10-Q 1 strs-20220331.htm 10-Q strs-20220331
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United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2022
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from   to
Commission file number: 001-37716
strs-20220331_g1.jpg
Stratus Properties Inc.
(Exact name of registrant as specified in its charter)
Delaware72-1211572
(State or other jurisdiction of(I.R.S. Employer Identification No.)
incorporation or organization) 
212 Lavaca Street, Suite 300
AustinTX78701
(Address of principal executive offices)(Zip Code)
(512) 478-5788
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $0.01 per shareSTRSThe NASDAQ Stock Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes  No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes   No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer

Accelerated filer

Non-accelerated filer  
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  No
On April 29, 2022, there were issued and outstanding 8,273,268 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)
March 31,
2022
December 31,
2021
ASSETS  
Cash and cash equivalents$12,273 $24,229 
Restricted cash10,859 18,294 
Real estate held for sale1,773 1,773 
Real estate under development206,191 181,224 
Land available for development34,816 40,659 
Real estate held for investment, net89,760 90,284 
Lease right-of-use assets10,460 10,487 
Deferred tax assets4,843 6,009 
Other assets22,621 17,214 
Assets held for sale - discontinued operations151,172 151,053 
Total assets$544,768 $541,226 
LIABILITIES AND EQUITY  
Liabilities:
Accounts payable$14,573 $14,118 
Accrued liabilities, including taxes19,682 22,069 
Debt121,446 106,648 
Lease liabilities14,135 13,986 
Deferred gain4,274 4,801 
Other liabilities10,381 17,894 
Liabilities held for sale - discontinued operations149,717 153,097 
Total liabilities334,208 332,613 
Commitments and contingencies
Equity:  
Stockholders’ equity:  
Common stock94 94 
Capital in excess of par value of common stock188,971 188,759 
Accumulated deficit(6,691)(8,963)
Common stock held in treasury(22,205)(21,753)
Total stockholders’ equity160,169 158,137 
Noncontrolling interests in subsidiaries50,391 50,476 
Total equity210,560 208,613 
Total liabilities and equity$544,768 $541,226 

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

2

STRATUS PROPERTIES INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(In Thousands, Except Per Share Amounts)
Three Months Ended
March 31,
 20222021
Revenues:
Real estate operations$19 $6,556 
Leasing operations3,080 4,818 
Total revenues3,099 11,374 
Cost of sales:
Real estate operations1,366 4,360 
Leasing operations984 2,052 
Depreciation873 1,586 
Total cost of sales3,223 7,998 
General and administrative expenses3,167 4,324 
Gain on sale of assets(4,812)(22,931)
Total1,578 (10,609)
Operating income1,521 21,983 
Interest expense, net(15)(1,056)
Loss on extinguishment of debt (63)
Other income, net6 3 
Income before income taxes and equity in unconsolidated affiliates' loss
1,512 20,867 
Benefit from (provision for) income taxes302 (2,691)
Equity in unconsolidated affiliates' loss(2)(2)
Net income from continuing operations
1,812 18,174 
Net income (loss) from discontinued operations
375 (2,508)
Net income and total comprehensive income
2,187 15,666 
Total comprehensive loss (income) attributable to noncontrolling interests
85 (6,722)
Net income and total comprehensive income attributable to common stockholders
$2,272 $8,944 
Basic net income (loss) per share attributable to common stockholders:
Continuing operations
$0.23 $1.39 
Discontinued operations0.05 (0.30)
$0.28 $1.09 
Diluted net income (loss) per share attributable to common stockholders:
Continuing operations
$0.23 $1.38 
Discontinued operations0.04 (0.30)
$0.27 $1.08 
Weighted-average shares of common stock outstanding:
Basic
8,251 8,223 
Diluted8,355 8,273 

The accompanying Notes to Consolidated Financial Statements (Unaudited) are an integral part of these consolidated financial statements.
3

STRATUS PROPERTIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In Thousands)
Three Months Ended
 March 31,
 20222021
Cash flow from operating activities:  
Net income$2,187 $15,666 
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation873 3,002 
Cost of real estate sold 3,112 
Gain on sale of assets(4,812)(22,931)
Loss on extinguishment of debt 63 
Debt issuance cost amortization and stock-based compensation 515 529 
Equity in unconsolidated affiliates' loss2 2 
Deferred income taxes1,167  
Purchases and development of real estate properties(4,864)(2,489)
(Increase) decrease in other assets(5,559)238 
Decrease in accounts payable, accrued liabilities and other(7,629)(7,563)
Net cash used in operating activities(18,120)(10,371)
Cash flow from investing activities:
Capital expenditures(14,724)(1,009)
Proceeds from sale of assets 59,488 
Payments on master lease obligations(182)(270)
Other, net (5)
Net cash (used in) provided by investing activities(14,906)58,204 
Cash flow from financing activities:
Borrowings from credit facility10,000 17,000 
Payments on credit facility (26,227)
Borrowings from project loans5,111 458 
Payments on project and term loans(1,172)(28,708)
Stock-based awards net payments(452)(157)
Distributions to noncontrolling interests (13,087)
Financing costs(17)(53)
Net cash provided by (used in) financing activities13,470 (50,774)
Net decrease in cash, cash equivalents and restricted cash(19,556)(2,941)
Cash, cash equivalents and restricted cash at beginning of year70,139 34,183 
Cash, cash equivalents and restricted cash at end of period$50,583 $31,242 

The accompanying Notes to Consolidated Financial Statements (Unaudited), which include information regarding noncash transactions, are an integral part of these consolidated financial statements.
4


