22,366-square-footdense, mid-rise, mixed-use project, with extensive multi-family and retail complexcomponents, coupled with limited office, entertainment and hospitality uses, surrounded by an extensive greenspace amenity, which is expected to result in a 3,085-square-foot bank building. In February 2017, we sold the 3,085-square-foot bank buildingsignificant increase in Barton Creek Village and an adjacent undeveloped 4.1 acre tract of land for $3.1 million (see Note 11). We intenddevelopment density, as compared to explore opportunities to sell the retail complex later this year depending on market conditions.
our prior plans.
Circle C Community
Effective AugustThe Circle C community is a master-planned community located in Austin, Texas. In 2002, the city of Austin (the City) granted final approval of a development agreement (the Circle C settlement), which firmly established all essential municipal development regulations applicable to our Circle C properties until 2032. The City also provided us $15.0 millionRefer to Note 9 for a summary of cash incentives we received in connection with the future development of our Circle C and other Austin-area properties. These incentives, which are in the form of credit bank capacity, can be used for City fees and for reimbursement of certain infrastructure costs. Annually, we may elect to sell up to $1.5 million of the incentives to other developers for their use in paying City fees related to their projects as long as the projects are within the desired development zone, as defined within the Circle C settlement. As of December 31, 2017, we have permanently used $12.7 million of the $15.0 million City-based development fee credits, including cumulative amounts sold to third parties totaling $5.1 million. We also had $0.5 million in credit bank capacity in use as temporary fiscal deposits as of December 31, 2017. Available credit bank capacity was $2.6 million at December 31, 2017.
We are developing the Circle C community based on the entitlements secured in ourthe Circle C settlement with the City. Oursettlement. The Circle C settlement, as amended in 2004, permits development of 1.16 million square feet of commercial space, 504 multi-family units and 830 single-family residential lots.
Meridian. Meridian is an 800-lot residential development at the Circle C community. Development of the final phase of Meridian, which consisted of 57 one-acre lots, was completed in 2014. We sold the last 12 lots during 2017 and 19 lots during each of 2016 and 2015.
The St. Mary. We have secured final building permits for The St. Mary, a 240-unit multi-family development in the Circle C community, and, subject to obtaining construction financing, intend to commence construction by mid-2018.
As of December 31, 2017,2022, our Circle C community had remaining entitlements for 674,942660,985 square feet of commercial space and 29756 multi-family units, including the 240 units planned for The St. Mary multi-family development.units.
Lantana
Lantana is a partially developed, mixed-use real-estate development project. Ascommunity south of December 31, 2017, we had remaining entitlements for approximately 480,000 square feet of office and retail use on 55 acres.Barton Creek in Austin. Regional utility and road infrastructure is in place with capacity to serve Lantana at full build-out as permitted under our existing entitlements. In 2017,addition to Lantana Place, we have remaining entitlements for 160,000 square feet of commercial use on five acres in the Lantana community.
Lantana Place
Lantana Place is a partially developed, mixed-use development project within the Lantana community. We completed construction commencedof the 99,379-square-foot first phase of Lantana Place in 2018. As of December 31, 2022, we had signed leases for approximately 90 percent of the retail space, including the anchor tenant, Moviehouse & Eatery, and a ground lease for an AC Hotel by Marriott, which opened in November 2021.
We have remaining entitlements at Lantana Place for 306 multi-family units on approximately 12 acres. We currently do not expect to begin construction of the Lantana Place multi-family development (now known as The Saint Julia) prior to 2024, and the project remains subject to financing and market conditions.
The Annie B
In September 2021, we announced plans for The Annie B, a proposed luxury high-rise rental project in downtown Austin. Based on preliminary plans, The Annie B would be developed as a 400-foot tower, consisting of approximately 420,000 square feet with 316 luxury multi-family units for lease. The project includes the historic AO Watson house, which will be renovated and expanded to offer amenities that may include a restaurant, pool and garden, while preserving the property’s historic and architectural features. We closed the land purchase in September 2021. We continue to work to finalize our development plans with a goal of beginning construction in late 2023 or 2024, subject to obtaining financing and other market conditions. We own this project through a limited partnership with third-party equity investors. Refer to Note 2 for further discussion.
The Saint George
In third-quarter 2022, we began construction on The Saint George, a 316-unit luxury wrap-style multi-family project in north central Austin. The Saint George is being built on approximately four acres and is comprised of studio, one and two bedroom units for lease and an attached parking garage. We purchased the land and entered into third-party equity financing for the project in December 2021. We entered into a construction loan for the project in July 2022 and began construction in third-quarter 2022. We currently expect to achieve substantial completion by mid-2024. We own this project through a limited partnership with a third-party equity investor. Refer to Notes 2 and 6 for further discussion.
Lakeway
We own approximately 35 acres of undeveloped property in Lakeway, Texas located in the greater Austin area, which is zoned for multi-family use. Refer to Note 9 for discussion of our sale of The Oaks at Lakeway in 2017.
Our other Texas properties include:
Magnolia Place
In August 2021, we began construction on the first phase of Lantanadevelopment of Magnolia Place, a 320,000 square footour H-E-B, L.P (H-E-B) grocery shadow-anchored, mixed-use development project in southwest Austin.Magnolia, Texas. The development concept plan for Magnolia Place consists of up to four retail buildings totaling approximately 34,000 square feet, up to nine retail pad sites on approximately 16 acres to be sold or ground leased, and a combination of residential uses, including single-family (approximately 124 lots) and multi-family (a maximum of 875 units). The first phase willof development consists of two retail buildings totaling 18,582 square feet, all pad sites, and the road, utility and drainage infrastructure necessary
to support the entire development. Infrastructure construction was substantially completed in second-quarter 2022, with the exception of certain water supply upgrades and a storm water drainage pond, which are expected to be anchoredcompleted by the end of 2023. In third-quarter 2022, we substantially completed construction on the first phase of development and the two retail buildings were turned over to our retail tenants to begin their finish-out process. During second-quarter 2022, we sold one retail pad site for $2.3 million and sold another retail pad site in third-quarter 2022 for $1.1 million. In third-quarter 2022, we also sold 28 acres of undeveloped single-family residential land for $3.2 million, leaving approximately 77 acres of undeveloped land in the development, currently entitled for approximately 15,000 square feet of retail space, a 12-screen Moviehouse,maximum of 875 multi-family units and up to seven retail pad sites. In October 2022, Stratus entered into a statecontract to sell approximately 11 acres planned for 275 multi-family units for $4.3 million, which is currently expected to close by the end of the art movie theater that provides a high-quality dining experience. We expect to complete2023. H-E-B completed construction of Moviehouseand opened its 95,000-square-foot grocery store on an adjoining 18-acre site in mid-2018.fourth-quarter 2022.
The W Austin Hotel & Residences
Jones Crossing
In December 2006, we acquired a two-acre city block in downtown Austin for $15.1 million to develop a multi-use project. In 2008,2017, we entered into a joint venture99-year ground lease pursuant to which we have leased a 72-acre tract of land in College Station, Texas, for Jones Crossing, an H-E-B-anchored, mixed-use project. Construction of the first phase of the retail component of the Jones Crossing project was completed in 2018, consisting of 154,117 square feet. The H-E-B grocery store opened in September 2018, and, as of December 31, 2022, we had signed leases for substantially all of the retail space, including the H-E-B grocery store. As of December 31, 2022, we had approximately 23 undeveloped commercial acres with Canyon-Johnson Urban Fund II, L.P. (Canyon-Johnson)estimated development potential of approximately 104,750 square feet of commercial space and four retail pad sites. We continue to evaluate options for the 21-acre multi-family component of this project.
Kingwood Place
In 2018, we purchased a 54-acre tract of land in Kingwood, Texas (in the greater Houston area) to be developed as Kingwood Place, an H-E-B-anchored, mixed-use development project. The Kingwood Place project includes 151,855 square feet of retail lease space, anchored by a 103,000-square-foot H-E-B grocery store, and five pad sites. Construction of two retail buildings, totaling approximately 41,000 square feet, was completed in August 2019, and the H-E-B grocery store opened in November 2019. An 8,000-square-foot retail building was completed in June 2020. We have signed ground leases on four retail pad sites and one retail pad site remains available for lease. As of December 31, 2022, we had signed leases for approximately 96 percent of the W Austin Hotel & Residences. In September 2015, we completedretail space, including the purchase of Canyon-Johnson's approximate 58 percent interest in the joint venture that owned the W Austin Hotel & Residences. SeeH-E-B grocery store. We own this project through a limited partnership with third-party equity investors. Refer to Note 2 for further discussion.
The W Austin Hotel & Residences contains a 251-room luxury hotel, 159 residential condominium units, 38,316 square feet of leasable office space, including 9,000 square feet occupied by our corporate office, 18,327 square feet of retail space, including 3TEN ACL Live, and entertainment space occupied by ACL Live. No sales of condominium units occurred in the last three years and as of December 31, 2017, two condominium units remained unsold and are being marketed.
The Oaks at Lakeway
In 2013 and 2014,October 2022, we acquired 87 acres inclosed on the greater Austin area to develop The Oakssale of a 10-acre multi-family tract of land at Lakeway project, an HEB Grocery Company, L.P. (HEB)-anchored retail project plannedKingwood Place for 236,739 square feet of commercial space. The HEB store opened in October 2015, and in February 2017,$5.5 million. In connection with the sale, we sold The Oaks at Lakeway for $114.0made a $5.0 million in cash. We retained 34.7 acres of undeveloped property, which is zoned for residential, hotel and civic uses (see Note 11).principal payment on the Kingwood Place construction loan.
Our other Texas properties and development projects include:
Magnolia
In 2014, we acquired 142 acres in the greater Houston area to develop the Magnolia project, an HEB-anchored retail project planned for 351,000 square feet of commercial space. Planning and infrastructure work by the city of Magnolia is complete and road expansion by the Texas Department of Transportation is in progress and expected to be completed in early 2018. The HEB grocery store is currently expected to open in 2020.
West Killeen Market
In 2015, we acquired approximately 21 acres in Killeen, Texas, to develop the West Killeen Market project, an HEB-anchoredH-E-B shadow-anchored retail project with 44,000and sold 11 acres to H-E-B. The project encompasses 44,493 square feet of commercial space and three pad sites adjacent to a 90,000 square-foot HEBH-E-B grocery store. Construction began in August 2016 andat West Killeen Market was completed on schedule and under budget in June 2017. The HEBthe H-E-B grocery store opened in April 2017. As of December 31, 2017,2022, we had signed leases for approximately 6074 percent of the retail space at West Killeen Market have been executed, and leasingMarket. During 2021, we sold a retail pad site for $0.8 million. During third-quarter 2022, we sold the last remaining space continues. We intend to explore opportunities to sell West Killeen Market later this year depending on leasing progress and market conditions.retail pad site for $1.0 million.
Jones Crossing
New Caney
In 2017,2018, we acquiredpurchased a 72-acre38-acre tract of land, in College Station,partnership with H-E-B, in New Caney, Texas, originally planned for Jones Crossing, a HEB-anchored,the future development of an H-E-B-anchored, mixed-use project. The Jones CrossingSubject to completion of development plans, we currently expect the New Caney project is expected to totalwill include restaurants and retail services, totaling approximately 258,000145,000 square feet, five pad sites and a 10-acre multi-family parcel planned for approximately 275 multi-family units. We finalized the lease for the H-E-B grocery store in March 2019, and upon execution of commercial space, including a 106,000 square-foot HEB grocery store. Constructionthis lease, we acquired H-E-B’s interests in the partnership for approximately $5 million. Due to changes in H-E-B’s development timeline, the H-E-B lease was terminated in fourth-quarter 2022. We are currently working with another prospective retail anchor and do not plan to commence construction of the retail componentNew Caney project prior to 2024.
Our development plans for The Annie B, Section N and The Saint Julia will require significant additional capital, which we currently intend to pursue through project-level debt and third-party equity capital arrangements through joint ventures in which we receive development management fees and asset management fees, and with our potential returns increasing above our relative equity interest in each project as negotiated return hurdles are
achieved. We anticipate seeking additional debt to finance the development of Phase II of Holden Hills. We are also pursuing other development projects. These potential development projects and projects in our pipeline could require extensive additional permitting and will be dependent on market conditions and financing. Because of the Jones Crossing project began in September 2017,nature and cost of the HEB grocery storeapproval and development process and uncertainty regarding market demand for a particular use, there is expecteduncertainty regarding the nature of the final development plans and whether we will be able to open in August 2018.successfully execute the plans.
Competition
We operate in highly competitive industries, namely the real estate development and leasing hotel and entertainment industries. In the real estate development industry, we compete with numerous public and private developers of varying sizes, ranging from localRefer to national in scope. As a result, we may be competing for investment opportunities, financing and potential buyers with developers that may possess greater financial, marketing or other resources than we have. Our prospective customers generally have a variety of choices of new and existing homes and homesites when considering a purchase. We attempt to differentiate our properties primarily on the basis of community design, quality, uniqueness, amenities, location and developer reputation.
The leasing industry is highly fragmented among individuals, partnerships and public and private entities, with no dominant single entity or person. Although we may compete against large sophisticated owners and operators, owners and operators of any size can provide effective competition for prospective tenants. We compete for tenants primarily on the basis of property location, rent charged, and the design and condition of improvements.
In the hotel industry, competition is generally based on quality and consistency of rooms, restaurant and meeting facilities and services, attractiveness of location, price and other factors. Management believes that we compete favorably in these areas. Our W Austin Hotel competes with other hotels and resorts in our geographic market, including hotels owned locally and facilities owned by national and international chains.
In the entertainment industry, we compete with other venues in Austin, Texas, and venues in other markets for artists likely to perform in the Austin, Texas region. Touring artists have several alternatives to our venue when scheduling tours. Some of our competitors in venue management have a greater number of venues in certain markets and may have greater financial resources in those markets. We differentiate our entertainment businesses
by providing a quality live music experience and promoting our ACL Live entertainment space through KLRU's broadcast of Austin City Limits.
See Part I, Item 1A. "Risk Factors"“Risk Factors” for further discussion.discussion of competitive factors relating to our businesses.
Revolving Credit Facility and Other Financing Arrangements
Obtaining and maintaining adequate financing is a critical component of our business. For information about our revolving credit facility and other financing arrangements, seerefer to “Capital Resources and Liquidity - Revolving Credit Facility and Other Financing Arrangements” in Part II, Items 7.MD&A and 7A.Notes 2, 6 and Note 6.11.
Regulation and Environmental Matters
Our real estate investments are subject to extensive and complex local, city, county and state laws, rules and regulations regarding permitting, zoning, subdivision, utilities and water quality as well as federal laws, rules and regulations regarding air and water quality, and protection of the environment, endangered species and their habitats. Such regulation has delayed and may continue to delay development of our properties and may result in higher development and administrative costs. SeeRefer to Part I, Item 1A. "Risk Factors"“Risk Factors” for further discussion.
We have made, and will continue to make, expenditures for the protection of the environment with respect to our real estate development activities. Emphasis on environmental matters will result in additional costs in the future. Based on an analysisFurther, regulatory and societal responses intended to reduce potential climate change impacts may increase our costs to develop, operate and maintain our properties.
Corporate Responsibility
During 2022, with the oversight of the Nominating and Corporate Governance Committee of our operations in relationBoard, we posted to currentour website information regarding our corporate responsibility performance and presently anticipated environmental requirements, we currently do not anticipateobjectives, including discussions about our human capital management, governance, sustainability objectives and related policies adopted by our Board. Our website is intended to provide information that these costs will have a material adverse effectmay be of interest to investors and other stakeholders. None of the information on, or accessible through, our future operationswebsite is part of this Form 10-K or financial condition.is incorporated by reference herein.
Employees
We believe that our employees are one of our greatest resources and that our diverse, dedicated and talented team is the foundation of our success and achievements. At December 31, 2017,2022, we had a total of 13931 employees, 48all of whichwhom were full-time employees, located at our Austin, Texas headquarters.employees. We believe we have a good relationship with our employees, none of whom are represented by a union. SinceIn 2022, we adopted a new Labor and Human Rights Policy, recommended by our Board’s Nominating and Corporate Governance Committee and approved by our Board.
Beginning in 1996, certain services necessary for our business and operations, including certain administrative, financial reporting and other services, have beenwere performed by FM Services Company (FM Services) pursuant to a services agreement. FM Services is a wholly owned subsidiary of Freeport-McMoRan Inc. Either party may terminateWe and FM Services phased out and terminated the services agreement at any time upon 60 days notice or earlier upon mutual written agreement.during 2022, and we are performing these functions in-house.
Sustainability
As a real estate development company centered in Austin, Texas, we understand the value that a healthy environment and healthy people bring to our projects, our company and our stakeholders. As a member of the U.S. Green Building Council (USGBC), we work along with council members with the goal of transforming the way buildings and communities are designed, built and operated in order to create environmentally and socially responsible properties for a more sustainable life. For more than 15 years, we have partnered with leaders in sustainable development, engineering and design, including, among others, USGBC and The Center for Maximum
Potential Building Systems. We have built a range of projects recognized as being on the leading edge of sustainable practices, including Block 21, the first mixed-use high rise tower in Austin to receive the USGBC LEED (Leadership in Energy & Environmental Design) Silver certification, and many of our residential communities and retail developments. Our Holden Hills residential development is being designed to focus on health and wellness, sustainability and energy conservation. We believe that our customers recognize our environmental stewardship and will continue to reward thoughtful and sustainable development. In 2022, we adopted a new Environmental Policy and Vendor Code of Conduct, recommended by our Board’s Nominating and Corporate Governance Committee and approved by our Board.
Item 1A. Risk Factors
This report contains "forward-looking statements"“forward-looking statements” within the meaning of U.S.the United States (U.S.) federal securities laws. Forward-looking statements are all statements other than statements of historical facts,fact, such as statements regardingplans, projections or expectations relatedexpectations. For additional information, refer to operational“Cautionary Statement” in Items 7. and financial performance or liquidity, reimbursements for infrastructure costs, financing7A. Management’s Discussion and regulatory matters, development plansAnalysis of Financial Condition and salesResults of properties, leasing activities, timeframes for development, constructionOperations and completion of our projects, capital expenditures, liquidityQuantitative and capital resources, the impact of tax reform on our operations, and other plans and objectives of management for future operations and activities. Qualitative Disclosures About Market Risk.
We undertake no obligation to update our forward-looking statements, which speak only as of the date made, notwithstanding any forward-looking statements.changes in our assumptions, business plans, actual experience, or other changes. 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 includeare discussed below. Investors should carefully consider the following:risks described below in addition to the other information set forth in this Annual Report on Form 10-K. The risk factors described herein are not all of the risks we may face. Other risks not presently known to us or that we currently believe are immaterial may materially and adversely affect our business if they occur, and the trading price of our securities could decline, and you may lose part or all of your investment. Moreover, new risks emerge from time to time. Further, our business may also be affected by general risks that apply to all companies operating in the U.S., which we have not included below.
Risks Relating to our Business and IndustriesIndustry
We need significant amounts of cash to servicecannot assure you that our debt. If we are unable to generate sufficient cash to service our debt, our liquidity, financial condition and results of operations could be negatively affected.
Ourcurrent business strategy requires us to rely onwill be successful.
In May 2022 we completed the sale of Block 21, which eliminated our Hotel and Entertainment segments. In 2021, we completed the sales of our stabilized multi-family properties, The Santal and The Saint Mary. These sales collectively generated after-tax cash flow of approximately $166 million. Our Board and management team engaged in a strategic planning process, and in third-quarter 2022 announced that, after streamlining our business through the sale of Block 21, we intend to continue our real estate development program, with our experienced 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. In addition, our Board declared a special cash dividend totaling approximately $40 million on our common stock, paid on September 29, 2022, and approved a new share repurchase program, which authorizes us, in management’s discretion, to repurchase up to $10 million of our common stock from operationstime to time, subject to market conditions and our debt agreements as our primary sources of funding for our liquidity needs.other factors. As of December 31, 2017, our outstanding debt totaled $221.5March 27, 2023, $8.7 million and our cash and cash equivalents totaled $14.6 million. Our level of indebtedness could have significant consequences. For example, it could:
Increase our vulnerability to adverse changes in economic and industry conditions;
Require us to dedicate a substantial portion of our cash flow from operationscommon stock had been repurchased under the program and proceeds from asset sales to pay or provide$1.3 million remained available under the program.
We cannot assure you that our current business strategy will be successful. Our development plans for our indebtedness, thus reducing the availability of cash flows to fund working capital, capital expenditures, acquisitions, investments and other general corporate purposes;
Limit our flexibility to plan for, or react to, changes in our business and the market in which we operate;
Place us at a competitive disadvantage to our competitors that have less debt; and
Limit our ability to borrow money to fund our working capital, capital expenditures, debt service requirements and other financing needs.
Historically, much of our debt has been renewed or refinanced in the ordinary course of business. Any deterioration of current economic conditions in our areas of operations could impact our ability to refinance ourfuture projects require significant additional debt and obtain renewals or replacement of credit enhancement devices on favorable terms or at all. In the future weequity capital. We have increasingly raised equity capital from third parties through joint venture structures, which have their own risks as described below. We may not be able to obtain the funding necessary to implement our business strategy on acceptable terms or at all as further described below. Furthermore, our business strategy may not produce sufficient external sourcesrevenues even if we are able to obtain the necessary capital. Our main source of liquidityrevenue and cash flow is expected to come from sales of our properties to third parties or to joint ventures in which we participate. Results of the past sales of our properties are not indicative of results of future sales. The timing of property sales and proceeds from such sales 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. However, 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. Our long-term success will depend on our ability to profitably execute our development plans over time.
Increases in construction and labor costs, supply chain constraints, higher borrowing costs and tightening bank credit are having an adverse impact on us and may continue to do so.
Our industry has been experiencing construction and labor cost increases, supply chain constraints, labor shortages higher borrowing costs and tightening bank credit. These factors have increased our costs, adversely impacted the projected profitability of our new projects, delayed the start of or completion of projects, adversely impacted our ability to raise equity capital on attractive terms if at all, or otherwise renew, extend or refinance a significant portion of our outstanding debt scheduled to become due in the near future. There can be no assurance that we will maintain cash reserves and generate sufficient cash flow from operations in an amount sufficient to enable us to service our debt or to fund our other liquidity needs. Any of these occurrences may have a material adverse effect on our liquidity, financial condition and results of operations. For example, our inability to extend, repay or refinance our debt when it becomes due, including upon a default or acceleration event, could force us to sell properties on unfavorable terms or ultimately result in foreclosure on properties pledged as collateral, which could result in a loss of our investment and harm our reputation.
The terms of the agreements governing our indebtedness include restrictive covenants and require that certain financial ratios be maintained. For example, the minimum stockholders' equity covenant contained in several of our debt agreements requires us to maintain total stockholders’ equity of no less than $110.0 million. At December 31, 2017, our total stockholders’ equity was $127.3 million and, as a result, we were in compliance with this covenant. Failure to comply with any of the covenants in our loan documents could result in a default that may, if not cured, accelerate the payment under our debt obligations which would likely have a material adverse effect on our liquidity, financial conditiondesired time frame and results of operations. Our ability to comply with our covenants will depend upon our future economic performance. These covenants may adversely affectimpacted our ability to finance our future operations, satisfy our capital needs or engage in other business activities that may be desirable or advantageous to us.
In order to maintain compliance with the covenantssell some properties at attractive prices in our desired time frame; these trends may continue or worsen.
On completed projects, we are experiencing increased borrowing costs on our variable rate debt agreements and carry outincreased operating costs due to inflation. As of December 31, 2022, all of our business plan, weconsolidated debt was variable rate debt. For all of such debt other than the Comerica Bank revolving credit facility, the average interest rate increased for 2022 compared to 2021 and may needcontinue to raise additional capital through equity transactions or obtain waivers or modifications of covenants from our lenders. Such additional funding may not be available on acceptable terms, if at all, when needed. We also may need to incur additional indebtednessrise in the future if prevailing market interest rates continue to climb. Refer to Note 6 for additional information. Further increases in interest rates would further increase our interest costs and the ordinary coursecosts of business to fund our development projects and our operations. There can be no assurance that such additional financing will be available when neededrefinancing existing debt or if available, offered on acceptable terms. Ifincurring new debt, is added to our current debt levels, the risks described above could intensify.
We are periodically rated by nationally recognized credit rating agencies. Any downgrades in our credit rating could impact our ability to borrow by increasing borrowing costs as well as limiting our access to capital. In addition, a downgrade could require us to post cash collateral and/or letters of credit, which would adversely affect our profits and cash flowflow. Our operating expenses impacted by inflation include contracted services for our properties such as janitorial and liquidity.
Additionally, a portionengineering services, utilities, repairs and maintenance and insurance. Inflation may cause the value of our outstanding debt bears interest at variable rates. See “Disclosures About Market Risks”properties to rise, which could lead to higher property taxes. High inflation or adverse economic conditions could have a negative impact on our tenants’ ability to pay rent or absorb rent increases. Our general and administrative expenses include compensation costs, professional fees and technology services, all of which may increase due to inflation.
In addition, rising costs and delays in Part II, Items 7.delivery of materials may increase the risk of default by contractors and 7A.subcontractors on ongoing construction projects. If we are unable to offset rising costs by value engineering or raising rents and sales prices, our profitability and cash flows would be adversely impacted, and we may be required to recognize additional impairment charges in the future. Further, these factors have caused and may continue to cause a decline in demand for more information.our real estate, which could harm our business.
We are vulnerable to concentration risks because our operations are almost exclusive toA decline in general economic conditions, particularly in the Austin, Texas market.area, could harm our business.
Our real estate operations are primarily,During 2022, the U.S. economy experienced steep rises in inflation and our hotel and entertainment venue operations are entirely, locatedinterest rates. Russia began a full-scale invasion of Ukraine in Austin, Texas. While our real estate operations have expanded to include select Texas markets outside of Austin, including College Station, Magnolia and West Killeen, the geographic concentration of the majority of our operations and limited number of projects weFebruary 2022, causing global economic disruptions. These economic disruptions may have under development at a given time means that our operations are more vulnerable to local economic downturns and adverse project-specific risks than those of larger, more
diversified companies. The performance of the Austin economy greatly affects our sales and consequently the underlying values of our properties. Our geographic concentration may create increased vulnerability during regional economic downturns, which can significantly affect our financial condition and results of operations. See "Overview - Real Estate Market Conditions" in Part II, Items 7. and 7A. for more information.
The success of our business is significantly related to general economic conditions and, accordingly, our business could be harmed by any slowdowncontinue or deteriorationworsen in the economy.
future. Periods of economic uncertainty, weakness or recession; significantly rising interest rates; declining employment levels; declining demand for real estate;consumer confidence and spending; declining real estate values; conditions which negatively shape public perception of travel, including travel-related accidents, the financial condition of the airline, automotive and other transportation-related industries;access to capital; global instability; or the public perception that any of these events or conditions may occur, or be present or worsen, may negatively affect our business. These economic conditions can result in a general decline in real estate acquisition, disposition, development and leasing activity, demand for hotel rooms and related lodging services, a general decline in the value of real estate and in rents, whichand increases in turn reduces revenue derived from property sales and leases and hotel operations as well as revenues associated with development activities. Thesetenant defaults. Our business is especially sensitive to economic conditions can also lead toin the Austin, Texas area, where the majority of our properties are located. As a result of a decline in property sales prices as well as a decline in funds invested in existing commercial real estate and related assets and properties planned for development. In addition, during periods of economic slowdown and recession, many consumers have historically reduced their discretionary spending, and our entertainment businesses depend on discretionary consumer and corporate spending. A reduction in consumer spending historically is accompanied by a decrease in attendance at live entertainment, sporting and leisure events, which may result in reductions in ticket sales, sponsorship opportunities and our ability to generate revenue with our entertainment businesses.
During an economic downturn, investment capital is usually constrained and it may take longer for us to dispose of real estate investments. As a result,conditions, the value of our real estate investments may be reduced, increasing the risk for additional asset impairments, our development projects may continue to be delayed or we may experience a decline in demand for our real estate, and we could realize losses or diminished profitability. If economic
We are vulnerable to concentration risks because our operations are primarily located in the Austin, Texas area and market conditions decline,are primarily focused on residential, residential-centric mixed-use, and retail real estate.
Our real estate operations are primarily located in the Austin, Texas area. While our real estate operations have expanded to include select markets in Texas outside of the Austin area, the geographic concentration of the majority of our operations and of the properties we may have under development at any given time means that our business is more vulnerable to negative changes in local economic, regulatory, weather and other conditions than the businesses of larger, more diversified companies. The performance of the Austin area's economy and profitability could deteriorate. If this wereour other select markets in Texas greatly affects our revenue and the values of our properties. We cannot assure you that these markets will continue to occur, we could failgrow or that underlying real estate fundamentals will be favorable in these markets. Further, negative changes in Austin demographic trends can result in Austin becoming a less desirable place for individuals, families and businesses to comply with certain financial covenants in our debt agreements, which would forcerelocate, making it more difficult for us to seek waiverssell or amendments withrent our lenders. No assurance canproperties, increase rents and retain tenants. As a result of our geographic concentration and focus on residential, residential-centric mixed-use, and retail projects in Austin, we may be given that we wouldexposed to greater risks than if our investment focus was based on more diversified types of properties and in more diversified geographic areas. Refer to “Overview of Financial Results for 2022 - Real Estate Market Conditions” in Part II, Items 7. and 7A. for more information.
We may not be able to obtain any necessary waivers or amendmentsraise additional capital for future projects on satisfactoryacceptable terms, if at all.
ChangesOur industry is capital-intensive and requires significant up-front expenditures to secure land and pursue development and construction. We have relied on cash flow from operations and our debt agreements as our primary sources of funding. We have also relied on third-party project-level equity financing of our subsidiaries, which we expect to continue to increase in the future. Our ability to raise additional capital in the future will depend
on conditions in the equity and debt markets, general economic and real estate conditions and our financial condition, performance and prospects, among other factors, many of which are not within our control. We may not be able to raise additional capital on acceptable terms if at all. Any inability to raise additional capital when needed for existing or future projects could delay or terminate future projects, hinder our ability to complete projects, and prevent us from refinancing debt obligations, which could have a material adverse effect on our business, financial condition and results of operations.
The failure of any bank in which we deposit our funds could have an adverse impact on our financial condition, liquidity and operations.
The Federal Deposit Insurance Corporation insures bank accounts in amounts up to only $250,000 per depositor per insured bank. We currently have cash and cash equivalents deposited in certain banks in excess of federally insured limits. If any of the banking institutions in which we have deposited funds fails, we may lose our deposits in excess of $250,000. The failure of a bank with which we do business may also disrupt our ability to access deposits and other services provided to us by the bank. The loss of, or inability to access, our deposits or other banking services may have a material adverse effect on our financial condition, liquidity and operations. For additional information, refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations – Capital Resources and Liquidity.
The ongoing COVID-19 pandemic may continue to challenge our business and any future major public health crisis could adversely affect our business.
The U.S. and other countries have experienced, and may experience in the future, outbreaks of contagious diseases or other health crises that affect public health and public perception of health risk. For example, the ongoing COVID-19 pandemic and the public health response to minimize its impact have had significant disruptive effects on global economic and market conditions. Many industries, including ours, have been experiencing related supply chain disruptions and labor shortages. In addition, inflation and interest rates increased significantly during 2022 and may continue to do so in 2023.
The COVID-19 pandemic disrupted the operations of our retail tenants, and during 2020, we proactively engaged with our project lenders in connection with formulating rent deferral arrangements for our tenants and obtaining concessions under our debt agreements. We cannot predict the extent to which individuals and businesses may voluntarily restrict their activities, the extent to which governments may reinstitute restrictions, nor the extent to which evolving COVID-19 pandemic developments may have an adverse impact on the economy or our business. Further, any future major public health crisis could have a material adverse impact on our business, results of operations and financial condition.
Part of our business strategy depends on maintaining strong relationships with key tenants and our inability to do so could adversely affect our business.
We have formed strategic relationships with key tenants as part of our overall strategy for particular retail and mixed-use development projects and may enter into other similar arrangements in the future. For example, our West Killeen Market, Jones Crossing, Kingwood Place and Magnolia Place mixed-use development projects are each anchored by an H-E-B grocery store. We finalized a lease for the H-E-B grocery store at our New Caney development project in March 2019; however, due to changes in H-E-B’s development timeline, the H-E-B lease was terminated in fourth-quarter 2022. We are currently working with another prospective retail anchor and do not plan to commence construction prior to 2024. Any deterioration in our relationship with H-E-B or our inability to form and retain strategic relationships with key tenants or enter into other similar arrangements in the future could adversely affect our business. If we are unable to renew a lease we have with a key tenant at one of our properties, or to re-lease the space to another key tenant of similar or better quality, we could experience material adverse consequences with respect to such property, such as a higher vacancy rate, less favorable leasing terms, reduced cash flow and reduced property values. Similarly, if one or more of our key tenants becomes insolvent or enters into bankruptcy proceedings, our business could be materially adversely impacted.
Loss of key personnel could negatively affect our business.
We depend on the experience and knowledge of our executive officers and other key personnel who guide our strategic direction and execute our business strategy, have extensive market knowledge and relationships, and
exercise substantial influence over our operations. Among the reasons that these individuals are important to our success is that each has a regional industry reputation that attracts business and investment opportunities and assists us in negotiations with lenders, existing and potential tenants, community stakeholders and industry personnel. The loss of any of our executive officers or other key personnel could negatively affect our business.
We could be impacted by our investments through joint ventures, which involve risks not present in investments in which we are the sole owner.
We have increased our use of third-party equity financing of our subsidiaries’ development projects. We expect to continue to fund development projects through the use of such joint ventures. Joint ventures involve risks not present with our wholly-owned properties, including but not limited to, the possibility the other joint venture partners may possess the ability to take or force action contrary to our interests or withhold consent contrary to our requests, have business goals which are or become inconsistent with ours, or default on their financial obligations to the joint venture, which may require us to fulfill the joint venture’s financial obligations as a legal or practical matter. We and our joint venture partners may each have the right to initiate a buy-sell arrangement, which could cause us to sell our interest, or acquire a joint venture partner’s interest, at a time when we otherwise would not have entered into such a transaction. In addition, a sale or transfer by us to a third party of our interests in the joint venture may be subject to consent rights or rights of first refusal in favor of our partners which would restrict our ability to dispose of our interest in the joint venture. Each joint venture agreement is individually negotiated, and our ability to operate, finance, or dispose of a joint venture project in our sole discretion is limited to varying degrees depending on the terms of the applicable joint venture agreement. Refer to Note 2 for further discussion of our investments in joint ventures.
Adverse weather conditions, orpublic safety issues, political instability, and other potentially catastrophic events in our Texas markets could adversely affect our business.
Adverse weather conditions, including natural disasters, couldpublic safety issues, political instability, and other potentially catastrophic events in our Texas markets may adversely affect our business, financial condition and results of operations.
Our performance Adverse weather conditions may be adversely affectedamplified by weather conditionsor increase in or near our areasfrequency due to the effects of operations. For our real estate operations, adverse weatherclimate change. These events may delay development activities, interrupt our leasing operations, or damage property resulting in substantial repair or replacement costs to the extent not covered by insurance, a reductioninsurance. Any of these factors could cause shortages and price increases in labor or raw materials, reduce property values, or cause a loss of revenue, each of which could have a material adverse effect on our business, financial condition and results of operations. Our competitors
Failure to succeed in new markets may be affected differently by such changeslimit our growth.
We have acquired in weather conditions or natural disasters depending on the location of their supplies or operations. Adverse weather conditions also may affect our live music events. Due to weather conditions,past, and we may acquire in the future, properties that are outside of the Austin, Texas area, which is our primary market. Our historical experience in existing markets does not ensure that we will be requiredable to rescheduleoperate successfully in new markets. Entering into new markets exposes us to a variety of risks, including difficulty evaluating local market conditions and local economies, developing new business relationships in the area, competing with other companies that already have an event to another available day, which would increaseestablished presence in the area, hiring and retaining personnel, evaluating quality tenants in the area, and a lack of familiarity with local governmental and permitting procedures. Furthermore, expansion into new markets may divert management's time and other resources away from our costs for the event and could negatively affect the attendance at the event, as well as concession and merchandise sales,current primary market. As a result, we may not be successful in expanding into new markets, which could adversely affectimpact our financial condition and results of operations.operations and limit our growth.
Our insurance coverage on our properties may be inadequate to cover any losses we may incur.incur and our insurance costs may increase.
We maintain insurance on our properties, including business interruption, property, liability, fire and extended coverage. However, there are certain types of losses, generally of a catastrophic nature, such as hurricanes and floods or acts of war or terrorism that may be uninsurable or not economical to insure. Further, insurance companies often increase premiums, require higher deductibles, reduce limits, restrict coverage, and refuse to insure certain types of risks, which may result in increased costs or adversely affect our business. We may be unable to renew our current insurance coverage in adequate amounts or at reasonable premiums. We use our discretion when determining amounts, coverage limits and deductibles for insurance. These terms are determinedinsurance based on retaining an acceptable level of risk at a reasonable cost. This may result in insurance coverage that, in the event of a substantial loss, would not be sufficient to pay the full current market value or current replacement cost of our lost investment. Inflation, changes in building codes and ordinances, environmental considerations and other factors also may make it unfeasible to use insurance proceeds to replace a building or other facility after it has been damaged or destroyed. Under such circumstances, the insurance proceeds we receive may be inadequate to restore our economic position in a property. In addition, we may
become liable for injuries and accidents occurring during the construction processat our properties that are underinsured.
The A significant uninsured loss of certain key senior management personnelor increase in insurance costs could negativelymaterially and adversely affect our business.business, liquidity, financial condition and results of operations.
We depend on our two executive officers and other key personnel. Our Chairman, President and Chief Executive Officer has been employed by the company since its inception in 1992. He has served as President since August 1996, Chief Executive Officer since May 1998 and Chairman of the Board since August 1998. Our Senior Vice President and Chief Financial Officer has been employed by the company since 2009. The loss of any of our key senior management personnel could negatively affect our business.
Our business may be adversely affected by information technology disruptions.disruptions and cybersecurity breaches of our systems or the systems of our contractors.
Cybersecurity incidentsMany of our business processes and records depend on technology systems to conduct day-to-day operations and lower costs, and therefore, we are vulnerable to the increasing in frequency, evolving in naturethreat of information technology disruptions and cybersecurity breaches. We also utilize the services of a number of independent contractors, such as general construction contractors, engineers, architects, leasing agents and attorneys, and their businesses are also vulnerable to the increasing threat of information technology disruptions and cybersecurity breaches. These risks include, but are not limited to, installation of malicious software, phishing, ransomware, credential attacks, unauthorized access to data and other electronic security breaches that could lead to disruptions in systems, unauthorized release of confidential or otherwise protected information, employee theft or misuse of confidential or otherwise protected information and the corruption of data. Although weIncreased use of remote work and virtual platforms may increase our risk of cybersecurity breaches. Our systems and those of our contractors are also vulnerable to damage or interruption from fire, floods, power loss, telecommunications failures, computer viruses, break-ins and similar events. A significant theft, loss, loss of access to, or fraudulent use of employee, tenant or other company data could adversely impact our reputation and could result in a loss of business, as well as remedial and other expenses, fines, and litigation. There can be no assurance that our security efforts and measures and those of our independent contractors will be effective.
We have not experienced targeted and non-targeted cybersecurity incidents in the past and may experience them in the future. While these cybersecurity incidents did not result in any material loss to us or interrupt our day-to-day operations as of March 27, 2023, there can be no assurance that we will not experience themany such losses in the future. GivenFurther, as cybersecurity threats continue to evolve and become more sophisticated, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any vulnerabilities to cybersecurity threats.
We cannot assure you that we will receive the unpredictability$6.9 million held in escrow from our sale of Block 21 in May 2022.
In order to secure our subsidiaries’ responsibilities for the accuracy of certain representations and warranties in the agreements governing the sale of Block 21, $6.9 million of the timing, naturepurchase price was held in escrow for 12 months after the closing, subject to a longer retention period with respect to any required reserve for pending claims. The $6.9 million is reflected in restricted cash in our consolidated balance sheet for the year ended December 31, 2022. We cannot assure you that we will eventually receive all or any of the amounts held in escrow.
Risks Relating to our Indebtedness
We have significant amounts of debt, may incur additional debt, and scopeneed significant amounts of information technology disruptions,cash to service our debt. If we are unable to generate sufficient cash to service our debt, our liquidity, financial condition and results of operations could be negatively affected.
As of December 31, 2022, our outstanding debt totaled $122.8 million and our cash and cash equivalents totaled $37.7 million. Except for our Comerica Bank revolving credit facility, all of our loans are project-level loans. Our project loans are generally secured by all or substantially all of the assets of the project, and our Comerica Bank revolving credit facility is secured by substantially all of our assets other than those encumbered by separate project-level financing. Stratus, as the parent company, is typically required to guarantee the payment of the project loans, in some cases until certain development milestones and/or financial conditions are met, and in some cases on a full recourse basis and in other cases on a more limited recourse basis. As of December 31, 2022, Stratus, as the parent company, guaranteed the payment of all of the project loans, except for the Jones Crossing loan and Lantana Place construction loan. Refer to Note 6 for additional discussion.
Our level of indebtedness could have significant adverse consequences. For example, it could:
•Increase our vulnerability to adverse changes in economic and industry conditions;
•Require us to dedicate a substantial portion of our cash flow from operations and proceeds from asset sales to pay or provide for our indebtedness, thus reducing the availability of cash flows to fund working capital, development projects, capital expenditures, land acquisitions and other general corporate purposes;
•Limit our flexibility to plan for, or react to, changes in our business and the markets in which we operate;
•Force us to dispose of one or more of our properties, possibly on unfavorable terms;
•Place us at a competitive disadvantage to our competitors that have less debt;
•Limit our ability to obtain future financing to fund our working capital, our development activities, capital expenditures, debt service requirements and other financing needs; and/or
•Limit our ability to refinance our indebtedness or cause the refinancing terms to be less favorable than the terms of our original indebtedness.
Our ability to make scheduled debt service payments or to refinance our indebtedness depends on our future operating and financial performance, which is subject to manipulationeconomic, financial, competitive and other factors beyond our control. Our inability to extend, repay or improper userefinance our debt when it becomes due, including upon a default or acceleration event, could allow our lenders to declare all amounts outstanding under the loans due and payable, seek to foreclose on the collateral securing the loans and/or seek to force us into involuntary bankruptcy proceedings. In addition, any difficulty in obtaining sufficient capital for planned development expenditures could also cause project delays, which could increase our costs, or could cause us to abandon projects already underway. There can be no assurance that we will generate cash flow from operations in an amount sufficient to enable us to service our debt, make necessary capital expenditures, or to fund our other liquidity needs.
Our current financing arrangements contain, and our future financing arrangements likely will contain, financial and restrictive covenants, and the failure to comply with such covenants could result in a default that accelerates the required payment of such debt.
The terms of the agreements governing our indebtedness include restrictive covenants, including covenants that require that certain financial ratios be maintained. The debt arrangements that we and our subsidiaries have contain significant limitations that may restrict our ability and the ability of our systemssubsidiaries to, among other things:
•borrow additional money or provide guarantees;
•pay dividends, repurchase equity or make other distributions to equityholders;
•make loans, advances or other investments or create liens on assets;
•sell assets, enter into sale-leaseback transactions or enter into transactions with affiliates; or
•permit a change of management or control, sell all or substantially all of our assets, or engage in mergers, consolidations or other business combinations. Refer to "Capital Resources and networks or financial losses from remedial actions,Liquidity" in Part II, Items 7. and 7A. and Note 6 for additional discussion of restrictive covenants in our debt agreements.
Failure to comply with any of the restrictive covenants in our loan documents could result in a default that may, if not cured or waived, accelerate the payment under our debt obligations which couldwould likely have a material adverse effect on our cash flow,liquidity, financial condition and results of operations. We may not be able to obtain waivers or modifications of covenants from our lenders and lenders may require fees or higher interest rates to grant any such requests. Certain of our debt arrangements have cross-default or cross-acceleration provisions, which could have a wider impact on liquidity than might otherwise arise from a default or acceleration of a single debt instrument. We cannot assure you that we could adequately address any such defaults, cross-defaults or acceleration of our debt payment obligations in a sufficient or timely manner, or at all. Our ability to comply with our covenants will depend upon our future economic performance. These covenants may adversely affect our ability to finance our future operations, satisfy our capital needs or engage in other business activities that may be desirable or advantageous to us.
In order to maintain compliance with the covenants in our debt agreements and financial condition.carry out our business plan, we may need to use cash to pay down the principal balance of the loan, contribute additional equity to a project or raise additional debt or equity capital, including project-level equity financing of our subsidiaries. Such additional funding may not be available on acceptable terms, if at all, when needed. If new debt is added to our current debt levels, the risks described above could intensify.
Risks Relating to Real Estate Operations
The real estate business is highly competitive and many of our competitors are larger and financially stronger than we are.
The real estate business is highly competitive. We compete with a large number of companies and individuals that have significantly greater financial, sales, marketing and other resources than we have. Our competitors include local developers who are committed primarily to particular markets and also national developers who acquire properties throughout the United States. A downturn in the real estate industry could significantly increase competition among developers. Increased competition could cause us to increase our selling incentives and/or reduce our prices. An oversupply of real estate properties available for sale or lease, as well as the potential significant discounting of prices by some of our competitors, may adversely affect our results of operations.
Our business, results of operations, cash flows and financial condition are greatly affected by the performance of the real estate industry.
Revenue from our real estate operations segment accounted for 14 percent of our total revenue for the fiscal year ended December 31, 2017. The U.S. real estate industry is highly cyclical and is affected by changes in global, national and local economic conditions, and events such as general employment and income levels, availability of financing, inflation, interest rates, and consumer confidence and overbuildingspending. As discussed above, our industry was adversely impacted during 2022 by rising inflation and interest rates, which may continue in 2023 and beyond. Our Holden Hills project involves the development of or decreaseresidential lots. Our ability to successfully monetize our investment in demanddeveloped lots will depend on the availability and cost of financing for purchasers of the lots, for residential construction and commercial real estate. Ourfor homebuyers, which may be adversely impacted by rising interest and mortgage rates. There has generally been a decline over time in the brick-and-mortar retail industry due to increases in on-line shopping, which generally has had an adverse impact on retail development projects. Other factors that may impact real estate activities are subject to numerous factors beyond our control, including local real estate market conditions (both where our properties are located andbusinesses include over-building, changes in areas where our potential customers reside), substantial existing and potential competition, general national, regional and local economic conditions, fluctuations in interest rates and mortgage availability,traffic patterns, changes in demographic conditions, changes in tenant and buyer preferences and changes in government regulations or requirements. Anyrequirements, including tax law changes and changes in zoning laws. These factors are outside of the foregoing factors could result in a reduction or cancellation of sales and/or lower gross margins for sales. Lower than expected sales couldour control and may have a material adverse effect on the level of our business, profits and the timing and amounts of our cash flows.
There can be no assurance that the properties in our development pipeline will be completed in accordance with the anticipated timing or cost.
We currently have several projects at various stages of development. The development of the projects in our pipeline is subject to numerous risks, many of which are outside of our control, including:
•inability to obtain entitlements;
•inability to obtain financing on acceptable terms;
•cost increases or overruns;
•default by any of the contractors we engage to construct our projects;
•site accidents; and
•failure to secure tenants or residents in the anticipated time frame, on acceptable terms, or at all.
We can provide no assurances that we will complete any of the projects in our development pipeline on the anticipated schedule or within the budget, or that, once completed, these properties will achieve the results that we expect. Under our construction loans, advances are typically made in accordance with established budget allocations, and if the lender deems that the undisbursed proceeds of the loan are insufficient to meet the costs of completing the project, the lender may decline to make additional advances until the borrower deposits with the lender sufficient additional funds to cover the deficiency. If the development of our projects is not completed in accordance with our anticipated timing or cost, or the properties fail to achieve the financial results we expect, it could have a material adverse effect on our business, financial condition, results of operations and cash flows and ability to repay our debt, including project-related debt.
Risks associated with our ownership of substantial amounts of undeveloped land or land under development could adversely affect our business and financial results.
