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EXCEL - IDEA: XBRL DOCUMENT - STRATUS PROPERTIES INCFinancial_Report.xls
EX-31.1 - EXHIBIT 31.1 - STRATUS PROPERTIES INCa3q14exhibit311.htm
EX-32.2 - EXHIBIT 32.2 - STRATUS PROPERTIES INCa3q14exhibit322.htm
EX-32.1 - EXHIBIT 32.1 - STRATUS PROPERTIES INCa3q14exhibit321.htm
EX-31.2 - EXHIBIT 31.2 - STRATUS PROPERTIES INCa3q14exhibit312.htm
EX-10.2 - EXHIBIT 10.2 - STRATUS PROPERTIES INCa3q14exhibit102.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
 
SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2014
 
or
[  ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
 
SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from to
 
Commission File Number: 000-19989
 
Stratus Properties Inc.
(Exact name of registrant as specified in its charter)
Delaware
72-1211572
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
212 Lavaca St., Suite 300
 
Austin, Texas
78701
(Address of principal executive offices)
(Zip Code)
 
(512) 478-5788
(Registrant's telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
þ Yes   ¨ No

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

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

Large accelerated filer ¨        Accelerated filer ¨         Non-accelerated filer ¨          Smaller reporting company þ

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

On October 31, 2014, there were issued and outstanding 8,038,353 shares of the registrant’s common stock, par value $0.01 per share.








PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

STRATUS PROPERTIES INC.
CONSOLIDATED BALANCE SHEETS (Unaudited)
(In Thousands)

 
September 30,
2014
 
December 31,
2013
ASSETS
 
 
 
Cash and cash equivalents
$
26,676

 
$
21,307

Restricted cash
6,264

 
5,077

Real estate held for sale
16,407

 
18,133

Real estate under development
116,113

 
76,891

Land available for development
21,659

 
21,404

Real estate held for investment, net
177,913

 
182,530

Investment in unconsolidated affiliates
3,307

 
4,427

Other assets
19,599

 
17,174

Total assets
$
387,938

 
$
346,943

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Liabilities:
 
 
 
Accounts payable
$
7,866

 
$
5,143

Accrued liabilities
8,388

 
9,360

Debt
187,782

 
151,332

Other liabilities and deferred gain
14,678

 
11,792

Total liabilities
218,714

 
177,627

 
 
 
 
Commitments and contingencies

 

 
 
 
 
Equity:
 
 
 
Stratus stockholders’ equity:
 
 
 
Common stock
91

 
91

Capital in excess of par value of common stock
204,137

 
203,724

Accumulated deficit
(58,811
)
 
(60,724
)
Accumulated other comprehensive loss
(258
)
 
(22
)
Common stock held in treasury
(20,275
)
 
(19,448
)
Total Stratus stockholders’ equity
124,884

 
123,621

Noncontrolling interests in subsidiaries
44,340

 
45,695

Total equity
169,224

 
169,316

Total liabilities and equity
$
387,938

 
$
346,943


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


2


STRATUS PROPERTIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In Thousands, Except Per Share Amounts)

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Revenues:
 
 
 
 
 
 
 
Real estate operations
$
6,562

 
$
10,810

 
$
18,817

 
$
57,715

Hotel
9,714

 
8,312

 
31,086

 
28,207

Entertainment
3,659

 
3,310

 
12,659

 
9,942

Commercial leasing
1,695

 
1,391

 
4,888

 
3,943

Total revenues
21,630

 
23,823

 
67,450

 
99,807

Cost of sales:
 
 
 
 
 
 
 
Real estate operations
5,478

 
6,942

 
13,978

 
46,727

Hotel
7,542

 
6,893

 
22,815

 
21,705

Entertainment
3,003

 
3,000

 
9,539

 
8,435

Commercial leasing
1,045

 
644

 
2,449

 
1,991

Depreciation
2,241

 
2,252

 
6,713

 
6,790

Total cost of sales
19,309

 
19,731

 
55,494

 
85,648

Litigation and insurance settlements
(1,506
)
 

 
(2,082
)
 
(1,785
)
General and administrative expenses
1,741

 
1,578

 
5,762

 
5,356

Total costs and expenses
19,544

 
21,309

 
59,174

 
89,219

Operating income
2,086

 
2,514

 
8,276

 
10,588

Interest expense, net
(974
)
 
(1,833
)
 
(2,797
)
 
(6,140
)
Gain (loss) on interest rate cap agreement
15

 

 
(236
)
 

Loss on early extinguishment of debt
(19
)
 
(1,379
)
 
(19
)
 
(1,379
)
Other income, net
3

 
7

 
25

 
1,352

Income (loss) before income taxes and equity in unconsolidated affiliates' (loss) income
1,111

 
(691
)
 
5,249

 
4,421

Equity in unconsolidated affiliates' (loss) income
(190
)
 
(114
)
 
248

 
(3
)
Provision for income taxes
(143
)
 
(192
)
 
(563
)
 
(617
)
Net income (loss)
778

 
(997
)
 
4,934

 
3,801

Net (income) loss attributable to noncontrolling interests in subsidiaries
(181
)
 
957

 
(3,021
)
 
(2,056
)
Net income (loss) attributable to Stratus common stock
$
597

 
$
(40
)
 
$
1,913

 
$
1,745

 
 
 
 
 
 
 
 
Basic and diluted net income (loss) per share attributable to Stratus common stock
$
0.07

 
$

 
$
0.24

 
$
0.22

 
 
 
 
 
 
 
 
Weighted-average shares of common stock outstanding:
 
 
 
 
 
 
 
Basic
8,032

 
8,057

 
8,037

 
8,087

Diluted
8,067

 
8,057

 
8,078

 
8,118


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

3


STRATUS PROPERTIES INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)
(In Thousands)

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
Net income (loss)
$
778

 
$
(997
)
 
$
4,934

 
$
3,801

 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of taxes:
 
 
 
 
 
 
 
Gain (loss) on interest rate swap agreement
98

 

 
(337
)
 

Other comprehensive income (loss)
98

 

 
(337
)
 

 
 
 
 
 
 
 
 
Total comprehensive income (loss)
876

 
(997
)
 
4,597

 
3,801

Total comprehensive (income) loss attributable to noncontrolling interests
(211
)
 
957

 
(2,920
)
 
(2,056
)
Total comprehensive income (loss) attributable to Stratus common stock
$
665

 
$
(40
)
 
