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UNITED
STATES
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SECURITIES
AND EXCHANGE COMMISSION
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Washington,
D.C. 20549
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FORM
10-K
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(Mark
One)
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[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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For
the fiscal year ended December 31, 2008
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OR
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[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For
the transition period from
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to
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Commission
File Number: 0-19989
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Stratus
Properties Inc.
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(Exact
name of registrant as specified in its
charter)
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Delaware
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72-1211572
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(State
or other jurisdiction of
incorporation
or organization)
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(IRS
Employer Identification No.)
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98
San Jacinto Blvd., Suite 220
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Austin,
Texas
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78701
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(Address
of principal executive offices)
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(Zip
Code)
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(512)
478-5788
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(Registrant's
telephone number, including area
code)
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Securities
registered pursuant to Section 12(b) of the Act:
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Title
of each class
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Name
of each exchange on which registered
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Common
Stock, par value $0.01 per share
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NASDAQ
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Preferred
Stock Purchase Rights
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NASDAQ
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Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities
Act 0 Yes R
No
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. 0 Yes R
No
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90
days. 0 Yes R
No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of the registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. 0
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). ÿ0 Yes
ÿ0 No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, non-accelerated filer or a smaller reporting
company. See definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act. (Check one): 0 Large
accelerated filer R Accelerated
filer 0
Non-accelerated filer 0 Smaller
reporting company
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the
Act). 0 Yes R
No
The
aggregate market value of common stock held by non-affiliates of the registrant
was approximately $31.3 million on May 31, 2009, and approximately $85.1 million
on June 30, 2008.
Common
stock issued and outstanding was 7,435,133 shares on May 31, 2009, and 7,636,341
shares on June 30, 2008.
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STRATUS PROPERTIES INC.
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TABLE
OF CONTENTS
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S-1
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F-1
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E-1
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PART I
Item
1. Business
Except
as otherwise described herein or the context otherwise requires, all references
to “Stratus,” “we,” “us,” and “our” in this Form 10-K refer to Stratus
Properties Inc. and all entities owned or controlled by Stratus Properties Inc.
All of our periodic report filings with the Securities and Exchange Commission
(SEC) pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934,
as amended, are available, free of charge, through our web site,
www.stratusproperties.com, including our annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and any amendments to those
reports. These reports and amendments are available through our web site as soon
as reasonably practicable after we electronically file or furnish such material
to the SEC. All subsequent references to “Notes” in this report refer to the
Notes to Consolidated Financial Statements located in Item 8. of this Form
10-K.
Overview
We are
engaged in the acquisition, development, management, operations and sale of
commercial, multi-family and residential real estate properties located
primarily in the Austin, Texas area.
Our
principal real estate holdings are in southwest Austin, Texas. We also own
undeveloped commercial property in San Antonio, Texas. The number of developed
lots, developed or under development acreage and undeveloped acreage as of
December 31, 2008, that comprise our principal properties are presented in the
following table.
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Acreage
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Developed
or Under Development
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Undeveloped
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Developed
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Single
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Multi-
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Single
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Total
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Lots
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Family
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family
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Commercial
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Total
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Family
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Commercial
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Total
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Acreage
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Austin
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Barton
Creek
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125
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358
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249
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376
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983
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510
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20
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530
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1,513
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Lantana
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-
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-
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-
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-
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-
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-
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223
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223
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223
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Circle
C
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98
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a
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148
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a
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-
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265
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413
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-
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122
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122
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535
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W
Austin Hotel
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&
Residences
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2
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b
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2
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-
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-
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2
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San Antonio
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Camino
Real
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-
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-
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-
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-
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-
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2
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2
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2
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Total
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223
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506
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249
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643
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1,398
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510
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367
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877
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2,275
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a.
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Relates
to Meridian, an 800-lot residential
development.
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b.
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Represents
a city block in downtown Austin planned for a mixture of hotel,
residential, retail, office and entertainment
uses.
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Our other
Austin holdings at December 31, 2008, consisted of two 75,000-square-foot office
buildings at 7500 Rialto Boulevard (7500 Rialto) located in our Lantana
development, a 22,000-square-foot retail complex representing phase one of
Barton Creek Village and two retail buildings totaling 21,000 square feet at the
5700 Slaughter project in Circle C.
For
information about our operating segments see “Results of Operations” within
Items 7. and 7A. and Note 14.
Company Strategies and Development
Activities
Our
overall 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 also continue to
investigate and pursue opportunities for new projects that offer the possibility
of acceptable returns and risk. As a result of the settlement of certain
development-related lawsuits and an increasing level of cooperation with the
City of Austin (the City) regarding the development of our properties, we
substantially increased our development activities and expenditures during the
last five years (see discussion below), which has resulted in our debt
increasing to $63.4 million at December 31, 2008. We also had cash, cash
equivalents and investments in U.S. treasury securities of $32.5 million at
December 31, 2008. We have funded our development activities primarily through
sales proceeds, $40.0 million of unsecured term loans and our
expanded
credit facility (see “Credit Facility and Other Financing Arrangements” below
and Note 9), which was established as a result of the financing relationship we
have built with Comerica Bank (Comerica) over the past several years. In August
2002, the City granted final approval of a development agreement (Circle C
settlement) and permanent zoning for our real estate located within the Circle C
community, thereby establishing all essential municipal development regulations
applicable to our Circle C properties for 30 years (see “Development and Other
Activities” within Items 7. and 7A. and Note 13). The credit facility and other
sources of financing have increased our financial flexibility and, together with
the Circle C settlement, have allowed us to focus our efforts on developing our
properties, acquiring other properties and increasing shareholder value. In
addition, we continue to pursue additional development opportunities, and
currently believe we can obtain bank financing necessary for developing our
properties, although our ability to obtain bank financing in the future may be
impacted by the current United States (U.S.) economic conditions.
Our
progress towards accomplishing these goals includes the following:
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·
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Over
the past several years we have successfully permitted and developed
significant projects in our Barton Creek and Lantana project
areas.
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Barton
Creek
Calera. In 2002,
we secured subdivision plat approval for a new residential subdivision called
Calera, which consists of 155 lots. During 2004, we began construction of 16
courtyard homes at Calera Court, the 16-acre initial phase of the Calera
subdivision. The second phase of Calera, Calera Drive, consisting of 53
single-family lots, many of which adjoin Fazio Canyons Golf Course, received
final plat and construction permit approval in 2005. In the third quarter of
2005, development of these lots was completed and the initial lots were sold. As
of December 31, 2008, four courtyard homes at Calera Court and eight lots at
Calera Drive remained unsold. Construction of the final phase, known as Verano
Drive, began in the first quarter of 2007 and was completed in July 2008. Verano
Drive includes 71 single-family lots, three of which were sold in July
2008.
Amarra
Drive. During 2007, we completed development of Amarra Drive
Phase I, the initial phase of the Amarra Drive subdivision. Amarra Drive Phase I
includes eight lots, one of which was sold in September 2007, with sizes ranging
from approximately one to four acres, some of which are course-side lots on the
Fazio Canyons Golf Course and others are secluded lots adjacent to the Nature
Conservancy of Texas. In January 2008, we commenced development of Amarra Drive
Phase II, which consists of 35 lots on 51 acres and two townhome tracts on 31
acres. Development was substantially completed in October 2008.
Mirador and Escala
Drive. We completed construction of Mirador, a subdivision
within the Barton Creek community adjoining the Escala Drive subdivision. We
developed 34 estate lots in the Mirador subdivision, with each lot averaging
approximately 3.5 acres in size, and have sold 32 of these lots. As of December
31, 2008, we owned two Mirador estate lots. By the end of 2006, we had sold all
of the 54 lots at Escala Drive in the Barton Creek community.
Wimberly
Lane. During 1999, we completed the development of 75
residential lots at the Wimberly Lane subdivision at Barton Creek, all of which
were sold by the end of 2003. During 2004, we completed the development of 47
lots in the second phase of Wimberly Lane (Wimberly Lane Phase II), and we also
entered into a contract with a national homebuilder to sell 41 of these Wimberly
Lane Phase II lots. We sold the last homebuilder lot in January 2008 and have
one Wimberly Lane lot remaining for sale.
Barton Creek
Village. In the second quarter of 2007, we completed the first
phase of Barton Creek Village, which includes a 22,000-square-foot retail
complex. In July 2007, we began construction of a 3,300-square-foot bank
building within this retail complex, and it was completed in early 2008. As of
December 31, 2008, the first retail complex was 71 percent leased and the bank
building is leased through 2022. Construction of the second retail complex is
expected to begin during 2010.
Lantana
Lantana
is a partially developed, mixed-use real-estate development project. As of
December 31, 2008, we had remaining entitlements for approximately 1.0 million
square feet of office and retail use on 223 acres. Regional utility and road
infrastructure is in place with capacity to serve Lantana at full build-out
permitted under our existing entitlements.
In 2006,
we sold 7000 West for $22.3 million (see “Discontinued Operations” below and
Note 12) and a 58-acre tract at Lantana to Advanced Micro Devices, Inc. (NYSE:
AMD) for $21.2 million. As demand for office space within Lantana increased, we
constructed a second 75,000-square-foot office building at 7500 Rialto
Boulevard, which was completed in September 2006. As of December 31, 2008,
occupancy was 97 percent for the first Rialto Boulevard office building and 100
percent for the second office building.
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In
December 2006, we purchased a city block in downtown Austin, Texas to
develop as a multi-use property.
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The W Austin Hotel &
Residences
In
December 2006, we acquired a city block in downtown Austin for $15.1 million.
The project, known as the W Austin Hotel & Residences project, is planned
for a mixture of hotel, residential, retail, office and entertainment uses on
approximately two acres. We have executed agreements with Starwood Hotels &
Resorts Worldwide, Inc. for the development of a W Hotel & Residences on the
site. Effective May 1, 2008, we entered into a joint venture with Canyon-Johnson
Urban Fund II, L.P., (Canyon-Johnson) for the development of the W Austin Hotel
& Residences project (see Note 6). At December 31, 2008, we had $2.1 million
of borrowings outstanding under the W Austin Hotel & Residences project
construction loan and total remaining commitments available of approximately
$163 million (see Note 9). Construction of the $300 million project commenced in
the second quarter of 2008 and is proceeding as scheduled. See Note 15 for
additional discussion of Corus Bank, N.A. (Corus), the bank providing the
construction loan.