STRATUS PROPERTIES INC.
CONSOLIDATED STATEMENTS OF EQUITY (Unaudited)
(In Thousands)
 Stockholders’ Equity  
Common Stock
Held in Treasury
Total
 Common StockCapital in Excess of Par ValueAccum-ulated DeficitNoncontrolling Interests in Subsidiaries 
Number
of Shares
At Par
Value
Number
of Shares
At
Cost
Total
Equity
Balance at December 31, 20219,388 $94 $188,759 $(8,963)1,143 $(21,753)$158,137 $50,476 $208,613 
Exercised and vested stock-based awards39 — — — — — — —  
Stock-based compensation— — 212 — — — 212 — 212 
Tender of shares for stock-based awards
— — — — 11 (452)(452)— (452)
Total comprehensive income (loss)— — — 2,272 — — 2,272 (85)2,187 
Balance at March 31, 20229,427 $94 $188,971 $(6,691)1,154 $(22,205)$160,169 $50,391 $210,560 

Balance at December 31, 20209,358 $94 $186,777 $(66,357)1,137 $(21,600)$98,914 $10,850 $109,764 
Exercised and vested stock-based awards19 — — — — — — —  
Stock-based compensation— — 182 — — — 182 — 182 
Grant of restricted stock units under the Profit Participation Incentive Plan— — 1,162 — — — 1,162 — 1,162 
Tender of shares for stock-based awards
— — — — 6 (153)(153)— (153)
Distributions to noncontrolling interests
— — — — — — — (13,087)(13,087)
Total comprehensive income— — — 8,944 — — 8,944 6,722 15,666 
Balance at March 31, 20219,377 $94 $188,121 $(57,413)1,143 $(21,753)$109,049 $4,485 $113,534 

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


5

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

1.GENERAL
The unaudited consolidated financial statements, and the accompanying notes, are prepared in accordance with generally accepted accounting principles in the United States (GAAP) and should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2021, included in Stratus Properties Inc.’s (Stratus) Annual Report on Form 10-K for the year ended December 31, 2021 (Stratus 2021 Form 10-K) filed with the United States (U.S.) Securities and Exchange Commission. The information furnished herein reflects all adjustments that are, in the opinion of management, necessary for a fair statement of the results for the interim periods reported and consist of normal recurring adjustments. Operating results for the first quarter of 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. Refer to Note 4 for a discussion of Stratus' discontinued operations.

Related Party Transactions. During the first quarter of 2022, Stratus had an arrangement with Whitefish Partners, LLC (Whitefish Partners), formerly known as Austin Retail Partners, LLC, for services provided by a consultant of Whitefish Partners who is the son of Stratus' President and Chief Executive Officer. Payments to Whitefish Partners for the consultant's consulting services and expense reimbursements totaled $173 thousand in first-quarter 2022 and $37 thousand in first-quarter 2021. The first quarter of 2022 included a cash payment under Stratus’ Profit Participation Incentive Plan (PPIP). As of March 31, 2022, the consultant has one outstanding award under the PPIP. In addition, during first-quarter 2022, the Compensation Committee of Stratus' Board of Directors (the Compensation Committee) approved an award to be granted to the consultant under the PPIP related to another development project. Refer to Note 7 for discussion of the PPIP. In April 2022, Stratus hired the consultant as an employee at the same annual salary as his compensation under the contract with Whitefish Partners. As an employee, he is eligible for the same health and retirement benefits provided to all Stratus employees.

2. EARNINGS PER SHARE
Stratus’ basic net income per share of common stock was calculated by dividing the net income attributable to common stockholders by the weighted-average shares of common stock outstanding during the period. A reconciliation of net income and weighted-average shares of common stock outstanding for purposes of calculating diluted net income per share (in thousands, except per share amounts) follows:
Three Months Ended
March 31,
20222021
Income from continuing operations$1,812 $18,174 
Net income (loss) from discontinued operations375 (2,508)
Net income2,187 15,666 
Net loss (income) attributable to noncontrolling interests in subsidiaries85 (6,722)
Net income attributable to Stratus common stockholders
$2,272 $8,944 
Basic weighted-average shares of common stock outstanding
8,251 8,223 
Add shares issuable upon exercise or vesting of dilutive stock options and restricted stock units (RSUs)a
104 50 
Diluted weighted-average shares of common stock outstanding
8,355 8,273 
Basic net income (loss) per share attributable to common stockholders
Continuing operations$0.23 $1.39 
Discontinued operations0.05 (0.30)
$0.28 $1.09 
Diluted net income (loss) per share attributable to common stockholders
Continuing operations$0.23 $1.38 
Discontinued operations0.04 (0.30)
$0.27 $1.08 
a.Excludes 4 thousand shares of common stock for the three months ended March 31, 2022, and 16 thousand shares of common stock for the three months ended March 31, 2021, associated with RSUs that were anti-dilutive.
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3. LIMITED PARTNERSHIPS
Stratus, through its subsidiaries, is a partner in the following limited partnerships: The Saint George Apartments, L.P., Stratus Block 150, L.P., The Saint June, L.P., Stratus Kingwood Place, L.P. and The Saint Mary, L.P. For additional information regarding Stratus' partnerships, refer to Note 2 in the Stratus 2021 Form 10-K.

Stratus Block 150, L.P. In the first quarter of 2022, pursuant to the limited partnership agreement, wholly owned subsidiaries of Stratus contributed an additional $1.4 million in cash to Stratus Block 150, L.P. No additional capital contributions are required to be made by the partners. As of March 31, 2022, Stratus holds, in the aggregate, a 31.0 percent indirect controlling equity interest in Stratus Block 150, L.P. As of March 31, 2022, JBM Trust, a related party to Stratus, holds a 5.9 percent equity interest in Stratus Block 150, L.P. For additional information regarding Stratus' related parties, including JBM Trust, refer to Notes 1 and 2 in the Stratus 2021 Form 10-K.