$
1,677

 
$
1,745

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



4


STRATUS PROPERTIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In Thousands)

 
Nine Months Ended
 
September 30,
 
2014
 
2013
Cash flow from operating activities:
 
 
 
Net income
$
4,934

 
$
3,801

Adjustments to reconcile net income to net cash (used in) provided by operating activities:
 
 
 
Depreciation
6,713

 
6,790

Cost of real estate sold
9,772

 
37,341

Loss on early extinguishment of debt
19

 
1,379

Stock-based compensation
348

 
245

Equity in unconsolidated affiliates' (income) loss
(248
)
 
3

Deposits
597

 
1,306

Purchases and development of real estate properties
(47,611
)
 
(14,054
)
Recovery of land previously sold

 
(485
)
Municipal utility district reimbursement

 
208

(Increase) decrease in other assets
(2,939
)
 
7,991

Increase in accounts payable, accrued liabilities and other
3,334

 
2,340

Net cash (used in) provided by operating activities
(25,081
)
 
46,865

 
 
 
 
Cash flow from investing activities:
 
 
 
Capital expenditures
(2,263
)
 
(991
)
Return of investment in (investment in) unconsolidated affiliates
1,368

 
(1,100
)
Net cash used in investing activities
(895
)

(2,091
)
 
 
 
 
Cash flow from financing activities:
 
 
 
Borrowings from credit facility
28,500

 
18,000

Payments on credit facility
(9,782
)
 
(32,924
)
Borrowings from project loans
29,812

 
101,577

Payments on project and term loans
(12,079
)
 
(68,511
)
Noncontrolling interests distributions
(4,275
)
 
(28,026
)
Repurchase of treasury stock
(637
)
 
(820
)
Net payments for stock-based awards
(125
)
 
(10
)
Financing costs
(69
)
 
(1,406
)
Net cash provided by (used in) financing activities
31,345

 
(12,120
)
Net increase in cash and cash equivalents
5,369

 
32,654

Cash and cash equivalents at beginning of year
21,307

 
12,784

Cash and cash equivalents at end of period
$
26,676

 
$
45,438


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

5


STRATUS PROPERTIES INC.
CONSOLIDATED STATEMENTS OF EQUITY (Unaudited)
(In Thousands)

 
 
Stratus Stockholders’ Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accum-
ulated
Other
Compre-
hensive
Loss
 
Common Stock
Held in Treasury
 
Total Stratus Stockholders' Equity
 
 
 
 
 
 
Common Stock
 
Capital in Excess of Par Value
 
Accum-ulated Deficit
 
 
 
 
Noncontrolling Interests in Subsidiaries
 
 
 
 
Number
of Shares
 
At Par
Value
 
 
 
 
Number
of Shares
 
At
Cost
 
 
 
Total
Equity
Balance at December 31, 2013
 
9,076

 
$
91

 
$
203,724

 
$
(60,724
)
 
$
(22
)
 
1,030

 
$
(19,448
)
 
$
123,621

 
$
45,695

 
$
169,316

Common stock repurchases
 

 

 

 

 

 
37

 
(637
)
 
(637
)
 

 
(637
)
Exercised and issued stock-based awards
 
40

 

 
65

 

 

 

 

 
65

 

 
65

Stock-based compensation
 

 

 
348

 

 

 

 

 
348

 

 
348

Tender of shares for stock-based awards
 

 

 

 

 

 
11

 
(190
)
 
(190
)
 

 
(190
)
Noncontrolling interests distributions
 

 

 

 

 

 

 

 

 
(4,275
)
 
(4,275
)
Total comprehensive income (loss)
 

 

 

 
1,913

 
(236
)
 

 

 
1,677

 
2,920

 
4,597

Balance at September 30, 2014
 
9,116

 
$
91

 
$
204,137

 
$
(58,811
)
 
$
(258
)
 
1,078

 
$
(20,275
)
 
$
124,884

 
$
44,340

 
$
169,224


Balance at December 31, 2012
 
9,037

 
$
90

 
$
203,298

 
$
(63,309
)
 
$

 
940

 
$
(18,392
)
 
$
121,687

 
$
87,208

 
$
208,895

Common stock repurchases
 

 

 

 

 

 
71

 
(810
)
 
(810
)
 

 
(810
)
Exercised and issued stock-based awards
 
38

 
1

 
78

 

 

 

 

 
79

 

 
79

Stock-based compensation
 

 

 
245

 

 

 

 

 
245

 

 
245

Tender of shares for stock-based awards
 

 

 

 

 

 
8

 
(99
)
 
(99
)
 

 
(99
)
Noncontrolling interests distributions
 

 

 

 

 

 

 

 

 
(18,127
)
 
(18,127
)
Total comprehensive income
 

 

 

 
1,745

 

 

 

 
1,745

 
2,056

 
3,801

Balance at September 30, 2013
 
9,075

 
$
91

 
$
203,621

 
$
(61,564
)
 
$

 
1,019

 
$
(19,301
)
 
$
122,847

 
$
71,137

 
$
193,984


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



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STRATUS PROPERTIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.
GENERAL
The accompanying unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2013, included in Stratus Properties Inc.’s (Stratus) Annual Report on Form 10-K (Stratus 2013 Form 10-K) filed with the Securities and Exchange Commission. In the opinion of management, the accompanying consolidated financial statements reflect all adjustments (consisting only of normal recurring items) considered necessary for a fair statement of the results for the interim periods reported. Operating results for the three-month and nine-month periods ended September 30, 2014, are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.

2.
EARNINGS PER SHARE
Stratus’ basic net income (loss) per share of common stock was calculated by dividing the net income (loss) attributable to Stratus common stock by the weighted-average shares of common stock outstanding during the three-month and nine-month periods. Following is a reconciliation of net income (loss) and weighted-average shares of common stock outstanding for purposes of calculating diluted net income (loss) per share (in thousands, except per share amounts):
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2014
 
2013
 
2014
 
2013
 
Net income (loss)
$
778

 
$
(997
)
 
$
4,934

 
$
3,801

 
Net (income) loss attributable to noncontrolling interests in subsidiaries
(181
)
 
957

 
(3,021
)
 
(2,056
)
 
Net income (loss) attributable to Stratus common stock
$
597

 
$
(40
)
 
$
1,913

 
$
1,745

 
 
 
 
 
 
 
 
 
 
Weighted-average shares of common stock outstanding
8,032

 
8,057

 
8,037

 
8,087

 
Add shares issuable upon exercise or vesting of:
 
 
 
 
 
 
 
 
Dilutive stock options
7

 

 
12


7

a 
Restricted stock units
28

b 

 
29

b 
24

 
 
 
 
 
 
 
 
 
 
Weighted-average shares of common stock outstanding for purposes of calculating diluted net income per share
8,067

 
8,057

 
8,078

 
8,118

 
 
 
 
 
 
 
 
 
 
Diluted net income (loss) per share attributable to Stratus common stock
$
0.07

 
$

 
$
0.24

 
$
0.22

 
a. Excludes approximately 1,700 shares of common stock associated with outstanding stock options with exercise prices less than the average market price of Stratus' common stock that were anti-dilutive based on the treasury stock method.
b. Excludes 30,000 shares of common stock associated with restricted stock units that were anti-dilutive based on the treasury stock method.

