STRATUS PROPERTIES INC. In Management's Discussion and Analysis of Financial Condition and Results of Operations, "we," "us," "our" and "Stratus" refer toStratus Properties Inc. and all entities owned or controlled byStratus 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" 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 inAustin, Texas . We are engaged primarily in the acquisition, entitlement, development, management, leasing and sale of multi-family and single-family residential real estate properties and commercial properties in theAustin, Texas area and other select, fast-growing markets inTexas . 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 and undeveloped properties and the lease of our retail, mixed-use and multi-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" below for a discussion of our business strategy. 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 inTexas 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
•InMay 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. •InSeptember 2022 , after receiving written consent fromComerica 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 onSeptember 29, 2022 to shareholders of record as ofSeptember 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. 27
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•During 2022, we sold various parcels of real estate and two
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 inAustin and other select markets inTexas . 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 ourHolden 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
•In
•InDecember 2021 , an equity investor acquired a 90.0 percent interest in The Saint George limited partnership for$18.3 million and inJuly 2022 , the equity investor contributed an additional$15.0 million ; and
•In
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 ofKingwood Place ,Jones Crossing and WestKilleen 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 inAustin and the other markets inTexas 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. 28
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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 residence already built on it. 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 undeveloped land held for future use.
Revenue in our Leasing Operations is generated from the lease of space at retail
and mixed-use properties that we developed and the lease of residences in the
multi-family projects that we developed. We may also generate income from the
sale of our leased properties, depending on market conditions.
Refer to Note 10 and Items 1. and 2. "Business and Properties" for discussion of the assets in our Real Estate Operations and Leasing Operations.
Summary financial results for 2022. Our net income attributable to common stockholders totaled$90.4 million , or$10.99 per diluted share, for 2022, compared to a net income attributable to common stockholders of$57.4 million ,$6.90 per diluted share, for 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 2021 included a$106.0 million pre-tax gain on sale of assets related to the sale of The Saint Mary and The Santal. Refer to Note 4 for additional discussion. Our total stockholders' equity increased from$98.9 million atDecember 31, 2020 to$207.2 million atDecember 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 completedAmarra Villas homes in our Real Estate Operations segment partially offset by a decrease in leasing revenue following the sale of The Santal in 2021. AtDecember 31, 2022 , we had total debt of$122.8 million and consolidated cash and cash equivalents of$37.7 million . In first-quarter 2023, we received$35.8 million in cash from theHolden Hills partnership. We believe we will have sufficient cash, cash flow and sources of debt financing to meet our cash requirements for at least the next 12 months. Refer to "Capital Resources and Liquidity" and Notes 2, 6 and 11 for additional discussion. Real Estate Market Conditions. Because of the concentration of our assets primarily in theAustin, Texas area, and in other select, fast-growing markets inTexas , market conditions in these regions significantly affect our business. These market conditions historically have moved in periodic cycles, and can be volatile. Real estate development inAustin , 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 inAustin . 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 inAustin-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 inTexas and within the Austin area. Based on aDecember 2021 U.S. Census report, the state ofTexas had the largest population gain of anyU.S. state betweenJuly 2020 andJuly 2021 . There has generally been a decline over time in the brick-and-mortar retail industry due to increases in on-line shopping, 29
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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 increased by approximately 33 percent and added over half a million residents to become the fastest-growing large metro area in theU.S. from 2010 through 2020. As of 2020, 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 the Austin-Round Rock area, which was higher than average occupancy rates for theU.S. andTexas . In 2022, theAmerican Growth Project ranked Austin as the second-fastest-growing city inthe United States . According to data provided by theU.S. Census Bureau , the median family income levels in the Austin-Round Rock area increased by 14 percent over a three-year period from 2016 to 2019 (the most recently available information). The expanding economy resulted in rising demand for residential housing and retail services. Property tax and sales tax receipts rose by 44 percent and 16 percent, respectively, in the city of Austin during fiscal year 2016 through fiscal year 2020. The median home value inAustin increased from$349,156 inAugust 2020 to$566,479 inAugust 2022 , with average multi-family rents rising 10 percent year over year, according to theAmerican Growth Project .
Vacancy rates in the city of
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 %
a.CB
b.Marcus & Millichap Research Services, CoStar Group, Inc.
During 2022, theU.S. economy experienced steep rises in inflation and interest rates. Our industry has been experiencing construction and labor cost increases, supply chain constraints, labor shortages, higher borrowing costs and tightening bank credit. The Austin andTexas economies and populations may not continue to grow at the same rate as in recent periods and may decline. Refer to Item 1A. Risk Factors for further discussion. CRITICAL ACCOUNTING ESTIMATES 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 theU.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." Critical accounting estimates are those estimates made in accordance withU.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 financial condition or results of operations. Our critical accounting estimates are discussed below. Real Estate Impairment Assessments. Real estate is classified as held for sale, under development, held for investment or land available for development (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. 30
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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 impairment losses on real estate totaling
Deferred Tax 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 and valuation allowances) totaling$38 thousand atDecember 31, 2022 . Refer to Note 7 for further discussion. Profit Participation Incentive Plan and Long-Term Incentive Plan. Refer to Notes 1 and 8 for our accounting policies related to the Stratus 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 PPIP. The accrued liability for the PPIP totaled$3.0 million atDecember 31, 2022 (included in other liabilities). The most significant assumptions in the estimation of the$3.0 million PPIP liability atDecember 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 ofDecember 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 ofDecember 31, 2021 ,$8.8 million was related 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 lower estimated capitalization rate and transaction costs in the range of assumptions in 2022. 31
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RECENT DEVELOPMENT ACTIVITIES
Residential. As of December 31, 2022 , the number of our residential lots/units
that are developed, under development and available for potential development by
area are shown below:
Residential Lots/Units
Under
Developed 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
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
c.For further discussion of ongoing development planning that may result in
increased densities for Section N, refer to "
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 2015, we completed the development of the Amarra Drive Phase III subdivision,
which consists of 64 lots on 166 acres. In 2021, we sold three lots. As of
Amarra Multi-family and Commercial. We also have multi-family and commercial lots in the Amarra development ofBarton Creek .The Amarra Villas and The Saint June, both described below, are being developed on two of these multi-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 ofDecember 31, 2022 , we have one remaining undeveloped multi-family lot of approximately 11 acres and one undeveloped 22-acre commercial lot in inventory. 32
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Amarra Villas . The Villas atAmarra Drive (Amarra Villas ) is a 20-unit project within the Amarra development for which we completed site work in 2015. 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 seven homes between 2017 and 2019. We began construction on the next twoAmarra 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 remaining ten homes. In fourth-quarter 2022, we sold one home for$3.6 million . InMarch 2023 , we completed and sold of one home for$2.5 million . Construction on the last ten units continue to progress, and as ofMarch 27, 2023 , one home was under contract to sell and nineAmarra Villas homes remain available for sale. The Saint June. InJune 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 and 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 theBarton 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 theHolden 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 inJanuary 2023 , and inFebruary 2023 obtained construction financing for Phase I of the project and commenced infrastructure construction. We contributed to the joint venture theHolden 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 theHolden 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 theHolden 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 forHolden Hills , we continue to progress the development plans for Section N, our approximately 570-acre tract located alongSouthwest Parkway in the southern portion of theBarton Creek community, adjacent toHolden 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 InSeptember 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 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 33
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2021. We entered into a construction loan for the project inJuly 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 ofLantana Place , a partially developed, mixed-use development project located south ofBarton Creek inAustin . The multi-family component is now known as The Saint Julia and is expected to consist of 306 units. We currently do not expect to begin construction prior to 2024, and the project remains subject to financing and market conditions.Kingwood Place InOctober 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 atKingwood Place , anH-E-B, L.P (H-E-B ) grocery anchored, mixed-use project inKingwood, Texas . In connection with the sale, we made a$5.0 million principal payment on theKingwood Place construction loan. Other Residential In 2022, we sold 28 acres of undeveloped residential land atMagnolia Place , anH-E-B grocery shadow-anchored, mixed-use project inMagnolia, Texas for$3.2 million . Also, inOctober 2022 , we entered into a contract to sell approximately 11 acres planned for 275 multi-family units inMagnolia Place for$4.3 million , which is currently expected to close by the end of 2023. Upon the anticipated closing of the sale, we would have 18 acres planned for up to 600 multi-family units remaining inMagnolia Place . We continue to evaluate options for the 21-acre multi-family component ofJones Crossing , anH-E-B grocery anchored, mixed-use development located inCollege Station, Texas . We are also evaluating options for a multi-family project on 35 acres inLakeway, Texas .