Accounting for Limited Partnerships. Stratus has performed evaluations and concluded that The Saint George Apartments, L.P., Stratus Block 150, L.P., The Saint June, L.P., Stratus Kingwood, L.P. and The Saint Mary, L.P. are variable interest entities and that Stratus is the primary beneficiary. Accordingly, the partnerships’ results are consolidated in Stratus’ financial statements. Stratus will continue to evaluate which entity is the primary beneficiary of these partnerships in accordance with applicable accounting guidance.

Stratus’ consolidated balance sheets include the following assets and liabilities of the partnerships (in thousands):
March 31, 2022December 31, 2021
Assets:
Cash and cash equivalents$8,504 $7,432 
Restricted cash5,170 11,809 
Real estate under development72,776 62,692 
Land available for development7,702 7,641 
Real estate held for investment31,417 31,399 
Other assets3,159 3,160 
Total assets128,728 124,133 
Liabilities:
Accounts payable and accrued liabilities9,894 6,661 
Debt46,334 46,096 
Total liabilities56,228 52,757 
Net assets$72,500 $71,376 

4. ASSET SALES
Block 21 Pending Sale - Discontinued Operations. Block 21 is Stratus’ wholly owned mixed-use real estate property in downtown Austin, Texas. Block 21 contains the 251-room W Austin Hotel and is home to Austin City Limits Live at the Moody Theater, a 2,750-seat entertainment venue that serves as the location for the filming of Austin City Limits, the longest running music series in American television history. Block 21 also includes Class A office space, retail space and the 3TEN ACL Live entertainment venue and business.

In December 2019, Stratus announced that it had agreed to sell Block 21 to Ryman Hospitality Properties, Inc. (Ryman) for $275.0 million. Ryman deposited $15.0 million in earnest money to secure its performance under the agreements governing the sales. In May 2020, Ryman delivered a termination letter, which was agreed to and accepted by Stratus, terminating the agreements to sell Block 21 and authorizing the release of Ryman’s $15.0 million in earnest money to Stratus, which Stratus recorded as operating income in 2020.

In October 2021, Stratus entered into new agreements to sell Block 21 to Ryman for $260.0 million. The purchase price includes Ryman’s assumption of approximately $137 million of existing Block 21 mortgage debt and is subject to an expected downward adjustment of $5.0 million. The remainder of the purchase price will be paid in cash. The transaction is expected to close prior to June 1, 2022, but remains subject to the timely satisfaction or waiver of various closing conditions, including the consent of the loan servicer to the purchaser’s assumption of the existing mortgage loan; the consent of the hotel operator, an affiliate of Marriott, to the purchaser’s assumption of the hotel operating agreement; the absence of a material adverse effect; and other customary closing conditions. The Block 21 purchase agreement will terminate if all conditions to closing are not satisfied or waived by the parties. Ryman has deposited $5.0 million in earnest money to secure its performance under the agreements governing the sale. Of the total purchase price, $6.9 million will be held in escrow for 12 months after the closing, subject to a longer retention period with respect to any required reserve for pending claims.
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In accordance with accounting guidance, Stratus reported the results of operations of Block 21 as discontinued operations in the consolidated statements of comprehensive income because the disposal represents a strategic shift that had a major effect on operations, and presented the assets and liabilities of Block 21 as held for sale - discontinued operations in the consolidated balance sheets for all periods presented. Block 21 did not have any other comprehensive income and Stratus' consolidated statements of cash flows are reported on a combined basis without separately presenting discontinued operations.

The carrying amounts of Block 21's major classes of assets and liabilities in the consolidated balance sheets follow (in thousands):
March 31, 2022December 31, 2021
Assets:
Cash and cash equivalents$9,509 $9,172 
Restricted casha
17,942 18,444 
Real estate held for investment, net120,634 120,452 
Other assets3,087 2,985 
Total assets$151,172 $151,053 
Liabilities:
Accounts payable and accrued liabilities, including taxes$4,268 $6,200 
Debtb
136,054 136,684 
Other liabilities9,395 10,213 
Total liabilities$149,717 $153,097 
a.Most restricted cash would be received by Ryman upon the closing of the sale.
b.In 2016, Stratus completed the refinancing of the W Austin Hotel & Residences. Goldman Sachs Mortgage Company provided a $150.0 million, ten-year, non-recourse term loan with a fixed interest rate of 5.58 percent per annum and payable monthly based on a 30-year amortization. Balances include net reductions for unamortized debt issuance costs of $0.5 million at March 31, 2022, and $0.6 million at December 31, 2021.

Block 21’s results of operations in the consolidated statements of comprehensive income consists of the following (in thousands):
Three Months Ended March 31,
20222021
Revenues:a
Hotel$5,871 $2,118 
Entertainment5,340 608 
Leasing operations and other726 414 
Total revenue11,937 3,140 
Cost of sales:
Hotel4,743 2,901 
Entertainment4,139 1,279 
Leasing operations and other471 337 
Depreciation 
b
1,416 
Total cost of sales9,353 5,933 
General and administrative expenses100 220 
Operating income (loss)2,484 (3,013)
Interest expense, net(1,945)(1,979)
(Provision for) benefit from income taxes(164)2,484 
Net income (loss)$375 $(2,508)
a.In accordance with accounting guidance, amounts are net of eliminations of intercompany sales totaling $321 thousand in first-quarter 2022 and $262 thousand in first-quarter 2021.
b.In accordance with accounting guidance, depreciation is not recognized subsequent to classification as assets held for sale, which occurred in the fourth quarter of 2021.