Outstanding stock options with exercise prices greater than the average market price for Stratus' common stock during the period are excluded from the computation of diluted net income per share of common stock. Excluded were approximately 56,900 stock options with a weighted-average exercise price of $21.54 for third-quarter 2014, 37,700 stock options with a weighted-average exercise price of $24.35 for the first nine months of 2014 and approximately 65,800 stock options with a weighted-average exercise price of $20.65 for the first nine months of 2013. Stock options and restricted stock units representing approximately 100,000 shares for third-quarter 2013 were excluded from weighted-average common shares outstanding for purposes of calculating diluted net loss per share because they were anti-dilutive.

3.
JOINT VENTURE WITH CANYON-JOHNSON URBAN FUND II, L.P.
Stratus and Canyon-Johnson Urban Fund II, L.P. (Canyon-Johnson) are participants in a joint venture, CJUF II Stratus Block 21, LLC (the Block 21 Joint Venture), for a 36-story mixed-use development in downtown Austin, Texas, anchored by a W Hotel & Residences (the W Austin Hotel & Residences project). Stratus is the manager of, and has an approximate 40 percent interest in, the Block 21 Joint Venture, and Canyon-Johnson has an approximate 60 percent interest in the Block 21 Joint Venture. As of September 30, 2014, cumulative capital

7


contributions totaled $71.9 million for Stratus and $94.0 million for Canyon-Johnson. Distributions totaled $0.5 million to Stratus and $0.7 million to Canyon-Johnson in third-quarter 2014 and $3.1 million to Stratus and $4.3 million to Canyon-Johnson for the first nine months of 2014. As of September 30, 2014, inception-to-date distributions totaled $47.8 million to Stratus and $54.9 million to Canyon-Johnson. The Block 21 Joint Venture is consolidated in Stratus’ financial statements based on Stratus' assessment that the Block 21 Joint Venture is a variable interest entity (VIE) and that Stratus is the primary beneficiary. Stratus will continue to periodically evaluate which entity is the primary beneficiary of the Block 21 Joint Venture in accordance with applicable accounting guidance. See Note 2 of the Stratus 2013 Form 10-K for further discussion.

Stratus’ consolidated balance sheets include the following assets and liabilities of the Block 21 Joint Venture (in thousands):
 
September 30,
 
December 31,
 
2014
 
2013
Assets:
 
 
 
Cash and cash equivalents
$
21,184

 
$
13,192

Restricted cash
5,730

 
5,069

Real estate held for sale
5,851

 
10,942

Real estate held for investment, net
152,233

 
157,541

Other assets
7,068

 
7,631

    Total assets
192,066

 
194,375

Liabilities:
 
 
 
Accounts payable
2,804

 
3,428

Accrued liabilities
6,075

 
6,856

Debt
98,648

 
99,754

Other liabilities
7,394

 
4,761

    Total liabilities
114,921

 
114,799

Net assets
$
77,145

 
$
79,576

 
 
 
 

Profits and losses among partners in a real estate venture are allocated based on how changes in net assets of the venture would affect cash payments to the partners over the life of the venture and on its liquidation. The amount of the ultimate profits earned by the Block 21 Joint Venture will affect the ultimate profit sharing ratios because of provisions in the joint venture agreement, which would require Stratus to return certain previously received distributions to Canyon-Johnson under certain circumstances. Because of the uncertainty of the ultimate profits and, therefore, profit-sharing ratios, the Block 21 Joint Venture's cumulative profits or losses are allocated based on a hypothetical liquidation of the Block 21 Joint Venture’s net assets as of each balance sheet date. As of September 30, 2014, the cumulative earnings of the Block 21 Joint Venture were allocated based on 42 percent for Stratus and 58 percent for Canyon-Johnson.

4. JOINT VENTURE WITH LCHM HOLDINGS, LLC
In 2011, Stratus entered into a joint venture (the Parkside Village Joint Venture) with Moffett Holdings, LLC (Moffett Holdings) for the development of Parkside Village, a retail project in the Circle C community in southwest Austin, Texas. On March 3, 2014, Moffett Holdings redeemed and purchased the membership interest in Moffett Holdings held by LCHM Holdings, LLC (LCHM Holdings). In connection with the redemption, (1) LCHM Holdings received the 625,000 shares of Stratus common stock held by Moffett Holdings and (2) LCHM Holdings entered into an assignment and assumption agreement pursuant to which Moffett Holdings assigned to LCHM Holdings its rights and obligations under the Investor Rights Agreement between Moffett Holdings and Stratus dated as of March 15, 2012. See Note 3 of the Stratus 2013 Form 10-K for further discussion.

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).


8


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):
 
September 30, 2014
 
December 31, 2013
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
Assets:
 
 
 
 
 
 
 
Interest rate cap agreement
$
115

 
$
115

 
$
351

 
$
351

Liabilities:
 
 
 
 
 
 
 
Interest rate swap agreement
369

 
369

 
32

 
32

Debt
187,782

 
188,083

 
151,332

 
151,584


Interest Rate Cap Agreement. On September 30, 2013, the Block 21 Joint Venture paid $0.5 million to enter into an interest rate cap agreement, which caps the one-month London Interbank Offered Rate (LIBOR), the variable rate in the loan agreement with Bank of America relating to the W Austin Hotel & Residences project (the BoA loan), at 1 percent for the first year the BoA loan is outstanding, 1.5 percent for the second year and 2 percent for the third year. Stratus uses an interest rate pricing model that relies on market observable inputs such as LIBOR to measure the fair value of the interest rate cap agreement. Stratus also evaluated the counterparty credit risk associated with the interest rate cap agreement, which is considered a Level 3 input, but did not consider such risk to be significant. Therefore, the interest rate cap agreement is classified within Level 2 of the fair value hierarchy.