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·
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We
have made significant progress in obtaining the permitting necessary to
pursue development of additional Austin-area
properties.
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Circle C
Community
We
obtained permits and approvals necessary to develop 1.16 million square feet of
commercial space, 504 multi-family units and 830 single-family residential lots.
The Circle C settlement, effective August 2002, firmly established all essential
municipal development regulations applicable to our Circle C properties for 30
years. The City also provided us $15 million of cash incentives in connection
with our future development of our Circle C and other Austin-area properties.
These incentives, which are in the form of Credit Bank capacity, can be used for
City fees and for reimbursement of certain infrastructure costs. Annually, we
may elect to sell up to $1.5 million of the incentives to other developers for
their use in paying City fees related to their projects. As of December 31,
2008, we have permanently used $8.2 million of our City-based incentives
including cumulative sales of $4.1 million to other developers, and we also have
$2.8 million in Credit Bank capacity in use as temporary fiscal deposits. At
December 31, 2008, unencumbered Credit Bank capacity was $4.0
million.
We are
developing the Circle C community based on the entitlements secured in our
Circle C settlement with the City, as amended in 2004. In 2005, we commenced the
first phase of construction and contracted to sell a total of 494 of a total 800
lots in our Meridian project to three national homebuilders in four phases.
Sales for each of the four phases commence upon substantial completion of
development for that phase, and continue every quarter until all of the lots
have been sold. The first and second phases each consisted of 134 lots. The
first phase was substantially completed at the end of 2005. Development of the
second phase was substantially completed in March 2006. Development of the
108-lot third phase of Meridian was completed in September 2007. The 118-lot
fourth phase commenced in early 2008 and was completed in June
2008.
In 2006,
we signed another contract with a national homebuilder for 42 additional lots.
Development of those lots commenced in April 2007 and substantial completion
occurred in April 2008. Construction of the final phase of Meridian, which
consists of 57 one-acre lots, is expected to commence in 2010.
In
addition, several retail sites at the Circle C community received final City
approvals and are being developed. In the third quarter of 2008, we completed
the construction of two retail buildings totaling 21,000 square feet at the 5700
Slaughter project. This retail project also includes a 4,000-square-foot
building on an existing ground lease. Leasing for the two buildings is under way
with 22 percent of the 21,000-square-foot retail complex leased as of December
31, 2008, and the initial tenants have opened for business. We expect the
21,000-square-foot retail complex to be fully leased by the end of
2009.
The
Circle C community also includes Parkside Village, an 80,000-square-foot planned
retail project. The project will be developed in two phases. The first phase
will consist of a 34,000-square-foot building to accommodate a full-service
restaurant and theater. The second phase will consist of three tilt-wall retail
buildings at 14,775 square feet, 8,075 square feet and 7,600 square feet, and
two pads available for ground leases. We are pursuing final permits and
entitlements to position the project for commencement of construction when
appropriate.
Escarpment
Village, a 168,000-square-foot retail project anchored by a grocery store,
opened in May 2006. On October 12, 2007, we sold Escarpment Village for $46.5
million, before closing costs and other adjustments (see “Discontinued
Operations” below and Note 12).
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·
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We
believe that we have the potential right to receive approximately $13.8
million of future reimbursements associated with previously incurred
Barton Creek utility infrastructure development
costs.
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At
December 31, 2008, we had approximately $4.1 million of expected future
reimbursements of previously incurred costs recorded as a component of “Real
estate, commercial leasing assets and facilities, net” on our balance sheet. The
remaining potential future reimbursements are not recorded on our balance sheet
because they relate to costs incurred prior to the 1995 formation of the Barton
Creek Municipal Utility District (MUD). Since these costs pre-date the formation
of the MUDs, there is less certainty in their potential reimbursement. Costs
incurred after the 1995 formation of the MUDs were capitalized into property
costs and subsequently expensed through cost of sales as properties sold. A
significant portion of the substantial additional costs which we will incur in
the future as our development activities at Barton Creek continue, is expected
to be eligible for reimbursement. We received total infrastructure
reimbursements, comprised of Barton Creek MUD reimbursements, of $7.2 million
during 2008, $4.8 million during 2007 and $1.6 million during 2006.
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·
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We
completed the development and related sale of lots for a project in Plano,
Texas.
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Deerfield
In
January 2004, we acquired the Deerfield property in Plano, Texas, for $7.0
million. The property was zoned and subject to a preliminary subdivision plan
for 234 residential lots. We executed agreements with a national homebuilder,
whereby the homebuilder paid us $1.4 million for an option to purchase all 234
lots over 36 monthly take-downs. The net purchase price for each of the 234 lots
was $61,500, subject to certain terms and conditions. The $1.4 million
non-refundable option payment was applied against subsequent purchases of lots
by the homebuilder after certain thresholds were achieved and was recognized by
us as income as lots were sold. In October 2005, we executed a revised agreement
with the homebuilder, increasing the lot sizes and average purchase price to
$67,150 based on a new total of 224 lots. In January 2008, we sold the remaining
lots.
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·
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We
formed a joint venture in November 2005 to purchase and develop a
multi-use property in Austin,
Texas.
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Crestview
Station
In
November 2005, we formed a joint venture partnership with Trammell Crow to
acquire an approximate 74-acre tract at the intersection of Airport Boulevard
and Lamar Boulevard in Austin, Texas for $7.7 million. The property, known as
Crestview Station, is a single-family, multi-family, retail and office
development, which is located on the future commuter rail line approved by City
voters. With Trammel Crow, we have completed environmental remediation, which
the State of Texas certified as complete in September 2007, and permitting the
property. Infrastructure development of Crestview Station is progressing. The
initial phase of utility and roadway infrastructure is under construction and
expected to be completed by the end of 2009. Crestview Station sold
substantially all of its multi-family and commercial properties in 2007. The
joint
venture
retained the single family component of Crestview Station and two commercial
sites, one of which was sold in the first quarter of 2008. The joint venture is
currently processing permits to develop the residential portion of Crestview
Station as a 450-unit transit-oriented neighborhood. At December 31, 2008, our
investment in the Crestview Station project totaled $2.3 million and the joint
venture partnership had $9.1 million of outstanding debt, of which we guarantee
$1.9 million (see Notes 8 and 15).
Credit Facility and Other Financing
Arrangements
Acquiring
and maintaining adequate financing is an important element of our business. For
information about our credit facility and other financing arrangements, see
“Credit Facility and Other Financing Arrangements” within Items 7. and 7A. and
Note 9.
Discontinued Operations
On March
27, 2006, we sold Stratus 7000 West Joint Venture (7000 West) and on October 12,
2007, we sold the Escarpment Village shopping center. As a result, 7000 West and
Escarpment Village are reported as discontinued operations and the consolidated
financial statements for all periods have been adjusted to reflect this
presentation. For information about our discontinued operations, see
“Discontinued Operations” within Items 7. and 7A. and Note 12.
Regulation and Environmental Matters
Our real
estate investments are subject to extensive local, city, county and state rules
and regulations regarding permitting, zoning, subdivision, utilities and water
quality as well as federal rules and regulations regarding air and water quality
and protection of endangered species and their habitats. Such regulation has
delayed and may continue to delay development of our properties and result in
higher developmental and administrative costs. See “Risk Factors.”
We have
made, and will continue to make, expenditures for the protection of the
environment with respect to our real estate development activities. Emphasis on
environmental matters will result in additional costs in the future. Based on an
analysis of our operations in relation to current and presently anticipated
environmental requirements, we currently do not anticipate that these costs will
have a material adverse effect on our future operations or financial
condition.
Employees
At
December 31, 2008, we had a total of 23 employees located at our Austin, Texas
headquarters. We do not have any union employees. We believe we have a good
relationship with our employees. Since January 1, 1996, numerous services
necessary for our business and operations, including certain executive,
administrative, accounting, financial, tax and other services, have been
performed by FM Services Company (FM Services) pursuant to a services
agreement. FM Services is a wholly owned subsidiary of
Freeport-McMoRan Copper & Gold Inc. Either party may terminate
the services agreement at any time upon 60 days notice or earlier upon mutual
written agreement.
Item
1A. Risk Factors
This
report includes “forward
looking statements”
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934, including statements about our plans,
strategies, expectations, assumptions and prospects. “Forward-looking
statements”
are all statements other than statements of historical fact, or current facts,
that address activities, events, outcomes and other matters that we plan,
expect, intend, assume, believe, budget, predict, forecast, project, estimate or
anticipate (or other similar expressions) will, should or may occur in the
future, such as: statements regarding our financial plans; our indebtedness;
share repurchases; strategic plans; future financing plans; development and
capital expenditures; obtaining necessary permits for new developments; and
other plans and objectives.
Forward-looking
statements are based on our assumptions and analysis made in light of our
experience and perception of historical trends, current conditions, expected
future developments and other factors that we believe are appropriate under the
circumstances. These statements are subject to a number of assumptions, risks
and uncertainties, including the risk factors discussed below and in our other
filings with the SEC, general economic and business conditions, the business
opportunities that may be presented to and pursued by us, changes in laws or
regulations and other factors, many of which are beyond our control. Readers are
cautioned that forward-looking statements are not guarantees of future
performance, and the actual results or developments may differ materially from
those projected, predicted or assumed in the forward-looking statements.
Important factors that could cause actual results to differ materially from our
expectations include, among others, the following:
Economic conditions could negatively
impact our business.
Our
business is affected by local, national and worldwide economic conditions and
the condition and levels of activity in the real estate industry. During 2008,
worldwide economic conditions significantly deteriorated, and the U.S. economy
and most other major economies entered a recessionary period. We are unable to
predict how long these global recessionary conditions will continue, but it is
reasonable to expect that our financial performance will continue to be
adversely affected as long as current conditions continue.
The
continuation of the current recessionary environment could also pose a threat to
the ability of our insurers, suppliers, customers and financial institutions to
perform their obligations. Although we monitor the creditworthiness of the third
parties with whom we do business, if any such party fails to perform, our
financial results could be adversely affected and we could incur losses and our
liquidity could be negatively impacted.
