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EX-10.9 - EXHIBIT 10.9 - STRATUS PROPERTIES INCa3q15exhibit109.htm
EX-31.1 - EXHIBIT 31.1 - STRATUS PROPERTIES INCa3q15exhibit311.htm
EX-31.2 - EXHIBIT 31.2 - STRATUS PROPERTIES INCa3q15exhibit312.htm
EX-32.2 - EXHIBIT 32.2 - STRATUS PROPERTIES INCa3q15exhibit322.htm
EX-32.1 - EXHIBIT 32.1 - STRATUS PROPERTIES INCa3q15exhibit321.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, 2015
 
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 þ         Non-accelerated filer ¨          Smaller reporting company ¨

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 30, 2015, there were issued and outstanding 8,067,356 shares of the registrant’s common stock, par value $0.01 per share.




STRATUS PROPERTIES INC.
TABLE OF CONTENTS
 
 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

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

 
September 30,
2015
 
December 31,
2014
ASSETS
 
 
 
Cash and cash equivalents
$
33,190

 
$
29,645

Restricted cash
8,181

 
7,615

Real estate held for sale
27,013

 
12,245

Real estate under development
153,241

 
123,921

Land available for development
24,223

 
21,368

Real estate held for investment, net
151,285

 
178,065

Deferred tax assets
15,977

 
11,759

Other assets
16,434

 
18,069

Total assets
$
429,544

 
$
402,687

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Liabilities:
 
 
 
Accounts payable
$
16,546

 
$
8,076

Accrued liabilities
11,298

 
9,670

Debt
255,567

 
196,477

Other liabilities and deferred gain
9,788

 
13,378

Total liabilities
293,199

 
227,601

 
 
 
 
Commitments and contingencies

 

 
 
 
 
Equity:
 
 
 
Stratus stockholders’ equity:
 
 
 
Common stock
91

 
91

Capital in excess of par value of common stock
192,103

 
204,269

Accumulated deficit
(35,450
)
 
(47,321
)
Accumulated other comprehensive loss

 
(279
)
Common stock held in treasury
(20,470
)
 
(20,317
)
Total stockholders’ equity
136,274

 
136,443

Noncontrolling interests in subsidiaries
71

 
38,643

Total equity
136,345

 
175,086

Total liabilities and equity
$
429,544

 
$
402,687


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


2


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

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Revenues:
 
 
 
 
 
 
 
Hotel
$
8,521

 
$
9,714

 
$
31,194

 
$
31,086

Real estate operations
6,210

 
6,562

 
10,920

 
18,817

Entertainment
4,159

 
3,659

 
13,463

 
12,659

Commercial leasing
787

 
1,695

 
4,311

 
4,888

Total revenues
19,677

 
21,630

 
59,888

 
67,450

Cost of sales:
 
 
 
 
 
 
 
Hotel
6,782

 
7,542

 
23,159

 
22,815

Real estate operations
4,459

 
5,478

 
8,580

 
13,978

Entertainment
3,423

 
3,003

 
10,514

 
9,539

Commercial leasing
516

 
1,045

 
2,216

 
2,449

Depreciation
2,063

 
2,241

 
6,713

 
6,713

Total cost of sales
17,243

 
19,309

 
51,182

 
55,494

General and administrative expenses
2,187

 
1,741

 
6,308

 
5,762

Gain on sales of assets
(20,729
)
 

 
(20,729
)
 

Litigation and insurance settlements

 
(1,506
)
 

 
(2,082
)
Total costs and expenses
(1,299
)
 
19,544

 
36,761

 
59,174

Operating income
20,976

 
2,086

 
23,127

 
8,276

Interest expense, net
(855
)
 
(974
)
 
(2,736
)
 
(2,797
)
(Loss) gain on interest rate derivative instruments
(918
)
 
15

 
(986
)
 
(236
)
Loss on early extinguishment of debt

 
(19
)
 

 
(19
)
Other income, net
15

 
3

 
304

 
25

Income before income taxes and equity in unconsolidated affiliates' (loss) income
19,218

 
1,111

 
19,709

 
5,249

Equity in unconsolidated affiliates' (loss) income
(280
)
 
(190
)
 
(398
)
 
248

Provision for income taxes
(5,197
)
 
(143
)
 
(5,244
)
 
(563
)
Income from continuing operations
13,741

 
778

 
14,067

 
4,934

Income from discontinued operations, net of taxes

 

 
3,218

 

Net income
13,741

 
778

 
17,285

 
4,934

Net income attributable to noncontrolling interests in subsidiaries
(3,493
)
 
(181
)
 
(5,414
)
 
(3,021
)
Net income attributable to common stock
$
10,248

 
$
597

 
$
11,871

 
$
1,913

 
 
 
 
 
 
 
 
Basic and diluted net income per share attributable to common stockholders:
 
 
 
 
 
 
 
Continuing operations
$
1.27

 
$
0.07

 
$
1.07

 
$
0.24

Discontinued operations
$

 
$

 
$
0.40

 
$

Basic and diluted net income per share attributable to common stockholders
$
1.27

 
$
0.07

 
$
1.47

 
$
0.24

 
 