We own a substantial amount of undeveloped land and land under development. If demand for undeveloped real estate, or retail, residential or multi-family properties deteriorates, we may not be able to develop or complete development of our land profitably, may not be able to fully recover the costs of some of the land we own, may choose to forfeit deposits on land controlled through options or purchase contracts, and may choose to sell land for prices lower than our costs, which may cause losses or additional impairment charges.
It may be difficult for us to sell our real estate at times and prices advantageous to us.
Real estate investments often cannot easily be converted into cash and market valuesis a relatively illiquid asset. It may be adversely affected by these economic circumstances, market fundamentals, and competitive and demographic conditions. Because of the effect these factors have ondifficult for us to sell our real estate values, it is difficultquickly if the need or desire arises, at prices or on terms we find acceptable. This may limit our ability to predictmake rapid adjustments in the levelsize and content of future salesour portfolio of assets in response to changes in economic or sales prices thatother conditions, may constrain our ability to pay our debts, and may lead to losses or additional impairment charges. Refer to "Critical Accounting Estimates" in Part II, Items 7. and 7A. for more information.
Significant competition could have an adverse effect on our business.
Our competitors include local developers who are committed primarily to particular markets and also regional and national developers who acquire and develop properties throughout the U.S. Many of our competitors are larger and financially stronger than we are, have more resources than we do, and have greater economies of scale and lower cost structures. If we fail to compete effectively, our business and profitability will be realized for individual assets.adversely affected.
Our operations are subject to an intensive regulatory approval process and opposition from environmental and special interest groups, either or both of which could cause delays and increase the costs of our development efforts or preclude such developments entirely.
Real estate projects must generally comply with local land development regulations and may need to comply with state and federal regulations. Before we can develop a property, we must obtain a variety of approvals from local and state governments with respect to such matters as zoning and other land use entitlements and issues, and subdivision, site planning and environmental issues under applicable regulations. SomeObtaining all of the necessary permits and entitlements to develop a parcel of land is often difficult and costly, and may take several years or more to complete. In some situations, we may be unable to obtain the necessary permits and/or entitlements to proceed with a real estate development or may be required to alter our plans for the development. In addition, the zoning that ultimately is approved could include density provisions that would limit the number of homes and other structures that could be built within the boundaries of a particular area. Any of these approvals are discretionary.may limit, delay or increase the costs of acquisition of land and development of our properties. Because government agencies and
special interest groups have in the past expressedfrom time to time express concerns about certain of our development plans, and in or near Austin,the future may express similar concerns, our ability to develop these properties and realize future income from our properties could be delayed, reduced, prevented or made more expensive.
Several special interest groups have In addition, any failure to comply with these laws or regulations could result in capital or operating expenditures or significant financial penalties or restrictions on our operations that could adversely affect present and future operations or our ability to sell our properties, and thereby, our financial condition, results of operations and cash flows. Further, the past opposed our plans incontractors and/or subcontractors we rely on to perform the Austin area and have taken various actions to partially or completely restrict development in some areas, including areas where someconstruction of our most valuable properties are located. We have actively opposed these actions. However, because of the regulatory environment that has existed in the Austin area and the opposition of these special interest groups, there can be no assurance that an unfavorable ruling would not havealso subject to a significant long-term adverse effect on the overall valuenumber of local, state and federal laws and regulations, including laws involving matters that are not within our property holdings.control. If they fail to comply with all applicable laws, we can suffer reputational damage, and may be exposed to potential liability.
Our operations are subject to environmental regulation,regulations, which can change at any time and could increase our costs. Further, increasing climate change concerns may increase our costs.
Real estate development is subject to state and federal environmental regulations and to possible interruption or termination because of environmental considerations, including without limitation,but not limited to, air and water quality, and protection of endangered species and their habitats.
In addition, in those cases where an endangered or threatened species is involved and agency rulemaking and litigation are ongoing, the outcome of such rulemaking and litigation can be unpredictable, and at any time can result in unplanned or unforeseeable restrictions on or even the prohibition of development in identified environmentally sensitive areas. Certain of the Barton Creek and Lantana propertiesour developments include nesting territories for the Golden-cheeked Warbler, a federally listedhabitats of endangered species. In 1995, we received a permitWe have obtained the necessary permits from the U.S. Wildlife Service pursuant to the Endangered Species Act, which to date has allowed the development of the Barton Creek and Lantana properties free of restrictions under the Endangered Species Act related to the maintenance of habitat for the Golden-cheeked Warbler.
Additionally, in April 1997, the U.S. Department of Interior listed the Barton Springs salamander as an endangered species after a federal court overturned a March 1997 decision by the Department of Interior not to list the Barton Springs Salamander based on a conservation agreement between the State of Texas and federal agencies. The listing of the Barton Springs Salamander has not affected, nor do we anticipate it will affect, our Barton Creek and Lantana properties for several reasons, including the results of technical studies and the U.S. Fish and Wildlife Service 10(a) permit obtained by us in 1995. Theto allow the development permitted by the 2002 Circle C settlement with the city of Austin has been reviewed and approved by the U.S. Fish and Wildlife Service and, as a result, we also do not anticipate that the 1997 listing of the Barton Springs Salamander will affect our Circle C properties.
In January 2013, the U.S. Department of the Interior announced that it had conducted an economic assessment of the potential designation of critical habitat for four species of Central Texas salamanders. Although this potential designation of habitat has not affected, nor do we anticipate that it will affect, our Barton Creek, Lantana or Circle C properties for several reasons, including prior studies and approvals, and our existing U.S. Fish and Wildlife Service 10(a) permit obtained in 1995, However, future endangered species listings or habitat designations could impact development of our properties.
Under various federal, state and local laws and regulations relating to the environment, as a current or former owner or operator of real property, we may be liable for costs and damages resulting from the presence or discharge of hazardous or toxic substances, waste or petroleum products at, on, in, under or migrating through such properties, whether generated from our property or other property, including costs to investigate and clean up such contamination and liability for harm to natural resources. The costs of removal or remediation, and the impact on the development potential and development timeline could be substantial. These laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of any hazardous or toxic substances. Environmental laws also may impose restrictions on the manner in which a property may be used or businesses may be operated, and these restrictions may require substantial expenditures. Environmental laws provide for sanctions in the event of noncompliance and may be enforced by governmental agencies or, in certain circumstances, by private parties. Certain environmental laws and common law principles could be used to impose liability for release of and exposure to hazardous substances, including asbestos and other airborne contaminants. In addition, third parties may seek recovery from owners or operators of real properties for personal injury or
property damage associated with exposure to released hazardous substances. The cost of defending against claims of liability, of compliance with environmental regulatory requirements, of remediating any contaminated property, or of paying personal injury claims could materially adversely affect our business, assets or results of operations.
From time to time, the Environmental Protection Agency and similar federal, state or local agencies review land developers’ compliance with environmental laws and may levy fines and penalties for failure to strictly comply with applicable environmental laws or impose additional requirements for future compliance as a result of past failures. Any such actions taken with respect to us may increase our costs and result in project delays. We are making, and will continue to make, expenditures with respect to our real estate development for the protection of the environment. Emphasis on environmental matters will result in additional costs in the future. New environmental regulations or changes in existing regulations or their enforcement may be enacted and such new regulations or changes may require significant expenditures by us. The recent trend toward stricter standards in environmental legislation and regulations is likely to continue and could have a material adverse effect on our operating costs.
Further, regulatory and societal responses intended to reduce potential climate change impacts may increase our costs to develop, operate and maintain our properties, including but not limited to, costs of building materials, energy and utility costs and insurance costs. Increasing governmental and societal focus on environmental, social and governance matters has increased, is controversial, and may continue to increase our costs of assessing and reporting on such matters. If we are unable to adequately address such matters, our reputation and our business could be adversely impacted.
Risks Relating to Leasing Operations
Unfavorable changes in market and economic conditions could negatively affect occupancy or rental rates, which could negatively affect our financial condition and results of operations.operations and ability to service our debt.
In 2022 and 2021, our leasing operations primarily involved the lease of retail space to tenants in a variety of businesses at retail and mixed-use properties that we developed, and the lease of residences in multi-family projects that we developed.
The average occupancy rates and rents at properties we develop and lease, particularly those that are newly constructed or have not stabilized, may fail to meet our original expectations for a number of reasons, including changes in market and economic conditions, the development by competitors of competing retail or housing alternatives, or our inability to achieve stabilization of a property on schedule, any of which may result in increased construction and financing costs and a decrease in expected rental revenues.
A decline in the real estate market and economic conditions could significantlyadversely affect rental rates. Occupancy andoccupancy or rental rates, in our market, in turn,which could significantlyadversely affect our profitability and our ability to satisfy our financial obligations. The risks that could affect conditions in our marketmarkets include the following:
•Local conditions in the market, such as an oversupply of, office space, a declineor decrease in the demand for, officeretail space or residential rental properties, or increased competition from other available office buildings;retail buildings or multi-family complexes;
•The inability or unwillingness of tenants to pay their current rent or rent increases; and
•Declines in market rental rates.
Additionally, tenants atOur rental revenues may be lower as a result of lower average occupancy rates, increased turnover, reduced rental rates, increased concessions and potential increases in uncollectible rent. In addition, we continue to incur expenses such as maintenance costs, insurance costs and property taxes, whether or not a property is occupied. Further, we may experience increases in our retail properties face continual competition in attracting customers from various on-line and other competitors. Our competitors and thoseoperating expenses, some or all of which may be out of our tenants could have a material adverse effect on our ability to lease space in our retail properties and on the rents we can charge or the concessions we can grant. Further, as new technologies emerge, the relationship among customers, retailers, and shopping centers are evolving on a rapid basis. If we are unable to adapt to such new technologies and relationships on a timely basis, our financial performance will be adversely impacted.
control. We cannot predict with certainty whether any of these conditions will occur or whether, and to what extent, they will have an adverse effect on our operations.
Risks Relating to Hotel Operations
We are subjectmay be unable to achieve and sustain satisfactory occupancy and rental rates at our retail and mixed use projects.
We face competition in attracting tenants to choose our retail and mixed-use projects over those of other developers and owners of similar properties. If our competitors offer space at rental rates below our current rates or the business, financialmarket rates, we may lose current or potential tenants to other properties in our markets and operating risks commonwe may need to the hotel industry, anyreduce rental rates below our current rates in order to retain tenants upon expiration of which could reduce our revenues.
Revenue from our hotel segment accountedtheir leases. Increased competition for 47 percent of our total revenue for the fiscal year ended December 31, 2017. Business, financial and operating risks commontenants may require us to the hotel industry include:
Changes in desirability of geographic regions and geographic concentration of our operations and customers;
Decreases in the demand for hotel rooms and related lodging services, including a reduction in business travel asmake improvements to properties beyond those that we would otherwise have planned to make. As a result, of alternatives to in-person meetings (including virtual meetings hosted online or over private teleconferencing networks) or due to general economic conditions;
Decreased corporate or governmental travel-related budgets and spending, as well as cancellations, deferrals or renegotiations of group business such as industry conventions;
Negative public perception of corporate travel-related activities;
The effect of internet intermediaries and other new industry entrants on pricing and our increasing reliance on technology;
The costs and administrative burdens associated with complying with applicable laws and regulations in the U.S., including health, safety and environmental laws, rules and regulations and other governmental and regulatory actions;
Changes in operating costs including, but not limited to, energy, water, labor costs (including the effect of labor shortages and unionization), food costs, workers’ compensation and health-care related costs, insurance and unanticipated costs related to acts of nature and their consequences; and
Cyclical over-building in the hotel industry.
External perception of the W Austin Hotel could negatively affect our results of operations.
Starwood manages hotel operations at the W Austin Hotel. Ourand cash flow may be adversely affected. Once entered into, our retail leases typically range from five to ten years or longer. We may be unable to renew existing leases as they come due. Adverse market or economic conditions that negatively impact our tenants’ businesses, particularly our key tenants, could adversely impact their ability to attract and retain guests depends, in part, uponmeet their obligations under the external perceptions of Starwood andleases or to renew the qualityleases. Additionally, the loss or failure to renew a key tenant may make it more difficult to lease or renew leases on the remainder of the W Austin Hotel and its services and we have to spend money periodically to keep the property well maintained, modernized and refurbished. The reputation of the W Austin Hotel may be negatively affected if Starwood fails to act responsibly or comply with regulatory requirementsproperties. Our retail tenants face continual competition in a number of areas, such as safety and security, sustainability, responsible tourism, environmental management, human rights and support for the local communities where Starwood manages and/or owns properties. The considerable increase in the use of social media over recent years has greatly expanded the potential scope and scale, and increased the rapidity of the dissemination of negative publicity that could be generated by any adverse incident or failure on the part of hotel operators. An adverse incident involving associates
or guests and any media coverage resulting therefrom may cause a loss of consumer confidence in the Starwood brand which could negatively affect our results of operations.
Our revenues, profits or market share could be harmed ifattracting customers, often including from online competitors. If we are unable to compete effectively in the hotel industry in Austin.lease our retail properties, collect rent payments from tenants or re-lease space on comparable or more favorable terms, such failure could have a material adverse effect on our financial condition and ability to service our debt obligations.
The hotel industry in Austin is highly competitive. The W Austin Hotel competes for customers with other hotel and resort properties in Austin, ranging from national and international hotel brands to independent, local and regional hotel operators. We compete based on a number of factors, including quality and consistency of rooms, restaurant and meeting facilities and services, attractiveness of location and price. Some of our competitors may have substantially greater marketing and financial resources than we do, and if we arebe unable to successfully competeachieve and sustain satisfactory occupancy and rental rates at our multi-family properties.
We also face competition in these areas,attracting tenants to our operating results could be adversely affected.
Historically, the Austin market has had a limited number of high-end hotel accommodations. However, hotel capacity is being expanded bymulti-family projects, including from other hotel operators in Austin, including severalmulti-family properties in close proximity to the W Austin Hotel in downtown Austin. This increase in competition as well as from condominiums and single-family homes available for rent or purchase. Once entered into, our multi-family leases are typically for a term of 12 months. As these leases typically permit the anticipated openingresidents to leave at the end of additional hotel roomsthe lease term without penalty, our rental revenues are impacted by declines in downtown Austin during 2018, is expectedmarket rents more quickly than if our leases were for longer terms. Further, we may be unable to furtherrenew existing leases as they come due. Adverse economic conditions that negatively impact future hotel revenues. As new rooms come on-line, increased competitionour tenants' employment could leadadversely impact our tenants' ability to an excess supply of hotel rooms in the Austin market, thereby causing Starwood to increase promotional incentives for hotel guestspay rent and/or reduce rates. Increased competition in the Austincause tenants and potential tenants to prefer housing alternatives with lower rents. In addition, economic developments that favor home ownership over renting, such as low or declining interest rates, favorable or improving mortgage terms or a strong or strengthening job market, from new hotels or hotels that have recently undergone substantial renovation could also have an adverse effectimpact on occupancy, average daily rate and revenue per available room.
Additionally, somethe profitability of our hotel rooms are booked through third-party internet travel intermediaries as well as lesser-known online travel service providers. In addition, travelers can book stays on websites that facilitate the short-term rental of homes and apartments from owners, thereby providing an alternative to hotel rooms. Increased internet bookings could have an adverse effect on occupancy, average daily rate and revenue per available room.multi-family properties.
Risks Relating to Entertainment Businesses
We face intense competition in the live music industry, and we may not be able to maintain or increase our current revenue, which could adversely affect our business, financial condition and results of operations.
Revenue from our entertainment businesses accounted for 29 percent of our total revenue for the fiscal year ended December 31, 2017. Our entertainment businesses compete in a highly competitive industry, and we may not be able to maintain or increase our current revenue as a result of such competition. The live music industry competes with other forms of entertainment for consumers’ discretionary spending and within this industry we compete with other venues to book artists. Our competitors compete with us for key employees who have relationships with popular music artists and that have a history of being able to book such artists for concerts and tours. These competitors may engage in more extensive development efforts, undertake more far-reaching marketing campaigns, adopt more aggressive pricing policies and make more attractive offers to existing and potential artists. Our competitors may develop services, advertising options or music venues that are equal or superior to those we provide or that achieve greater market acceptance and brand recognition than we achieve. It is possible that new competitors may emerge and rapidly acquire significant market share.
Other variables related to our entertainment businesses that could adversely affect our financial performance by, among other things, leading to decreases in overall revenue, the number of sponsors, event attendance, ticket prices and fees or profit margins include:
An increased level of competition for advertising dollars, which may lead to lower sponsorships as we attempt to retain advertisers or which may cause us to lose advertisers to our competitors offering better programs that we are unable or unwilling to match;
Unfavorable fluctuations in operating costs, which we may be unwilling or unable to pass through to our customers via ticket prices;
Competitors’ offerings that may include more favorable terms than we do in order to obtain events for the venues they operate;
Technological changes and innovations that we are unable to adopt or are late in adopting that offer more attractive entertainment alternatives than we or other live entertainment providers currently offer, which may lead to a reduction in attendance at live events, a loss of ticket sales or lower ticket fees;
Other entertainment options available to our audiences that we do not offer;
General economic conditions which could cause our consumers to reduce discretionary spending;
Unfavorable changes in labor conditions which may require us to spend more to retain and attract key employees;
Interruptions in our ticketing systems and infrastructures and data loss or other breaches of our network security; and
Changes in consumer preferences.
Additionally, our entertainment operations are seasonal. The results of operations from our entertainment segment vary from quarter to quarter and year to year, and the financial performance in certain quarters or years may not be indicative of, or comparable to, our financial performance in subsequent quarters or years.
Personal injuries and accidents may occur in connection with our live music events, which could subject us to personal injury or other claims and increase our expenses, as well as reduce attendance at our live music events, causing a decrease in our revenue.
There are inherent risks involved with producing live music events. As a result, personal injuries and accidents have, and may, occur from time to time, which could subject us to claims and liabilities for personal injuries. Incidents in connection with our live music events at ACL Live or festival sites that we rent through our joint ventures could also result in claims or reduce attendance at our events, which could cause a decrease in our revenue or reduce our operating income. We maintain insurance policies that provide coverage for personal injuries sustained by persons at our venues or events or accidents in the ordinary course of business, and there can be no assurance that such insurance will be adequate at all times and in all circumstances.
Risks Relating to Ownership of Shares of Our Common Stock
Our common stock is thinly traded; therefore, our stock price may fluctuate more than the stock market as a whole.whole and it may be difficult to sell large numbers of our shares at prevailing trading prices.
As a result of the thin trading market for shares of our common stock, our stock price may fluctuate significantly more than the stock market as a whole or the stock prices of similar companies. Without a larger public float, shares of our common stock will be less liquid than the shares of common stock of companies with broader public ownership, and as a result, the trading prices for shares of our common stockit may be more volatile. Among other things, tradingdifficult for investors to sell the number of shares they desire at an acceptable price. Trading of a relatively small volume of shares of our common stock may have a greater effect on the trading price than would be the case if our public float were larger.
Our charter documents and Delaware law contain anti-takeover provisions and our by-laws contain an exclusive forum provision.
Anti-takeover provisions in our charter documents and Delaware law may make an acquisition of us more difficult. These provisions may discourage potential takeover attempts, discourage bids for our common stock at a premium over market price or adversely affect the market price of, and the voting and other rights of the holders of, our common stock. These provisions could also discourage proxy contests and make it more difficult for stockholders to elect directors other than the candidates nominated by our Board of Directors (Board). Refer to Exhibit 4.1 for further discussion of anti-takeover provisions and an exclusive forum provision in our charter documents and Delaware law.
We may not pay dividends on our common stock or repurchase shares of our common stock in the future.
Holders of our common stock are entitled to receive dividends only when and if they are declared by our Board. Further, our Comerica Bank debt agreements prohibit us from paying a dividend on our common stock without the
bank’s prior written consent. Although we declared special cash dividends on our common stock in March 2017 and September 2022 after receiving written consents from Comerica Bank, we may not pay special cash dividends in the future. Comerica Bank’s consents to the payment of dividends in March 2017 and September 2022 are not indicative of the bank’s willingness to consent to the payment of future dividends.
Additionally, our Comerica Bank debt agreements contain a restrictive covenant limiting common stock repurchases to $1.0 million in the aggregate during the term of the agreements. Any repurchases of our common stock in excess of $1.0 million would require a waiver from Comerica Bank. During third-quarter 2022, we received written consent from Comerica Bank in order to implement our $10 million share repurchase program; as of March 27, 2023, $1.3 million remained available to repurchase shares under the program. Comerica Bank’s consent to the $10 million share repurchase program in 2022 is not indicative of the bank’s willingness to consent to any future share repurchases. 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. Our 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, which may decrease the trading price of our common stock.
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.
Item 1B. Unresolved Staff Comments
None.
Item 3. Legal Proceedings
We are from time to time involved in legal proceedings that arise in the ordinary course of our business. We do not believe, based on currently available information, that the outcome of any legal proceeding will have a material adverse effect on our financial condition or results of operations. We maintain liability insurance to cover some, but not all, potential liabilities normally incident to the ordinary course of our business as well as other insurance coverage customary in our business, with such coverage limits as management deems prudent. Refer to Part I, Item 1A. "Risk Factors" for further discussion.
Item 4. Mine Safety Disclosures
Not applicable.
Information About Our Executive Officers of the Registrant
Certain information as of February 28, 2018,March 27, 2023, regarding our executive officers is set forth in the following table and accompanying text. Each of our executive officers serves at the discretion of our Board of Directors.
|
| | | | | | | | | | | | | |
| Name | | Age | | Position or Office |
| William H. Armstrong III | | 5358 | | Chairman of the Board, President and Chief Executive Officer |
| Erin D. Pickens | | 5661 | | Senior Vice President and Chief Financial Officer |
Mr. Armstrong has been employed by us since our inception in 1992. Mr. Armstrong has served as President since August 1996, Chief Executive Officer since May 1998 and Chairman of the Board since August 1998. Mr. Armstrong previously served as President, Chief Operating Officer and Chief Financial Officer from 1996 to 1998. Mr. Armstrong also serves as Director of Moody National REIT II, Inc., a publicly traded real estate investment trust, from September 2017 to present. Mr. Armstrong previously served as Director of Moody National REIT I, Inc., a publicly traded real estate investment trust, from September 2008 until September 2017. In March 2021, Mr. Armstrong was elected secretary-treasurer of Green Business Certification Inc., an organization that drives implementation of the LEED green building program.
Ms. Pickens has served as our Senior Vice President since May 2009 and as our Chief Financial Officer since June 2009. Ms. Pickens previously served as Executive Vice President and Chief Financial Officer of Tarragon Corporation from November 1998 until April 2009, and as Vice President and Chief Accounting Officer from September 1996 until November 1998 and Accounting Manager from June 1995 until August 1996 for Tarragon and its predecessors. Ms. Pickens is a licensed Certified Public Accountant. Ms. Pickens is an active member of the American Institute of Certified Public Accountants and the Texas Society of Certified Public Accountants.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Performance Graph
The following graph compares the change in the cumulative total stockholder return on our common stock from December 31, 2012, through December 31, 2017, with the cumulative total return of (a) the Standard & Poor's (S&P) 500 Stock Index, (b) the Dow Jones U.S. Real Estate Index and (c) the below custom peer group of real estate related companies:
Alexander & Baldwin, Inc. (ALEX)
Consolidated-Tomoka Land Co. (CTO)
Forestar Group Inc. (FOR)
The Howard Hughes Corporation (HHC)
Maui Land & Pineapple Company, Inc. (MLP)
The St. Joe Company (JOE)
Tejon Ranch Co. (TRC)
This comparison assumes $100 invested on December 31, 2012, in (a) our common stock, (b) the S&P 500 Stock Index, (c) the Dow Jones U.S. Real Estate Index and (d) the custom peer group.
The total returns shown assume that dividends are reinvested. The stock price performance shown below is not necessarily indicative of future price performance.
Comparison of Cumulative Total Return
Stratus Properties Inc., S&P 500 Stock Index,
Dow Jones U.S. Real Estate Index and Custom Peer Group
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, |
| | 2012 | | 2013 | | 2014 | | 2015 | | 2016 | | 2017 |
| Stratus Properties Inc. | $ | 100 |
| | $ | 201 |
| | $ | 162 |
| | $ | 240 |
| | $ | 385 |
| | $ | 362 |
|
| S&P 500 Stock Index | 100 |
| | 132 |
| | 151 |
| | 153 |
| | 171 |
| | 201 |
|
| Dow Jones U.S. Real Estate Index | 100 |
| | 102 |
| | 129 |
| | 132 |
| | 142 |
| | 156 |
|
| Custom Peer Group | 100 |
| | 131 |
| | 131 |
| | 115 |
| | 126 |
| | 139 |
|
Common Stock
Our common stock trades on The Nasdaq Stock Market (NASDAQ) under the symbol "STRS". The following table sets forth, for the periods indicated, the range of high and low sales prices of our common stock, as reported by NASDAQ.
|
| | | | | | | | | | | | | | | |
| | 2017 | | 2016 |
| | High | | Low | | High | | Low |
| First Quarter | $ | 33.96 |
| | $ | 24.35 |
| | $ | 25.05 |
| | $ | 18.45 |
|
| Second Quarter | 30.30 |
| | 25.20 |
| | 24.24 |
| | 15.75 |
|
| Third Quarter | 30.95 |
| | 27.25 |
| | 25.50 |
| | 17.11 |
|
| Fourth Quarter | 32.15 |
| | 27.25 |
| | 36.06 |
| | 23.17 |
|
“STRS.” As of February 28, 2018,March 27, 2023, there were 337307 holders of record of our common stock.stock including participants in security position listings.
Common Stock Dividends and Share Repurchase Program
The declaration of dividends is at the discretion of our Board of Directors (the Board); however,. In 2017, we paid a special cash dividend of $1.00 per share totaling approximately $8 million after the sale of our Oaks at Lakeway project, and in 2022, we paid a special cash dividend of $4.67 per share totaling approximately $40 million after the sales of Block 21, The Santal and The Saint Mary, in each case after receiving the consent of Comerica Bank. Our ability to pay dividends is restricted by the terms of our Comerica credit facilityBank debt agreements, which prohibitsprohibit us from paying a dividend on or repurchasing shares of our common stock without the bank’sComerica Bank’s prior written consent. In March 2017, we announced that our Board, after receiving written consent from Comerica Bank, declared a special cash dividend of $1.00 per share that was paid on April 18, 2017, to stockholders of record on March 31, 2017. The dividend was declared after the Board’s consideration of the resultsaddition, certain of our sale of The Oaks at Lakeway. Comerica’s consentproject loan agreements contain provisions that restrict our subsidiaries from distributing cash to Stratus, as the payment of this special dividend is not indicative of the bank’s willingness to consent to the payment of future dividends.parent company. The declaration of future dividends which is subject to our Board's discretion and the restrictions under our Comerica credit facility, 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.Board, and is subject to restrictions in our loan agreements.
In 2022, our Board approved a new share repurchase program, which authorizes repurchases of up to $10.0 million of our common stock, after receiving the consent of Comerica Bank. As of March 27, 2023, $1.3 million remained available under the program. Our Comerica Bank debt agreements contain a restrictive covenant limiting common stock repurchases to $1.0 million in the aggregate during the term of the agreements. Any repurchases of our common stock outside of our approved $10 million share repurchase program would require a waiver from Comerica Bank. Refer to Part I, Item 1A. "Risk Factors" for further discussion.
Unregistered Sales of Equity Securities
None.
Issuer Purchases of Equity Securities
The following table sets forth information with respect to shares of our common stock that we repurchased under the board-approved open marketour $10.0 million share purchase program during the three-month periodthree months ended December 31, 2017.2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Period | | Total Number of Shares Purchased | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs a | | Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs a |
| October 1, 2022 through October 31, 2022 | | 47,428 | | | $ | 23.34 | | | 47,428 | | | $ | 8,095,096 | |
| November 1, 2022 through November 30, 2022 | | 197,552 | | | 28.34 | | | 197,552 | | | 2,503,567 | |
| December 1, 2022 through December 31, 2022 | | 15,762 | | | 23.33 | | | 15,762 | | | 2,135,797 | |
| Total | | 260,742 | | | $ | 27.10 | | | 260,742 | | | $ | 2,135,797 | |
|
| | | | | | | | | | | | | |
Period | | Total Number of Shares Purchased | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programsa
| | Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programsa
|
October 1 to 31, 2017 | | — |
| | $ | — |
| | — |
| | 991,695 |
|
November 1 to 30, 2017 | | — |
| | — |
| | — |
| | 991,695 |
|
December 1 to 31, 2017 | | — |
| | — |
| | — |
| | 991,695 |
|
Total | | — |
| | $ | — |
| | — |
| | 991,695 |
|
| |
a. | In November 2013, the Board approved an increase in our open-market share purchase program, initially authorized in 2001, for up to 1.7a.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 March 27, 2023, we have acquired 335,703 shares of our common stock. The program does not have an expiration date. |
As stated above, our Comerica credit facility requires lender approval of any common stock repurchases.for a total cost of $8.7 million at an average price of $25.93 per share, and $1.3 million remains available for repurchases under the program.
Item 6. Selected Financial DataReserved
The selected consolidated financial data shown below is derived from our audited consolidated financial statements. These historical results are not necessarily indicative of results that you can expect for any future period. You should read this data in conjunction with Items 7. and 7A. "Management’s Discussion and Analysis of Financial Condition and Results of Operations and Quantitative and Qualitative Disclosures About Market Risk" and Item 8. "Financial Statements and Supplementary Data".
|
| | | | | | | | | | | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 | | 2014 | | 2013 | |
| | (In Thousands, Except Per Share Amounts) | |
| Years Ended December 31: | | | | | | | | | | |
| Revenues | $ | 80,340 |
| | $ | 80,341 |
| | $ | 80,871 |
| | $ | 94,111 |
| | $ | 127,710 |
| |
| Operating income | 23,237 |
| a | 1,177 |
| | 25,732 |
| b,c | 10,364 |
| d,e | 14,151 |
| c,e |
| Equity in unconsolidated affiliates' (loss) income | (49 | ) | | 51 |
| | (1,299 | ) | | 1,112 |
| | (76 | ) | |
| Income (loss) from continuing operations, net of taxes | 3,884 |
| | (5,999 | ) | | 14,377 |
| | 18,157 |
| | 5,894 |
| |
| Income from discontinued operations, net of taxes | — |
| | — |
| | 3,218 |
| f | — |
| | — |
| |
| Net income (loss) | 3,884 |
| a,g,h | (5,999 | ) | g | 17,595 |
| b,c,f | 18,157 |
| d,e,i | 5,894 |
| |
| Net income (loss) attributable to common stockholders | 3,879 |
| a,g,h | (5,999 | ) | g | 12,177 |
| b,c,f | 13,403 |
| d,e,i | 2,585 |
| c,e |
| | | | | | | | | | | |
| Basic net income (loss) per share: | | | | | | | | | | |
| Continuing operations | $ | 0.48 |
| | $ | (0.74 | ) | | $ | 1.11 |
| | $ | 1.67 |
| | $ | 0.32 |
| |
| Discontinued operations | — |
| | — |
| | 0.40 |
| | — |
| | — |
| |
| Basic net income (loss) per share | $ | 0.48 |
| | $ | (0.74 | ) | | $ | 1.51 |
| | $ | 1.67 |
| | $ | 0.32 |
| |
| | | | | | | | | | | |
| Diluted net income (loss) per share: | | | | | | | | | | |
| Continuing operations | $ | 0.47 |
| a,g,h | $ | (0.74 | ) | g | $ | 1.11 |
| b,c | $ | 1.66 |
| d,e,i | $ | 0.32 |
| c,e |
| Discontinued operations | — |
| | — |
| | 0.40 |
| f | — |
| | — |
| |
| Diluted net income (loss) per share | $ | 0.47 |
| a,g,h | $ | (0.74 | ) | g | $ | 1.51 |
| b,c | $ | 1.66 |
| d,e,i | $ | 0.32 |
| c,e |
| | | | | | | | | | | |
| Average shares outstanding: | | | | | | | | | | |
| Basic | 8,122 |
| | 8,089 |
| | 8,058 |
| | 8,037 |
| | 8,077 |
| |
| Diluted | 8,171 |
| | 8,089 |
| | 8,091 |
| | 8,078 |
| | 8,111 |
| |
| | | | | | | | | | | |
| Dividends declared per share of common stock | $ | 1.00 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| |
| | | | | | | | | | | |
| At December 31: | | | | | | | | | | |
| Real estate held for sale | $ | 22,612 |
| | $ | 21,236 |
| | $ | 25,944 |
| | $ | 12,245 |
| | $ | 18,133 |
| |
| Real estate held for investment, net | 188,390 |
| | 239,719 |
| | 186,626 |
| | 178,065 |
| | 182,530 |
| |
| Real estate under development | 118,484 |
| | 111,373 |
| | 139,171 |
| | 123,921 |
| | 76,891 |
| |
| Land available for development | 14,804 |
| | 19,153 |
| | 23,397 |
| | 21,368 |
| | 21,404 |
| |
| Total assets | 405,993 |
| | 452,175 |
| | 430,105 |
| | 400,117 |
| | 344,498 |
| |
| Debt | 221,470 |
| | 291,102 |
| | 260,592 |
| | 193,907 |
| | 148,887 |
| |
| Stockholders' equity | 127,310 |
| | 130,951 |
| | 136,599 |
| | 136,443 |
| | 123,621 |
| |
| Noncontrolling interests in subsidiaries | 80 |
| | 75 |
| | 75 |
| | 38,643 |
| | 45,695 |
| |
| |
a. | Includes a gain of $25.5 million ($16.4 million to net income attributable to common stockholders or $2.01 per share), primarily associated with recognition of $24.3 million of the gain on the sale of The Oaks at Lakeway, and the sales of a bank building and an adjacent undeveloped 4.1 acre tract of land in Barton Creek, partly offset by a charge of $2.5 million ($1.6 million to net income attributable to common stockholders or $0.20 per share) for profit participation associated with the sale of The Oaks at Lakeway. |
| |
b. | Includes a gain of $20.7 million ($10.8 million to net income attributable to common stockholders or $1.34 per share) associated with the sales of Parkside Village and 5700 Slaughter. |
| |
c. | Includes a gain of $0.6 million ($0.4 million to net income attributable to common stockholders or $0.05 per share) in 2015 associated with the sale of a tract of undeveloped land and $2.1 million ($2.1 million to net income attributable to common stockholders or $0.26 per share) in 2013 associated with undeveloped land sales. |
| |
d. | Includes a gain of $1.5 million ($1.0 million to net income attributable to common stockholders or $0.12 per share) associated with a litigation settlement. |
| |
e. | Includes income of $0.6 million ($0.4 million to net income attributable to common stockholders or $0.05 per share) in 2014 and $1.8 million ($1.8 million to net income attributable to common stockholders or $0.22 per share) in 2013 related to insurance settlements, and $0.4 million ($0.3 million to net income attributable to common stockholders or $0.03 per share) in 2014 and $1.1 million ($1.1 million to net income attributable to common stockholders or $0.13 per share) in 2013, for the recovery of building repair costs. |
| |
f. | Includes recognition of a previously deferred gain of $5.0 million ($3.2 million to net income attributable to common stockholders or $0.40 per share) associated with 7500 Rialto Boulevard, which was sold in February 2012. |
| |
g. | Includes losses on early extinguishment of debt totaling $0.5 million ($0.3 million to net income attributable to stockholders or $0.04 per share) in 2017 associated with the prepayment of the Lakeway construction loan, and $0.8 million ($0.5 million to net loss attributable to common stockholders or $0.06 per share) in 2016 associated with prepayment of the Bank of America loan (see Note 6). |
| |
h. | Includes a charge of $7.6 million ($0.93 per share) associated with U.S. tax reform (see Note 7). |
| |
i. | Includes a credit to provision for income taxes of $12.1 million, $1.50 per share, for the reversal of valuation allowances on deferred tax assets. |
Items 7. and 7A. Management’s Discussion and Analysis of Financial Condition and Results of Operationsand Quantitative and Qualitative Disclosures About Market Risk
OVERVIEW
In Management’s Discussion and Analysis of Financial Condition and Results of Operations, “we,” “us,” “our” and "Stratus"“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 the related discussion of “Business and Properties” and “Risk Factors” included elsewhere in this Form 10-K. The results of operations reported and summarized below are not necessarily indicative of future operating results, and future results could differ materially from those anticipated in forward-looking statements (refer to "Cautionary Statement" for further discussion)“Cautionary Statement” and Part I, Item 1A. "Risk Factors" herein). All subsequent references to “Notes” refer to Notes to Consolidated Financial Statements located in Part II, Item 8. “Financial Statements and Supplementary Data.”
OVERVIEW
We are a diversified real estate company with headquarters in Austin, Texas. We are engaged primarily in the acquisition, entitlement, development, management, operationleasing and sale of commercial, hotel, entertainment, and multi-family and single-family residential real estate properties primarily locatedand commercial properties in the Austin, Texas area and also including projects in certain other select, fast-growing markets in Texas. Our portfolio includes approximately 1,600 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 properties. We generate revenues and cash flows from the sale of our developed properties, rental income from our leasedand undeveloped properties and fromthe lease of our hotelretail, mixed-use and entertainment operations. Seemulti-family properties. Refer to "Part I, Items 1. and 2. "Business and Properties," and Note 10 for further discussion of our operating segments and "Business Strategy and Related Risks"“Business Strategy” below for a discussion of our business strategy.
General.
BUSINESS STRATEGY
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 successful 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, when available, an increase in the value of the property or from lower interest rates, or for other reasons.
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.
We produced net income attributable to common stockholders of $90.4 million in 2022, a record for the company. Our results for 2022 reflect our strong performance in executing on our successful development program:
•In May 2022, we completed the sale of Block 21 to 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. Our 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). We recorded a pre-tax gain on the sale of $119.7 million in 2022.
•In September 2022, after receiving written consent from Comerica Bank, our Board of Directors (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.
•During 2022, we sold various parcels of real estate and two Amarra Villas homes, for a total of $24.6 million.
After streamlining our business through the sale of Block 21, our Board 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. As part of re-focusing our business, during third-quarter 2022, we completed the sale of substantially all of our non-core assets.
Besides the potential additional $10.0 million capital that we may be required to contribute to our Holden Hills limited partnership, we do not currently have any material commitments to contribute additional cash to our joint venture projects or wholly owned development projects. However, our development plans for future projects require significant additional capital. Historically, we relied primarily on cash flow from operations and debt financing as our primary sources of funding for our liquidity needs. More recently, we have increasingly relied on third-party project-level equity financing of our development projects. Some of our recent joint ventures include:
•In July 2021, an equity investor acquired a 65.87 percent interest in The Saint June limited partnership for $16.3 million;
•In September 2021, equity investors acquired an aggregate 69 percent interest in the Block 150 limited partnership for $11.7 million;
•In December 2021, an equity investor acquired a 90.0 percent interest in The Saint George limited partnership for $18.3 million and in July 2022, the equity investor contributed an additional $15.0 million; and
•In January 2023, an equity investor acquired a 50 percent interest in the Holden Hills limited partnership for $40.0 million.
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.
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 cash 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 distributions from joint ventures, 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 rental revenue 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 in this report. 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.
During 2022, we explored a potential sale or refinancing of Kingwood Place, Jones Crossing and West Killeen Market. However, we decided to retain these cash-flowing properties given challenging current market conditions. 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. While uncertainty in the market, primarily due to the increasing costs of construction materials and labor, rising interest rates and recent disruptions in the banking industry due to some highly-publicized bank failures, is currently causing tightened bank credit and 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 and the other 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 FOR 2022
Sources of revenue and income. As a result of the sale of Block 21, Stratus has two operating segments: Real Estate Operations and Leasing Operations. Block 21, which encompassed Stratus’ Hotel and Entertainment operating segments, along with some leasing operations, is reflected as discontinued operations in the Consolidated Statements of Income for the years ended December 31, 2021 and 2022. 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 residential-centric mixed-use properties. We may sell or lease the real estate we develop, depending on market conditions. Multi-family and retail rental properties that we develop are classified to our Leasing Operations segment when construction is completed and they are ready for occupancy. 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 homeresidence already built on itit. In addition to our developed properties, we have a development portfolio that consists of approximately 1,600 acres of commercial and multi-family and single-family residential projects under development or condominium unitsundeveloped 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 W Austin Residences.lease of residences in the multi-family projects that we developed. We may sell properties under development, undeveloped properties oralso generate income from the sale of our leased properties, if opportunities arise that we believe will maximize overall asset values as part of our business strategy.depending on market conditions.
Our acreage under developmentRefer to Note 10 and undeveloped as of December 31, 2017, is presented in the following table.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Under Development | | Undeveloped | | |
| | | Single Family | | Multi-family | | Commercial | | Total | | Single Family | | Multi- family | | Commercial | | Total | | Total Acreage |
| Austin: | | | | | | | | | | | | | | | | | | |
| Barton Creek | | 4 |
| | 38 |
| | — |
| | 42 |
| | 512 |
| | 262 |
| | 394 |
| | 1,168 |
| | 1,210 |
|
| Circle C | | — |
| | — |
| | — |
| | — |
| | — |
| | 36 |
| | 216 |
| | 252 |
| | 252 |
|
| Lantana | | — |
| | — |
| | 11 |
| | 11 |
| | — |
| | — |
| | 44 |
| | 44 |
| | 55 |
|
| Other | | — |
| | — |
| | — |
| | — |
| | 7 |
| | — |
| | — |
| | 7 |
| | 7 |
|
Lakewaya | | — |
| | — |
| | — |
| | — |
| | 35 |
| | — |
| | — |
| | 35 |
| | 35 |
|
| Magnolia | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 124 |
| | 124 |
| | 124 |
|
| Jones Crossing | | — |
| | — |
| | 72 |
| | 72 |
| | — |
| | — |
| | — |
| | — |
| | 72 |
|
| Camino Real, San Antonio | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2 |
| | 2 |
| | 2 |
|
| Total | | 4 |
| | 38 |
| | 83 |
| | 125 |
| | 554 |
| | 298 |
| | 780 |
| | 1,632 |
| | 1,757 |
|
| |
a. | On February 15, 2017, we sold The Oaks at Lakeway, which included 52 acres of land under development at December 31, 2016, but we retained 34.7 acres of undeveloped land adjacent to the project. |
Our single-family residential holdings at December 31, 2017, are principally in southwest Austin, Texas,Items 1. and include developed lots2. “Business and townhomes and townhomes under development in Barton Creek and condominium units at the W Austin Residences. See "Development Activities - Residential"Properties” for further discussion. Our multi-family and commercial holdings at December 31, 2017, consistdiscussion of the first phase of Barton Creek Village, the Santal multi-assets in our Real Estate Operations and Leasing Operations.
family project, the office and retail space at the W Austin Hotel & Residences, Lantana Place, Phases I and II of Jones Crossing and West Killeen Market. See "Development Activities - Commercial" and "Development Activities - Residential"Summary financial results for further discussion.
The W Austin Hotel & Residences is located on a two-acre city block in downtown Austin and contains a 251-room luxury hotel, 159 residential condominium units and office, retail and entertainment space. The hotel is managed by Starwood Hotels & Resorts Worldwide, Inc., a subsidiary of Marriott International, Inc. (Starwood). The entertainment space, occupied by Austin City Limits Live at the Moody Theater (ACL Live) and 3TEN ACL Live, includes a live music and entertainment venue and production studio. The 3TEN ACL Live venue which opened in March 2016, has a capacity of approximately 350 people and is designed to be more intimate than ACL Live, which can accommodate approximately 3,000 people.
In 2017, our revenues totaled $80.3 million and our2022. Our net income attributable to common stockholders totaled $3.9$90.4 million,, or $10.99 per diluted share, for 2022, compared with revenues of $80.3 million and net loss attributable to common stockholders of $6.0 million for 2016 and revenues of $80.9 million anda net income attributable to common stockholders of $12.2$57.4 million, $6.90 per diluted share, for 2015.
2021. Higher net income for 2022, compared to our net income in 2021, is primarily the result of income from discontinued operations totaling $96.8 million related to the sale of Block 21 in 2022. Our results for 2017 include2021 included a $106.0 million pre-tax gainsgain on the sale of assets totaling $25.5 million ($16.4 millionrelated to net income attributable to common stockholders), primarily associated with recognition of a majority of the gain on the sale of The OaksSaint Mary and The Santal. Refer to Note 4 for additional discussion. Our total stockholders’ equity increased from $98.9 million at Lakeway, andDecember 31, 2020 to $207.2 million at December 31, 2022.
Our revenues totaled $37.5 million for 2022, compared with $28.2 million for 2021. The increase in revenues in 2022, compared with 2021, primarily reflects the sales of undeveloped real estate properties as well as two completed Amarra Villas homes in our Real Estate Operations segment partially offset by a bank building and an adjacent undeveloped 4.1 acre tract of landdecrease in Barton Creek (see Note 11). Our results for 2017 also included a tax charge of $7.6 million associated withleasing revenue following the Tax Cuts and Jobs Act enacted on December 22, 2017 (U.S. tax reform), and a charge of $2.5 million ($1.6 million to net income attributable to common stockholders) for profit participation costs and a loss of $0.5 million ($0.3 million to net income attributable to common stockholders) on early extinguishment of debt, both related to our sale of The Oaks at Lakeway.Santal in 2021.
Our results for 2016 included higher net interest expense and an increase in general and administrative expenses totaling $3.1 million, primarily associated with our successful proxy contest and review of strategic alternatives. Higher interest expense reflects increased borrowings and higher interest rates associated with our refinancing of the W Austin Hotel & Residences with longer-term, fixed-rate debt. The W Austin Hotel & Residences refinancing resulted in a loss on early extinguishment of debt totaling $0.8 million in 2016.
Our results for 2015 included a pre-tax gain of $20.7 million on the sales of our Parkside Village and 5700 Slaughter commercial developments and the recognition of a previously deferred gain associated with the 2012 sale of 7500 Rialto totaling $5.0 million (see Note 11 for further discussion). The results for 2015 also included a gain of $0.6 million associated with an undeveloped land sale.
At December 31, 2017,2022, we had total debt of $221.5$122.8 million (see "Debt Maturities and Other Contractual Obligations" for further discussion) and consolidated cash and cash equivalents of $14.6$37.7 million. For discussionIn first-quarter 2023, we received $35.8 million in cash from the Holden Hills partnership. We believe we will have sufficient cash, cash flow and sources of operatingdebt financing to meet our cash flows and debt transactions see "Capitalrequirements for at least the next 12 months. Refer to “Capital Resources and Liquidity" below.Liquidity” and Notes 2, 6 and 11 for additional discussion.
Real Estate Market Conditions.
Because of the concentration of our assets primarily in the Austin, Texas area, and in other select, fast-growing markets in Texas, markets, market conditions in these regions significantly affect our business. Our future operating cash flows and our ability to develop and sell our properties will be dependent on the level and profitability of our real estate sales. In turn, these sales will be significantly affected by future real estate market conditions in and around Austin and the other markets in which we operate, including development costs, interest rate levels, the availability of credit to finance real estate transactions, demand for residential and commercial real estate, and regulatory factors including our use and development entitlements. These market conditions historically movehave moved in periodic cycles, and can be volatile. Real estate development in Austin, where most of our real estate under development and undeveloped real estate is located, has historically been constrained as a result of various restrictions imposed by the city of Austin. Additionally, several special interest groups have traditionally opposed development in Austin.
In addition to the traditional influence of state and federal government employment levels on the local economy, the Austin-Round Rock, Texas area (Austin-Round Rock) has been influenced by growth in the technology sector. Large, high-profile technology companies have expanded their profile in Austin-Round Rock recently as the technology sector has clustered in this market. The COVID-19 pandemic and the increase in remote work has also resulted in population increases in Texas and within the Austin area. Based on a December 2021 U.S. Census report, the state of Texas had the largest population gain of any U.S. state between July 2020 and July 2021. There has generally been a decline over time in the brick-and-mortar retail industry due to increases in on-line shopping,
which accelerated during the pandemic. We have generally responded to these retail trends by incorporating more multi-family residential space and more food and beverage and entertainment space into our development plans.
According to the 2020 U.S. Census (the most recent complete census), the population of the Austin-Round Rock-area populationRock area increased by 25approximately 33 percent and added over half a million residents to become the fastest-growing large metro area in the U.S. from 20092010 through 2016, largely because2020. As of growing interest2020, the Austin-Round Rock area had a population of approximately 2.3 million people. In addition, 93 percent of the housing units were occupied in Austin's local job market. Medianthe Austin-Round Rock area, which was higher than average occupancy rates for the U.S. and Texas. In 2022, the American Growth Project ranked Austin as the second-fastest-growing city in the United States.
