STRS Q3 2012 10-Q
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UNITED STATES |
SECURITIES AND EXCHANGE COMMISSION |
Washington, D.C. 20549 |
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FORM 10-Q |
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(Mark One) |
[X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2012 |
or |
[ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from | | to |
Commission File Number: 0-19989 |
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Stratus Properties Inc.
(Exact name of registrant as specified in its charter)
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Delaware | 72-1211572 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
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212 Lavaca St., Suite 300 | |
Austin, Texas | 78701 |
(Address of principal executive offices) | (Zip Code) |
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(512) 478-5788 |
(Registrant's telephone number, including area code) |
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
þ Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). þ Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes þ No
On October 31, 2012, there were issued and outstanding 8,095,042 shares of the registrant’s common stock, par value $0.01 per share.
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STRATUS PROPERTIES INC. |
TABLE OF CONTENTS |
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STRATUS PROPERTIES INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
STRATUS PROPERTIES INC.
CONSOLIDATED BALANCE SHEETS (Unaudited)
(In Thousands)
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| | | | | | | |
| September 30, 2012 | | December 31, 2011 |
ASSETS | | | |
Cash and cash equivalents | $ | 16,782 |
| | $ | 7,695 |
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Real estate held for sale | 69,409 |
| | 74,003 |
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Real estate under development | 30,539 |
| | 54,956 |
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Land available for development | 49,397 |
| | 60,936 |
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Real estate held for investment, net | 191,574 |
| | 185,221 |
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Investment in unconsolidated affiliate | 3,446 |
| | 3,246 |
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Other assets | 24,540 |
| | 18,619 |
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Discontinued operations | — |
| | 16,929 |
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Total assets | $ | 385,687 |
| | $ | 421,605 |
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| | | |
LIABILITIES AND EQUITY | | | |
Accounts payable | $ | 6,037 |
| | $ | 8,760 |
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Accrued liabilities | 7,400 |
| | 10,217 |
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Deposits | 2,862 |
| | 1,848 |
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Debt | 144,634 |
| | 158,451 |
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Other liabilities and deferred gain | 8,142 |
| | 3,064 |
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Discontinued operations | — |
| | 21,583 |
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Total liabilities | 169,075 |
| | 203,923 |
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Commitments and contingencies |
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| | | |
Equity: | | | |
Stratus stockholders’ equity: | | | |
Preferred stock | — |
| | — |
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Common stock | 90 |
| | 84 |
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Capital in excess of par value of common stock | 203,210 |
| | 198,175 |
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Accumulated deficit | (63,255 | ) | | (61,723 | ) |
Common stock held in treasury | (18,392 | ) | | (18,347 | ) |
Total Stratus stockholders’ equity | 121,653 |
| | 118,189 |
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Noncontrolling interests in subsidiaries | 94,959 |
| | 99,493 |
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Total equity | 216,612 |
| | 217,682 |
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Total liabilities and equity | $ | 385,687 |
| | $ | 421,605 |
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The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.
STRATUS PROPERTIES INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)
(In Thousands, Except Per Share Amounts)
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| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2012 | | 2011 | | 2012 | | 2011 |
Revenues: | | | | | | | |
Real estate | $ | 27,960 |
| | $ | 15,549 |
| | $ | 49,047 |
| | $ | 80,398 |
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Hotel | 7,567 |
| | 5,961 |
| | 25,191 |
| | 20,292 |
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Entertainment venue | 3,155 |
| | 2,343 |
| | 9,258 |
| | 6,253 |
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Rental | 1,189 |
| | 610 |
| | 3,244 |
| | 1,527 |
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Total revenues | 39,871 |
| | 24,463 |
| | 86,740 |
| | 108,470 |
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Cost of sales: | | | | | | | |
Real estate | 24,440 |
| | 13,509 |
| | 45,278 |
| | 66,522 |
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Hotel | 6,377 |
| | 5,944 |
| | 19,809 |
| | 18,382 |
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Entertainment venue | 2,798 |
| | 2,508 |
| | 7,592 |
| | 6,626 |
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Rental | 561 |
| | 447 |
| | 1,576 |
| | 1,059 |
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Depreciation | 2,644 |
| | 1,984 |
| | 6,927 |
| | 5,482 |
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Total cost of sales | 36,820 |
| | 24,392 |