 
 
 
 
 
 
Weighted-average shares of common stock outstanding:
 
 
 
 
 
 
 
Basic
8,063

 
8,032

 
8,055

 
8,037

Diluted
8,094

 
8,067

 
8,085

 
8,078


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 (Unaudited)
(In Thousands)

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
Net income
$
13,741

 
$
778

 
$
17,285

 
$
4,934

 
 
 
 
 
 
 
 
Other comprehensive loss, net of taxes:
 
 
 
 
 
 
 
Income (loss) on interest rate swap agreement
438

 
98

 
457

 
(337
)
Other comprehensive income (loss)
438

 
98

 
457

 
(337
)
 
 
 
 
 
 
 
 
Total comprehensive income
14,179

 
876

 
17,742

 
4,597

Total comprehensive income attributable to noncontrolling interests
(3,666
)
 
(211
)
 
(5,592
)
 
(2,920
)
Total comprehensive income attributable to common stock
$
10,513

 
$
665

 
$
12,150

 
$
1,677

 
 
 
 
 
 
 
 
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,
 
2015
 
2014
Cash flow from operating activities:
 
 
 
Net income
$
17,285

 
$
4,934

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

 
6,713

Cost of real estate sold
4,935

 
9,772

Deferred gain on sale of 7500 Rialto
(5,000
)
 

Gain on sales of assets
(20,729
)
 

Loss on early extinguishment of debt

 
19

Stock-based compensation
421

 
348

Equity in unconsolidated affiliates' loss (income)
398

 
(248
)
Deposits
1,267

 
597

Deferred income taxes
3,252

 

Purchases and development of real estate properties
(20,591
)
 
(47,611
)
Municipal utility district reimbursement
5,307

 

Increase in other assets
(1,777
)
 
(2,939
)
Increase in accounts payable, accrued liabilities and other
11,863

 
3,334

Net cash provided by (used in) operating activities
3,344

 
(25,081
)
 
 
 
 
Cash flow from investing activities:
 
 
 
Capital expenditures
(37,383
)
 
(2,263
)
Net proceeds from sales of assets
43,266

 

Return of investment in unconsolidated affiliates
6

 
1,368

Net cash provided by (used in) investing activities
5,889


(895
)
 
 
 
 
Cash flow from financing activities:
 
 
 
Borrowings from credit facility
55,826

 
28,500

Payments on credit facility
(20,857
)
 
(9,782
)
Borrowings from project loans
60,202

 
29,812

Payments on project and term loans
(36,081
)
 
(12,079
)
Purchase of noncontrolling interest
(61,991
)
 

Stock-based awards net proceeds (payments), including excess tax benefit
1,722

 
(125
)
Noncontrolling interests distributions
(4,244
)
 
(4,275
)
Repurchase of treasury stock

 
(637
)
Financing costs
(265
)
 
(69
)
Net cash (used in) provided by financing activities
(5,688
)
 
31,345

Net increase in cash and cash equivalents
3,545

 
5,369

Cash and cash equivalents at beginning of year
29,645

 
21,307

Cash and cash equivalents at end of period
$
33,190

 
$
26,676


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, 2014
 
9,116

 
$
91

 
$
204,269

 
$
(47,321
)
 
$
(279
)
 
1,081

 
$
(20,317
)
 
$
136,443

 
$
38,643

 
$
175,086

Exercised and issued stock-based awards
 
42

 

 

 

 

 

 

 

 

 

Stock-based compensation
 
2

 

 
421

 

 

 

 

 
421

 

 
421

Tax benefit for stock-based awards

 

 

 
1,866

 

 

 

 

 
1,866

 

 
1,866

Tender of shares for stock-based awards
 

 

 

 

 

 
12

 
(153
)
 
(153
)
 

 
(153
)
Noncontrolling interests distributions
 

 

 

 

 

 

 

 

 
(4,244
)
 
(4,244
)
Purchase of noncontrolling interest in consolidated subsidiary, net of taxes
 

 

 
(14,453
)
 

 

 

 

 
(14,453
)
 
(39,920
)
 
(54,373
)
Total comprehensive income
 

 

 

 
11,871

 
279

 

 

 
12,150

 
5,592

 
17,742

Balance at September 30, 2015
 
9,160

 
$
91

 
$
192,103

 
$
(35,450
)
 
$

 
1,093

 
$
(20,470
)
 
$
136,274

 
$
71

 
$
136,345


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


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



6


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, 2014, included in Stratus Properties Inc.’s (Stratus) Annual Report on Form 10-K (Stratus 2014 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, 2015, are not necessarily indicative of the results that may be expected for the year ending December 31, 2015.