According to data provided by the U.S. Census Bureau, the median family income levels in the Austin-Round Rock area increased by 1614 percent during theover a three-year period from 2009 through 2016.2016 to 2019 (the most recently available information). The expanding economy resulted in rising demandsdemand for residential housing commercial office space and retail services. From 2009 through 2016,Property tax and sales tax receipts rose by 44 percent and 16 percent, respectively, in the city of Austin (the City) rose by 52 percent, an indication of the increase in business activity during the period.
The following chart compares Austin-Round Rock's five-county median family income and metro area population for 1999, 2009 and the most current information available for 2016 and 2017, based on United States (U.S.) Census Bureau data and Austin-Round Rock's data.
Based on the City's fiscal year of October 12016 through September 30,fiscal year 2020. The median home value in Austin increased from $349,156 in August 2020 to $566,479 in August 2022, with average multi-family rents rising 10 percent year over year, according to the chart below comparesAmerican Growth Project.
Vacancy rates in the City’s sales tax revenues for 1999, 2009 and 2016 (the latest period for which data is available).
Source: Comprehensive Annual Financial Report for the Citycity of Austin, Texas
Real estate development in southwest Austin, where most of our real estate under development and undeveloped real estate is located, has historically been constrained as a result of various restrictions imposed by the City. Additionally, several special interest groups have traditionally opposed development in southwest Austin. Vacancy rates as of December 31, 2017 and 2016, are noted below.
| | | | | | | | | | | | | | |
| | | December 31, |
| Building Type | | 2022 | | 2021 |
Office Buildings (Class A) a | | 18.9 | % | | 20.7 | % |
Multi-Family Buildings b | | 3.6 | % | | 5.3 | % |
Retail Buildings b | | 3.4 | % | | 4.5 | % |
|
| | | | | | | |
| | | Vacancy Rates | |
| Building Type | | 2017 | | 2016 | |
| Office Buildings (Class A) | | 9 | % | a | 9 | % | a |
| Multi-Family Buildings | | 6 | % | b | 4 | % | b |
| Retail Buildings | | 3.5 | % | b | 4 | % | b |
| |
a. | CB Richard Ellis: Austin MarketView |
| |
b. | Marcus & Millichap Research Services, CoStar Group, Inc. |
a.CB Richard Ellis: Austin MarketView
BUSINESS STRATEGYb.Marcus & Millichap Research Services, CoStar Group, Inc.
Stratus Properties Inc. was formedDuring 2022, the U.S. economy experienced steep rises in 1992 to hold, operateinflation and develop the domestic real estate and oil and gas properties of our former parent company. We sold all of our oil and gas properties during the 1990s and have since focused solely on our real estate properties.interest rates. Our overall strategyindustry has been to manage our diverse asset base of residential, commercial, hotelexperiencing construction and entertainment real estate located in the premier Austin, Texas marketlabor cost increases, supply chain constraints, labor shortages, higher borrowing costs and in other select, fast-growing Texas markets. We enhance the value of our residential and commercial properties by securing and maintaining development entitlements and developing and building real estate projects on these properties for sale or investment. Our hotel and entertainment venues, including ACL Live, are located in downtowntightening bank credit. The Austin and are central to the city's world renowned, vibrant music scene.
We are continuing our successful program of actively developing our propertiesTexas economies and strategically marketing and selling developed assets at appropriate times to maximize stockholder value. Our active development plan includes completion of both residential and commercial development projects. Our development portfolio consists of approximately 1,800 acres of commercial, multi-family and single-family projects under development or undeveloped and held for future use. We believe that our portfolio, along with management's extensive experience in Austin-area real estate development, support our ability to obtain project financing and/or seek joint venture partners including for the development projects described in "Development Activities - Residential" and "Development Activities - Commercial".
As discussed below in “Development Activities - Commercial”, in February 2017, we sold (i) The Oaks at Lakeway for $114.0 million in cash and (ii) our 3,085-square-foot bank building in Barton Creek Village and an adjacent undeveloped 4.1 acre tract of land for $3.1 million in cash. In 2015, we completed the sales of our Austin-area Parkside Village and 5700 Slaughter commercial properties, both located in the Circle C community, for $32.5 million and $12.5 million, respectively.
In addition, during 2017 we made significant progress in advancing our development projects. We (i) completed construction of West Killeen Market, a retail development project in Killeen Texas, anchored by a 90,000-square-foot HEB grocery store and consisting of approximately 44,000 square feet of total tenant leasing space, on schedule and under budget, (ii) secured project financing and commenced construction of phase one of Lantana Place, a mixed-use development in southwest Austin consisting of approximately 320,000 square feet of retail, hotel and office space, (iii) secured project financing and commenced construction of the retail component of Jones Crossing, an HEB-anchored, mixed use development in College Station, Texas, which is expected to total approximately 258,000 square feet of commercial space, including the 106,000-square-foot HEB grocery store which is currently expected to open in August 2018, (iv) secured project financing and commenced construction of Santal Phase II, a 212-unit garden style, multi-family project located directly adjacent to Santal Phase I in the upscale, highly populated Barton Creek community, (v) advanced development plans for Magnolia, an HEB-anchored retail development project in Magnolia, Texas, which includes 351,000 square feet of total tenant leasing space and 1,200 multi-family units; and (vii) secured final building permits for The St. Mary, a 240-unit multi-family development in the Circle C community, and subject to obtaining project financing, we intend to commence construction in the second quarter of 2018.
We believe that Austin and surrounding sub-marketspopulations may not continue to be desirable locations. Many of our developments aregrow at the same rate as in locations where development approvals have historically been subject to regulatory constraints, which has made it difficult to obtain entitlements. Our Austin assets, which are located in desirable areas with significant
regulatory constraints, are highly entitled and now 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,recent periods and may be pursued through joint ventures or other means.decline. Refer to Item 1A. Risk Factors for further discussion.
CRITICAL ACCOUNTING POLICIESESTIMATES
Management’s discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the U.S. The preparation of these financial statements requires that we make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. We base these estimates on historical experience and on assumptions that we consider reasonable under the circumstances; however, reported results could differ from those based on the current estimates under different assumptions and/or conditions. The areas requiring the use of management’s estimates are discussed in Note 1 under the heading “Use of Estimates.” We believeCritical accounting estimates are those estimates made in accordance with U.S. generally accepted accounting principles that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our most critical accounting policies relate to our real estate and leasing assets, deferred tax assets, income taxes and profit recognition.
Management has reviewed the following discussionfinancial condition or results of its development and selection ofoperations. Our critical accounting estimates with the audit committee of our board of directors.are discussed below.
Real Estate Hotel, Entertainment Venue and Leasing Assets.Impairment Assessments. Real estate is classified as held for sale, is stated at the lower of cost or fair value less costs to sell. The cost of real estate sold includes acquisition, development, construction and carrying costs and other related costs through the development stage. Real estate under development, andheld for investment or land available for development are stated at cost. Real estate held for investment, which includes the hotel and entertainment venues at the W Austin Hotel & Residences and our leasing assets, is also stated at cost.(refer to Note 1). When events or circumstances indicate that an asset’s carrying amount may not be recoverable, an impairment test is performed. For real estate held for sale, if estimated fair value less costs to sell is less than the related carrying amount, a reduction of the asset’s carrying value to fair value less costs to sell is required. For real estate under development, land available for development and real estate held for investment, if the projected undiscounted cash flow from the asset is less than the related carrying amount, a reduction of the carrying amount of the asset to fair value is required. Measurement of an impairment loss is based on the fair value of the long-lived asset. Generally, we determine fair value using valuation techniques such as discounted expected future cash flows.
In developing estimated future cash flows for impairment testing for our real estate assets, we have incorporated our own market assumptions including those regarding real estate prices, sales pace, sales and marketing costs, and infrastructure costs. Our assumptions are based, in part, on general economic conditions, the current state of the real estate industry, expectations about the short- and long-term outlook for the real estate market, and competition from other developers or operators in the area in which we develop or operate our properties. These assumptions can significantly affect our estimates of future cash flows. For those properties held for sale and deemed to be impaired, we determine fair value based on appraised values, adjusted for estimated costs to sell, as we believe this is the value for which the property could be sold.
We recorded no impairment losses on real estate totaling $0.7 million and $1.8 million during the three-year period ended December 31, 2017(see Note 1).2022 and 2021, respectively.
Deferred Tax Assets.Assets Valuation Allowance. The carrying amounts of deferred tax assets are required to be reduced by a valuation allowance if, based on the available evidence, it is more likely than not that such assets will not be realized. Accordingly, we assess the need to establish valuation allowances for deferred tax assets periodically based on the more-likely-than-not realization threshold criterion. In the assessment of the need for a valuation allowance, appropriate consideration is given to all positive and negative evidence related to the realization of the deferred tax assets. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, the potential to recognize gains on sales of properties, forecasts of future profitability, the duration of statutory carryforward periods, our experience with operating loss and tax credit carryforwards not expiring unused, and tax planning alternatives. This process involves significant management judgment about assumptions that are subject to change based on variances between projected and actual operating performance and changes in our business environment or operating or financing plans.
We regularly evaluate the recoverability of our deferred tax assets, considering available positive and negative evidence, including earnings history and the forecast of future taxable income. During 2021, we recorded a $4.2 million non-cash credit to reduce the valuation allowance on our deferred tax assets related to Block 21 because of its pending sale. We had deferred tax assets (net of deferred tax liabilities)liabilities and valuation allowances) totaling $11.5 million$38 thousand at December 31, 2017.
Income Taxes. In preparing our annual consolidated financial statements, we estimate the actual amount of income taxes currently payable or receivable as well as deferred income tax assets and liabilities attributable2022. Refer to
temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which these temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates or laws is recognized in income in the period in which such changes are enacted. Our income tax provision for 2017 includes a net tax charge of $7.6 million associated with U.S. tax reform. As the provisions related to U.S. tax reform are numerous and complex, we continue to evaluate their impact. See Note 7 for further discussion.
Profit Recognition on Sales of Real Estate. Sales of real estate do not qualifyParticipation Incentive Plan and Long-Term Incentive Plan. Refer to Notes 1 and 8 for the full accrual method of profit recognition until all of the following criteria are met: (i) a sale is consummated, (ii) the buyer's initial and continuing investments are adequate to demonstrate a commitment to pay for the property, (iii) the seller's receivable is not subject to future subordination, and (iv) the seller has transferred to the buyer the usual risks and rewards of ownership in a transaction that is in substance a sale and does not have a substantial continuing involvement with the party.
In February 2017, upon the sale of The Oaks at Lakeway, the gain on sale of $39.7 million was deferred as a result of Stratus’ continuing involvement under the master lease agreements with the purchaser (see Note 11). Stratus estimates its maximum probable exposure to loss using a probability-weighted assessment of future lease payments based on the master lease agreements. The rent paymentsour accounting policies related to the 99-year hotel pad master lease representStratus Profit Participation Incentive Plan (PPIP). During 2022, we recorded $2 thousand to project development costs ($0.4 million in 2021) and charged $0.5 million to general and administrative expenses ($9.8 million in 2021) related to the greatest exposure to loss. In May 2017,PPIP. The accrued liability for the hotel tenant began paying rent and,PPIP totaled $3.0 million at December 31, 2022 (included in August 2017, obtained construction financing and commenced construction of its building.other liabilities). The achievement of these milestones significantly reduced Stratus' probability weighted estimated maximum exposure to loss and $24.3 millionmost significant assumptions in the estimation of the gain$3.0 million PPIP liability at December 31, 2022 were estimated capitalization rates ranging from 4.3 percent to 7.5 percent, expected remaining service periods ranging from 0.5 to 3.3 years, and estimated transaction costs ranging from 1.3 percent to 7.9 percent of sale prices. These assumptions for the PPIP liability as of December 31, 2021 were estimated capitalization rates ranging from 6.0 percent to 7.5 percent, expected remaining service periods ranging from 1.5 to 3.4 years, and estimated transaction costs ranging from 2.0 percent to 6.8 percent. Of the $15.2 million liability as of December 31, 2021, $8.8 million was recognized during third-quarter 2017related to properties sold in 2021 and was based on actual sale prices and transaction costs. PPIP awards were granted during 2022 for The Saint June, a multi-family property, which resulted in the performancelower estimated capitalization rate and transaction costs in the range of services method.assumptions in 2022.
RECENT DEVELOPMENT ACTIVITIES
Residential. As of December 31, 2017,2022, the number of our residential developed lots/units lots/unitsthat are developed, under development and lot/unitsavailable for potential development by area are shown below:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Residential Lots/Units |
| | Developed | | Under
Development | | Potential Development a | | Total |
| Barton Creek: | | | | | | | |
| Amarra Drive: | | | | | | | |
| Phase III lots | 2 | | | — | | | — | | | 2 | |
Amarra Villas b | — | | | 11 | | | — | | | 11 | |
| The Saint June | — | | | 182 | | | — | | | 182 | |
| Other homes | — | | | — | | | 10 | | | 10 | |
| Holden Hills | — | | | — | | | 475 | | | 475 | |
Section N c | — | | | — | | | 1,412 | | | 1,412 | |
| Other Barton Creek sections | — | | | — | | | 2 | | | 2 | |
| Circle C multi-family | — | | | — | | | 56 | | | 56 | |
| The Annie B | — | | | — | | | 316 | | | 316 | |
| The Saint George | — | | | 316 | | | — | | | 316 | |
| Lakeway | — | | | — | | | 270 | | | 270 | |
Lantana d | — | | | — | | | 306 | | | 306 | |
Jones Crossing d | — | | | — | | | 275 | | | 275 | |
Magnolia Place d | — | | | — | | | 875 | | | 875 | |
New Caney d | — | | | — | | | 275 | | | 275 | |
| Total Residential Lots/Units | 2 | | | 509 | | | 4,272 | | | 4,783 | |
|
| | | | | | | | | | | |
| | Residential Lots/Units |
| | Developed | | Under Development | | Potential Developmenta | | Total |
| Barton Creek: | | | | | | | |
| Amarra Drive: | | | | | | |
|
| Phase II | 12 |
| | — |
| | — |
| | 12 |
|
| Phase III | 38 |
| | 4 |
| | — |
| | 42 |
|
| Amarra Villas | 4 |
| | 15 |
| | — |
| | 19 |
|
| Other townhomes | — |
| | — |
| | 170 |
| | 170 |
|
| Section N multi-family: | | | | | | | |
| Santal Phase I | 236 |
| | — |
| | — |
| | 236 |
|
| Santal Phase II | — |
| | 212 |
| | — |
| | 212 |
|
| Other Section N | — |
| | — |
| | 1,412 |
| | 1,412 |
|
| Other Barton Creek sections | — |
| | — |
| | 156 |
| | 156 |
|
| Circle C multi-family: | | | | | | |
|
| The St. Mary | — |
| | — |
| | 240 |
| | 240 |
|
| Tract 102 | — |
| | — |
| | 56 |
| | 56 |
|
| Lakeway | — |
| | — |
| | 100 |
| | 100 |
|
| Other | — |
| | — |
| | 7 |
| | 7 |
|
| W Austin Residences | 2 |
| | — |
| | — |
| | 2 |
|
| Total Residential Lots/Units | 292 |
| | 231 |
| | 2,141 |
| | 2,664 |
|
| |
a. | Our development of the properties identified under the heading “Potential Development” is dependent upon the approval of our development plans and permits by governmental agencies, including the City. Those governmental agencies may not approve one or more development plans and permit applications related to such properties or may require us to modify our development plans. Accordingly, our development strategy with respect to those properties may change in the future. While we may be proceeding with approved infrastructure projects or planning activities for some of these properties, they are not considered to be “under development” for disclosure in this table until construction activities have begun. |
a.Our development of the properties identified under the heading “Potential Development” is dependent upon the approval of our development plans and permits by governmental agencies, including the city of Austin and other cities in our Texas markets. Those governmental agencies may not approve one or more development plans and permit applications related to such properties or may require us to modify our development plans. Accordingly, our development strategy with respect to those properties may change in the future. While we may be proceeding with approved infrastructure projects or planning activities for some of these properties, they are not considered to be “under development” for disclosure in this table until construction activities have begun, infrastructure work over the entire property has been completed, is currently being completed or is able to be completed and for which necessary permits have been obtained. Subsequent to December 31, 2022, we commenced construction on Holden Hills.
b.In March 2023, we completed and sold one Amarra Villas home for $2.5 million.
d.For a discussion of this project, refer to Items 1. and 2. “Business and Properties.”
The discussion below focuses on our recent significant residential development activity. For a description of our properties containing additional information, refer to Items 1. and 2. “Business and Properties.”
Barton Creek
Amarra Drive.Amarra Drive is a subdivision featuring lots ranging from one to over five acres.
In 2008,2015, we substantially completed the development of Amarra Drive Phase II, which consists of 35 lots on 51 acres. We sold one lot for $0.6 million in 2017, one lot for $0.6 million in 2016 and none in 2015. As of December 31, 2017, 12 Phase II lots remained unsold. During January 2018, one Phase II lot was sold.
In 2015, we substantially completed the development of Amarra Drive Phase III subdivision, which consists of 64 lots on 166 acres. In 2017,2021, we identified four lots on which to build homes and began construction on two homes. We sold 6 Phase III lots for $4.1 million in 2017, 6 Phase III lots for $4.4 million in 2016 and 10 Phase III lots for $7.0 million in 2015.three lots. As of December 31, 2017, 382022, two developed Phase III lots remainremained unsold.
In March 2018, we entered into a contract to sell one Amarra Drive Phase II lotMulti-family and eightCommercial. We also have multi-family and commercial lots in the Amarra Drive Phase III lots for a totaldevelopment of $5.9 million. In accordance with the contract, the partiesBarton Creek. The Amarra Villas and The Saint June, both described below, are required to closebeing developed on the saletwo of these lots ratably beforemulti-family lots. During 2021, we sold a five-acre multi-family tract of land for $2.5 million, and during 2022, we sold a six-acre multi-family tract of land for $2.5 million. As of December 31, 2018. If the purchaser fails to close on the sale2022, we have one remaining undeveloped multi-family lot of the minimum numberapproximately 11 acres and one undeveloped 22-acre commercial lot in inventory.
Amarra Villas.The Villas at Amarra Drive (Amarra Villas) townhome project is a 20-unit project within the Amarra development for which we completed site work in late 2015. During 2017,The homes average approximately 4,400 square feet and are being marketed as “lock and leave” properties, with golf course access and cart garages. We completed construction and sale of the first five townhomesseven homes between 2017 and 2019. We began construction on the next two Amarra Villas homes in first-quarter 2020, one of which was completed and sold for $2.4 million in second-quarter 2022. In 2021, we began construction of one additional home and in 2022, we began construction on the nextremaining ten homes. In fourth-quarter 2022, we sold one home for $3.6 million. In March 2023, we completed and sold of one home for $2.5 million. Construction on the last ten units continue to progress, and as of March 27, 2023, one home was under contract to sell and nine Amarra Villas homes remain available for sale.
The Saint June. In June 2021, The Saint June, L.P. raised $16.3 million of equity from third-party investors and entered into an approximately $30 million construction loan. Refer to Notes 2 and 6 for additional discussion. 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 being built on approximately 36 acres and is comprised of multiple buildings featuring one, two townhomes began. Oneand three bedroom units for lease with amenities that include a resort-style clubhouse, fitness center, pool and extensive green space. The project is expected to be completed in third-quarter 2023.
Holden Hills. Our final large residential development within the Barton Creek community, Holden Hills, consists of 495 acres and the community is designed to feature 475 unique residences to be developed in two phases with a focus on health and wellness, sustainability and energy conservation. Phases I and II of the completed townhomes was sold during 2017. AsHolden Hills development plan encompass the development of the home sites. We entered into a limited partnership agreement with a third-party equity investor for this project in January 2023, and in February 28, 2018, two townhomes, currently2023 obtained construction financing for Phase I of the project and commenced infrastructure construction. We contributed to the joint venture the Holden Hills land and related personal property at an agreed value of $70.0 million and our 50 percent partner contributed $40.0 million in cash. The partnership distributed $35.8 million in cash to us in connection with these transactions. We expect to consolidate the Holden Hills limited partnership, and the contribution from our partner will be accounted for as a noncontrolling interest.
We and the equity investor have agreed to contribute up to an additional $10 million each to the partnership if called upon by the general partner. The initial and potential additional equity contributions are projected to constitute a sufficient amount of equity capital to develop both Phase I and Phase II of the Holden Hills project. The partnership anticipates securing additional debt financing for the development of Phase II. The construction of homes on the pods or estate lots would require additional capital. We expect to complete site work for Phase I, including the construction of road, utility, drainage and other required infrastructure in late 2024. Accordingly, our current projections anticipate that we could start building homes and/or selling home sites in late 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. Refer to Note 11 for further discussion.
Section N. Using an entitlement strategy 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, adjacent to Holden Hills. We are designing a dense, mid-rise, mixed-use project, with extensive multi-family and retail components, coupled with limited office, entertainment and hospitality uses, surrounded by an extensive greenspace amenity, which is expected to result in a significant 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. Stratus Block 150, L.P. raised $11.7 million in third-party equity capital and entered into a $14.0 million loan to finance part of the costs of land acquisition and budgeted pre-development costs for The Annie B. We continue to work to finalize our development plans with a goal of beginning construction in late 2023 or 2024, subject to obtaining financing and other market conditions. Refer to Notes 2 and 6 for additional discussion.
The Saint George
The Saint George is a luxury wrap-style multi-family project under construction were under contract.on approximately four acres in north central Austin, with approximately 316 units comprised of studio, one and two bedroom units and an attached parking garage. We purchased the land and entered into third-party equity financing for the project in December
Santal. 2021. We entered into a construction loan for the project in July 2022 and began construction in third-quarter 2022. We currently expect to achieve substantial completion by mid-2024. Refer to Notes 2 and 6 for further discussion.
Lantana Multi-Family
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. The Santal Phase I multi-family project, a garden-style apartment complex, was completed within budget in August 2016component is now known as The Saint Julia and consistsis expected to consist of 236306 units. We began recognizing rental revenue, which is includedcurrently do not expect to begin construction prior to 2024, and the project remains subject to financing and market conditions.
Kingwood Place
In October 2022, we closed the sale of a 10-acre multi-family tract of land planned for approximately 275 multi-family units for $5.5 million at Kingwood Place, an H-E-B, L.P (H-E-B) grocery anchored, mixed-use project in Kingwood, Texas. In connection with the Leasing Operations segment,sale, we made a $5.0 million principal payment on the Kingwood Place construction loan.
Other Residential
In 2022, we sold 28 acres of undeveloped residential land at Magnolia Place, an H-E-B grocery shadow-anchored, mixed-use project in January 2016. As of February 28, 2018, approximately 95 percent of the units were leased. In September 2017,Magnolia, Texas for $3.2 million. Also, in October 2022, we entered into an amended loan agreement that increased the original commitment of $34.1 milliona contract to $59.2sell approximately 11 acres planned for 275 multi-family units in Magnolia Place for $4.3 million, which includes a $32.8 million loanis currently expected to close by the end of 2023. Upon the anticipated closing of the sale, we would have 18 acres planned for Santal Phase I andup to 600 multi-family units remaining in Magnolia Place. We continue to evaluate options for the 21-acre multi-family component of Jones Crossing, an additional $26.4 million for construction of Santal Phase II, a 212-unit garden-style apartment complexH-E-B grocery anchored, mixed-use development located adjacent to Santal Phase I. We began construction of Santal Phase II in September 2017 and expect the first building to be complete in third-quarter 2018.
Circle C
College Station, Texas. We are developing the Circle C community basedalso evaluating options for a multi-family project on the entitlements secured35 acres in our Circle C settlement with the City. Our Circle C settlement, as amended in 2004, permits development of 1.16 million square feet of commercial space, 504 multi-family units and 830 single-family residential lots. See "Properties" under Part 1, Items 1. and 2. for further discussion of our Circle C settlement with the City.Lakeway, Texas.
Meridian. Meridian is an 800-lot residential development at the Circle C community. Development of the final phase of Meridian, which consisted of 57 one-acre lots, was completed in 2014. We sold the last 12 lots for $3.4 million in 2017, 19 lots for $5.3 million in 2016 and 19 lots for $5.4 million in 2015.
The St. Mary. We have secured final building permits for The St. Mary, a 240-unit multi-family development in the Circle C community, and, subject to obtaining construction financing, intend to commence construction by mid-2018.
W Austin Residences
Commercial.As of December 31, 2017, two remaining condominium units are available for sale and are being marketed.
Commercial. As of December 31, 2017,2022, the number of square feet of our commercial property developed, under development and our remaining entitlements for potential development (excluding property associated with our unconsolidated joint venture with Trammell Crow Central Texas Development, Inc. relating to Crestview Station in Austin (the Crestview Station Joint Venture), and the W Austin Hotel and ACL Live entertainment venue) are shown below: | | | | | | | | | | | | | | | | | | | | | | | |
| | Commercial Property |
| | Developed | | Under Development | | Potential Development a | | Total |
| Barton Creek: | | | | | | | |
| Entry corner | — | | | — | | | 5,000 | | | 5,000 | |
| Amarra retail/office | — | | | — | | | 83,081 | | | 83,081 | |
| Section N | — | | | — | | | 1,560,810 | | | 1,560,810 | |
| Circle C | — | | | — | | | 660,985 | | | 660,985 | |
| Lantana: | | | | | | | |
| Lantana Place | 99,379 | | | — | | | — | | | 99,379 | |
| Tract G07 | — | | | — | | | 160,000 | | | 160,000 | |
| Magnolia Place | 18,582 | | | — | | | 15,000 | | | 33,582 | |
| West Killeen Market | 44,493 | | | — | | | — | | | 44,493 | |
| Jones Crossing | 154,117 | | | — | | | 104,750 | | | 258,867 | |
| Kingwood Place | 151,855 | | | — | | | — | | | 151,855 | |
| New Caney | — | | | — | | | 145,000 | | | 145,000 | |
The Annie B b | — | | | — | | | 8,325 | | | 8,325 | |
| Office building in Austin | — | | | — | | | 7,285 | | | 7,285 | |
| Total Square Feet | 468,426 | | | — | | | 2,750,236 | | | 3,218,662 | |
|
| | | | | | | | | | | |
| | Commercial Property |
| | Developed | | Under Development | | Potential Development a | | Total |
| Barton Creek: | | | | | | | |
| Barton Creek Village | 22,366 |
| | — |
| | — |
| | 22,366 |
|
| Entry corner | — |
| | — |
| | 5,000 |
| | 5,000 |
|
| Amarra retail/office | — |
| | — |
| | 83,081 |
| | 83,081 |
|
| Section N | — |
| | — |
| | 1,500,000 |
| | 1,500,000 |
|
| Circle C | — |
| | — |
| | 674,942 |
| | 674,942 |
|
| Lantana: | | | | | | | |
| Lantana Place | — |
| | 99,663 |
| | 220,337 |
| | 320,000 |
|
| Tract G07 | — |
| | — |
| | 160,000 |
| | 160,000 |
|
| W Austin Hotel & Residences: | | | | | | | |
| Office | 38,316 |
| | — |
| | — |
| | 38,316 |
|
| Retail | 18,327 |
| | — |
| | — |
| | 18,327 |
|
| Magnolia | — |
| | — |
| | 351,000 |
| | 351,000 |
|
| West Killeen Market | 44,000 |
| | — |
| | — |
| | 44,000 |
|
| Jones Crossing | — |
| | 153,250 |
| | 104,750 |
| | 258,000 |
|
| Total Square Feet | 123,009 |
| | 252,913 |
| | 3,099,110 |
| | 3,475,032 |
|
| |
a. | a.Our development of the properties identified under the heading “Potential Development” is dependent upon the approval of our development plans and permits by governmental agencies, including the City. Those governmental agencies may not approve one or more development plans and permit applications related to such properties or may require us to modify our development plans. Accordingly, our development strategy with respect to those properties may change in the future. While we may be proceeding with approved infrastructure projects or planning activities for some of these properties, they are not considered to be “under development” for disclosure in this table until construction activities have begun. |
The Oaks at Lakeway
On February 15, 2017, we sold The Oaks at Lakeway to FHF I Oaks at Lakeway, LLC for $114.0 million in cash. Net cash proceeds totaled $50.8 million after repayment of the Lakeway construction loan (see Note 11). We used a portionproperties identified under the heading “Potential Development” is dependent upon the approval of our development plans and permits by governmental agencies, including the city of Austin and other cities in our Texas markets. Those governmental agencies may not approve one or more development plans and permit applications related to such properties or may require us to modify our development plans. Accordingly, our development strategy with respect to those properties may change in the future. While we may be proceeding with approved infrastructure projects or planning activities for some of these net cash proceedsproperties, they are not considered to pay indebtedness outstanding under the Comerica Bank credit facility. The parties entered into three master lease agreements at closing: (1) one covering unleased in-line retail space, withbe “under development” for disclosure in this table until construction activities have begun.
b.For a 5-year term, (2) one covering four unleased pad sites, threediscussion of which have 10-year terms,this project, refer to Items 1. and one of which has a 15-year term,2. “Business and (3) one covering the hotel pad with a 99-year term. As specified conditions are met, primarily consisting of the tenant executing a lease, commencing payment of rent and taking occupancy, leases will be assigned to the purchaser and the corresponding leased space will be removed from the master lease, reducing our master lease payment obligations. Our master lease payment obligation, which currently approximates $180 thousand per month, is expected to decline over time until leasing is complete and all leases are assigned to the purchaser.Properties.”
We agreed to guarantee the obligations of our selling subsidiary under the sales agreement, up to a liability cap of two percent of the purchase price. This cap does not apply to our obligation to satisfy the selling subsidiary's indemnity obligations for its broker commissions or similar compensation or our liability in guaranteeing the selling subsidiary's obligations under the master leases. To secure the subsidiary's obligations under the master leases, we provided a $1.5 million irrevocable letter of credit with a three-year term.
The gain on sale of $39.7 millionwas deferred as a result of our continuing involvement under the master lease agreements with the purchaser. The hotel pad was leased to a hotel operator under a ground lease at the date of sale. However, the hotel tenant had not commenced rent payments under the ground lease or construction of its building. At the date of the sale, primarily because of the uncertainty related to the hotel tenant’s performance under its ground lease, our estimated maximum probable exposure to loss using a probability-weighted assessment of future lease payments based on the master lease agreements exceeded the gain on sale. The rent payments under the master lease agreements represent continuing support obligations and are recorded as a reduction of the
The discussion below focuses on our recent significant commercial development activity. For a description of our properties containing additional information, refer to Items 1. and 2. “Business and Properties.”
deferred gain. We recognized $24.3 million
Magnolia Place
The retail component of the gain during third-quarter 2017Magnolia Place is currently planned to consist of up to four retail buildings totaling approximately 34,000 square feet and $11.3 million remains deferred at December 31, 2017 (see Note 11).
Barton Creek
up to nine retail pad sites to be sold or ground leased. The first phase of Barton Creek Village includesdevelopment consists of two retail buildings totaling 18,582 square feet, all pad sites, and the road, utility and drainage infrastructure necessary to support the entire development was substantially completed in 2022, with the exception of certain water supply upgrades and a 22,366-square-footstorm water drainage pond, which are expected to be completed by the end of 2023, and the two retail complex that was fully occupied at December 31, 2017. In February 2017, webuildings were turned over to our retail tenants to begin their finish-out process. We sold the 3,085-square-foot bank buildingone retail pad site for $2.3 million in Barton Creek Villagesecond-quarter 2022 and sold another retail pad site in third-quarter 2022 for $1.1 million, leaving up to seven remaining retail pad sites to be sold or ground leased. H-E-B completed construction and opened its 95,000-square-foot grocery store on an adjacent undeveloped 4.1 acre tract of land for $3.1 million (see Note 11). We intend to explore opportunities to sell the retail complex later this year depending on market conditions.adjoining 18-acre site in fourth-quarter 2022.
Circle C
In 2015,addition to our recent commercial development activity, we soldalso own and operate the following stabilized retail projects that we developed:
•West Killeen Market is our Austin-area Parkside Village and 5700 Slaughter commercial properties, both located in the Circle C community. The Parkside VillageH-E-B shadow-anchored retail project which we owned in a joint venture with LCHM Holdings, LLC, consisted of 90,184 leasable square feet and was sold for $32.5 million. The 5700 Slaughter retail project, which we previously wholly owned, consisted of 25,698 leasable square feet and was sold for $12.5 million. See Note 11 for further discussion.
Lantana
Lantana is a partially developed, mixed-use real-estate development project.West Killeen, Texas, near Fort Hood. As of December 31, 2017,2022, we had remaining entitlementsexecuted leases for approximately 480,000 square feet74 percent of office andthe 44,493-square-foot retail use on 55 acres. Regional utility and road infrastructurespace. During third-quarter 2022, we sold the last remaining pad site for $1.0 million.
•Jones Crossing is in place with capacity to serve Lantana at full build-out as permitted under our existing entitlements. In 2017, construction commenced on the first phase of Lantana Place, a 320,000 square footH-E-B-anchored mixed-use development project in southwest Austin. The first phase will be anchored by a 12-screen Moviehouse, a stateCollege Station, Texas, the location of the art movie theater that provides a high-quality dining experience. We expect to complete construction of Moviehouse in mid-2018.
W Austin Hotel & Residences
The W Austin Hotel & Residences has 38,316 square feet of leasable office space, including 9,000 square feet occupied by our corporate office, and 18,327 square feet of retail space.Texas A&M University. As of December 31, 2017, both2022, we had signed leases for substantially all of the office andcompleted retail space, were substantially fully occupied.
Magnolia
including the H-E-B grocery store, totaling 154,117 square feet. The Magnolia project is an HEB-anchored retail project planned for 351,000 square feetJones Crossing site has future development opportunities. As of commercial space. Planning and infrastructure work by the cityDecember 31, 2022, we had approximately 23 undeveloped acres with estimated development potential of Magnolia is complete and road expansion by the Texas Department of Transportation is in progress and expected to be completed in early-2018. The HEB store is currently expected to open in 2020.
West Killeen Market
In 2015, we acquired approximately 21 acres in Killeen, Texas, to develop the West Killeen Market project, an HEB-anchored retail project with 44,000104,750 square feet of commercial space and threefour retail pad sites adjacent to a 90,000 square-foot HEB grocery store. Construction begansites.
•Lantana Place is our mixed-use development project within the Lantana community south of Barton Creek in August 2016 and was completed on schedule and under budget in June 2017. The HEB store opened in April 2017.Austin, Texas. As of December 31, 2017,2022, we had signed leases for approximately 6090 percent of the 99,379-square-foot retail space, at West Killeen Market have been executed,including the anchor tenant, Moviehouse & Eatery, and leasinga ground lease for the remaining space continues. We intend to explore opportunities to sell West Killeen Market later this year depending on leasing progress and market conditions.an AC Hotel by Marriott that opened in November 2021.
Jones Crossing
In September 2017, we entered in to a $36.8 million loan to finance the construction of Phases 1 and 2, the retail component, of Stratus' Jones Crossing project, a new HEB-anchored,•Kingwood Place is our H-E-B-anchored, mixed-use development project in College Station, Texas. The Jones Crossing project is expected to total approximately 258,000Kingwood, Texas (in the greater Houston area). We have constructed 151,855 square feet of commercialretail space at Kingwood Place, including a 106,000 square-foot HEBan H-E-B grocery store. Constructionstore, and as of December 31, 2022, we had signed leases for approximately 96 percent of the retail componentspace, including the H-E-B grocery store. We have also signed ground leases on four of the Jones Crossing project began in September 2017,retail pad sites. One retail pad site remains available for lease.
Refer to Part I, Items 1. and the HEB grocery store is expected to open in August 2018.2. "Business and Properties" for further discussion.
RESULTS OF OPERATIONS
We are continually evaluating the development and sale potential of our properties and will continue to consider opportunities to enter into transactions involving our properties, including possible joint ventures or other arrangements. As a result, and because of numerous other factors affecting our business activities as described herein, our past operating results are not necessarily indicative of our future results. We use operating income or loss to measure the performance of each operating segment. Corporate, eliminations and other includes consolidated general and administrative expenses, which primarily consist of employee salariescompensation and other costs.costs described herein.
The following table summarizes our operating results for the years ended December 31 (in thousands):
| | | | | | | | | | | |
| Years Ended December 31, |
| | 2022 | | 2021 |
| Operating (loss) income: | | | |
Real estate operations a | $ | 164 | | | $ | (3,272) | |
Leasing operations b | 9,621 | | | 111,369 | |
Corporate, eliminations and other c | (17,548) | | | (24,437) | |
| Operating (loss) income | $ | (7,763) | | | $ | 83,660 | |
| Interest expense, net | $ | (15) | | | $ | (3,193) | |
| Net (loss) income from continuing operations | $ | (7,077) | | | $ | 69,457 | |
Net income (loss) from discontinued operations d | $ | 96,820 | | | $ | (6,208) | |
| Net income attributable to common stockholders | $ | 90,426 | | | $ | 57,394 | |
a.Includes sales commissions and other revenues together with related expenses. Includes impairment charges for real estate properties of $0.7 million in 2022 and $1.8 million in 2021.
b.The year 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 we entered into in connection with the sale of The Oaks at Lakeway in 2017. Refer to Note 4 under the heading “The Oaks at Lakeway” for additional discussion. The year 2021 includes the pre-tax gains on the December 2021 sale of The Santal of $83.0 million and the January 2021 sale of The Saint Mary of $22.9 million.
c.Includes consolidated general and administrative expenses and eliminations of intersegment amounts. The decrease in 2022 from 2021 is primarily the result of $4.0 million incurred for 2021 for consulting, legal and public relation costs for our successful proxy contest and the REIT exploration process in addition to $9.8 million incurred in 2021 for employee incentive compensation costs associated with the PPIP resulting primarily from an increased valuation for The Santal.
d.The year 2022 includes a $119.7 million pre-tax gain on the May 2022 sale of Block 21.
|
| | | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 | |
| Operating income (loss): | | | | | | |
| Real estate operations | $ | 522 |
| | $ | 824 |
| | $ | 3,671 |
| |
| Leasing operations | 24,217 |
| a | 2,369 |
| | 22,514 |
| b |
| Hotel | 6,553 |
| | 8,058 |
| | 5,065 |
| |
| Entertainment | 4,045 |
| | 2,546 |
| | 3,086 |
| |
| Corporate, eliminations and other | (12,100 | ) | | (12,620 | ) | | (8,604 | ) | |
| Operating income | $ | 23,237 |
| | $ | 1,177 |
| | $ | 25,732 |
| |
| Interest expense, net | $ | (6,742 | ) | | $ | (9,408 | ) | | $ | (4,065 | ) | |
| Income from discontinued operations, net of taxes | $ | — |
| | $ | — |
| | $ | 3,218 |
| |
| Net income (loss) | $ | 3,884 |
| c | $ | (5,999 | ) | | $ | 17,595 |
| |
| Net income attributable to noncontrolling interests in subsidiaries | $ | (5 | ) | | $ | — |
| | $ | (5,418 | ) | d |
| Net income (loss) attributable to common stockholders | $ | 3,879 |
| | $ | (5,999 | ) | | $ | 12,177 |
| |
| |
a. | Includes the recognition of a gain of $24.3 million associated with the sale of The Oaks at Lakeway and $11.3 million remains deferred at December 31, 2017. Also includes a $1.1 million gain on the sale of a 3,085-square-foot bank building and an adjacent undeveloped 4.1 acre tract of land in Barton Creek. These gains were partially offset by a $2.5 million profit participation charge associated with the sale of The Oaks at Lakeway. |
| |
b. | Includes a gain of $20.7 million on the sales of our Parkside Village and 5700 Slaughter commercial developments. |
| |
c. | Includes a tax charge totaling $7.6 million to reduce the carrying amount of deferred tax assets as a result of U.S. tax reform (see Note 7). |
| |
d. | Primarily relates to Canyon-Johnson's share in the Block 21 Joint Venture, which we acquired in 2015. |
WeAs a result of the sale of Block 21, we currently have fourtwo operating segments: Real Estate Operations and Leasing Operations Hotel(refer to Notes 4 and Entertainment (see Note 10)10). The following is a discussion of our operating results by segment.
Real Estate Operations
The following table summarizes our Real Estate Operations results for the years ended December 31 (in thousands):
| | | | | | | | | | | |
| Years Ended December 31, |
| | 2022 | | 2021 |
| Revenues: | | | |
| Developed property sales | $ | 5,982 | | | $ | 4,615 | |
| Undeveloped property sales | 18,620 | | | 3,250 | |
| Commissions and other | 148 | | | 601 | |
| Total revenues | 24,750 | | | 8,466 | |
| Cost of sales, including depreciation | 23,866 | | | 9,913 | |
| Impairment of real estate | 720 | | | 1,825 | |
| Operating income (loss) | $ | 164 | | | $ | (3,272) | |
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Revenues: | | | | | |
| Developed property sales | $ | 10,286 |
| | $ | 10,223 |
| | $ | 12,320 |
|
| Undeveloped property sales | 544 |
| | 73 |
| | 1,175 |
|
| Commissions and other | 314 |
| | 454 |
| | 848 |
|
| Total revenues | 11,144 |
| | 10,750 |
| | 14,343 |
|
| Cost of sales, including depreciation | 10,609 |
| | 9,926 |
| | 10,672 |
|
| Loss on sales of assets | 13 |
| | — |
| | — |
|
| Operating income | $ | 522 |
| | $ | 824 |
| | $ | 3,671 |
|
Developed Property Sales. The following table summarizes our developed property sales (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| | 2022 | | 2021 |
| | Lots/Units | | Revenues | | Average Cost per Lot/Unit | | Lots/Homes | | Revenues | | Average Cost per Lot/Home |
| Barton Creek | | | | | | | | | | | |
| Amarra Drive: | | | | | | | | | | | |
| Amarra Villas homes | 2 | | | $ | 5,982 | | | $ | 2,800 | | | — | | | $ | — | | | $ | — | |
| Phase III lots | — | | | — | | | — | | | 3 | | | 2,215 | | | 299 | |
| | | | | | | | | | | |
| W Austin Residences at Block 21: | | | | | | | | | | | |
| Condominium unit | — | | | — | | | — | | | 1 | | | 2,400 | | | 1,721 | |
| Total Residential | 2 | | | $ | 5,982 | | | | | 4 | | | $ | 4,615 | | | |
The increase in revenues from developed property sales for 2022, compared to 2021, reflects the years endedsales of two Amarra Villas homes in 2022. In 2021, revenue included the sales of three developed Phase III lots and the sale of our last condominium unit at the W Austin Hotel & Residences. As of December 31, (in thousands):2022, two developed Phase III lots remained unsold.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| | Lots/Units | | Revenues | | Average Cost per Lot/Unit | | Lots/Units | | Revenues | | Average Cost per Lot/Unit | | Lots/Units | | Revenues | | Average Cost per Lot/Unit |
| Barton Creek | | | | | | | | | | | | | | | | | |
| Amarra Drive: | | | | | | | | | | | | | | | | | |
| Phase II lots | 1 |
| | $ | 560 |
| | $ | 193 |
| | 1 |
| | $ | 550 |
| | $ | 190 |
| | — |
| | $ | — |
| | $ | — |
|
| Phase III lots | 6 |
| | 4,090 |
| | 292 |
| | 6 |
| | 4,408 |
| | 338 |
| | 10 |
| | 6,955 |
| | 334 |
|
| Amarra Villas | 1 |
| | 2,193 |
| | 1,886 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| | | | | | | | | | | | | | | | | | |
| Circle C | | | | | | | | | | | | | | | | | |
| Meridian | 12 |
| | 3,443 |
| | 162 |
| | 19 |
| | 5,265 |
| | 156 |
| | 19 |
| | 5,365 |
| | 160 |
|
| Total Residential | 20 |
| | $ | 10,286 |
| | | | 26 |
| | $ | 10,223 |
| | | | 29 |
| | $ | 12,320 |
| | |
Undeveloped Property Sales.Sales. In 2017,2022, we soldclosed $18.6 million of undeveloped property sales consisting of (i) a six-acre10 acre multi-family tract of land in Kingwood Place for $5.5 million, (ii) 28 acres of residential land at the Circle C community, which had entitlementsMagnolia Place for 14,000 square feet$3.2 million, (iii) a six-acre multi-family tract of commercial space,land in Amarra Drive for $0.5 million. In 2015, we sold$2.5 million, (iv) a nine-acreretail pad site at Magnolia Place for $2.3 million, (v) a 0.3 acre tract of land in Austin Texas, with entitlements for approximately 20,000 square feet$1.6 million, (vi) a retail pad site at Magnolia Place for $1.1 million, (vii) a retail pad site at West Killeen Market for $1.0 million, (viii) a 2.4 acre tract of commercial spaceland in San Antonio for $1.2$0.8 million and (ix) a tract of land in Austin for $0.6 million. In 2021, we sold a five-acre multi-family tract of land in Amarra Drive for $2.5 million and a retail pad site at West Killeen Market for $0.8 million.
Commissions and Other. Commissions and other primarily includes sales commissions, design fees and sales of our development fee credits to third parties. We received the development fee credits as part of the Circle C settlement (see Note 9).
Real Estate Cost of Sales.Sales and Depreciation. Cost of sales includes cost of property sold, project operating and marketing expenses and allocated overhead costs, partly offset by reductions for certain municipal utility district (MUD) reimbursements.costs. Cost of sales totaled $10.6$23.9 million in 2017,2022 and $9.9 million in 2016 and $10.7 million in 2015.2021. The increase in cost of sales in 2017,2022, compared with 2016,2021, primarily reflects higher costs associated with the sale of the Amarra Villas townhomean increase in 2017. The decrease in cost ofundeveloped property sales in 2016, compared with 2015, primarily reflects fewer Barton Creek lot sales in 2016.over 2021.
Cost of sales for our real estate operations also includes significant recurring costs (including property taxes, maintenance and marketing), which totaled $4.3$6.6 million in 2017, 2022and$4.55.8 million in 20162021.
Impairment of Real Estate. During 2022, we recorded impairment charges totaling $720 thousand. These included a $650 thousand impairment charge related to the Amarra Villas and $3.5a $70 thousand impairment charge for the multi-family tract of land at Kingwood Place that sold for $5.5 millionin2015. The increase in these recurring costsOctober 2022.
During 2021, we recorded impairment charges totaling $1.8 million. These included $700 thousand of impairment charges related to the Amarra Villas, a $625 thousand impairment charge for 2016, compared with 2015, primarily reflects higher property taxesthe multi-family tract of land at Kingwood Place that was sold in 2022 and homeowner association assessments associated with Barton Creek lots not yet sold.a $500 thousand impairment charge for an office building in Austin.
Leasing Operations
The following table summarizes our Leasing Operations results for the years ended December 31 (in thousands):
| | | | | | | | | | | |
| Years Ended December 31, |
| | 2022 | | 2021 |
| Rental revenue | $ | 12,754 | | | $ | 19,787 | |
| Rental cost of sales, excluding depreciation | 4,439 | | | 9,030 | |
| Depreciation | 3,506 | | | 5,358 | |
| Gain on sales of assets | (4,812) | | | (105,970) | |
| Operating income | $ | 9,621 | | | $ | 111,369 | |
|
| | | | | | | | | | | | |
| | 2017a | | 2016 | | 2015ab | |
| Rental revenue | $ | 8,856 |
| | $ | 10,449 |
| | $ | 6,179 |
| |
| Rental cost of sales, excluding depreciation | 4,829 |
| | 4,936 |
| | 2,838 |
| |
| Depreciation | 2,693 |
| | 3,144 |
| | 1,556 |
| |
| Profit participation | 2,538 |
| c | — |
| | — |
| |
| Gain on sales of assets | (25,421 | ) | | — |
| | (20,729 | ) | |
| Operating income | $ | 24,217 |
| | $ | 2,369 |
| | $ | 22,514 |
| |
| |
a. | Includes the results of the The Oaks at Lakeway through February 21, 2017 (see Note 11). |
| |
b. | Includes the results of the Parkside Village and 5700 Slaughter commercial properties through July 2, 2015 (see Note 11). |
| |
c. | Relates to the sale of The Oaks at Lakeway (see Note 11). |
Rental Revenue. Rental revenue primarily includes revenue from the officeour retail and retail space at the W Austin Hotel & Residences, Barton Creek Village, Santal Phase I,mixed-use projects Lantana Place, Jones Crossing, Kingwood Place and West Killeen Market, and until its sale in December 2021, our multi-family project The Oaks at Lakeway (which was sold in February 2017), and Parkside Village and 5700 Slaughter, which were both sold in 2015.Santal. The decrease in rental revenue in 2017,2022, compared with 2016,to 2021, primarily reflects the sale of The Santal in December 2021, partly offset by increased rental revenue at Lantana Place and Kingwood Place. The Santal had rental revenue of $8.7 million in 2021 prior to the sale.