Capital expenditures associated with discontinued operations totaled $182 thousand in first-quarter 2022 and $107 thousand in first-quarter 2021.


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The Oaks at Lakeway. In 2017, Stratus sold The Oaks at Lakeway to FHF I Oaks at Lakeway, LLC for $114.0 million in cash. The Oaks at Lakeway is an H-E-B, L.P.-anchored retail project located in Lakeway, Texas. The parties entered into three master lease agreements at closing: (1) one covering unleased in-line retail space, with a 5-year term (the In-line Master Lease), (2) one covering the hotel pad with a 99-year term (the Hotel Master Lease) and (3) one covering four unleased pad sites, three of which have 10-year terms, and one of which has a 15-year term (the Pad Site Master Lease). For additional information, refer to Note 9 in the Stratus 2021 Form 10-K under the heading “Deferred Gain on Sale of The Oaks at Lakeway.”

The In-Line Master Lease expired in February 2022 and the Hotel Master Lease was terminated in November 2020. As such, Stratus has no further obligations under these two master leases. With respect to the Pad Site Master Lease, Stratus has leased the one pad site with a 15-year term, reducing the monthly rent payment net of rent collections for this pad site to approximately $2,500. Stratus may assign this lease to the purchaser and terminate the obligation under the Pad Site Master Lease for this pad site with a payment of $560,000 to the purchaser. The lease term for the remaining three unleased pad sites under the Pad Site Master Lease expires in February 2027. To the extent leases are executed for the remaining three unleased pad sites, tenants open for business, and the leases are then assigned to the purchaser, the master lease obligation could be reduced further.

In the first quarter of 2022, Stratus reassessed its plans with respect to construction of the remaining buildings on the three remaining unleased pad sites and determined that, rather than execute leases and build the buildings, it is less costly to continue to pay the monthly rent (approximately $77 thousand per month) pursuant to the Pad Site Master Lease until the lease expires in February 2027. In connection with this determination, Stratus reversed an accrual of costs to lease and construct these buildings, resulting in recognition of an additional $4.8 million of gain in first-quarter 2022. A contract liability of $4.3 million is presented as a deferred gain in the consolidated balance sheets at March 31, 2022, compared with $4.8 million at December 31, 2021. The reduction in the deferred gain balance primarily reflects master lease payments. The remaining deferred gain balance is expected to be reduced primarily by future master lease payments.

The Saint Mary. In January 2021, The Saint Mary, L.P. sold The Saint Mary for $60.0 million. After closing costs and payment of the outstanding construction loan, the sale generated net proceeds of approximately $34 million. In first-quarter 2021, after establishing a reserve for remaining costs of the partnership, Stratus received $20.9 million from the subsidiary in connection with the sale and $12.9 million of the net proceeds were distributed to the noncontrolling interest owners. Stratus recognized a pre-tax gain on the sale of $22.9 million ($16.2 million net of noncontrolling interests) in first-quarter 2021. Stratus also recognized a $63 thousand loss on extinguishment of debt in first-quarter 2021 related to the repayment of The Saint Mary construction loan.
The Saint Mary had rental revenue of $0.1 million in first-quarter 2021 prior to the sale. Interest expense, net of capitalized amounts, related to The Saint Mary construction loan was less than $0.1 million in first-quarter 2021.

Kingwood Place Pending Land Sale. In September 2021, Stratus entered into a contract to sell the multi-family tract of land at Kingwood Place, which was planned for approximately 275 multi-family units, for $5.5 million. The sale, if consummated, is expected to close by mid-2022.

5. FAIR VALUE MEASUREMENTS
Fair value accounting guidance includes a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 inputs) and the lowest priority to unobservable inputs (Level 3 inputs).

The carrying value for certain Stratus financial instruments (i.e., cash and cash equivalents, restricted cash, accounts payable and accrued liabilities) approximates fair value because of their short-term nature and generally negligible credit losses.

A summary of the carrying amount and fair value of Stratus' debt follows (in thousands):
 March 31, 2022December 31, 2021
Carrying
Value
Fair
Value
Carrying
Value
Fair
Value
Liabilities:
Debt$121,446 $122,747 $106,648 $108,091 

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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
The components of Stratus' debt follow (in thousands):
 March 31, 2022December 31, 2021
Comerica Bank credit facility$10,000 $ 
Jones Crossing loan24,067 24,042 
The Annie B land loan13,877 13,847 
New Caney land loan4,262 4,496 
Paycheck Protection Program loan
38 156 
Construction loans:
Kingwood Place32,457 32,249 
Lantana Place
21,997 22,098 
Magnolia Place6,542 2,077 
West Killeen Market
6,040 6,078 
Amarra Villas credit facility2,166 1,605 
Total debta
$121,446 $106,648 
a.Includes net reductions for unamortized debt issuance costs of $1.1 million at March 31, 2022, and $1.2 million at December 31, 2021. Total debt does not include debt associated with Block 21, which is reflected in liabilities held for sale. Refer to Note 4 for further discussion.

Comerica Bank credit facility. As of March 31, 2022, Stratus had $49.7 million available under its $60.0 million Comerica Bank credit facility, with letters of credit totaling $347 thousand committed against the credit facility. In April 2022, Stratus borrowed $20.0 million on the credit facility, of which the majority of the funds were used to make a U.S. Federal tax payment for Stratus’ 2021 tax liability. In May 2022, Stratus and Comerica Bank entered into an amendment to extend the maturity date of the Comerica Bank credit facility from September 27, 2022, to December 26, 2022, increase the letter of credit sublimit from $7.5 million to $11.5 million and change the benchmark rate from the London Interbank Offered Rate (LIBOR) to the Bloomberg Short-Term Bank Yield Index (BSBY) Rate. Advances under the credit facility now bear interest at the one-month BSBY Rate (with a floor of 0.0 percent) plus 4.0 percent.