| | 81,182 |
| | 98,071 |
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General and administrative expenses | 1,542 |
| | 1,532 |
| | 4,870 |
| | 5,170 |
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Total costs and expenses | 38,362 |
| | 25,924 |
| | 86,052 |
| | 103,241 |
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Operating income (loss) | 1,509 |
| | (1,461 | ) | | 688 |
| | 5,229 |
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Interest expense, net | (2,835 | ) | | (1,889 | ) | | (9,443 | ) | | (4,041 | ) |
Other income, net | 11 |
| | 71 |
| | 51 |
| | 537 |
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(Loss) income from continuing operations before income taxes and equity in unconsolidated affiliate’s (loss) income | (1,315 | ) | | (3,279 | ) | | (8,704 | ) | | 1,725 |
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Equity in unconsolidated affiliate’s (loss) income | (61 | ) | | (75 | ) | | 14 |
| | (240 | ) |
Provision for income taxes | (224 | ) | | (167 | ) | | (523 | ) | | (489 | ) |
(Loss) income from continuing operations | (1,600 | ) | | (3,521 | ) | | (9,213 | ) | | 996 |
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(Loss) income from discontinued operations | — |
| | (164 | ) | | 4,805 |
| | 248 |
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Net (loss) income and total comprehensive (loss) income | (1,600 | ) | | (3,685 | ) | | (4,408 | ) | | 1,244 |
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Net loss (income) and total comprehensive loss (income) attributable to noncontrolling interests in subsidiaries | 1,923 |
| | 109 |
| | 2,876 |
| | (7,353 | ) |
Net income (loss) and total comprehensive income (loss) attributable to Stratus common stock | $ | 323 |
| | $ | (3,576 | ) | | $ | (1,532 | ) | | $ | (6,109 | ) |
| | | | | | | |
Basic and diluted net income (loss) per share attributable to Stratus common stock: | | | | | | | |
Continuing operations | $ | 0.04 |
| | $ | (0.46 | ) | | $ | (0.80 | ) | | $ | (0.85 | ) |
Discontinued operations | — |
| | (0.02 | ) | | 0.61 |
| | 0.03 |
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Basic and diluted net income (loss) per share attributable to Stratus common stock | $ | 0.04 |
| | $ | (0.48 | ) | | $ | (0.19 | ) | | $ | (0.82 | ) |
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Weighted-average shares of common stock outstanding: | | | | | | | |
Basic and diluted | 8,095 |
| | 7,494 |
| | 7,923 |
| | 7,491 |
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The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.
STRATUS PROPERTIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In Thousands)
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| | | | | | | |
| Nine Months Ended |
| September 30, |
| 2012 | | 2011 |
Cash flow from operating activities: | | | |
Net (loss) income | $ | (4,408 | ) | | $ | 1,244 |
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Adjustments to reconcile net (loss) income to net cash provided by operating activities: | | | |
Depreciation | 6,922 |
| | 6,122 |
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Cost of real estate sold | 35,643 |
| | 53,208 |
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Gain on sale of 7500 Rialto | (5,146 | ) | | — |
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Stock-based compensation | 198 |
| | 331 |
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Equity in unconsolidated affiliate’s (income) loss | (14 | ) | | 240 |
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Deposits | 1,029 |
| | (5,918 | ) |
Development of real estate properties | (8,446 | ) | | (37,047 | ) |
(Increase) decrease in other assets | (5,689 | ) | | 975 |
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(Decrease) increase in accounts payable, accrued liabilities and other | (4,499 | ) | | 9,288 |
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Net cash provided by operating activities | 15,590 |
| | 28,443 |
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Cash flow from investing activities: | | | |
Capital expenditures: | | | |
Commercial leasing properties | (3,413 | ) | | (5,605 | ) |
Entertainment venue | (170 | ) | | (4,665 | ) |
Hotel | (3 | ) | | (5,339 | ) |
Proceeds from sale of 7500 Rialto | 5,697 |
| | — |
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Investment in unconsolidated affiliate | (185 | ) | | (500 | ) |
Net cash provided by (used in) investing activities | 1,926 |
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| (16,109 | ) |
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Cash flow from financing activities: | | | |
Borrowings from credit facility | 22,500 |
| | 16,500 |
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Payments on credit facility | (29,554 | ) | | (2,266 | ) |
Borrowings from project and term loans | 10,532 |
| | 25,591 |
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Payments on project and term loans | (17,436 | ) | | (64,538 | ) |
Noncontrolling interests contributions | 341 |
| | 8,578 |
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Common stock issuance | 4,817 |
| | — |
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Net payments for stock-based awards | (19 | ) | | (75 | ) |
Financing costs | — |
| | (263 | ) |
Net cash used in financing activities | (8,819 | ) | | (16,473 | ) |
Net increase (decrease) in cash and cash equivalents | 8,697 |
| | (4,139 | ) |
Cash and cash equivalents at beginning of year | 8,085 |
| | 11,730 |
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Cash and cash equivalents at end of period | $ | 16,782 |
| | $ | 7,591 |
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The accompanying Notes to Consolidated Financial Statements, which include information regarding noncash transactions, are an integral part of these consolidated financial statements.
STRATUS PROPERTIES INC.