Interest Rate Swap Agreement. On December 13, 2013, the Parkside Village Joint Venture entered into an interest rate swap agreement with Comerica Bank that effectively converts the variable rate portion of Parkside Village's loan from Comerica Bank (the Parkside Village loan) from one-month LIBOR to a fixed rate of 2.3 percent. With the interest rate swap agreement in place, the Parkside Village Joint Venture's interest cost on the Parkside Village loan will be 4.8 percent through the December 31, 2020, maturity date. Stratus also evaluated the counterparty credit risk associated with the interest rate swap agreement, which is considered a Level 3 input, but did not consider such risk to be significant. Therefore, the interest rate swap agreement is classified within Level 2 of the fair value hierarchy.

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

6.
DEBT AND EQUITY TRANSACTIONS
Lakeway Construction Loan. On September 29, 2014, a Stratus subsidiary entered into a $62.9 million construction loan agreement with PlainsCapital Bank (the Lakeway Construction loan) to fund the construction, development and leasing of The Oaks at Lakeway in Lakeway, Texas (The Oaks at Lakeway). On November 7, 2014, the Stratus subsidiary and PlainsCapital Bank entered into an amendment to the loan agreement to effect the syndication of a portion of the aggregate principal amount of the Lakeway Construction loan with Southside Bank. Pursuant to the amendment, PlainsCapital Bank has committed $37.9 million and Southside Bank has committed $25.0 million under the Lakeway Construction loan. As of September 30, 2014, $14.0 million had been drawn under the loan. The Lakeway Construction loan matures on September 29, 2019, and is secured by assets at The Oaks at Lakeway. The variable interest rate is one-month LIBOR plus 2.75 percent. The Lakeway Construction loan has been guaranteed by Stratus subject to the guarantee decreasing as certain milestones set forth in the loan agreement are met. Pursuant to the Lakeway Construction loan, $1.6 million of the proceeds were used to fully repay the existing Lakeway loan, which was scheduled to mature on May 15, 2015.

Magnolia Term Loan. On September 15, 2014, Stratus entered into a $3.8 million term loan agreement with Holliday Fenoglio Fowler, L.P. (the Magnolia loan). The proceeds of the Magnolia loan were used to purchase approximately 142 acres of land located in Magnolia, Texas (approximately 18 acres of which were subsequently sold to HEB Grocery Stores). The interest rate is fixed at 7 percent and the Magnolia loan matures on October 1, 2016, and is secured by the land purchased with the proceeds of the Magnolia loan. Stratus has the option to extend the maturity date on the Magnolia loan to October 1, 2017, upon prior written notice to the lender no later than July 1, 2016.

9



Slaughter Term Loan. On July 18, 2014, Stratus entered into a $7.0 million term loan agreement with United Heritage Credit Union (the United/Slaughter loan). The United/Slaughter loan matures on July 31, 2024, and is secured by assets at Stratus' 5700 Slaughter project in the Circle C community. The interest rate is 4.50 percent through July 31, 2019. Beginning August 1, 2019, and continuing through the maturity date, interest will accrue at the greater of the prime interest rate plus 1.25 percent, or 4.95 percent. As required by the United/Slaughter loan, $5.0 million of the proceeds were used to fully repay the existing 5700 Slaughter term loan, which was scheduled to mature on January 31, 2015.

Barton Creek Village Term Loan. On June 27, 2014, Stratus entered into a $6.0 million term loan agreement with PlainsCapital Bank (the Barton Creek Village term loan). The Barton Creek Village term loan matures on June 27, 2024, and is secured by assets at Stratus' Barton Creek Village project. The interest rate is 4.19 percent and payments of principal and interest are due monthly. As required by the Barton Creek Village term loan, $4.3 million of the proceeds were used to fully repay the existing Barton Creek Village loan, which was scheduled to mature on June 30, 2014.

Interest Expense and Capitalization. Interest expense (before capitalized interest) totaled $2.0 million for third-quarter 2014, $2.9 million for third-quarter 2013, $5.6 million for the nine months ended September 30, 2014, and $8.9 million for the nine months ended September 30, 2013. Stratus' capitalized interest costs totaled $1.1 million for each of the third quarters of 2014 and 2013 and $2.8 million for each of the nine months ended September 30, 2014, and 2013. Capitalized interest costs for the 2014 and 2013 periods primarily related to development activities at properties in Barton Creek.

Common Stock Repurchases. During the nine months ended September 30, 2014, Stratus purchased 36,900 shares of its common stock for $0.6 million ($17.26 per share). Stratus obtained lender approval for these repurchases. See Note 9 of the Stratus 2013 Form 10-K for further discussion of common stock repurchases permitted under Stratus' debt agreements.

7.
INCOME TAXES
Stratus’ accounting policy for and other information regarding its income taxes is further described in Notes 1 and 8 of the Stratus 2013 Form 10-K.

Stratus evaluated the recoverability of its deferred tax assets and considered available positive and negative evidence, giving greater weight to losses in recent years, the absence of taxable income in the carry-back period and uncertainty regarding projected future financial results. As a result, Stratus concluded that there was not sufficient positive evidence supporting the realizability of its deferred tax assets beyond an amount totaling $0.3 million at September 30, 2014, and December 31, 2013.

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. 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.

The difference between Stratus’ consolidated effective income tax rate for the first nine months of 2014 and 2013, and the U.S. federal statutory income tax rate of 35 percent was primarily attributable to the realization of deferred tax assets.

8.
BUSINESS SEGMENTS
Stratus currently has four operating segments: Real Estate Operations, Hotel, Entertainment and Commercial Leasing.

The Real Estate Operations segment is comprised of Stratus’ real estate assets (developed, under development and undeveloped), which consists of its properties in Austin, Texas (the Barton Creek community, the Circle C community, Lantana and the condominium units at the W Austin Hotel & Residences project) and in Lakeway, Texas (The Oaks at Lakeway).

The Hotel segment includes the W Austin Hotel located at the W Austin Hotel & Residences project.

The Entertainment segment includes ACL Live, a live music and entertainment venue and production studio at the W Austin Hotel & Residences project. In addition to hosting concerts and private events, this venue is the home of

10


Austin City Limits, a television program showcasing popular music legends. The Entertainment segment also includes revenues and costs associated with events hosted at other venues, and the results of the Stageside Productions joint venture with Pedernales Entertainment LLC.