2.
EARNINGS PER SHARE
Stratus’ basic net income per share of common stock was calculated by dividing the net income attributable to common stock by the weighted-average shares of common stock outstanding during the third-quarter and nine-month periods. 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:
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2015
 
2014
 
2015
 
2014
 
Net income
$
13,741

 
$
778

 
$
17,285

 
$
4,934

 
Net income attributable to noncontrolling interests in subsidiaries
(3,493
)
 
(181
)
 
(5,414
)
 
(3,021
)
 
Net income attributable to Stratus common stock
$
10,248

 
$
597

 
$
11,871

 
$
1,913

 
 
 
 
 
 
 
 
 
 
Weighted-average shares of common stock outstanding
8,063

 
8,032

 
8,055

 
8,037

 
Add shares issuable upon exercise or vesting of:
 
 
 
 
 
 
 
 
Dilutive stock options
6

 
7

 
6


12

 
Restricted stock units (RSUs)
25

a 
28

a 
24

a 
29

a 
 
 
 
 
 
 
 
 
 
Weighted-average shares of common stock outstanding for purposes of calculating diluted net income per share
8,094

 
8,067

 
8,085

 
8,078

 
 
 
 
 
 
 
 
 
 
Diluted net income per share attributable to common stock
$
1.27

 
$
0.07

 
$
1.47

 
$
0.24

 
a. Excludes shares of common stock totaling approximately 22 thousand for third-quarter 2015, 28 thousand for the first nine months of 2015 and 30 thousand for the third quarter and first nine months of 2014 associated with anti-dilutive RSUs.

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 stock options totaled approximately 18 thousand for third-quarter 2015, 24 thousand for the first nine months of 2015, 57 thousand for third-quarter 2014 and 38 thousand for the first nine months of 2014.

3.
JOINT VENTURE WITH CANYON-JOHNSON URBAN FUND II, L.P.
On September 28, 2015, Stratus completed the purchase of Canyon-Johnson Urban Fund II, L.P.'s (Canyon-Johnson) approximate 58 percent interest in the CJUF II Stratus Block 21, LLC joint venture (the Block 21 Joint Venture), which owns a 36-story mixed-use development in downtown Austin, Texas, anchored by a W Austin Hotel & Residences (the W Austin Hotel & Residences project), for approximately $62 million. Canyon-Johnson triggered the process on May 12, 2015, requiring Stratus to elect to either sell its interest in the Block 21 Joint Venture to Canyon-Johnson for $44.5 million or purchase Canyon-Johnson’s interest in the Block 21 Joint Venture. On July 6, 2015, Stratus notified Canyon-Johnson of its election to purchase Canyon-Johnson’s interest in the Block 21 Joint Venture. The Block 21 Joint Venture, which was previously a variable interest entity consolidated by Stratus, is now a wholly owned subsidiary of Stratus and continues to be consolidated. The change in ownership was reflected in stockholder's equity on the Consolidated Balance Sheet, primarily as a reduction in noncontrolling interests in subsidiaries and capital in excess of par value, and an increase in deferred tax assets.

Stratus funded its acquisition of Canyon-Johnson’s interest in the Block 21 Joint Venture with (1) $32.3 million from its non-recourse term loan with Bank of America, (2) a $20.0 million term loan under Stratus’ credit facility with Comerica Bank and (3) $9.7 million in cash.


7


Prior to Stratus' purchase of Canyon-Johnson's interest on September 28, 2015, cumulative capital contributions totaled $71.9 million for Stratus and $94.0 million for Canyon-Johnson, and the inception-to-date distributions totaled $53.4 million to Stratus and $62.6 million to Canyon-Johnson.

Prior to the purchase transaction, the Block 21 Joint Venture's cumulative profits were allocated based on a hypothetical liquidation of the Block 21 Joint Venture’s net assets as of each balance sheet date and through September 28, 2015, the allocation was 42 percent for Stratus and 58 percent for Canyon-Johnson.

4.
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):
 
September 30, 2015
 
December 31, 2014
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
Assets:
 
 
 
 
 
 
 
Interest rate cap agreement
$
2

 
$
2

 
$
79

 
$
79

Liabilities:
 
 
 
 
 
 
 
Interest rate swap agreement
909

 
909

 
596

 
596

Debt
255,567

 
255,578

 
196,477

 
196,856


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 Bank of America loan agreement 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, Stratus' joint venture with LCHM Holdings, LLC, formerly Moffett Holdings, LLC, for the development of Parkside Village (the Parkside Village Joint Venture), entered into an interest rate swap agreement with Comerica Bank that Stratus had designated as a cash flow hedge with changes in fair value of the instrument recorded in other comprehensive income. The instrument effectively converted the variable rate portion of Parkside Village's loan from Comerica Bank (the Parkside Village loan) from one-month LIBOR to a fixed rate of 2.3 percent. On July 2, 2015, Stratus completed the sale of the Parkside Village property (see Note 9). In connection with the sale, Stratus fully repaid the amount outstanding under the Parkside Village loan. Stratus assumed the interest rate swap agreement and as a result, the instrument no longer qualifies for hedge accounting. Accordingly, the liability balance of $0.6 million on July 2, 2015, was reclassified to the statement of income as a loss on interest rate derivative instruments and future changes in the fair value of the instrument will be recorded in the statement of income (including a loss of $0.3 million in third-quarter 2015). 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.