A
prolonged recession could result in a lower level of economic activity,
decreased real estate development and increased uncertainty regarding real
estate prices and the capital and credit markets. A lower level of real estate
development could have a material adverse effect on our business, which may also
adversely affect our revenues. If the capital and credit markets continue to
experience volatility and the availability of funds remains limited, we may
incur increased costs associated with any additional financing we may require
for future operations.
We
are vulnerable to concentration risks because our operations are almost
exclusive to the Austin, Texas, market.
Our real
estate activities are almost entirely located in Austin, Texas. Because of our
geographic concentration and limited number of projects, our operations are more
vulnerable to local economic downturns and adverse project-specific risks than
those of larger, more diversified companies. The performance of the Austin
economy greatly affects our sales and consequently the underlying values of our
properties. Our geographic concentration may create increased vulnerability
during regional economic downturns, which can significantly affect our financial
condition and results of operations.
To
continue development of the W Austin Hotel & Residences project, we may need
to obtain additional financing, which could be difficult in the current credit
market.
We
currently have agreements with third parties to support the funding and
development of our W Austin Hotel & Residences project. In May 2008, the
joint venture entered into a construction loan agreement with Corus under which
the joint venture has the ability to borrow up to an aggregate of $165 million
to fund the construction, development and marketing costs of the W Austin Hotel
& Residences project. On February 18, 2009, Corus
entered
into a written agreement with the Federal Reserve Bank of Chicago and a consent
order with the Office of the Comptroller of the Currency (collectively, the
Regulatory Agreements). We are unsure how the Regulatory Agreements
will affect the construction loan agreement. As a result of the
continued downturn in the real estate industry, current market and economic
conditions, and Corus’ entry into the Regulatory Agreements, Corus may become
unable or unwilling to fund any of our joint venture’s future borrowing
requests. We are pursuing other options for financing the W Austin
Hotel & Residences project, including additional equity contributions by
Stratus and our joint venture partner, obtaining financing from other financial
institutions, admitting new equity partners, or a combination of these
alternatives, if Corus fails to fulfill its obligations. Alternate
financing may not be available on favorable terms, if at all. If Corus is unable
or unwilling to fulfill its funding obligations, and if alternate financing
cannot be obtained, we may be required to delay further construction of the
project until additional sources of financing are available or we may be
required to write down our investment at amounts that could be
significant.
We
currently participate in two joint ventures and may participate in other joint
ventures in the future. We could be adversely impacted if any of our
joint venture partners would fail to fulfill their obligations or if we had
disagreements with any of our joint venture partners.
We
currently have investments in and commitments to two joint ventures with
unrelated parties to develop land and we may participate in other joint ventures
in the future. Under existing joint venture agreements, we and our joint venture
partners could be required to, among other things, provide guarantees of
obligations or contribute additional capital until specified capital
contribution requirements are met and we may have little or no control over the
amount or timing of these obligations. In some circumstances,
decisions of the joint venture are made by unanimous vote of the partners. As a
result of the continued downturn in the real estate industry and current market
and economic conditions, our existing joint ventures or the joint venture
partners may become unable or unwilling to fulfill their economic or other
obligations. If our joint venture partners are unable or unwilling to
fulfill their obligations or if we have any disagreements with our joint venture
partners, we may be required to fulfill those obligations alone, expend
additional resources to continue development of projects or delay further
construction of projects, or we may be required to write down our investments at
amounts that could be significant.
We may
participate in other joint ventures in the future, which could subject us to
certain risks, which may not otherwise be present, including:
|
·
|
the
potential that our joint venture partner may not
perform;
|
|
·
|
the
joint venture partner may have economic, business or legal interests or
goals that are inconsistent with or adverse to our interests or goals or
the goals of the joint venture;
|
|
·
|
the
joint venture partner may take actions contrary to our requests or
instructions or contrary to our objectives or
policies;
|
|
·
|
the
joint venture partner might become bankrupt or fail to fund its share of
required capital contributions;
|
|
·
|
we
and the joint venture partner may not be able to agree on matters relating
to the property; and
|
|
·
|
we
may become liable for the actions of our third-party joint venture
partners.
|
Any
disputes that may arise between joint venture partners and us may result in
litigation or arbitration that would increase our expenses and prevent us from
focusing our time and effort on the business of the joint ventures.
If
we are unable to generate sufficient cash from operations, we may find it
necessary to curtail our development activities.
Significant
capital resources will be required to fund our development expenditures. Our
performance continues to depend on future cash flows from real estate sales and
rental income, and there can be no assurance that we will generate sufficient
cash flow or otherwise obtain sufficient funds to meet the expected development
plans for our properties.
If
we are not able to obtain suitable financing or our credit ratings are lowered,
our business and results of operations may decline.
Our
business and results of operations depend substantially on our ability to obtain
financing for our real estate developments. The availability of
financing from banks and the public debt markets has declined significantly.
Because
of the deterioration of the credit markets and the uncertainties that exist in
the economy and for real estate developers in general, we cannot be certain that
we will be able to replace existing financing or find additional sources of
financing on reasonable terms or at all. In such an event, we could
be precluded from sustaining our operations at current levels.
The
conditions of the capital markets may adversely affect our ability to draw on
our revolving credit facility as well as have an adverse effect on other
financial transactions.
Global
financial markets continue to be under considerable stress, and traditional
sources of equity and debt for capital or financing continue to be difficult to
find. In particular, the cost of raising funds from the debt and
equity capital markets has increased substantially while the availability of
funds has diminished significantly. Many lenders and institutional
investors have increased interest rates, enacted tighter lending or investment
standards, refused to refinance existing debt at maturity at all or on terms
similar to our current debt.
Because
of these factors, we cannot be certain that funding will be available if needed
and to the extent required, on acceptable terms. If funding is not available
when needed, or is available only on unfavorable terms, we may be unable to meet
our obligations as they come due or be required to post collateral to support
our obligations, or we may be unable to implement our development plan, enhance
our existing projects, complete projects or otherwise take advantage of business
opportunities or respond to competitive pressures, any of which could have a
material adverse effect on our revenues and results of operations.
If other
financial institutions that have extended credit commitments to us are adversely
affected by the conditions of the capital markets, they may become unable to
fund borrowings under our credit commitments with them, which could have a
material and adverse impact on our financial condition and our ability to borrow
additional funds, if needed, for working capital, capital expenditures,
acquisitions, investments, development and other corporate
purposes.
Our
indebtedness could adversely affect our operating results and financial
condition.
As of
December 31, 2008, the outstanding principal amount of our indebtedness was
$63.4 million. Our level of indebtedness could have important consequences. For
example, it could:
|
·
|
increase
our vulnerability to adverse changes in economic and industry
conditions;
|
|
·
|
require
us to dedicate a substantial portion of our cash flow from operations and
proceeds from asset sales to pay or provide for our indebtedness, thus
reducing the availability of cash flows to fund working capital, capital
expenditures, acquisitions, investments and other general corporate
purposes;
|
|
·
|
limit
our flexibility to plan for, or react to, changes in our business and the
market in which we operate;
|
|
·
|
place
us at a competitive disadvantage to our competitors that have less debt;
and
|
|
·
|
limit our
ability to borrow money to fund our working capital, capital expenditures,
debt service requirements and other financing
needs.
|
In
addition, the terms of the agreements governing our indebtedness include
restrictive covenants and require that certain financial ratios be maintained.
We may also need to incur additional indebtedness in the future in the ordinary
course of business to fund our development projects and our operations. If new
debt is added to current debt levels, the risks described above could intensify.
Further, if future debt financing is not available to us when required or is not
available on acceptable terms, as mentioned above, we may be unable to grow our
business, take advantage of business opportunities, respond to competitive
pressures or refinance maturing debt, any of which could have a material adverse
effect on our operating results and financial condition.
Our
results of operations, cash flows and financial condition are greatly affected
by the performance of the real estate industry.
The real
estate industry is highly cyclical and is affected by changes in national,
global and local economic conditions, which, as mentioned above, have
significantly deteriorated in the last year, and events, such as employment and
income levels, availability of financing, interest rates, consumer confidence
and overbuilding or decrease in demand. Our real estate activities are subject
to numerous factors beyond our control, including local real estate market
conditions (both where our properties are located and in areas where our
potential customers reside), substantial existing and potential competition,
general national, regional and local economic conditions, fluctuations in
interest rates and mortgage availability, changes in demographic conditions and
changes in government regulations or requirements. The occurrence of any of the
foregoing could result in a reduction or cancellation of sales and/or lower
gross margins for sales. Lower than expected sales as a result of these
occurrences could have a material adverse effect on the level of our profits and
the timing and amounts of our cash flows.
Real
estate investments often cannot easily be converted into cash and market values
may be adversely affected by these economic circumstances, market fundamentals,
competition and demographic conditions. Because of the effect these factors have
on real estate values, it is difficult to predict the level of future sales or
sales prices that will be realized for individual assets.
Mortgage
financing issues, including lack of supply of mortgage loans and tightened
lending requirements, could reduce demand for our products.
Our real
estate operations are dependent upon the availability and cost of mortgage
financing for potential customers, to the extent they finance their purchases,
and for buyers of the potential customers’ existing residences. Many mortgage
lenders and investors in mortgage loans are currently experiencing severe
financial difficulties arising from losses incurred on sub-prime and other loans
originated before the downturn in the real estate market. These factors have led
to a decrease in the availability of financing and an increase in the cost of
financing. These issues in the mortgage lending industry could adversely affect
potential purchasers of our products, negatively affecting demand for our
products.
If
the market value of our land and developments declines, our results of
operations will likely decrease.
The
market value of our land and our developments depend on market conditions. We
acquire land for expansion into new markets and for replacement of land
inventory and expansion within our current markets. If real estate demand
decreases below what we anticipated when we acquired our properties, we may not
be able to recover our investment in such property through sales or leasing, and
our profitability may be adversely affected. If the current recession
is prolonged, we may have additional write-downs to the carrying values of our
properties and/or be required to sell property at a loss.
Unfavorable
changes in market and economic conditions could negatively impact occupancy or
rental rates, which could negatively affect our profitability.
The
current market and economic conditions may significantly affect rental rates.