CONSOLIDATED STATEMENTS OF EQUITY (Unaudited)
(In Thousands)
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Stratus Stockholders’ Equity | | | | |
| | | | | | | | | | Common Stock | | Total Stratus Stockholders' Equity | | | | |
| | Common Stock | | Capital in Excess of Par Value | | Accum-ulated Deficit | | Held in Treasury | | | Noncontrolling Interests in Subsidiaries | | |
| | Number of Shares | | At Par Value | | | | Number of Shares | | At Cost | | | | Total Equity |
Balance at December 31, 2011 | | 8,387 |
| | $ | 84 |
| | $ | 198,175 |
| | $ | (61,723 | ) | | 935 |
| | $ | (18,347 | ) | | $ | 118,189 |
| | $ | 99,493 |
| | $ | 217,682 |
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Common stock issuance | | 625 |
| | 6 |
| | 4,811 |
| | — |
| | — |
| | — |
| | 4,817 |
| | — |
| | 4,817 |
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Exercised and issued stock-based awards | | 23 |
| | — |
| | 26 |
| | — |
| | — |
| | — |
| | 26 |
| | — |
| | 26 |
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Stock-based compensation | | — |
| | — |
| | 198 |
| | — |
| | — |
| | — |
| | 198 |
| | — |
| | 198 |
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Tender of shares for stock-based awards | | — |
| | — |
| | — |
| | — |
| | 5 |
| | (45 | ) | | (45 | ) | | — |
| | (45 | ) |
Noncontrolling interests distributions, net | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1,658 | ) | | (1,658 | ) |
Total comprehensive loss | | — |
| | — |
| | — |
| | (1,532 | ) | | — |
| | — |
| | (1,532 | ) | | (2,876 | ) | | (4,408 | ) |
Balance at September 30, 2012 | | 9,035 |
| | $ | 90 |
| | $ | 203,210 |
| | $ | (63,255 | ) | | 940 |
| | $ | (18,392 | ) | | $ | 121,653 |
| | $ | 94,959 |
| | $ | 216,612 |
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2010 | | 8,354 |
| | $ | 84 |
| | $ | 197,773 |
| | $ | (51,335 | ) | | 879 |
| | $ | (17,972 | ) | | $ | 128,550 |
| | $ | 84,250 |
| | $ | 212,800 |
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Exercised and issued stock-based awards | | 26 |
| | — |
| | (20 | ) | | — |
| | — |
| | — |
| | (20 | ) | | — |
| | (20 | ) |
Stock-based compensation | | — |
| | — |
| | 331 |
| | — |
| | — |
| | — |
| | 331 |
| | — |
| | 331 |
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Tender of shares for stock-based awards | | — |
| | — |
| | — |
| | — |
| | 7 |
| | (56 | ) | | (56 | ) | | — |
| | (56 | ) |
Noncontrolling interests contributions | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 8,578 |
| | 8,578 |
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Total comprehensive (loss) income | | — |
| | — |
| | — |
| | (6,109 | ) | | — |
| | — |
| | (6,109 | ) | | 7,353 |
| | 1,244 |
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Balance at September 30, 2011 | | 8,380 |
| | $ | 84 |
| | $ | 198,084 |
| | $ | (57,444 | ) | | 886 |
| | $ | (18,028 | ) | | $ | 122,696 |
| | $ | 100,181 |
| | $ | 222,877 |
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The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.
STRATUS PROPERTIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The accompanying unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2011, included in Stratus Properties Inc.’s (Stratus) Annual Report on Form 10-K (Stratus 2011 Form 10-K) filed with the Securities and Exchange Commission. In the opinion of management, the accompanying consolidated financial statements reflect all adjustments (consisting only of normal recurring items) considered necessary for a fair statement of the results for the interim periods. Operating results for the three-month and nine-month periods ended September 30, 2012, are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.
Stratus’ basic and diluted net loss per share of common stock was calculated by dividing the net loss attributable to Stratus common stock by the weighted-average shares of common stock outstanding during the period. Because Stratus had losses from continuing operations in third-quarter 2012, third-quarter 2011 and the first nine months of 2012 and a net loss attributable to Stratus common stock for the first nine months of 2011, no potential common shares are included in the computation of any diluted per share amounts.
Stock options and restricted stock units representing 125,200 shares for third-quarter 2012, 99,300 shares for third-quarter 2011, 135,500 shares for the first nine months of 2012 and 109,800 shares for the first nine months of 2011 were excluded from weighted-average common shares outstanding for purposes of calculating diluted net loss per share because they were anti-dilutive.
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3. | JOINT VENTURE WITH CANYON-JOHNSON URBAN FUND II, L.P. |
Stratus and Canyon-Johnson Urban Fund II, L.P. (Canyon-Johnson) are participants in a joint venture for a 36-story mixed-use development in downtown Austin, Texas, anchored by a W Hotel & Residences (the W Austin Hotel & Residences project). Stratus is the manager of, and has an approximate 40 percent interest in, the joint venture, and Canyon-Johnson has an approximate 60 percent interest in the joint venture. As of September 30, 2012, cumulative capital contributions totaled $71.9 million for Stratus and $94.0 million for Canyon-Johnson. The joint venture is consolidated in Stratus’ financial statements based on its assessment that the joint venture is a variable interest entity and that Stratus is the primary beneficiary. Stratus will continue to evaluate the primary beneficiary of this joint venture in accordance with applicable accounting guidance. See Note 2 of the Stratus 2011 Form 10-K for further discussion.