The Commercial Leasing segment includes the office and retail space at the W Austin Hotel & Residences project, a retail building and a bank building in Barton Creek Village, and 5700 Slaughter and Parkside Village in the Circle C community.

Stratus uses operating income or loss to measure the performance of each segment. Stratus allocates parent company general and administrative expenses that do not directly relate to a particular operating segment between the Real Estate Operations and Commercial Leasing segments based on projected annual revenues for each segment. General and administrative expenses related to the W Austin Hotel & Residences project are allocated to the Real Estate Operations, Hotel, Entertainment and Commercial Leasing segments based on projected annual revenues for the W Austin Hotel & Residences project. The following segment information reflects management’s determinations that may not be indicative of what actual financial performance of each segment would be if it were an independent entity.

Segment data presented below was prepared on the same basis as Stratus’ consolidated financial statements (in thousands).
 
Real Estate
Operationsa
 
Hotel
 
Entertainment
 
Commercial Leasing
 
Eliminations and Otherb
 
Total
Three Months Ended September 30, 2014:
 
 
 
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Unaffiliated customers
$
6,562

 
$
9,714

 
$
3,659

 
$
1,695

 
$

 
$
21,630

Intersegment
24

 
85

 
12

 
131

 
(252
)
 

Cost of sales, excluding depreciation
5,494

 
7,548

 
3,066

 
1,069

 
(109
)
 
17,068

Depreciation
53

 
1,460

 
313

 
452

 
(37
)
 
2,241

Litigation settlement
(1,506
)
 

 

 

 

 
(1,506
)
General and administrative expenses
1,344

 
83

 
31

 
412

 
(129
)
 
1,741

Operating income (loss)
$
1,201

 
$
708

 
$
261

 
$
(107
)
 
$
23

 
$
2,086

Capital expendituresc
$
22,794

 
$
57

 
$
23

 
$
1,230

 
$

 
$
24,104

Total assets at September 30, 2014
179,741

 
112,747

 
51,418

 
49,630

 
(5,598
)
 
387,938

 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2013:
 

 
 

 
 

 
 

 
 

 
 

Revenues:
 
 
 
 
 
 
 
 
 
 
 
Unaffiliated customers
$
10,810

 
$
8,312

 
$
3,310

 
$
1,391

 
$

 
$
23,823

Intersegment
9

 
59

 
37

 
121

 
(226
)
 

Cost of sales, excluding depreciation
6,954

 
6,893

 
3,035

 
666

 
(69
)
 
17,479

Depreciation
58

 
1,501

 
309

 
421

 
(37
)
 
2,252

General and administrative expenses
1,362

 
68

 
27

 
273

 
(152
)
 
1,578

Operating income (loss)
$
2,445

 
$
(91
)
 
$
(24
)
 
$
152

 
$
32

 
$
2,514

Capital expendituresc
$
5,326

 
$
12

 
$
180

 
$
167

 
$

 
$
5,685

Total assets at September 30, 2013
170,243

 
116,959

 
48,217

 
46,913

 
(5,924
)
 
376,408


11


 
 
 
 
 
 
 
 
 
 
 
 
 
Real Estate
Operationsa
 
Hotel
 
Entertainment
 
Commercial Leasing
 
Eliminations and Otherb
 
Total
Nine Months Ended September 30, 2014:
 
 
 
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
  Unaffiliated customers
$
18,817

 
$
31,086

 
$
12,659

 
$
4,888

 
$

 
$
67,450

  Intersegment
71

 
314

 
30

 
386

 
(801
)
 

Cost of sales, excluding depreciation
14,060

 
22,822

 
9,733

 
2,521

 
(355
)
 
48,781

Depreciation
166

 
4,390

 
943

 
1,325

 
(111
)
 
6,713

Litigation and insurance settlements
(2,082
)
 

 

 

 

 
(2,082
)
General and administrative expenses
4,437

 
298

 
110

 
1,358

 
(441
)
 
5,762

Operating income
$
2,307

 
$
3,890

 
$
1,903

 
$
70

 
$
106

 
$
8,276

Capital expendituresc
$
47,611

 
$
133

 
$
55

 
$
2,075

 
$

 
$
49,874

 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2013:
 
 
 
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
  Unaffiliated customers
$
57,715

 
$
28,207

 
$
9,942

 
$
3,943

 
$

 
$
99,807

  Intersegment
49

 
191

 
60

 
402

 
(702
)
 

Cost of sales, excluding depreciation
46,795

 
21,705

 
8,524

 
2,053

 
(219
)
 
78,858

Depreciation
181

 
4,536

 
926

 
1,258

 
(111
)
 
6,790

Insurance settlement
(1,785
)
 

 

 

 

 
(1,785
)
General and administrative expenses
4,526

 
258

 
101

 
900

 
(429
)
 
5,356

Operating income
$
8,047

 
$
1,899

 
$
451

 
$
134

 
$
57

 
$
10,588

Capital expendituresc
$
14,054

 
$
15

 
$
299

 
$
677

 
$

 
$
15,045

a.
Includes sales commissions and other revenues together with related expenses.
b.
Includes eliminations of intersegment amounts, including the deferred development fee income between Stratus and the Block 21 Joint Venture (see Note 3).
c.
Also includes purchases and development of residential real estate held for sale.

9.
NEW ACCOUNTING STANDARDS
In May 2014, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) which outlines a single comprehensive model and supersedes most of the current revenue recognition guidance. For public entities, this ASU is effective for annual reporting periods beginning after December 15, 2016, and interim periods within that reporting period. Early adoption is not permitted. Stratus is evaluating this new guidance, but does not expect it to have a significant impact on its current revenue recognition policies.

In April 2014, FASB issued an ASU which revises the guidance for reporting discontinued operations. This ASU amends the definition of a discontinued operation and requires additional disclosures about disposal transactions that do not meet the definition of a discontinued operation. For public entities, this ASU is effective for annual periods beginning on or after December 15, 2014, and interim periods within that year. Early adoption is permitted, but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued or available for issuance. Stratus adopted this ASU in first-quarter 2014.

10.
SUBSEQUENT EVENTS
Stratus evaluated events after September 30, 2014, and through the date the financial statements were issued, and determined any events or transactions occurring during this period that would require recognition or disclosure are appropriately addressed in these financial statements.