Occupancy and rental rates in our market, in turn, may significantly affect our
profitability and our ability to satisfy our financial obligations. The risks
that may affect conditions in our market include the following:
|
·
|
a
further deterioration in economic
conditions;
|
|
·
|
local
conditions, such as oversupply of office space, a decline in the demand
for office space or increased competition from other available office
buildings;
|
|
·
|
the
inability or unwillingness of tenants to pay their current rent or rent
increases; and
|
|
·
|
declines
in market rental rates.
|
We cannot
predict with certainty whether any of these factors will occur or whether, and
to what extent, they will have an adverse effect on our operations.
Our operations are subject to an
intensive regulatory approval process and opposition from environmental groups
that could cause delays and increase the costs of our development efforts or
preclude such developments entirely.
Before we
can develop a property, we must obtain a variety of approvals from local and
state governments with respect to such matters as zoning, and other land use
issues, subdivision, site planning and environmental issues under applicable
regulations. Some of these approvals are discretionary. Because government
agencies and special interest groups have in the past expressed concerns about
our development plans in or near Austin, our ability to develop these properties
and realize future income from our properties could be delayed, reduced,
prevented or made more expensive.
Several
special interest groups have long opposed our plans in the Austin area and have
taken various actions to partially or completely restrict development in some
areas, including areas where some of our most valuable properties are located.
We have actively opposed these actions and do not believe unfavorable rulings
would have a significant long-term adverse effect on the overall value of our
property holdings. However, because of the regulatory environment that has
existed in the Austin area and the opposition of several special interest
groups, there can be no assurance that our expectations will prove
correct.
Our
operations are subject to governmental environmental regulation, which can
change at any time and generally would result in an increase to our
costs.
Real
estate development is subject to state and federal regulations and to possible
interruption or termination because of environmental considerations, including,
without limitation, air and water quality and protection of endangered species
and their habitats. Certain of the Barton Creek properties include nesting
territories for the Golden-cheeked Warbler, a federally listed endangered
species. In 1995, we received a permit from the U.S. Wildlife Service pursuant
to the Endangered Species Act, which to date has allowed the development of the
Barton Creek and Lantana properties free of restrictions under the Endangered
Species Act related to the maintenance of habitat for the Golden-cheeked
Warbler.
Additionally,
in April 1997, the U.S. Department of Interior listed the Barton Springs
Salamander as an endangered species after a federal court overturned a March
1997 decision by the Department of Interior not to list the Barton Springs
Salamander based on a conservation agreement between the State of Texas and
federal agencies. The listing of the Barton Springs Salamander has not affected,
nor do we anticipate it will affect, our Barton Creek and Lantana properties for
several reasons, including the results of technical studies and our U.S. Fish
and Wildlife Service 10(a) permit obtained in 1995. The development permitted by
our 2002 Circle C settlement with the City has been reviewed and approved by the
U.S. Fish and Wildlife Service and, as a result, we do not anticipate that the
1997 listing of the Barton Springs Salamander will impact our Circle C
properties.
We are
making, and will continue to make, expenditures with respect to our real estate
development for the protection of the environment. Emphasis on environmental
matters will result in additional costs in the future. New environmental
regulations or changes in existing regulations or their enforcement may be
enacted and such new regulations or changes may require significant expenditures
by us. The recent trend toward stricter standards in environmental legislation
and regulations is likely to continue and could have an additional impact on our
operating costs.
The
real estate business is very competitive and many of our competitors are larger
and financially stronger than we are.
The real
estate business is highly competitive. We compete with a large number of
companies and individuals that have significantly greater financial, sales,
marketing and other resources than we have. Our competitors include local
developers who are committed primarily to particular markets and also national
developers who acquire properties throughout the U.S. The current downturn in
the real estate industry could significantly increase competition among
developers. Increased competition could cause us to increase our selling
incentives and/or reduce our prices. An oversupply of real estate properties
available for sale or lease, as well as the potential significant discounting of
prices by some of our competitors, may adversely affect the results of our
operations.
Our
operations are subject to natural risks.
Our
performance may be adversely affected by weather conditions that delay
development or damage property.
Our
common stock is thinly traded; therefore, our stock price may fluctuate more
than the stock market as a whole.
As a
result of the thin trading market for our stock, its market price may fluctuate
significantly more than the stock market as a whole or the stock prices of
similar companies. Without a larger float, our common stock will be less liquid
than the stock of companies with broader public ownership, and as a result, the
trading prices for our common stock may be more volatile. Among other things,
trading of a relatively small volume of common stock may have a greater impact
on the trading price than would be the case if public float were
larger.
Failure
to satisfy the listing requirements of the National Association of Securities
Dealers Automated Quotations (NASDAQ) stock market could result in our common
stock being delisted.
On May
15, 2009, we received a staff determination letter from NASDAQ stating that in
accordance with NASDAQ Marketplace Rule 5250(c)(1) our common stock is subject
to delisting for failure to file our annual report on Form 10-K for the year
ended December 31, 2008, by the May 14, 2009 extended filing deadline and
failure to timely file our quarterly report on Form 10-Q for the quarter ended
March 31, 2009, by the May 11, 2009 filing deadline. On May 22, 2009,
we requested a hearing to appeal NASDAQ’s determination, and also requested a
further stay on the delisting of our securities. We have been notified by NASDAQ
that the delisting action has been stayed pending our hearing scheduled for June
25, 2009. Accordingly, Stratus’ common stock will continue to be listed on
NASDAQ pending NASDAQ’s decision on the appeal. There can be no assurance,
however, that NASDAQ will grant our request to waive this requirement or that
our common stock will not be delisted.
If our
common stock is delisted from NASDAQ, our common stock would be traded
over-the-counter, more commonly known as OTC. OTC transactions involve risks in
addition to those associated with transactions in securities traded on NASDAQ.
Many OTC stocks trade less frequently and in smaller volumes than securities
traded on NASDAQ. Accordingly, our common stock would be less liquid,
and the value of our common stock could decline.
Item
1B. Unresolved Staff Comments
None.
Item
2. Properties
Our
developed lots, developed or under development acreage and undeveloped acreage
as of December 31, 2008, are presented in the following table. The undeveloped
acreage shown in the table is presented according to anticipated uses for
single-family lots, multi-family units and commercial development based upon our
understanding of the properties’ existing entitlements. However, there is no
assurance that the undeveloped acreage will be developed because of the nature
and cost of the approval and development process and market demand for a
particular use. Undeveloped acreage includes real estate that can be sold "as
is" (i.e., no infrastructure or development work has begun on such property). A
developed lot is an individual tract of land that has been developed and
permitted for residential use. A developed lot may be sold with a home already
built on it. As of December 31, 2008, we own only four lots with homes that have
already been built on them (the Calera Court homes). Developed acreage or
acreage under development includes real estate for which infrastructure work
over the entire property has been completed, is currently being completed or is
able to be completed and necessary permits have been obtained.
|
Acreage
|
|||||||||||||||||
|
Developed
or Under Development
|
Undeveloped
|
||||||||||||||||
|
Developed
|
Single
|
Multi-
|
Single
|
Total
|
|||||||||||||
|
Lots
|
Family
|
family
|
Commercial
|
Total
|
Family
|
Commercial
|
Total
|
Acreage
|
|||||||||
|
Austin
|
|||||||||||||||||
|
Barton
Creek
|
125
|
358
|
249
|
376
|
983
|
510
|
20
|
530
|
1,513
|
||||||||
|
Lantana
|
-
|
-
|
-
|
-
|
-
|
-
|
223
|
223
|
223
|
||||||||
|
Circle
C
|
98
|
a
|
148
|
a
|
-
|
265
|
413
|
-
|
122
|
122
|
535
|
||||||
|
W
Austin Hotel
|
|||||||||||||||||
|
&
Residences
|
-
|
-
|
-
|
2
|
b
|
2
|
-
|
-
|
-
|
2
|
|||||||
|
San Antonio
|
|||||||||||||||||
|
Camino
Real
|
-
|
-
|
-
|
-
|
-
|
-
|
2
|
2
|
2
|
||||||||
|
Total
|
223
|
506
|
249
|
643
|
1,398
|
510
|
367
|
877
|
2,275
|
||||||||
|
a.
|
Relates
to Meridian, an 800-lot residential
development.
|
|
b.
|
Represents
a city block in downtown Austin planned for a mixture of hotel,
residential, retail, office and entertainment
uses.
|
Our other
Austin holdings at December 31, 2008, consisted of two 75,000-square-foot office
buildings at 7500 Rialto Boulevard located in our Lantana development, a
22,000-square-foot retail complex representing phase one of Barton Creek Village
and two retail buildings totaling 21,000 square feet at the 5700 Slaughter
project in Circle C.
The
following table summarizes the estimated development potential of our
Austin-area acreage as of December 31, 2008:
|
Single
|
Commercial
|
|||||||
|
Family
|
Multi-family
|
Office
|
Retail
|
|||||
|
(lots)
|
(units)
|
(gross
square feet)
|
||||||
|
Barton
Creek
|
464
|
1,860
|
1,590,000
|
23,000
|
||||
|
Circle
C
|
57
|
-
|
760,000
|
200,000
|
||||
|
Lantana
|
-
|
-
|
1,365,000
|
400,000
|
||||
|
Austin
290 Tract
|
-
|
-
|
-
|
20,000
|
||||
|
Total
|
521
|
1,860
|
3,715,000
|
643,000
|
||||
Item
3. Legal Proceedings
We are
from time to time involved in various legal proceedings of a character normally
incident to the ordinary course of our business. We believe that potential
liability from any of these pending or threatened proceedings will not have a
material adverse effect on our financial condition or results of operations. We
maintain liability insurance to cover some, but not all, potential liabilities
normally incident to the ordinary course of our business as well as other
insurance coverage customary in our business, with such coverage limits as
management deems prudent.
Item
4. Submission of Matters to a Vote of Security
Holders
None.
PART II
Item
5. Market for Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
Performance
Graph
The
following graph compares the change in the cumulative total stockholder return
on our common stock with the cumulative total return of the Hemscott Real Estate
Development Group and the S&P 500 Stock Index from 2004 through 2008. This
comparison assumes $100 invested on December 31, 2003 in (a) our common stock,
(b) the Hemscott Real Estate Development Group and (c) the S&P 500 Stock
Index.