Rental Cost of Sales and Depreciation. Rental costs of sales and depreciation expense decreased in 2022, compared to 2021, primarily as a result of the sale of The Santal.
Gain on Sales of Assets. For 2022, we recognized a gain on the reversal of accruals for costs to lease and construct buildings under a master lease arrangement that we entered into in connection with our sale of The Oaks at Lakeway in February 2017, partly offset by an increase in revenue from Santal Phase I. The increase in rental revenue in 2016, compared with 2015, primarily reflects rental revenues from The2017. Refer to Note 4 under the heading “The Oaks at LakewayLakeway” for further discussion.
In December 2021, our subsidiary sold The Santal for $152.0 million. After closing costs and Santal Phase I, partially offset bypayment of the outstanding project loan, the sale generated net proceeds of approximately $74 million. We recorded a decrease relatedpre-tax gain on sale of $83.0 million in 2021.
In January 2021, our subsidiary 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. 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 sales of Parkside Village and 5700 Slaughter.
Rental Cost of Sales. Rental costs of sales, excluding depreciation, totaled $4.8 million in 2017, compared with $4.9 million in2016 and $2.8 million in 2015. The decrease in rental costs in 2017, compared with 2016, primarily reflects the sale of The Oaks at Lakeway, mostly offset by increased operating expenses associated with Santal Phase I. The increase in rental costs in 2016, compared with 2015, primarily reflects increased operating costs relating to The Oaks at Lakeway and Santal Phase I, partially offset bynoncontrolling interest owners. We recognized a decrease in operating expenses related to the sales of Parkside Village and 5700 Slaughter.
Depreciation. Depreciation costs totaled $2.7 million in 2017, compared with $3.1 million in 2016 and $1.6 million in 2015. The decrease in 2017, compared with 2016, primarily reflects lower depreciation costs associated with The Oaks at Lakeway, partially offset by higher depreciation costs associated with Santal Phase I. The increase in 2016, compared with 2015, primarily reflects higher depreciation costs relating to The Oaks at Lakeway and Santal Phase I.
Gain on Sales of Assets. During 2017, we recorded a $25.4 million gain on the sales of assets, primarily related to the sale of The Oaks at Lakeway and a bank building and an adjacent undeveloped 4.1 acre tract of land in Barton Creek. During 2015, we recorded a $13.6 millionpre-tax gain on the sale of Parkside Village and a $7.1$22.9 million gain on the sale($16.2 million net of 5700 Slaughter.noncontrolling interests) in 2021.
Hotel
The following table summarizes our Hotel results for the years ended December 31 (in thousands):
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Hotel revenue | $ | 38,681 |
| | $ | 40,727 |
| | $ | 41,651 |
|
| Hotel cost of sales, excluding depreciation | 28,584 |
| | 29,248 |
| | 30,789 |
|
| Depreciation | 3,544 |
| | 3,421 |
| | 5,797 |
|
| Operating income | $ | 6,553 |
| | $ | 8,058 |
| | $ | 5,065 |
|
Hotel Revenue. Hotel revenue primarily includes revenue from W Austin Hotel room reservations and food and beverage sales. Revenue per available room (RevPAR), which is calculated by dividing total room revenue by the average total rooms available during the year, was $253 in 2017, compared with $259 in 2016 and $279 in 2015. In 2015 and 2016, over 2,600 new hotel rooms were added to the Austin hotel market, and approximately 600 more rooms were added in 2017. The increase in competition from several newly completed hotels in the downtown Austin area, including the anticipated opening of additional rooms during 2018, is expected to impact hotel revenues.
Hotel Cost of Sales. Hotel operating costs totaled $28.6 million in 2017, $29.2 million in 2016and$30.8 million in 2015. Lower costsin 2017, compared with 2016 and 2015, primarily reflect lower variable costs related to lower revenue.
Hotel Depreciation. Hotel depreciation totaled $3.5 million in 2017. Hotel depreciation decreased to $3.4 million in 2016, compared to$5.8 million in 2015, primarily reflecting certain furniture and equipment being fully depreciated as of December 31, 2015.
Entertainment
The following table summarizes our Entertainment results for the years ended December 31 (in thousands):
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Entertainment revenue | $ | 23,232 |
| | $ | 19,705 |
| | $ | 19,800 |
|
| Entertainment cost of sales, excluding depreciation | 17,719 |
| | 15,698 |
| | 15,426 |
|
| Depreciation | 1,523 |
| | 1,461 |
| | 1,288 |
|
| Gain on sale of assets | (55 | ) | | — |
| | — |
|
| Operating income | $ | 4,045 |
| | $ | 2,546 |
| | $ | 3,086 |
|
Entertainment Revenue. Entertainment revenue primarily reflects the results of operations for ACL Live, including ticket sales, revenue from private events, sponsorships, personal seat license sales and suite sales, and sales of concessions and merchandise. Entertainment revenue also reflects revenues associated with events hosted at venues other than ACL Live, including 3TEN ACL Live, as well as the results of the Stageside Productions joint venture with Pedernales Entertainment LLC. Revenues from the Entertainment segment will vary from period to period as a result of factors such as the price of tickets and number of tickets sold, as well as the number and type
of events hosted at ACL Live and 3TEN ACL Live. Entertainment revenue increased in 2017, compared with 2016 and 2015, primarily reflecting higher ticket sales at ACL Live from headliners such as Dave Chappelle and Louis CK, and growing visibility of our 3TEN ACL Live venue, which opened in March 2016.
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, for the years ended December 31. |
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| ACL Live | | | | | |
| Events: | | | | | |
| Events hosted | 224 |
| | 223 |
| | 210 |
|
| Estimated attendance | 297,100 |
| | 237,000 |
| | 245,000 |
|
| Ancillary net revenue per attendee | $ | 40.47 |
| | $ | 46.21 |
| | $ | 44.89 |
|
| Ticketing: | | | | | |
| Number of tickets sold | 221,340 |
| | 175,023 |
| | 168,506 |
|
| Gross value of tickets sold (in thousands) | $ | 13,392 |
| | $ | 9,679 |
| | $ | 11,191 |
|
| | | | | | |
3TEN ACL Livea | | | | | |
| Events: | | | | | |
| Events hosted | 228 |
| | 162 |
| | — |
|
| Estimated attendance | 40,600 |
| | 25,500 |
| | — |
|
| Ancillary net revenue per attendee | $ | 42.02 |
| | $ | 35.19 |
| | — |
|
| Ticketing: | | | | | |
| Number of tickets sold | 18,770 |
| | 12,777 |
| | — |
|
| Gross value of tickets sold (in thousands) | $ | 430 |
| | $ | 289 |
| | — |
|
| |
a. | This venue opened in March 2016. |
Entertainment Cost of Sales. Entertainment cost of sales, excluding depreciation, totaled $17.7 million in 2017, compared with $15.7 millionin2016 and $15.4 million in 2015. Entertainment costs were higher in 2017, compared with 2016and2015, primarily reflecting higher production costs for larger events.
Corporate, Eliminations and Other
Corporate, eliminations and other (see(refer to Note 10) includes consolidated general and administrative expenses, which primarily consist of employee salariescompensation and other costs. Consolidated general and administrative expenses totaled $11.4$17.6 million in 2017, $12.22022 and $24.5 million in 2016 and $8.1 million2021. The decrease in 2015. Beginning January 1, 2016, general and administrative expenses are managed on a consolidated basisin 2022, compared to 2021, occurred primarily because in 2021, we incurred $9.8 million in employee incentive compensation costs associated with the PPIP primarily for The Santal project and are not allocated to our operating segments. The segment disclosures for 2015 have been recast to be consistent with 2016. Costs were higher for 2016, compared with 2017 and 2015, primarily reflecting higher$4.0 million in consulting, legal and consulting fees mainly because of $3.1 million associated with Stratus'public relation costs for our successful proxy contest and review of strategic alternatives.the real estate investment trust exploration process. Corporate, eliminations and other also includes eliminations of intersegment amounts incurred by the fourour operating segments.
Non-Operating Results
Interest Expense, Net. Interest costs (before capitalized interest) totaled $12.6$6.6 million in 2017, 2022and$15.78.7 million in 2016 and $9.5 million in 2015.2021. The decrease in interest costs in 2017,2022, compared with 2016,2021, primarily reflects lowera reduction in average debt balances, resulting fromincluding the repayment of the outstanding balance on the Comerica Bank revolving credit facility and the repayment of The Santal loan for The Oaks at Lakeway after its sale in February 2017. The increase in interest expense in 2016, compared with 2015, primarily reflects higher average debt balances associated with refinancing the W Austin Hotel & Residences and higherpartially offset by rising interest rates. All of our debt at December 31, 2022 was variable-rate debt, and for all of such debt other than the Comerica Bank revolving credit facility, the average interest rate increased for 2022 compared to 2021 and may continue to rise in the future if prevailing market interest rates continue to climb. Refer to Note 6 for additional information.
Capitalized interest totaled $5.9$6.6 million in 2017, $6.3 million in 20162022 and $5.5 million in 2015,2021, and is primarily related to development activities at Barton Creek in 2017,(primarily Section N, Holden Hills and development activities at Barton CreekAmarra Villas), The Annie B, The Saint George, The Saint June and The Oaks at Lakeway in 2016 and 2015.Magnolia Place.
Net Gain (Loss) on Interest Rate Derivative Instruments.Extinguishment of Debt. We recorded gainsa net gain of $0.3$1.5 million on extinguishment of debt in 2017 and $0.2 million in 2016 associated with changes in the fair value of our interest rate derivative instruments. In 2015, we recorded a loss of $(0.7) million2021 primarily associated with the recognitionforgiveness of cumulative changes in the fair valuesubstantially all of our interest rate swap agreement because it no longer qualified for hedge accounting treatment and changesPPP loan in the fair value of our interest rate cap agreement. See Note 5 for further discussion.
Loss on Early Extinguishment of Debt. We recordedthird quarter 2021. This gain was partly offset by losses on earlythe extinguishment of debt of $0.5 million in 2017 associated with the repayment of The Oaks at Lakeway Loan and $0.8 million in 2016 related toSaint Mary construction loan upon the repaymentsale of the Bankproperty in first-quarter 2021 and the refinancing of Americathe Jones Crossing construction loan with the proceeds from the Goldman Sachs loan.
Equity in Unconsolidated Affiliates' (Loss) Income. We account for our interests in our unconsolidated affiliates, primarily Crestview Station, using the equity method. Our equitysecond-quarter 2021, which resulted in the net income (loss)write-off of these entities totaled less than $(0.1) million in 2017, $0.1 million in 2016 and $(1.3) million in 2015. The loss in 2015 primarily reflects operating losses at two of these affiliates.unamortized deferred financing costs.
(Provision for) Benefit fromfor Income Taxes. We recorded a (provision for) benefit fromprovision for income taxes of $(13.9)$0.4 million in 2017, $2.82022 and $12.6 million in 2016 and $(5.6) million in 2015. Each period also includes the Texas state margin tax. The difference between our consolidated effective income2021. We had deferred tax rate for 2017 and the U.S. federal statutory income tax rate of 35 percent was primarily attributable to a $7.6 million charge to reduce the carrying amountassets (net of deferred tax assets based on lower federal corporate tax rates associated with U.S. tax reform (seeliabilities and valuation allowances) totaling $38 thousand at December 31, 2022, and $6.0 million at December 31, 2021. Refer to Note 7). The difference between our consolidated effective income tax rate7 for 2016 and the U.S. federal statutory income tax rate of 35 percent was primarily attributable to the Texas state margin tax. The difference between our consolidated effective income tax rate for 2015 and the U.S. federal statutory income tax rate of 35 percent was primarily attributable to state margin taxes, partially offset by the tax effectfurther discussion of income attributable to non-controlling interests.taxes.
Net IncomeTotal Comprehensive Loss (Income) Attributable to Noncontrolling Interests in Subsidiaries. Net income attributable to noncontrolling interests in subsidiariesSubsidiaries. Our partners' share of loss totaled $5.4$0.7 million in 20152022 and primarily relatedour partner's share of income totaled $5.9 million in 2021. In 2021, our partners were allocated $6.7 million of the gain from the sale of The Saint Mary.
Discontinued Operations
On May 31, 2022, Stratus completed the sale of Block 21 to our former joint venture partner's interestRyman 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 income (loss) 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 & Residences project (see Note 2).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.
DISCONTINUED OPERATIONS
In 2012, we sold 7500 Rialto, an office buildingaccordance with accounting guidance, Stratus reported the results of operations of Block 21 as discontinued operations in Lantana. In connection withthe consolidated statements of comprehensive 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.
Net income (loss) from discontinued operations totaled $96.8 million in 2022 and $(6.2) million in 2021. The net income for 2022 primarily reflects a $119.7 million pre-tax gain on the sale we recognized a gain of $5.1 millionBlock 21. The net loss in 2021 reflects the negative impacts that the COVID-19 pandemic had on the Hotel and deferred a gain of $5.0 million because of a guaranty provided to the lender in connection with the buyer's assumption of the loan related to 7500 Rialto. The guaranty was released and we recognized the deferred gain totaling $5.0 million ($3.2 million to net income attributable to common stockholders) in 2015.Entertainment operations within our discontinued operations.
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. See "Business Strategy and Related Risks" for further discussion of our liquidity.
Comparison of Year-to-Year Cash Flows
Operating Activities. Cash provided by (used in)used in operating activities totaled $10.3 million in 2017, $(3.7) million in 2016 and $(1.8)$55.3 million in 2015.2022 and $53.6 million in 2021. Expenditures for purchases and development of real estate properties totaled $14.4$24.5 million in 2017, $14.6 million in 2016 and $26.2 million in 20152022, primarily related to the development of our Barton Creek properties.properties, particularly Amarra Villas and, to a lesser extent, Holden Hills, and $52.8 million in 2021, primarily related to the purchase of the land for The increaseAnnie B, the purchase of the property for The Saint George and development of our Barton Creek properties, including Amarra Villas. The $62.0 million decrease in accounts payable, accrued liabilities and other in 2022 is primarily relatesrelated to increased development activity in 2017. During 2017, we also paid $2.2 million ofpaying off the $2.5 million profit participation due to HEB as a result ofincome tax liabilities associated with the sale of The Oaks at Lakeway.
We received MUD reimbursements relating to substantially all of the infrastructure costs incurred to date in Barton Creek, totaling $13.8Santal and The Saint Mary. During first-quarter 2023, we paid $4.5 million in 2017, $12.3employee incentive compensation and $4.0 million in 2016 and $5.3 million in 2015. In November 2017, the city of Magnolia and the state of Texas approved the creation of a MUD, which will provide an opportunity for us to recoupproperty taxes that were accrued at year end.
approximately $26 million over the life of the project for future road and utility infrastructure costs incurred in connection with our development of the Magnolia project.
Investing Activities. Cash provided by (used in) investing activities totaled $70.6$50.0 million in 2017, $(28.2)2022 and $188.9 million in 2016 and $(12.6)2021. During 2022, we received net proceeds from the sale of Block 21 of $105.8 million in 2015. The year 2017 included $117.3(excluding the release of reserves previously presented as restricted cash but including $6.9 million inof 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 2021, we received net proceeds from the sales of The Oaks at Lakeway,Santal and a bank building and an adjacent undeveloped 4.1 acre tractThe Saint Mary of land in Barton Creek. The year 2015 included $43.3 million in proceeds from the sales of the Parkside Village and 5700 Slaughter commercial properties. $209.9 million.
Capital expenditures totaled $34.1$54.8 million in 2017,for 2022, primarily related to the development ofThe Saint June, The Saint George and Magnolia Place projects, and $19.6 million for 2021, primarily for The Saint June, Lantana Place Santal Phase II, West Killeen Market and Jones Crossing. Capital expenditures totaled $28.2 million in 2016 and $55.2 million in 2015, and primarily included costs to develop Leasing Operations' properties related to Santal Phase I and The Oaks at LakewayMagnolia Place projects.
In 2017, Stratus also made payments totaling $2.2 million under its master lease obligations associated with the sale of The Oaks at Lakeway. The use of cash for site development escrow deposit and other, net during the year 2017, primarily relates to restricted cash associated with the Jones Crossing project.
Financing Activities. Cash (used in) provided byused in financing activities totaled $(79.8) million in 2017, $28.5 million in 2016 and $1.8$19.2 million in 2015. Net repayments2022 and $99.4 million in 2021. During 2022, we had no net borrowings on the Comerica Bank revolving credit facility, totaled $20.8 million in 2017, compared with net borrowings of $13.4$43.3 million in 2016 and $10.1 million in 2015.for 2021. Net repaymentsborrowings on other project and term loans totaled $49.0$14.3 million in 2017,2022, primarily forreflecting borrowings on the Magnolia Place and The Oaks at Lakeway term loan,Saint June construction loans and Amarra Villas construction credit facility, compared with net borrowingsrepayments of $16.8$88.1 million in 20162021, primarily reflecting the repayment of The Santal loan and $56.6The Saint Mary construction loan upon the sale of those projects. In first-quarter 2023, we paid off
the New Caney land loan at its maturity and made a $2.2 million in 2015. In 2016, we used $150 millionprincipal payment on the Amarra Villas construction credit facility upon closing of borrowings under the Goldman Sachs loan to refinance our Banka sale of America loan ($129.5 million) for the W Austin Hotel & Residences. Other project borrowings in 2016 were primarily used to fund the developmentone of the Santal Phase I and The Oaks at Lakeway projects. In 2015, we borrowed $32.3 million under project loans and $20.0 million under our Comerica credit facility, plus $9.7 million of cash that was usedAmarra Villas homes. Refer to purchase Canyon-Johnson's noncontrolling interest in the Block 21 Joint Venture for $62.0 million. Other project borrowings in 2015 were primarily associated with Santal Phase I and The Oaks at Lakeway projects. Noncontrolling interest distributions for the Parkside Village Joint Venture and the Block 21 Joint Venture totaled $4.2 million in 2015.
See Note 6 and “Credit Facilitytable “Debt Maturities and Other Financing Arrangements”Contractual Obligations” below for a discussionpresentation of our outstanding debt atand principal maturities for the years ended December 31, 2017.2023 through 2027 and thereafter.
During 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 2022. During 2021, we paid distributions to noncontrolling interest owners of $12.5 million, primarily related to the sale of The Saint Mary, and received contributions from noncontrolling interest owners of $46.3 million, related to The Saint June, The Annie B and The Saint George partnerships. In first-quarter 2023, we received a contribution from noncontrolling interest owner of $40.0 million related to the Holden Hills partnership formation.
On March 15, 2017, we announced that our Board,September 1, 2022, after receiving written consent from Comerica Bank, our Board declared a special cash dividend of $1.00$4.67 per share (totaling $40.0 million) on our common stock, which was paid on April 18, 2017,September 29, 2022 to stockholdersshareholders of record on March 31, 2017. The special cash dividend was declared after the Board’s considerationas of the resultsSeptember 19, 2022. Our Board also approved a new share repurchase program, which authorizes repurchases of the recent saleup to $10.0 million of The Oaks at Lakeway. The declaration of future dividends is at the discretion of our Board subject to the restrictions contained in our Comerica credit facility, which prohibit us from paying a dividend on our common stock, without the bank'swhich replaced our prior written consent. Comerica's approval of the special dividend declaredshare repurchase program. The repurchase program authorizes us, in March 2017 is not indicative of the bank's willingnessmanagement’s discretion, to approve future dividends.
In 2013, our Board approved an increase in the openrepurchase shares from time to time, subject to market share purchase program from 0.7 million shares to 1.7 million shares of our common stock. There were no purchases under this program during 2017, 2016 or 2015.conditions and other factors. As of December 31, 2017, a total of 991,6952022, we repurchased 294,700 shares of our common stock remain available under this program. Our ability to repurchasefor a total of $7.9 million at an average price of $26.69. Through March 27, 2023, we have acquired 335,703 shares of our common stock is restrictedfor a total cost of $8.7 million at an average price of $25.93 per share, and $1.3 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 termsprogram 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 our Comerica credit facility, which prohibits us from repurchasing shares, of our common stockdoes not have an expiration date, and may be suspended, modified or discontinued at any time without the bank's prior written consent.notice.
Revolving Credit Facility and Other Financing Arrangements
As of December 31, 2022, we had cash and cash equivalents of $37.7 million and restricted cash of $8.0 million. We have taken steps to obtain Federal Deposit Insurance Corporation (FDIC) protection for much of our deposits; however, we typically have some cash balances on deposit with banks in excess of FDIC insured limits. Any loss of uninsured deposits could have a material adverse effect on our future financial condition, liquidity and operations.
At December 31, 2017,2022, we had total debt of $221.5$123.9 million based on the principal amounts outstanding, compared with $291.1$107.9 million at December 31, 2016. The principal amounts of our2021. Consolidated debt outstanding at December 31, 2017, consisted2021 excluded the Block 21 loan of approximately $137 million, 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 Comerica Bank revolving credit facility prior to June 30, 2022. At December 31, 2022, we had $49.0 million available under the revolving credit facility. Letters of credit, totaling $11.0 million, have been issued under the revolving credit facility, and secure our obligation to 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 December 31, 2022.
In May 2022, we entered into an amendment with Comerica Bank to extend the maturity date of the following:
$146.3Comerica Bank revolving credit facility from September 27, 2022 to December 26, 2022, and in November 2022, Comerica Bank extended the maturity date from December 26, 2022 to March 27, 2023. The May 2022 amendment also increased the letter of credit sublimit from $7.5 million to $11.5 million and changed the benchmark rate to the Bloomberg Short-Term Bank Yield Index (BSBY) Rate. In February 2023, the Holden Hills property was removed from the borrowing base for the revolving credit facility, and the maximum amount that could be borrowed was reduced. At March 27, 2023 the maximum amount that could be borrowed under the Goldman Sachs loan.
$25.8facility was $53.7 million pursuant to the terms of the loan agreement, resulting in availability of $42.7 million, net of letters of credit committed under the $52.5 million Comericafacility. In March 2023, we entered into a modification of the revolving credit facility, which is comprisedextended the maturity date to March 27, 2025 and increased the floor of a $45.0 million revolving line of credit, $19.2 million of which was available at December 31, 2017, and a $7.5 million letters of credit tranche, against which $4.1 million was committed and $3.4 million was available at December 31, 2017.
$32.1 millionthe BSBY Rate to 0.50 percent. Pursuant to these amendments, advances under the constructionrevolving credit facility bear interest at the one-month BSBY Rate (with a floor of 0.50 percent) plus 4.00 percent. Refer to Note 6 for additional discussion.
In February 2023, our subsidiary Holden Hills, L.P. entered into a $26.1 million loan agreement with Comerica Bank due February 8, 2026 to fundfinance the development of Phase I of the multi-family developmentHolden Hills project. Refer to Note 11 for further discussion.
Our debt agreements require compliance with specified financial covenants. The Magnolia Place construction loan includes a requirement that we maintain liquid assets, as defined in Section Nthe agreements, of Barton Creek (the Santal Phase I loan).
$5.3 million undernot less than $7.5 million. The Jones Crossing loan includes a requirement that we maintain liquid assets, as defined in the stand-aloneagreement, of not less than $2 million. The New Caney land loan and The Saint June construction loan include a requirement that we maintain liquid assets, as defined in the agreements, of not less than $10 million. The Comerica Bank revolving credit facility, with Comerica Bank to fund the construction and development of the Amarra Villas (the Amarra Villas credit facility).
$5.5 million under theLantana Place construction loan, with Southside Bank to fund the development and construction of the West Killeen Market retail project (the West Killeen Market construction loan).
$5.1 million under the construction loan with Southside Bank to finance the development and construction of Phases 1 and 2, the retail component, of Jones Crossing (the Jones Crossing construction loan).
$3.4 million under the term loan with PlainsCapital Bank secured by assets at Barton Creek Village (the Barton Creek Village term loan).
No amounts have been drawn under the construction loan with Southside Bank to finance the development and construction of the initial phase of Lantana Place, nor under the agreement with Comerica Bank to finance the development and construction of Santal Phase II.
Several of our financing instruments contain customary financial covenants. The Comerica credit facility, the Santal Phase I and Phase II loans, the Amarra Villas credit facility, andthe Kingwood Place construction loan, the West Killeen Market construction loan, the New Caney land loan, The Saint June construction loan, the Magnolia Place construction loan, The Annie B land loan, The Saint George construction loan and the Holden Hills construction loan include a requirement that we maintain a minimum total stockholders’ equity balancenet asset value, as defined in each agreement, of $110.0$125 million. The Comerica Bank revolving credit facility, the Amarra Villas credit facility, the Kingwood Place construction loan, The Annie B land loan, The Saint George construction loan and the Holden Hills construction loan also includesinclude a requirement that we obtain Comerica'smaintain a debt-to-gross asset value, as defined in the agreements, of not more than 50 percent. The West Killeen Market construction loan, the Jones Crossing loan and the Lantana Place construction loan each include a financial covenant requiring the applicable Stratus subsidiary to maintain a debt service coverage ratio as defined in each agreement. As of December 31, 2022, we were in compliance with all of our financial covenants; however our Jones Crossing project did not pass the debt service coverage ratio test under the Jones Crossing loan. The debt service coverage ratio under the Jones Crossing loan is not a financial covenant; however to avoid a “Cash Sweep,” as defined in the loan agreement, Stratus made a $231 thousand principal payment on the Jones Crossing loan in February 2023 to regain compliance with the debt service coverage ratio requirement.
Stratus’ and its subsidiaries’ debt arrangements, including Stratus’ guaranty agreements 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 or change in management; sell all or substantially all of its assets; and engage in mergers, consolidations or other business combinations. Our Comerica Bank revolving credit facility, Amarra Villas credit facility, The Annie B land loan, The Saint George construction loan, Kingwood Place construction loan and the Holden Hills construction loan require Comerica Bank’s prior written consent for any common stock repurchases in excess of $1.0 million or any dividend payments. As of December 31, 2017, Stratus' total stockholders' equity was $127.3 million and Stratus was in compliance with all financial covenants. See Note 6 for further discussion of our outstanding debt as of December 31, 2017.
DEBT MATURITIES AND OTHER CONTRACTUAL OBLIGATIONS
The following table summarizes our total debt maturities based on the principal amounts outstanding as of December 31, 2017 (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | 2018 | | 2019 | | 2020 | | 2021 | | 2022 | | Thereafter | | Total |
| Goldman Sachs loan | $ | 2,086 |
| | $ | 2,207 |
| | $ | 2,313 |
| | $ | 2,470 |
| | $ | 2,613 |
| | $ | 134,636 |
| | $ | 146,325 |
|
| Santal Phase I loan | — |
| | — |
| | 32,133 |
| a | — |
| | — |
| | — |
| | 32,133 |
|
| Comerica credit facility | 25,765 |
| b | — |
| | — |
| | — |
| | — |
| | — |
| | 25,765 |
|
| Amarra Villas credit facility | — |
| | 5,342 |
| | — |
| | — |
| | — |
| | — |
| | 5,342 |
|
| West Killeen Market construction loan | — |
| | — |
| | — |
| | — |
| | 5,544 |
| | — |
| | 5,544 |
|
| Barton Creek Village term loan | 100 |
| | 105 |
| | 109 |
| | 114 |
| | 119 |
| | 2,877 |
| | 3,424 |
|
| Jones Crossing construction loan | — |
| | — |
| | — |
| | — |
| | — |
| | 5,066 |
| — |
| 5,066 |
|
| Total | $ | 27,951 |
| | $ | 7,654 |
| | $ | 34,555 |
| | $ | 2,584 |
| | $ | 8,276 |
| | $ | 142,579 |
| | $ | 223,599 |
|
| | | | | | | | | | | | | | |
| |
a. | Stratus has the option to extend the maturity date for two additional twelve-month periods, subject to certain debt service coverage conditions. |
| |
b. | On November 7, 2017, Stratus extended the maturity by one year to November 30, 2018 (see Note 6). |
The following table summarizes our contractual cash obligations, other than debt, as of December 31, 2017 (in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
| | Total | | 2018 | | 2019-2020 | | 2021-2022 | | Thereafter | |
Scheduled interest payment obligationsa | $ | 14,910 |
| | $ | 4,236 |
| | $ | 5,045 |
| | $ | 2,723 |
| | $ | 2,906 |
| |
| Construction contracts | 47,497 |
| | 47,497 |
| | — |
| | — |
| | — |
| |
| Operating lease obligations | 113,090 |
| | 372 |
| | 808 |
| | 865 |
| | 111,045 |
| |
| Total | $ | 175,497 |
| | $ | 52,105 |
| | $ | 5,853 |
| | $ | 3,588 |
| | $ | 113,951 |
| |
| | | | | | | | | | | |
| |
a. | Scheduled interest payments, were calculated using stated coupon rates for fixed-rate debt and interest rates applicable at December 31, 2017, for variable-rate debt. |
Not reflected in the table above are the master lease obligations entered into in conjunction with the sale of The Oaks at Lakeway. As more fully explained in Note 11, the master lease payment obligation currently approximates $180 thousand per month and is expected to decline as vacant space is leased and the new leases are assigned to the purchaser. Stratus currently estimates its aggregate master lease payment obligation through 2022, the date all master leases are currently projected to be terminated, will total $6.9 million.
We had commitments under noncancelable contracts totaling $47.5 million at December 31, 2017.
We also had guarantees related to the W Austin Hotel & Residences at December 31, 2017 (see Note 6).
DISCLOSURES ABOUT MARKET RISKS
We derive our revenues from the acquisition, entitlement, development, management, operation and sale of our commercial, hotel, entertainment, and multi- and single-family residential real estate properties. Our results of operations can vary significantly with fluctuations in the market prices of real estate, which are influenced by numerous factors, including interest rate levels. Changes in interest rates also affect interest expense on our debt.
We also have an interest rate swap agreement with Comerica Bank that was previously designated as a cash flow hedge with changes in fair value recorded in other comprehensive income. The instrument effectively converted the variable rate portion of Parkside Village's loan from Comerica Bank (the Parkside Village loan) from one-month LIBOR to a fixed rate of 2.3 percent. On July 2, 2015, we completed the sale of the Parkside Village property and fully repaid the amount outstanding under the Parkside Village loan. We assumed the interest rate swap agreement and, as a result, the instrument no longer qualifies for hedge accounting. Accordingly, the liability balance of $0.6 million on July 2, 2015, was reclassified to the statement of operations as a loss on interest rate derivative instruments and future changes in the fair value of the instrument are being recorded in the statement of operations, including gains of $0.3 millionin 2017 and $0.2 million in 2016, and a loss of $0.1 million in 2015. See Note 5 for further discussion.
At December 31, 2017, $73.9 million of our total principal amount of debt outstanding of $223.6 million bears interest at variable rates. An increase of 100 basis points in annual interest rates for this variable-rate debt would increase our annual interest costs by $0.7 million.
NEW ACCOUNTING STANDARDS
Refer to Note 1 for discussion of new accounting standards.
OFF-BALANCE SHEET ARRANGEMENTS
Refer to Note 9 for discussion of our off-balance sheet arrangements.
CAUTIONARY STATEMENT
Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements in which we discuss our future performance. Forward-looking statements are all statements other than statements of historical fact, such as statements regarding the implementation and potential results of our active development plan, and projections or expectations related to operational and financial performance or liquidity, reimbursements for infrastructure costs, financing and regulatory matters, development plans and sales of properties, including Amarra Drive lots and exploring opportunities to sell West Killeen Market and the retail complex in Barton Creek Village, leasing activities, timeframes for development, construction and completion of our projects, capital expenditures, possible joint venture or other arrangements, our projections with respect to our obligations under the master lease agreements entered into in connection with the sale of The Oaks at Lakeway in 2017, and other plans and objectives of management for future operations and activities, and future dividend payments. The words “anticipate,” “may,” “can,” “plan,” “believe,” “potential,” “estimate,” “expect,” “project,” “intend,” “likely,” “will,” “should,” “to be” and any similar expressions and/or statements that are not historical facts are intended to identify those assertions as forward-looking statements.
Under our Comerica credit facility, we are not permitted to pay dividends on common stock without Comerica’s prior written consent, which was obtained in connection with the special cash dividend paid in April 2017, but not required to be granted by Comerica in the future. Theand 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 credit facility,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 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.
Of the $37.7 million in consolidated cash and cash equivalents at December 31, 2022, $7.7 million held at certain consolidated subsidiaries is subject to restrictions on distribution to the parent company pursuant to project loan agreements.
Our project loans are generally secured by all or substantially all of the assets of the project, and our Comerica Bank revolving credit facility is secured by substantially all of our assets other than those encumbered by separate project financing. In addition, we are typically required to guarantee the payment of our project loans, in some cases until certain development milestones and/or financial conditions are met, except for the Jones Crossing loan guarantees, which is generally limited to non-recourse carve-out obligations. Refer to Note 6 for additional discussion.
Our construction loans typically permit advances only in accordance with budgeted allocations and subject to specified conditions, and require lender consent for changes to plans and specifications exceeding specified amounts. If the lender deems undisbursed proceeds insufficient to meet costs of completing the project, the lender may decline to make additional advances until the borrower deposits with the lender sufficient additional funds to cover the deficiency the lender deems to exist. The inability to satisfy a condition to receive advances for a specified time period after lender’s refusal, or the failure to complete a project by a specified completion date, may be an event of default, subject to exceptions for force majeure.
DEBT MATURITIES AND OTHER CONTRACTUAL OBLIGATIONS
The following table summarizes our total debt maturities based on the principal amounts outstanding as of December 31, 2022 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | Thereafter | | Total |
Comerica Bank revolving credit facility a | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Jones Crossing loan | — | | | — | | | — | | | 24,500 | | | | | — | | | 24,500 | |
The Annie B land loan b | 14,000 | | | — | | | — | | | — | | | — | | | — | | | 14,000 | |
New Caney land loan c | 4,050 | | | — | | | — | | | — | | | — | | | — | | | 4,050 | |
| Construction loans: | | | | | | | | | | | | | |
Kingwood Place d | 27,617 | | | — | | | — | | | — | | | — | | | — | | | 27,617 | |
| Lantana Place | 108 | | | 277 | | | 300 | | | 321 | | | 20,873 | | | — | | | 21,879 | |
| The Saint June | — | | | 14,150 | | | — | | | — | | | — | | | — | | | 14,150 | |
| West Killeen Market | 68 | | | 72 | | | 5,176 | | | — | | | — | | | — | | | 5,316 | |
| Magnolia Place | — | | | 7,013 | | | — | | | — | | | — | | | — | | | 7,013 | |
Amarra Villas credit facility e | — | | | 5,366 | | | — | | | — | | | — | | | — | | | 5,366 | |
| Total | $ | 45,843 | | | $ | 26,878 | | | $ | 5,476 | | | $ | 24,821 | | | $ | 20,873 | | | $ | — | | | $ | 123,891 | |
a.In March 2023, we entered into a modification of the revolving credit facility, which extended the maturity date of the revolving credit facility to March 27, 2025. Refer to Note 6 for further information.
b.In March 2023, we extended the maturity date of this loan to March 1, 2024.
c.In March 2023, we repaid this loan.
d.The maturity date is December 6, 2023. We have the option to extend the maturity date for one additional 12-month period, subject to certain debt service coverage conditions.
e.In March 2023, we made a $2.2 million principal payment on this credit facility upon the closing of a sale of one of the Amarra Villas homes.
As discussed above, in February 2023, we entered into the Holden Hills construction loan for $26.1 million due February 8, 2026. Refer to Note 11 for further discussion.
We had firm commitments totaling approximately $75 million at December 31, 2022 related to Amarra Villas, Magnolia Place, The Saint June and The Saint George development projects. In addition, commitments for construction of the first phase of Holden Hills total approximately $40 million, including the Tecoma Improvements. We have construction loans, as well as remaining equity capital contributed to The Saint George and Holden Hills limited partnerships, in place to fund these commitments except for 60 percent of the cost of the Tecoma Improvements, or approximately $9 million, for which Stratus has agreed to reimburse the Holden Hills limited partnership. Refer to Items 1. and 2. Business and Properties and Note 11 for further discussion of the Holden Hills project and the Tecoma Improvements. Refer to Note 9 for further discussion of future cash requirements.
We project that we will be able to meet our debt service and other cash obligations for at least the next 12 months. For our development projects with firm commitments, we have construction loans, as well as remaining equity capital allocated to the project, in place to fund the projected cash outlays for these projects over the next 12 months. Our stabilized commercial properties are projected to generate positive cash flow after debt service over the next 12 months. For other projected pre-development costs, much of which are discretionary, and for projected general and administrative expenses, we have cash on hand and availability under our revolving credit facility (which was recently extended to March 27, 2025, as stated above) in amounts expected to be sufficient to fund these costs. For future potential significant development projects, we would not plan to enter into commitments to incur material costs for the projects until we obtain what we project to be adequate financing to cover anticipated cash outlays. As discussed under “Business Strategy” above, our main source of revenue and cash flow is expected to come from sales of our properties to third parties or distributions from joint ventures, 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 rental revenue 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, No assurances can be given that the results anticipated by our projections will occur. Refer to Note 6 and “Risk Factors” included in Part I, Item 1A. for further discussion.
Our ability to meet our cash obligations over the longer term 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.
NEW ACCOUNTING STANDARDS
No new accounting pronouncements adopted or issued by the Financial Accounting Standards Board had or may have a material impact on our consolidated financial statements.
OFF-BALANCE SHEET ARRANGEMENTS
Refer to Note 9 for discussion of our off-balance sheet arrangements.
CAUTIONARY STATEMENT
Management’s Discussion and Analysis of Financial Condition and Results of Operations 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 the impact of inflation and estimates regardinginterest 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 anticipated effectsAustin and Texas real estate markets, the planning, financing, development, construction, completion and stabilization of U.S.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 reform. Theserates, 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, the impacts of the ongoing COVID-19 pandemic and any future major public health crisis, and future cash returns to stockholders, including the timing and amount of repurchases under our share 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 and estimates are basedintended to identify those assertions as forward-looking statements.
Under our Comerica Bank debt agreements, we are not permitted to repurchase our common stock in excess of $1.0 million or pay dividends on our current interpretationcommon stock without Comerica Bank's prior written consent, which was obtained in connection with the special cash dividend and share repurchase program. Any future declaration of this legislation, which may change as a resultdividends or decision to repurchase our common stock is at the discretion of additional implementation guidance, changesour Board, subject to restrictions under our Comerica Bank debt agreements, and will depend on our financial results, cash requirements, projected compliance with covenants in assumptions,our debt agreements, outlook and potentialother factors deemed relevant by our Board. Our future refinementsdebt agreements, future refinancings of or revisionsamendments to calculations.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, our ability to refinanceimplement our business strategy successfully, including our ability to develop, construct and servicesell or lease properties on terms our debtBoard considers acceptable, increases in operating and construction costs, including real estate taxes and the cost of building materials and labor, increases in inflation and interest rates, supply chain constraints, tightening bank credit, defaults by contractors and subcontractors, declines in the market value of our assets, market conditions or corporate developments that could preclude, impair or delay any opportunities with respect to plans to sell, recapitalize or refinance properties, a decrease in the demand for real estate in select markets in Texas where we operate, particularly in Austin, changes in economic, market, tax and business conditions, including as a result of the war in Ukraine, or potential U.S. or local economic downturn or recession, the availability and terms of financing for development projects and other corporate purposes, the failure of any bank in which we deposit our funds, the ongoing COVID-19 pandemic and any future major public health crisis, our ability to sell properties at pricescollect anticipated rental
payments and close projected asset sales, loss of key personnel, our Board considers acceptable, a decrease in the demand for real estate in the Austin, Texas areaability to enter into and maintain joint ventures, partnerships, or other strategic relationships, including risks associated with such joint ventures, our ability to pay or refinance our debt, extend maturity dates of our loans or comply with or obtain waivers of financial and other select Texas markets where Stratus operates,covenants in debt agreements and to meet other cash obligations, eligibility for and potential receipt and timing of receipt of MUD reimbursements, industry risks, changes in economic and business conditions, reductions in discretionary spending by consumers and corporations,buyer preferences, potential additional impairment charges, competition from other real estate developers, hotel operators and/or entertainment venue operators and promoters, the termination of sales contracts or letters of intent due to, among other factors, the failure of one or more closing conditions or market changes, the failure to attract customers for our developments or such customers' failure to satisfy their purchase commitments, our ability to secure qualifying tenants for the space subject to the master lease agreements entered into in connection with the sale of The Oaks at Lakeway in 2017obtain various entitlements and to assign such leases to the purchaser and remove the corresponding property from the master leases, increases in interest rates, declines in the market value of our assets, increases in operating costs, including real estate taxes and the cost of construction materials, changes in external perception of the W Austin Hotel, changes in consumer preferences,permits, 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, environmental and litigation risks, the failure to attract buyers or tenants for our developments or such buyers’ or tenants’ failure to satisfy their purchase commitments or leasing obligations, cybersecurity incidents and other factors described in more detail under the heading “Risk Factors” in Part I, Item 1A. of this Form 10-K.
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 do not intendundertake no obligation to update our forward-looking statements, more frequently than quarterlywhich speak only as of the date made, notwithstanding any changes in our assumptions, business plans, actual experience, or other changes, and we undertake no obligation to update any forward-looking statements.changes.
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
| | | | | |
| Page Reference |
| Management’s Annual Report on Internal Control Over Financial Reporting | |
| Report of Independent Registered Public Accounting Firm (PCAOB ID: 596) | |
| Report of Independent Registered Public Accounting Firm (PCAOB ID: 5127) | |
| Consolidated Balance Sheets as of December 31, 2022 and 2021 | |
| Consolidated Statements of Comprehensive Income for each of the two years in the period ended December 31, 2022 | |
| Consolidated Statements of Cash Flows for each of the two years in the period ended December 31, 2022 | |
| Consolidated Statements of Equity for each of the two years in the period ended December 31, 2022 | |
| Notes to the Consolidated Financial Statements | |
MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Stratus Properties Inc.’s (the Company’s) management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
•Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the Company’s assets;
•Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
•Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the Company'sCompany’s financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company'sCompany’s management, including its principal executive officer and principal financial officer, assessed the effectiveness of its internal control over financial reporting as of the end of the fiscal year covered by this annual report on Form 10-K. In making this assessment, the Company'sCompany’s management used the criteria set forth in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). Based on its assessment, management concluded that, as of December 31, 2017,2022, the Company’s internal control over financial reporting is effective based on the COSO criteria.
BKM Sowan Horan, LLP, an independent registered public accounting firm who audited the Company’s consolidated financial statements included in this Form 10-K, has issued an attestation report on the Company’s internal control over financial reporting, which is included herein.
|
| | | | |
| /s/ William H. Armstrong III | /s/ Erin D. Pickens |
| William H. Armstrong III | Erin D. Pickens |
| Chairman of the Board, President | Senior Vice President |
| and Chief Executive Officer | and Chief Financial Officer |
| |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
StockholdersStratus Properties Inc.
Austin, Texas
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of Stratus Properties Inc.
Opinion on Internal Control over Financial Reporting
We have audited Stratus Properties Inc.’s and subsidiaries (the Company’s) internal control over financial reporting“Company”) as of December 31, 2017, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control-Integrated Framework (2013) issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets2022, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows the year ended December 31, 2022, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022, and our report dated March 16, 2018, expressed an unqualified opinion.the results of its operations and its cash flows for the year ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over
These consolidated financial reporting, and for its assessmentstatements are the responsibility of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting.Company’s management. Our responsibility is to express an opinion on the Company’s internal control overthese consolidated financial reportingstatements based on our audit. We are a public accounting firm registered with the PCAOBPublic Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effectivethe consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting was maintained in all material respects. Ourreporting. As part of our audit of internal control over financial reporting included obtainingwe are required to obtain an understanding of internal control over financial reporting assessingbut not for the risk that a material weakness exists, and testing and evaluatingpurpose of expressing an opinion on the design and operating effectiveness of the Company’s internal control basedover financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the assessed risk.amounts and disclosures in the consolidated financial statements. Our audit also included performing such other proceduresevaluating the accounting principles used and significant estimates made by management, as we considered necessary inwell as evaluating the circumstances.overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reportingCritical Audit Matter
The critical audit matter communicated below is a process designed to provide reasonable assurance regardingmatter arising from the reliabilitycurrent period audit of financial reporting and the preparation ofconsolidated financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertainwas communicated or required to be communicated to the maintenanceaudit committee and that: (1) related to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of recordsa critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
Impairment assessment on long-lived assets - Refer to Notes 1 and 3 to the consolidated financial statements
The Company’s long-lived assets consist primarily of held for sale real estate assets of $1,773,000, real estate under development of $239,278,000, real estate held for investment, net of $92,377,000 and land available for development of $39,855,000. The real estate assets are individually reviewed for impairment whenever events or changes in circumstances indicate that in reasonable detail, accurately and fairly reflect the transactions and dispositionscarrying amount may not be recoverable. For real estate held for sale, if estimated fair value less costs to sell is less than the related carrying amount, a reduction of the assetsasset’s carrying value to fair value less costs to sell is required. For real estate under development, land available for development and real estate held for investment, an impairment exists when the carrying amount of an asset exceeds the aggregate projected future cash flows over the anticipated holding period on an undiscounted basis. An impairment loss is measured based on the excess of the company; (2) provide reasonable assurance that transactionsproperty’s carrying amount over its fair value. The Company’s undiscounted cash flows are recordedsubjective and are based, in part, on estimates and assumptions such as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles,real estate prices, sales pace, sales and that receiptsmarketing costs, infrastructure development costs and expenditures ofcapitalization rates. In the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ BKM Sowan Horan, LLP
Austin, Texas
March 16, 2018
event a property’s carrying amount is not recoverable, the Company determines fair value based on appraised values, adjusted for estimated costs to sell. Evaluation of appraisals is subjective and is based, in part, on estimates and assumptions such as real estate prices, market rental rates, capitalization rates, and discount rates that could differ materially from actual results.
Significant judgment is exercised by management in evaluating the recoverability and fair value of the long-lived assets noted above. Given these factors, the related audit effort in evaluating these management judgments was challenging, subjective, and complex and required a high degree of auditor judgment.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the undiscounted cash flow analyses and appraisals included, among other things, the following:
–We obtained an understanding and evaluated the design of internal controls over management’s evaluation of the recoverability of the carrying amount of long-lived assets based on undiscounted cash flows and the measurement of impairment based on fair value estimates derived from appraisals less estimated costs to sell.
–We evaluated the reasonableness of significant assumptions in the undiscounted cash flow analyses and appraisals, including estimates of real estate prices, market rental rates, capitalization rates, and discount rates, for properties with impairment indicators. In addition, we tested the mathematical accuracy of the undiscounted cash flow analyses.
–We evaluated the reasonableness of management’s undiscounted cash flow analyses by comparing management’s projections to earlier projections for the same property, current year results of similar properties, and external market sources.
–We evaluated whether the assumptions in any of the analyses above were consistent with evidence obtained in other areas of the audit.
/s/ CohnReznick LLP
We have served as the Company’s auditor since 2022.
Dallas, Texas
March 31, 2023
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors andStockholders
Stockholders of Stratus Properties Inc.
Austin, Texas
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheetssheet of Stratus Properties Inc. and subsidiaries (the Company) as of December 31, 2017 and 2016,2021, and the related consolidated statementsstatement of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year periodyear ended December 31, 2017,2021, and the related notes and schedule (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016,2021, and the results of its operations and its cash flows for each of the years in the three-year periodyear ended December 31, 2017,2021, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 16, 2018, expressed an unqualified opinion.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits.audit. We are a public accounting firm registered with the PCAOBPublic Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our auditsaudit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our auditsaudit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our auditsaudit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provideaudit provides a reasonable basis for our opinion.