8


5.
DEBT
Bank of America Loan. On September 28, 2015, Stratus amended its term loan with Bank of America, N.A. (the BoA Loan). Pursuant to the BoA Loan amendment and among other revisions, (1) the $100.0 million non-recourse term loan previously made available to the Block 21 Joint Venture was increased to $130.0 million, (2) the interest rate was reduced to the LIBOR daily floating rate plus 2.35 percent and (3) the maturity date was extended from September 29, 2016, to September 28, 2020. In addition, Canyon-Johnson was released as a guarantor. Accordingly, certain obligations of the Block 21 Joint Venture, including environmental indemnification and other customary carve-out obligations, are guaranteed by Stratus. All other terms and conditions remain unchanged.

Comerica Credit Facility. On August 21, 2015, Stratus amended its $48.0 million credit facility with Comerica (the Comerica credit facility), that was scheduled to mature on August 31, 2015. The amendment increases the borrowing capacity under the Comerica credit facility to $72.5 million, comprised of a $45.0 million revolving line of credit, a $7.5 million tranche for letters of credit and a $20.0 million term loan. The interest rate applicable to amounts borrowed under the Comerica credit facility is LIBOR plus 4.0 percent, with a minimum interest rate of 6.0 percent. The Comerica credit facility matures on August 31, 2017, however, to the extent amounts are outstanding under the $20.0 million term loan, a principal payment of $8.0 million is required on or before December 31, 2015, with quarterly principal payments of $1.75 million due thereafter. The Comerica credit facility is secured by substantially all of Stratus' assets except for properties that are encumbered by separate loan financing.The Comerica credit facility contains customary financial covenants including a requirement that Stratus maintain a minimum total stockholders' equity balance of $110.0 million. As of September 30, 2015, Stratus had $58.1 million outstanding under the Comerica credit facility, which was comprised of $38.1 million under the revolving line of credit and $20.0 million under the term loan.

Santal (formerly Tecoma) Construction Loan. On January 8, 2015, a Stratus subsidiary entered into a $34.1 million construction loan agreement with Comerica Bank to fund the development and construction of the first phase of a multi-family development in Section N of Barton Creek, which is referred to as the Santal Barton Creek multi-family project (the Santal construction loan). The interest rate on the Santal construction loan is a LIBOR-based rate (as defined in the loan agreement) plus 2.5 percent. The Santal construction loan matures on January 8, 2018, and Stratus has the option to extend the maturity date for two additional twelve-month periods, subject to certain debt service coverage conditions. The Santal construction loan is fully guaranteed by Stratus until certain operational milestones (as defined in the loan agreement) are met.

Interest Expense and Capitalization. Interest expense (before capitalized interest) totaled $2.2 million for third-quarter 2015, $2.0 million for third-quarter 2014, $6.8 million for the nine months ended September 30, 2015, and $5.6 million for the nine months ended September 30, 2014. Stratus' capitalized interest costs totaled $1.4 million for third-quarter 2015, $1.1 million for third-quarter 2014, $4.1 million for the nine months ended September 30, 2015, and $2.8 million for the nine months ended September 30, 2014. Capitalized interest costs for the 2015 and 2014 periods primarily related to development activities at Lakeway and certain properties in Barton Creek.

6.
INCOME TAXES
Stratus’ accounting policy for and other information regarding its income taxes is further described in Notes 1 and 8 in the Stratus 2014 Form 10-K.

Stratus had deferred tax assets (net of deferred tax liabilities) totaling $16.0 million at September 30, 2015, and $11.8 million at December 31, 2014. Stratus’ future results of operations may be negatively impacted by an inability to realize a tax benefit for future tax losses or for items that will generate additional deferred tax assets.

The difference between Stratus' consolidated effective income tax rate for third-quarter and the first nine months of 2015, and the U.S. Federal statutory income tax rate of 35 percent, was primarily attributable to state income taxes partially offset by the tax effect of income attributable to noncontrolling interests. During the first nine months of 2014, Stratus was subject to state income taxes while maintaining a valuation allowance against its deferred tax assets related to federal income taxes. During fourth-quarter 2014, Stratus released the valuation allowance and recorded a tax benefit.


9


7.
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 available for development), which consist 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); in Lakeway, Texas (The Oaks at Lakeway) located in the greater Austin area; in Magnolia, Texas located in the greater Houston area; and in Killeen, Texas (The West Killeen Market).

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 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 (see Note 2 in the Stratus 2014 Form 10-K for further discussion).

The Commercial Leasing segment includes the office and retail space at the W Austin Hotel & Residences project and a retail building and a bank building in Barton Creek Village. On July 2, 2015, Stratus completed the sales of the Parkside Village and 5700 Slaughter properties, which were included in the Commercial Leasing segments. See Note 9 for further discussion.

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 determinations that may not be indicative of what the actual financial performance of each segment would be if it was an independent entity.


10


Segment data presented below was prepared on the same basis as Stratus’ consolidated financial statements (in thousands).
 