Comparison
of Cumulative Total Return*
Stratus
Properties Inc., Hemscott Real Estate
Development
Group and S&P 500 Stock Index
|
December
31,
|
||||||
|
2003
|
2004
|
2005
|
2006
|
2007
|
2008
|
|
|
Stratus
Properties Inc.
|
$ 100.00
|
$ 159.50
|
$ 232.14
|
$ 318.41
|
$ 337.71
|
$ 123.98
|
|
Hemscott
Real Estate
|
||||||
|
Development
Group
|
100.00
|
132.82
|
140.10
|
186.07
|
309.74
|
141.27
|
|
S&P
500 Stock Index
|
100.00
|
110.88
|
116.33
|
134.70
|
142.10
|
89.53
|
_______________
* Total
return assumes reinvestment of dividends.
Our
common stock trades on the National Association of Securities Dealers Automated
Quotation (NASDAQ) stock market under the symbol STRS. The following table sets
forth, for the periods indicated, the range of high and low sales prices of
Stratus’ common stock, as reported by NASDAQ.
|
2008
|
2007
|
||||||||
|
High
|
Low
|
High
|
Low
|
||||||
|
First
Quarter
|
$33.95
|
$23.98
|
$35.00
|
$28.50
|
|||||
|
Second
Quarter
|
30.49
|
16.86
|
40.73
|
29.96
|
|||||
|
Third
Quarter
|
30.75
|
15.72
|
35.92
|
25.91
|
|||||
|
Fourth
Quarter
|
27.91
|
10.10
|
36.33
|
27.37
|
|||||
As of May
15, 2009, there were 600 holders of record of our common stock. We have not in
the past paid, and do not anticipate in the future paying, cash dividends on our
common stock. The decision whether or not to pay dividends and in what amounts
is within the discretion of our Board of Directors. However, our current ability
to pay dividends is also restricted by terms of our credit agreement, as
discussed in management’s discussion and analysis and Note 9.
The
following table sets forth shares of our common stock that we repurchased during
the three-month period ended December 31, 2008.
|
Period
|
Total
Number of Shares Purchased
|
Average
Price Paid Per Share
|
Total
Number of Shares Purchased as Part of Publicly Announced Plans or
Programsa
|
Maximum
Number of Shares That May Yet Be Purchased Under the Plans or
Programsa
|
|||||
|
October
1 to 31, 2008
|
3,400
|
$
|
24.04
|
3,400
|
402,053
|
||||
|
November
1 to 30, 2008
|
1,908
|
15.43
|
1,908
|
400,145
|
|||||
|
December
1 to 31, 2008
|
190,000
|
b
|
10.00
|
190,000
|
210,145
|
||||
|
Total
|
195,308
|
10.30
|
195,308
|
||||||
|
a.
|
In
February 2001, our Board of Directors approved an open market share
purchase program for up to 0.7 million shares of our common stock. The
program does not have an expiration date. Our loan agreement with Comerica
provides a limit of $6.5 million for our common stock repurchases after
September 30, 2005. At December 31, 2008, $1.3 million remains available
under the Comerica agreement for purchases of our common
stock.
|
|
b.
|
Represents
shares purchased in a private transaction on December 24,
2008.
|
Item
6. Selected Financial Data
The
following table sets forth our selected historical financial data as of and for
each of the five years in the period ended December 31, 2008. The historical
financial information is derived from our audited financial statements
reflecting all adjustments (consisting only of normal and recurring items,
except as otherwise noted below) and is not necessarily indicative of our future
results. In addition, the historical results have been adjusted to reflect the
operations of Escarpment Village and Stratus 7000 West Joint Venture (7000 West)
as discontinued operations (see Note 12). You should read the information in the
table below together with Items 7. and 7A. “Management’s Discussion and Analysis
of Financial Condition and Results of Operation and Quantitative and Qualitative
Disclosures About Market Risk” and Item 8. “Financial Statements and
Supplementary Data.” Refer to Note 2 regarding revisions to previously issued
financial statements for the years ended December 31, 2007 and 2006, and at
December 31, 2007, relating to capitalization of interest and property taxes and
equity in unconsolidated affiliate’s income. Refer to footnote “c” below for
information regarding revisions to previously issued financial statements for
the years ended December 31, 2005 and 2004, and at December 31, 2006, 2005 and
2004, relating to capitalization of interest and property taxes.
|
2008
|
2007
|
2006
|
2005
c
|
2004
c
|
||||||||||||
|
(In
Thousands, Except Per Share Amounts)
|
||||||||||||||||
|
Years
Ended December 31:
|
||||||||||||||||
|
Revenues
|
$
|
18,783
|
$
|
27,164
|
$
|
61,875
|
$
|
35,194
|
$
|
17,725
|
||||||
|
Operating
(loss) income
|
(7,258
|
)
|
(543
|
)
|
22,638
|
7,954
|
33
|
|||||||||
|
Interest
income
|
1,448
|
849
|
370
|
226
|
71
|
|||||||||||
|
Equity
in unconsolidated affiliate’s
|
||||||||||||||||
|
income
|
562
|
982
|
-
|
-
|
-
|
|||||||||||
|
(Loss)
income from continuing
|
||||||||||||||||
|
operations
|
(3,732
|
)
|
2,609
|
30,318
|
8,107
|
104
|
||||||||||
|
(Loss)
income from discontinued
|
||||||||||||||||
|
operations,
net of taxes
|
(105
|
)a
|
11,180
|
a
|
9,142
|
a,
b
|
1,232
|
b
|
1,222
|
b
|
||||||
|
Net
(loss) income applicable to
|
||||||||||||||||
|
common
stock
|
(3,837
|
)
|
13,789
|
39,460
|
9,339
|
1,326
|
||||||||||
|
Basic
net (loss) income per share:
|
||||||||||||||||
|
Continuing
operations
|
$
|
(0.49
|
)
|
$
|
0.35
|
$
|
4.15
|
$
|
1.12
|
$
|
0.01
|
|||||
|
Discontinued
operations
|
(0.01
|
)a
|
1.48
|
a
|
1.25
|
a,
b
|
0.17
|
b
|
0.17
|
b
|
||||||
|
Basic
net (loss) income per share
|
$
|
(0.50
|
)
|
$
|
1.83
|
$
|
5.40
|
$
|
1.29
|
$
|
0.18
|
|||||
|
Diluted
net (loss) income per share:
|
||||||||||||||||
|
Continuing
operations
|
$
|
(0.49
|
)
|
$
|
0.34
|
$
|
3.96
|
$
|
1.06
|
$
|
0.01
|
|||||
|
Discontinued
operations
|
(0.01
|
)a
|
1.46
|
a
|
1.19
|
a,
b
|
0.16
|
b
|
0.16
|
b
|
||||||
|
Diluted
net (loss) income per share
|
$
|
(0.50
|
)
|
$
|
1.80
|
$
|
5.15
|
$
|
1.22
|
$
|
0.17
|
|||||
|
Average
shares outstanding:
|
||||||||||||||||
|
Basic
|
7,621
|
7,554
|
7,306
|
7,209
|
7,196
|
|||||||||||
|
Diluted
|
7,621
|
7,677
|
7,658
|
7,636
|
7,570
|
|||||||||||
|
At
December 31:
|
||||||||||||||||
|
Property
held for sale
|
$
|
143,480
|
$
|
136,531
|
$
|
136,911
|
c
|
$
|
125,285
|
$
|
121,564
|
|||||
|
Property
held for use, net
|
56,919
|
38,215
|
18,600
|
9,277
|
9,660
|
|||||||||||
|
Assets
from discontinued operations
|
-
|
-
|
35,303
|
a,
c
|
34,359
|
a,
b
|
19,903
|
a,
b
|
||||||||
|
Total
assets
|
252,546
|
232,634
|
206,558
|
c
|
177,320
|
155,430
|
||||||||||
|
Debt
from continuing operations
|
63,352
|
61,500
|
28,000
|
40,368
|
43,646
|
|||||||||||
|
Debt
from discontinued operations
|
-
|
-
|
22,675
|
a
|
21,731
|
a,
b
|
12,001
|
a,
b
|
||||||||
|
Stockholders’
equity
|
149,236
|
155,442
|
136,554
|
c
|
97,601
|
90,765
|
||||||||||
|
a.
|
Relates
to the operations, assets and liabilities of Escarpment Village, which we
sold in October 2007 (see Note 12).
|
|
b.
|
Relates
to the operations, assets and liabilities of 7000 West, which we sold in
March 2006 (see Note 12).
|
|
c.