New Caney land loan. In March 2022, Stratus extended the maturity of the loan for an additional 12 months to March 8, 2023, which required a principal payment of $0.2 million and will require a second principal payment of $0.2 million in September 2022. Stratus also entered into an amendment to the New Caney land loan to convert the benchmark rate from LIBOR to the Secured Overnight Financing Rate (SOFR). The loan now bears interest at SOFR plus 3.0 percent, subject to the applicable margin adjustment.

PPP loan. In April 2020, Stratus received a $4.0 million loan under the Paycheck Protection Program (PPP loan) of the Coronavirus Aid, Relief, and Economic Security Act, which was signed into law on March 27, 2020. The PPP loan matured and the remaining balance was repaid by Stratus on April 15, 2022. Of the original loan amount, $3.7 million was forgiven in August 2021.

Lantana Place construction loan. In January 2022, Stratus entered into an amendment to the Lantana Place construction loan to extend the date through which Stratus can request advances under the loan through December 31, 2022.

Amarra Villas credit facility. In March 2022, Stratus subsidiaries and Comerica Bank agreed to an extension of the maturity date to June 19, 2022, while they negotiate a modification of this facility.

For additional information regarding Stratus' debt, refer to Note 6 in the Stratus 2021 Form 10-K.

Interest Expense and Capitalization. Interest costs (before capitalized interest) totaled $1.1 million in first-quarter 2022 and $2.3 million in first-quarter 2021. Stratus' capitalized interest totaled $1.1 million in first-quarter 2022 and $1.3 million in first-quarter 2021. Capitalized interest is primarily related to development activities at Barton Creek, The Annie B, The Saint George and Magnolia Place.

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7. PROFIT PARTICIPATION INCENTIVE PLAN
In July 2018, the Compensation Committee unanimously adopted the PPIP, which provides participants with economic incentives tied to the success of the development projects designated by the Compensation Committee as approved projects under the PPIP. Estimates related to the awards may change over time as a result of differences between projected and actual development progress and costs, market conditions and the timing of capital transactions or valuation events. During the first quarter of 2022, the Compensation Committee designated The Saint June as an approved project under the PPIP although no awards for this project were granted as of March 31, 2022. Refer to Note 8 of the Stratus 2021 Form 10-K for further discussion.

The sale of The Saint Mary in January 2021 was a capital transaction under the PPIP. During February 2022, $2.1 million was paid in cash to eligible participants.

In September 2021, Lantana Place reached a valuation event under the PPIP. The profit pool was $3.9 million, of which $0.2 million was paid in cash during February 2022. The remaining accrued liability under the PPIP related to Lantana Place totaled $3.7 million at March 31, 2022, and is expected to be settled in RSUs awarded to eligible participants in the first half of 2022.

The sale of The Santal in December 2021 was a capital transaction under the PPIP. During February 2022, $5.0 million was paid in cash to eligible participants, subject to the PPIP’s limits on cash compensation paid to certain officers. Amounts due under the PPIP above the limits are converted to an equivalent number of RSUs with a one-year vesting period. The remaining accrued liability under the PPIP related to The Santal totaled $1.7 million at March 31, 2022, and is expected to be settled in RSUs awarded to eligible participants in the first half of 2022.

A summary of PPIP costs follows (in thousands):
Three Months Ended March 31,
20222021
Charged to general and administrative expense
$15 $495 
Capitalized to project development costs51 224 
Total PPIP costs
$66 $719 

The accrued liability for the PPIP totaled $7.9 million at March 31, 2022, and $15.2 million at December 31, 2021 (included in other liabilities).

8. INCOME TAXES
Stratus’ accounting policy for and other information regarding its income taxes are further described in Notes 1 and 7 in the Stratus 2021 Form 10-K.

Stratus had deferred tax assets (net of deferred tax liabilities) totaling $11.3 million at March 31, 2022 and $12.4 million at December 31, 2021. Stratus' deferred tax assets had valuation allowances totaling $6.5 million at March 31, 2022, and $6.4 million at December 31, 2021. Management has concluded that the pending sale of Block 21 is sufficient positive evidence to support the ability to realize certain deferred tax assets expected to be realized from the sale, which resulted in Stratus recording a $4.2 million non-cash tax credit in the fourth quarter of 2021 to reduce the related valuation allowance. Stratus continues to maintain a valuation allowance on its remaining deferred tax assets.

In evaluating the recoverability of the remaining deferred tax assets, management considered available positive and negative evidence, giving greater weight to the uncertainty regarding projected future financial results. Upon a change in facts and circumstances, management may conclude that sufficient positive evidence exists to support a reversal of, or decrease in, the valuation allowance in the future, which would favorably impact Stratus' results of operations. Stratus’ future results of operations may be negatively impacted by an inability to realize a tax benefit for future tax losses or for items that will generate additional deferred tax assets that are not more likely than not to be realized.


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The difference between Stratus' consolidated effective income tax rate of (20) percent in first-quarter 2022 and the U.S. Federal statutory income tax rate of 21 percent was primarily attributable to the release of a reserve on uncertain tax positions related to the 2015 through 2017 U.S. Federal tax audit, which was closed in the first quarter of 2022. The difference between Stratus' consolidated effective income tax rate of 13 percent in first-quarter 2021 and the U.S. Federal statutory income tax rate of 21 percent was primarily attributable to noncontrolling interests in subsidiaries, the presence of a full valuation allowance against certain U.S. Federal deferred tax assets as of March 31, 2021, and the Texas state margin tax.