Real Estate
Operationsa
 
Hotel
 
Entertainment
 
Commercial Leasingb
 
Eliminations and Otherc
 
Total
Three Months Ended September 30, 2015:
 
 
 
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Unaffiliated customers
$
6,210

 
$
8,521

 
$
4,159

 
$
787

 
$

 
$
19,677

Intersegment
8

 
76

 
22

 
134

 
(240
)
 

Cost of sales, excluding depreciation
4,458

 
6,792

 
3,493

 
524

 
(87
)
 
15,180

Depreciation
58

 
1,494

 
323

 
222

 
(34
)
 
2,063

General and administrative expenses
1,672

 
120

 
43

 
497

 
(145
)
 
2,187

Gain on sales of assets

 

 

 
(20,729
)
 

 
(20,729
)
Operating income
$
30

 
$
191

 
$
322

 
$
20,407

 
$
26

 
$
20,976

Capital expendituresd
$
4,888

 
$
241

 
$
52

 
$
20,350

 
$

 
$
25,531

Total assets at September 30, 2015
233,295

 
108,877

 
49,039

 
26,629

 
11,704

 
429,544

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 expendituresd
$
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

Nine Months Ended September 30, 2015:
 
 
 
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
  Unaffiliated customers
$
10,920

 
$
31,194

 
$
13,463

 
$
4,311

 
$

 
$
59,888

  Intersegment
58

 
217

 
124

 
386

 
(785
)
 

Cost of sales, excluding depreciation
8,580

 
23,247

 
10,666

 
2,274

 
(298
)
 
44,469

Depreciation
183

 
4,484

 
965

 
1,190

 
(109
)
 
6,713

General and administrative expenses
4,667

 
510

 
184

 
1,396

 
(449
)
 
6,308

Gain on sales of assets

 

 

 
(20,729
)
 

 
(20,729
)
Operating (loss) income
$
(2,452
)
 
$
3,170

 
$
1,772

 
$
20,566

 
$
71

 
$
23,127

Income from discontinued operationse
$

 
$

 
$

 
$
3,218

 
$

 
$
3,218

Capital expendituresd
20,591

 
689

 
121

 
36,573

 

 
57,974

 
 
 
 
 
 
 
 
 
 
 
 
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

Insurance settlement
(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 expendituresd
$
47,611

 
$
133

 
$
55

 
$
2,075

 
$

 
$
49,874

a.
Includes sales commissions and other revenues together with related expenses.
b.
Includes the results of the Parkside Village and 5700 Slaughter commercial properties through July 2, 2015 (see Note 9).
c.
Includes eliminations of intersegment amounts.
d.
Also includes purchases and development of residential real estate held for sale.
e.
Represents a deferred gain, net of taxes, associated with the 2012 sale of 7500 Rialto that was recognized in first-quarter 2015 (see Note 9).


11


8.
NEW ACCOUNTING STANDARDS
In April 2015, the Financial Accounting Standards Board issued an Accounting Standards Update (ASU) to simplify the presentation of debt issuance costs. This ASU requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. For public entities, this ASU is effective for annual periods beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted for financial statements that have not been previously issued. Retrospective application of the ASU is required upon adoption and the impact of adopting this ASU on the Consolidated Balance Sheets would be a decrease in other assets and debt of $2.8 million at September 30, 2015, and $2.6 million at December 31, 2014. Stratus plans to adopt this ASU on January 1, 2016.

9.
ASSET SALES AND DISCONTINUED OPERATIONS
Parkside Village and 5700 Slaughter. As of June 30, 2015, Stratus' balance sheet had approximately $24.3 million of assets and $26.0 million of liabilities associated with the Parkside Village and 5700 Slaughter commercial properties. On July 2, 2015, Stratus completed the sales of its Austin-area Parkside Village and 5700 Slaughter commercial properties, both located in the Circle C community, to Whitestone REIT. The Parkside Village retail project, owned in a joint venture with LCHM Holdings, LLC, consisted of 90,184 leasable square feet and was sold for $32.5 million. The 5700 Slaughter retail project, wholly owned by Stratus, consisted of 25,698 leasable square feet and was sold for $12.5 million. Stratus used proceeds from these transactions to repay the $26 million outstanding under the Parkside Village construction loan with Comerica Bank and the term loan with United Heritage Credit Union, with the remainder being held in escrow while Stratus assessed potential tax free like-kind exchange transactions. In September 2015, Stratus used $2.6 million of the escrow funds to purchase an undeveloped tract of land for the West Killeen Market project and withdrew $12.1 million to fund distributions to Stratus and LCHM Holdings, of $9.4 million and $3.2 million respectively. The remaining proceeds are expected to be distributed to Stratus in fourth-quarter 2015. After debt repayments and closing costs, cash proceeds from these transactions approximated $17 million, and Stratus recorded a pre-tax gain in third-quarter 2015 of approximately $21 million, of which the noncontrolling interest share was $4 million. Stratus has determined that the sales of the Parkside Village and 5700 Slaughter commercial properties do not meet the criteria for classification as discontinued operations.