|
Reflects
revisions of previously issued financial statements as presented below (in
thousands, except per share
amounts):
|
|
2006
|
|||||||||||||||
|
Adjustments
|
|||||||||||||||
|
As
|
Capitalized
|
Property
|
Net
|
As
|
|||||||||||
|
Reported
|
Interest
|
Tax
|
Adjustments
|
Revised
|
|||||||||||
|
At
December 31:
|
|||||||||||||||
|
Property
held for sale
|
$
|
133,210
|
$
|
5,425
|
$
|
(1,724
|
)
|
$
|
3,701
|
$
|
136,911
|
||||
|
Property
held for use, net
|
18,874
|
-
|
(274
|
)
|
(274
|
)
|
18,600
|
||||||||
|
Assets
from discontinued operations
|
34,917
|
523
|
(137
|
)
|
386
|
35,303
|
|||||||||
|
Total
assets
|
203,950
|
3,980
|
(1,372
|
)
|
2,608
|
206,558
|
|||||||||
|
Stockholders’
equity
|
133,946
|
3,980
|
(1,372
|
)
|
2,608
|
136,554
|
|||||||||
|
2005
|
|||||||||||||||
|
Adjustments
|
|||||||||||||||
|
As
|
Capitalized
|
Property
|
Net
|
As
|
|||||||||||
|
Reported
|
Interest
|
Tax
|
Adjustments
|
Revised
|
|||||||||||
|
Year
Ended December 31:
|
|||||||||||||||
|
Operating
income
|
$
|
8,336
|
$
|
(110
|
)
|
$
|
(272
|
)
|
$
|
(382
|
)
|
$
|
7,954
|
||
|
Income
from continuing operations
|
7,960
|
419
|
(272
|
)
|
147
|
8,107
|
|||||||||
|
Income
from discontinued operations
|
514
|
718
|
-
|
718
|
1,232
|
||||||||||
|
Net
income applicable to common stock
|
8,474
|
1,137
|
(272
|
)
|
865
|
9,339
|
|||||||||
|
Basic
net income per share:
|
|||||||||||||||
|
Continuing
operations
|
$
|
1.11
|
$
|
0.05
|
$
|
(0.04
|
)
|
$
|
0.01
|
$
|
1.12
|
||||
|
Discontinued
operations
|
0.07
|
0.10
|
-
|
0.10
|
0.17
|
||||||||||
|
Basic
net income per share
|
$
|
1.18
|
$
|
0.15
|
$
|
(0.04
|
)
|
$
|
0.11
|
$
|
1.29
|
||||
|
Diluted
net income per share:
|
|||||||||||||||
|
Continuing
operations
|
$
|
1.04
|
$
|
0.06
|
$
|
(0.04
|
)
|
$
|
0.02
|
$
|
1.06
|
||||
|
Discontinued
operations
|
0.07
|
0.09
|
-
|
0.09
|
0.16
|
||||||||||
|
Diluted
net income per share
|
$
|
1.11
|
$
|
0.15
|
$
|
(0.04
|
)
|
$
|
0.11
|
$
|
1.22
|
||||
|
At
December 31:
|
|||||||||||||||
|
Property
held for sale
|
$
|
122,468
|
$
|
4,555
|
$
|
(1,738
|
)
|
$
|
2,817
|
$
|
125,285
|
||||
|
Property
held for use, net
|
9,452
|
(61
|
)
|
(114
|
)
|
(175
|
)
|
9,277
|
|||||||
|
Assets
from discontinued operations
|
33,956
|
516
|
(113
|
)
|
403
|
34,359
|
|||||||||
|
Total
assets
|
173,886
|
5,399
|
(1,965
|
)
|
3,434
|
177,320
|
|||||||||
|
Stockholders’
equity
|
94,167
|
5,399
|
(1,965
|
)
|
3,434
|
97,601
|
|||||||||
|
2004
|
|||||||||||||||
|
Adjustments
|
|||||||||||||||
|
As
|
Capitalized
|
Property
|
Net
|
As
|
|||||||||||
|
Reported
|
Interest
|
Tax
|
Adjustments
|
Revised
|
|||||||||||
|
Year
Ended December 31:
|
|||||||||||||||
|
Operating
income
|
$
|
338
|
$
|
(34
|
)
|
$
|
(271
|
)
|
$
|
(305
|
)
|
$
|
33
|
||
|
Income
from continuing operations
|
99
|
276
|
(271
|
)
|
5
|
104
|
|||||||||
|
Income
from discontinued operations
|
573
|
649
|
-
|
649
|
1,222
|
||||||||||
|
Net
income applicable to common stock
|
672
|
925
|
(271
|
)
|
654
|
1,326
|
|||||||||
|
Basic
net income per share:
|
|||||||||||||||
|
Continuing
operations
|
$
|
0.01
|
$
|
0.04
|
$
|
(0.04
|
)
|
$
|
-
|
$
|
0.01
|
||||
|
Discontinued
operations
|
0.08
|
0.09
|
-
|
0.09
|
0.17
|
||||||||||
|
Basic
net income per share
|
$
|
0.09
|
$
|
0.13
|
$
|
(0.04
|
)
|
$
|
0.09
|
$
|
0.18
|
||||
|
Diluted
net income per share:
|
|||||||||||||||
|
Continuing
operations
|
$
|
0.01
|
$
|
0.04
|
$
|
(0.04
|
)
|
$
|
-
|
$
|
0.01
|
||||
|
Discontinued
operations
|
0.08
|
0.08
|
-
|
0.08
|
0.16
|
||||||||||
|
Diluted
net income per share
|
$
|
0.09
|
$
|
0.12
|
$
|
(0.04
|
)
|
$
|
0.08
|
$
|
0.17
|
||||
|
At
December 31:
|
|||||||||||||||
|
Property
held for sale
|
$
|
119,067
|
$
|
3,963
|
$
|
(1,466
|
)
|
$
|
2,497
|
$
|
121,564
|
||||
|
Property
held for use, net
|
9,926
|
(152
|
)
|
(114
|
)
|
(266
|
)
|
9,660
|
|||||||
|
Assets
from discontinued operations
|
19,961
|
55
|
(113
|
)
|
(58
|
)
|
19,903
|
||||||||
|
Total
assets
|
152,861
|
4,262
|
(1,693
|
)
|
2,569
|
155,430
|
|||||||||
|
Stockholders’
equity
|
88,196
|
4,262
|
(1,693
|
)
|
2,569
|
90,765
|
|||||||||
Items 7.
and 7A. Management’s Discussion and Analysis of Financial Condition
and
Results of Operation and
Quantitative and Qualitative Disclosures About Market Risk
OVERVIEW
In
management’s discussion and analysis “we,” “us,” and “our” refer to Stratus
Properties Inc. and its consolidated subsidiaries and joint venture. You should
read the following discussion in conjunction with our consolidated financial
statements and the related discussion of “Business,” “Risk Factors” and
“Properties” included elsewhere in this Form 10-K. The results of operations
reported and summarized below are not necessarily indicative of our future
operating results. All subsequent references to “Notes” refer to Notes to
Consolidated Financial Statements located in Item 8. “Financial Statements and
Supplementary Data.”
We are
engaged in the acquisition, development, management, operations and sale of
commercial, multi-family and residential real estate properties located
primarily in the Austin, Texas area.
Our
principal real estate holdings are in southwest Austin, Texas. We also own
undeveloped commercial property in San Antonio, Texas. The number of developed
lots, developed or under development acreage and undeveloped acreage as of
December 31, 2008, that comprise our principal development projects are
presented in the following table.
|
Acreage
|
|||||||||||||||||
|
Developed
or Under Development
|
Undeveloped
|
||||||||||||||||
|
Developed
|
Single
|
Multi-
|
Single
|
Total
|
|||||||||||||
|
Lots
|
Family
|
family
|
Commercial
|
Total
|
Family
|
Commercial
|
Total
|
Acreage
|
|||||||||
|
Austin
|
|||||||||||||||||
|
Barton
Creek
|
125
|
358
|
249
|
376
|
983
|
510
|
20
|
530
|
1,513
|
||||||||
|
Lantana
|
-
|
-
|
-
|
-
|
-
|
-
|
223
|
223
|
223
|
||||||||
|
Circle
C
|
98
|
a
|
148
|
a
|
-
|
265
|
413
|
-
|
122
|
122
|
535
|
||||||
|
W
Austin Hotel
|
|||||||||||||||||
|
&
Residences
|
-
|
-
|
-
|
2
|
b
|
2
|
-
|
-
|
-
|
2
|
|||||||
|
San Antonio
|
|||||||||||||||||
|
Camino
Real
|
-
|
-
|
-
|
-
|
-
|
-
|
2
|
2
|
2
|
||||||||
|
Total
|
223
|
506
|
249
|
643
|
1,398
|
510
|
367
|
877
|
2,275
|
||||||||
|
a.
|
Relates
to Meridian, an 800-lot residential
development.
|
|
b.
|
Represents
a city block in downtown Austin planned for a mixture of hotel,
residential, retail, office and entertainment
uses.
|
Our other
Austin holdings at December 31, 2008, consisted of two 75,000-square-foot office
buildings at 7500 Rialto Boulevard (7500 Rialto) located in our Lantana
development, a 22,000-square-foot retail complex representing phase one of
Barton Creek Village and two retail buildings totaling 21,000 square feet at the
5700 Slaughter project in Circle C.
The sharp
decline in the real estate market, among other factors, significantly impacted
our consolidated financial results for 2008. In 2008, we recognized $18.8
million of revenues and recorded a net loss of $3.8 million, compared to $27.2
million of revenues and $13.8 million of net income in 2007, which included a
gain on the sale of Escarpment Village of $10.8 million, net of taxes of $5.0
million. During the fourth quarter of 2008, we evaluated the carrying values of
our long-lived assets for impairment and recognized charges of $0.3 million
($0.2 million to net loss or $0.02 per share). Refer to Notes 1 and 4 for
further discussion of these impairment charges.
Real
Estate Market Conditions
Factors
that significantly affect United States (U.S.) real estate market conditions
include interest rate levels and the availability of financing, the supply of
product (i.e. developed and/or undeveloped land, depending on buyers’ needs) and
current and anticipated future economic conditions. These market conditions
historically move in periodic cycles, and can be volatile in specific regions.
Because of the concentration of our assets primarily in the Austin, Texas area,
market conditions in this region significantly affect our business.
In
addition to the traditional influence of state and federal government employment
levels on the local economy, in recent years the Austin area has experienced
significant growth in the technology sector. The Austin-area population
increased approximately 25 percent between 1999 and 2008, largely due to an
influx of technology companies and related businesses. Median family income
levels in Austin also increased during the period from 1999 through 2007, rising
by 15 percent. The expanding economy resulted in rising demands for residential
housing, commercial office space and retail services. Between 1999 and 2007,
sales tax receipts in Austin rose by 43 percent, an indication of the dramatic
increase in business activity during the period. The increases in population,
income levels and sales tax revenues have been less dramatic over the last few
years.
The
following chart compares Austin’s five-county metro area population and median
family income for 1989, 1999 and the most current information available for 2007
and 2008, based on U.S. Census Bureau data and City of Austin data.
Based on
the City of Austin’s fiscal year of October 1st through
September 30th, the
chart below compares Austin’s sales tax revenues for 1989, 1999 and
2007.