Commercial. As of
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
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.
b.For a discussion of this project, refer to Items 1. and 2. "Business and Properties."
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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."Magnolia Place The retail component ofMagnolia Place is currently planned to consist of up to four retail buildings totaling approximately 34,000 square feet and up to nine retail pad sites to be sold or ground leased. The first phase of 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 was substantially completed in 2022, with the exception of certain water supply upgrades and a storm water drainage pond, which are expected to be completed by the end of 2023, and the two retail buildings were turned over to our retail tenants to begin their finish-out process. We sold one retail pad site for$2.3 million in second-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 adjoining 18-acre site in fourth-quarter 2022.
In addition to our recent commercial development activity, we also own and operate the following stabilized retail projects that we developed:
•West
•Jones Crossing is ourH-E-B -anchored mixed-use project inCollege Station, Texas , the location ofTexas A&M University . As ofDecember 31, 2022 , we had signed leases for substantially all of the completed retail space, including theH-E-B grocery store, totaling 154,117 square feet.The Jones Crossing site has future development opportunities. As ofDecember 31, 2022 , we had approximately 23 undeveloped acres with estimated development potential of approximately 104,750 square feet of commercial space and four retail pad sites. •Lantana Place is our mixed-use development project within theLantana community south ofBarton Creek inAustin, Texas . As ofDecember 31, 2022 , we had signed leases for approximately 90 percent of the 99,379-square-foot retail space, including the anchor tenant, Moviehouse & Eatery, and a ground lease for anAC Hotel by Marriott that opened inNovember 2021 . •Kingwood Place is ourH-E-B -anchored, mixed-use development project inKingwood, Texas (in the greaterHouston area). We have constructed 151,855 square feet of retail space atKingwood Place , including anH-E-B grocery store, and as ofDecember 31, 2022 , we had signed leases for approximately 96 percent of the retail space, including theH-E-B grocery store. We have also signed ground leases on four of the retail pad sites. One retail pad site remains available for lease.
Refer to Part I, Items 1. and 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 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 compensation and other costs described herein.
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The following table summarizes our operating results (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 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 atLakeway in 2017. Refer to Note 4 under the heading "The Oaks atLakeway " for additional discussion. The year 2021 includes the pre-tax gains on theDecember 2021 sale of The Santal of$83.0 million and theJanuary 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$119.7 million pre-tax gain on theMay 2022 sale of Block 21. As a result of the sale of Block 21, we currently have two operating segments: Real Estate Operations and Leasing Operations (refer to Notes 4 and 10). The following is a discussion of our operating results by segment. Real Estate Operations The following table summarizes our Real Estate Operations results (in thousands): Years Ended December 31, 2022 2021 Revenues: Developed property sales$ 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) 36
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Developed Property Sales. The following table summarizes our developed property sales (in thousands):
Years Ended December 31,
2022 2021
Average Cost Average Cost
Lots/Units Revenues per Lot/Unit Lots/Homes Revenues 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 sales 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, 2022 ,
two developed Phase III lots remained unsold.
Undeveloped Property Sales. In 2022, we closed $18.6 million of undeveloped
property sales consisting of (i) a 10 acre multi-family tract of land in
Kingwood Place for $5.5 million , (ii) 28 acres of residential land at Magnolia
Place for $3.2 million , (iii) a six-acre multi-family tract of land in Amarra
Drive for $2.5 million , (iv) a retail pad site at Magnolia Place for
$2.3 million , (v) a 0.3 acre tract of land in Austin for $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 land in San
Antonio for $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 .
Real Estate Cost of Sales and Depreciation. Cost of sales includes cost of
property sold, project operating and marketing expenses and allocated overhead
costs. Cost of sales totaled $23.9 million in 2022 and $9.9 million in 2021. The
increase in cost of sales in 2022, compared with 2021, primarily reflects an
increase in undeveloped property sales over 2021.
Cost of sales for our real estate operations also includes significant recurring
costs (including property taxes, maintenance and marketing), which totaled $6.6
million in 2022 and $5.8 million in 2021.
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 a $70 thousand impairment charge for the multi-family tract of
land at Kingwood Place that sold for $5.5 million in October 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 the multi-family tract of land at Kingwood
Place that was sold in 2022 and a $500 thousand impairment charge for an office
building in Austin .
Leasing Operations
The following table summarizes our Leasing Operations results (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
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Rental Revenue. Rental revenue primarily includes revenue from our retail and mixed-use projectsLantana Place ,Jones Crossing ,Kingwood Place and WestKilleen Market , and until its sale inDecember 2021 , our multi-family project The Santal. The decrease in rental revenue in 2022, compared to 2021, primarily reflects the sale of The Santal inDecember 2021 , partly offset by increased rental revenue atLantana Place andKingwood 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
InDecember 2021 , our subsidiary sold The Santal 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. InJanuary 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 noncontrolling interest owners. We recognized a pre-tax gain on the sale of$22.9 million ($16.2 million net of noncontrolling interests) in 2021. Corporate, Eliminations and Other Corporate, eliminations and other (refer to Note 10) includes consolidated general and administrative expenses, which primarily consist of employee compensation and other costs. Consolidated general and administrative expenses totaled$17.6 million in 2022 and$24.5 million in 2021. The decrease in general and administrative expenses in 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$4.0 million in consulting, legal and public relation costs for our successful proxy contest and the real estate investment trust exploration process. Corporate, eliminations and other also includes eliminations of intersegment amounts incurred by our operating segments. Non-Operating Results Interest Expense, Net. Interest costs (before capitalized interest) totaled$6.6 million in 2022 and$8.7 million in 2021. The decrease in interest costs in 2022, compared with 2021, primarily reflects a reduction in average debt balances, including the repayment of the outstanding balance on theComerica Bank revolving credit facility and the repayment of The Santal loan partially offset by rising interest rates. All of our debt atDecember 31, 2022 was variable-rate debt, and for all of such debt other than theComerica 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$6.6 million in 2022 and$5.5 million in 2021, and is primarily related to development activities atBarton Creek (primarily Section N,Holden Hills andAmarra Villas ), The Annie B, The Saint George, The Saint June andMagnolia Place .Net Gain on Extinguishment of Debt. We recorded a net gain of$1.5 million on extinguishment of debt in 2021 primarily associated with the forgiveness of substantially all of our PPP loan in third quarter 2021. This gain was partly offset by losses on the extinguishment of debt associated with the repayment of The Saint Mary construction loan upon the sale of the property in first-quarter 2021 and the refinancing of theJones Crossing construction loan in second-quarter 2021, which resulted in the write-off of unamortized deferred financing costs. Provision for Income Taxes. We recorded a provision for income taxes of$0.4 million in 2022 and$12.6 million in 2021. We had deferred tax assets (net of deferred tax liabilities and valuation allowances) totaling$38 thousand atDecember 31, 2022 , and$6.0 million atDecember 31, 2021 . Refer to Note 7 for further discussion of income taxes. Total Comprehensive Loss (Income) Attributable to Noncontrolling Interests in Subsidiaries. Our partners' share of loss totaled$0.7 million in 2022 and our 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. 38