Net (loss) income before income taxes and net (loss) income attributable to Stratus associated with Parkside Village and 5700 Slaughter follow (in thousands):
 
 
January 1, 2015,
to July 2, 2015
 
Nine Months Ended September 30, 2014
 
 
 
 
 
Net (loss) income before income taxes
 
$
(46
)
 
$
275

Net (loss) income attributable to Stratus
 
(47
)
 
178


7500 Rialto. In 2012, Stratus sold 7500 Rialto, an office building in Lantana. In connection with the sale, Stratus recognized a gain of $5.1 million and deferred a gain of $5.0 million because of a guaranty provided to the lender in connection with the buyer's assumption of the loan related to 7500 Rialto. The guaranty was released in January 2015, and Stratus recognized the deferred gain totaling $5.0 million ($3.2 million to net income attributable to common stock) in first-quarter 2015.

10.
SUBSEQUENT EVENTS
On October 30, 2015, Stratus sold the Austin 290 undeveloped tract of land for $1.2 million, with the proceeds being held in escrow for potential tax free like-kind exchange transactions. Stratus expects to record a pre-tax gain of approximately $0.5 million in fourth-quarter 2015.

On December 2, 2010, and December 13, 2012, the Block 21 Joint Venture entered into common stock purchase warrants agreement with Ticketfly, Inc. to purchase 75,000 shares of common stock at an average price of $0.78 per share. In October 2015, Stratus received notification that it would receive $9.6195 per share in cash in exchange for the warrants as a result of Pandora Media, Inc.’s merger with Ticketfly, Inc. Prior to this notification, Stratus did not assign a value to these warrants, as Ticketfly, Inc. was a privately-held company and their value could not be readily determined. Stratus expects to record a gain of approximately $0.7 million in fourth-quarter 2015.



12


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. and all entities owned or controlled by Stratus Properties Inc. 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, 2014 (2014 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 primarily in the acquisition, entitlement, development, management, operation and sale of commercial, hotel, entertainment, and multi- and single-family residential real estate properties, primarily located in the Austin area, but including projects in certain other select markets in Texas. We generate revenues from sales of developed properties, from our hotel and entertainment operations and from rental income from our commercial properties. See Note 7 for further discussion of our operating segments.

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

The principal holdings in our Real Estate Operations operating segment are in southwest Austin, Texas. The number of developed lots/units, acreage under development and undeveloped acreage as of September 30, 2015, that comprise our real estate development operations are presented in the following table.
 
 
 
Acreage
 
 
 
 
 
Under Development
 
Undeveloped
 
 
 
Developed
Lots/Units
 
Multi-
family
 
Commercial
 
Total
 
Single
family
 
Multi-family
 
Commercial
 
Total
 
Total
Acreage
Austin:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Barton Creek
71

 
18

 

 
18

 
512

 
308

 
418

 
1,238

 
1,256

Circle C
32

 

 

 

 

 
36

 
228

 
264

 
264

Lantana

 

 

 

 

 

 
44

 
44

 
44

W Austin Residences
2

 

 

 

 

 

 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The Oaks at Lakeway

 

 
87

 
87

 

 

 

 

 
87

Magnolia

 
 
 

 

 

 

 
124

 
124

 
124

West Killeen Market

 

 
9

 
9

 

 

 

 

 
9

San Antonio:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Camino Real

 

 

 

 

 

 
2

 
2

 
2

Total
105

 
18

 
96

 
114

 
512

 
344

 
816

 
1,672

 
1,786


Our residential holdings at September 30, 2015, 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 leasing holdings at September 30, 2015, consisted of the office and retail space at the W Austin Hotel & Residences project, and the first phase of Barton Creek Village, 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 the remaining two unsold units were being marketed as of September 30, 2015), and office, retail and entertainment space. The hotel is managed by Starwood

13


Hotels & Resorts Worldwide, Inc. The 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 2015, our revenues totaled $19.7 million and our net income attributable to common stock totaled $10.2 million, compared with revenues of $21.6 million and net income attributable to common stock of $0.6 million for third-quarter 2014. For the first nine months of 2015, our revenues totaled $59.9 million and our net income attributable to common stock totaled $11.9 million, compared with revenues of $67.5 million and net income attributable to common stock of $1.9 million for the first nine months of 2014. The decrease in revenues in the 2015 periods primarily relates to fewer condominium unit sales at the W Austin Residences and fewer lot sales at Verano Drive and Amarra Drive Phase II as inventory has declined as a result of previous sales activity. Our results for the third quarter and first nine months of 2015 included a gain of $20.7 million ($10.8 million to net income attributable to common stock) on the sales of our Parkside Village and 5700 Slaughter commercial developments (see "Results of Operations - Commercial Leasing"). The results for the first nine months of 2015 also included recognition of a deferred gain associated with the 2012 sale of 7500 Rialto totaling $5.0 million ($3.2 million to net income attributable to common stock). The results for the first nine months of 2014 included income of $2.5 million (including $1.5 million for third-quarter 2014) associated with a litigation settlement, an insurance settlement and the recovery of building repair costs associated with damage caused by the June 2011 balcony glass breakage incidents at the W Austin Hotel & Residence project.

In third-quarter 2015, we purchased the noncontrolling interest share of the CJUF II Stratus Block 21, LLC joint venture (the Block 21 Joint Venture) and we now own 100 percent of the joint venture (see "Business Strategy and Related Risks" below).