Stratus’ consolidated balance sheets include the following assets and liabilities of the joint venture (in thousands):
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| September 30, | | December 31, |
| 2012 | | 2011 |
Assets: | | | |
Cash and cash equivalents | $ | 14,654 |
| | $ | 4,955 |
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Real estate held for sale | 53,142 |
| | 54,783 |
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Real estate under development | — |
| | 18,432 |
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Real estate held for investment, net | 165,801 |
| | 170,788 |
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Other assets | 19,617 |
| | 13,984 |
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Total assets | 253,214 |
| | 262,942 |
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Liabilities: | | | |
Accounts payable | 6,022 |
| | 6,526 |
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Accrued liabilities | 5,517 |
| | 7,360 |
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Deposits | 2,533 |
| | 1,618 |
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Debta | 70,817 |
| | 70,349 |
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Other liabilities | 2,008 |
| | 1,510 |
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Total liabilities | 86,897 |
| | 87,363 |
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Net assets | $ | 166,317 |
| | $ | 175,579 |
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a. | Stratus guarantees the debt associated with the W Austin Hotel & Residences project. |
Gross profit on condominium sales from the W Austin Hotel & Residences project is based on estimates of total project sales value and total project costs for the condominiums. When estimates of sales value or project costs are revised, gross profit is adjusted in the period of change so that cumulative project earnings reflect the revised profit estimate. During third-quarter 2012, based on revised estimates of future revenues, Stratus lowered the expected gross profit margin on condominiums units at the W Austin Hotel & Residences project. The margin reduction increased cumulative cost of sales and lowered cumulative gross profit by $1.5 million in the third quarter and first nine months of 2012.
Profits and losses between partners in a real estate venture should be allocated based on how changes in net assets of the venture would affect cash payments to the investors over the life of the venture and on its liquidation. The amount of the ultimate profits earned by the W Austin Hotel & Residences project will affect the ultimate profit sharing ratios because of provisions in the joint venture agreement, which would require Stratus to return certain previously received distributions to Canyon-Johnson under certain circumstances. Because of the uncertainty of the ultimate profits and, therefore, profit-sharing ratios, the W Austin Hotel & Residences project’s cumulative profits or losses are allocated based on a hypothetical liquidation of the venture’s net assets as of each balance sheet date. As of September 30, 2012, the cumulative earnings for the W Austin Hotel & Residences project were allocated based on 44 percent for Stratus and 56 percent for Canyon-Johnson.
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4. | JOINT VENTURE WITH MOFFETT HOLDINGS, LLC |
On February 28, 2011, Stratus entered into a joint venture with Moffett Holdings, LLC (Moffett Holdings) for the development of Parkside Village, a retail project in the Circle C community.
Stratus’ capital contributions to the joint venture totaled $3.1 million, which consisted of a 23.03 acre tract of land located in Austin, Texas, the related property and development agreements for the land and other project costs incurred by Stratus before February 28, 2011. Moffett Holdings made capital contributions to the joint venture totaling $3.8 million to fund the development of the project. The joint venture also has a construction loan with Comerica Bank to finance the development of Parkside Village (see Note 7 of the Stratus 2011 Form 10-K for further discussion). The Parkside Village loan had an outstanding balance of $9.9 million and availability of $3.8 million at September 30, 2012.
Stratus is the manager of the joint venture, and after the partners are repaid their original capital contributions and a preferred return on those contributions, Stratus will receive 80 percent of any distributions and Moffett Holdings will receive 20 percent. As the manager of the joint venture with a majority of the voting and profit interest (80 percent), Stratus consolidates this joint venture in its financial statements.
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5. | FAIR VALUE MEASUREMENTS |
Fair value accounting guidance includes a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 inputs) and the lowest priority to unobservable inputs (Level 3 inputs).
The carrying value for certain Stratus financial instruments (i.e., cash, accounts and notes receivable, accounts payable and accrued liabilities) approximate fair value because of their short-term nature and generally negligible credit losses. A summary of the carrying amount and fair value of Stratus' other financial instrument follows (in thousands):
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| | | | | | | | | | | | | | | |
| September 30, 2012 | | December 31, 2011 |
| Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
Debt | $ | 144,634 |
| | $ | 144,415 |
| | $ | 158,451 |
| | $ | 157,529 |
|
Stratus' debt is recorded at cost and is not actively traded. Fair value is estimated based on discounted future expected cash flows at estimated current market interest rates. Accordingly, Stratus' debt is classified within Level 2 of the fair value hierarchy. The fair value of debt does not represent the amounts that will ultimately be paid upon the maturities of the loans.
In September 2012, Stratus entered into modification agreements for its American Strategic Income Portfolio (ASIP) unsecured term loans whereby two loans totaling $9 million were repaid and the maturity dates of the remaining five loans were extended; four loans totaling $15.0 million mature in 2015 and one $8.0 million loan matures in 2016. In addition, the interest rate of the remaining term loans was reduced from 8.75 percent per annum to 7.25 percent per annum.
On January 30, 2012, Stratus fully repaid the Ford loan and during first-quarter 2012 generated operating cash flow, as defined by the Ford profits interest agreement, which entitled Ford to a profits interest of $1.2 million, resulting in a charge to interest expense (before capitalized interest) of approximately $1.2 million in first-quarter 2012. Stratus has no further obligations under the Ford profits interest agreement.