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Discontinued Operations OnMay 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 Stratus' wholly owned mixed-use real estate property in downtownAustin, Texas . Block 21 contains the 251-roomW Austin Hotel and is home to Austin City Limits Live at theMoody 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. 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 of Block 21. The net loss in 2021 reflects the negative impacts that the COVID-19 pandemic had on theHotel and 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. Comparison of Year-to-Year Cash Flows Operating Activities. Cash used in operating activities totaled$55.3 million in 2022 and$53.6 million in 2021. Expenditures for purchases and development of real estate properties totaled$24.5 million in 2022, primarily related to development of ourBarton Creek properties, particularlyAmarra Villas and, to a lesser extent,Holden Hills , and$52.8 million in 2021, primarily related to the purchase of the land for The Annie B, the purchase of the property for The Saint George and development of ourBarton Creek properties, includingAmarra Villas . The$62.0 million decrease in accounts payable, accrued liabilities and other in 2022 is primarily related to paying off the income tax liabilities associated with the sale of The Santal and The Saint Mary. During first-quarter 2023, we paid$4.5 million in employee incentive compensation and$4.0 million in property taxes that were accrued at year end. Investing Activities. Cash provided by investing activities totaled$50.0 million in 2022 and$188.9 million in 2021. During 2022, we received net proceeds from the sale of Block 21 of$105.8 million (excluding the release of reserves previously presented as restricted cash but including$6.9 million of post-closing escrow amounts to be held for 12 months after the closing, subject to a longer retention period with respect to any required reserves for pending claims). During 2021, we received net proceeds from the sales of The Santal and The Saint Mary of$209.9 million . Capital expenditures totaled$54.8 million for 2022, primarily related to The Saint June, The Saint George andMagnolia Place projects, and$19.6 million for 2021, primarily for The Saint June,Lantana Place andMagnolia Place projects. Financing Activities. Cash used in financing activities totaled$19.2 million in 2022 and$99.4 million in 2021. During 2022, we had no net borrowings on theComerica Bank revolving credit facility, compared with net borrowings of$43.3 million for 2021. Net borrowings on other project and term loans totaled$14.3 million in 2022, primarily reflecting borrowings on theMagnolia Place and The Saint June construction loans andAmarra Villas construction credit facility, compared with net repayments of$88.1 million in 2021, primarily reflecting the repayment of The Santal loan and The Saint Mary construction loan upon the sale of those projects. In first-quarter 2023, we paid off 39
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theNew Caney land loan at its maturity and made a$2.2 million principal payment on theAmarra Villas construction credit facility upon closing of a sale of one of theAmarra Villas homes. Refer to the table "Debt Maturities and Other Contractual Obligations" below for a presentation of our outstanding debt and principal maturities for the years endedDecember 31, 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 theHolden Hills partnership formation. OnSeptember 1, 2022 , after receiving written consent fromComerica Bank , our Board declared a special cash dividend of$4.67 per share (totaling$40.0 million ) on our common stock, which was paid onSeptember 29, 2022 to shareholders of record as ofSeptember 19, 2022 . Our Board also approved a new share repurchase program, which authorizes repurchases of up to$10.0 million of our common stock, which replaced our prior share repurchase program. The repurchase program authorizes us, in management's discretion, to repurchase shares from time to time, subject to market conditions and other factors. As ofDecember 31, 2022 , we repurchased 294,700 shares of our common stock for a total of$7.9 million at an average price of$26.69 . ThroughMarch 27, 2023 , we have acquired 335,703 shares of our common stock 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. 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. Revolving Credit Facility and Other Financing Arrangements As ofDecember 31, 2022 , we had cash and cash equivalents of$37.7 million and restricted cash of$8.0 million . We have taken steps to obtainFederal Deposit Insurance Corporation (FDIC) protection for much of our deposits; however, we typically have some cash balances on deposit with banks in excess ofFDIC insured limits. Any loss of uninsured deposits could have a material adverse effect on our future financial condition, liquidity and operations. AtDecember 31, 2022 , we had total debt of$123.9 million based on the principal amounts outstanding, compared with$107.9 million atDecember 31, 2021 . Consolidated debt atDecember 31, 2021 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 ourComerica Bank revolving credit facility prior toJune 30, 2022 . AtDecember 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 benefitingHolden 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 ofDecember 31, 2022 . InMay 2022 , we entered into an amendment withComerica Bank to extend the maturity date of theComerica Bank revolving credit facility fromSeptember 27, 2022 toDecember 26, 2022 , and inNovember 2022 ,Comerica Bank extended the maturity date fromDecember 26, 2022 toMarch 27, 2023 . TheMay 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. InFebruary 2023 , theHolden Hills property was removed from the borrowing base for the revolving credit facility, and the maximum amount that could be borrowed was reduced. AtMarch 27, 2023 the maximum amount that could be borrowed under the facility 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 facility. InMarch 2023 , we entered into a modification of the revolving credit facility, which extended the maturity date toMarch 27, 2025 and increased the floor of the BSBY Rate to 0.50 percent. Pursuant to these amendments, advances under the revolving 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. 40
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InFebruary 2023 , our subsidiaryHolden Hills, L.P. entered into a$26.1 million loan agreement withComerica Bank dueFebruary 8, 2026 to finance the development of Phase I of the Holden 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 the agreements, of not less than$7.5 million .The Jones Crossing loan includes a requirement that we maintain liquid assets, as defined in the agreement, of not less than$2 million . TheNew 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 . TheComerica Bank revolving credit facility, theLantana Place construction loan, theAmarra Villas credit facility, theKingwood Place construction loan, theWest Killeen Market construction loan, theNew Caney land loan, The Saint June construction loan, theMagnolia 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 net asset value, as defined in each agreement, of$125 million . TheComerica Bank revolving credit facility, theAmarra Villas credit facility, theKingwood Place construction loan, The Annie B land loan, The Saint George construction loan and the Holden Hills construction loan also include a requirement that we maintain a debt-to-gross asset value, as defined in the agreements, of not more than 50 percent. The WestKilleen Market construction loan, theJones Crossing loan and theLantana 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 ofDecember 31, 2022 , we were in compliance with all of our financial covenants; however ourJones Crossing project did not pass the debt service coverage ratio test under theJones Crossing loan. The debt service coverage ratio under theJones 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 theJones Crossing loan inFebruary 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. OurComerica 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 requireComerica Bank's prior written consent for any common stock repurchases in excess of$1.0 million or any dividend payments, which was obtained in connection with the special cash dividend and share repurchase program. Any future declaration of dividends or decision to repurchase our common stock is at the discretion of our Board, subject to restrictions under ourComerica Bank debt agreements, and will depend on our financial results, cash requirements, projected compliance with covenants in our debt agreements, outlook and other factors deemed relevant by our Board. Our future debt agreements, future refinancings of or amendments to existing debt agreements or other future agreements may restrict our ability to declare dividends or repurchase shares.
Of the
Our project loans are generally secured by all or substantially all of the assets of the project, and ourComerica 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 theJones 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. 41
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DEBT MATURITIES AND OTHER CONTRACTUAL OBLIGATIONS
The following table summarizes our total debt maturities based on the principal
amounts outstanding as of
2023 2024 2025 2026 2027 Thereafter TotalComerica 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 - 5,366 - - - - 5,366 facility e Total$ 45,843 $ 26,878 $ 5,476 $ 24,821 $ 20,873 $ -$ 123,891
a.In
b.In
c.In
d.The maturity date is
e.In
As discussed above, in
We had firm commitments totaling approximately$75 million atDecember 31, 2022 related toAmarra 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 toMarch 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 42
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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 interest rate changes,
supply chain constraints and tightening bank credit, our ability to meet our
future debt service and other cash obligations, future cash flows and liquidity,
our expectations about the Austin and Texas real estate markets, the planning,
financing, development, construction, completion and stabilization of our
development projects, plans to sell, recapitalize, or refinance properties,
future operational and financial performance, MUD reimbursements for
infrastructure costs, regulatory matters, leasing activities, tax rates, 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 are
intended 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 common 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 dividends or decision to repurchase our common stock is at the
discretion of our Board, subject to restrictions under our Comerica Bank debt
agreements, and will depend on our financial results, cash requirements,
projected compliance with covenants in our debt agreements, outlook and other
factors deemed relevant by our Board. Our future debt agreements, future
refinancings of or amendments to existing debt agreements or other future
agreements may restrict our ability to declare dividends or repurchase shares.