9. BUSINESS SEGMENTS
As a result of the pending sale of Block 21, Stratus has two operating segments: Real Estate Operations and Leasing Operations. Block 21, which encompassed Stratus’ hotel and entertainment segments, along with some leasing operations, is reflected as discontinued operations.

The Real Estate Operations segment is comprised of Stratus’ real estate assets (developed for sale, under development and available for development), which consists of its properties in Austin, Texas (including the Barton Creek community; the Circle C community; the Lantana community, including a portion of Lantana Place planned for a multi-family phase now known as The Saint Julia, and the land for The Saint George and The Annie B); in Lakeway, Texas, located in the greater Austin area (Lakeway); in College Station, Texas (a portion of Jones Crossing and vacant pad sites); in Killeen, Texas (one vacant pad site at West Killeen Market); and in Magnolia, Texas (Magnolia Place), Kingwood, Texas (land for future multi-family development, for which a sale is pending, and a vacant pad site) and New Caney, Texas (New Caney), located in the greater Houston area.

The Leasing Operations segment is comprised of Stratus’ real estate assets, both residential and commercial, that are leased or available for lease and includes West Killeen Market, Lantana Place, Kingwood Place and the completed portion of Jones Crossing. The segment also included The Saint Mary until its sale in January 2021 and The Santal until its sale in December 2021.

Stratus uses operating income or loss to measure the performance of each segment. General and administrative expenses, which primarily consist of employee salaries, wages and other costs, are managed on a consolidated basis and are not allocated to Stratus’ operating segments. The following segment information reflects management determinations that may not be indicative of what the actual financial performance of each segment would be if it were an independent entity.

Revenues from Contracts with Customers. Stratus' revenues from contracts with customers follow (in thousands):
Three Months Ended March 31,
20222021
Real Estate Operations:
Developed property sales$ $4,040 
Undeveloped property sales 2,500 
Commissions and other19 16 
19 6,556 
Leasing Operations:
Rental revenue3,080 4,818 
3,080 4,818 
Total revenues from contracts with customers$3,099 $11,374 

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Financial Information by Business Segment. The following segment information was prepared on the same basis as Stratus’ consolidated financial statements (in thousands).
Real Estate
Operationsa
Leasing Operations
Corporate, Eliminations and Otherb
Total
Three Months Ended March 31, 2022:   
Revenues:
Unaffiliated customers$19 $3,080 $ $3,099 
Intersegment4  (4) 
Cost of sales, excluding depreciation1,366 984  2,350 
Depreciation25 852 (4)873 
General and administrative expenses  3,167 
c
3,167 
Gain on sale of assets (4,812)
d
 (4,812)
Operating (loss) income$(1,368)$6,056 $(3,167)$1,521 
Capital expenditures and purchases and development of real estate properties
$4,864 $14,542 $182 $19,588 
Total assets at March 31, 2022254,212 106,652 183,904 
e
544,768 
Three Months Ended March 31, 2021:
Revenues:
Unaffiliated customers$6,556 $4,818 $ $11,374 
Intersegment4  (4) 
Cost of sales, excluding depreciation4,360 

2,052  6,412 
Depreciation
64 1,544 (22)1,586 
General and administrative expenses  4,324 4,324 
Gain on sale of assets (22,931)
f
 (22,931)
Operating income (loss)
$2,136 $24,153 $(4,306)$21,983 
Capital expenditures and purchases and development of real estate properties
$2,489 $902 $107 $3,498 
Total assets at March 31, 2021161,488 180,758 
g
159,625 
e
501,871 
a.Includes sales commissions and other revenues together with related expenses.
b.Includes consolidated general and administrative expenses and eliminations of intersegment amounts.
c.The decrease in first-quarter 2022, compared to first-quarter 2021, is primarily the result of $0.8 million incurred in first-quarter 2021 for consulting, legal and public relation costs for Stratus' successful proxy contest and the real estate investment trust exploration process as well as a $0.5 million decrease in employee incentive compensation costs associated with the PPIP.
d.Represents a gain recognized on the reversal of accruals for costs to lease and construct buildings under a master lease arrangement that Stratus entered into in connection with its sale of The Oaks at Lakeway in 2017.
e.Includes assets held for sale associated with discontinued operations at Block 21, which totaled $151.2 million at March 31, 2022, and $140.5 million at March 31, 2021.
f.Represents the gain on the January 2021 sale of The Saint Mary.
g.Includes $68.5 million of assets held for sale related to The Santal, which was sold in the fourth quarter of 2021.

10. SUBSEQUENT EVENTS
Stratus evaluated events after March 31, 2022, and through the date the financial statements were issued, and determined any events or transactions occurring during this period that would require recognition or disclosure are appropriately addressed in these financial statements.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

In Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A), “we,” “us,” “our” and "Stratus" refer to Stratus Properties Inc. and all entities owned or controlled by Stratus Properties Inc. You should read the following discussion in conjunction with our consolidated financial statements and accompanying notes, related MD&A and discussion of our business and properties included in our Annual Report on Form 10-K for the year ended December 31, 2021 (2021 Form 10-K) filed with the United States (U.S.) Securities and Exchange Commission (SEC) and the unaudited consolidated financial statements and accompanying notes included in this Form 10-Q. The results of operations reported and summarized below are not necessarily indicative of future operating results, and future results could differ materially from those anticipated in forward-looking statements (refer to “Cautionary Statement” and Part II, Item 1A. “Risk Factors” herein and Part I, Item 1A. “Risk Factors” of our 2021 Form 10-K for further discussion). All subsequent references to “Notes” refer to Notes to Consolidated Financial Statements (Unaudited) located in Part I, Item 1. “Financial Statements” herein, unless otherwise stated.