/s/ BKM Sowan Horan, LLP
We have served as the Company’s auditor since 20102010.
Austin, Texas
March 16, 201831, 2022
STRATUS PROPERTIES INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Par Value)
|
| | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
| ASSETS | | | |
| Cash and cash equivalents | $ | 14,611 |
| | $ | 13,597 |
|
| Restricted cash | 24,779 |
| | 11,892 |
|
| Real estate held for sale | 22,612 |
| | 21,236 |
|
| Real estate under development | 118,484 |
| | 111,373 |
|
| Land available for development | 14,804 |
| | 19,153 |
|
| Real estate held for investment, net | 188,390 |
| | 239,719 |
|
| Deferred tax assets | 11,461 |
| | 17,223 |
|
| Other assets | 10,852 |
| | 17,982 |
|
| Total assets | $ | 405,993 |
| | $ | 452,175 |
|
| | | | |
| LIABILITIES AND EQUITY | | | |
| Liabilities: | | | |
| Accounts payable | $ | 22,809 |
| | $ | 6,734 |
|
| Accrued liabilities, including taxes | 13,429 |
| | 13,240 |
|
| Debt | 221,470 |
| | 291,102 |
|
| Deferred gain | 11,320 |
| | — |
|
| Other liabilities | 9,575 |
| | 10,073 |
|
| Total liabilities | 278,603 |
| | 321,149 |
|
| | | | |
| Commitments and contingencies (Notes 6, 9 and 11) |
| |
|
| | | | |
| Equity: | | | |
| Stockholders’ equity: | | | |
| Common stock, par value of $0.01 per share, 150,000 shares authorized, | | | |
| 9,250 and 9,203 shares issued, respectively and | | | |
| 8,134 and 8,098 shares outstanding, respectively | 93 |
| | 92 |
|
| Capital in excess of par value of common stock | 185,395 |
| | 192,762 |
|
| Accumulated deficit | (37,121 | ) | | (41,143 | ) |
| Common stock held in treasury, 1,117 shares and 1,105 shares | | | |
| at cost, respectively | (21,057 | ) | | (20,760 | ) |
| Total stockholders’ equity | 127,310 |
| | 130,951 |
|
| Noncontrolling interests in subsidiaries | 80 |
| | 75 |
|
| Total equity | 127,390 |
| | 131,026 |
|
| Total liabilities and equity | $ | 405,993 |
| | $ | 452,175 |
|
| | | | | | | | | | | |
| | December 31, |
| | 2022 | | 2021 |
| ASSETS | | | |
| Cash and cash equivalents | $ | 37,666 | | | $ | 24,229 | |
| Restricted cash | 8,043 | | | 18,294 | |
| Real estate held for sale | 1,773 | | | 1,773 | |
| Real estate under development | 239,278 | | | 181,224 | |
| Land available for development | 39,855 | | | 40,659 | |
| Real estate held for investment, net | 92,377 | | | 90,284 | |
| Lease right-of-use assets | 10,631 | | | 10,487 | |
| Deferred tax assets | 38 | | | 6,009 | |
| Other assets | 15,479 | | | 17,214 | |
| Assets held for sale, including discontinued operations | — | | | 151,053 | |
| Total assets | $ | 445,140 | | | $ | 541,226 | |
| | | |
| LIABILITIES AND EQUITY | | | |
| Liabilities: | | | |
| Accounts payable | $ | 15,244 | | | $ | 14,118 | |
| Accrued liabilities, including taxes | 7,049 | | | 22,069 | |
| Debt | 122,765 | | | 106,648 | |
| Lease liabilities | 14,848 | | | 13,986 | |
| Deferred gain | 3,519 | | | 4,801 | |
| Other liabilities | 9,642 | | | 17,894 | |
| Liabilities held for sale, including discontinued operations | — | | | 153,097 | |
| Total liabilities | 173,067 | | | 332,613 | |
| | | |
| Commitments and contingencies (Notes 7 and 9) | | | |
| | | |
| Equity: | | | |
| Stockholders’ equity: | | | |
Common stock, par value of $0.01 per share, 150,000 shares authorized, 9,439 and 9,388 shares issued, respectively and 7,991 and 8,245 shares outstanding, respectively | 94 | | | 94 | |
| Capital in excess of par value of common stock | 195,773 | | | 188,759 | |
| Retained earnings (accumulated deficit) | 41,452 | | | (8,963) | |
| Common stock held in treasury, 1,448 shares and 1,143 shares at cost, respectively | (30,071) | | | (21,753) | |
| Total stockholders’ equity | 207,248 | | | 158,137 | |
| Noncontrolling interests in subsidiaries | 64,825 | | | 50,476 | |
| Total equity | 272,073 | | | 208,613 | |
| Total liabilities and equity | $ | 445,140 | | | $ | 541,226 | |
The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.
STRATUS PROPERTIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONSCOMPREHENSIVE INCOME
(In Thousands, Except Per Share Amounts)
| | | | Years Ended December 31, | | Years Ended December 31, |
| | 2017 | | 2016 | | 2015 | | 2022 | | 2021 |
| Revenues: | | | | | | Revenues: | | | |
| Real estate operations | $ | 11,001 |
| | $ | 10,719 |
| | $ | 14,277 |
| Real estate operations | $ | 24,744 | | | $ | 8,449 | |
| Leasing operations | 7,981 |
| | 9,682 |
| | 5,641 |
| Leasing operations | 12,754 | | | 19,787 | |
| Hotel | 38,360 |
| | 40,418 |
| | 41,346 |
| |
| Entertainment | 22,998 |
| | 19,522 |
| | 19,607 |
| |
| Total revenues | 80,340 |
| | 80,341 |
| | 80,871 |
| Total revenues | 37,498 | | | 28,236 | |
| Cost of sales: | | | | | | Cost of sales: | | | |
| Real estate operations | 10,378 |
| | 9,702 |
| | 10,425 |
| Real estate operations | 23,761 | | | 9,733 | |
| Leasing operations | 4,797 |
| | 4,903 |
| | 2,772 |
| Leasing operations | 4,439 | | | 9,030 | |
| Hotel | 28,478 |
| | 29,090 |
| | 30,702 |
| |
| Entertainment | 17,121 |
| | 15,223 |
| | 15,169 |
| |
| Depreciation | 7,853 |
| | 8,082 |
| | 8,743 |
| |
| Depreciation and amortization | | Depreciation and amortization | 3,586 | | | 5,449 | |
| Total cost of sales | 68,627 |
| | 67,000 |
| | 67,811 |
| Total cost of sales | 31,786 | | | 24,212 | |
| General and administrative expenses | 11,401 |
| | 12,164 |
| | 8,057 |
| General and administrative expenses | 17,567 | | | 24,509 | |
| Profit participation in sale of The Oaks at Lakeway | 2,538 |
| | — |
| | — |
| |
| Impairment of real estate | | Impairment of real estate | 720 | | | 1,825 | |
| Gain on sales of assets | (25,463 | ) | | — |
| | (20,729 | ) | Gain on sales of assets | (4,812) | | | (105,970) | |
| Total | 57,103 |
| | 79,164 |
| | 55,139 |
| Total | 45,261 | | | (55,424) | |
| Operating income | 23,237 |
| | 1,177 |
| | 25,732 |
| |
| Operating (loss) income | | Operating (loss) income | (7,763) | | | 83,660 | |
| Interest expense, net | (6,742 | ) | | (9,408 | ) | | (4,065 | ) | Interest expense, net | (15) | | | (3,193) | |
| Gain (loss) on interest rate derivative instruments | 293 |
| | 218 |
| | (724 | ) | |
| Loss on early extinguishment of debt | (532 | ) | | (837 | ) | | — |
| |
| Net gain on extinguishment of debt | | Net gain on extinguishment of debt | — | | | 1,529 | |
| Other income, net | 1,581 |
| | 21 |
| | 309 |
| Other income, net | 1,103 | | | 65 | |
| Income (loss) before income taxes and equity in unconsolidated affiliates' (loss) income | 17,837 |
| | (8,829 | ) | | 21,252 |
| |
| Equity in unconsolidated affiliates' (loss) income | (49 | ) | | 51 |
| | (1,299 | ) | |
| (Provision for) benefit from income taxes | (13,904 | ) | | 2,779 |
| | (5,576 | ) | |
| Income (loss) from continuing operations | 3,884 |
| | (5,999 | ) | | 14,377 |
| |
| Income from discontinued operations, net of taxes | — |
| | — |
| | 3,218 |
| |
| Net income (loss) | 3,884 |
| | (5,999 | ) | | 17,595 |
| |
| Net income attributable to noncontrolling interests in subsidiaries | (5 | ) | | — |
| | (5,418 | ) | |
| Net income (loss) attributable to common stockholders | $ | 3,879 |
| | $ | (5,999 | ) | | $ | 12,177 |
| |
| Net (loss) income before income taxes and equity in unconsolidated affiliate's loss | | Net (loss) income before income taxes and equity in unconsolidated affiliate's loss | (6,675) | | | 82,061 | |
| Provision for income taxes | | Provision for income taxes | (389) | | | (12,577) | |
| Equity in unconsolidated affiliate's loss | | Equity in unconsolidated affiliate's loss | (13) | | | (27) | |
| Net (loss) income from continuing operations | | Net (loss) income from continuing operations | (7,077) | | | 69,457 | |
| Net income (loss) from discontinued operations | | Net income (loss) from discontinued operations | 96,820 | | | (6,208) | |
| Net income and total comprehensive income | | Net income and total comprehensive income | 89,743 | | | 63,249 | |
| Total comprehensive loss (income) attributable to noncontrolling interests | | Total comprehensive loss (income) attributable to noncontrolling interests | 683 | | | (5,855) | |
| Net income and total comprehensive income attributable to common stockholders | | Net income and total comprehensive income attributable to common stockholders | $ | 90,426 | | | $ | 57,394 | |
| | | | | | | | | | |
| Basic net income (loss) per share attributable to common stockholders: | | | | | | |
| Basic net (loss) income per share attributable to common stockholders: | | Basic net (loss) income per share attributable to common stockholders: | | | |
| Continuing operations | $ | 0.48 |
| | $ | (0.74 | ) | | $ | 1.11 |
| Continuing operations | $ | (0.78) | | | $ | 7.72 | |
| Discontinued operations | — |
| | — |
| | 0.40 |
| Discontinued operations | 11.77 | | | (0.75) | |
| Basic net income (loss) per share attributable to common stockholders | $ | 0.48 |
| | $ | (0.74 | ) | | $ | 1.51 |
| |
| | | | | | | | $ | 10.99 | | | $ | 6.97 | |
| Diluted net income (loss) per share attributable to common stockholders: | | | | | | |
| | Diluted net (loss) income per share attributable to common stockholders: | | Diluted net (loss) income per share attributable to common stockholders: | |
| Continuing operations | $ | 0.47 |
| | $ | (0.74 | ) | | $ | 1.11 |
| Continuing operations | $ | (0.78) | | | $ | 7.65 | |
| Discontinued operations | — |
| | — |
| | 0.40 |
| Discontinued operations | 11.77 | | | (0.75) | |
| Diluted net income (loss) per share attributable to common stockholders | $ | 0.47 |
| | $ | (0.74 | ) | | $ | 1.51 |
| |
| | | $ | 10.99 | | | $ | 6.90 | |
| | | | | | | | | | |
| Weighted-average shares of common stock outstanding: | | | | | | Weighted-average shares of common stock outstanding: | | | |
| Basic | 8,122 |
| | 8,089 |
| | 8,058 |
| Basic | 8,228 | | | 8,236 | |
| Diluted | 8,171 |
| | 8,089 |
| | 8,091 |
| Diluted | 8,228 | | | 8,313 | |
| | | | | | | | | | |
| Dividends declared per share of common stock | $ | 1.00 |
| | $ | — |
| | $ | — |
| Dividends declared per share of common stock | $ | 4.67 | | | $ | — | |
The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.
STRATUS PROPERTIES INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In Thousands)
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | | | | | |
| Net income (loss) | $ | 3,884 |
| | $ | (5,999 | ) | | $ | 17,595 |
|
| | | | | | |
| Other comprehensive income, net of taxes: | | | | | |
| Income on interest rate swap agreement | — |
| | — |
| | 458 |
|
| Other comprehensive income | — |
| | — |
| | 458 |
|
| | | | | | |
| Total comprehensive income (loss) | 3,884 |
| | (5,999 | ) | | 18,053 |
|
| Total comprehensive income attributable to noncontrolling interests | (5 | ) | | — |
| | (5,597 | ) |
| Total comprehensive income (loss) attributable to common stockholders | $ | 3,879 |
| | $ | (5,999 | ) | | $ | 12,456 |
|
| | | | | | |
The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.
STRATUS PROPERTIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
|
| | | | | | | | | | | | |
| | | Years Ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| Cash flow from operating activities: | | | | | | |
| Net income (loss) | | $ | 3,884 |
| | $ | (5,999 | ) | | $ | 17,595 |
|
| Adjustments to reconcile net income (loss) to net cash provided by (used in) | | | | | | |
| operating activities: | | | | | | |
| Depreciation | | 7,853 |
| | 8,082 |
| | 8,743 |
|
| Cost of real estate sold | | 5,774 |
| | 4,899 |
| | 6,465 |
|
| Gain on sale of 7500 Rialto, net of tax | | — |
| | — |
| | (3,218 | ) |
| Gain on sales of assets | | (25,463 | ) | | — |
| | (20,729 | ) |
| U.S. tax reform charge | | 7,580 |
| | — |
| | — |
|
| (Gain) loss on interest rate derivative contracts | | (293 | ) | | (218 | ) | | 724 |
|
| Loss on early extinguishment of debt | | 532 |
| | 837 |
| | — |
|
| Debt issuance cost amortization and stock-based compensation | | 1,573 |
| | 1,681 |
| | 1,436 |
|
| Equity in unconsolidated affiliates' loss (income) | | 49 |
| | (51 | ) | | 1,299 |
|
| (Decrease) increase in deposits | | (1,322 | ) | | 584 |
| | 450 |
|
| Deferred income taxes, excluding U.S. tax reform charge | | (1,675 | ) | | (1,894 | ) | | 2,118 |
|
| Purchases and development of real estate properties | | (14,395 | ) | | (14,575 | ) | | (26,237 | ) |
| Municipal utility districts reimbursements | | 13,799 |
| | 12,302 |
| | 5,307 |
|
| Decrease (increase) in other assets | | 2,231 |
| | (6,211 | ) | | (2,983 | ) |
| Increase (decrease) in accounts payable, accrued liabilities and other | | 10,126 |
| | (3,157 | ) | | 7,240 |
|
| Net cash provided by (used in) operating activities | | 10,253 |
| | (3,720 | ) | | (1,790 | ) |
| | | | | | | |
| Cash flow from investing activities: | | | | | | |
| Capital expenditures | | (34,079 | ) | | (28,215 | ) | | (55,178 | ) |
| Net proceeds from sales of assets | | 117,261 |
| | — |
| | 43,266 |
|
| Payments on master lease obligations | | (2,196 | ) | | — |
| | — |
|
| Site development escrow deposit and other, net | | (10,405 | ) | | (32 | ) | | (678 | ) |
| Net cash provided by (used in) investing activities | | 70,581 |
| | (28,247 | ) | | (12,590 | ) |
| | | | | | | |
| Cash flow from financing activities: | | | | | | |
| Borrowings from credit facility | | 47,200 |
| | 32,969 |
| | 42,326 |
|
| Payments on credit facility | | (67,981 | ) | | (19,573 | ) | | (32,263 | ) |
| Borrowings from project loans | | 15,793 |
| | 179,957 |
| | 99,670 |
|
| Payments on project and term loans | | (64,761 | ) | | (163,120 | ) | | (43,096 | ) |
| Purchase of noncontrolling interest | | — |
| | — |
| | (61,991 | ) |
| Cash dividend paid | | (8,133 | ) | | — |
| | — |
|
| Stock-based awards net (payments) proceeds | | (235 | ) | | (368 | ) | | 1,634 |
|
| Noncontrolling interests distributions | | — |
| | — |
| | (4,244 | ) |
| Financing costs | | (1,703 | ) | | (1,337 | ) | | (265 | ) |
| Net cash (used in) provided by financing activities | | (79,820 | ) | | 28,528 |
| | 1,771 |
|
| Net increase (decrease) in cash and cash equivalents | | 1,014 |
| | (3,439 | ) | | (12,609 | ) |
| Cash and cash equivalents at beginning of year | | 13,597 |
| | 17,036 |
| | 29,645 |
|
| Cash and cash equivalents at end of year | | $ | 14,611 |
| | $ | 13,597 |
| | $ | 17,036 |
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2022 | | 2021 |
| Cash flow from operating activities: | | | |
| Net income | $ | 89,743 | | | $ | 63,249 | |
| Adjustments to reconcile net income to net cash used in operating activities: | | | |
| Depreciation and amortization | 3,586 | | | 9,964 | |
| Cost of real estate sold | 15,596 | | | 4,056 | |
| Impairment of real estate | 720 | | | 1,825 | |
| Gain on sale of discontinued operations | (119,695) | | | — | |
| Gain on sales of assets | (4,812) | | | (105,970) | |
| Net gain on extinguishment of debt | — | | | (1,529) | |
| Debt issuance cost amortization and stock-based compensation | 2,824 | | | 2,007 | |
| Equity in unconsolidated affiliates’ loss | 13 | | | 27 | |
| Deferred income taxes | 5,971 | | | (5,965) | |
| Purchases and development of real estate properties | (24,454) | | | (52,772) | |
| Write-off of capitalized hotel remodel costs | — | | | 287 | |
| Decrease (increase) in other assets | 3,805 | | | (2,212) | |
| (Decrease) increase in accounts payable, accrued liabilities and other | (28,557) | | | 33,423 | |
| Net cash used in operating activities | (55,260) | | | (53,610) | |
| | | |
| Cash flow from investing activities: | | | |
| Capital expenditures | (54,813) | | | (19,562) | |
| Proceeds from sale of discontinued operations | 105,813 | | | — | |
| Proceeds from sales of assets | — | | | 209,947 | |
| Payments on master lease obligations | (989) | | | (1,501) | |
| Other, net | (8) | | | 56 | |
| Net cash provided by investing activities | 50,003 | | | 188,940 | |
| | | |
| Cash flow from financing activities: | | | |
| Borrowings from revolving credit facility | 30,000 | | | 39,700 | |
| Payments on revolving credit facility | (30,000) | | | (83,004) | |
| Borrowings from project loans | 33,163 | | | 42,661 | |
| Payments on project and term loans | (18,831) | | | (130,723) | |
| Payment of dividends | (38,693) | | | — | |
| Finance lease principal paydown | (4) | | | — | |
| Stock-based awards net payments | (452) | | | (132) | |
| Distributions to noncontrolling interests | — | | | (12,529) | |
| Purchases of treasury stock | (7,866) | | | — | |
| Noncontrolling interests' contributions | 15,032 | | | 46,300 | |
| Financing costs | (1,522) | | | (1,647) | |
| Net cash used in financing activities | (19,173) | | | (99,374) | |
| Net (decrease) increase in cash, cash equivalents and restricted cash | (24,430) | | | 35,956 | |
| Cash, cash equivalents and restricted cash at beginning of year | 70,139 | | | 34,183 | |
| Cash, cash equivalents and restricted cash at end of year | $ | 45,709 | | | $ | 70,139 | |
The accompanying Notes to Consolidated Financial Statements, which include information regarding noncash transactions, are an integral part of these consolidated financial statements.
STRATUS PROPERTIES INC.
CONSOLIDATED STATEMENTS OF EQUITY
(In Thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Stratus Stockholders’ Equity | | | | |
| | Common Stock | | | | | | | | Common Stock Held in Treasury | | | | | | |
| | Number of Shares | | At Par Value | | Capital in Excess of Par Value | | Accum- ulated Deficit | | Accum- ulated Other Compre-hensive Loss | | Number of Shares | | At Cost | | Total Stockholders’ Equity | | Noncontrolling Interests in Subsidiaries | | Total Equity |
| Balance at December 31, 2014 | 9,116 |
| | $ | 91 |
| | $ | 204,269 |
| | $ | (47,321 | ) | | $ | (279 | ) | | 1,081 |
| | $ | (20,317 | ) | | $ | 136,443 |
| | $ | 38,643 |
| | $ | 175,086 |
|
| Exercised and issued stock-based awards | 44 |
| | — |
| | 32 |
| | — |
| | — |
| | — |
| | — |
| | 32 |
| | — |
| | 32 |
|
| Stock-based compensation | — |
| | — |
| | 528 |
| | — |
| | — |
| | — |
| | — |
| | 528 |
| | — |
| | 528 |
|
| Tax benefit for stock-based awards | — |
| | — |
| | 1,746 |
| | — |
| | — |
| | — |
| | — |
| | 1,746 |
| | — |
| | 1,746 |
|
| Tender of shares for stock-based awards | — |
| | — |
| | — |
| | — |
| | — |
| | 12 |
| | (153 | ) | | (153 | ) | | — |
| | (153 | ) |
| Noncontrolling interests distributions | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (4,244 | ) | | (4,244 | ) |
| Purchase of noncontrolling interest in consolidated subsidiary, net of taxes | — |
| | — |
| | (14,453 | ) | | — |
| | — |
| | — |
| | — |
| | (14,453 | ) | | (39,921 | ) | | (54,374 | ) |
| Total comprehensive income | — |
| | — |
| | — |
| | 12,177 |
| | 279 |
| | — |
| | — |
| | 12,456 |
| | 5,597 |
| | 18,053 |
|
| Balance at December 31, 2015 | 9,160 |
| | 91 |
| | 192,122 |
| | (35,144 | ) | | — |
| | 1,093 |
| | (20,470 | ) | | 136,599 |
| | 75 |
| | 136,674 |
|
| Exercised and issued stock-based awards | 43 |
| | 1 |
| | (1 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Stock-based compensation | — |
| | — |
| | 719 |
| | — |
| | — |
| | — |
| | — |
| | 719 |
| | — |
| | 719 |
|
| Tax provision for stock-based awards | — |
| | — |
| | (78 | ) | | — |
| | — |
| | — |
| | — |
| | (78 | ) | | — |
| | (78 | ) |
| Tender of shares for stock-based awards | — |
| | — |
| | — |
| | — |
| | — |
| | 12 |
| | (290 | ) | | (290 | ) | | — |
| | (290 | ) |
| Total comprehensive loss | — |
| | — |
| | — |
| | (5,999 | ) | | — |
| | — |
| | — |
| | (5,999 | ) | | — |
| | (5,999 | ) |
| Balance at December 31, 2016 | 9,203 |
| | 92 |
| | 192,762 |
| | (41,143 | ) | | — |
| | 1,105 |
| | (20,760 | ) | | 130,951 |
| | 75 |
| | 131,026 |
|
| Adjustment for cumulative effect of change in accounting for stock-based compensation | — |
| | — |
| | — |
| | 143 |
| | — |
| | — |
| | — |
| | 143 |
| | — |
| | 143 |
|
| Cash dividend | — |
| | — |
| | (8,221 | ) | | — |
| | — |
| | — |
| | — |
| | (8,221 | ) | | — |
| | (8,221 | ) |
| Exercised and issued stock-based awards | 47 |
| | 1 |
| | 62 |
| | — |
| | — |
| | — |
| | — |
| | 63 |
| | — |
| | 63 |
|
| Stock-based compensation | — |
| | — |
| | 792 |
| | — |
| | — |
| | — |
| | — |
| | 792 |
| | — |
| | 792 |
|
| Tender of shares for stock-based awards | — |
| | — |
| | — |
| | — |
| | — |
| | 12 |
| | (297 | ) | | (297 | ) | | — |
| | (297 | ) |
| Total comprehensive income | — |
| | — |
| | — |
| | 3,879 |
| | — |
| | — |
| | — |
| | 3,879 |
| | 5 |
| | 3,884 |
|
| Balance at December 31, 2017 | 9,250 |
| | $ | 93 |
| | $ | 185,395 |
| | $ | (37,121 | ) | | $ | — |
| | 1,117 |
| | $ | (21,057 | ) | | $ | 127,310 |
| | $ | 80 |
| | $ | 127,390 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Stockholders’ Equity | | | | |
| Common Stock | | | | | | Common Stock
Held in Treasury | | | | | | |
| Number
of
Shares | | At Par
Value | | Capital in
Excess of
Par Value | | Retained Earnings (Accumulated Deficit) | | Number
of
Shares | | At
Cost | | Total | | Noncontrolling
Interests in
Subsidiaries | | Total
Equity |
| Balance at December 31, 2020 | 9,358 | | | $ | 94 | | | $ | 186,777 | | | $ | (66,357) | | | 1,137 | | | $ | (21,600) | | | $ | 98,914 | | | $ | 10,850 | | | $ | 109,764 | |
| Vested stock-based awards | 30 | | | — | | | 25 | | | — | | | — | | | — | | | 25 | | | — | | | 25 | |
| Stock-based compensation | — | | | — | | | 795 | | | — | | | — | | | — | | | 795 | | | — | | | 795 | |
| Grant of restricted stock units (RSUs) under the Profit Participation Incentive Plan (PPIP) | — | | | — | | | 1,162 | | | — | | | — | | | — | | | 1,162 | | | — | | | 1,162 | |
| Tender of shares for stock-based awards | — | | | — | | | — | | | — | | | 6 | | | (153) | | | (153) | | | — | | | (153) | |
| Distributions to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (12,529) | | | (12,529) | |
| Noncontrolling interests' contributions | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 46,300 | | | 46,300 | |
| Total comprehensive income | — | | | — | | | — | | | 57,394 | | | — | | | — | | | 57,394 | | | 5,855 | | | 63,249 | |
| Balance at December 31, 2021 | 9,388 | | | 94 | | | 188,759 | | | (8,963) | | | 1,143 | | | (21,753) | | | 158,137 | | | 50,476 | | | 208,613 | |
| Common stock repurchases | — | | | — | | | — | | | — | | | 294 | | | (7,866) | | | (7,866) | | | — | | | (7,866) | |
| Cash dividend | — | | | — | | | — | | | (40,011) | | | — | | | — | | | (40,011) | | | — | | | (40,011) | |
| Vested stock-based awards | 51 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Director fees paid in shares of common stock | — | | | — | | | 6 | | | — | | | — | | | — | | | 6 | | | — | | | 6 | |
| Stock-based compensation | — | | | — | | | 1,716 | | | — | | | — | | | — | | | 1,716 | | | — | | | 1,716 | |
| Grant of RSUs under the PPIP | — | | | — | | | 5,292 | | | — | | | — | | | — | | | 5,292 | | | — | | | 5,292 | |
| Tender of shares for stock-based awards | — | | | — | | | — | | | — | | | 11 | | | (452) | | | (452) | | | — | | | (452) | |
| Noncontrolling interests' contributions | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 15,032 | | | 15,032 | |
| Total comprehensive income (loss) | — | | | — | | | — | | | 90,426 | | | — | | | — | | | 90,426 | | | (683) | | | 89,743 | |
| Balance at December 31, 2022 | 9,439 | | | $ | 94 | | | $ | 195,773 | | | $ | 41,452 | | | 1,448 | | | $ | (30,071) | | | $ | 207,248 | | | $ | 64,825 | | | $ | 272,073 | |
The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.
STRATUS PROPERTIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business and Principles of Consolidation. Stratus Properties Inc. (Stratus), a Delaware corporation, is engaged primarily in the acquisition, entitlement, development, management, operationleasing and sale of commercial, hotel, entertainment, and multi-family and single-family residential real estate properties primarily locatedand commercial properties in the Austin, Texas area and also projects in certain other select markets in Texas. The real estate development and marketingleasing operations of Stratus are conducted primarily through its wholly owned subsidiaries. Stratus consolidates its wholly owned subsidiaries, subsidiaries in which Stratus has a controlling interest and variable interest entities (VIEs) in which Stratus is deemeddetermined to be the primary beneficiary. All significant intercompany transactions have been eliminated in consolidation. Refer to Note 4 for a discussion of Stratus' discontinued operations.
Concentration of Risks. Stratus primarily conducts its operations in the Austin, Texas area and other select markets in Texas. Consequently, any significant economic downturn in the Texas market, and the Austin market specifically, could potentially have an effect on Stratus’ business, results of operations and financial condition. Stratus has taken steps to obtain Federal Deposit Insurance Corporation (FDIC) protection for much of its cash deposits; however it typically has some cash balances on deposit with banks in excess of FDIC-insured limits.
Use of Estimates. The preparation of Stratus’ financial statements in conformity with accounting principles generally accepted in the United States (U.S. GAAP)) requires management to make estimates and assumptions that affect the amounts reported in these financial statements and accompanying notes. The more significant areas requiring the use of management estimates include the estimates of future cash flow from development and sale of real estate properties used in the assessment of impairments; profit recognition related to the sales of real estate; deferred income taxes and related valuation allowances; income taxes; allocation of certain indirect costs; profit pools under the Profit Participation Incentive Plan (PPIP) and the Long-Term Incentive Plan (LTIP); and asset lives for depreciation. Actual results could differ from those estimates.
Cash and cash equivalents. Stratus considers allAll highly liquid investments with a maturity of three months or less when purchased are considered cash equivalents.
Restricted cash. Stratus' restricted cash of $8.0 million is comprised of bank deposits and at December 31, 2022 primarily consists of $6.9 million of post-closing escrow amounts from the sale of Block 21 in May 2022 to be cash equivalents.held for 12 months after the closing, subject to a longer retention period with respect to any required reserve for pending claims.
Real Estate and Leasing Assets.Estate. Real estate held for investment is stated at cost, less accumulated depreciation. Real estate held for sale is stated at the lower of cost or fair value less costs to sell. The cost of real estate held for sale includes acquisition, development, construction and carrying costs, and other related costs incurred through the development stage.
Real estate under development and land available for development are stated at cost. Real estate held for investment, which includes the hotel and entertainment venue at the W Austin Hotel & Residences and Stratus' Leasing Operations assets, is stated at cost, less accumulated depreciation. Stratus capitalizes interest on funds used in developing properties from the date of initiation of development activities through the date the property is substantially complete and ready for use sale or lease.sale. Common costs are allocated based on the relative fair value of individual land parcels. Certain carrying costs including property taxes are capitalized for properties currently under active development. Stratus capitalizes improvements that increase the value of Leasing Operations properties and have useful lives greater than one year. Costs related to repairs and maintenance are charged to expense as incurred.
Stratus performs an impairment test when events or circumstances indicate that an asset’s carrying amount may not be recoverable. Events or circumstances that Stratus considers indicators of impairment include significant decreases in market values, adverse changes in regulatory requirements (including environmental laws), significant budget overruns for properties under development, and current period or projected operating cash flow losses from properties held for investment. Impairment tests for properties held for investment and properties under development involve the use of estimated future net undiscounted cash flows expected to be generated from the operation of the property and its eventual disposition. If projected undiscounted cash flow is less than the related carrying amount, then a reduction of the carrying amount of the long-lived asset to fair value is required. Generally, Stratus determines fair value using valuation techniques such as discounted expected future cash flows. Impairment tests for properties held for sale involve management estimates of fair value based on estimated market values for similar properties in similar locations and management estimates of costs to sell. If estimated fair value less costs to
sell is less than the related carrying amount, then a reduction of the carrying amount of the asset to fair value less costs to sell is required.
Stratus recorded no impairment charges for the three-year period ended December 31, 2017. Should market conditions deteriorate in the future or other events occur that indicate the carrying amount of Stratus’ real estate assets may not be recoverable, Stratus will reevaluate the expected cash flows from each property to determine whether any impairment exists.
Depreciation. Properties associated with Leasing Operations are Real estate held for investment is depreciated on a straight-line basis over theirthe properties' estimated lives of 30 to 40 years. The hotel and entertainment venue properties are depreciated on a straight-line basis over their estimated lives of 35 years. Furniture, fixtures and equipment are depreciated on a straight-line basis over a 3 to 15-year period. Tenant improvements are depreciated over the related lease terms.
Accrued Property Taxes. Stratus estimates its property taxes based on prior year property tax payments and other current events that may impact the amount. Upon receipt of the property tax bill, Stratus adjusts its accrued property tax balance at year-end to the actual amount of taxes due for such year. Accrued property taxes included in accrued liabilities totaled $7.4$3.8 million at December 31, 2017,2022 and $7.6$3.6 million at December 31, 2016.2021.
Revenue Recognition. Revenues from property Revenue or gains on sales of real estate are recognized when control of the risks and rewards of ownership areasset has been transferred to the buyer whenif collection of substantially all of the consideration received canto which Stratus will be reasonably determinedentitled is probable and when Stratus has completed itssatisfied all other performance obligations under the contract. Consideration is allocated among multiple performance obligations or distinct nonfinancial assets to perform certain supplementary development activities, if any exist, atbe transferred to the time of the sale.buyer based on relative fair value. Consideration is reasonably determined and considereddeemed likely of collection when Stratus has signed sales agreements and has determined that the buyer has demonstrated a commitment to pay. The buyer’s commitment to pay is supported by the level of its initial investment, Stratus’ assessment of the buyer’s credit standing and Stratus’ assessment of whether the buyer’s stake in the property is sufficient to motivate the buyer to honor its obligation to pay.
Stratus' revenues from hotel operations are primarily derived from room reservations and food and beverage sales. Revenue is recognized when rooms are occupied and services have been rendered. Taxes collected from customers and submitted to taxing authorities are not recorded in revenue.
Stratus' revenues from entertainment operations are primarily derived from ticket sales, revenue from private events, sponsorships, personal seat license sales and suite sales, and sales of concessions and merchandise. Revenues from ticket sales are recognized after the corresponding performance occurs. Revenues from sponsorships and other revenue not related to a single event are classified as deferred revenue and generally amortized over the operating season or term of the contract. Revenues from concessions and merchandise sales are recognized at the time of sale.
Stratus recognizes its rental income on a straight-line basis based on the terms of its signed leases with tenants. Recoveries from tenants for taxes, insurance and other commercial property operating expenses are recognized as revenues in the period the related costs are incurred. Stratus recognizes sales commissions and management and development fees when earned, as properties are sold or when the services are performed.
A summary of Stratus’ revenues follows (in thousands):
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Hotel | $ | 38,360 |
| | $ | 40,418 |
| | $ | 41,346 |
|
| Entertainment | 22,998 |
| | 19,522 |
| | 19,607 |
|
| Developed property sales | 10,286 |
| | 10,223 |
| | 12,320 |
|
| Leasing Operations | 7,981 |
| | 9,682 |
| | 5,641 |
|
| Undeveloped property sales | 544 |
| | 73 |
| | 1,175 |
|
| Commissions and other | 171 |
| | 423 |
| | 782 |
|
| Total revenues | $ | 80,340 |
| | $ | 80,341 |
| | $ | 80,871 |
|
Cost of Sales. Cost of sales includes the cost of real estate sold as well as costs directly attributable to the properties sold, properties held for sale, and land available for development, such as marketing, maintenance and property taxes. Cost of sales also includes operating costs and depreciation for properties held for investment and municipal utility district reimbursements. A summary of Stratus’ cost of sales follows (in thousands):
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2022 | | 2021 |
| Depreciation and amortization | $ | 3,586 | | | $ | 5,449 | |
| Leasing operations | 4,439 | | | 9,030 | |
| Cost of developed property sales | 5,601 | | | 2,617 | |
| Cost of undeveloped property sales | 11,524 | | | 1,671 | |
| Project expenses and allocation of overhead costs (see below) | 6,611 | | | 5,758 | |
| Other, net | 25 | | | (313) | |
| Total cost of sales | $ | 31,786 | | | $ | 24,212 | |
|
| | | | | | | | | | | | |
| | Years Ended December 31, | |
| | 2017 | | 2016 | | 2015 | |
| Hotel | $ | 28,478 |
| | $ | 29,090 |
| | $ | 30,702 |
| |
| Entertainment | 17,121 |
| | 15,223 |
| | 15,169 |
| |
| Depreciation | 7,853 |
| | 8,082 |
| | 8,743 |
| |
| Leasing Operations | 4,797 |
| | 4,903 |
| | 2,772 |
| |
| Project expenses and allocation of overhead costs (see below) | 4,343 |
| | 4,473 |
| | 3,546 |
| |
| Cost of developed property sales | 3,890 |
| | 5,156 |
| | 6,386 |
| |
| Other, net | 1,793 |
| | 18 |
| | (71 | ) | |
| Cost of undeveloped property sales | 352 |
| | 55 |
| | 564 |
| |
| Total cost of sales | $ | 68,627 |
| | $ | 67,000 |
| | $ | 67,811 |
| |
Allocation of Overhead Costs. Stratus allocates a portion of its overhead costs to both capitalized real estate costs and cost of sales based on the percentage of time certain employees worked in the related areas (i.e. costs of construction and development activities are capitalized to real estate under development, and costs of project management, sales and marketing activities are charged to expense as cost of sales). Stratus capitalizes only direct and certain indirect project costs associated with the acquisition, development and construction of a real estate project. Indirect costs include allocated costs associated with certain pooled resources (such as rent, office supplies, insurance, telephone and postage) which are used to support Stratus’ development projects, as well as general and administrative functions. Allocations of pooled resources are based only on those employees directly responsible for development (i.e., project managers and subordinates). Stratus charges to expense indirect costs that do not clearly relate to a real estate project, such as all salaries and costs related to its Chief Executive Officer and Chief Financial Officer.
Municipal Utility District Reimbursements. Stratus capitalizes infrastructure costs and receives Barton Creek municipal utility district (MUD) reimbursements for certain infrastructure costs incurred in the Barton Creek area. MUD reimbursements received for infrastructure projects are recorded as a reduction of the related asset’s carrying amount or cost of sales if the property has been sold. Stratus has long-term agreements with seven independent MUDs in Barton Creek to build the MUDs’ utility systems and to be eligible for future reimbursements for the related costs.
In November 2017, the city of Magnolia and the state of Texas approved the creation of a MUD which will provide an opportunity for Stratus to recoup approximately $26 million over the life of the project for future road and utility infrastructure costs incurred in connection with its development of the Magnolia project, an HEB Grocery Company, L.P. (HEB)-anchored retail project planned for 351,000 square feet of commercial space.
The amount and timing of MUD reimbursements depends upon the respective MUD having a sufficient tax base within its district to issue bonds and obtain the necessary state approval for the sale of the bonds. Because the timing of the issuance and approval of the bonds is subject to considerable uncertainty, coupled with the fact that interest rates on such bonds cannot be fixed until they are approved, the amounts associated with MUD reimbursements are not known until approximately one month before the MUD reimbursements are received. To the extent the reimbursements are less than the costs capitalized, Stratus records a loss when such determination is made. MUD reimbursements represent the actual amounts received.
Advertising Costs. Advertising costs are expensedcharged to expense as incurred and are included as a component of cost of sales. Advertising costs totaled $1.0$0.5 million in 20172022and$0.90.4 million in both 2016 and 2015.2021.
Income Taxes. Stratus accounts for deferred income taxes under an asset and liability method, whereby deferred tax assets and liabilities are recognized based on the tax effects of temporary differences between the financial statements and the tax basis of assets and liabilities, as measured by currently enacted tax rates. The effect on deferred income tax assets and liabilities of a change in tax rates or laws is recognized in income or loss in the period in which such changes are enacted. Stratus periodically evaluates the need for a valuation allowance to reduce deferred tax assets to estimated recoverable amounts. Stratus establishes a valuation allowance to reduce its deferred tax assets and records a corresponding charge to earnings if it is determined, based on available
evidence at the time, that it is more likely than not that any portion of the deferred tax assets will not be realized. In evaluating the need for a valuation allowance, Stratus estimates future taxable income based on projections and ongoing tax strategies. This process involves significant management judgment about assumptions that are subject to change based on variances between projected and actual operating performance and changes in Stratus’ business environment or operating or financial plans. SeeRefer to Note 7 for further discussion.
Earnings Per Share. Stratus’ basic net income (loss) per share of common stock was calculated by dividing the net income (loss) attributable to common stockholders by the weighted-average shares of common stock outstanding during the period. A reconciliation of net income (loss) and weighted-average shares of common stock outstanding for purposes of calculating diluted net income (loss) per share (in thousands, except per share amounts) follows:
| | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 |
| Net (loss) income from continuing operations | $ | (7,077) | | | $ | 69,457 | |
| Net income (loss) from discontinued operations | 96,820 | | | (6,208) | |
| Net income | $ | 89,743 | | | $ | 63,249 | |
| Net income (loss) attributable to noncontrolling interests | 683 | | | (5,855) | |
| Net income attributable to common stockholders | $ | 90,426 | | | $ | 57,394 | |
| | | |
| Basic weighted-average shares of common stock outstanding | 8,228 | | | 8,236 | |
Add shares issuable upon vesting of dilutive restricted stock units (RSUs) a | — | | | 77 | |
| Diluted weighted-average shares of common stock outstanding | 8,228 | | | 8,313 | |
| | | |
| Basic net income (loss) per share attributable to common stockholders: | | | |
| Continuing operations | $ | (0.78) | | | $ | 7.72 | |
| Discontinued operations | 11.77 | | | (0.75) | |
| Basic net income per share attributable to common stockholders | $ | 10.99 | | | $ | 6.97 | |
| | | |
| Diluted net income(loss) per share attributable to common stockholders: | | | |
| Continuing operations | $ | (0.78) | | | $ | 7.65 | |
| Discontinued operations | 11.77 | | | (0.75) | |
| Diluted net income per share attributable to common stockholders | $ | 10.99 | | | $ | 6.90 | |
|
| | | | | | | | | | | | |
| | Years Ended December 31, | |
| | 2017 | | 2016 | | 2015 | |
| Income (loss) from continuing operations | $ | 3,884 |
| | $ | (5,999 | ) | | $ | 14,377 |
| |
| Income from discontinued operations, net of taxes | — |
| | — |
| | 3,218 |
| |
| Net income (loss) | $ | 3,884 |
| | $ | (5,999 | ) | | $ | 17,595 |
| |
| Net income attributable to noncontrolling interests in subsidiaries | (5 | ) | | — |
| | (5,418 | ) | |
| Net income (loss) attributable to Stratus common stockholders | $ | 3,879 |
| | $ | (5,999 | ) | | $ | 12,177 |
| |
| | | | | | | |
| Basic weighted-average shares of common stock outstanding | 8,122 |
| | 8,089 |
| | 8,058 |
| |
| | | | | | | |
| Add shares issuable upon exercise or vesting of dilutive stock options and restricted stock units (RSUs) | 49 |
| a | — |
| b | 33 |
| a |
| | | | | | | |
| Diluted weighted-average shares of common stock outstanding | 8,171 |
| | 8,089 |
| | 8,091 |
| |
| | | | | | | |
| Basic net income (loss) per share attributable to common stockholders: | | | | | | |
| Continuing operations | $ | 0.48 |
| | $ | (0.74 | ) | | $ | 1.11 |
| |
| Discontinued operations | — |
| | — |
| | 0.40 |
| |
| Basic net income (loss) per share attributable to common stockholders | $ | 0.48 |
| | $ | (0.74 | ) | | $ | 1.51 |
| |
| | | | | | | |
| Diluted net income (loss) per share attributable to common stockholders: | | | | | | |
| Continuing operations | $ | 0.47 |
| | $ | (0.74 | ) | | $ | 1.11 |
| |
| Discontinued operations | — |
| | — |
| | 0.40 |
| |
| Diluted net income (loss) per share attributable to common stockholders | $ | 0.47 |
| | $ | (0.74 | ) | | $ | 1.51 |
| |
| |
a. | Excludes approximately 26 thousand shares of common stock for both 2017 and 2015 associated with anti-dilutive RSU's. |
| |
b. | Excludes approximately 125 thousand shares of common stock for 2016 associated with outstanding stock options with exercise prices less than the average market price of Stratus' common stock, and RSUs that were anti-dilutive. |
a.Excludes approximately 295 thousand shares in 2022 of common stock associated with RSUs that were anti-dilutive as a result of the net loss from continuing operations. Excludes 5 thousand shares associated with RSUs that were anti-dilutive in 2021.
Stock-Based Compensation. Compensation costs for share-based payments to employees are measured at fair value and charged to expense over the requisite service period for awards that are expected to vest. The fair value of stock options is determined using the Black-Scholes-Merton option valuation model. The fair value of RSUs and performance based RSUs is based on Stratus'Stratus’ stock price on the date of grant. Stratus estimates forfeitures at the time of grant and revises those estimates in subsequent periods if actual forfeitures differ from those estimates through the final vesting date of the awards. SeeThe awards are amortized on a straight-line basis over the estimated service period.
Stratus may grant RSUs that settle in cash to employees and nonemployees under the PPIP. The value of these awards in excess of the liability amount, if any, as of the date of the valuation event is amortized on a straight-line basis over the estimated service period. Refer to Note 8 for further discussion.
New Accounting Standards. In May 2014, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) that provides a single comprehensive revenue recognition model, which will replace most existing revenue recognition guidance, and also requires expanded disclosures. The core principle of the model is that revenue is recognized when control of goods or services has been transferred to customers at an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. For public entities, this ASU is effective for annual reporting periods beginning after December 15, 2017, and interim reporting periods within that reporting period. Stratus adopted this ASU January 1, 2018, and will apply the modified retrospective approach under which any cumulative effect adjustment would be recorded to retained earnings as of the adoption date. Stratus has substantially completed its review of the impact of this guidance and does not expect the application of this guidance to have a material impact on its financial statements or on its revenue recognition policies or processes. Stratus continues to review the impact of the new guidance on its financial reporting and disclosures.
Related Party Transactions. Refer to Notes 2 and 4 for discussion of LCHM Holdings, LLC (LCHM), its manager, and JBM Trust, which are related parties as a result of LCHM’s representation on Stratus’ Board of Directors (Board). LCHM and JBM Trust have invested in certain of Stratus' limited partnerships.
Through 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. In April 2022, Stratus hired the consultant as an employee at an annual salary of $100 thousand. As an employee, he is eligible for the same health and retirement benefits provided to all Stratus employees and is also eligible for annual incentive awards and for awards under the PPIP and the LTIP. In 2022, he received $20 thousand as an annual incentive award for 2021 and a $135 thousand cash bonus related to payouts for development projects under the PPIP. As of December 31, 2022, the employee has two outstanding awards under the PPIP. Refer to Note 8 for discussion of the PPIP. Payments to Whitefish Partners for the consultant's consulting services and expense reimbursements totaled $122 thousand during 2021.
NOTE 2.LIMITED PARTNERSHIPS
The Saint George Apartments, L.P. In November 2021, The Saint George Apartments, L.P. (The Saint George partnership), a Texas limited partnership and subsidiary of Stratus, was formed to purchase land and develop, construct and lease The Saint George, a 316-unit luxury wrap-style multi-family project in Austin. In December 2021, The Saint George partnership purchased the land for the project for $18.5 million. In December 2021, an unrelated equity investor contributed $18.3 million to The Saint George partnership for a 90.0 percent interest. In July 2022, The Saint George Apartments, L.P. entered into a construction loan agreement. Borrowings on the construction loan are secured by The Saint George project and are guaranteed by Stratus until certain conditions are met. 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 (consisting of pursuit costs and $2.2 million in cash) and the Class B limited partner’s total capital contributions to $33.4 million. Stratus has a 10.0 percent interest in The Saint George partnership. Stratus’ potential returns may increase above its relative equity interest if negotiated return hurdles are achieved.
The Saint George partnership is governed by a limited partnership agreement between Stratus and the equity investor, and a wholly owned subsidiary of Stratus serves as the general partner. The general partner has the authority to manage the day-to-day operations of the partnership, subject to approval rights of the limited partners for specified matters. The general partner will manage The Saint George partnership in exchange for an asset management fee of $300 thousand per year beginning two years after construction of The Saint George, and will earn a development management fee of 4.0 percent of certain construction costs for The Saint George. The limited partnership agreement contains a buy-sell option pursuant to which at any time either party will have the right to initiate a buy-sell of the other party’s interests. Transfers of interests in the partnership are subject to substantial restrictions.