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

OVERVIEW

In management’s discussion and analysis of financial condition and results of operations, “we,” “us,” “our” and "Stratus" refer to Stratus Properties Inc. (Stratus) and all entities owned or controlled by Stratus. You should read the following discussion in conjunction with our financial statements, the related management's discussion and analysis of financial condition and results of operations and the discussion of our business and properties included in our Annual Report on Form 10-K for the year ended December 31, 2013 (2013 Form 10-K) filed with the Securities and Exchange Commission. The results of operations reported and summarized below are not necessarily indicative of future operating results, and future results could differ materially from those anticipated in forward-looking statements (refer to "Cautionary Statement" for further discussion). All subsequent references to “Notes” refer to Notes to Consolidated Financial Statements (Unaudited) located in Part I, Item 1. “Financial Statements” of this Form 10-Q, unless otherwise stated.

We are a diversified real estate company engaged in the acquisition, development, management, operation and/or sale of commercial, hotel, entertainment, and multi- and single-family residential real estate properties located in Texas, primarily in the Austin and central-Texas areas. We generate revenues from sales of developed properties, from our hotel and entertainment operations and from rental income from our commercial properties. See Note 8 for further discussion of our operating segments.

Developed property sales can include condominium units at the W Austin Hotel & Residences project, an individual tract of land that has been developed and permitted for residential use or a developed lot with a home already built on it. We may, on occasion, sell properties under development, undeveloped properties or commercial properties, if opportunities arise that we believe will maximize overall asset values.

Our principal real estate holdings are in southwest Austin, Texas. The number of developed lots/units, under development acreage and undeveloped acreage as of September 30, 2014, that comprise our real estate development projects are presented in the following table.
 
 
 
 
 
Acreage
 
 
 
 
 
Under Development
 
Undeveloped
 
 
 
Developed
Lots/Units
 
Single
Family
 
Commercial
 
Total
 
Single
family
 
Multi-family
 
Commercial
 
Total
 
Total
Acreage
Austin:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Barton Creek
18

 
166

 

 
166

 
512

 
327

 
418

 
1,257

 
1,423

Circle C
53

 

 
23

 
23

 

 
36

 
228

 
264

 
287

Lantana

 

 

 

 

 

 
43

 
43

 
43

W Austin Residences
4

 

 

 

 

 

 

 

 

Lakeway:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The Oaks at Lakeway

 

 
87

 
87

 

 

 

 

 
87

Magnolia

 

 

 

 

 

 
124

 
124

 
124

San Antonio:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Camino Real

 

 

 

 

 

 
2

 
2

 
2

Total
75

 
166

 
110

 
276

 
512

 
363

 
815

 
1,690

 
1,966


Our residential holdings at September 30, 2014, included developed lots at Barton Creek and the Circle C community, and condominium units at the W Austin Hotel & Residences project. See "Development Activities - Residential" for further discussion. Our commercial holdings at September 30, 2014, in addition to the W Austin Hotel & Residences project, consisted of the first phase of Barton Creek Village, and the 5700 Slaughter retail complex and Parkside Village, which are both in the Circle C community. See "Development Activities - Commercial" for further discussion.

The W Austin Hotel & Residences project is located on a two-acre city block in downtown Austin and contains a 251-room luxury hotel, 159 residential condominium units (of which we owned and were marketing four units as of September 30, 2014), and office, retail and entertainment space. As of November 3, 2014, two of the four remaining condominium units were under contract. The hotel is managed by Starwood Hotels & Resorts Worldwide, Inc. The

13


entertainment space, occupied by Austin City Limits Live at the Moody Theater (ACL Live), includes a live music and entertainment venue and production studio.

For third-quarter 2014, our revenues totaled $21.6 million and our net income attributable to common stock totaled $0.6 million, compared with revenues of $23.8 million and a net loss attributable to common stock of less than $0.1 million for third-quarter 2013. For the first nine months of 2014, our revenues totaled $67.5 million and our net income attributable to common stock totaled $1.9 million, compared with revenues of $99.8 million and net income attributable to common stock of $1.7 million for the first nine months of 2013. The decrease in revenues in the 2014 periods primarily relates to a decrease in condominium unit sales at the W Austin Residences and lot sales at Verano Drive, as remaining available inventory declined for each. The results for the third quarter and first nine months of 2014 include income of $1.5 million associated with a litigation settlement. The first nine months of 2014 also include $0.6 million associated with an insurance settlement. The results for the third quarter of 2013 include a loss on early extinguishment of debt of $1.4 million, partly offset by a $1.3 million recovery of building repair costs associated with damage caused by the June 2011 balcony glass breakage incidents at the W Austin Hotel & Residences. The first nine months of 2013 include gains of $4.3 million associated with the sale of a 16-acre tract of land at Lantana, an insurance settlement and the recovery of building repair costs, partly offset by a loss on early extinguishment of debt of $1.4 million.

For discussion of operating cash flows and debt transactions see "Capital Resources and Liquidity" below.

BUSINESS STRATEGY AND RELATED RISKS

Our business strategy is to create value for our shareholders by methodically developing high-quality residential and commercial projects using our existing assets and selectively pursuing new development opportunities. We believe that Austin, and other Texas markets, continue to be desirable. Many of our developments are in unique locations where development approvals have historically been subject to regulatory constraints, making it difficult to obtain entitlements. Our Austin assets, which are located in desirable areas with significant regulatory constraints, are highly entitled and, as a result, we believe that through strategic planning and development, we can maximize and fully exploit their value. Additionally, we believe the W Austin Hotel sets a high standard for contemporary luxury in downtown Austin and competes favorably with other hotels and resorts in our geographic market. Our entertainment operations provide quality live music experiences that create awareness for our ACL Live venue and brand, enhancing the overall value of the W Austin Hotel & Residences project. Our current focus is to proceed with the development of our properties, to seek new opportunities to acquire additional properties for potential mixed-use and retail development projects, including with strategic partners where beneficial, and to continue to effectively operate our hotel and entertainment businesses.
In years past, economic conditions, including the constrained capital and credit markets, negatively affected the execution of our business plan, primarily by decreasing the pace of development to match economic and market conditions. We responded to these conditions by successfully restructuring our existing debt, including reducing interest rates and extending maturities, which enabled us to preserve our development opportunities until market conditions improved. Economic conditions have improved and we believe we have the financial flexibility to fully exploit our development opportunities and resources. In the first nine months of 2014, the joint venture for the W Austin Hotel & Residences project, CJUF II Stratus Block 21, LLC (the Block 21 Joint Venture), paid $3.1 million in distributions to Stratus and $4.3 million to Canyon-Johnson Urban Fund II, L.P. (Canyon-Johnson), Stratus' joint venture partner. Additionally, during the first nine months of 2014, our operating cash flows reflect purchases and development of real estate properties totaling $47.6 million, funded primarily from construction and term loans, to invest in new development opportunities to be executed over the next 24 months. As of September 30, 2014, we had $16.3 million of availability under our revolving line of credit with Comerica Bank, which matures in February 2015 and which we expect to refinance in the normal course of business. We also had $5.0 million in cash and cash equivalents available for use in our real estate operations, excluding cash balances held by our joint ventures, as shown below (in thousands):
Consolidated cash and cash equivalents
 