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 implement our business strategy successfully, including our
ability to develop, construct and sell or lease properties on terms our Board
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 collect anticipated
rental
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payments and close projected asset sales, loss of key personnel, our ability 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 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 buyer preferences,
potential additional impairment charges, competition from other real estate
developers, our ability to obtain various entitlements and 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
undertake no obligation to update our forward-looking statements, which speak
only as of the date made, notwithstanding any changes in our assumptions,
business plans, actual experience, or other changes.
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Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
Page Reference
Management's Annual Report on Internal Control Over Financial Reporting 46
Report of Independent Registered Public Accounting Firm (PCAOB ID: 596)
47
Report of Independent Registered Public Accounting Firm (PCAOB ID: 5127)
49
Consolidated Balance Sheets as of December 31, 2022 and 2021 50
Consolidated Statements of Comprehensive Income for each of the two years in
51
the period ended
52
ended December 31, 2022
Consolidated Statements of Equity for each of the two years in the period ended 53
December 31, 2022
Notes to the Consolidated Financial Statements 54
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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'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'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's management used the criteria set forth in Internal Control-Integrated Framework issued by theCommittee of Sponsoring Organizations of theTreadway Commission (2013 framework) (the COSO criteria). Based on its assessment, management concluded that, as ofDecember 31, 2022 , the Company's internal control over financial reporting is effective based on the COSO criteria.
/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 46
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Stratus Properties Inc.
Austin, Texas Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet ofStratus Properties Inc. and subsidiaries (the "Company") as ofDecember 31, 2022 , and the related consolidated statements of comprehensive income (loss), stockholders' equity, and cash flows the year endedDecember 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 ofDecember 31, 2022 , and the results of its operations and its cash flows for the year endedDecember 31, 2022 , in conformity with accounting principles generally accepted inthe United States of America .
Basis for Opinion
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We are a public accounting firm registered with thePublic Company Accounting Oversight Board (United States ) ("PCAOB") and are required to be independent with respect to the Company in accordance with theU.S. federal securities laws and the applicable rules and regulations of theSecurities 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 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 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 amounts and disclosures in the consolidated financial statements. Our audit 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 audit provides a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit 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 a 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 the carrying 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 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, 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 property's carrying amount over its fair value. The Company's undiscounted cash flows are subjective and are based, in part, on estimates and assumptions such as real estate prices, sales pace, sales and marketing costs, infrastructure development costs and capitalization rates. In the 47
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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/
We have served as the Company's auditor since 2022.
Dallas, Texas March 31, 2023 48
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders
Stratus Properties Inc.
Austin, Texas Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet ofStratus Properties Inc. and subsidiaries (the Company) as ofDecember 31, 2021 , and the related consolidated statement of comprehensive income (loss), stockholders' equity, and cash flows for the year endedDecember 31, 2021 , 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 ofDecember 31, 2021 , and the results of its operations and its cash flows for each of the year endedDecember 31, 2021 , in conformity with accounting principles generally accepted inthe United States of America .
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 audit. We are a public accounting firm registered with thePublic Company Accounting Oversight Board (United States ) (PCAOB) and are required to be independent with respect to the Company in accordance with theU.S. federal securities laws and the applicable rules and regulations of theSecurities 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 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 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 amounts and disclosures in the consolidated financial statements. Our audit 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 audit provides a reasonable basis for our opinion. /s/BKM Sowan Horan, LLP
We have served as the Company's auditor since 2010.
Austin, Texas March 31, 2022 49
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STRATUS PROPERTIES INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Par Value)
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$0.01 per share, 150,000 shares authorized, 9,439 and 9,388 shares issued, respectively and 7,991 and 8,245 shares outstanding, respectively 94 94 Capital in excess of par value of common stock 195,773 188,759 Retained earnings (accumulated deficit) 41,452 (8,963)
Common stock held in treasury, 1,448 shares and 1,143 shares at cost, (30,071)
(21,753)
respectively
Total stockholders' equity 207,248 158,137 Noncontrolling interests in subsidiaries 64,825 50,476 Total equity 272,073 208,613 Total liabilities and equity$ 445,140 $ 541,226
The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.
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STRATUS PROPERTIES INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands, Except Per Share Amounts)
Years Ended December 31,
2022 2021
Revenues:
Real estate operations $ 24,744 $ 8,449
Leasing operations 12,754 19,787
Total revenues 37,498 28,236
Cost of sales:
Real estate operations 23,761 9,733
Leasing operations 4,439 9,030
Depreciation and amortization 3,586 5,449
Total cost of sales 31,786 24,212
General and administrative expenses 17,567 24,509
Impairment of real estate 720 1,825
Gain on sales of assets (4,812) (105,970)
Total 45,261 (55,424)
Operating (loss) income (7,763) 83,660
Interest expense, net (15) (3,193)
Net gain on extinguishment of debt - 1,529
Other income, net 1,103 65
Net (loss) income before income taxes and equity in unconsolidated
(6,675) 82,061
affiliate's loss
Provision for income taxes (389) (12,577)
Equity in unconsolidated affiliate's loss (13) (27)
Net (loss) income from continuing operations (7,077) 69,457
Net income (loss) from discontinued operations 96,820 (6,208)
Net income and total comprehensive income 89,743 63,249
Total comprehensive loss (income) attributable to noncontrolling 683 (5,855)
interests
Net income and total comprehensive income attributable to common stockholders
$
90,426
Basic net (loss) income per share attributable to common stockholders: Continuing operations
$ (0.78) $ 7.72 Discontinued operations 11.77 (0.75) $
10.99
Diluted net (loss) income per share attributable to common stockholders: Continuing operations
$ (0.78) $ 7.65 Discontinued operations 11.77 (0.75) $
10.99
Weighted-average shares of common stock outstanding: Basic 8,228 8,236 Diluted 8,228 8,313 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.
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STRATUS PROPERTIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
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
The accompanying Notes to Consolidated Financial Statements, which include information regarding noncash transactions, are an integral part of these consolidated financial statements.
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STRATUS PROPERTIES INC.
CONSOLIDATED STATEMENTS OF EQUITY
(In Thousands)
Stockholders' Equity
Common Stock
Common Stock Held in Treasury
Number Capital in Retained Earnings Number Noncontrolling
of At Par Excess of (Accumulated of At Interests in Total
Shares Value Par Value Deficit) Shares Cost Total Subsidiaries 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 - - 1,162 - - - 1,162 - 1,162
Participation Incentive Plan (PPIP)
Tender of shares for stock-based - - - - 6 (153) (153) - (153)
awards
Distributions to noncontrolling - - - - - - - (12,529) (12,529) interests Noncontrolling interests' contributions - - - - - - - 46,300 46,300 Total comprehensive income - - - 57,394 - - 57,394 5,855 63,249 Balance atDecember 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 - - 6 - - - 6 - 6 common stock 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 - - - - 11 (452) (452) - (452) awards Noncontrolling interests' - - - - - - - 15,032 15,032 contributions Total comprehensive income (loss) - - - 90,426 - - 90,426 (683) 89,743 Balance atDecember 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.
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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, leasing and sale of multi-family and single-family
residential real estate properties and commercial properties in the Austin,
Texas area and other select markets in Texas . The real estate and leasing
operations of Stratus are conducted primarily through its subsidiaries. Stratus
consolidates its wholly owned subsidiaries, subsidiaries in which Stratus has a
controlling interest and variable interest entities (VIEs) in which Stratus is
determined 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 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. )
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. All 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 atDecember 31, 2022 primarily consists of$6.9 million of post-closing escrow amounts from the sale of Block 21 inMay 2022 to be held for 12 months after the closing, subject to a longer retention period with respect to any required reserve for pending claims. Real 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. 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 or 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 development. Stratus capitalizes improvements that increase the value of 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 54
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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.