Stratus Block 150, L.P. In September 2021, Stratus Block 150, L.P., a Texas limited partnership and a subsidiary of Stratus, completed financing transactions from which a portion of the proceeds were used to purchase the land for Block 150, now known as The Annie B, a proposed luxury multi-family high-rise development in downtown Austin, Texas. The proceeds will also be used to fund predevelopment costs of the project. These financing transactions included (i) a $14.0 million land loan and (ii) $11.7 million from the sale of Class B limited partnership interests in a private placement offering, along with $3.9 million in cash and pursuit costs contributed by wholly owned subsidiaries of Stratus. The Annie B land loan is secured by The Annie B project and guaranteed by Stratus until certain conditions are met. Refer to Note 6 for further discussion of the land loan.
In first-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 December 31, 2022, Stratus holds, in the aggregate, a 31.0 percent indirect equity interest in Stratus Block 150, L.P. No individual Class B limited partner has an equity interest greater than 25.0 percent. One of the participants in the private placement offering, JBM Trust, which purchased a limited partnership interest initially representing a 5.9 percent equity interest in Stratus Block 150, L.P., has a trustee who also serves as sole manager of LCHM.
Stratus Block 150, L.P. is governed by a limited partnership agreement between Stratus and the equity investors, and a wholly owned subsidiary of Stratus serves as the general partner. The general partner has the authority to manage the day-to-day operations of the partnership, subject to approval rights of the limited partners for specified
matters. Stratus plans to capitalize The Annie B in a two-phase process consisting of the initial land partnership phase and potentially followed by a development partnership phase. No asset management fee will be paid to the general partner during the land partnership phase. If the general partner determines to proceed with the development partnership phase, the general partner would continue to manage Stratus Block 150, L.P. and would begin to receive an asset management fee to be agreed on at that time. During the development partnership phase, the general partner would receive a development management fee of approximately 4 percent of certain construction costs for The Annie B. Transfers of interests in the partnership are subject to substantial restrictions. If a change of control of Stratus occurs as defined in the limited partnership agreement, each Class B limited partner has a put right to require Stratus to purchase all but not less than all of its interests for a price generally providing a cumulative 10 percent annual return on capital contributions.
The Saint June, L.P. In June 2021, The Saint June, L.P., a Texas limited partnership and a subsidiary of Stratus, entered into a construction loan to develop The Saint June, a 182-unit luxury garden-style multi-family project within the Amarra development of the Barton Creek community in Austin, Texas. The loan is secured by The Saint June project and is guaranteed by Stratus until certain conditions are met. Refer to Note 6 for further discussion of this loan.
In July 2021, an unrelated equity investor contributed $16.3 million to The Saint June, L.P. partnership for a 65.87 percent interest. Stratus has a 34.13 percent interest in The Saint June, L.P. following its contribution of land, development costs and $1.1 million of cash. Stratus’ potential returns may increase above its relative equity interest if negotiated return hurdles are achieved.
The Saint June, L.P. is governed by a limited partnership agreement between Stratus and the equity investor, and a wholly owned subsidiary of Stratus serves as the general partner. The general partner has the authority to manage the day-to-day operations of the partnership, subject to approval rights of the limited partners for specified matters. The general partner will manage The Saint June, L.P. in exchange for an asset management fee of $210 thousand per year beginning two years after construction of The Saint June, which began in July 2021, and will earn a development management fee of 4.0 percent of certain construction costs for The Saint June. The limited partnership agreement contains a buy-sell option pursuant to which at any time either party will have the right to initiate a buy-sell of the other party’s interests. Transfers of interests in the partnership are subject to substantial restrictions.
Stratus Kingwood Place, L.P.In August 2018, Stratus Kingwood Place, L.P., a Texas limited partnership and a subsidiary of Stratus (the Kingwood, L.P.), completed a $10.7 million private placement, approximately $7 million of which, combined with a $6.8 million loan from Comerica Bank, was used to purchase a 54-acre tract of land located in Kingwood, Texas for $13.5 million, for the development of Kingwood Place, an H-E-B-anchored mixed-use development project (Kingwood Place). Two of the participants in the Kingwood Offering, LCHM and JBM Trust, each purchased Kingwood Class B limited partnership interests initially representing an 8.8 percent equity interest in the Kingwood, L.P.
Kingwood, L.P. is governed by a limited partnership agreement between Stratus and the equity investors, and a wholly owned subsidiary of Stratus serves as the general partner. The general partner has the authority to manage the day-to-day operations of the partnership, subject to approval rights of the limited partners for specified matters. The general partner manages the Kingwood, L.P., in exchange for an asset management fee of $283 thousand per year and earns a development management fee of 4.0 percent of certain construction costs for Kingwood Place. Transfers of interests in the partnership are subject to substantial restrictions.
In December 2018, the Kingwood, L.P., entered into a construction loan agreement with Comerica Bank, which superseded and replaced the land acquisition loan agreement discussed above and provided for a loan totaling $32.9 million to finance nearly 70 percent of the costs associated with construction of Kingwood Place, which was subsequently modified and increased to $35.4 million in January 2016, FASB issued an ASU that amends the current guidance2020 (refer to Note 6 for further discussion). Borrowings on the classificationKingwood Place construction loan are secured by the Kingwood Place project, and measurement of financial instruments. This ASU makes limited changes to existing guidance and amendsare guaranteed by Stratus until certain disclosure requirements. For public entities, this ASU is effective for interim and annual periods beginning after December 15, 2017. Stratus adopted this ASU effective January 1, 2018, and adoption did not have a material impact on its financial statements.
In February 2016, FASB issued an ASU that will require lessees to recognize most leases on the balance sheet. This ASU allows lessees to make an accounting policy election to not recognize a lease asset and liability for leases with a term of 12 months or less and do not have a purchase option that is expected to be exercised. For public entities, this ASU is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. This ASU must be applied using the modified retrospective approach for leases that exist orconditions are entered into after the beginningmet. The remaining 30 percent of the earliest comparative periodproject’s cost (totaling approximately $15 million) was funded by borrower equity, contributed by Stratus and private equity investors.
In October 2019, Stratus acquired an unrelated equity investor's 33.33 percent interest in Kingwood, L.P. for $5.8 million. Following the financial statements.acquisition, Stratus is currently evaluating the impact this guidance will have on its financial statements.
In March 2016, the FASB issued an ASU that simplifies various aspects of the accounting for share-based payment
transactions, including the income tax consequences, statutory tax withholding requirements, an accounting policy
election for forfeitures and the classification on the statement of cash flows. Stratus adopted this ASU effective January 1, 2017, onhas a modified retrospective basis and recorded a cumulative effect adjustment of $143 thousand to its 2017 opening accumulated deficit balance.
NOTE 2.JOINT VENTURES WITH CANYON-JOHNSON URBAN FUND II, L.P., AND PEDERNALES ENTERTAINMENT, LLC
On September 28, 2015, Stratus completed the purchase of Canyon-Johnson Urban Fund II, L.P.'s (Canyon-Johnson) approximate 5860.0 percent interest in the CJUF IIKingwood, L.P. Stratus’ potential returns may increase above its relative equity interest if negotiated return hurdles are achieved.
Accounting for Limited Partnerships. Stratus has performed evaluations and concluded that The Saint George partnership, Stratus Block 21, LLC joint venture (the Block 21 Joint Venture)150, L.P., which owns a 36-story mixed-use development in downtown Austin, Texas, anchored by the W Austin Hotel & Residences (the W Austin Hotel & Residences), for $62.0 million. Stratus’ purchase of Canyon-Johnson’s interest was based on a total project gross price of approximately $210 million, before considering approximately $22.8 million of cash and cash equivalents held by the Block 21 Joint Venture and acquired by Stratus in its purchase of Canyon-Johnson’s interest.
The Block 21 Joint Venture, which was previously a VIE consolidated by Stratus, is now a wholly owned consolidated subsidiary of Stratus. The change in ownership was reflected in stockholder's equity on the Consolidated Balance Sheet, primarily as a reduction in noncontrolling interests in subsidiaries and capital in excess of par value, and an increase in deferred tax assets.
Stratus funded its acquisition of Canyon-Johnson’s interest in the Block 21 Joint Venture with (1) $32.3 million from its non-recourse term loan with Bank of America, (2) a $20.0 million term loan under Stratus’ credit facility with Comerica Bank and (3) $9.7 million in cash.
Prior to Stratus' purchase of Canyon-Johnson's interest on September 28, 2015, cumulative capital contributions totaled $71.9 million for Stratus and $94.0 million for Canyon-Johnson,Saint June, L.P. and the inception-to-date distributions totaled $53.4 million to Stratus and $62.6 million to Canyon-Johnson.
On October 3, 2012, the Block 21 Joint Venture and Pedernales Entertainment LLC (Pedernales) formed Stageside Productions (Stageside) to promote, market and commercialize the production, sale, distribution and general oversight of audio and video recordings of events or performances occurring at Austin City Limits Live at the Moody Theater (ACL Live). The Block 21 Joint Venture's initial capital contributions to Stageside totaled $0.3 million, and Stratus' wholly owned Block 21 subsidiary will contribute additional capital as necessary to fund the working capital needs of Stageside. In conjunction with the purchase of Canyon-Johnson's interest in the Block 21 Joint Venture, Stratus acquired Canyon-Johnson's interest in Stageside effective September 28, 2015. Stratus has a 100 percent capital funding interest and a 40 percent residual and voting interest in Stageside. Stratus performed an evaluation and concluded Stageside is a VIEKingwood, L.P. are VIEs and that Stratus is the primary beneficiary. Accordingly, the partnerships’ results of Stageside are consolidated in Stratus'Stratus’ financial statements. Stratus will continue to re-evaluate which entity is the primary beneficiary of these partnerships in accordance with applicable accounting guidance.
The cash and cash equivalents held at these limited partnerships are subject to restrictions on distribution to the parent company pursuant to project loan agreements.
Stratus’ consolidated balance sheets include the following assets and liabilities of the partnerships (in thousands).
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
Assets: a | | | |
| Cash and cash equivalents | $ | 7,744 | | | $ | 6,177 | |
| Restricted cash | — | | | 11,809 | |
| Real estate under development | 107,258 | | | 62,692 | |
| Land available for development | 5,970 | | | 7,641 | |
| Real estate held for investment, net | 30,720 | | | 31,399 | |
| Other assets | 4,455 | | | 3,132 | |
| Total assets | 156,147 | | | 122,850 | |
Liabilities: b | | | |
| Accounts payable and accrued liabilities | 12,563 | | | 5,499 | |
| Debt | 55,305 | | | 46,096 | |
| Total liabilities | 67,868 | | | 51,595 | |
| Net assets | $ | 88,279 | | | $ | 71,255 | |
a.Substantially all of the assets are available to settle obligations of only the partnerships.
b.All of the debt is guaranteed by Stratus until certain conditions are met in the individual partnership loan agreements. The creditors for the remaining liabilities do not have recourse to the general credit of Stratus.
NOTE 3.JOINT VENTURE WITH LCHM HOLDINGS, LLC
Stratus had a joint venture (the Parkside Village Joint Venture) with LCHM Holdings, LLC (LCHM Holdings). Stratus’ capital contributions to the Parkside Village Joint Venture totaled $3.1 million, which consisted of a 23.03 acre tract of land located in Austin, Texas, the related property and development agreements for the land and other project costs incurred by Stratus before February 28, 2011. On July 2, 2015, Stratus completed the sale of Parkside Village and recognized a pre-tax gain of $13.5 million.
NOTE 4.3.REAL ESTATE, NET
Stratus'Stratus’ consolidated balance sheets include the following net real estate assets (in thousands):
| | | | | | | | | | | |
| | December 31, |
| | 2022 | | 2021 |
| Real estate held for sale: | | | |
| Developed lots | $ | 1,773 | | | $ | 1,773 | |
| | | |
| Real estate under development: | | | |
| Acreage, multi-family units, commercial square footage and homes | 239,278 | | | 181,224 | |
| | | |
| Land available for development: | | | |
| Undeveloped acreage and vacant office building for future renovation | 39,855 | | | 40,659 | |
| | | |
| Real estate held for investment: | | | |
| Kingwood Place | 34,239 | | | 33,979 | |
| Lantana Place | 30,284 | | | 30,283 | |
| Jones Crossing | 25,032 | | | 25,239 | |
| West Killeen Market | 10,192 | | | 10,237 | |
| Magnolia Place | 5,761 | | | — | |
| Furniture, fixtures and equipment | 491 | | | 730 | |
| Total | 105,999 | | | 100,468 | |
| Accumulated depreciation | (13,622) | | | (10,184) | |
| Total real estate held for investment, net | 92,377 | | | 90,284 | |
| Total real estate, net | $ | 373,283 | | | $ | 313,940 | |
|
| | | | | | | | |
| | December 31, | |
| | 2017 | | 2016 | |
| Real estate held for sale: | | | | |
| Developed lots, townhomes and condominium units | $ | 22,612 |
| | $ | 21,236 |
| |
| | | | | |
| Real estate under development: | | | | |
| Acreage, multi-family units, commercial square footage and townhomes | 118,484 |
| | 111,373 |
| |
| | | | | |
| Land available for development: | | | | |
| Undeveloped acreage | 14,804 |
| | 19,153 |
| |
| | | | | |
| Real estate held for investment: | | | | |
| Barton Creek Village | 5,075 |
| | 6,092 |
| |
| The Oaks at Lakeway | — |
| | 54,839 |
| |
| Santal Phase I | 38,023 |
| | 37,848 |
| |
| West Killeen Market | 8,818 |
| | — |
| |
| W Austin Hotel & Residences | | | | |
| Hotel | 111,808 |
| | 111,479 |
| |
| Entertainment venue | 42,687 |
| | 42,382 |
| |
| Office and retail | 19,515 |
| | 19,700 |
| |
| Furniture, fixtures and equipment | 1,290 |
| | 1,223 |
| |
| Total | 227,216 |
| | 273,563 |
| |
| Accumulated depreciation | (38,826 | ) | | (33,844 | ) | |
| Total real estate held for investment, net | 188,390 |
| | 239,719 |
| |
| Total real estate, net | $ | 344,290 |
| | $ | 391,481 |
| |
Real estate held for sale. Developed lots Amarra Villas townhomes and condominium units include individual tracts of land that have been developed and permitted for residential use, developed lots with homes already built on them or condominium units at the W Austin Hotel & Residences.use. As of December 31, 2017,2022, Stratus owned 50two developed units, 2 condominium units at the W Austin Hotel & Residences and 4 townhomes in Amarra Villas.lots.
Real estate under development. Acreage under development includes real estate for which infrastructure work over the entire property has been completed, is currently being completed or is able to be completed and for which necessary permits have been obtained. Real estate under development also includes the second phasecommercial and residential properties under construction. Stratus' real estate under development as of December 31, 2022 increased from December 31, 2021, primarily as a result of the Santal multi-family project, Lantana Place, Jones Crossing in College Station, Texas,development costs for The Saint June, The Saint George and Amarra Villas townhomesprojects.
Real estate under constructiondevelopment also includes The Villas at Amarra Drive (Amarra Villas), a 20-unit residential project within the Amarra development. During 2021, Stratus recorded a $700 thousand impairment charge for the Amarra Villas homes because the estimated total project costs and planned, andcosts of sale for two of the homes under construction or planned on four lotsexceed their contract sale prices, as Stratus was required to retain a new general contractor during the course of construction and after entering into the sales contracts for the two homes. Stratus recorded an additional $650 thousand impairment charge in Amarra Drive Phase III.third-quarter 2022.
In November 2017, the city of Magnolia and the state of Texas approved the creation of a municipal utility district (MUD) which provides an opportunity for Stratus to recoup certain road and utility infrastructure costs incurred in connection with the development of Magnolia Place. Real estate held for investment as of December 31, 2022, includes approximately $12 million of costs eligible for reimbursement by the Magnolia MUD.
Land available for development. Undeveloped acreage includes real estate that can be sold “as is” (i.e., planning, infrastructure or development work is not currently in progress on such property). Stratus’ undeveloped acreage as of December 31, 2017,2022 included land primarily in Austin, Texas, permitted for residential and commercial development.development and vacant pad sites at Jones Crossing and Kingwood Place.
Included in land available for development is an office building in Austin, Texas that Stratus had purchased with the intent to renovate. During 2021 and in connection with Stratus' evaluation of properties for indication of impairment,
the estimated net undiscounted future cash flows from this property were less than its carrying value, and Stratus recorded a $500 thousand impairment charge to reduce its carrying value to its estimated fair value.
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.
Real estate held for investment. The Kingwood Place project includes 151,855 square-feet of commercial space anchored by an H-E-B grocery store and leased pad sites. The Lantana Place project includes 99,379 square feet for the first retail phase. The Jones Crossing project includes 154,117 square-feet for the first phase of Barton Creek Villagethe retail component of an H-E-B-anchored, mixed-use development. The West Killeen Market project includes 44,493 square-feet of commercial space adjacent to a 22,366-square-foot90,000 square-foot H-E-B grocery store. The Magnolia Place project includes 18,582 square feet in the first phase of the retail complex, whichcomponent of an H-E-B-shadow anchored, mixed-used development.
Capitalized interest. Stratus recorded capitalized interest of $6.6 million in 2022 and $5.5 million in 2021.
NOTE 4. ASSET SALES
Block 21 - Discontinued Operations. On May 31, 2022, Stratus completed the sale of Block 21 to 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 income (loss) from discontinued operations. Block 21 was 100 percent leasedStratus’ 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 accordance with accounting guidance, Stratus reported the results of operations of Block 21 as discontinued operations in the consolidated statements of comprehensive 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 sheet at December 31, 2017. 2021, follow (in thousands):
| | | | | |
| 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 held for sale | $ | 151,053 | |
| Liabilities: | |
| Accounts payable and accrued liabilities, including taxes | $ | 6,200 | |
| Debt | 136,684 | |
| Other liabilities | 10,213 | |
| Total liabilities held for sale | $ | 153,097 | |
a.Most restricted cash was received by Ryman upon the closing of the sale.
Block 21's results of operations, presented as net income (loss) from discontinued operations in Stratus' consolidated statements of comprehensive income follow (in thousands):
| | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 |
Revenues: a | | | |
| Hotel | $ | 12,653 | | | $ | 18,310 | |
| Entertainment | 10,004 | | | 12,929 | |
| Leasing operations and other | 932 | | | 1,479 | |
| Total revenue | 23,589 | | | 32,718 | |
| Cost of Sales: | | | |
| Hotel | 8,869 | | | 15,784 | |
| Entertainment | 7,472 | | | 10,482 | |
| Leasing operations and other | 710 | | | 872 | |
Depreciation b | — | | | 4,515 | |
| Total cost of sales | 17,051 | | | 31,653 | |
| General and administrative expenses | 337 | | | 735 | |
| Gain on sale of assets | (119,695) | | | — | |
| Operating income | 125,896 | | | 330 | |
| Interest expense, net | (3,236) | | | (7,972) | |
| Provision for income taxes | (25,840) | | | 1,434 | |
| Net income (loss) from discontinued operations | $ | 96,820 | | | $ | (6,208) | |
a.In February 2017,accordance with accounting guidance, amounts are net of eliminations of intercompany sales totaling $0.5 million in 2022 and $1.2 million in 2021.
b.In accordance with accounting guidance, depreciation is not recognized subsequent to classification as assets held for sale, which occurred in December 2021.
Capital expenditures associated with discontinued operations totaled $0.2 million in 2022 and $0.5 million in 2021.
The Santal. In December 2021, Stratus completed the sale of The Oaks at LakewaySantal for $114.0$152.0 million, (see Note 11 for further discussion).less a $0.7 million repair credit. The Santal Phase Iwas Stratus’ wholly owned 448-unit luxury garden-style multi-family project islocated in Section N of Austin’s Barton Creek community. After closing costs and repayment of The Santal loan, the sale generated net proceeds of approximately $74 million and Stratus recorded a pre-tax gain on the sale of $83.0 million in 2021. Stratus also recognized a $1.9 million loss on extinguishment of debt in 2021, primarily for prepayment fees on The Santal loan.
The Santal had rental revenue of $8.7 million in 2021. Interest expense related to The Santal loan was $3.0 million in 2021.
The Saint Mary. In January 2021, The Saint Mary, L.P., a consolidated Texas limited partnership in which Stratus holds an aggregate 57 percent indirect equity interest, sold The Saint Mary, a 240-unit luxury garden-style apartment complex consisting of 236 units. Construction was completedmulti-family project in August 2016,the Circle C community in Austin, Texas for $60.0 million. After closing costs and approximately 95 percentpayment of the 236outstanding construction loan, the sale generated net proceeds of approximately $34 million. 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 2021. Stratus also recognized a $63 thousand loss on extinguishment of debt in 2021 related to the repayment of The Saint Mary construction loan. In connection with the sale, The Saint Mary, L.P. distributed $1.7 million each to LCHM and JBM Trust.
The Saint Mary had rental revenue of $0.1 million in 2021 prior to the sale. Interest expense on The Saint Mary construction loan was less than $0.1 million in 2021.
Kingwood Place Land Sale. 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, were leased at December 31, 2017.for $5.5 million. The West Killeen Market project includes 44,000 square feet of commercial space and three pad sites adjacent to a 90,000 square-foot HEB grocery store. Construction began in August 2016 and was completed in June 2017, and the HEB store opened in April
sale
2017. As of December 31, 2017, leases for approximately 60 percentclosed 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 space at West Killeen Market have been executedland 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. The sale closed in March 2023 for $2.5 million. Stratus recorded a $650 thousand impairment charge in third-quarter 2022 because the estimated total project costs and leasing activitiescosts of sale for the remaining space continues.home under construction exceeded its contractual sale price. In fourth-quarter 2022, we sold another Amarra Villas home for $3.6 million.
The W Austin Hotel & Residences includes a 251-room hotel, 38,316 square feet of leasable office space, including 9,000 square feet occupied by Stratus' corporate office, and 18,327 square feet of retail space, including the 3TEN ACL Live venue, which opened in March 2016 and has a capacity of approximately 350 people. As of December 31, 2017, both the office and retail space were substantially fully occupied. The W Austin Hotel & Residences also includes entertainment space, occupied by ACL Live, an entertainment venue and production studio with a maximum capacity of 3,000 people.
Capitalized interest. Stratus recorded capitalized interest of $5.9 million in 2017, $6.3 million in 2016 and $5.5 million in 2015.
NOTE 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)1 inputs) and the lowest priority to unobservable inputs (Level 3)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'Stratus’ other financial instruments follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 | | December 31, 2021 |
| Carrying
Value | | Fair
Value | | Carrying
Value | | Fair
Value |
| Liabilities: | | | | | | | |
| Debt | $ | 122,765 | | | $ | 124,575 | | | $ | 106,648 | | | $ | 108,091 | |
|
| | | | | | | | | | | | | | | |
| | December 31, 2017 | | December 31, 2016 |
| | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
| Liabilities: | | | | | | | |
| Debt | $ | 221,470 |
| | $ | 224,632 |
| | $ | 291,102 |
| | $ | 293,620 |
|
| Interest rate swap agreement | 134 |
| | 134 |
| | 427 |
| | 427 |
|
Debt.Stratus' debt is recorded at cost and is not actively traded. Fair value is estimated based on discounted future expected cash flows at estimated current market interest rates. Accordingly, Stratus' debt is classified within Level 2 of the fair value hierarchy. The fair value of debt does not represent the amounts that will ultimately be paid upon the maturities of the loans.
Interest Rate Swap Agreement. On December 13, 2013, the Parkside Village Joint Venture entered into a 10-year interest rate swap agreement with Comerica Bank that Stratus had designated as a cash flow hedge with changes in fair value of the instrument recorded in other comprehensive income (loss). The instrument effectively converted the variable rate portion of the Parkside Village Joint Venture's loan from Comerica Bank (the Parkside Village loan) from the one-month London Inter-bank Offered Rate (LIBOR) to a fixed rate of 2.3 percent. In connection with the sale of the Parkside Village property on July 2, 2015, Stratus fully repaid the amount outstanding under the Parkside Village loan. Stratus assumed the interest rate swap agreement and, as a result, the instrument no longer qualifies for hedge accounting. Accordingly, the accumulated other comprehensive loss balance of $0.6 million on July 2, 2015, was reclassified to the Consolidated Statement of Operations as a loss on interest rate derivative instruments, and changes in the fair value of the instrument are being recorded in the Consolidated Statements of Operations. The Consolidated Statements of Operations include gains on interest rate derivative instruments of $0.3 millionin 2017 and$0.2 million in 2016. Stratus also evaluated the counterparty credit risk associated with the interest rate swap agreement, which is considered a Level 3 input, but did not consider such risk to be significant. Therefore, the interest rate swap agreement is classified within Level 2 of the fair value hierarchy.
NOTE 6.DEBT
Stratus'Stratus’ debt follows (in thousands):
|
| | | | | | | | |
| | December 31, | |
| | 2017 | | 2016 | |
| Goldman Sachs loan, | | | | |
| average interest rate of 5.58% in 2017 and 2016 | $ | 145,195 |
| | $ | 147,025 |
| |
| Lakeway Construction loan, | |
| | |
| |
| average interest rate of 3.24% in 2016 | — |
| | 57,912 |
| |
| Comerica Bank credit facility, | | | | |
| average interest rate of 5.96% in 2017 and 6.00% in 2016 | 25,765 |
| | 46,547 |
| |
| Santal Phase I construction loan, | | | | |
| average interest rate of 3.74% in 2017 and 2.98% in 2016 | 31,864 |
| | 30,286 |
| |
| Barton Creek Village term loan, | | | | |
| average interest rate of 4.19% in 2017 and 2016 | 3,375 |
| | 5,555 |
| |
| Amarra Villas credit facility, | | | | |
| average interest rate of 4.12% in 2017 and 3.54% in 2016 | 5,247 |
| | 3,777 |
| |
| West Killeen Market construction loan, | | | | |
| average interest rate of 3.89% in 2017 | 5,378 |
| | — |
| |
| Jones Crossing construction loan | | | | |
| average interest rate of 4.56% in 2017 | 4,646 |
| | — |
| |
Total debta | $ | 221,470 |
| | $ | 291,102 |
| |
| | | | | | | | | | | |
| | December 31, |
| | 2022 | | 2021 |
| Comerica Bank revolving credit facility, | | | |
| average interest rate of 4.97% in 2022 and 5.00% in 2021 | $ | — | | | $ | — | |
| Jones Crossing loan, | | | |
| average interest rate of 3.85% in 2022 and 2.40% in 2021 | 24,143 | | | 24,042 | |
| The Annie B land loan, | | | |
| average interest rate of 4.67% in 2022 and 3.50% in 2021 | 13,969 | | | 13,847 | |
| New Caney land loan, | | | |
| average interest rate of 4.06% in 2022 and 3.11% in 2021 | 4,047 | | | 4,496 | |
| Paycheck Protection Program loan, | | | |
| fixed interest rate of 1.00% in 2021 | — | | | 156 | |
| Construction loans: | | | |
| Kingwood Place construction loan, | | | |
| average interest rate of 4.06% in 2022 and 2.61% in 2021 | 27,507 | | | 32,249 | |
| Lantana Place construction loan, | | | |
| average interest rate of 4.18% in 2022 and 3.00% in 2021 | 21,782 | | | 22,098 | |
| The Saint June construction loan, | | | |
| average interest rate of 5.89% in 2022 | 13,829 | | | — | |
| Magnolia Place construction loan, | | | |
| average interest rate of 5.12% in 2022 and 3.50% in 2021 | 6,816 | | | 2,077 | |
| West Killeen Market construction loan, | | | |
| average interest rate of 4.45% in 2022 and 3.00% in 2021 | 5,306 | | | 6,078 | |
| Amarra Villas credit facility, | | | |
| average interest rate of 5.10% in 2022 and 3.10% in 2021 | 5,366 | | | 1,605 | |
Total debt a | $ | 122,765 | | | $ | 106,648 | |
a. Includes net reductions for unamortized debt issuance costs of $2.1$1.1 million at December 31, 2017,2022, and $2.2$1.2 million at December 31, 2016. Debt issuance costs are amortized using the straight-line method over the term of the related debt, which approximates the effective interest method, to interest expense.2021.
Goldman Sachs loan.On January 5, 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 (the Goldman Sachs loan) with a fixed interest rate of 5.58 percent per annum and payable monthly based on a 30-year amortization. Stratus used the proceeds from the Goldman Sachs loan to fully repay its existing obligations under Stratus' term loan with Bank of America, N.A. (the BoA loan) and the $20.0 million Comerica Bank term loan included as part of the Comerica Bankrevolving credit facility. In connection with prepayment of the BoA loan, Stratus recorded a loss on early extinguishment of debt totaling $0.8 million in 2016.
The obligations of Stratus Block 21, LLC (Block 21), a wholly-owned subsidiary of Stratus and borrower under the Goldman Sachs loan, are secured by all assets owned from time to time by Block 21. Additionally, certain obligations of Block 21 under the Goldman Sachs loan are guaranteed by Stratus, including environmental indemnification and other customary carve-out obligations. In connection with any acceleration of the Goldman Sachs loan, Block 21 must pay a yield maintenance premium in the amount of at least three percent of the amount of indebtedness prepaid. Prepayment of the Goldman Sachs loan is not permitted except for certain prepayments resulting from casualty or condemnation and in whole within 90 days of the maturity date.
Lakeway Construction loan.On September 29, 2014, a Stratus subsidiary entered into a $62.9 million construction loan agreement with PlainsCapital Bank (the Lakeway Construction loan) to fund the construction, development and leasing of The Oaks at Lakeway in Lakeway, Texas. In February 2017, Stratus repaid the Lakeway Construction loan withUsing proceeds from the sale of The Oaks at Lakeway (see Note 11).
Block 21, Stratus repaid the outstanding amount under its Comerica Bank revolving credit facility.Stratus' borrowing capacityfacility in June 2022. As of December 31, 2022, Stratus had $49.0 million available under the Comericarevolving credit facility. Letters of credit, totaling $11.0 million, have been issued under the revolving credit facility, is $52.5 million, comprised of a $45.0 million revolving lineand secure the company’s obligation to build certain roads and utilities facilities benefiting Holden Hills and Section N. In May 2022, Stratus and Comerica Bank entered into an amendment to increase the letter of credit and asublimit from $7.5 million trancheto $11.5 million and change the benchmark rate to the Bloomberg Short-Term Bank Yield Index (BSBY) Rate. In February 2023, the Holden Hills property was removed from the borrowing base for letters of credit. Prior to November 7, 2017, the interest rate applicable to amountsrevolving credit facility, and the maximum amount that could be borrowed was reduced. At March 27, 2023 the maximum amount that could be borrowed under the Comericafacility was $53.7 million pursuant to the terms of the loan agreement, resulting in availability of $42.7 million, net of letters of credit committed against the facility. The borrowing base limitation, as defined in the facility, is no more than 50 percent of the fair market value (primarily determined by appraisals) of the collateral assets, and the maximum amount that may be borrowed is determined by applying specified percentages to different types of collateral, with the largest category as of December 31, 2022 and 2021 consisting of unimproved real property which has a limitation of 35 percent of fair market value. In March 2023, Stratus entered into a modification of the revolving credit facility, was LIBOR plus 4.0 percent, with a minimum interest rate of 6.0 percent. As of November 2017, the interest rate applicable to amounts borrowed under each tranche is equal to an annual rate of LIBOR plus 4.0 percent, with no minimum. In August 2017, Stratuswhich extended the maturity date of thisthe revolving credit facility from August 31, 2017, to November 30, 2017,March 27, 2025, and in November 2017, further extendedincreased the maturity date by one yearBSBY Rate floor to November 30, 2018. Stratus is continuing to negotiate a modification and a longer-term extension of0.50 percent. As amended, advances under the revolving credit facility with Comerica Bank.bear interest at the one-month BSBY Rate (with a floor of 0.50 percent) plus 4.00 percent. The Comerica Bank credit facilityloan is secured by substantially all of Stratus' assets except for properties that are encumberednot subject to a separate project loan agreement. The loan agreement requires Stratus to maintain a net asset value, as defined in the loan agreement, of $125 million and an aggregate debt-to-gross asset value of not more than 50 percent. Comerica Bank’s prior written consent is required for any common stock repurchases in excess of $1.0 million or any dividend payments.
Jones Crossing loan. In June 2021, a Stratus wholly-owned subsidiary entered into a $24.5 million loan with Regions Bank (the Jones Crossing loan). Of the proceeds from the Jones Crossing loan, $22.2 million was used to repay in full the original Jones Crossing construction loan. The repayment of the Jones Crossing construction loan resulted in Stratus recognizing a $163 thousand loss on the early extinguishment of debt representing the write-off of unamortized debt issuance costs related to the construction loan.
The Jones Crossing loan has a maturity date of June 17, 2026, and bears interest at LIBOR plus 2.25 percent (or, if applicable, a replacement rate), provided LIBOR shall not be less than 0.15 percent. Payments of interest only on the Jones Crossing loan are due monthly through the term of the loan with the outstanding principal due at maturity. If the debt service coverage ratio falls below 1.15 to 1.00 for any fiscal quarter beginning with the quarter ending September 30, 2022, a “Cash Sweep Period” (as defined in the Jones Crossing loan) results, which limits Stratus’ ability to receive cash from its Jones Crossing subsidiary. The debt service coverage ratio fell below 1.15 to 1.00 in fourth-quarter 2022, and the Jones Crossing subsidiary made a $231 thousand principal payment in February 2023 on the Jones Crossing loan to bring the debt service coverage ratio back above 1.15 to 1.00, and a “Cash Sweep Period” did not occur. The Jones Crossing loan is secured by separate debt financing.the Jones Crossing project, and Stratus has provided a guaranty limited to non-recourse carve-out obligations and environmental indemnification. In addition, any default under the ground leases, which grant Stratus the right to occupy the Jones Crossing property, would trigger the carve-out guaranty. The Comerica Bank credit facilityJones Crossing loan contains customarycertain financial covenants, including a requirement that Stratus maintain a minimum total stockholders' equity balanceliquid assets of $110.0 million and a requirement thatat least $2.0 million.
The Annie B land loan. In September 2021, Stratus obtain Comerica's prior written consent for any common stock repurchases or dividend payments. Additionally, the
Comerica Bank credit facility is cross-collateralized with Stratus' $59.2 million construction loan agreement with Comerica Bank (the Santal construction loans) to fund the development and construction of a multi-family development in Section N of Barton Creek, and with an $8.0 million stand-alone revolving credit facility with Comerica Bank (the Amarra Villas credit facility), the proceeds of which will be used for the construction of single family townhomes and related improvements at the Amarra Villas.
As of December 31, 2017, Stratus had $25.8 million outstanding under the $45.0 million revolving line of credit.
Santal Construction loans.On January 8, 2015, a Stratus subsidiaryBlock 150, L.P. entered into a $34.1an 18-month, $14.0 million constructionland loan with Comerica Bank (Santal Phase I Loan) to fundacquire the development and construction of Santal Phase I, a 236-unit, garden-style, multi-family development in Section N of Barton Creek, which was completed in August 2016. On September 11, 2017, the same Stratus subsidiary entered into an amended and restated construction loan agreement with Comerica Bank to increase the original commitment to $59.2 million, which includes $32.8 millionland for the Santal Phase I Loan and $26.4 million to finance the construction of Santal Phase II, a 212-unit garden style, multi-family, development located adjacent to Santal Phase I (Santal Phase IIThe Annie B project (The Annie B land loan). Both the Santal Phase IThe loan was set to mature March 1, 2023, and the Santal Phase II loans havebore interest at LIBOR (with a maturity datefloor of September 11, 2020. As of December 31, 2017, a total of $31.9 million was drawn on the Santal Phase I loan and no amounts were drawn on the Santal Phase II loan. The interest rate applicable to the Santal Phase I loan is LIBOR0.50 percent) plus 2.5 percent. The interest rate applicable to the Santal Phase II loan is LIBOR plus 3.03.00 percent. Payments of interest on each loan are due and payable monthly, through September 11, 2020. Outstanding amounts will be secured by Santal Phase I and Phase II and all subsequent improvements, including all leases and rents associated with the developments as well as related permits and other entitlements. The construction loan agreements and related documents contain affirmative and negative covenants usual and customary for loan agreements of this nature. Santal may extend the maturity of each loan for up to two additional 12-month periods subject to satisfaction of certain conditions, including a debt service coverage ratio of at least 1.10 to 1.00 on the date immediately preceding the commencement of the first extension period and 1.20 to 1.00 on the date immediately preceding the commencement of the second extension period. The Santal Phase I and Phase II loans contain customary financial covenants including a requirement that Stratus maintain a minimum total stockholders' equity balance of $110.0 million.
Barton Creek Village term loan. On June 27, 2014, Stratus entered into a $6.0 million term loan agreement with PlainsCapital Bank (the Barton Creek Village term loan), that matures on June 27, 2024. The interest rate is fixed at 4.19 percent and payments of principal and interest are due monthly. The Barton Creek Village term loan is secured by assets at Stratus' Barton Creek Village project, which had an aggregate net book value of $3.5 million at December 31, 2017. In February 2017, in connection with the sale of a portion of the property, Stratus prepaid $2.1 million of this loan.
Amarra Villas credit facility.On July 12, 2016, a Stratus subsidiary entered into the Amarra Villas credit facility. The Amarra Villas credit facility matures on July 12, 2019, and is secured by assets at Stratus’ 20-unit Villas at Amarra Drive townhome project (the Amarra Villas), which had a net book value of $10.9 million at December 31, 2017. Interestonly on the loan is variablewere due monthly through February 2023, with the outstanding principal due at LIBOR plus 3.0 percent.maturity. The Amarra Villas credit facilityAnnie B land loan is guaranteed by Stratus and secured by The Annie B project. The loan agreement contains financial covenants, including a requirement that Stratus maintain a minimum total stockholders' equity balancenet asset value, as defined in the agreement, of $110.0 million. Principal paydowns will be made as townhomes sell,$125.0 million and additional amounts will be borrowed as additional townhomes are constructed.an aggregate debt-to-gross asset value of not more than 50 percent and places certain restrictions on distributions from the partnership to its partners, including Stratus. The Annie B land loan requires Comerica Banks’ prior written consent for any Stratus common stock repurchases in excess of $1.0 million or any dividend payments. In February 2023, Stratus entered into a modification agreement that extended the maturity date of the loan to March 1, 2024, and changed the interest rate to the BSBY Rate (with a floor of 0.50 percent) plus 3.00 percent. In connection with the modification agreement, Stratus Block 150, LP, escrowed an interest reserve of $0.6 million with the lender.
West Killeen Market ConstructionNew Caney land loan. On August 5, 2016,In March 2019, a Stratus wholly-owned subsidiary entered into a $9.9$5.0 million constructionland loan with Texas Capital Bank. Proceeds from the loan were used to fund the acquisition of H-E-B's portion of the New Caney partnership in which Stratus and H-E-B purchased a tract of land for the future development of an H-E-B-anchored mixed-use project in New Caney, Texas. In March 2021, Stratus exercised its option to extend the loan for an additional 12 months to March 8, 2022, which required a principal payment of $0.5 million. In March 2022, Stratus extended the loan for an additional 12 months to March 8, 2023, which required two principal payment of $0.2 million, one in March 2022 and one 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). As amended the loan bore interest at Term SOFR plus 3.00 percent. Borrowings were secured by the New Caney land and were guaranteed by Stratus. The loan agreement with Southside Bank (the West Killeen Market loan) for the construction of the West Killeen Market project. Interest on the loan is variable at one-month LIBOR plus 2.75 percent, with a minimum interest rate of 3.0 percent. Payments of interest only will be made monthly during the initial 42 months of the 72-month term, followed by 30 months of monthly principal and interest payments based on a 30-year amortization. Borrowings on the West Killeen Market loan are secured by assets at Stratus’ West Killeen Market retail project in Killeen, Texas, which had a net book value of $10.7 million at December 31, 2017, and are guaranteed by Stratus until construction is completed and certain customary debt service coverage ratios are met. The West Killeen Market loan contains customarycontained financial covenants including a requirement that Stratus maintain a minimumnet asset value of $125.0 million and unencumbered liquid assets of no less than $10.0 million. This loan was repaid at its maturity in March 2023.
Paycheck Protection Program 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 (the CARES Act), which was signed into law on March 27, 2020. The PPP loan bore interest at 1.00 percent and matured April 15, 2022, except for the portion that was forgiven. Stratus' PPP loan forgiveness application was accepted and approved in August 2021 and the outstanding balance and accrued interest were forgiven with the exception of $0.3 million. As such, Stratus recognized a gain on extinguishment of debt of $3.7 million during 2021.
Kingwood Place construction loan. In 2018, the Kingwood, L.P. entered into a construction loan agreement with Comerica Bank (the Kingwood Place construction loan), which provides financing for nearly 70 percent of the costs associated with construction of Kingwood Place. The total stockholders'loan of $32.9 million included the original commitment of $6.8 million used to purchase a 54-acre tract of land located in Kingwood, Texas, and an additional $26.1 million for
the development of Kingwood Place. The remaining 30 percent of the project’s cost (totaling approximately $15 million) was funded by borrower equity, contributed by Stratus and private equity investors. In January 2020, the Kingwood Place construction loan was modified to increase the loan amount by $2.5 million to a total of $35.4 million. The increase was used to fund the construction of a retail building on an existing Kingwood Place retail pad. In December 2022, the loan was amended to extend the maturity date for an additional 12 months to December 6, 2023, which required an extension fee payment of approximately $90 thousand. The loan has the possibility of one additional 12-month extension if certain debt service coverage ratios are met. The amendment also converted the benchmark rate from LIBOR to the BSBY Rate. The loan now bears interest at the one-month BSBY Rate (with a floor of 0.50 percent) plus 2.75 percent. Principal and interest payments of $29,200 are due monthly with the remaining balance due at maturity. Borrowings on the Kingwood Place construction loan are secured by the Kingwood Place project, and are guaranteed by Stratus until certain conditions are met. The loan agreement contains financial covenants, including a requirement that Stratus maintain a net asset value, as defined in the agreement, of $110.0 million.$125.0 million and an aggregate debt-to-gross asset value of not more than 50 percent and places certain restrictions on distributions from the partnership to its partners, including Stratus. The Kingwood Place construction loan requires Comerica Banks’ prior written consent for any common stock repurchases in excess of $1.0 million and any dividend payments.
Lantana Place Constructionconstruction loan. On April 28,In 2017, a Stratus wholly-owned subsidiary entered into a $26.3 million construction loan with Southside Bank (the Lantana Place construction loan) to finance the initial phase of Lantana Place. In January 2021, Stratus entered into amendments to the Lantana Place construction loan in which Stratus' Lantana Place subsidiary was granted a 320,000-square-foot, mixed-use development project in southwest Austin, Texas. Constructionwaiver of the first phasedebt service coverage ratio covenant until September 30, 2021, at which point the ratio was measured by reference to the three-month period then ended, and subsequently increased each quarter until measured by reference to the 12-month period ended June 30, 2022, and then on a trailing 12-month period for each quarter thereafter. As part of Lantana Place beganthe January 2021 amendment, Stratus repaid $2.0 million in June 2017. No amounts were drawnprincipal on the Lantana Place construction loan.
In August 2022, Stratus and Southside Bank amended the Lantana Place construction loan. Pursuant to the agreement, the date through which Stratus can request advances under the loan as ofwas extended through December 31, 2017. Interest is
variable at one-month LIBOR2023, the interest rate for the loan was changed to Term SOFR plus 2.752.40 percent, subject to a minimum interest rate3.00 percent floor, and the maturity date of 3.0 percent. 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 will beon the construction loan are due and payable monthly through NovemberJuly 1, 2020. The principal balance outstanding after November2023. Beginning August 1, 2020, will be payable in equal2023, monthly installmentspayments of principal and interest based on a 30-year amortization. Outstanding amounts must be repaid in fullamortization 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.
The Saint June construction loan. In June 2021, The Saint June, L.P. entered into a construction loan with Texas Capital Bank to finance approximately 55 percent of the estimated $55 million cost of the development and construction of The Saint June. Available borrowings under the loan total the least of (i) $30.3 million, (ii) 60 percent of the total construction costs, or (iii) 55 percent of the as-stabilized appraised value of the property.
The loan matures on or before April 28,October 2, 2024, with two options to extend the maturity for an additional 12 months, subject to satisfying specified conditions and the payment of an extension fee for each extension. In January 2023, Stratus and can be prepaid without penalty. Outstanding amounts will beTexas Capital Bank amended The Saint June construction loan. Pursuant to the agreement, the interest rate for the loan was changed to Term SOFR plus 2.85 percent, subject to a 3.50 percent floor. Payments of interest only on the loan are due monthly through October 2, 2024, with the outstanding principal due at maturity.
The loan is secured by the Lantana PlaceThe Saint June project and all subsequent improvements, including all leases and rents associated withis fully guaranteed by Stratus. However, the development. The agreement contains affirmative and negative covenants usual and customary for loan agreements of this nature, including but not limitedguaranty will convert to a financial covenant50 percent repayment guaranty upon completion of construction of The Saint June. Further, once The Saint June, L.P. is able to maintain a debt service coverage ratio of at least 1.351.25 to 1.00, at all times beginning on December 31, 2019.the repayment guaranty will be eliminated. Notwithstanding the foregoing, Stratus will guarantee outstanding amounts under the loan until the developmentremain liable for customary carve-out obligations and environmental indemnity. Stratus is ablealso required to maintain a net asset value, as defined by the guaranty, of $125.0 million and liquid assets of at least $10.0 million. The Saint June, L.P. is not permitted to make distributions to its partners, including Stratus, until completion of The Saint June project, payment of construction costs and the project continues to satisfy an assumed debt service coverage ratio of 1.50not less than 1.00 to 1.00 for a period of sixthree consecutive months. The project must comply with a specified loan-to-value ratio covenant.
Jones Crossing Construction
Magnolia Place construction loan.On September 1, 2017, In August 2021, a Stratus wholly-owned subsidiary entered into a $36.8$14.8 million construction loan with SouthsideVeritex Community Bank (the Jones Crossing loan)secured by the Magnolia Place project. The loan matures on August 12, 2024, with two options to finance construction of Phases 1 and 2,extend the retail component, of Stratus' Jones Crossing project, a new HEB-anchored, mixed use development in College Station, Texas. Construction of the initial two phases of the Jones Crossing project began in September 2017,maturity for an additional 12 months, subject to satisfying specified conditions and the HEB grocery store is expected to open in mid-2018. Aspayment of December 31, 2017, $5.1 million was drawn on the Jones Crossing loan. Interest is variablean extension fee. The loan bears interest at one-month30-day LIBOR plus 3.753.25 percent subject to(or, if applicable, a minimum interest ratereplacement rate), with a floor of 4.03.50 percent. Payments of interest only are due monthly with the outstanding principal due at maturity. Stratus provided a completion guaranty and payable monthly through March 1, 2021.25-percent-limited-payment guaranty. The principal balanceloan agreement contains financial covenants, including that Stratus is required to maintain a net asset value, as defined in the loan agreement, of $125.0 million and liquid assets of at least $7.5 million.
West Killeen Market construction loan. In 2016, a Stratus wholly-owned subsidiary entered into a $9.9 millionconstruction loan agreement with Southside Bank (the West Killeen Market loan) to finance a portion of the loan outstanding after March 1, 2021, will be payable in equal monthly installmentsconstruction of principal and interest based on a 30-year amortization. Outstanding amounts must be repaid in full on or before September 1, 2023.the West Killeen Market project. The loan is secured by the Jones CrossingWest Killeen Market project and all subsequent improvements, including all leases and rents associated with the development as well as related permits and other entitlements. The loan agreement and related documents contain affirmative and negative covenants usual and customary for loan agreements of this nature, including, but not limited to, a financial covenant to maintain a debt service coverage ratio of at least 1.35 to 1.00 at all times beginning on March 31, 2020. Outstanding amounts under the loan areis guaranteed by Stratus until Phases 1 and 2 of the Jones Crossing development are completed and the developmentStratus' West Killeen Market subsidiary is able to maintain a debt service ratio of 1.50 to 1.00 as of the end of each fiscal quarter after completion of construction on the project, measured by reference to the trailing six-month period ending on the last day of such quarter. 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 3.00 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.
Maturities.The following table summarizesloan agreement contains financial covenants, including a requirement that Stratus maintain a net asset value, as defined in the agreement, of $125.0 million and a requirement that Stratus' West Killeen Market maintains a debt service coverage ratio of at least 1.35 to 1.00 measured by reference to a trailing 12-month period for each quarter.