$
26,676

 
Less: Block 21 Joint Venture cash
 
21,184

 
Less: Parkside Village Joint Venture cash
 
455

 
Net cash available
 
$
5,037

 
 
 
 
 

14


Although we have near-term debt maturities and significant recurring costs, including property taxes, maintenance and marketing, we believe we will have sufficient sources of debt financing and cash from operations to address our cash requirements. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” in the Stratus 2013 Form 10-K for further discussion.
DEVELOPMENT ACTIVITIES

Residential. As of September 30, 2014, the number of our residential developed lots/units, lots under development and lots for potential development by area are shown below (excluding lots associated with our unconsolidated joint venture with Trammell Crow Central Texas Development, Inc. relating to Crestview Station in Austin, Texas (the Crestview Station Joint Venture)):

 
 
Residential Lots/Units
 
 
Developed
 
Under
Development
 
Potential Developmenta
 
Total
W Austin Hotel & Residences project:
 
 
 
 
 
 
 
 
Condominium unitsb
 
4

 

 

 
4

Barton Creek:
 
 
 
 
 
 
 
 
Amarra Drive:
 
 
 
 
 
 
 
 
Phase II Lots
 
18

 

 

 
18

Phase III Lots
 

 
64

 

 
64

Townhomes
 

 

 
214

 
214

Section N Multi-family
 

 

 
1,860

 
1,860

Other Barton Creek Sections
 

 

 
155

 
155

Circle C:
 
 
 
 
 
 
 
 
Meridian
 
53

 

 

 
53

Tract 101 Multi-family
 

 

 
240

 
240

Tract 102 Multi-family
 

 

 
56

 
56

Lakeway:
 
 
 
 
 
 
 
 
The Oaks at Lakeway
 

 

 
90

 
90

Magnolia
 

 

 
1,200

 
1,200

Total Residential Lots/Units
 
75

 
64

 
3,815

 
3,954

a.
Our development of the properties identified under the heading “Potential Development” is dependent upon the approval of our development plans and permits by governmental agencies, including the City of Austin (the City). Those governmental agencies may either not approve one or more development plans and permit applications related to such properties or 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 on some of these properties, they are not considered to be “under development” for disclosure in this table unless other development activities necessary to fully realize the properties’ intended final use are in progress or scheduled to commence in the near term.
b.
Owned through a joint venture.

W Austin Residences.  Delivery of the first condominium units at the W Austin Residences began in January 2011. As of September 30, 2014, sales of 155 of the 159 condominium units had closed for $182.2 million (including two units for $3.5 million in third-quarter 2014). As of November 3, 2014, two of the four remaining condominium units were under contract.

Barton Creek.

Calera. Calera is a residential subdivision with plat approval for 155 lots. Construction of the final phase, known as Verano Drive, was completed in July 2008 and includes 71 single-family lots. During second-quarter 2014, we sold the remaining six Verano Drive lots.

Amarra Drive. In 2008, we commenced development of Amarra Drive Phase II, which consists of 35 lots on 51 acres. Development was substantially completed in October 2008. During late 2013, we commenced development of Amarra Drive Phase III, which consists of 64 lots on 166 acres, and is expected to be completed by year-end 2014. During third-quarter 2014, we sold 3 Phase II lots for $1.7 million and as of September 30, 2014, 18 Phase II

15


lots remain unsold. During October 2014, we sold two Phase II lots for $1.0 million, and as of November 3, 2014, two Phase II lots were under contract.

Circle CWe are developing the Circle C community based on the entitlements secured in our Circle C settlement with the City. Our Circle C settlement, as amended in 2004, permits development of 1.16 million square feet of commercial space, 504 multi-family units and 830 single-family residential lots. Meridian is an 800-lot residential development at the Circle C community. Development of the final phase of Meridian, which consists of 57 one-acre lots, was completed in first-quarter 2014. During third-quarter 2014, we sold four Meridian lots for $1.2 million and as of September 30, 2014, 53 lots remain unsold. During October 2014, we sold one Meridian lot for $0.3 million, and as of November 3, 2014, two Meridian lots were under contract.

The Oaks at Lakeway. The Oaks at Lakeway is a project planned for 90 high-density single-family residential units. The project is currently under construction.

Magnolia. The Magnolia project is planned to include 1,200 multi-family units. Planning and infrastructure work by the city of Magnolia are in progess and construction is expected to begin in 2016.

Commercial. As of September 30, 2014, the number of square feet of our commercial property developed, under development and our remaining entitlements (i.e., potential development) is shown below:
 
Commercial Property
 
Developed
 
Under Development
 
Potential Developmenta
 
Total
W Austin Hotel & Residences project:
 
 
 
 
 
 
 
Officeb
39,328

 

 

 
39,328

Retailb
18,362

 

 

 
18,362

Barton Creek:
 
 
 
 
 
 
 
Treaty Oak Bank
3,085

 

 

 
3,085

Barton Creek Village Phase I
22,366

 

 

 
22,366

Barton Creek Village Phase II

 

 
16,000

 
16,000

Entry Corner

 

 
5,000

 
5,000

Amarra Retail/Office

 

 
83,081

 
83,081

Section N

 

 
1,500,000

 
1,500,000

Lakeway:
 
 
 
 
 
 
 
The Oaks at Lakeway

 
245,022

 

 
245,022

Magnolia

 

 
351,000

 
351,000

Circle C:
 
 
 
 
 
 
 
Chase Bank Ground Lease
4,450

 

 

 
4,450

5700 Slaughter
21,248

 

 

 
21,248

Parkside Villageb
85,684

 
4,500

 

 
90,184

Tract 110

 

 
614,500

 
614,500

Tract 114

 

 
78,357

 
78,357

Lantana:
 
 
 
 
 
 
 
Tract GR1

 

 
325,000

 
325,000

Tract G07

 

 
160,000

 
160,000

Austin 290 Tract

 

 
20,000

 
20,000

Total Square Feet
194,523

 
249,522

 
3,152,938

 
3,596,983

a.
Our development of the properties identified under the heading “Potential Development” is dependent upon the approval of our development plans and permits by governmental agencies, including the City. Those governmental agencies may either not approve one or more development plans and permit applications related to such properties or 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 on some of these properties, they are not considered to be “under development” for disclosure in this table unless other development activities necessary to fully realize the properties’ intended final use are in progress or scheduled to commence in the near term.
b.
Owned through a joint venture.
 