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 enhance the value of our properties by securing and maintaining development entitlements and developing and building real estate projects on these properties for sale or investment. We have also pursued opportunities for new projects that offer the possibility of acceptable returns and risks.
Our board of directors has approved a five-year plan to create value for stockholders by methodically developing certain existing assets and actively marketing other assets for possible sale at appropriate values. Under the plan, any future new projects will be complementary to existing operations and will be projected to be developed and sold within a five-year time frame. Consistent with our five-year plan, on July 2, 2015, we completed the sales of our Austin-area Parkside Village and 5700 Slaughter commercial properties, both located in the Circle C community, for $32.5 million and $12.5 million, respectively. We are also in the process of engaging or considering the engagement of advisers to market other developed and undeveloped properties.
Additionally, on September 28, 2015, we completed the purchase of Canyon-Johnson Urban Fund II, L.P.'s (Canyon-Johnson’s) approximate 58 percent interest in the Block 21 Joint Venture, for approximately $62 million. See Note 3 for further discussion. In connection with our acquisition of Canyon-Johnson's interest in the Block 21 Joint Venture, we completed the refinancing of the Block 21 Joint Venture. See "Capital Resources and Liquidity - Credit Facility and Other Financing Arrangements."
We believe that the Austin and surrounding sub-markets continue to be desirable. Many of our developments are in locations where development approvals have historically been subject to regulatory constraints, which has made it difficult to obtain entitlements. Our Austin 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 realize their value. Our development plans require significant additional capital, and may be pursued through joint ventures or other means. In addition, our strategy is subject to continued review by our board of directors and may change as a result of market conditions or other factors deemed relevant by our board of directors.
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

14


exploit our development opportunities and resources. During the first nine months of 2015, our operating cash flows reflect purchases and development of real estate properties totaling $20.6 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, 2015, we had $33.2 million in cash and cash equivalents and $6.9 million of availability under our revolving line of credit with Comerica Bank, which matures in August 2017.

Although we have scheduled debt maturities of $16.2 million in fourth-quarter 2015 and $20.8 million in 2016, 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 "Capital Resources and Liquidity" below regarding recent debt repayments and refinancing and “Risk Factors” included in Part 1, Item 1A. of our 2014 Form 10-K for further discussion.
DEVELOPMENT ACTIVITIES

Residential. As of September 30, 2015, the number of our residential developed lots/units, lots under development and lots for potential development by area are shown below:
 
 
Residential Lots/Units
 
 
Developed
 
Under
Development
 
Potential Developmenta
 
Total
Barton Creek:
 
 
 
 
 
 
 
 
Amarra Drive:
 
 
 
 
 
 
 
 
Phase II Lots
 
14

 

 

 
14

Phase III Lots
 
57

 

 

 
57

Townhomes
 

 

 
190

 
190

Section N Multi-family
 
 
 
 
 
 
 
 
Santal Multi-family
 

 
236

 

 
236

Other Section N
 

 

 
1,624

 
1,624

Other Barton Creek sections
 

 

 
156

 
156

Circle C:
 
 
 
 
 
 
 
 
Meridian
 
32

 

 

 
32

Tract 101 Multi-family
 

 

 
240

 
240

Tract 102 Multi-family
 

 

 
56

 
56

W Austin Hotel & Residences project:
 
 
 
 
 
 
 
 
Condominium units
 
2

 

 

 
2

Total Residential Lots/Units
 
105

 
236

 
2,266

 
2,607

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 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 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.

Amarra Drive. Amarra Drive Phase I, which was the initial phase of the Amarra Drive subdivision, was completed in 2007 and included six lots with sizes ranging from approximately one to four acres. Amarra Drive Phase II, which consisted of 35 lots on 51 acres, was substantially completed in October 2008. We have not sold any Phase II lots in 2015. During the first nine months of 2014, we sold 12 Phase II lots for $5.9 million, including 3 lots for $1.7 million in third-quarter 2014. As of September 30, 2015, 14 Phase II lots remained unsold.
 
In first-quarter 2015, we completed the development of Amarra Drive Phase III, which consists of 64 lots on 166 acres. During the first nine months of 2015, we sold 7 Phase III lots for $5.1 million (including 4 lots for $3.3 million in third-quarter 2015) and as of September 30, 2015, 57 lots remained unsold. During October 2015, we sold one lot and as of October 31, 2015, four lots were under contract.

Santal (formerly Tecoma) Multi-family. The Santal Multi-family project is a garden-style apartment complex consisting of 236 units. Construction commenced in January 2015 and pre-leasing is expected to begin in September 2015. The project is expected to be completed in April 2016.

15



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 consisted of 57 one-acre lots, was completed in first-quarter 2014. During the first nine months of 2015, we sold 18 Meridian lots for $5.0 million (including 9 lots for $2.6 million in third-quarter 2015) and as of September 30, 2015, 32 lots remained unsold. As of October 31, 2015, two lots were under contract.

Calera. Calera is a residential subdivision with plat approval for 155 lots. The initial phase of the Calera subdivision included 16 courtyard homes at Calera Court. The second phase of the Calera subdivision, Calera Drive, consisted of 53 single-family lots. Construction of the final phase, known as Verano Drive, was completed in July 2008 and included 71 single-family lots. During 2014, we sold the remaining nine Verano Drive lots for $3.5 million.