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. Real estate held for investment is depreciated on a straight-line basis over the properties' estimated lives of 30 to 40 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$3.8 million atDecember 31, 2022 and$3.6 million atDecember 31, 2021 . Revenue Recognition. Revenue or gains on sales of real estate are recognized when control of the asset has been transferred to the buyer if collection of substantially all of the consideration to which Stratus will be entitled is probable and Stratus has satisfied all other performance obligations under the contract. Consideration is allocated among multiple performance obligations or distinct nonfinancial assets to be transferred to the buyer based on relative fair value. Consideration is reasonably determined and deemed likely of collection when Stratus has signed sales agreements and has determined that the buyer has demonstrated a commitment to pay. Stratus recognizes its rental income on a straight-line basis based on the terms of its signed leases with tenants. Recoveries from tenants for taxes, insurance and other commercial property operating expenses are recognized as revenues in the period the related costs are incurred. Stratus recognizes sales commissions and management and development fees when earned, as properties are sold or when the services are performed. Cost of Sales. Cost of sales includes the cost of real estate sold as well as costs directly attributable to the properties sold, properties held for sale, and land available for development, such as marketing, maintenance and property taxes. Cost of sales also includes operating costs and depreciation for properties held for investment and municipal utility district reimbursements. A summary of Stratus' cost of sales follows (in thousands): Years Ended December 31, 2022 2021 Depreciation and amortization$ 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
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. Advertising Costs. Advertising costs are charged to expense as incurred and are included as a component of cost of sales. Advertising costs totaled$0.5 million in 2022 and$0.4 million in 2021. 55
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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. Refer to Note 7 for further discussion.
Earnings Per Share. Stratus' basic net income per share of common stock was calculated by dividing the net income attributable to common stockholders by the weighted-average shares of common stock outstanding during the period. A reconciliation of net income and weighted-average shares of common stock outstanding for purposes of calculating diluted net income per share (in thousands, except per share amounts) follows:
Years Ended
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
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
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
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 RSUs is
based on 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. The 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.
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Related Party Transactions. Refer to Notes 2 and 4 for discussion ofLCHM Holdings, LLC (LCHM), its manager, andJBM 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 withWhitefish Partners, LLC (Whitefish Partners ), formerly known asAustin Retail Partners, LLC , for services provided by a consultant ofWhitefish Partners who is the son of Stratus' President and Chief Executive Officer. InApril 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 ofDecember 31, 2022 , the employee has two outstanding awards under the PPIP. Refer to Note 8 for discussion of the PPIP. Payments toWhitefish Partners for the consultant's consulting services and expense reimbursements totaled$122 thousand during 2021. NOTE 2. LIMITED PARTNERSHIPSThe Saint George Apartments, L.P. InNovember 2021 ,The Saint George Apartments, L.P. (The Saint George partnership), aTexas 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 inAustin . InDecember 2021 , The Saint George partnership purchased the land for the project for$18.5 million . InDecember 2021 , an unrelated equity investor contributed$18.3 million to The Saint George partnership for a 90.0 percent interest. InJuly 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. InSeptember 2021 , Stratus Block 150, L.P., aTexas 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 downtownAustin, 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 ofDecember 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 57
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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. InJune 2021 ,The Saint June, L.P. , aTexas 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 theBarton Creek community inAustin, 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. InJuly 2021 , an unrelated equity investor contributed$16.3 million toThe Saint June, L.P. partnership for a 65.87 percent interest. Stratus has a 34.13 percent interest inThe 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 manageThe 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 inJuly 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. InAugust 2018 ,Stratus Kingwood Place, L.P. , aTexas limited partnership and a subsidiary of Stratus (theKingwood, L.P. ), completed a$10.7 million private placement, approximately$7 million of which, combined with a$6.8 million loan fromComerica Bank , was used to purchase a 54-acre tract of land located inKingwood, Texas for$13.5 million , for the development of Kingwood Place, anH-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 theKingwood, 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. InDecember 2018 , theKingwood, L.P. , entered into a construction loan agreement withComerica 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 inJanuary 2020 (refer to Note 6 for further discussion). 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 remaining 30 percent of the project's cost (totaling approximately$15 million ) was funded by borrower equity, contributed by Stratus and private equity investors. InOctober 2019 , Stratus acquired an unrelated equity investor's 33.33 percent interest inKingwood, L.P. for$5.8 million . Following the acquisition, Stratus has a 60.0 percent interest in theKingwood, L.P. Stratus' potential returns may increase above its relative equity interest if negotiated return hurdles are achieved. 58
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Accounting for Limited Partnerships. Stratus has performed evaluations and concluded that The Saint George partnership, Stratus Block 150, L.P.,The Saint June, L.P. and theKingwood, L.P. are VIEs and that Stratus is the primary beneficiary. Accordingly, the partnerships' results are consolidated in 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.
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NOTE 3. REAL ESTATE,NET 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
Real estate held for sale. Developed lots include individual tracts of land that
have been developed and permitted for residential use. As of December 31, 2022 ,
Stratus owned two developed 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
commercial 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 development costs for The Saint June, The Saint
George and Amarra Villas projects.
Real estate under development 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 costs of sale for two of the
homes under construction exceed 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 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, 2022 included land permitted for residential and commercial
development and vacant pad sites at Jones Crossing and Kingwood Place.
Included in land available for development is an office building in
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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. InSeptember 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 inOctober 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 anH-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 the retail component of anH-E-B -anchored, mixed-use development. The WestKilleen Market project includes 44,493 square-feet of commercial space adjacent to a 90,000 square-footH-E-B grocery store.The Magnolia Place project includes 18,582 square feet in the first phase of the retail component of anH-E-B -shadow anchored, mixed-used development.
Capitalized interest. Stratus recorded capitalized interest of
NOTE 4. ASSET SALES Block 21 - Discontinued Operations. OnMay 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$119.7 million in second-quarter 2022 included in net income (loss) from discontinued operations. Block 21 was Stratus' wholly owned mixed-use real estate property in downtownAustin, Texas . Block 21 contains the 251-roomW Austin Hotel and is home to Austin City Limits Live at theMoody Theater , a 2,750-seat entertainment venue that serves as the location for the filming of Austin City Limits, the longest running music series in American television history. Block 21 also includes Class A office space, retail space and the 3TEN ACL Live entertainment venue and business. In accordance with accounting guidance, Stratus reported the results of operations of Block 21 as discontinued operations in the consolidated statements of comprehensive income because the disposal represents a strategic shift that had a major effect on operations and presented the assets and liabilities of Block 21 as held for sale - discontinued operations in the consolidated balance sheets for all periods presented. Block 21 did not have any other comprehensive income and Stratus' consolidated statements of cash flows are reported on a combined basis without separately presenting discontinued operations. The carrying amounts of Block 21's major classes of assets and liabilities in the consolidated balance sheet atDecember 31, 2021 , follow (in thousands): Assets: Cash and cash equivalents$ 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
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.
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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
a.In accordance with accounting guidance, amounts are net of eliminations of
intercompany sales totaling
b.In accordance with accounting guidance, depreciation is not recognized
subsequent to classification as assets held for sale, which occurred in
Capital expenditures associated with discontinued operations totaled
The Santal. InDecember 2021 , Stratus completed the sale of The Santal for$152.0 million , less a$0.7 million repair credit. The Santal was Stratus' wholly owned 448-unit luxury garden-style multi-family project located in Section N of Austin'sBarton 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
The Saint Mary. InJanuary 2021 ,The Saint Mary, L.P. , a consolidatedTexas limited partnership in which Stratus holds an aggregate 57 percent indirect equity interest, sold The Saint Mary, a 240-unit luxury garden-style multi-family project in the Circle C community inAustin, Texas 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, 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 toLCHM 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. InSeptember 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 62
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closed inOctober 2022 . Upon entering into the contract, Stratus recorded a$625 thousand impairment charge in third-quarter 2021 to reduce the carrying value of the land to its fair value based on the contractual sale price less estimated selling costs. In third-quarter 2022, Stratus recorded a$70 thousand impairment charge due to selling costs in excess of the previous estimate.Amarra Villas . InFebruary 2021 , Stratus entered into a contract to sell one of theAmarra Villas homes. The sale closed inMarch 2023 for$2.5 million . Stratus recorded a$650 thousand impairment charge in third-quarter 2022 because the estimated total project costs and costs of sale for the home under construction exceeded its contractual sale price. In fourth-quarter 2022, we sold anotherAmarra Villas home for$3.6 million . NOTE 5. FAIR VALUE MEASUREMENTS Fair value accounting guidance includes a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 inputs) and the lowest priority to unobservable inputs (Level 3 inputs). The carrying value for certain Stratus financial instruments (i.e., cash and cash equivalents, restricted cash, accounts payable and accrued liabilities) approximates fair value because of their short-term nature and generally negligible credit losses.