OVERVIEW

We are a diversified real estate company with headquarters in Austin, Texas. We are engaged primarily in the acquisition, entitlement, development, management and sale of commercial, and multi-family and single-family residential real estate properties, and real estate leasing in the Austin, Texas area, and other select, fast-growing markets in Texas. We generate revenues and cash flows from the sale of our developed properties and the lease of our retail, mixed-use and multi-family properties. Refer to Note 9 for discussion of our operating segments and “Business Strategy” below for a discussion of our business strategy.

Block 21 is our wholly owned mixed-use real estate property located on a two-acre city block in downtown Austin that contains the W Austin Hotel, consisting of a 251-room luxury hotel, and office, retail and entertainment space. In October 2021, we entered into new agreements to sell Block 21 to Ryman Hospitality Properties, Inc. (Ryman) for $260.0 million, subject to an expected downward adjustment of $5.0 million. The transaction is expected to close prior to June 1, 2022, but remains subject to the timely satisfaction or waiver of various closing conditions. The sale of Block 21 would eliminate our Hotel and Entertainment segments. As a result, our hotel and entertainment operations, as well as the leasing operations associated with Block 21, are reported as discontinued operations for all periods presented in the financial statements included in this Form 10-Q. Refer to "Results of Operations - Discontinued Operations" and Note 4 for further discussion.

BUSINESS STRATEGY

Our portfolio consists of approximately 1,700 acres of undeveloped acreage and acreage under development for commercial and multi-family and single-family residential projects, as well as several completed commercial and residential projects.

Our primary business objective is to create value for stockholders by methodically developing and enhancing the value of our properties and then selling them or holding them for lease. Our full cycle development program of acquiring properties, securing and maintaining development entitlements, developing and stabilizing properties, and selling them or holding them as part of our leasing operations is a key element of our strategy. We may also seek to refinance properties, in order to benefit from the increased value of the property, from lower interest rates or in connection with holding them for lease once the properties have been completed and stabilized.

We believe that Austin and other select, fast-growing markets in Texas continue to be attractive locations. Many of our developments are in locations where development approvals have historically been subject to regulatory constraints, which has made it difficult to obtain or change entitlements. Most of our Austin properties, which are located in desirable areas with significant regulatory constraints, are entitled and have utility capacity for full buildout. As a result, we believe that through strategic planning, development and marketing, we can maximize and fully realize their value.

Our development plans require significant additional capital, which we may pursue through joint ventures or other arrangements. Our business strategy requires us to rely on cash flow from operations and debt financing as our primary sources of funding for our liquidity needs. However, we have increasingly relied on project-level equity financing of our subsidiaries. We have formed and expect to continue to pursue strategic relationships as part of our overall strategy for particular development projects and may enter into similar equity financing arrangements in the future. See Note 3 for further discussion.
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As described in this report and in our 2021 Form 10-K, in December 2021, one of our wholly owned subsidiaries sold The Santal multi-family property for $152.0 million, which after closing costs and payment of the outstanding project loan, generated net proceeds of approximately $74 million. In January 2021, one of our subsidiaries sold The Saint Mary multi-family property for $60.0 million of which we received approximately $21.9 million after closing costs, payment of the construction loan, reserves for remaining costs of the partnership and distributions to noncontrolling interest owners. Net proceeds of the sales were used to pay down the balance of our $60.0 million Comerica Bank credit facility and for other corporate purposes.

As previously mentioned, the sale of Block 21 is expected to close prior to June 1, 2022, but remains subject to the timely satisfaction or waiver of various closing conditions. If completed, the sale of Block 21 will result in substantial additional cash proceeds of approximately $115 million pre-tax and $90 million after-tax (before prorations, but including post-closing escrow amounts).

Our Board of Directors (Board) and management team are engaged in a strategic planning process, which includes consideration of the uses of proceeds from sales in 2021 and the pending sale of Block 21, and of our long-term business strategy. Potential uses of proceeds may include a combination of further deleveraging, returning cash to shareholders and reinvesting in our project pipeline. We expect to provide additional information after the Block 21 transaction is concluded and our Board and management have had the opportunity to assess market conditions and the capital requirements for our development pipeline.

OVERVIEW OF FINANCIAL RESULTS FOR FIRST-QUARTER 2022
As a result of the pending sale of Block 21, we have two operating segments: Real Estate Operations and Leasing Operations. Block 21, which encompassed our hotel and entertainment segments, along with some leasing operations, is reflected as discontinued operations. We operate primarily in Austin, Texas and in other select, fast-growing markets in Texas.

Our Real Estate Operations encompass our activities associated with our acquisition, entitlement, development, and sale of real estate. The current focus of our real estate operations is multi-family and single-family residential properties and retail and mixed-use properties. We may sell or lease the real estate we develop, depending on market conditions. Real estate that we develop and then lease becomes part of our Leasing Operations. Revenue in our Real Estate Operations may be generated from the sale of properties that are developed, undeveloped or under development, depending on market conditions. Developed property sales can include an individual tract of land that has been developed and permitted for residential use or a developed lot with a residence already built on it. In addition to our developed properties, we have a development portfolio that consists of approximately 1,700 acres of commercial and multi-family and single-family residential projects under development or undeveloped land held for future use.