W Austin Residences. During the first nine months of 2014, we sold five condominium units for $7.9 million, including two units for $3.5 million in third-quarter 2014. There were no sales during the first nine months of 2015 and as of September 30, 2015, two condominium units remained unsold. The two unsold units are being marketed for sale.

Commercial. As of September 30, 2015, the number of square feet of our commercial property developed, under development and our remaining entitlements for potential development (excluding property associated with our unconsolidated joint venture with Tramell Crow Central Texas Development, Inc. relating to Crestview Station in Austin (the Crestview Station Joint Venture)) are shown below:
 
Commercial Property
 
Developed
 
Under Development
 
Potential Developmenta
 
Total
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

Circle C:
 
 
 
 
 
 
 
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

W Austin Hotel & Residences project:
 
 
 
 
 
 
 
Office
38,316

 

 

 
38,316

Retail
18,327

 

 

 
18,327

Lakeway:
 
 
 
 
 
 
 
The Oaks at Lakeway

 
245,022

 

 
245,022

Magnolia

 

 
351,000

 
351,000

Killeen Center

 
45,000

 

 
45,000

Austin 290 Tractb

 

 
20,000

 
20,000

Total Square Feet
82,094

 
290,022

 
3,152,938

 
3,525,054

a.
Our development of the properties identified under the heading “Potential Development” is dependent upon the approval of our development plans and permits by governmental agencies, including the City. Those governmental agencies may not approve one or more development plans and permit applications related to such properties or may require us to modify our development plans. Accordingly, our development strategy with respect to those properties may change in the future. While we may be proceeding with approved infrastructure projects 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.
On October 30, 2015, Stratus sold the Austin 290 tract (see Note 10).

16


 
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, 2015, occupancy was 100 percent for the retail complex, and the bank building is leased through January 2023.

W Austin Hotel & Residences project. The project has 38,316 square feet of leasable office space, including 9,000 square feet occupied by our corporate office, and 18,327 square feet of retail space. As of September 30, 2015, occupancy for the office space was 100 percent and occupancy for the retail space was 74 percent. Leasing is ongoing for the remaining retail space. See "Business Strategy and Related Risks" for information on our acquisition of the interest of our joint venture partner.

The Oaks at Lakeway. The Oaks at Lakeway is a HEB Grocery Company, L.P. (HEB) anchored retail project planned for 245,022 square feet of commercial space. Leases for 68 percent of the space, including the HEB lease, have been executed and leasing for the remaining space is underway. The project is currently under construction, and the HEB store opened in 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 and road expansion by the Texas Department of Transportation are in progress and construction is expected to begin in 2016.

West Killeen Market. The West Killeen Market project is a HEB-anchored retail project planned for 45,000 square feet of commercial space and three pad sites adjacent to a 90,000 HEB grocery store.

UNCONSOLIDATED AFFILIATE

Crestview Station. The Crestview Station Joint Venture is a single-family, multi-family, retail and office development, located on the site of a commuter rail line. As of September 30, 2015, the Crestview Station Joint Venture has sold all of its properties except for one commercial site (see Note 6 in our 2014 Form 10-K). We account for our 50 percent interest in the Crestview Station Joint Venture under the equity method.

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. 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.


17


The following table summarizes our results (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Operating income (loss):
 
 
 
 
 
 
 
Real estate operations
$
30

 
$
1,201

 
$
(2,452
)
 
$
2,307

Hotel
191

 
708

 
3,170

 
3,890

Entertainment
322

 
261

 
1,772

 
1,903

Commercial leasing
20,407

 
(107
)
 
20,566

 
70

Eliminations and other
26

 
23

 
71

 
106

Operating income
$
20,976

 
$
2,086

 
$
23,127

 
$
8,276

Interest expense, net
$
(855
)
 
$
(974
)
 
$
(2,736
)
 
$
(2,797
)
Income from discontinued operations, net of taxes
$

 
$

 
$
3,218

 
$

Net income
$
13,741

 
$
778

 
$
17,285

 
$
4,934

Net income attributable to noncontrolling interests in subsidiaries
$
(3,493
)
 
$
(181
)
 
$
(5,414
)
 
$
(3,021
)
Net income attributable to Stratus common stock
$
10,248

 
$
597

 
$
11,871

 
$
1,913


We have four operating segments: Real Estate Operations, Hotel, Entertainment and Commercial Leasing (see Note 7 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,
 
2015
 
2014
 
2015
 
2014
Revenues:
 
 
 
 
 
 
 
Developed property sales
$
5,900

 
$
6,378

 
$
10,150

 
$
18,504

Commissions and other
318

 
208

 
828

 
384

Total revenues
6,218

 
6,586

 
10,978

 
18,888

Cost of sales, including depreciation
4,516

 
5,547

 
8,763

 
14,226

Litigation and insurance settlements

 
(1,506
)
 

 
(2,082
)
General and administrative expenses
1,672

 
1,344

 
4,667

 
4,437

Operating income (loss)
$
30

 
$
1,201

 
$
(2,452
)
 
$
2,307