16


W Austin Hotel & Residences project. The project has 39,328 square feet of leasable office space, including 9,000 square feet occupied by our corporate office, and 18,362 square feet of retail space. As of September 30, 2014, occupancy for the office space was 91 percent and occupancy for the retail space was 84 percent.

Barton Creek. The first phase of Barton Creek Village consists of a 22,366-square-foot retail complex and a 3,085-square-foot bank building. As of September 30, 2014, occupancy was 100 percent for the retail complex, and the bank building is leased through January 2023.

The Oaks at Lakeway. The Oaks at Lakeway is a HEB-anchored retail project planned for 245,022 square feet of commercial space. The HEB lease and related agreements have been executed and leasing for the retail space is underway. The project is currently under construction with the HEB store opening planned for October 2015.

Magnolia. The Magnolia project is a HEB-anchored retail project planned for 351,000 square feet of commercial space. Planning and infrastructure work by the city of Magnolia are in progress and construction is expected to begin in 2016.

Circle C. In 2008, we completed the construction of two retail buildings, totaling 21,248 square feet, at 5700 Slaughter in the Circle C community (5700 Slaughter). The Circle C community also includes a 4,450-square-foot bank building on an existing ground lease, which expires in 2025. As of September 30, 2014, aggregate occupancy for the two retail buildings was 100 percent.

The Circle C community also includes Parkside Village, a 90,184-square-foot retail project. This retail project consists of a 33,650-square-foot full-service movie theater and restaurant, a 13,890-square-foot medical clinic and five other retail buildings, including a 14,926-square-foot building, a 10,175-square-foot building, an 8,043-square-foot building, a 4,500-square-foot building and a stand-alone 5,000-square-foot building. In February 2011, we entered into a joint venture with Moffett Holdings, LLC for the development of Parkside Village (the Parkside Village Joint Venture), obtained final permits and entitlements and began construction on the retail project. Construction of the 8,043-square-foot building was completed in third-quarter 2014 and as of September 30, 2014, occupancy of the completed 85,684 square feet was 95 percent. The remaining 4,500-square-foot building under development is fully pre-leased and expected to be completed in fourth-quarter 2014.

Lantana. Lantana is a partially developed, mixed-use real estate development project. During first-quarter 2013, we sold a 16-acre tract for $2.1 million, which had entitlements for approximately 70,000 square feet of office space. As of September 30, 2014, we had entitlements for approximately 485,000 square feet of office and retail space on the remaining 43 acres. Regional utility and road infrastructure is in place with capacity to serve Lantana at full build-out permitted under our existing entitlements.

Unconsolidated Affiliate.
Crestview Station. The Crestview Station Joint Venture is a single-family, multi-family, retail and office development, which is located on the site of a commuter line. The Crestview Station Joint Venture sold substantially all of its multi-family and commercial properties in 2007 and one commercial site in 2008, while retaining the single-family component. The Crestview Station Joint Venture has entered into an agreement to sell the remaining residential land to DR Horton. The contract with DR Horton provides for the sale of 304 lots over four years for a total contract price of $15.8 million. The results of the first three closings are shown below (in millions, except lots closed). Under the terms of the contract with DR Horton, the fourth lot closing must occur by April 2015, and the final lot closing must occur no later than June 2015.
Closing Date
 
Lots Closed
 
Sale Price
 
Gross Profit
April 2012
 
73

 
$
3.8

 
$
0.4

May 2013
 
59

 
3.4

 
0.7

March 2014
 
59

 
3.5

 
0.8

 
We account for our 50 percent interest in the Crestview Station Joint Venture under the equity method.


17


RESULTS OF OPERATIONS

We are continually evaluating the development potential of our properties and will continue to consider opportunities to enter into transactions involving our properties. As a result, and because of numerous other factors affecting our business activities as described herein, our past operating results are not necessarily indicative of our future results.

The following table summarizes our results (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Operating income (loss):
 
 
 
 
 
 
 
Real estate operations
$
1,201

 
$
2,445

 
$
2,307

 
$
8,047

Hotel
708

 
(91
)
 
3,890

 
1,899

Entertainment
261

 
(24
)
 
1,903

 
451

Commercial leasing
(107
)
 
152

 
70

 
134

Eliminations and other
23

 
32

 
106

 
57

Operating income
$
2,086

 
$
2,514

 
$
8,276

 
$
10,588

Interest expense, net
$
(974
)
 
$
(1,833
)
 
$
(2,797
)
 
$
(6,140
)
Net income (loss)
$
778

 
$
(997
)
 
$
4,934

 
$
3,801

Net (income) loss attributable to noncontrolling interests in subsidiaries
$
(181
)
 
$
957

 
$
(3,021
)
 
$
(2,056
)
Net income (loss) attributable to Stratus common stock
$
597

 
$
(40
)
 
$
1,913

 
$
1,745


We have four operating segments: Real Estate Operations, Hotel, Entertainment and Commercial Leasing (see Note 8 for further discussion). The following is a discussion of our operating results by segment.

Real Estate Operations
The following table summarizes our Real Estate Operations operating results (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Revenues:
 
 
 
 
 
 
 
Developed property sales
$
6,378

 
$
10,549

 
$
18,504

 
$
55,050

Undeveloped property sales

 

 

 
2,100

Commissions and other
208

 
270

 
384

 
614

Total revenues
6,586

 
10,819

 
18,888

 
57,764

Cost of sales, including depreciation
5,547

 
7,012

 
14,226

 
46,976

Litigation and insurance settlements
(1,506
)
 

 
(2,082
)
 
(1,785
)
General and administrative expenses
1,344

 
1,362

 
4,437

 
4,526

Operating income
$
1,201

 
$
2,445

 
$
2,307