Real
estate development in southwest Austin historically has been constrained as a
result of various restrictions imposed by the City of Austin (the City). Several
special interest groups have also traditionally opposed development in that
area, where most of our property is located. From 2001 through 2004, a downturn
in the technology sector negatively affected the Austin real estate market,
especially the high-end residential and commercial leasing markets; however,
beginning in 2005 through mid-2007, market conditions improved. Beginning in the
third quarter of 2007, market conditions began to weaken. The December 31, 2008
and 2007 vacancy percentages for various types of developed properties in Austin
are noted below.
|
December
31,
|
||||
|
|
2008
|
2007
|
||
|
Building
Type
|
Vacancy
Factor
|
|||
|
Industrial
Buildings
|
16%a
|
6%
b
|
||
|
Office
Buildings (Class A)
|
19%
a
|
14%
b
|
||
|
Multi-Family
Buildings
|
9%
b
|
6%
b
|
||
|
Retail
Buildings
|
7%
b
|
7%
b
|
||
|
a.
|
CB
Richard Ellis: Austin
MarketView
|
|
b.
|
Texas
A&M University Real Estate Center: Texas Market
News
|
Our
operating cash flows and, ultimately, our ability to develop our properties and
expand our business are largely dependent on the level of our real estate sales.
In turn, these sales will be significantly affected by future real estate market
conditions in Austin, Texas, including development costs, interest rate levels,
the availability of credit to finance real estate transactions, and regulatory
issues including our land use and development entitlements.
Since the
third quarter of 2007, U.S. economic activity has progressively weakened due
initially to stresses in the residential housing and financial sectors,
aggravated by the impact of rising food and energy prices on consumer spending.
Weaker economic growth resulted in a general decline in real estate activity
across the U.S. in 2008, and has caused vacancy rates to increase in most
markets, including Austin, Texas. U.S. investment sales
activity
also declined sharply during 2008 because of, among other factors, limited
availability and increased cost of financing, especially the absence of
securitized debt, which was the source of recent heightened investment activity,
and the resulting gap between buyer and seller expectations of
value.
We
continue to focus on our near-term goal of developing our properties and
projects in a difficult economic climate and our long-term goal of maximizing
the value of our development communities. We believe that Austin, Texas
continues to be a very desirable market and many of our developments are in
locations that are unique and where approvals that we have obtained have been
increasingly difficult for others to achieve. Real estate development in
southwest Austin historically has been constrained as a result of various
restrictions imposed by the City and several special interest groups have also
traditionally opposed development in the area where most of our property is
located. We believe that many of our developments have inherent value given
their unique nature and location and that this value should be sustainable in
the future. Our long-term success will depend on our ability to maximize the
value of our real estate through obtaining additional required approvals that
permit us to develop and sell our properties in a timely manner at a reasonable
cost. In addition, we continue to pursue additional development opportunities
and believe we can obtain bank financing for developing our properties at a
reasonable cost. See “Risk Factors” located in Item 1A.
The
recovery of U.S. credit markets has yet to materialize, and given the current
business climate in which we are operating and the numerous uncertainties
related to our business, including the rate of sales, sales prices, and mortgage
constraints, it is difficult to provide specific guidance for fiscal 2009. We
believe that our performance in 2009 will be significantly affected by real
estate market conditions in Austin, Texas, including development costs, interest
rate levels, the availability of credit to finance real estate transactions, and
regulatory issues including our land use and development
entitlements.
REVISIONS
OF PREVIOUSLY ISSUED CONSOLIDATED FINANCIAL STATEMENTS AND
RECLASSIFICATIONS
As
discussed in Note 2, certain accounting matters were identified during 2008 and
subsequently that required revisions of our financial statements for the years
ended December 31, 2007 and December 31, 2006. Management’s discussion and
analysis has been updated to discuss changes in comparative results of
operations and cash flows after considering the impacts of the items discussed
in detail in Notes 2 and 3.
DEVELOPMENT
AND OTHER ACTIVITIES
W Austin Hotel &
Residences. In 2005, the City selected our proposal to develop
a mixed-use project in downtown Austin immediately north of the new City Hall
complex. The W Austin Hotel & Residences project includes an entire city
block and is planned for a mixture of hotel, residential, retail, office and
entertainment uses. In December 2006, we acquired the property for $15.1
million. We have executed agreements with Starwood Hotels & Resorts
Worldwide, Inc. for the development of a W Hotel & Residences on the site.
In May 2007, we announced our proposed partnership with Canyon-Johnson Urban
Fund II, L.P. (Canyon-Johnson) for the development of the W Austin Hotel &
Residences project. The grand opening for the onsite sales center was held in
conjunction with the groundbreaking ceremony in October 2007. Effective May 1,
2008, we entered into a joint venture with Canyon-Johnson for the development of
the project (see Note 6). At December 31, 2008, we had $2.1 million of
borrowings outstanding under the W Austin Hotel & Residences project
construction loan and total remaining commitments available of approximately
$163 million (see Notes 9 and 15). Construction of the $300 million project
commenced in the second quarter of 2008 and is proceeding as scheduled. We
currently consolidate the joint venture with Canyon-Johnson because under the
provisions of Financial Accounting Standards Board Interpretation No. 46R,
“Consolidation of Variable Interest Entities (revised December 2003) –an
Interpretation of ARB No. 51” (FIN 46R), the project is considered a variable
interest entity (VIE) and we are considered the primary beneficiary. If it is
determined that the W Austin Hotel & Residences project is no longer a VIE
under the guidance of FIN 46R or that we are no longer the primary beneficiary
of the entity, the project will be deconsolidated from our financial statements
(see Note 6).
Crestview
Station. In 2005, we formed a joint venture with Trammell Crow
to acquire an approximate 74-acre tract at the intersection of Airport Boulevard
and Lamar Boulevard in Austin, Texas, for $7.7 million. The property, known as
Crestview Station, is a single-family, multi-family, retail and office
development, which is located on the site of a future commuter rail line
approved by City voters. With Trammell Crow, we have completed environmental
remediation, which the State of Texas certified as complete in September 2007,
and permitting of the property. Infrastructure development of Crestview Station
is progressing. The initial phase of
utility
and roadway infrastructure is under construction and expected to be completed by
year-end 2009. Crestview Station sold substantially all of its multi-family and
commercial properties in 2007. The joint venture retained the single family
component of Crestview Station and two commercial sites, one of which was sold
in the first quarter of 2008. The joint venture is currently processing permits
to develop the residential portion of Crestview Station as a 450-unit
transit-oriented neighborhood. At December 31, 2008, our investment in the
Crestview Station project totaled $2.3 million and the joint venture partnership
had $9.1 million of outstanding debt, of which we guarantee $1.9 million (see
Notes 8 and 15). We account for our 50 percent interest in the Crestview Station
joint venture under the equity method.
Residential. As of December
31, 2008, the number of our residential developed lots, lots under development
and development potential by area are shown below (excluding lots and units
associated with our Canyon-Johnson and Crestview joint ventures):
|
Residential
Lots
|
|||||||
|
Developed
|
Under
Development
|
Potential
Development
a
|
Total
|
||||
|
Barton
Creek:
|
|||||||
|
Calera:
|
|||||||
|
Calera
Court Courtyard Homes
|
4
|
-
|
-
|
4
|
|||
|
Calera
Drive
|
8
|
-
|
-
|
8
|
|||
|
Verano
Drive
|
68
|
-
|
-
|
68
|
|||
|
Amarra
Drive:
|
|||||||
|
Phase
I Lots
|
7
|
-
|
-
|
7
|
|||
|
Phase
II Lots
|
35
|
-
|
-
|
35
|
|||
|
Townhomes
|
-
|
-
|
221
|
221
|
|||
|
Phase
III
|
-
|
-
|
89
|
89
|
|||
|
Mirador
Estate
|
2
|
-
|
-
|
2
|
|||
|
Wimberly
Lane Phase II
|
1
|
-
|
-
|
1
|
|||
|
Section
N Multi-family
|
-
|
-
|
1,860
|
1,860
|
|||
|
Other
Barton Creek Sections
|
-
|
-
|
154
|
154
|
|||
|
Circle
C:
|
|||||||
|
Meridian
|
98
|
57
|
-
|
155
|
|||
|
Total
Residential Lots
|
223
|
57
|
2,324
|
2,604
|
|||
|
a.
|
Our
development of the properties identified under the heading “Potential
Development” is dependent upon the approval of our development plans and
permits by governmental agencies, including the City. Those governmental
agencies may either not approve one or more development plans and permit
applications related to such properties or require us to modify our
development plans. Accordingly, our development strategy with respect to
those properties may change in the
future.
|
Calera. In 2002, we secured
subdivision plat approval for a new residential subdivision called Calera, which
consists of 155 lots. During 2004, we began construction of 16 courtyard homes
at Calera Court, the 16-acre initial phase of the Calera subdivision. The second
phase of Calera, Calera Drive, consisting of 53 single-family lots, many of
which adjoin the Fazio Canyons Golf Course, received final plat and construction
permit approval in 2005. In the third quarter of 2005, development of these lots
was completed and the initial lots were sold. As of December 31, 2008, four
courtyard homes at Calera Court and eight lots at Calera Drive remained unsold.
Construction of the final phase, known as Verano Drive, began in the first
quarter of 2007 and was completed in July 2008. Verano Drive includes 71
single-family lots, three of which were sold in July 2008.
Amarra Drive. During
2007, we completed development of Amarra Drive Phase I, the initial phase of the
Amarra Drive subdivision. Amarra Drive Phase I includes eight lots, one of which
was sold in September 2007, with sizes ranging from approximately one to four
acres, some of which are course-side lots on the Fazio Canyons Golf Course and
others are secluded lots adjacent to the Nature Conservancy of Texas. In January
2008, we commenced development of Amarra Drive Phase II, which consists of 35
lots on 51 acres and two townhome tracts on 31 acres. Development was
substantially completed in October 2008.
Mirador
Estate. In
2001, we completed construction of the Mirador subdivision, which
included the development of 34 estate lots with each lot averaging approximately
3.5 acres in size, and have sold 32 of these lots. As of December 31, 2008, we
owned two Mirador estate lots.
Wimberly Lane Phase
II. In 2004, we entered into a contract with a national homebuilder to
sell 41 lots within the Wimberly Lane Phase II subdivision. The average purchase
price for each of the 41 lots was $150,400, subject
to a six
percent annual escalator. We sold the last homebuilder lot in January 2008 and
have one Wimberly Lane lot remaining for sale.