Amarra Villas credit facility.In2016, a Stratus wholly-owned subsidiary entered into the Amarra Villas credit facility to finance construction of the Amarra Villas project. In March 2019, two Stratus wholly-owned subsidiaries entered into an amended and restated loan agreement with Comerica Bank to modify, increase and extend Stratus' Amarra Villas credit facility. The amended and restated loan agreement provided for an increase in the revolving credit facility commitment from $8.0 million to $15.0 million and an extension of the maturity date from July 12, 2019 to March 19, 2022. In March 2022, the Stratus subsidiaries and Comerica Bank agreed to an extension of the maturity date to June 19, 2022, while they negotiated a modification of this facility. In June 2022, Stratus subsidiaries and Comerica Bank entered into a modification agreement pursuant to which 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 0.00 percent) plus 3.00 percent, and the maturity date was extended to June 19, 2024.
The Amarra Villas credit facility 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 not more than 50 percent. At December 31, 2022, Stratus had $12.6 million available under its $18.0 million Amarra Villas credit facility. Principal paydowns occur as homes are sold, and additional amounts are borrowed as additional homes are constructed. The loan is secured by the Amarra Villas project and guaranteed by Stratus. The Amarra Villas credit facility requires Comerica Banks’ prior written consent for any common stock repurchases in excess of $1.0 million and any dividend payments. In March 2023, Stratus made a $2.2 million principal payment on the credit facility upon the closing of a sale of one of the Amarra Villas homes.
The Saint George construction loan. In July 2022, The Saint George Apartments, L.P. 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 0.00 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.
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 not more than 50 percent. The Saint George Apartments, L.P. is not permitted to make distributions to its partners, including Stratus, while the loan remains outstanding. No amounts had been borrowed on this loan as of December 31, 2022.
Financial Covenants and Compliance. Stratus’ and its subsidiaries’ debt arrangements, including Stratus’ guaranty agreements, 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 or change of management; sell all or substantially all of its assets; and engage in mergers, consolidations or other business combinations. As of December 31, 2022, Stratus and its subsidiaries were in compliance with the financial covenants contained in the financing agreements discussed above.
LIBOR Phase Out. Certain of Stratus' debt maturitiesagreements reference LIBOR which is being phased out and replaced with alternative reference rates. Stratus does not expect the transition from LIBOR and other interbank offered rates to have a material impact on its consolidated financial results.
Interest Payments. Interest paid on debt, excluding debt related to Block 21 and The Santal included in liabilities held for sale, totaled $4.9 million in 2022 and $4.8 million in 2021.
Maturities. Maturities of debt based on the principal amounts and terms outstanding as ofat December 31, 2017 (in thousands):2022 total $45.8 million in 2023, $26.9 million in 2024, $5.5 million in 2025, $24.8 million in 2026, and $20.9 million in 2027.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2018 | | 2019 | | 2020 | | 2021 | | 2022 | | Thereafter | | Total |
| Goldman Sachs loan | $ | 2,086 |
| | $ | 2,207 |
| | $ | 2,313 |
| | $ | 2,470 |
| | $ | 2,613 |
| | $ | 134,636 |
| | $ | 146,325 |
|
Santal Phase I loana | — |
| | — |
| | 32,133 |
| | — |
| | — |
| | — |
| | 32,133 |
|
| Comerica Bank credit facility | 25,765 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 25,765 |
|
| Amarra Villas credit facility | — |
| | 5,342 |
| | — |
| | — |
| | — |
| | — |
| | 5,342 |
|
| West Killeen Market construction loan | — |
| | — |
| | — |
| | — |
| | 5,544 |
| | — |
|
| 5,544 |
|
| Barton Creek Village term loan | 100 |
| | 105 |
| | 109 |
| | 114 |
| | 119 |
| | 2,877 |
| | 3,424 |
|
| Jones Crossing loan | — |
| | — |
| | — |
| | — |
| | — |
| | 5,066 |
| | 5,066 |
|
| Total | $ | 27,951 |
| | $ | 7,654 |
| | $ | 34,555 |
| | $ | 2,584 |
| | $ | 8,276 |
| | $ | 142,579 |
| | $ | 223,599 |
|
| |
a. | Stratus has the option to extend the maturity date for two additional twelve-month periods, subject to certain debt service coverage conditions. |
NOTE 7.INCOME TAXES
Stratus’ (provision for) benefit fromprovision for income taxes consists of the following (in thousands):
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2022 | | 2021 |
| Current | $ | (981) | | | $ | 18,608 | |
| Deferred | 1,370 | | | (6,031) | |
| Provision for income taxes | $ | 389 | | | $ | 12,577 | |
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Current | $ | (7,998 | ) | | $ | 806 |
| | $ | (3,458 | ) |
| Deferred | (5,906 | ) | | 1,973 |
| | (2,118 | ) |
| (Provision for) benefit from income taxes | $ | (13,904 | ) | | $ | 2,779 |
| | $ | (5,576 | ) |
Excess tax benefits related to option exercises and vesting of RSUs are required to be recognized as an income tax benefit and expense on the Consolidated Statements of Operations. During 2017, Stratus realized tax benefits of $0.2 million related to excess tax benefits on stock option exercises and RSUs vested.
The components of deferred income taxes follow (in thousands):
| | | | | | | | | | | |
| | December 31, |
| | 2022 | | 2021 |
| Deferred tax assets and liabilities: | | | |
| Real estate, commercial leasing assets and facilities | $ | 4,707 | | | $ | 9,743 | |
| Employee benefit accruals | 1,005 | | | 2,411 | |
| Deferred income | — | | | 10 | |
| Other assets | 3,745 | | | 3,465 | |
| Net operating loss credit carryforwards | 3 | | | — | |
| Other liabilities | (3,237) | | | (3,180) | |
| Valuation allowance | (6,185) | | | (6,440) | |
| Deferred tax assets, net | $ | 38 | | | $ | 6,009 | |
The $6.0 million decrease in Stratus' net deferred tax assets is primarily attributable to deferred tax assets realized in 2022 from the sale of Block 21. Stratus continues to maintain a valuation allowance on substantially all of its remaining net deferred tax assets. In evaluating the recoverability of the remaining deferred tax assets,
|
| | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
| Deferred tax assets and liabilities: | | | |
| Real estate, commercial leasing assets and facilities | $ | 10,179 |
| | $ | 13,995 |
|
| Alternative minimum tax credits (no expiration) | — |
| | 1,169 |
|
| Employee benefit accruals | 464 |
| | 563 |
|
| Accrued liabilities | 53 |
| | 80 |
|
| Deferred income | 81 |
| | 5 |
|
| Charitable contribution carryforward | — |
| | 185 |
|
| Other assets | 711 |
| | 496 |
|
| Net operating loss credit carryforwards | 5 |
| | 1,225 |
|
| Other liabilities | (32 | ) | | (495 | ) |
| Deferred tax assets, net | $ | 11,461 |
| | $ | 17,223 |
|
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. The realizationassets that are not more likely than not to be realized. Stratus’ future results of theoperations may be favorably impacted by reversals of valuation allowances if Stratus is able to demonstrate sufficient positive evidence that its deferred tax assets recorded as of December 31, 2017, is primarily dependent upon Stratus' ability to generate future taxable income.will be realized.
A reconciliationReconciliations of the U.S. federal statutory tax rate to Stratus'Stratus’ effective income tax rate for the years ended December 31 followsfollow (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2022 | | 2021 a |
| | Amount | | Percent | | Amount | | Percent |
| Income tax provision (benefit) computed at the federal statutory income tax rate | $ | (1,405) | | | 21 | % | | $ | 17,228 | | | 21 | % |
| Adjustments attributable to: | | | | | | | |
| Change in valuation allowance | (255) | | | 4 | | | (4,247) | | | (5) | |
| Noncontrolling interests | 141 | | | (2) | | | (1,230) | | | (2) | |
| Executive compensation limitation | 664 | | | (10) | | | 840 | | | 1 | |
| State taxes | 177 | | | (3) | | | 571 | | | 1 | |
| PPP loan forgiveness | — | | | — | | | (773) | | | (1) | |
| Net, other | 1,067 | | | (16) | | | 188 | | | — | |
| Provision for income taxes | $ | 389 | | | (6) | % | | $ | 12,577 | | | 15 | % |
a.Certain prior year tax component amounts have been reclassified to conform to the current year presentation.
|
| | | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, | |
| | 2017 | | 2016 | | 2015 | |
| | Amount | | Percent | | Amount | | Percent | | Amount | | Percent | |
| Income tax (expense) benefit computed at the | | | | | | | | | | | | |
| federal statutory income tax rate | $ | (6,220 | ) | | (35 | )% | | $ | 3,072 |
| | (35 | )% | | $ | (6,983 | ) | | (35 | )% | |
| Adjustments attributable to: | | | | | | | | | | | | |
| Noncontrolling interests | (2 | ) | | — |
| | — |
| | — |
| | 1,896 |
| | 9 |
| |
| Change in statutory rate | (7,580 | ) | | (42 | ) | | — |
| | — |
| | — |
| | — |
| |
| State taxes and other, net | (102 | ) | | (1 | ) | | (293 | ) | | 3 |
| | (489 | ) | | (2 | ) | |
| (Provision for) benefit from income taxes | $ | (13,904 | ) | | (78 | ) | | $ | 2,779 |
| | (32 | ) | | $ | (5,576 | ) | | (28 | ) | |
Stratus paid federal income taxes and state margin taxes totaling $6.9$37.7 million in 2017, $1.72022and$0.4 million in 20162021. In connection with the CARES Act and $2.0 million in 2015.the ability to carry back net operating losses, Stratus received a $5.1 million U.S. federal income tax refunds of $2.3refund in 2022. Stratus also received a $1.9 million U.S. federal income tax refund in 2017, and less than $0.1 million in each of2016 and 2015.2021.
Uncertain Tax Positions. During the three years ended December 31, 2017, Stratus has recorded unrecognized tax benefits related to state margin tax filing positions.federal examinations. A summary of the changes in unrecognized tax benefits follows (in thousands):
| | | | | | | | | | | |
| Years Ended December 31, |
| | 2022 | | 2021 |
| Balance at January 1 | $ | 221 | | | $ | 210 | |
| (Reductions) additions for tax positions related to prior years | (221) | | | 11 | |
| Balance at December 31 | $ | — | | | $ | 221 | |
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Balance at January 1 | $ | 773 |
| | $ | 1,105 |
| | $ | 1,160 |
|
| Subtractions for tax positions related to prior years | (266 | ) | | (332 | ) | | (55 | ) |
| Balance at December 31 | $ | 507 |
| | $ | 773 |
| | $ | 1,105 |
|
As of December 31, 2017,2022, Stratus had $0.5 million ofno unrecognized tax benefits that if recognized would affect its annual effective tax rate.benefits. During 2018,2022, approximately $0.3$0.2 million of unrecognized tax benefits could bewere recognized as a result of the expirationcompletion of statutes of limitations.federal examinations.
Stratus records liabilities offsetting the tax provision benefits of uncertain tax positions to the extent it estimates that a tax position is more likely than not to not be sustained upon examination by the taxing authorities. Stratus has elected to classify any interest and penalties related to income taxes within income tax expense in its
Consolidated Statements consolidated statements of Operations.comprehensive income (loss). As of December 31, 2017, less than $0.1 million of2022, no such interest costs have been accrued.
Stratus files both U.S. federal income tax and state margin tax returns. With limited exceptions, Stratus is no longer subject to U.S. federal income tax examinations by tax authorities for the years prior to 2014,2019 and state margin tax examinations for the years prior to 2013.2018.
Tax Reform. The Tax Cuts and JobsOn 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 one percent excise tax on December 22, 2017, includes significant changes to the U.S. Internal Revenue Codefair market value of 1986, as amended (the Code). The Act reduces thenet corporate incomestock repurchases made by covered corporations, effective for tax rate to 21 percent, eliminates the corporate alternative minimum tax, allows for immediate expensing of capital investments, and limits deductions of interest expense and executive compensation. While the Act is generally applicable for years beginning after December 31, 2017, existing U.S. GAAP requires2022. Stratus is
assessing the effects of changes in tax rates and laws on deferred tax balances to be recognized in the period in which the legislation is enacted.
Due to the significant and complex changes to the Code from the the Act, the U.S. Securities and Exchange Commission (SEC) issued staff Accounting Bulletin No. 118, “Income Tax Accounting Implicationspotential impacts of the Tax Cuts and JobsIR Act,” (SAB 118). SAB 118 provides but does not expect the IR Act to have a measurement period for up to one year for adjustments to be made to account for the effects of the Act. Stratus reflected the income tax effects of those aspects of the Act for which the accounting is complete. To the extent Stratus' accounting for certain income tax effects of the Act is incomplete but Stratus is able to determine a reasonable estimate, Stratus has recorded a provisional estimate in the financial statements.
The primary impact of the Act on Stratus relates to the re-measurement of deferred tax assets and liabilities resulting from the change in the U.S. corporate tax rate from 35 percent to 21 percent. In fourth-quarter 2017, Stratus recognized the change in the federal statutory rate and recorded a tax provision of approximately $7.6 million to reflect thematerial impact on its deferred tax assets.consolidated financial statements
NOTE 8.EQUITY TRANSACTIONS, STOCK-BASED COMPENSATION AND EMPLOYEE BENEFITS
Equity
Dividends. Stratus'The Comerica Bank revolving credit facility, requires the bank'sAmarra Villas credit facility, The Annie B land loan, The Saint George construction loan, Kingwood Place construction loan and Holden Hills construction loan entered into in February 2023 require Comerica Bank’s prior written consent to pay afor any common stock repurchases in excess of $1.0 million or any dividend on Stratus' common stock. payments.
Dividends. On March 15, 2017, the Board of Directors (the Board),September 1, 2022, after receiving written consent from Comerica Bank, Stratus’ Board declared a special cash dividend of $1.00$4.67 per share ($8.1(totaling $40.0 million), on Stratus’ common stock, which was paid on April 18, 2017,September 29, 2022 to stockholdersshareholders of record on Marchas of September 19, 2022. Accrued liabilities as of December 31, 2017. The special cash dividend was declared after2022, included $1.3 million representing dividends accrued for unvested RSUs in accordance with the Board’s considerationterms of the resultsawards. The accrued dividends will be paid to the holders of the sale of The Oaks at Lakeway. Comerica Bank’sRSUs, if and when they vest.
Share Repurchase Program. On September 1, 2022, after receiving written consent to the payment of this special dividend is not indicative of the bank’s willingness to consent to the payment of future dividends. The declaration of future dividends is at the discretion of the Board, subject to the restrictions under Stratus'from Comerica Bank, credit facility, and will depend on Stratus' financial results, cash requirements, projected compliance with covenants in its debt agreements, outlook and other factors deemed relevant by the Board.
Share Purchase Program. In November 2013, Stratus'Stratus’ Board approved an increase in the open marketa new share purchaserepurchase program, from 0.7which authorizes repurchases of up to $10.0 million shares to 1.7 million shares of StratusStratus’ common stock. The purchases may occur overrepurchase program authorizes Stratus, in management’s discretion, to repurchase shares from time depending on many factors, includingto time, subject to market conditions and other factors. In 2022, Stratus acquired 294,700 shares of its common stock under the marketshare repurchase program for a total cost of $7.9 million at an average price of $26.69 per share. Through March 27, 2023, Stratus has acquired 335,703 shares of its common stock; Stratus’ operating results, cash flowstock for a total cost of $8.7 million at an average price of $25.93 per share, and financial position; and general economic and market conditions. There were no purchases$1.3 million remains available for repurchases under this program during 2017, 2016 or 2015. As of December 31, 2017, 991,695 shares remain available under thisthe program.
Stock-based Compensation
Stock Award Plans. On May 12, 2022, the stockholders of Stratus currently has four stock-based compensation plans, all of which have awards available for grant. In 2017, Stratus' stockholders approved the 20172022 Stock Incentive Plan which provides for(the Plan). The Plan authorizes the issuance of stock-based compensation awards, including stock options and RSUs, relatingup to 180,000 shares of Stratus common stock that are issuable to Stratus employees and non-employee directors. Stratus’ 2010 and 2013 Stock Incentive Plans provide for the issuance of stock-based compensation awards, including stock options and RSUs, relating to 140,000 shares and 180,000 shares, respectively, of Stratus common stock that are issuable to Stratus employees and non-employee directors. Stratus' 1996 Stock Option plan for Non-Employee Directors provides for the issuance of stock options only. Stratus common stock issued upon option exercises or RSU vestings represents newly issued500,000 shares of common stock. Awards with respectfor no more than 250,000 shares may be granted to 180,000a participant in a single year, however, an annual limit of $300,000 applies to the sum of all cash, equity-based awards and other compensation granted to a non-employee director for services as a member of the board, and a maximum grant date value of equity-based awards granted during a single year may not exceed $200,000 of such annual limit. Upon approval of the Plan by stockholders, Stratus ceased making new awards under any prior plans. The Plan had 317,061 shares under the 2017 Stock Incentive Plan, 25,800 shares under the 2013 Stock Incentive Plan, 4,375 shares under the 2010 Stock Incentive Plan and 2,500 shares under the 1996 Stock Option Plan for Non-Employee Directors were available for new grants as of December 31, 2017.2022.
Stock-Based Compensation Costs. Compensation costs charged against earnings for RSUs, the only stock-based awards granted over the last several years, totaled $791 thousand$1.7 million for 2017, $719 thousand2022and $0.8 million for 2016 and $528 thousand for 2015.2021. Stock-based compensation costs are capitalized when appropriate. Based on Stratus’ history, executive turnover is rare. Therefore, Stratus does not currently apply a forfeiture rate when estimating stock-based compensation costs for RSUs.
RSUs. RSUs granted under the plans provide for the issuance of common stock to non-employee directors and certain officers of Stratusemployees and consultants at no cost to the directors and officers.recipients. The RSUs are converted into shares of Stratus common stock ratably and generally vest in one-quarter increments over the a one to four years year period following the grant date. For officers,employees and consultants, the awards willgenerally fully vest upon retirement, death and disability, and upon a qualifying termination of employment in connection with a change of control. For directors, the awards will fully vest upon a change of control and there will be a partial acceleration of vesting due tobecause of retirement, death and disability.disability for RSUs granted prior to 2022 and full acceleration of vesting under these scenarios for RSUs granted in 2022.
During 2016, Stratus' executive officers wereIn May 2022, Stratus granted performance-basedan aggregate 173,726 stock-settled RSUs with a three-year performance period. The final numbergrant-date value of shares to be issued$7.4 million, based on Stratus' stock price on the date of issuance, pursuant to the executive officers will be determined based on achievementterms of certain performance targets.the PPIP in connection with Lantana Place, which reached a valuation event under the PPIP in September 2021, and the sale of The total grant date target shares related to the performance-based RSU grants was 21,000,Santal in December 2021 (see further discussion below).
A summary of outstanding unvested RSUs including performance-based RSUs, as of December 31, 2017,2022, and activity during the year ended December 31, 2017, is presented below:2022, follow (dollars in thousands):
| | | | | | | | | | | |
| Number of
RSUs | | Aggregate
Intrinsic
Value |
| Balance at January 1 | 135,611 | | | |
| Granted | 198,179 | | | |
| Vested | (51,521) | | | |
| Balance at December 31 | 282,269 | | | $ | 5,445 | |
|
| | | | | | |
| | Number of RSUs | | Aggregate Intrinsic Value ($000) |
| Balance at January 1 | 111,750 |
| | |
| Granted | 27,200 |
| | |
| Vested | (39,750 | ) | | |
| Balance at December 31 | 99,200 |
| | $ | 2,004 |
|
The total fair value of RSUs granted was $0.7$8.3 million during 2017, $1.0 for 2022 and $2.4 million during 2016 and $0.6 million during 2015.for 2021. The total intrinsic value of RSUs vested was $0.6 million during 2017, $1.0$2.0 million during 20162022 and $0.6$0.8 million during 2015.2021. As of December 31, 2017,2022, Stratus had $1.4$3.0 million of total unrecognized compensation cost related to unvested RSUs expected to be recognized over a weighted-average period of 1.21.4 years.
Stock Options. Stock options granted under the plans generally expire 10 years after the date of grant and vest in 25 percent annual increments beginning one year from the date of grant. The plans and award agreements provide that participants will receive the following year’s vesting after retirement and provide for accelerated vesting if there is a change of control (as defined in the plans). Stratus has not granted stock options since 2011. A summary of stock options outstanding as of December 31, 2017, and changes during the year ended December 31, 2017, follows:
|
| | | | | | | | | | | | |
| | Number of Options | | Weighted Average Option Price | | Weighted Average Remaining Contractual Term (years) | | Aggregate Intrinsic Value ($000) |
| Balance at January 1 | 25,000 |
| | $ | 17.40 |
| | | | |
| Exercised | (7,500 | ) | | 8.37 |
| | | | |
| Expired | (5,000 | ) | | 32.85 |
| | | | |
| Balance at December 31 | 12,500 |
| | 16.64 |
| | 1.9 | | $ | 163 |
|
| Vested and exercisable at December 31 | 12,500 |
| | 16.64 |
| | 1.9 | | $ | 163 |
|
The intrinsic value of options exercised during 2017 totaled $142 thousand. There were no stock option exercises during 2016 or 2015. In addition, no stock options vested during 2017, 2016or2015.
The following table includes amounts related to vesting of RSUs and exercises of stock options (in thousands, except shares of Stratus common stock tendered):
| | | | | | | | | | | |
| Years Ended December 31, |
| | 2022 | | 2021 |
Stratus shares tendered to pay the minimum required taxes a | 11,277 | | | 5,461 | |
| Amounts Stratus paid for employee taxes | $ | 452 | | | $ | 153 | |
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Stratus shares tendered to pay the exercise | | | | | |
price and/or the minimum required taxesa | 11,888 |
| | 12,591 |
| | 11,562 |
|
| Cash received from stock option exercises | $ | 63 |
| | $ | — |
| | $ | — |
|
| Amounts Stratus paid for employee taxes | $ | 297 |
| | $ | 290 |
| | $ | 153 |
|
| |
a. | Under terms of the related plans and agreements, upon vesting of RSUs and exercise of stock options, employees may tender shares of Stratus common stock to Stratus to pay the exercise price and/or the minimum required taxes. |
Employee Benefits
Stratus maintains a 401(k) defined contribution plansplan subject to the provisions of the Employee Retirement Income Security Act of 1974 (ERISA). The 401(k) plans provideplan provides for an employer matching contribution equal to 100 percent of the participant’s contribution, subject to a limit of 5 percent of the participant’s annual salary. Stratus’ policy is to make an additional safe harbor contribution equal to 3 percent of each participant’s total compensation. The 401(k) plansplan also provideprovides for discretionary contributions. Stratus’ contributions to the 401(k) plansplan totaled $0.6 million in 2022 and $0.5 million in both 20172021.
Profit Participation Incentive Plan. In 2018, the Stratus Compensation Committee of the Board (the Committee) unanimously adopted the PPIP, which provides participants with economic incentives tied to the success of the development projects designated by the Committee as approved projects under the PPIP. In February 2023, the Committee approved the LTIP, which amends and 2016,restates the PPIP, and $0.4is effective for participation interests awarded under development projects on or after its effective date. As of March 27, 2023, there were not yet any participation interests awarded under the LTIP. Outstanding participation interests granted under the PPIP will continue to be governed by the terms of the prior PPIP. The PPIP and LTIP provide participants with economic incentives tied to the success of the development projects designated by the Committee as approved projects under the PPIP and LTIP. Under the PPIP and LTIP, 25 percent of the profit (as described below) for each approved project following a capital transaction (each as defined in the PPIP and LTIP) will be set aside in a pool. The Committee will allocate participation interests in each pool to certain officers, employees and consultants determined to be instrumental in the success of the project. The profit is equal to the net proceeds to Stratus from a capital transaction after Stratus has received a return of its costs and expenses, any capital contributions and a preferred return of 10 percent per year on the approved project. Provided the applicable service conditions are met, each participant is eligible to earn a bonus equal to his or her allocated participation interest in the applicable profit pool. Bonuses under the PPIP are payable in cash prior to March 15 of the year following the capital transaction, unless the participant is an executive officer, in which case annual cash payouts under the PPIP are limited to no more than four times the executive officer’s base salary, and any amounts due under the PPIP in excess of that amount will be converted to an equivalent number of stock-settled RSUs based on the 12-month trailing average price of Stratus common stock during the year of the capital transaction, with a one-year vesting period.
If a capital transaction has not occurred prior to the third anniversary of the date an approved project is substantially complete (a valuation event), the Committee will obtain a third-party appraisal of the approved project as of the valuation event. Based on the appraised value, the Committee will determine if any profit would have been
generated after applying the hurdles described above, and if so, the amount of any bonus that would have been attributable to each participant. Any such amount will convert into an equivalent number of stock-settled RSUs based on the 12-month average trailing price of Stratus common stock during the year of the valuation event. The RSUs will be granted in the year following the valuation event and will vest in annual installments over a three-year period, provided that the participant satisfies the applicable service conditions. The fair value of the RSUs will be determined based on the price of Stratus' common stock on the date of grant. If the grant date fair value exceeds the calculated bonus amount, the incremental portion will be amortized ratably over the three-year vesting period. If a participant leaves Stratus and forfeits their RSUs, Stratus is able to reverse the expense associated with that award.
In 2018, the Committee designated seven development projects as approved projects under the PPIP, and allocated participation interests in profit pools of each approved project to certain officers, employees and consultants. During 2019, the Committee designated Magnolia Place as an approved project under the PPIP. During first-quarter 2022, the Committee designated The Saint June as an approved project under the PPIP, and the awards were granted in August 2022. As required for liability-based awards under Accounting Standards Codification 718, Stock-Based Compensation, at the date of grant, Stratus estimates the fair value of each award and adjusts the fair value in each subsequent reporting period. Estimates related to the awards may change over time due to differences between projected and actual development progress and costs, market conditions and the timing of capital transactions or valuation events.
Stratus estimated the profit pool of each approved project by projecting the cash flow from operations, the net sales price, the timing of a capital transaction or valuation event and Stratus' equity and preferred return including costs to complete for projects under development. The primary fair value assumptions used at December 31, 2022, were projected cash flows, estimated capitalization rates ranging from 4.3 percent to 7.5 percent, projected remaining service periods for each project ranging from 0.5 years to 3.3 years, and estimated transaction costs of approximately 1.3 percent to 7.9 percent.
On October 17, 2020, West Killeen Market reached a valuation event under the PPIP. 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. The grant date value of the RSUs was $0.3 million greater than the accrued liability as a result of this different valuation methodology, Stratus transferred the $1.2 million accrued liability balance under the PPIP for West Killeen Market to capital in 2015.excess of par value and is amortizing the $0.3 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 vesting period of the RSUs.
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 and the remaining accrued liability of $3.7 million was settled in RSUs with a three-year vesting period awarded to eligible participants during second-quarter 2022 following stockholder approval of Stratus’ new stock incentive plan.
The sale of The Santal in December 2021 was a capital transaction under the PPIP. The profit pool was $6.7 million, of which $5.0 million was paid in cash to eligible participants during February 2022. During second-quarter 2022, following stockholder approval of Stratus’ new stock incentive plan, the remaining accrued liability related to The Santal of $1.6 million was settled in RSUs with a one-year vesting period awarded to one participant for whom the cash compensation limitation was reached.
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 the different valuation methodology described above. 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):
| | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 |
| Charged to general and administrative expense | $ | 524 | | | $ | 9,780 | |
| Capitalized to project development costs | 2 | | | 441 | |
| Total PPIP costs | $ | 526 | | | $ | 10,221 | |
The accrued liability for the PPIP totaled $3.0 million at December 31, 2022, and $15.2 million at December 31, 2021 (included in other liabilities).
NOTE 9.COMMITMENTS AND CONTINGENCIES
Construction Contracts. Stratus had firm commitments under noncancelable construction contracts totaling $47.5approximately $75 million at December 31, 2017. These commitments primarily included contracts for2022 related to Amarra Villas, Magnolia Place, The Saint June and The Saint George development projects. We have construction of Santal Phase II, Jones Crossing and Lantana Place.loans, as well as remaining equity capital contributed to The Saint George limited partnership, in place to fund these commitments.
Letters of Credit. As of December 31, 2017,2022, Stratus had letters of credit totaling $11.0 million committed totaling $4.1 million underagainst its revolving credit facility with Comerica Bank, (seewhich secure the company’s obligation to build certain roads and utilities facilities benefiting Holden Hills and Section N (refer to Note 6)6 for further discussion).
Rental Income. As of December 31, 2022, Stratus’ minimum rental income, including scheduled rent increases under noncancelable long-term leases of developed retail space and ground leases, totaled $10.1 million in 2023, $10.3 million in 2024, $10.0 million in 2025, $10.0 million in 2026, $10.0 million in 2027 and $92.3 million thereafter, with the longest lease extending through 2039.
H-E-B Profit Participation. H-E-B has profit participation rights in the Jones Crossing, Ground Lease. In September 2017,Kingwood Place, and Lakeway projects. H-E-B is entitled to 10 percent of any cash flow from operations or profit from the sale of these properties after Stratus receives a return of its equity plus a preferred return of 10 percent. Stratus subsidiary enteredmay enter into similar profit participation agreements for future projects.
Leases. Stratus' most significant lease is a 99-year ground lease for approximately 72 acres of land in College Station, Texas. Stratus began construction ofTexas on which it is developing the Jones Crossing Project in September 2017. The annual contractual paymentsproject. Stratus also leases various types of assets, including office space, vehicles and office equipment under this noncancelable long-termnon-cancelable leases. Stratus entered into one lease during fourth-quarter 2022 that is classified as a finance lease, and the other leases are classified as operating lease total $0.2 million for each of 2018 and 2019, $0.3 million for 2020, $0.4 million for each of 2021 and 2022, and $111.0 million thereafter.
Rental Income.leases. As of December 31, 2017, Stratus’ minimum rental income, including scheduled rent increases under noncancelable long-term2022, the remaining term of the finance lease is five years with a weighted-average discount rate of 6.4 percent to determine the lease liability. Stratus did not have any finance leases which extend through 2027, totaled $2.3 million in 2018, $1.7 million in 2019, $1.7 million in 2020, $1.7 million in 2021, $1.4during 2021.
Supplemental balance sheet information related to leases is as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| | | December 31, |
| Classification on the Consolidated Balance Sheet | | 2022 | | 2021 |
| Assets | | | | | |
| Operating right-of-use assets | Lease right-of-use assets | | $ | 10,631 | | | $ | 10,487 | |
| Finance right-of-use assets | Other assets | | 79 | | | — | |
| | | | | |
| Liabilities | | | | | |
| Operating lease liability | Lease liabilities | | $ | 14,848 | | | $ | 13,986 | |
| Finance lease liability | Other liabilities | | 80 | | | — | |
Operating lease costs were $1.5 million in 2022 and $2.4$1.3 million thereafter.
Other Operating Leases. in 2021. Stratus paid $757 thousand during 2022 and $183 thousand in 2021 for lease liabilities recorded in the consolidated balance sheet (included in operating cash flows in the consolidated statements of cash flows). As of December 31, 2017, Stratus’2022 and 2021, the weighted-average discount rate used to determine the lease liabilities was 6.0 percent. As of December 31, 2022, the weighted-average remaining lease term was 90 years (94 years as of December 31, 2021).
The future minimum annual contractual payments under its noncancelable long-termfor operating leases excludingrecorded on the Jones Crossing ground lease discussed above, totaled $0.2 million for both 2018 and 2019 and $0.1 millionfor 2020 and less than $0.1 million for 2021. Total expense under Stratus’ operating leases totaled $0.1 million for each of 2017, 2016 and 2015.consolidated balance sheet at December 31, 2022 follow (in thousands):
| | | | | |
| Years ending December 31, | |
| 2023 | $ | 911 | |
| 2024 | 848 | |
| 2025 | 742 | |
| 2026 | 669 | |
| 2027 | 692 | |
| Thereafter | 107,850 | |
| Total payments | 111,712 | |
| Present value adjustment | (96,864) | |
| Present value of net minimum lease payments | $ | 14,848 | |
Circle C Settlement. On August 1, In 2002, the city of Austin (the City) granted final approval of a development agreement (the Circle C settlement) and permanent zoning for Stratus’ real estate located within the Circle C community in southwest Austin. The Circle C settlement firmly established all essential municipal development regulations applicable to Stratus’ Circle C properties until 2032. The Citycity of Austin also provided Stratus $15.0$15.0 millionof development fee credits, which are in the form of credit bank capacity, in connection with its future development of its Circle C and other Austin-area properties for waivers of fees and reimbursement for certain infrastructure costs. In addition, Stratus can elect to sell up to $1.5$1.5 millionof the incentives per year to other developers for their use in paying City fees related to their projects as long as the projects are within the desired development zone, as defined within the Circle C settlement. To the extent Stratus sells the incentives to other developers, Stratus recognizes the income from the sale when title is transferred and compensation is received. As of December 31, 2017,2022, Stratus had permanently used $12.7$12.4 million of its City-based development fee credits, including cumulative amounts sold to third parties totaling $5.1 million.$5.1 million. Fee credits used for the development of Stratus’ properties effectively reduce the basis of the related properties and deferStratus defers recognition of any gain associated with the use of the fees until the affected properties are sold. Stratus also had $0.5$0.9 million in credit bank capacity in use as temporary fiscal deposits as of December 31, 2017.2022. Available credit bank capacity was $2.6$1.8 millionat December 31, 2017.2022.
Deferred Gain on Sale of 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 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 five-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 ten-year terms, and one of which has a 15-year term (the Pad Site Master Lease).
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 thousand to the purchaser. The lease 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 first-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 $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 during 2022. A contract liability of $3.5 million is presented as a deferred gain in the consolidated balance sheets at December 31, 2022, compared with $4.8 million at December 31, 2021. The reduction in the deferred gain balance primarily reflects Pad Site Master Lease payments. The remaining deferred gain balance is expected to be reduced primarily by future Pad Site Master Lease payments.
Environmental Regulations. Stratus has made, and will continue to make, expenditures for protection of the environment. Increasing emphasis on environmental matters can be expected to result in additional costs, which willcould be charged against Stratus’ operations in future periods. Present and future environmental laws and regulations applicable to Stratus’ operations may require substantial capital expenditures that could adversely affect the development of its real estate interests or may affect its operations in other ways that cannot be accurately predicted at this time.
Litigation. Stratus may from time to time be involved in various legal proceedings of a character normally incident to the ordinary course of its business. Stratus believes that potential liability from any of these pending or threatened proceedings will not have a material adverse effect on Stratus’ financial condition or results of operations.
NOTE 10.BUSINESS SEGMENTS
As a result of the sale of Block 21, Stratus currently has fourtwo operating segments: Real Estate Operations and Leasing Operations,Operations. Block 21, which encompassed Stratus’ Hotel and Entertainment.Entertainment segments, along with some leasing operations, is presented as discontinued operations.
The Real Estate Operations segment is comprised of Stratus’ real estate assets (developed for sale, under development and available for development), which consists of its properties in Austin, Texas (the(including the Barton Creek community,Community, including Santal Phase II,Section N, Holden Hills, Amarra multi-family and commercial land, Amarra Villas, The Saint June and other vacant land; 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; The Saint George; and the condominium units at the W Austin Hotel & Residences)land for The Annie B); in Lakeway, Texas, located in the greater Austin area (Lakeway); in College Station, Texas (Jones(land for future phases of retail and multi-family development and retail pad sites at Jones Crossing); and in Magnolia, Texas (land for a future phase of retail development and for future multi-family use and retail pad sites at Magnolia Place), Kingwood, Texas (a retail pad site) and New Caney, Texas (New Caney), located in the greater Houston area (Magnolia).area.
The Leasing Operations segment includes the officeis comprised of Stratus’ real estate assets, both residential and retail space at the W Austin Hotel & Residences, a retail building in Barton Creek Village, Santal Phase Icommercial, that are leased or available for lease and theincludes West Killeen Market, in Killeen, Texas.
The Hotel segment includesKingwood Place and the W Austin Hotel located at the W Austin Hotel & Residences in downtown Austin, Texas.
The Entertainment segment includes ACL Live, a live musiccompleted portions of Lantana Place, Jones Crossing and entertainment venue and production studio at the W Austin Hotel & Residences. In addition to hosting concerts and private events, this venue is the home of Austin City Limits, a television program showcasing popular music legends.Magnolia Place. The Entertainment segment also includes revenuesincluded The Saint Mary until its sale in January 2021 and costs associated with events hosted at other venues, including 3TEN ACL Live, which openedThe Santal until its sale in March 2016 on the site of the W Austin Hotel & Residences, and the results of the Stageside Productions joint venture with Pedernales Entertainment LLC (seeDecember 2021 (refer to Note 2)4 for further discussion).
Stratus uses operating income or loss to measure the performance of each segment. Stratus' generalGeneral 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'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. The following segment information was prepared on the same basis as
Revenues From Contracts with Customers. Stratus’ consolidated financial statementsrevenues from contracts with customers follow (in thousands).:
| | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 |
| Real Estate Operations: | | | |
| Developed property sales | $ | 5,982 | | | $ | 4,615 | |
| Undeveloped property sales | 18,620 | | | 3,250 | |
| Commissions and other | 142 | | | 584 | |
| 24,744 | | | 8,449 | |
| Leasing Operations: | | | |
| Rental revenue | 12,754 | | | 19,787 | |
| 12,754 | | | 19,787 | |
| | | |
| Total revenues from contracts with customers | $ | 37,498 | | | $ | 28,236 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Real Estate Operationsa | | Leasing Operations | | Hotel | | Entertainment | | Eliminations and Otherb | | Total |
| Year Ended December 31, 2017: | | | | | | | | | | | |
| Revenues: | | | | | | | | | | | |
| Unaffiliated customers | $ | 11,001 |
| | $ | 7,981 |
| | $ | 38,360 |
| | $ | 22,998 |
| | $ | — |
| | $ | 80,340 |
|
| Intersegment | 143 |
| | 875 |
| | 321 |
| | 234 |
| | (1,573 | ) | | — |
|
| Cost of sales, excluding depreciation | 10,377 |
| | 4,829 |
| | 28,584 |
| | 17,719 |
| | (735 | ) | | 60,774 |
|
| Depreciation | 232 |
| | 2,693 |
| | 3,544 |
| | 1,523 |
| | (139 | ) | | 7,853 |
|
| General and administrative expenses | — |
| | — |
| | — |
| | — |
| | 11,401 |
| | 11,401 |
|
| Profit participation | — |
| | 2,538 |
| | — |
| | — |
| | — |
| | 2,538 |
|
| Loss (gain) on sales of assets | 13 |
| | (25,421 | ) | c | — |
| | (55 | ) | | — |
| | (25,463 | ) |
| Operating income (loss) | $ | 522 |
| | $ | 24,217 |
| | $ | 6,553 |
| | $ | 4,045 |
| | $ | (12,100 | ) | | $ | 23,237 |
|
Capital expendituresd | $ | 14,395 |
| | $ | 33,290 |
| | $ | 506 |
| | $ | 283 |
| | $ | — |
| | $ | 48,474 |
|
| Total assets at December 31, 2017 | 189,832 |
| | 71,851 |
| | 102,491 |
| | 35,446 |
| | 6,373 |
| | 405,993 |
|
Financial Information by Business Segment. Summarized financial information by segment for the year ended December 31, 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 | $ | 24,744 | | | $ | 12,754 | | | $ | — | | | $ | 37,498 | |
| Intersegment | 6 | | | — | | | (6) | | | — | |
| Cost of sales, excluding depreciation | 23,766 | | | 4,439 | | | (5) | | | 28,200 | |
| Depreciation and amortizaion | 100 | | | 3,506 | | | (20) | | | 3,586 | |
| General and administrative expenses | — | | | — | | | 17,567 | | | 17,567 | |
Impairment of real estate c | 720 | | | — | | | — | | | 720 | |
Gain on sales of assets d | — | | | (4,812) | | | — | | | (4,812) | |
| Operating income (loss) | $ | 164 | | | $ | 9,621 | | | $ | (17,548) | | | $ | (7,763) | |
| Capital expenditures and purchases and development of real estate properties | $ | 24,454 | | | $ | 54,600 | | | $ | 213 | | | $ | 79,267 | |
| Total assets at December 31, 2022 | 288,270 | | | 109,348 | | | 47,522 | | | 445,140 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Real Estate Operationsa | | Leasing Operations | | Hotel | | Entertainment | | Eliminations and Otherb | | Total |
| Year Ended December 31, 2016: | | | | | | | | | | | |
| Revenues: | | | | | | | | | | | |
| Unaffiliated customers | $ | 10,719 |
| | $ | 9,682 |
| | $ | 40,418 |
| | $ | 19,522 |
| | $ | — |
| | $ | 80,341 |
|
| Intersegment | 31 |
| | 767 |
| | 309 |
| | 183 |
| | (1,290 | ) | | — |
|
| Cost of sales, excluding depreciation | 9,702 |
| | 4,936 |
| | 29,248 |
| | 15,698 |
| | (666 | ) | | 58,918 |
|
| Depreciation | 224 |
| | 3,144 |
| | 3,421 |
| | 1,461 |
| | (168 | ) | | 8,082 |
|
| General and administrative expenses | — |
| | — |
| | — |
| | — |
| | 12,164 |
| | 12,164 |
|
| Operating income (loss) | $ | 824 |
| | $ | 2,369 |
| | $ | 8,058 |
| | $ | 2,546 |
| | $ | (12,620 | ) | | $ | 1,177 |
|
Capital expendituresd | $ | 14,575 |
| | $ | 26,782 |
| | $ | 1,216 |
| | $ | 217 |
| | $ | — |
| | $ | 42,790 |
|
| Total assets at December 31, 2016 | 176,163 |
| | 120,394 |
| | 104,087 |
| | 37,692 |
| | 13,839 |
| | 452,175 |
|
b.Includes consolidated general and administrative expenses and eliminations of intersegment amounts. |
| | | | | | | | | | | | | | | | | | | | | | | |
Year Ended December 31, 2015:e | | | | | | | | | | | |
| Revenues: | | | | | | | | | | | |
| Unaffiliated customers | $ | 14,277 |
| | $ | 5,641 |
| | $ | 41,346 |
| | $ | 19,607 |
| | $ | — |
| | $ | 80,871 |
|
| Intersegment | 66 |
| | 538 |
| | 305 |
| | 193 |
| | (1,102 | ) | | — |
|
| Cost of sales, excluding depreciation | 10,426 |
| | 2,838 |
| | 30,789 |
| | 15,426 |
| | (411 | ) | | 59,068 |
|
| Depreciation | 246 |
| | 1,556 |
| | 5,797 |
| | 1,288 |
| | (144 | ) | | 8,743 |
|
| General and administrative expenses | — |
| | — |
| | — |
| | — |
| | 8,057 |
| | 8,057 |
|
| Gain on sales of assets | — |
| | (20,729 | ) | f | — |
| | — |
| | — |
| | (20,729 | ) |
| Operating income (loss) | $ | 3,671 |
| | $ | 22,514 |
| | $ | 5,065 |
| | $ | 3,086 |
| | $ | (8,604 | ) | | $ | 25,732 |
|
Income from discontinued operationsg | $ | — |
| | $ | 3,218 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 3,218 |
|
Capital expendituresd | 26,237 |
| | 54,027 |
| | 1,023 |
| | 128 |
| | — |
| | 81,415 |
|
| Total assets at December 31, 2015 | 205,735 |
| | 61,371 |
| | 109,562 |
| | 42,125 |
| | 11,312 |
| | 430,105 |
|
| |
a. | Includes sales commissions and other revenues together with related expenses. |
| |
b. | Includes consolidated general and administrative expenses and eliminations of intersegment amounts. |
| |
c. | Includes $24.3 million associated with recognition of the majority of the gain on the sale of The Oaks at Lakeway (see Note 11).
|
| |
d. | Also includes purchases and development of residential real estate held for sale. |
| |
e. | Includes the results of the Parkside Village and 5700 Slaughter commercial properties through July 2, 2015 (see Note 11). |
| |
f. | Represents gain on sales of Parkside Village and 5700 Slaughter. |
| |
g. | Represents recognition of a deferred gain, net of taxes, associated with the 2012 sale of 7500 Rialto (see Note 11). |
NOTE 11. ASSET SALES AND DISCONTINUED OPERATIONS
The Oaks at Lakeway.On February 15, 2017, Stratusc.Includes $650 thousand for one of the Amarra Villas homes that was sold The Oaks at Lakeway to FHF I Oaks at Lakeway, LLC for $114.0$2.5 million in cash. Net cash proceeds were $50.8March 2023 and $70 thousand for the multi-family tract of land at Kingwood Place sold for $5.5 million after repaymentin October 2022.
d.Represents a pre-tax gain recognized on the reversal of the Lakeway Construction loan (see Note 6). Stratus usedaccruals for costs to lease and construct buildings under a portion of these net cash proceeds to pay indebtedness outstanding under the Comerica Bank credit facility. The partiesmaster lease arrangement that we entered into three master lease agreements at closing: (1) one covering unleased in-line retail space,in connection with a 5-year term, (2) one covering four unleased pad sites, three of which have 10-year terms, and one of which has a 15-year term, and (3) one covering the hotel pad with a 99-year term. As specified conditions are met, primarily consisting of the tenant executing a lease, commencing payment of rent and taking occupancy, leases will be assigned to the purchaser and the corresponding property will be removed from the master lease, reducing Stratus' master lease payment obligations. Stratus' master lease payment obligation, which currently approximates $180 thousand per month, is expected to decline over time until leasing is complete and all leases are assigned to the purchaser.
Stratus agreed to guarantee the obligations of its selling subsidiary under the sales agreement, up to a liability cap of two percent of the purchase price. This cap does not apply to Stratus' obligation to satisfy the selling subsidiary's indemnity obligations for its broker commissions or similar compensation or Stratus' liability in guaranteeing the selling subsidiary's obligations under the master leases. To secure its obligations under the master leases, Stratus has provided a $1.5 million irrevocable letter of credit with a three-year term.
The gain on sale of $39.7 millionwas deferred as a result of Stratus’ continuing involvement under the master lease agreements with the purchaser. The hotel pad was leased to a hotel operator under a ground lease at the date of sale. However, the hotel tenant had not commenced rent payments under the ground lease or construction of its building. At the date of the sale, primarily because of the uncertainty related to the hotel tenant’s performance under
its ground lease, Stratus' estimated maximum probable exposure to loss using a probability-weighted assessment of future lease payments based on the master lease agreements exceeded the gain on sale. The rent payments under the master lease agreements represent continuing support obligations and are recorded as a reduction of the deferred gain.
The rent payments related to the 99-year hotel pad master lease represent the greatest exposure to loss. In May 2017, the hotel tenant began paying rent and, in August 2017, obtained construction financing and commenced construction of its building. The achievement of these milestones significantly reduced Stratus' probability weighted estimated maximum exposure to loss and $24.3 millionof the gain was recognized in third-quarter 2017 based on the performance of services method. The following table summarizes changes to the deferred gain balance during 2017 (in thousands):
|
| | | | |
| Balance as of February 15, 2017 | | $ | 39,677 |
|
| Master lease payments | | (2,196 | ) |
| Revisions to costs to complete | | (1,855 | ) |
| Gain recognized | | (24,306 | ) |
| Balance as of December 31, 2017 | | $ | 11,320 |
|
The remaining deferred gain, as reduced by future master lease payments, will be recognized in future periods under the performance of services method, when Stratus’ continuing involvement ends or substantially all of the risks and rewards of ownership have transferred to the buyer and Stratus' remaining probability weighted estimated maximum exposure to loss under the master lease agreements is less than the deferred gain.
Upon the sale of The Oaks at Lakeway HEB earned a profit participation of $2.5 million (of which $2.2 million was paid at closing), which is presented separately in 2017.
Summarized financial information by segment for the Consolidated Statements of Operations.