A summary of the carrying amount and fair value of Stratus' other financial instruments follows (in thousands):
December 31, 2022 December 31, 2021
Carrying Fair Carrying Fair
Value Value Value Value
Liabilities:
Debt$ 122,765 $ 124,575 $ 106,648 $ 108,091 Stratus' debt is recorded at cost and is not actively traded. Fair value is estimated based on discounted future expected cash flows at estimated current market interest rates. Accordingly, Stratus' debt is classified within Level 2 of the fair value hierarchy. The fair value of debt does not represent the amounts that will ultimately be paid upon the maturities of the loans. 63
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NOTE 6. DEBT
Stratus' debt follows (in thousands):
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
WestKilleen 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
Comerica Bank revolving credit facility. Using proceeds from the sale of Block 21, Stratus repaid the outstanding amount under itsComerica Bank revolving credit facility inJune 2022 . As ofDecember 31, 2022 , Stratus 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 the company's obligation to build certain roads and utilities facilities benefiting Holden Hills and Section N. InMay 2022 , Stratus andComerica Bank entered into an amendment to increase the letter of credit sublimit from$7.5 million to$11.5 million and change the benchmark rate to theBloomberg Short-Term Bank Yield Index (BSBY) Rate. InFebruary 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. AtMarch 27, 2023 the maximum amount that could be borrowed under the facility 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 ofDecember 31, 2022 and 2021 consisting of unimproved real property which has a limitation of 35 percent of fair market value. InMarch 2023 , Stratus entered into a modification of the revolving credit facility, which extended the maturity date of the revolving credit facility toMarch 27, 2025 , and increased the BSBY Rate floor to 0.50 percent. As amended, advances under the revolving credit facility bear interest at the one-month BSBY Rate (with a floor of 0.50 percent) plus 4.00 percent. The loan is secured by substantially all assets that are not 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. 64
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Jones Crossing loan. InJune 2021 , a Stratus wholly-owned subsidiary entered into a$24.5 million loan withRegions Bank (theJones Crossing loan). Of the proceeds from theJones Crossing loan,$22.2 million was used to repay in full the originalJones Crossing construction loan. The repayment of theJones 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 ofJune 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 theJones 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 endingSeptember 30, 2022 , a "Cash Sweep Period" (as defined in theJones Crossing loan) results, which limits Stratus' ability to receive cash from itsJones Crossing subsidiary. The debt service coverage ratio fell below 1.15 to 1.00 in fourth-quarter 2022, and theJones Crossing subsidiary made a$231 thousand principal payment inFebruary 2023 on theJones 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 theJones 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 theJones Crossing property, would trigger the carve-out guaranty.The Jones Crossing loan contains certain financial covenants, including a requirement that Stratus maintain liquid assets of at least$2.0 million . The Annie B land loan. InSeptember 2021 , Stratus Block 150, L.P. entered into an 18-month,$14.0 million land loan withComerica Bank to acquire the land for The Annie B project (The Annie B land loan). The loan was set to matureMarch 1, 2023 , and bore interest at LIBOR (with a floor of 0.50 percent) plus 3.00 percent. Payments of interest only on the loan were due monthly throughFebruary 2023 , with the outstanding principal due at maturity. The Annie 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 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 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. InFebruary 2023 , Stratus entered into a modification agreement that extended the maturity date of the loan toMarch 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.New Caney land loan. InMarch 2019 , a Stratus wholly-owned subsidiary entered into a$5.0 million land loan withTexas Capital Bank . Proceeds from the loan were used to fund the acquisition ofH-E-B's portion of theNew Caney partnership in which Stratus andH-E-B purchased a tract of land for the future development of anH-E-B -anchored mixed-use project inNew Caney, Texas . InMarch 2021 , Stratus exercised its option to extend the loan for an additional 12 months toMarch 8, 2022 , which required a principal payment of$0.5 million . InMarch 2022 , Stratus extended the loan for an additional 12 months toMarch 8, 2023 , which required two principal payment of$0.2 million , one inMarch 2022 and one inSeptember 2022 . Stratus also entered into an amendment to theNew 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 theNew Caney land and were guaranteed by Stratus. The loan agreement contained financial covenants including a requirement that Stratus maintain a net asset value of$125.0 million and unencumbered liquid assets of no less than$10.0 million . This loan was repaid at its maturity inMarch 2023 . Paycheck Protection Program loan. InApril 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 onMarch 27, 2020 . The PPP loan bore interest at 1.00 percent and maturedApril 15, 2022 , except for the portion that was forgiven. Stratus' PPP loan forgiveness application was accepted and approved inAugust 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, theKingwood, L.P. entered into a construction loan agreement withComerica Bank (the Kingwood Place construction loan), which provides financing for nearly 70 percent of the costs associated with construction of Kingwood Place. The total loan of$32.9 million included the original commitment of$6.8 million used to purchase a 54-acre tract of land located inKingwood, Texas , and an additional$26.1 million for 65
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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. InJanuary 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. InDecember 2022 , the loan was amended to extend the maturity date for an additional 12 months toDecember 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$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 construction loan. In 2017, a Stratus wholly-owned subsidiary entered into a$26.3 million construction loan withSouthside Bank (theLantana Place construction loan) to finance the initial phase ofLantana Place . InJanuary 2021 , Stratus entered into amendments to theLantana Place construction loan in whichStratus' Lantana Place subsidiary was granted a waiver of the debt service coverage ratio covenant untilSeptember 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 endedJune 30, 2022 , and then on a trailing 12-month period for each quarter thereafter. As part of theJanuary 2021 amendment, Stratus repaid$2.0 million in principal on theLantana Place construction loan. InAugust 2022 , Stratus andSouthside Bank amended theLantana Place construction loan. Pursuant to the agreement, the date through which Stratus can request advances under the loan was extended throughDecember 31, 2023 , the interest rate for the loan was changed to Term SOFR plus 2.40 percent, subject to a 3.00 percent floor, and the maturity date of the loan was extended toJuly 1, 2027 . In addition, the land planned for The Saint Julia, a proposed multi-family project atLantana Place , was released from the collateral for the loan. Payments of interest only on the construction loan are due monthly throughJuly 1, 2023 . BeginningAugust 1, 2023 , monthly payments of principal and interest based on a 30-year amortization are due, with the outstanding principal due at maturity.
The debt service coverage ratio was also changed to 1.25 to 1.00, and Stratus was released as guarantor under the related guaranty.