Stratus' Beal Bank loan contains customary financial covenants, including a requirement that Stratus maintain a minimum total stockholders' equity balance of $120.0 million, and the Comerica credit facility and the ASIP unsecured term loans contain cross-default provisions with the Beal Bank loan. As of December 31, 2011, Stratus' total stockholders' equity was $118.2 million, which was less than the amount required under the covenants in Stratus' loan agreements. However, the the sale of 7500 Rialto (see Note 10) and the sale of common stock during first-quarter 2012 contributed to an increase in Stratus' stockholders' equity balance, which totaled $121.7 million as of September 30, 2012.
Interest Expense and Capitalization. Interest expense (before capitalized interest) totaled $3.5 million for third-quarter 2012, $4.2 million for third-quarter 2011, $12.2 million for the first nine months of 2012 and $13.7 million for the first nine months of 2011. Stratus capitalized interest costs totaling $0.7 million for third-quarter 2012, $2.3 million for third-quarter 2011, $2.7 million for the first nine months of 2012 and $9.7 million for the first nine months of 2011 primarily related to the W Austin Hotel & Residences project and the Parkside Village project.
On March 15, 2012, in a private placement transaction, Stratus sold 625,000 shares of its common stock to Moffett Holdings for an aggregate purchase price of $5.0 million, or $8.00 per share. Following the sale, Stratus had 8,093,167 shares of common stock outstanding, with Moffett Holdings owning approximately 7.7 percent of Stratus' outstanding common stock. Stratus used the $4.8 million in net proceeds from the sale to reduce the outstanding balance under the Comerica credit facility.
Stratus’ accounting policy for and other information regarding its income taxes is further described in Notes 1 and 8 of the Stratus 2011 Form 10-K.
Stratus evaluated the recoverability of its deferred tax assets, and considered available positive and negative evidence, giving greater weight to the recent losses, the absence of taxable income in the carry back period and uncertainty regarding projected future financial results. As a result, Stratus concluded that there was not sufficient positive evidence supporting the realizability of its deferred tax assets beyond an amount totaling $0.2 million at December 31, 2011, and September 30, 2012.
Stratus’ future results of operations may be negatively impacted by an inability to realize a tax benefit for future tax losses or for items that will generate additional deferred tax assets. Stratus’ future results of operations may be favorably impacted by reversals of valuation allowances if Stratus is able to demonstrate sufficient positive evidence that its deferred tax assets will be realized.
The difference between Stratus’ consolidated effective income tax rate for the first nine months of 2012 and 2011, and the U.S. federal statutory tax rate of 35 percent was primarily attributable to additional valuation allowances recorded against deferred tax assets.
Stratus currently has four operating segments, Real Estate Operations, Hotel, Entertainment Venue and Commercial Leasing.
The Real Estate Operations segment is comprised of Stratus’ real estate assets (developed, under development and undeveloped), which consists of its properties in the Barton Creek community, the Circle C community and Lantana, and the condominium units at the W Austin Hotel & Residences project.
The Hotel segment includes the W Austin Hotel located at the W Austin Hotel & Residences project.
The Entertainment Venue segment includes Austin City Limits Live at the Moody Theater (ACL Live), a live music and entertainment venue and production studio at the W Austin Hotel & Residences project, which began operations in February 2011. In addition to hosting concerts and private events, this venue is the new home of Austin City Limits, a television program showcasing popular music legends. The entertainment venue segment also includes revenues and costs associated with events hosted at other venues.
The Commercial Leasing segment includes the office and retail space at the W Austin Hotel & Residences project, a retail building and a bank building in Barton Creek Village, and 5700 Slaughter and the Parkside Village project in the Circle C community. In February 2012, Stratus sold the two office buildings at 7500 Rialto Boulevard (7500 Rialto). Accordingly, the operating results for 7500 Rialto are reported as discontinued operations in the tables below (see Note 10).
Stratus uses operating income or loss to measure the performance of each segment. Stratus allocates parent company general and administrative expenses that do not directly relate to an operating segment between the Real Estate Operations and Commercial Leasing segments based on projected annual revenues for each segment. General and administrative expenses related to the W Austin Hotel & Residences project are allocated to the real estate operations, hotel, entertainment venue and commercial leasing segments based on projected annual revenues for the W Austin Hotel & Residences project. Prior year general and administrative expense allocations have been revised to exclude the results of 7500 Rialto. Additionally, prior year amounts for individual segments have been revised to reflect intersegment transactions. The following segment information reflects management’s determinations that may not be indicative of what actual financial performance of each segment would be if it were an independent entity.
Segment data presented below were prepared on the same basis as Stratus’ consolidated financial statements (in thousands).