FFF Presents LLC. In October 2017, Stratus sold intangible assets of FFF Presents, LLC, primarily the rights to host the Fun Fun Fun Festival. The purchaser paid a base purchase price of $0.3 million. The purchaser will also pay Stratus a contingent purchase priceyear ended December 31, 2021, based on a portionStratus’ 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 | $ | 8,449 | | | $ | 19,787 | | | $ | — | | | $ | 28,236 | |
| Intersegment | 17 | | | — | | | (17) | | | — | |
| Cost of sales, excluding depreciation | 9,758 | | | 9,030 | | | (25) | | | 18,763 | |
| Depreciation | 155 | | | 5,358 | | | (64) | | | 5,449 | |
General and administrative expenses c | — | | | — | | | 24,509 | | | 24,509 | |
Impairment of real estate d | 1,825 | | | — | | | — | | | 1,825 | |
Gain on sales of assets e | — | | | (105,970) | | | — | | | (105,970) | |
| Operating (loss) income | $ | (3,272) | | | $ | 111,369 | | | $ | (24,437) | | | $ | 83,660 | |
| Capital expenditures and purchases and development of real estate properties | $ | 52,772 | | | $ | 19,024 | | | $ | 538 | | | $ | 72,334 | |
| Total assets at December 31, 2021 | 241,225 | | | 107,990 | | | 192,011 | | | 541,226 | |
a.Includes sales commissions and other revenues together with related expenses.
b.Includes consolidated general and administrative expenses and eliminations of festival profit between 2018intersegment amounts.
c.Includes $4.0 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 $9.8 million in employee incentive compensation costs associated with the PPIP resulting primarily from an increased valuation for The Santal.
d.Includes $700 thousand for two Amarra Villas homes that were sold in 2022, and a deferred purchase price based on a multiple of a portion of average festival profit in 2021 and 2022. Stratus recognized a gain on$625 thousand for the sale of $0.2 million.
Barton Creek Village. On February 28, 2017, Stratus completed the sale of its 3,085-square-foot bank building and an adjacent undeveloped 4.1 acremulti-family tract of land in Barton Creek Village, for $3.1 million and recorded a gain on the sale of $1.1 million. In connection with the sale, a $2.1 million paydown was made on the Barton Creek Village term loan and Stratus plans to use the gross sale proceeds on a deferred basis to acquire qualifying replacement property.
Parkside Village and 5700 Slaughter.On July 2, 2015, Stratus completed the sales of its Austin-area Parkside Village and 5700 Slaughter commercial properties, both located in the Circle C community, to Whitestone REIT. The Parkside Village retail project, which was owned in a joint venture with LCHM Holdings, LLC, consisted of 90,184 leasable square feet and wasat Kingwood Place that sold for $32.5 million. The 5700 Slaughter retail project, which was wholly owned by Stratus, consisted of 25,698 leasable square feet$5.5 million in October 2022 and was sold for $12.5 million. Stratus used proceeds from these transactions to repay the total $26.0 million outstanding under the Parkside Village loan and the United/Slaughter term loan, with the remainder being held in escrow while Stratus assessed potential tax free like-kind exchange transactions. In September 2015, Stratus used $2.6 million of the escrow funds to purchase an undeveloped tract of land for the West Killeen Market project and withdrew $12.1 million to fund distributions to Stratus and LCHM Holdings of $9.4 million and $3.2 million, respectively. After debt repayments and closing costs, cash proceeds from these transactions approximated $17 million, and Stratus recorded a pre-tax gain in 2015 of $20.7 million, of which the noncontrolling interest share was $3.9 million.
Stratus' net loss attributable to common stockholders associated with Parkside Village and 5700 Slaughter totaled $47$500 thousand for the period January 1, 2015, to July 2, 2015.
7500 Rialto. In 2012, Stratus sold 7500 Rialto, an office building in Lantana. In connection withAustin.
e.Represents the pre-tax gains on the December 2021 sale Stratus recognized a gain of $5.1The Santal of $83.0 million, and deferred a gainthe January 2021 sale of $5.0 million becauseThe Saint Mary of a guaranty provided to the lender in connection with the buyer's assumption of the loan related to 7500 Rialto. The guaranty was released in January$22.9 million.
2015, and Stratus recognized the deferred gain of $5.0 million ($3.2 million to net income attributable to common stockholders) in 2015.
NOTE 12.11.SUBSEQUENT EVENTS
Holden Hills, L.P. In first-quarter 2023, Holden Hills, L.P., a Texas limited partnership (the Holden Hills partnership), entered into financing transactions and commenced construction on the development of the Holden Hills project. The Holden Hills project is Stratus’ final large residential development within the Barton Creek community in Austin, Texas, consisting of 495 acres and designed to feature 475 unique residences.
The Holden Hills partnership is governed by a limited partnership agreement between a wholly owned subsidiary of Stratus evaluated eventsas Class A limited partner and an unaffiliated equity investor as Class B limited partner, and another wholly owned subsidiary of Stratus which serves as general partner. The partners made the following initial capital contributions to the Holden Hills partnership: (i) The Class A limited partner contributed the Holden Hills land and related personal property at an agreed value of $70.0 million and (ii) The Class B limited partner contributed $40.0 million in cash. Immediately following the Class B limited partner's initial capital contribution, $30.0 million of cash was distributed by the Holden Hills partnership to the Class A limited partner. Further, the Holden Hills partnership reimbursed the Class A limited partner for certain initial project costs and closing costs of approximately $5.8 million. As a result of these transactions, Stratus holds, indirectly through its wholly owned subsidiaries, a 50 percent equity capital interest in the Holden Hills partnership, and the Class B limited partner holds the remaining 50 percent equity capital interest in the Holden Hills partnership. Stratus’ potential returns on its equity investment in the Holden Hills partnership may increase above its relative equity interest as negotiated return hurdles are achieved. We expect to consolidate the Holden Hills limited partnership, and the contribution from our partner will be accounted for as a noncontrolling interest.
In addition to each partner’s initial capital contribution, upon the call of the general partner from time to time, the Class A limited partner and the general partner, together, are obligated to make capital contributions up to an additional $10.0 million, and the Class B limited partner is also obligated to make capital contributions up to an additional $10.0 million.
The general partner has the authority to manage the day-to-day operations of the Holden Hills partnership, subject to approval rights of the Class B limited partner for specified “major decisions,” including project and operating budgets, the business plan and amendments thereto; sales, leases or transfers of any portion of the Holden Hills project to any partner, affiliate of any partner, or to any unaffiliated third party other than as contemplated in the business plan; incurring any debt, mortgage or guaranty; capital calls in excess of those previously agreed upon; admitting a new partner; and certain transfers of direct or indirect interests in the Holden Hills partnership. The business plan includes rights of first refusal in favor of the Class B limited partner for sale of a pod to a third party. A “deadlock” may be declared by any partner if any limited partner does not approve any two major decisions proposed by the general partner within any 12-month period. Prior to the third anniversary of the effective date of the limited partnership agreement, a buy-sell provision can be triggered only if there is a deadlock. On or after December 31, 2017,the third anniversary, any partner can initiate the buy-sell at any time by written notice to the other partner, specifying the buyout price.
The Holden Hills partnership has agreed to pay the general partner a development management fee of 4.00 percent of certain construction costs for Phase I, and throughan asset management fee of $150 thousand per year starting 15 months after construction starts on the dateproject payable from available cash flow after debt service. The Class A limited partner and the financial statements were issued,Holden Hills partnership entered into a development agreement (Development Agreement) that provides that, as part of Phase I, the Holden Hills partnership will construct certain street, drainage, water, sidewalk, electric and determined any events or transactions occurring during this period that would require recognition or disclosuregas improvements in order to extend the Tecoma Circle roadway on Section N land owned by Stratus from its current terminus to Southwest Parkway (the Tecoma Improvements). The Tecoma Improvements will enable access and provide utilities necessary for the development of both the Holden Hills project and Section N. Section N is Stratus’ wholly-owned approximately 570-acre tract located along Southwest Parkway in the southern portion of the Barton Creek community adjacent to Holden Hills. Pursuant to the Development Agreement, Stratus will reimburse the Holden Hills partnership for 60 percent of the costs of the Tecoma Improvements. The Class A limited partner has posted standby letters of credit with the City of Austin under Stratus’ revolving credit facility with Comerica Bank totaling approximately $11 million as fiscal security for completion of certain infrastructure improvements benefiting the Holden Hills project, and has agreed to leave such fiscal security in place until the improvements are appropriately addressed in these financial statements.completed.
Holden Hills construction loan. In February 2023, the Holden Hills partnership entered into a loan agreement with Comerica Bank to finance the development of Phase I of the Holden Hills project. NOTE 13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
|
| | | | | | | | | | | | | | | | | | | | |
| | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter | | Year | |
| | (In thousands, except per share amounts) | |
| 2017 | | | | | | | | | | |
| Revenues | $ | 20,664 |
| | $ | 21,429 |
| | $ | 17,222 |
| | $ | 21,025 |
| | $ | 80,340 |
| |
| Operating (loss) income | (1,499 | ) | a,b | 295 |
| | 23,640 |
| a | 801 |
|
| 23,237 |
| a,b |
| Net (loss) income | (2,670 | ) | c | (885 | ) | | 14,308 |
|
| (6,869 | ) | d | 3,884 |
| c,d |
| Net (loss) income attributable to | | | | | | | | | | |
| common stockholders | (2,670 | ) | a,b,c | (893 | ) | | 14,308 |
| a | (6,866 | ) | d | 3,879 |
| a,b,c,d |
| Basic net (loss) income per share share | | | | | | | | | | |
| attributable to common stockholders | (0.33 | ) | a,b,c | (0.11 | ) | | 1.76 |
| a | (0.84 | ) | d | 0.48 |
| a,b,c,d |
| Diluted net (loss) income per share | | | | | | | | | | |
| attributable to common stockholders | (0.33 | ) | a,b,c | (0.11 | ) | | 1.75 |
| a | (0.84 | ) | d | 0.47 |
| a,b,c,d |
| | | | | | | | | | | |
| 2016 | | | | | | | | | | |
| Revenues | $ | 19,026 |
| | $ | 19,150 |
| | $ | 21,180 |
| | $ | 20,985 |
| | $ | 80,341 |
| |
| Operating income (loss) | 473 |
|
| (1,362 | ) |
| 425 |
|
| 1,641 |
| | 1,177 |
| |
| Net loss | (1,683 | ) | c | (2,483 | ) |
| (1,659 | ) |
| (174 | ) |
| (5,999 | ) | c |
| Net loss attributable to common | | | | | | | | | | |
| stockholders | (1,683 | ) | c | (2,483 | ) |
| (1,659 | ) |
| (174 | ) |
| (5,999 | ) | c |
| Basic and diluted net loss per share | | | | | | | | | | |
| attributable to common stockholders | (0.21 | ) | c | (0.31 | ) |
| (0.20 | ) |
| (0.02 | ) |
| (0.74 | ) | c |
| |
a. | Includes gains on sales of assets of $1.1 million ($0.7 million to net loss attributable to common stockholders or $0.09 per share) in the first quarter, $24.3 million ($15.7 million to net income attributable to common stockholders or $1.92 per share) in the third quarter and $25.5 million ($16.4 million to net income attributable to common stockholders or $2.01 per share) for the year, primarily associated with the recognition of the majority of the of the gain on the sale of The Oaks at Lakeway and the sale of a bank building and an adjacent undeveloped 4.1 acre tract of land in Barton Creek (see Note 11). |
| |
b. | Includes a charge of $2.5 million ($1.6 million to net (loss) income attributable to common stockholders or $0.20 per share) in the first quarter and for the year for profit participation costs related to the sale of The Oaks at Lakeway. |
| |
c. | Includes a loss on early extinguishment of debt totaling $0.5 million($0.3 million to net (loss) income attributable to common stockholders or $0.04 per share) in the first quarter and for the year 2017, primarily related to prepayment of the Lakeway Construction loan with proceeds from the sale of The Oaks at Lakeway, and $0.8 million ($0.5 million to net loss attributable to common stockholders or $0.07 per share) in the first quarter and for the year 2016 related to prepayment of the BoA loan.
|
| |
d. | Includes a tax charge of $7.6 million ($0.93 per share) in the fourth quarter and for the year to reduce the carrying amount of deferred tax assets to reflect lower federal corporate tax rates as a result of the Act. |
The loan agreement provides for a senior secured construction loan in the aggregate principal amount of the least of (i) $26.1 million, (ii) 23 percent of the total development costs for Phase I or (iii) the amount that would result in a maximum loan-to-value ratio of 28 percent. The loan has a maturity date of February 8, 2026. Advances under the loan bear interest at the one-month BSBY Rate (with a floor of 0.50 percent), plus 3.00 percent. Payments of interest only on the loan are due monthly until the maturity date with the outstanding principal due at maturity. The Holden Hills partnership may prepay all or any portion of the loan without premium or penalty. Amounts repaid under the loan may not be reborrowed.
The loan is secured by the Holden Hills project, including the land related to both Phase I and Phase II, and the Phase I improvements. After completion of construction of Phase I, the Holden Hills partnership may sell and obtain releases of the liens on single-family platted home sites, individual pods or the Phase II land, subject to specified conditions, and upon payment to the lender of specified amounts related to the parcel to be released. The Holden Hills partnership is not permitted to make distributions to its partners, including Stratus, while the loan is outstanding. The Holden Hills partnership must apply all MUD reimbursements it receives and is entitled to retain as payments of principal on the loan.
Stratus has entered into a guaranty for the benefit of the lender pursuant to which Stratus has guaranteed the payment of the loan and the completion of Phase I, including the Tecoma Improvements. Stratus is also liable for customary carve-out obligations and an environmental indemnity. The Holden Hills construction loan requires Comerica Banks’ prior written consent for any common stock repurchases in excess of $1.0 million and any dividend payments. Stratus must maintain, on a consolidated basis, a net asset value not less than $125.0 million, and a debt-to-gross-asset value not more than 50 percent (in each case as defined in the guaranty).
Holden Hills Municipal Utility District Reimbursements. The Holden Hills partnership is expected to be eligible to be reimbursed in the future by Travis County MUDs for a portion of future costs of the Tecoma Improvements and also for a portion of future costs related only to the Holden Hills project. The Holden Hills partnership has agreed to deliver to the Class A limited partner 60 percent of any MUD reimbursements for Tecoma Improvement costs paid directly by the Class A limited partner, when such reimbursements are received by the partnership. The amount and timing of MUD reimbursements depends, among other factors, upon the timing of actual future expenditures, the MUD having a sufficient tax base within its district to issue bonds and obtaining the necessary state approval for the sale of the bonds. Accordingly, the amount and timing of the receipt of MUD reimbursements is uncertain.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. 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) to allow timely decisions regarding required disclosure as of the end of the period covered by this annual report on Form 10-K. Based on their evaluation, they have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
(b) Changes in internal control over financial reporting. There has been no change in our internal control over financial reporting that occurred during the fiscal quarter ended December 31, 2017,2022, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
(c) Management'sManagement’s annual report on internal control over financial reporting and the report thereon of BKM Sowan Horan, LLP areis included in Part II, Item 8. “Financial Statements and Supplementary Data.”
Item 9B. Other Information
Not applicable.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Information required by this item will be contained in our definitive proxy statement to be filed with the Securities and Exchange Commission (SEC) pursuant to Regulation 14A relating to our 20182023 annual meeting of stockholders and is incorporated herein by reference. The information required by Item 10 regarding our executive officers appears in a separately captioned heading after Item 4. "Executive Officers of the Registrant"“Information About our Executive Officers” in Part I of this report.
Item 11. Executive Compensation
Information required by this item will be contained in our definitive proxy statement to be filed with the SEC pursuant to Regulation 14A relating to our 20182023 annual meeting of stockholders and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information required by this item will be contained in our definitive proxy statement to be filed with the SEC pursuant to Regulation 14A relating to our 20182023 annual meeting of stockholders and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information required by this item will be contained in our definitive proxy statement to be filed with the SEC pursuant to Regulation 14A relating to our 20182023 annual meeting of stockholders and is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
Information required by this item (including fees billed to us by CohnReznick LLP - PCAOB ID No. 596 and BKM Sowan Horan, LLP - PCAOB ID No. 5127) will be contained in our definitive proxy statement to be filed with the SEC pursuant to Regulation 14A relating to our 20182023 annual meeting of stockholders and is incorporated herein by reference.
PART IV
Item 15. Exhibits, Financial Statement Schedules
| |
(a)(1). | Financial Statements.
|
(a)(1). Financial Statements.
The consolidated statements of operations, comprehensive income, (loss), cash flows and equity, and the consolidated balance sheets are included as part of Part II, Item 8. "Financial“Financial Statements and Supplementary Data."”
| |
(a)(2). | Financial Statement Schedules.
|
The following financial statement schedule is presented below.
Schedule III – Real Estate, Commercial Leasing Assets and Facilities and Accumulated Depreciation
Schedules other than the one listed below have been omitted since they are either not required, not applicable or
the required information is included in the financial statements or notes thereto.
STRATUS PROPERTIES INC.
REAL ESTATE, COMMERCIAL LEASING ASSETS AND FACILITIES AND ACCUMULATED DEPRECIATION
December 31, 2017
(In Thousands, except Number of Lots and Acres)
SCHEDULE III
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Initial Cost | | Cost Capitalized | | Gross Amounts at December 31, 2017 | | | | Number of Lots/Units and Acres | | | | |
| | | | Bldg. and | | Subsequent to | | | | Bldg. and | | | | Lots/ Units | | Acres | | Accumulated | | Year |
| | Land | | Improvements | | Acquisitions | | Land | | Improvements | | Total | | | | Depreciation | | Acquired |
Real Estate Held for Salea | | | | | | | | | | | | | | | | | | | |
| Barton Creek, Austin, TX | $ | 7,532 |
| | $ | — |
| | $ | 12,837 |
| | $ | 20,369 |
| | $ | — |
| | $ | 20,369 |
| | 290 |
| | — |
| | $ | — |
| | 1988 |
| W Austin Residences, Austin, TX | — |
| | 2,243 |
| | — |
| | — |
| | 2,243 |
| | 2,243 |
| | 2 |
| | — |
| | — |
| | 2014 |
Real Estate Under Developmentb,c | | | | | | | | | | | | | | | | | | | |
| Barton Creek, Austin, TX | 4,591 |
| | — |
| | 68,988 |
| | 73,579 |
| | — |
| | 73,579 |
| | — |
| | 990 |
| | — |
| | 1988 |
| Circle C, Austin, TX | 753 |
| | — |
| | 3,723 |
| | 4,476 |
| | — |
| | 4,476 |
| | — |
| | 52 |
| | — |
| | 1992 |
| Magnolia, TX | 3,237 |
| | — |
| | 2,428 |
| | 5,665 |
| | — |
| | 5,665 |
| | — |
| | 124 |
| | — |
| | 2014 |
| College Station Properties LLC | — |
| | — |
| | 10,916 |
| | 10,916 |
| | — |
| | 10,916 |
| | — |
| | 72 |
| | — |
| | 2017 |
| Lakeway Residential, Austin, TX | 5,172 |
| | — |
| | 148 |
| | 5,320 |
| | — |
| | 5,320 |
| | — |
| | 35 |
| | — |
| | 2013 |
| Lantana, Austin, TX | 255 |
| | — |
| | 18,273 |
| | 18,528 |
| | — |
| | 18,528 |
| | — |
| | 11 |
| | — |
| | 1994 |
Land Available for Developmentc,d | | | | | | | | | | | | | | | | | | | |
| Camino Real, San Antonio, TX | 16 |
| | — |
| | (16 | ) | | — |
| | — |
| | — |
| | — |
| | 2 |
| | — |
| | 1990 |
| Barton Creek, Austin, TX | 2,413 |
| | — |
| | 3,875 |
| | 6,288 |
| | — |
| | 6,288 |
| | — |
| | 223 |
| | — |
| | 1988 |
| West Killeen Market, Killeen, TX | 1,331 |
| | — |
| | 627 |
| | 1,958 |
| | — |
| | 1,958 |
| | — |
| | — |
| | — |
| | N/A |
| Dessau Road - Austin, TX | 213 |
| | — |
| | 11 |
| | 224 |
| | — |
| | 224 |
| | — |
| | 7 |
| | — |
| | N/A |
| Circle C, Austin, TX | 2,593 |
| | — |
| | 2,237 |
| | 4,830 |
| | — |
| | 4,830 |
| | — |
| | 200 |
| | — |
| | 1992 |
| Flores Street, Austin, TX | 1,000 |
| | — |
| | 94 |
| | 1,094 |
| | — |
| | 1,094 |
| | — |
| | — |
| | — |
| | 2015 |
| Lantana, Austin, TX | 157 |
| | — |
| | 254 |
| | 411 |
| | — |
| | 411 |
| | — |
| | 44 |
| | — |
| | 1994 |
Real Estate Held for Investmentb,c | | | | | | | | | | | | | | | | | | | |
W Austin Hotel & Residences, Austin, TXe | 8,075 |
| | 165,972 |
| | — |
| | 8,075 |
| | 165,972 |
| | 174,047 |
| | — |
| | — |
| | 34,180 |
| | 2006 |
Barton Creek, Austin, TXf | 405 |
| | 42,693 |
| | — |
| | 405 |
| | 42,693 |
| | 43,098 |
| | — |
| | — |
| | 3,775 |
| | 2007 |
| West Killeen Market, Killeen, TX | 1,174 |
| | 7,644 |
| | — |
| | 1,174 |
| | 7,644 |
| | 8,818 |
| | — |
| | — |
| | 120 |
| | 2015 |
| Corporate offices, Austin,TX | — |
| | 1,252 |
| | — |
| | — |
| | 1,252 |
| | 1,252 |
| | — |
| | — |
| | 751 |
| | N/A |
| Total | $ | 38,917 |
| | $ | 219,804 |
| | $ | 124,395 |
| | $ | 163,312 |
| | $ | 219,804 |
| | $ | 383,116 |
| | 292 |
| | 1,760 |
| | $ | 38,826 |
| | |
| |
a. | Includes individual tracts of land that have been developed and permitted for residential use, developed lots with homes already built on it, or condominium units at our W Austin Residences. |
| |
b. | Includes real estate for which infrastructure work over the entire property has been completed, is currently being completed or is able to be completed and for which necessary permits have been obtained. |
| |
c. | See Note 6 included in Part II, Item 8. of this Annual Report on Form 10-K for a description of assets securing debt. |
| |
d. | Includes undeveloped real estate that can be sold “as is” (i.e., planning, infrastructure or development work is not currently in progress on such property). |
| |
e. | Consists of a 251-room hotel, entertainment venue, and office and retail space at the W Austin Hotel & Residences. |
| |
f. | Consists of a 22,366-square-foot retail complex representing the first phase of Barton Creek Village and the Santal multi-family project. |
STRATUS PROPERTIES INC.
Notes to Schedule III
(1) Reconciliation of Real Estate, Commercial Leasing Assets and Facilities:
The changes in real estate, leasing assets and facilities for the years ended December 31, are as follows (in thousands):
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Balance, beginning of year | $ | 425,325 |
| | $ | 402,609 |
| | $ | 370,983 |
|
| Additions and improvements | 34,698 |
| | 29,324 |
| | 79,168 |
|
| Dispositions, retirements and other adjustments | (76,907 | ) | | (6,608 | ) | | (47,542 | ) |
| Balance, end of year | $ | 383,116 |
| | $ | 425,325 |
| | $ | 402,609 |
|
The aggregate net book value for federal income tax purposes as of December 31, 2017, was $373.4 million.
(2) Reconciliation of Accumulated Depreciation:
The changes in accumulated depreciation for the years ended December 31,are as follows (in thousands):
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Balance, beginning of year | $ | 33,844 |
| | $ | 27,471 |
| | $ | 35,384 |
|
| Dispositions, retirements and other adjustments | (2,871 | ) | | (1,709 | ) | | (16,656 | ) |
| Depreciation expense | 7,853 |
| | 8,082 |
| | 8,743 |
|
| Balance, end of year | $ | 38,826 |
| | $ | 33,844 |
| | $ | 27,471 |
|
Depreciation of buildings and improvements is calculated over estimated lives of 30 to 40 years.
|
| | | | | | | | | | | | | | | |
| | | | | | Incorporated by Reference |
Exhibit
Number
| | Exhibit Title | | Filed with this Form 10-K | | 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 |
| | | | | | | | | | |
| | 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 |
| | | | | | | | | | |
| | 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 |
| | | | | | | | | | |
| | 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 |
| | | | | | | | | | |
| | 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 |
| | | | | | | | | | |
| | 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 |
| | | | | | | | | | |
| | Composite Certificate of Incorporation of Stratus Properties Inc. | | | | 8-A/A | | 000-19989001-37716 | | 8/26/201013/2021 |
| | | | | | | | | | |
| | Second Amended and Restated By-Laws of Stratus Properties Inc., as amended effective August 3, 2017. | | | | 10-Q | | 001-37716 | | 8/9/2017 |
| | | | | | | | | | |
| | Description of Common Stock of Stratus Properties Inc. | | | | 10-K | | 001-37716 | | 3/31/2022 |
| | | | | | | | | | |
| | 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 |
| | | | | | | | | | |
| | Assignment and Assumption Agreement by and among Moffett Holdings, LLC, LCHM Holdings, LLC and Stratus Properties Inc., dated as of March 3, 2014. | | | | 13D | | 000-19989 | | 3/5/2014 |
| | | | | | | | | | |
| | Amended and Restated Loan Agreement by and between Stratus Properties Inc., Stratus Properties Operating Co., L.P., Circle C Land, L.P., Austin 290 Properties, Inc., Overlook at Amarra, L.L.C. and Comerica Bank dated as of August 21, 2015. | | | | 8-K | | 000-19989 | | 8/26/2015 |
| | | | | | | | | | |
| | Amended and Restated Revolving Promissory Note by and between Stratus Properties Inc., Stratus Properties Operating Co., L.P., Circle C Land, L.P., Austin 290 Properties, Inc., Overlook at Amarra, L.L.C. and Comerica Bank dated as of August 21, 2015 ($45.0 million revolving line of credit). | | | | 8-K | | 000-19989 | | 8/26/2015 |
| | | | | | | | | | |
| | Amended and Restated Promissory Note by and between Stratus Properties Inc., Stratus Properties Operating Co., L.P., Circle C Land, L.P., Austin 290 Properties, Inc., Overlook at Amarra, L.L.C. and Comerica Bank dated as of August 21, 2015 ($7.5 million letters of credit). | | | | 8-K | | 000-19989 | | 8/26/2015 |
| | | | | | | | | | |
| | Modification and Extension Agreement by and between Stratus Properties Inc., Stratus Properties Operating Co., L.P., Circle C Land, L.P., Austin 290 Properties, Inc. and Comerica Bank dated as of November 12, 2014. | | | | 10-K | | 000-19989 | | 3/16/2015 |
| | | | | | | | | | |
| | Second Modification and Extension Agreement by and between Stratus Properties Inc., Stratus Properties Operating Co., L.P., Circle C Land, L.P., Austin 290 Properties, Inc. and Comerica Bank dated as of February 11, 2015. | | | | 10-K | | 000-19989 | | 3/16/2015 |
| | | | | | | | | | |
| | Third Modification and Extension Agreement by and between Stratus Properties Inc., Stratus Properties Operating Co., L.P., Circle C Land, L.P., Austin 290 Properties, Inc. and Comerica Bank dated as of May 19, 2015. | | | | 8-K | | 000-19989 | | 5/22/2015 |
| | | | | | | | | | |
| | Fourth Modification Agreement between Stratus Properties Inc., Stratus Properties Operating Co., L.P., Circle C Land, L.P., Austin 290 Properties, Inc., Overlook at Amarra, L.L.C., and Comerica Bank, dated as of August 21, 2015. | | | | 10-K | | 001-199989 | | 3/16/2017 |
| | | | | | | | | | |
| | Fifth Modification Agreement between Stratus Properties Inc., Stratus Properties Operating Co., L.P., Circle C Land, L.P., Austin 290 Properties, Inc., The Villas at Amarra Drive, L.L.C., and Comerica Bank, dated as of December 30, 2015. | | | | 10-K | | 001-199989 | | 3/16/2017 |
|
| | | | | | | | | | |
| | Specimen Common Stock Certificate. | | | | Incorporated by Reference8-A/A | | 000-19989 | | 8/26/2010 |
| | | | | | | | | | |
Exhibit
| | Exhibit Title | | Filed with this Form 10-K | | Form | | File No. | | Date Filed |
| | Sixth Modification Agreement between Stratus Properties Inc., Stratus Properties Operating Co., L.P., Circle C Land, L.P., Austin 290 Properties, Inc., The Villas at Amarra Drive, L.L.C., and Comerica Bank, dated as of August 12, 2016. | | | | 10-Q | | 001-37716 | | 11/9/2016 |
| | | | | | | | | | |
| | Seventh Modification Agreement between Stratus Properties Inc., Stratus Properties Operating Co., L.P., Circle C Land, L.P., Austin 290 Properties, Inc., The Villas at Amarra Drive, L.L.C., and Comerica Bank, dated as of August 3, 2017. | | | | 10-Q | | 001-37716 | | 8/9/2017 |
| | | | | | | | | | |
| | Eighth Modification Agreement between Stratus Properties Inc., Stratus Properties Operating Co., L.P., Circle C Land, L.P., Austin 290 Properties, Inc., The Villas at Amarra Drive, L.L.C., and Comerica Bank, dated as of November 7, 2017. | | | | 10-Q | | 001-37716 | | 11/9/2017 |
| | | | | | | | | | |
| | | | | | | | | | |
| | Loan Agreement, dated January 5, 2016, between Stratus Block 21, LLC, as borrower, and Goldman Sachs Mortgage Company, as lender, as amended through January 27, 2016. | | | | 10-K | | 000-19989 | | 3/15/2016 |
| | | | | | | | | | |
| | Promissory Note A-1, dated February 1, 2016, between Stratus Block 21, LLC and Goldman Sachs Mortgage Company. | | | | 10-K | | 000-19989 | | 3/15/2016 |
| | | | | | | | | | |
| | Promissory Note A-2, dated February 1, 2016, between Stratus Block 21, LLC and Goldman Sachs Mortgage Company. | | | | 10-K | | 000-19989 | | 3/15/2016 |
| | | | | | | | | | |
| | Development Agreement effective as of August 15, 2002, between Circle C Land Corp. and City of Austin. | | | | 10-Q | | 000-19989 | | 11/14/2002 |
| | | | | | | | | | |
| | First Amendment dated June 21, 2004, Second Amendment dated November 9, 2004, and Third Amendment dated March 2, 2005, to Development Agreement effective as of August 15, 2002, between Circle C Land Corp. and City of Austin. | | | | 10-K | | 000-19989 | | 3/16/2015 |
| | | | | | | | | | |
| | 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 |
| | | | | | | | | | |
| | 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. | | | | 10-Q | | 001-37716 | | 5/16/2022 |
| | | | | | | | | | |
| | 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 |
| | | | | | | | | | |
| | 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 |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Incorporated by Reference |
Exhibit
Number | | Exhibit Title | | Filed with this Form 10-K | | Form | | File No. | | Date Filed |
| | Third Modification Agreement by and between Stratus Properties Inc., certain of its subsidiaries and Comerica Bank, effective as of May 13, 2022. | | | | 10-Q | | 001-37716 | | 5/16/2022 |
| | | | | | | | | | |
| | Fourth Modification Agreement by and between Stratus Properties Inc., certain of its subsidiaries and Comerica Bank, effective as of November 8, 2022. | | X | | | | | | |
| | | | | | | | | | |
| | Fifth Modification Agreement by and between Stratus Properties Inc., certain of its subsidiaries and Comerica Bank, effective as of March 10, 2023. | | X | | | | | | |
| | | | | | | | | | |
| | Loan Agreement by and between College Station 1892 Properties, L.L.C., as borrower, and Regions Bank, as lender, dated June 17, 2021. | | | | 8-K | | 001-37716 | | 6/23/2021 |
| | | | | | | | | | |
| | Promissory Note by and between College Station 1892 Properties, L.L.C. and Regions Bank dated June 17, 2021. | | | | 8-K | | 001-37716 | | 6/23/2021 |
| | | | | | | | | | |
| | Guaranty of Recourse Obligations by Stratus Properties Inc. for the benefit of Regions Bank dated June 17, 2021 with respect to the Loan Agreement by and between College Station 1892 Properties, L.L.C., as borrower, and Regions Bank, as lender, dated June 17, 2021. | | | | 10-K | | 001-37716 | | 3/31/2022 |
| | | | | | | | | | |
| | 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 | | 5/3/5/2017 |
| | | | | | | | | | |
| | Promissory Note by and between Lantana Place, L.L.C.L.L.C, and Southside Bank dated April 28, 2017. | | | | 8-K10-K | | 001-37716 | | 3/5/201731/2022 |
| | | | | | | | | | |
| | Construction Loan Agreement by and between College Station 1892 Properties, L.L.C. and Southside Bank, dated September 1, 2017. | | | | 8-K | | 001-37716 | | 9/7/2017 |
| | | | | | | | | | |
| | Promissory Note by and between College Station 1892 Properties, L.L.C. and Southside Bank, dated September 1, 2017. | | | | 8-K | | 001-37716 | | 9/7/2017 |
| | | | | | | | | | |
| | 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. | | X | | 10-K | | 001-37716 | | 3/16/2018 |
| | | | | | | | | | |
| | AmendedLoan Modification Agreement by and Restatedbetween 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 |
| | | | | | | | | | |
| | Second Modification Agreement by and between Lantana Place, L.L.C and Southside Bank, effective as of January 4, 2021. | | | | 10-K | | 001-37716 | | 3/15/2021 |
| | | | | | | | | | |
| | 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 |
| | | | | | | | | | |
| | Loan Modification Agreement by and between Lantana Place, L.L.C. and Southside Bank, effective as of August 26, 2022. | | | | 10-Q | | 001-37716 | | 11/14/2022 |
| | | | | | | | | | |
| | Guaranty Agreement by Stratus Properties Inc. in favor of Southside Bank dated April 28, 2017 with respect to the Construction Loan Agreement by and between Santal I,Lantana Place, L.L.C., as borrower, and Southside Bank, as lender, dated April 28, 2017. | | | | 10-K | | 001-37716 | | 3/31/2022 |
| | | | | | | | | | |
| | Construction Loan Agreement by and between Stratus Kingwood Place, L.P., as borrower, and Comerica Bank, as lender, dated September 11, 2017.December 6, 2018. | | | | 8-K | | 001-37716 | | 9/14/201712/12/2018 |
| | | | | | | | | | |
| | Installment Note by and between Stratus Kingwood Place, L.P. and Comerica Bank dated December 6, 2018. | | | | 8-K | | 001-37716 | | 12/12/2018 |
| | | | | | | | | | |
| | Modification Agreement by and among Stratus Kingwood Place, L.P., as borrower, Stratus Properties Inc. as guarantor, and Comerica Bank, as lender, effective as of January 17, 2020. | | | | 10-Q | | 001-37716 | | 6/25/2020 |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Incorporated by Reference |
Exhibit
Number | | Exhibit Title | | Filed with this Form 10-K | | Form | | File No. | | Date Filed |
| | Amended and Restated Installment Note by and between Santal I, L.L.C.Stratus Kingwood Place, L.P. and Comerica Bank, dated September 11, 2017.effective as of January 17, 2020. | | | | 8-K10-Q | | 001-37716 | | 9/14/20176/25/2020 |
| | | | | | | | | | |
| | Installment NoteSecond Modification Agreement by and between Santal I, L.L.C.among Stratus Kingwood Place, L.P., as borrower, Stratus Properties Inc. as guarantor, and Comerica Bank, dated September 11, 2017.as lender, effective as of December 6, 2022. | | X | | 8-K | | 001-37716 | | 9/14/2017 |
|
| | | | | | | | | | |
| | Guaranty Agreement by Stratus Properties Inc. for the benefit of Comerica Bank dated December 6, 2018. | | | | 10-K | | 001-37716 | | 3/31/2022 |
| | | | | | | | | | |
| | Loan Agreement by and among The Saint June, L.P., as borrower, Texas Capital Bank, National Association, as administrative agent, and each of the lenders party thereto, dated June 2, 2021. | | | | 8-K | | 001-37716 | | 6/8/2021 |
| | | | | | | | | | |
| | Note by and between The Saint June, L.P. and Texas Capital Bank, National Association dated June 2, 2021. | | | | 8-K | | 001-37716 | | 6/8/2021 |
| | | | | | | | | | |
| | Guaranty Agreement by Stratus Properties Inc. for the benefit of Texas Capital Bank, National Association dated June 2, 2021 with respect to the Loan Agreement by and among The Saint June, L.P., as borrower, Texas Capital Bank, National Association, as administrative agent, and each of the lenders party thereto, dated June 2, 2021. | | | | 10-K | | 001-37716 | | 3/31/2022 |
| | | | | | | | | | |
| | Interest Rate Index Replacement Agreement dated January 3, 2023 with respect to the Loan Agreement by and among The Saint June, L.P., as borrower, Texas Capital Bank, National Association, as administrative agent, and each of the lenders party thereto, dated June 2, 2021. | | X | | | | | | |
| | | | | | | | | | |
| | 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 |
| | | | | | | | | | |
| | 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 |
| | | | | | | | | | |
| | Guaranty Agreement by Stratus Properties Inc. for the benefit of Comerica Bank dated July 19, 2022 with respect to the 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 |
| | | | | | | | | | |
| | Construction Loan Agreement by and between Holden Hills, L.P., as borrower, and Comerica Bank, as lender, dated February 8, 2023. | | | | 8-K | | 001-37716 | | 2/14/2023 |
| | | | | | | | | | |
| | Installment Note by and between Holden Hills, L.P. and Comerica Bank dated February 8, 2023. | | | | 8-K | | 001-37716 | | 2/14/2023 |
| | | | | | | | | | |
| | Guaranty by Stratus Properties Inc. for the benefit of Comerica Bank dated February 8, 2023 with respect to the Construction Loan Agreement by and between Holden Hills, L.P., as borrower, and Comerica Bank, as lender, dated February 8, 2023. | | | | 8-K | | 001-37716 | | 2/14/2023 |
| | | | | | | | | | |
| | Amended and Restated Limited Partnership Agreement of Stratus Kingwood Place, L.P. entered into by and among Stratus Northpark, L.L.C., Stratus Properties Operating Co., L.P., and several Class B Limited Partners. | | | | 10-Q | | 001-37716 | | 8/9/2018 |
| | | | | | | | | | |
| | First Amendment to the Amended and Restated Limited Partnership Agreement of Stratus Kingwood Place, L.P. | | | | 10-K | | 001-37716 | | 3/18/2019 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Incorporated by Reference |
Exhibit
Number
| | Exhibit Title | | Filed with this Form 10-K | | Form | | File No. | | Date Filed |
| | | | | | | | | | |
| | Board RepresentationSecond Amendment to the Amended and StandstillRestated Limited Partnership Agreement datedof Stratus Kingwood Place, L.P. | | | | 10-K | | 001-37716 | | 3/15/2021 |
| | | | | | | | | | |
| | Amended and Restated Limited Partnership Agreement 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 |
| | | | | | | | | | |
| | First Amendment to the Amended and Restated Limited Partnership Agreement of Stratus Block 150, L.P. | | | | 10-Q | | 001-37716 | | 5/16/2022 |
| | | | | | | | | | |
| | Amended and Restated Limited Partnership Agreement of Holden Hills, L.P. entered into by and among Holden Hills GP, L.L.C., Stratus Properties Operating Co., L.P., and Bartoni, LLC. | | X | | | | | | |
| | | | | | | | | | |
| | Development Agreement effective as of January 11, 2017 by and among31, 2023, between Stratus Properties Inc.Operating Co., Oasis Management Company Ltd., Oasis Investments II Master Fund Ltd.L.P. and Oasis Capital Partners (Texas) Inc.Holden Hills, L.P. | | X | | 8-K | | 001-37716 | | 1/11/2017 |
| | | | | | | | | | |
| | Stratus Properties Inc. 2017 Stock Incentive Plan. | | | | 8-K | | 001-37716 | | 5/18/2017 |
| | | | | | | | | | |
| | Stratus Properties Inc. 20132022 Stock Incentive Plan, as amended and restated.Plan. | | | | 10-K8-K | | 000-19989001-37716 | | 3/16/20155/13/2022 |
| | | | | | | | | | |
| | Stratus Properties Inc. 2010 Stock Incentive Plan, as amended and restated. | | | | 10-K | | 000-19989 | | 3/16/2015 |
| | | | | | | | | | |
| | Form of Notice of Grant of Nonqualified Stock Options under the Stratus Properties Inc. stock incentive plans (adopted January 2011). | | | | 10-K | | 000-19989 | | 3/31/2011 |
| | | | | | | | | | |
| | Form of Notice of Grant of Restricted Stock Units under the Stratus Properties Inc. stock incentive plans (adopted January 2011). | | | | 10-K | | 000-19989 | | 3/31/2011 |
| | | | | | | | | | |
| | Form of Notice of Grant of Restricted Stock Units under the Stratus Properties Inc. Stock Incentive Plan for Non-Employee Director Grants (adopted August 2014). | | | | 10-K | | 000-19989 | | 3/16/2015 |
| | | | | | | | | | |
| | Form of Notice of Grant of Restricted Stock Units under the Stratus Properties Inc. 2013 Stock Incentive Plan (adopted August 2015). | | | | 10-Q | | 000-19989 | | 11/9/2015 |
| | | | | | | | | | |
| | Form of Performance-Based Restricted Stock Unit Agreement under the Stratus Properties Inc. 2013 Stock Incentive Plan (adopted March 2016). | | | | 10-Q | | 001-37716 | | 11/9/2016 |
| | | | | | | | | | |
| | Form of Notice of Grant of Restricted Stock Units under the Stratus Properties Inc. 2013 Stock Incentive Plan (adopted March 2016). | | | | 10-Q | | 001-37716 | | 11/9/2016 |
| | | | | | | | | | |
| | Stratus Properties Inc. Performance Incentive Awards Program, as amended, effective December 30, 2008. | | | | 10-Q | | 000-19989 | | 5/5/2009 |
| | | | | | | | | | |
| | Stratus Properties Inc. 1996 Stock Option Plan for Non-Employee Directors, as amended and restated. | | | | 10-Q | | 000-19989 | | 5/10/2007 |
| | | | | | | | | | |
| | Stratus Properties Inc. Director Compensation. | | X | | | | | | |
| | | | | | | | | | |
| | Severance and Change of Control Agreement between Stratus Properties Inc. and William H. Armstrong III, effective as of April 1, 2016.2022. | | | | 10-Q10-K | | 001-37716 | | 5/10/20163/31/2022 |
| | | | | | | | | | |
| | Severance and Change of Control Agreement between Stratus Properties Inc. and Erin D. Pickens, effective as of April 1, 2016.2022. | | | | 10-Q10-K | | 001-37716 | | 5/10/20163/31/2022 |
| | | | | | | | | | |
| | List of subsidiaries. | | X | | | | | | |
| | | | | | | | | | |
| | Consent of BKM Sowan Horan, LLP. | | X | | | | | | |
| | | | | | | | | | |
| | Certified resolution of the Board of Directors ofConsulting Agreement between Stratus Properties Inc. authorizing this report to be signed on behalf of any officer or director pursuant to a Power of Attorney.and James C. Leslie, dated November 4, 2022. | | X | | | | | | |
| | | | | | | | | | |
| | Powers of Attorney pursuant to which this report has been signed on behalf of certain officers and directors of Stratus Properties Inc. | | X | | | | | | |
| | | | | | | | | | |
| | Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a). | | X | | | | | | |
| | | | | | | | | | |
|
| | | | | | | | | | |
| | Share Repurchase Agreement between Stratus Properties Inc. and James C. Leslie, dated November 1, 2022. | | X | | | | | | |
| | | | | | | | | | |
| | Stratus Properties Inc. Profit Participation Incentive Plan and Form of Award Notice. | | | | 10-K | | 001-37716 | | 3/18/2019 |
| | | | | | | | | | |
| | Form of Notice of Grant of Restricted Stock Units under the Stratus Properties Inc. 2017 Stock Incentive Plan for Non-Employee Director Grants (adopted May 2019). | | | | 10-Q | | 000-19989 | | 5/10/2019 |
| | | | | | | | | | |
| | Form of Notice of Grant of Restricted Stock Units under the Stratus Properties Inc. 2022 Stock Incentive Plan for Non-Employee Director Grants (adopted July 2022). | | X | | | | | | |
| | | | | | | | | | |
| | Form of Notice of Grant of Restricted Stock Units (adopted 2021). | | | | 10-Q | | 001-37716 | | 8/16/2021 |
| | | | | | | | | | |
| | Form of Notice of Grant of Restricted Stock Units for Awards under the Profit Participation Incentive Plan (adopted 2021). | | | | 10-Q | | 001-37716 | | 8/16/2021 |
| | | | | | | | | | |
| | Letter to the Securities and Exchange Commission from BKM Sowan Horan, LLP. | | | | 8-K | | 001-37716 | | 11/14/2022 |
| | | | | | | | | | |
| | Letter to the Securities and Exchange Commission from CohnReznick LLP. | | | | 8-K | | 001-37716 | | 11/14/2022 |
| | | | | | | | | | |
| | List of subsidiaries. | | X | | | | | | |
| | | | | | | | | | |
| | Consent of CohnReznick LLP. | | X | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Incorporated by Reference |
Exhibit
Number
| | Exhibit Title | | Filed with this Form 10-K | | Form | | File No. | | Date Filed |
| | | | | | | | | | |
| | Consent of BKM Sowan Horan, LLP. | | X | | | | | | |
| | | | | | | | | | |
| | Power of Attorney (included on signature page). | | X | | | | | | |
| | | | | | | | | | |
| | Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a). | | X | | | | | | |
| | | | | | | | | | |
| | Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a). | | X | | | | | | |
| | | | | | | | | | |
| | Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350. | | X | | | | | | |
| | | | | | | | | | |
| | Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350. | | X | | | | | | |
| | | | | | | | | | |
| 101.INS | | XBRL Instance Document.Document – the XBRL Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | | 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 | | The cover page from this Annual Report on Form 10-K, 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.
Item 16. Form 10-K Summary
Not applicable.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on March 16, 2018.31, 2023.
STRATUS PROPERTIES INC.
By: /s/ William H. Armstrong III_______
William H. Armstrong III
Chairman of the Board, President
and Chief Executive Officer
Power of Attorney. BE IT KNOWN: that each person whose signature appears below constitutes and appoints William H. Armstrong III, Erin D. Pickens and Kenneth N. Jones, and each of them acting individually, his or her true and lawful attorneys-in-fact and agents, each with the full power of substitution, for him or her in any and all capacities, to sign any amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the U.S. Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform any other act and thing requisite and necessary to be done, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant in the capacities indicatedand on March 16, 2018.
| | | | | | | | | | | |
| Name | | Capacity | Date |
| | | |
| /s/ William H. Armstrong III | | Chairman of the Board, President | March 31, 2023 |
| William H. Armstrong III | | and Chief Executive Officer
(Principal Executive Officer) | |
| | |
/s/ William H. Armstrong III | | Chairman of the Board, President |
William H. Armstrong III | | and Chief Executive Officer
(Principal Executive Officer)
|
| | |
| /s/ Erin D. Pickens | | Senior Vice President | March 31, 2023 |
Erin D. Pickens
| | and Chief Financial Officer
(Principal Financial Officer)
|
| | |
* | | Vice PresidentOfficer and Controller |
C. Donald Whitmire, Jr. | | (
Principal Accounting Officer) | |
| | | |
*/s/ Laurie L. Dotter | | Director | March 31, 2023 |
Ella G. BensonLaurie L. Dotter | | | |
| | | |
*/s/ Kate B. Henriksen | | Director | March 31, 2023 |
| Kate B. Henriksen | | | |
| | | |
| /s/ James E. Joseph | | Director | March 31, 2023 |
| James E. Joseph | | | |
* | | Director | |
James C. Leslie | | |
| | |
* | | Director |
| /s/ Michael D. Madden | | Director | March 31, 2023 |
| Michael D. Madden | | | |
* | | Director | |
| /s/ Charles W. Porter | | Director | March 31, 2023 |
| Charles W. Porter | | | |
* | | Director | |
John C. Schweitzer/s/ Neville L. Rhone Jr. | | Director | March 31, 2023 |
| Neville L. Rhone Jr. | | | |
*By: /s/ William H. Armstrong__
William H. Armstrong III
Attorney-in-Fact