The Saint June construction loan. InJune 2021 ,The Saint June, L.P. entered into a construction loan withTexas 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 onOctober 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. InJanuary 2023 ,Stratus and Texas 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 throughOctober 2, 2024 , with the outstanding principal due at maturity. The loan is secured by The Saint June project and is fully guaranteed by Stratus. However, the guaranty will convert to a 50 percent repayment guaranty upon completion of construction of The Saint June. Further, onceThe Saint June, L.P. is able to maintain a debt service coverage ratio of 1.25 to 1.00, the repayment guaranty will be eliminated. Notwithstanding the foregoing, Stratus will remain liable for customary carve-out obligations and environmental indemnity. Stratus is also 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 not less than 1.00 to 1.00 for three consecutive months. The project must comply with a specified loan-to-value ratio covenant. 66
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Magnolia Place construction loan. InAugust 2021 , a Stratus wholly-owned subsidiary entered into a$14.8 million construction loan withVeritex Community Bank secured by theMagnolia Place project. The loan matures onAugust 12, 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. The loan bears interest at 30-day LIBOR plus 3.25 percent (or, if applicable, a replacement rate), with a floor of 3.50 percent. Payments of interest only are due monthly with the outstanding principal due at maturity. Stratus provided a completion guaranty and 25-percent-limited-payment guaranty. The loan 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 . WestKilleen Market construction loan. In 2016, a Stratus wholly-owned subsidiary entered into a$9.9 million construction loan agreement withSouthside Bank (the WestKilleen Market loan) to finance a portion of the construction of the WestKilleen Market project. The loan is secured by the WestKilleen Market project and is guaranteed by Stratus until Stratus'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. InJune 2022 , Stratus andSouthside Bank amended theWest 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 toJuly 31, 2025 . Principal and interest payments based on a 30-year amortization are due monthly and the remaining balance is payable at maturity. 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 a requirement that Stratus' WestKilleen 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. In 2016, a Stratus wholly-owned subsidiary entered into theAmarra Villas credit facility to finance construction of theAmarra Villas project. InMarch 2019 , two Stratus wholly-owned subsidiaries entered into an amended and restated loan agreement withComerica Bank to modify, increase and extendStratus' 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 fromJuly 12, 2019 toMarch 19, 2022 . InMarch 2022 , the Stratus subsidiaries andComerica Bank agreed to an extension of the maturity date toJune 19, 2022 , while they negotiated a modification of this facility. InJune 2022 , Stratus subsidiaries andComerica Bank entered into a modification agreement pursuant to which the commitment amount of theAmarra 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 toJune 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. AtDecember 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 theAmarra 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. InMarch 2023 , Stratus made a$2.2 million principal payment on the credit facility upon the closing of a sale of one of theAmarra Villas homes. The Saint George construction loan. InJuly 2022 ,The Saint George Apartments, L.P. entered into a$56.8 million loan withComerica Bank to provide financing for the construction of The Saint George multi-family project. The construction loan has a maturity date ofJuly 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 throughJuly 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. 67
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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 ofDecember 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 ofDecember 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 agreements 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 at
NOTE 7. INCOME TAXES
Stratus' provision 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 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,
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management considered available positive and negative evidence, giving greater weight to the uncertainty regarding projected future financial results.
Upon a change in facts and circumstances, management may conclude that sufficient positive evidence exists to support a reversal of, or decrease in, the valuation allowance in the future, which would favorably impact Stratus' results of operations. Stratus' future results of operations may be negatively impacted by an inability to realize a tax benefit for future tax losses or for items that will generate additional deferred tax assets that are not more likely than not to be realized. Stratus' future results of operations may be favorably impacted by reversals of valuation allowances if Stratus is able to demonstrate sufficient positive evidence that its deferred tax assets will be realized.
Reconciliations of the
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.
Stratus paid federal income taxes and state margin taxes totaling $37.7 million
in 2022 and $0.4 million in 2021. In connection with the CARES Act and the
ability to carry back net operating losses, Stratus received a $5.1 million U.S.
federal income tax refund in 2022. Stratus also received a $1.9 million U.S.
federal income tax refund in 2021.
Uncertain Tax Positions. Stratus has recorded unrecognized tax benefits related
to 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
As of December 31, 2022 , Stratus had no unrecognized tax benefits. During 2022,
approximately $0.2 million of unrecognized tax benefits were recognized as a
result of the completion of 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 of comprehensive income
(loss). As of December 31, 2022 , 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 2019 and state margin tax
examinations for the years prior to 2018.
On August 16, 2022 , the Inflation Reduction Act of 2022 (the IR Act) was enacted
in the United States . Among other provisions, the IR Act imposes a new one
percent excise tax on the fair market value of net corporate stock repurchases
made by covered corporations, effective for tax years beginning after December
31, 2022 . Stratus is
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assessing the potential impacts of the IR Act, but does not expect the IR Act to have a material impact on its consolidated financial statements
NOTE 8. EQUITY TRANSACTIONS, STOCK-BASED COMPENSATION AND EMPLOYEE BENEFITS Equity TheComerica Bank revolving credit facility,Amarra Villas credit facility, The Annie B land loan, The Saint George construction loan, Kingwood Place construction loan and Holden Hills construction loan entered into inFebruary 2023 requireComerica Bank's prior written consent for any common stock repurchases in excess of$1.0 million or any dividend payments. Dividends. OnSeptember 1, 2022 , after receiving written consent fromComerica Bank , Stratus' Board declared a special cash dividend of$4.67 per share (totaling$40.0 million ) on Stratus' common stock, which was paid onSeptember 29, 2022 to shareholders of record as ofSeptember 19, 2022 . Accrued liabilities as ofDecember 31, 2022 , included$1.3 million representing dividends accrued for unvested RSUs in accordance with the terms of the awards. The accrued dividends will be paid to the holders of the RSUs, if and when they vest. Share Repurchase Program. OnSeptember 1, 2022 , after receiving written consent fromComerica Bank , Stratus' Board approved a new share repurchase program, which authorizes repurchases of up to$10.0 million of Stratus' common stock. The repurchase program authorizes Stratus, in management's discretion, to repurchase shares from time to time, subject to market conditions and other factors. In 2022, Stratus acquired 294,700 shares of its common stock under the share repurchase program for a total cost of$7.9 million at an average price of$26.69 per share. ThroughMarch 27, 2023 , Stratus has acquired 335,703 shares of its common stock 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. Stock-based Compensation Stock Award Plans. OnMay 12, 2022 , the stockholders of Stratus approved the 2022 Stock Incentive Plan (the Plan). The Plan authorizes the issuance of up to 500,000 shares of common stock. Awards for no more than 250,000 shares may be granted to a 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 available for new grants as ofDecember 31, 2022 . Stock-Based Compensation Costs. Compensation costs charged against earnings for RSUs, the only stock-based awards granted over the last several years, totaled$1.7 million for 2022 and$0.8 million for 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 employees and consultants at no cost to the recipients. The RSUs are converted into shares of Stratus common stock ratably and generally vest in increments over a one to four year period following the grant date. For employees and consultants, the awards generally 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 because of retirement, death and disability for RSUs granted prior to 2022 and full acceleration of vesting under these scenarios for RSUs granted in 2022. InMay 2022 , Stratus granted an aggregate 173,726 stock-settled RSUs with a grant-date value of$7.4 million , based on Stratus' stock price on the date of issuance, pursuant to the terms of the PPIP in connection withLantana Place , which reached a valuation event under the PPIP inSeptember 2021 , and the sale of The Santal inDecember 2021 (see further discussion below). 70
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A summary of outstanding unvested RSUs as of
Aggregate
Number of Intrinsic
RSUs Value
Balance at January 1 135,611
Granted 198,179
Vested (51,521)
Balance at December 31 282,269 $ 5,445
The total fair value of RSUs granted was $8.3 million for 2022 and $2.4 million
for 2021. The total intrinsic value of RSUs vested was $2.0 million during 2022
and $0.8 million during 2021. As of December 31, 2022 , Stratus had $3.0 million
of total unrecognized compensation cost related to unvested RSUs expected to be
recognized over a weighted-average period of 1.4 years.
The following table includes amounts related to vesting of RSUs (in thousands, except shares of Stratus common stock tendered):
Years Ended
2022 2021
Stratus shares tendered to pay the minimum required taxes a 11,277 5,461
Amounts Stratus paid for employee taxes $
452
a.Under terms of the related plans and agreements, upon vesting of RSUs, employees may tender shares of Stratus common stock to Stratus to pay the minimum required taxes.