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Real Estate Operationsa | | Hotel | | Entertainment Venue | | Commercial Leasing | | Eliminations and Otherb | | Total |
Three Months Ended September 30, 2012: | | | | | | | | | | | |
Revenues: | | | | | | | | | | | |
Unaffiliated customers | $ | 27,960 |
| | $ | 7,567 |
| | $ | 3,155 |
| | $ | 1,189 |
| | $ | — |
| | $ | 39,871 |
|
Intersegment | 18 |
| | 48 |
| | 17 |
| | 156 |
| | (239 | ) | | — |
|
Cost of sales, excluding depreciation | 24,460 |
| | 6,377 |
| | 2,830 |
| | 580 |
| | (71 | ) | | 34,176 |
|
Depreciation | 65 |
| | 1,855 |
| | 351 |
| | 405 |
| | (32 | ) | | 2,644 |
|
General and administrative expenses | 1,290 |
| | 64 |
| | 27 |
| | 323 |
| | (162 | ) | | 1,542 |
|
Operating income (loss) | $ | 2,163 |
| | $ | (681 | ) | | $ | (36 | ) | | $ | 37 |
| | $ | 26 |
| | $ | 1,509 |
|
Capital expenditures | $ | 1,875 |
| | $ | 3 |
| | $ | 6 |
| | $ | 607 |
| | $ | — |
| | $ | 2,491 |
|
Total assets at September 30, 2012 | 181,753 |
| | 120,560 |
| | 43,436 |
| | 47,687 |
| | (7,749 | ) | | 385,687 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
Three Months Ended September 30, 2011: | |
| | |
| | |
| | |
| | |
| | |
|
Revenues: | | | | | | | | | | | |
Unaffiliated customers | $ | 15,549 |
| | $ | 5,961 |
| | $ | 2,343 |
| | $ | 610 |
| | $ | — |
| | $ | 24,463 |
|
Intersegment | — |
| | 46 |
| | 7 |
| | 128 |
| | (181 | ) | | — |
|
Cost of sales, excluding depreciation | 13,531 |
| | 5,944 |
| | 2,541 |
| | 447 |
| | (55 | ) | | 22,408 |
|
Depreciation | 68 |
| | 1,405 |
| | 292 |
| | 254 |
| | (35 | ) | | 1,984 |
|
General and administrative expenses | 1,386 |
| | — |
| | — |
| | 263 |
| | (117 | ) | | 1,532 |
|
Operating income (loss) | $ | 564 |
| | $ | (1,342 | ) | | $ | (483 | ) | | $ | (226 | ) | | $ | 26 |
| | $ | (1,461 | ) |
Loss from discontinued operations | $ | — |
| | $ | — |
| | $ | — |
| | (164 | ) | | $ | — |
| | $ | (164 | ) |
Capital expenditures | 10,654 |
| | (26 | ) | | (427 | ) | | 2,701 |
| | — |
| | 12,902 |
|
Total assets at September 30, 2011 | 215,764 |
| | 124,492 |
| | 42,163 |
| | 58,646 |
| | (7,384 | ) | | 433,681 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Real Estate Operationsa | | Hotel | | Entertainment Venue | | Commercial Leasing | | Eliminations and Otherb | | Total |
Nine Months Ended September 30, 2012: | | | | | | | | | | | |
Revenues: | | | | | | | | | | | |
Unaffiliated customers | $ | 49,047 |
| | $ | 25,191 |
| | $ | 9,258 |
| | $ | 3,244 |
| | $ | — |
| | $ | 86,740 |
|
Intersegment | 36 |
| | 146 |
| | 46 |
| | 382 |
| | (610 | ) | | — |
|
Cost of sales, excluding depreciation | 45,343 |
| | 19,809 |
| | 7,674 |
| | 1,621 |
| | (192 | ) | | 74,255 |
|
Depreciation | 215 |
| | 4,745 |
| | 961 |
| | 1,109 |
| | (103 | ) | | 6,927 |
|
General and administrative expenses | 3,967 |
| | 227 |
| | 83 |
| | 999 |
| | (406 | ) | | 4,870 |
|
Operating (loss) income | $ | (442 | ) | | $ | 556 |
| | $ | 586 |
| | $ | (103 | ) | | $ | 91 |
| | $ | 688 |
|
Income from discontinued operations | $ | — |
| | $ | — |
| | $ | — |
| | $ | 4,805 |
| | $ | — |
| | $ | 4,805 |
|
Capital expenditures | 8,446 |
| | 3 |
| | 170 |
| | 3,413 |
| | — |
| | 12,032 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
Nine Months Ended September 30, 2011: | | | | | | | | | | | |
Revenues: | | | | | | | | | | | |
Unaffiliated customers | $ | 80,398 |
| | $ | 20,292 |
| | $ | 6,253 |
| | $ | 1,527 |
| | $ | — |
| | $ | 108,470 |
|
Intersegment | — |
| | 216 |
| | 43 |
| | 274 |
| | (533 | ) | | — |
|
Cost of sales, excluding depreciation | 66,633 |
| | 18,383 |
| | 6,738 |
| | 1,059 |
| | (224 | ) | | 92,589 |
|
Depreciation | 180 |
| | 4,076 |
| | 759 |
| | 554 |
| | (87 | ) | | 5,482 |
|
General and administrative expenses | 4,580 |
| | — |
| | — |
| | 871 |
| | (281 | ) | | 5,170 |
|
Operating income (loss) | $ | 9,005 |
| | $ | (1,951 | ) | | $ | (1,201 | ) | | $ | (683 | ) | | $ | 59 |
| | $ | 5,229 |
|
Income from discontinued operations | $ | — |
| | $ | — |
| | $ | — |
| | $ | 248 |
| | $ | — |
| | $ | 248 |
|
Capital expenditures | 37,047 |
| | 5,339 |
| | 4,665 |
| | 5,605 |
| | — |
| | 52,656 |
|
| |
a. | Includes sales commissions and other revenues together with related expenses. |
| |
b. | Includes eliminations of intersegment amounts, including the deferred development fee income between Stratus and the joint venture with Canyon-Johnson. |
| |
10. | DISCONTINUED OPERATIONS |