Revenue in our Leasing Operations is generated from the lease of space at retail and mixed-use properties that we developed and the lease of residences in the multi-family projects that we developed. We also generate income from the sale of our leased properties, depending on market conditions.

Our revenues totaled $3.1 million in first-quarter 2022, compared with $11.4 million in first-quarter 2021. The decrease in revenues in first-quarter 2022, compared to first-quarter 2021, is primarily a result of no real estate sales occurring in first-quarter 2022 because of a decrease in available inventory of developed properties in our Real Estate Operations segment and a decrease in leasing revenue as a result of the sales of The Saint Mary and The Santal multi-family projects in 2021. Refer to "Results of Operations" below for further discussion of our segments.

Our net income attributable to common stockholders totaled $2.3 million, or $0.27 per diluted share in first-quarter 2022, compared to $8.9 million, or $1.08 per diluted share, in first-quarter 2021. Our results for first-quarter 2022 included a $4.8 million pre-tax gain recognized on the reversal of accruals for costs to lease and construct buildings under a master lease arrangement that Stratus entered into in connection with its sale of The Oaks at Lakeway in 2017. Refer to Note 4 under the heading “The Oaks at Lakeway” for additional discussion. Net income attributable to common stockholders in first-quarter 2021 included a $22.9 million pre-tax gain ($16.2 million net of noncontrolling interests) on the January 2021 sale of The Saint Mary, a 240-unit luxury garden-style multi-family project in the Circle C community, partially offset by a $2.5 million net loss from discontinued operations as our hotel and entertainment operations were impacted by the COVID-19 pandemic.

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RECENT DEVELOPMENT ACTIVITIES
Current Residential Activities

Barton Creek
In first-quarter 2022, we sold no residential units or lots. As of March 31, 2022, two developed Amarra Drive Phase III lots remained unsold.

The Villas at Amarra Drive (Amarra Villas) project is a 20-unit development in the Barton Creek community for which we completed construction of the first seven homes during 2017 and 2018. We sold the last two completed homes in 2019. We began construction on the next two Amarra Villas homes during the first quarter of 2020, which are expected to be completed in mid-2022. In 2021, we began construction of one additional home and in March 2022, we began construction on another two homes. As of May 13, 2022, two homes were under contract to sell (one which we began construction on in 2020 and one which we began construction on in 2021). As of May 13, 2022, a total of 11 units (3 of which are under construction and 8 of which construction has not started) remain available for sale of the initial 20-unit project.

In third-quarter 2021, we began construction on The Saint June, a 182-unit luxury garden-style multi-family project within the Amarra development. The Saint June is expected to be comprised of multiple buildings featuring one, two and three bedroom units for lease with amenities that include a resort-style clubhouse, fitness center, pool and extensive green space. The first units of The Saint June are currently expected to be completed in fourth-quarter 2022 with completion of the project expected in first-quarter 2023. This project is being built consistent with our sustainability, wellness and conservation goals.

We continue to progress the development plans for Holden Hills, our final large residential development within the Barton Creek community consisting of 495 acres and designed to feature 475 unique residences to be developed in multiple phases with a focus on health and wellness, sustainability and energy conservation. We currently expect to secure final permits to start construction in September 2022. Subject to obtaining financing and other market conditions, we currently expect to complete site work for Phase I, including the construction of road, utility, drainage and other required infrastructure, approximately 17 months from the issuance of our final permits. Accordingly, our current projections anticipate that we could begin closing sales of certain home sites in Holden Hills in late 2024. We may sell the developed home sites, or may elect to build and sell, or build and lease, homes on some or all of the home sites, depending on financing and market conditions.
Using a conceptual approach similar to that used for Holden Hills, we continue to progress the development plans for Section N, our approximately 570-acre tract located along Southwest Parkway in the southern portion of the Barton Creek community. If successful, this new project would be designed as a dense, mid-rise, mixed-use project surrounded by an extensive greenspace amenity, resulting in a significant potential increase in development density, as compared to our prior plans.

The Annie B
In September 2021, we purchased the land and announced plans for The Annie B, a proposed luxury high-rise rental project in downtown Austin to be developed as a 400-foot tower, consisting of approximately 420,000 square feet with approximately 300 luxury multi-family units for lease and ground level retail. We currently expect to finalize development plans, secure development financing and begin construction by late 2022 or early 2023. This project will be built consistent with our sustainability, wellness and conservation goals.

The Saint George
In December 2021, we purchased the land for The Saint George, a proposed 316-unit luxury wrap-style multi-family project to be constructed in north-central Austin. While we continue the planning for the project and obtaining the entitlement and permit approvals, we currently expect to begin construction in the second quarter of 2022 and to achieve substantial completion by mid-2024. We are negotiating a construction loan for the project.

Lantana Multi-Family, Kingwood Place and Other Residential
We have advanced development plans for the multi-family component of Lantana Place, a partially developed, mixed-use development project located south of Barton Creek in Austin, and, subject to securing an acceptable capital structure and other market conditions, currently expect to begin construction in third-quarter 2022 with expected completion in mid-2024. The multi-family component is now known as The Saint Julia and is expected to consist of 306 units.
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We are evaluating a sale of a portion of the land for the single-family and multi-family residential components of Magnolia Place, an H-E-B, L.P (H-E-B) grocery shadow-anchored, mixed-use project in Magnolia, Texas. We also continue to evaluate options for the multi-family component of Jones Crossing, an H-E-B grocery anchored, mixed-use development located in College Station, Texas.

In September 2021, we entered into a contract to sell a multi-family tract of land currently planned for approximately 275 multi-family units for $5.5 million at Kingwood Place, an H-E-B grocery anchored, mixed-use project in Kingwood, Texas