Employee Benefits Stratus maintains a 401(k) defined contribution plan subject to the provisions of the Employee Retirement Income Security Act of 1974 (ERISA). The 401(k) plan 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) plan also provides for discretionary contributions. Stratus' contributions to the 401(k) plan totaled$0.6 million in 2022 and$0.5 million in 2021. 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. InFebruary 2023 , the Committee approved the LTIP, which amends and restates the PPIP, and is effective for participation interests awarded under development projects on or after its effective date. As ofMarch 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 toMarch 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 71
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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 designatedMagnolia 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 inAugust 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 atDecember 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. OnOctober 17, 2020 , WestKilleen 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 WestKilleen Market to capital in 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
InSeptember 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 duringFebruary 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 inDecember 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 duringFebruary 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 withLantana 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 forLantana Place and The Santal that was settled in RSUs to capital in excess of par value and is amortizing the$2.1 million balance of the grant-date value with a charge to general and administrative expenses and a credit to capital in excess of par value over the three-year or one-year vesting periods of the related RSUs. 72
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A summary of PPIP costs follows (in thousands):
Years Ended December 31,
2022 2021
Charged to general and administrative expense$ 524 $ 9,780 Capitalized to project development costs 2 441 Total PPIP costs$ 526 $ 10,221
The accrued liability for the PPIP totaled
NOTE 9. COMMITMENTS AND CONTINGENCIES Construction Contracts. Stratus had firm commitments totaling approximately$75 million atDecember 31, 2022 related toAmarra Villas ,Magnolia Place , The Saint June and The Saint George development projects. We have construction loans, as well as remaining equity capital contributed to The Saint George limited partnership, in place to fund these commitments. Letters of Credit. As ofDecember 31, 2022 , Stratus had letters of credit totaling$11.0 million committed against its revolving credit facility withComerica Bank , which secure the company's obligation to build certain roads and utilities facilities benefiting Holden Hills and Section N (refer to Note 6 for further discussion). Rental Income. As ofDecember 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$92.3 million thereafter, with the longest lease extending through 2039. H-E-B Profit Participation.H-E-B has profit participation rights in theJones Crossing , Kingwood Place, andLakeway projects.H-E-B is entitled to 10 percent of any cash flow from operations or profit from the sale of these properties after Stratus receives a return of its equity plus a preferred return of 10 percent. Stratus may enter into similar profit participation agreements for future projects. Leases. Stratus' most significant lease is a 99-year ground lease for approximately 72 acres of land inCollege Station, Texas on which it is developing theJones Crossing project. Stratus also leases various types of assets, including office space, vehicles and office equipment under non-cancelable leases. Stratus entered into one lease during fourth-quarter 2022 that is classified as a finance lease, and the other leases are classified as operating leases. As ofDecember 31, 2022 , the remaining term of the finance lease is five years with a weighted-average discount rate of 6.4 percent to determine the lease liability. Stratus did not have any finance leases during 2021. Supplemental balance sheet information related to leases is as follows (in thousands): December 31, Classification on the Consolidated Balance Sheet 2022 2021 Assets Operating right-of-use assets Lease right-of-use assets$ 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$1.3 million in 2021. Stratus paid$757 thousand during 2022 and$183 thousand in 2021 for lease liabilities recorded in the consolidated balance sheet (included in operating cash flows in the consolidated statements of cash flows). As ofDecember 31, 2022 and 2021, the weighted-average discount rate used to determine the lease liabilities was 6.0 percent. As ofDecember 31, 2022 , the weighted-average remaining lease term was 90 years (94 years as ofDecember 31, 2021 ). 73
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The future minimum payments for operating leases recorded on the consolidated balance sheet atDecember 31, 2022 follow (in thousands): Years ending December 31, 2023$ 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
Circle C Settlement. In 2002, the city of Austin 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 city of Austin also provided Stratus$15.0 million of 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 million of 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 ofDecember 31, 2022 , Stratus had permanently used$12.4 million of its City-based development fee credits, including cumulative amounts sold to third parties totaling$5.1 million . Fee credits used for the development of Stratus' properties effectively reduce the basis of the related properties and Stratus defers recognition of any gain associated with the use of the fees until the affected properties are sold. Stratus also had$0.9 million in credit bank capacity in use as temporary fiscal deposits as ofDecember 31, 2022 . Available credit bank capacity was$1.8 million atDecember 31, 2022 . Deferred Gain on Sale of The Oaks atLakeway . In 2017, Stratus sold The Oaks atLakeway to FHF I Oaks atLakeway, LLC for$114.0 million in cash. The Oaks atLakeway is anH-E-B anchored retail project located inLakeway, 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 (theHotel 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 SiteMaster Lease ). The In-Line Master Lease expired inFebruary 2022 and theHotel Master Lease was terminated inNovember 2020 . As such, Stratus has no further obligations under these two master leases. With respect to the Pad SiteMaster 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 SiteMaster 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 SiteMaster Lease expires inFebruary 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 SiteMaster Lease until the lease expires inFebruary 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 atDecember 31, 2022 , compared with$4.8 million atDecember 31, 2021 . The reduction in the deferred gain balance primarily reflects Pad SiteMaster Lease payments. The remaining deferred gain balance is expected to be reduced primarily by future Pad SiteMaster Lease payments. 74
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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 could 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 has two operating segments: Real Estate Operations and Leasing Operations. Block 21, which encompassedStratus' Hotel and 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 inAustin, Texas (including theBarton Creek Community , including Section N, Holden Hills, Amarra multi-family and commercial land,Amarra Villas , The Saint June and other vacant land; the Circle C community; theLantana community, including a portion ofLantana Place planned for a multi-family phase now known as The Saint Julia; The Saint George; and the land for The Annie B); inLakeway, Texas , located in the greater Austin area (Lakeway ); inCollege Station, Texas (land for future phases of retail and multi-family development and retail pad sites atJones Crossing ); and inMagnolia, Texas (land for a future phase of retail development and for future multi-family use and retail pad sites atMagnolia Place ),Kingwood, Texas (a retail pad site) andNew Caney, Texas (New Caney ), located in the greaterHouston area. The Leasing Operations segment is comprised of Stratus' real estate assets, both residential and commercial, that are leased or available for lease and includes WestKilleen Market , Kingwood Place and the completed portions ofLantana Place ,Jones Crossing andMagnolia Place . The segment also included The Saint Mary until its sale inJanuary 2021 and The Santal until its sale inDecember 2021 (refer to Note 4 for further discussion). Stratus uses operating income or loss to measure the performance of each segment. General and administrative expenses, which primarily consist of employee salaries, wages and other costs, are managed on a consolidated basis and are not allocated to Stratus' operating segments. The following segment information reflects management determinations that may not be indicative of what the actual financial performance of each segment would be if it were an independent entity.
Revenues From Contracts with Customers. Stratus' revenues from contracts with customers follow (in thousands):
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
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Financial Information by Business Segment. Summarized financial information by
segment for the year ended
Corporate,
Real Estate Leasing Eliminations and
Operations a Operations 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
213 $ 79,267
Total assets at December 31, 2022 288,270 109,348 47,522 445,140
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$650 thousand for one of theAmarra Villas homes that was sold for$2.5 million inMarch 2023 and$70 thousand for the multi-family tract of land at Kingwood Place sold for$5.5 million inOctober 2022 . d.Represents a 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 atLakeway in 2017.
Summarized financial information by segment for the year ended
Corporate,
Real Estate Leasing Eliminations and
Operations a Operations 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
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 intersegment 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 twoAmarra Villas homes that were sold in 2022,$625 thousand for the multi-family tract of land at Kingwood Place that sold for$5.5 million inOctober 2022 and$500 thousand for an office building inAustin .
e.Represents the pre-tax gains on the
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NOTE 11. SUBSEQUENT EVENTSHolden Hills, L.P. In first-quarter 2023,Holden Hills, L.P. , aTexas 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 inAustin, 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 as 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 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 an asset management fee of$150 thousand per year starting 15 months after construction starts on the project payable from available cash flow after debt service. The Class A limited partner and the 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 gas improvements in order to extend the Tecoma Circle roadway on Section N land owned by Stratus from its current terminus toSouthwest 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 alongSouthwest 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 theCity of Austin under Stratus' revolving credit facility withComerica 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 completed. Holden Hills construction loan. InFebruary 2023 , the Holden Hills partnership entered into a loan agreement withComerica Bank to finance the development of Phase I of the Holden Hills project. 77
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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 ofFebruary 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.
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