On February 27, 2012, Stratus sold 7500 Rialto to Lincoln Properties and Greenfield Partners (Lincoln Properties) for $27.0 million. Lincoln Properties paid $6.7 million ($5.7 million net to Stratus after closing and other costs) in cash and assumed Stratus' outstanding nonrecourse debt (the Lantana Promissory Note) of $20.3 million secured by the property. Stratus is providing a limited guaranty of debt service and other obligations on the Lantana Promissory Note up to $5.0 million, which will be reduced to $2.5 million on May 1, 2016, until January 1, 2018 (the maturity date for the Lantana Promissory Note). Stratus recognized $5.1 million of its $10.1 million gain on the sale in first-quarter 2012 and expects the balance to be recorded as its obligations under the limited guaranty are relieved.
The operating results and assets and liabilities for 7500 Rialto are presented in the financial statements as discontinued operations. The operations of 7500 Rialto previously represented a component of the Commercial Leasing segment (see Note 9). The following table presents the results of operations for 7500 Rialto up to and including the sale in February 2012 (in thousands):
|
| | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2011 | | 2012 | | 2011 |
Revenues | $ | 717 |
| | $ | 287 |
| | $ | 2,573 |
|
Rental property costs | (524 | ) | | (370 | ) | | (1,380 | ) |
Depreciation | (214 | ) | | — |
| | (640 | ) |
Interest expensea | (314 | ) | | (198 | ) | | (947 | ) |
Gain on sale | — |
| | 5,146 |
| | — |
|
Provision for income taxes | (7 | ) | | (60 | ) | | (26 | ) |
(Loss) income from 7500 Rialto | (342 | ) | | 4,805 |
| | (420 | ) |
Interest capitalized by Stratus to other propertiesb | 178 |
| | — |
| | 668 |
|
(Loss) income from discontinued operations | $ | (164 | ) | | $ | 4,805 |
| | $ | 248 |
|
| | | | | |
| |
a. | Relates to interest on the Lantana Promissory Note and does not include any additional allocations of interest. |
| |
b. | Stratus capitalized interest cost on the Lantana Promissory Note to other development projects. |
The assets and liabilities for 7500 Rialto are shown below (in thousands):
|
| | | |
| December 31, |
| 2011 |
Assets: | |
Cash and cash equivalents | $ | 390 |
|
Real estate held for investment, net | 15,193 |
|
Other assets | 1,346 |
|
Total assets | 16,929 |
|
Liabilities: | |
Accounts payable | 64 |
|
Accrued liabilities | 947 |
|
Deposits | 205 |
|
Debt | 20,367 |
|
Total liabilities | 21,583 |
|
Net liabilities | $ | (4,654 | ) |
| |
| |
11. | NEW ACCOUNTING STANDARDS |
In May 2011, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) in connection with guidance for fair value measurements and disclosures. This ASU clarifies the FASB's intent on current guidance, modifies and changes certain guidance and principles, and expands disclosures concerning Level 3 fair value measurements in the fair value hierarchy (including quantitative information about significant unobservable inputs within Level 3 of the fair value hierarchy). In addition, this ASU requires disclosure of the fair value hierarchy for assets and liabilities not measured at fair value in the statement of financial position, but whose fair value is required to be disclosed. This ASU is effective for interim and annual reporting periods beginning after December 15, 2011, and early application is not permitted. Stratus adopted this guidance effective January 1, 2012.
In June 2011, the FASB issued an ASU in connection with accounting guidance on the presentation of comprehensive income. The objective of this ASU is to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. This ASU requires an entity to present the components of net income, other comprehensive income and total comprehensive income (i.e. including net income) either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This ASU eliminates the option to present the components of other comprehensive income as part of the statement of equity, but does not change the items that must be reported in other comprehensive income. This ASU is effective for interim and annual reporting periods beginning after December 15, 2011, and early adoption is permitted. Effective January 1, 2012, Stratus adopted this ASU and presented comprehensive income in a single continuous statement.
Stratus evaluated events after September 30, 2012, and through the date the financial statements were issued, and determined any events or transactions occurring during this period that would require recognition or disclosure are appropriately addressed in these financial statements.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
OVERVIEW
Management’s discussion and analysis presented below should be read in conjunction with our discussion and analysis of financial results contained in our 2011 Annual Report on Form 10-K (2011 Form 10-K) filed with the Securities and Exchange Commission. The operating results summarized in this report are not necessarily indicative of our future operating results. All subsequent references to “Notes” refer to Notes to Consolidated Financial Statements (unaudited), unless otherwise stated.