Circle C. We are developing the
Circle C community based on the entitlements secured in our Circle C settlement
with the City, as amended in 2004. In 2005, we commenced the first phase of
construction and contracted to sell 494 of a total of 800 lots in our Meridian
project to three national homebuilders in four phases. Sales for each of the
four phases commence upon substantial completion of development for that phase,
and continue every quarter until all of the lots have been sold. The first and
second phases each consisted of 134 lots. The first phase was substantially
completed at the end of 2005. Development of the second phase was substantially
completed in March 2006. Development of the 108-lot third phase of Meridian was
completed in September 2007. The 118-lot fourth phase commenced in early 2008
and was completed in June 2008.
In 2006,
we signed another contract with a national homebuilder for 42 additional lots.
Development of those lots commenced in April 2007 and substantial completion
occurred in April 2008. Construction of the final phase of Meridian, which
consists of 57 one-acre lots, is expected to commence in 2010.
Deerfield. In January 2004,
we acquired the Deerfield property in Plano, Texas, for $7.0 million. The
property was zoned and subject to a preliminary subdivision plan for 234
residential lots. We executed agreements with a national homebuilder, whereby
the homebuilder paid us $1.4 million for an option to purchase all 234 lots over
36 monthly take-downs. The net purchase price for each of the 234 lots was
$61,500, subject to certain terms and conditions. The $1.4 million
non-refundable option payment was applied against subsequent purchases of lots
by the homebuilder after certain thresholds were achieved and was recognized by
us as income as lots were sold. In October 2005, we executed a revised agreement
with the homebuilder, increasing the lot sizes and average purchase price to
$67,150 based on a new total of 224 lots. In January 2008, we sold the final 21
lots for $1.4 million.
Commercial. As of December
31, 2008, the number of square feet of our commercial property developed, under
development and our remaining entitlements are shown below (excluding property
associated with our Canyon-Johnson and Crestview joint ventures):
|
Commercial
Property
|
|||||||
|
Developed
|
Under
Development
|
Potential
Development
a
|
Total
|
||||
|
Barton
Creek:
|
|||||||
|
Barton
Creek Village Phase I
|
22,000
|
-
|
-
|
22,000
|
|||
|
Barton
Creek Village Phase II
|
-
|
18,000
|
-
|
18,000
|
|||
|
Entry
Corner
|
-
|
-
|
5,000
|
5,000
|
|||
|
Amarra
Retail/Office
|
-
|
-
|
90,000
|
90,000
|
|||
|
Section
N
|
-
|
-
|
1,500,000
|
1,500,000
|
|||
|
Circle
C:
|
|||||||
|
Chase
Ground Lease
|
4,000
|
-
|
-
|
4,000
|
|||
|
Tract
106
|
21,000
|
-
|
-
|
21,000
|
|||
|
Tract
110
|
-
|
760,000
|
-
|
760,000
|
|||
|
Tract
107
|
-
|
80,000
|
-
|
80,000
|
|||
|
Tract
101
|
-
|
-
|
90,000
|
90,000
|
|||
|
Tract
102
|
-
|
-
|
25,000
|
25,000
|
|||
|
Tract
114
|
-
|
-
|
5,000
|
5,000
|
|||
|
Lantana:
|
|||||||
|
7500
Rialto
|
150,000
|
-
|
-
|
150,000
|
|||
|
Advanced
Micro Devices Option Tracts
|
-
|
-
|
760,000
|
760,000
|
|||
|
Tract
GR1
|
-
|
-
|
325,000
|
325,000
|
|||
|
Tract
G07
|
-
|
-
|
210,000
|
210,000
|
|||
|
Tract
CS5
|
-
|
-
|
175,000
|
175,000
|
|||
|
Tract
CS1-CS3
|
-
|
-
|
150,000
|
150,000
|
|||
|
Tract
LR1
|
-
|
-
|
75,000
|
75,000
|
|||
|
Tract
L04
|
-
|
-
|
70,000
|
70,000
|
|||
|
Austin
290 Tract
|
-
|
-
|
20,000
|
20,000
|
|||
|
Total
Square Feet
|
197,000
|
858,000
|
3,500,000
|
4,555,000
|
|||
|
a.
|
Our
development of the properties identified under the heading “Potential
Development” is dependent upon the approval of our development plans and
permits by governmental agencies, including the City. Those governmental
agencies may either not approve one or more development plans and permit
applications related to such properties
|
|
|
or require us to
modify our development plans. Accordingly, our development strategy with
respect to those properties may change in the
future.
|
Barton Creek. In the
second quarter of 2007, we completed the first phase of the Barton Creek
Village. The first phase includes a 22,000-square-foot retail complex. In July
2007, we began construction of a 3,300-square-foot bank building within this
retail complex, and it was completed in early 2008. As of December 31, 2008, the
first retail complex was 71 percent leased and the bank building is leased
through 2022. Construction of the second retail complex is expected to begin
during 2010.
Circle C. During the
third quarter of 2008, Stratus completed the construction of two retail
buildings totaling 21,000 square feet at the 5700 Slaughter project. This retail
project also includes a 4,000-square-foot building on an existing ground lease.
Leasing for the two retail buildings is under way with 22 percent of the
21,000-square-foot retail complex leased as of December 31, 2008, and the
initial tenants have opened for business. We expect the 21,000-square-foot
retail complex to be fully leased by the end of 2009.
The
Circle C community also includes Parkside Village, an 80,000-square-foot planned
retail project. The project will be developed in two phases. The first phase
will consist of a 34,000-square-foot building to accommodate a full-service
restaurant and theater. The second phase will consist of three tilt-wall retail
buildings at 14,775 square feet, 8,075 square feet and 7,600 square feet, and
two pads available for ground leases. We are pursuing final permits and
entitlements to position the project for commencement of construction when
appropriate.
Lantana. Lantana is a partially
developed, mixed-use real-estate development project with remaining entitlements
for approximately 1.0 million square feet of office and retail use on 223 acres
as of December 31, 2008. Regional utility and road infrastructure is in place
with capacity to serve Lantana at full build-out permitted under our existing
entitlements. Lantana also includes 760,000 square feet of potential development
for commercial property under an option contract with Advanced Micro Devices,
Inc. (NYSE:AMD).
In
Lantana, we also own two 75,000-square-foot office buildings at 7500 Rialto. As
of December 31, 2008, occupancy was 97 percent for the original office building
and 100 percent for the second office building.
RESULTS
OF OPERATIONS
We are
continually evaluating the development potential of our properties and will
continue to consider opportunities to enter into transactions involving our
properties. As a result, and because of numerous other factors affecting our
business activities as described herein, our past operating results are not
necessarily indicative of our future results.
Summary
operating results follow (in thousands):
|
2008
|
2007
|
2006
|
|||||||
|
Revenues:
|
|||||||||
|
Real
estate operations
|
$
|
14,310
|
$
|
24,083
|
$
|
60,213
|
|||
|
Commercial
leasing
|
4,473
|
3,081
|
1,662
|
||||||
|
Total
revenues
|
$
|
18,783
|
$
|
27,164
|
$
|
61,875
|
|||
|
Operating
(loss) income
|
$
|
(7,258
|
)
|
$
|
(543
|
)
|
$
|
22,638
|
|
|
Benefit
from (provision for) income taxes
|
$
|
1,734
|
$
|
(1,679
|
)
|
$
|
7,310
|
||
|
(Loss)
income from continuing operations
|
$
|
(3,732
|
)
|
$
|
2,609
|
$
|
30,318
|
||
|
(Loss)
income from discontinued operations
|
(105
|
)a
|
11,180
|
b
|
9,142
|
c
|
|||
|
Net
(loss) income
|
$
|
(3,837
|
)
|
$
|
13,789
|
$
|
39,460
|
||
|
a.
|
Relates
to the revised amount of Texas margin tax accrued on Escarpment Village
income earned during 2007 (see Note
12).
|
|
b.
|
Includes
a gain on sale of Escarpment Village of $10.8 million, net of taxes of
$5.0 million.
|
|
c.
|
Includes
a gain on sale of Stratus 7000 West Joint Venture (7000 West) of $8.3
million, net of taxes of $1.5
million.
|
Our
deferred tax assets at December 31, 2005, totaled $18.3 million and we had
provided a 100 percent valuation allowance because realization of the deferred
tax assets was not considered likely. Realization of our deferred tax assets is
dependent on generating sufficient taxable income within the carryforward period
available under tax law. In 2006, we sold 7000 West (see Note 12) and 58 acres
at our Lantana property. These transactions generated pre-tax income of
approximately $26 million and, along with our then-current homebuilder contract
arrangements and projected levels of future sales, provided sufficient evidence
that we would more likely than not be able to realize certain of our deferred
tax assets. As a result, income from continuing operations for 2006 included a
$15.3 million tax benefit, $2.09 per basic share and $2.00 per diluted share,
resulting from the reversal of a portion of our deferred tax asset valuation
allowance. Based on the expectation of future taxable income and that
deductible temporary differences will offset existing taxable temporary
differences, management believes it is more likely than not that the benefits of
these deductible differences, net of the existing valuation allowances, are
realizable at December 31, 2008 and 2007. The valuation allowance at
December 31, 2008 relates to certain net operating loss carryforwards which are
not expected to be realized due to limitations imposed under the Internal
Revenue Code.
We have
two operating segments, “Real Estate Operations” and “Commercial Leasing” (see
Note 14). The following is a discussion of our operating results by
segment.
Real Estate
Operations
Summary
real estate operating results follow (in thousands):
|
2008
|
2007
|
2006
|
|||||||
|
Revenues:
|
|||||||||
|
Developed
property sales
|
$
|
13,231
|
$
|
21,388
|
$
|
33,459
|
|||
|
Undeveloped
property sales
|
40
|
1,082
|
24,929
|
||||||
|
Commissions,
management fees and other
|
1,039
|
1,613
|
1,825
|
||||||
|
Total
revenues
|
14,310
|
24,083
|
60,213
|
||||||
|
Cost
of sales, including depreciation
|
|||||||||
|
and
long-lived asset impairments
|
(13,482
|
)a
|
(16,299
|
)
|
(29,940
|
)
|
|||
|
General
and administrative expenses
|
(6,496
|
)
|
(6,119
|
)
|
(6,281
|
||||