We are engaged in the acquisition, development, management, operation and sale of commercial, hotel, entertainment, and multi- and single-family residential real estate properties located primarily in the Austin, Texas area. We generate revenues primarily from sales of developed properties and from our hotel operations. Developed property sales can include condominium units at our W Austin Hotel & Residences project, an individual tract of land that has been developed and permitted for residential use or a developed lot with a home already built on it. We may, on occasion, sell properties under development, undeveloped properties or commercial properties, if opportunities arise that we believe will maximize overall asset values.
In December 2010, the hotel at our W Austin Hotel & Residences project opened, and in January 2011, we began closing on sales of condominium units at the project. The W Austin Hotel & Residences project is located on a two-acre city block in downtown Austin and contains a 251-room luxury hotel, 159 residential condominium units, and office, retail and entertainment space. The hotel is managed by Starwood Hotels & Resorts Worldwide, Inc. The office space totals 37,551 square feet and the retail space totals 18,362 square feet. The entertainment space, occupied by Austin City Limits Live at the Moody Theater (ACL Live) includes a live music and entertainment venue and production studio, which opened in February 2011. See “Development and Other Activities – W Austin Hotel & Residences.”
Our principal real estate holdings are in southwest Austin, Texas. The number of developed lots/units, developed or under development acreage and undeveloped acreage as of September 30, 2012, that comprise our principal real estate development projects are presented in the following table.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Acreage | | |
| | | Under Development | | Undeveloped | | |
| Developed Lots/Units | | Multi- family | | Commercial | | Total | | Single family | | Multi-family | | Commercial | | Total | | Total Acreage |
Austin: | | | | | | | | | | | | | | | | | |
Barton Creek | 98 |
| | 249 |
| | 368 |
| | 617 |
| | 676 |
| | 78 |
| | 50 |
| | 804 |
| | 1,421 |
|
Circle C | — |
| | — |
| | 23 |
| | 23 |
| | 132 |
| | — |
| | 335 |
| | 467 |
| | 490 |
|
Lantana | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 72 |
| | 72 |
| | 72 |
|
W Austin Residences | 50 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
San Antonio: | | | | | | | | | | | | | | | | | |
Camino Real | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2 |
| | 2 |
| | 2 |
|
Total | 148 |
| | 249 |
| | 391 |
| | 640 |
| | 808 |
| | 78 |
| | 459 |
| | 1,345 |
| | 1,985 |
|
Our principal commercial holdings at September 30, 2012, in addition to the W Austin Hotel & Residences, consisted of the first phase of Barton Creek Village, and the 5700 Slaughter retail complex and Parkside Village in the Circle C community. See "Development and Other Activities - Commercial" for further discussion.
In third-quarter 2012, our revenues totaled $39.9 million and our net income attributable to common stock totaled $0.3 million, compared with revenues of $24.5 million and a net loss attributable to common stock of $3.6 million for third-quarter 2011. The increase in revenues for third-quarter 2012 primarily relates to the sale of eight undeveloped tracts at Lantana. For the first nine months of 2012, our revenues totaled $86.7 million and our net loss attributable to common stock totaled $1.5 million, compared with revenues of $108.5 million and a net loss attributable to common stock of $6.1 million for the first nine months of 2011. The decrease in revenues for the first nine months of 2012 primarily relates to fewer sales of condominium units at the W Austin Hotel & Residences project as a result of less inventory. Our results for the first nine months of 2012 also include a profit of $4.3 million associated with the sale of eight undeveloped tracts at Lantana and $5.1 million associated with the sale of the two office buildings at 7500 Rialto Boulevard in February 2012 (see "Discontinued Operations" and Note 10 for further discussion).
Our financial condition and results of operations are highly dependent upon real estate market conditions in Austin, Texas. Our future operating cash flows and, ultimately, our ability to develop our properties and expand our business will be largely dependent on the level of our real estate sales (see “Capital Resources and Liquidity” for further discussion of our liquidity). In turn, these sales will be significantly affected by future real estate market conditions in Austin, Texas, including development costs, foreclosures and interest rate levels, the availability of credit to finance real estate transactions, demand for residential and commercial real estate, and regulatory factors including our land use and development entitlements. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” in our 2011 Form 10-K for further discussion.
NEAR-TERM REQUIREMENTS FOR ADDITIONAL CAPITAL AND BUSINESS STRATEGY
Extended adverse market conditions for real estate in Austin, Texas, have constrained our ability to carry out our business plan. As of September 30, 2012, we had $1.2 million in cash and cash equivalents available for use in our real estate operations, excluding $15.6 million of cash primarily associated with the W Austin Hotel & Residences project, total debt of $144.6 million ($31.3 million of which matures in 2012), and $6.1 million of availability under our credit facility with Comerica. Our 2012 debt maturities include our $31.3 million credit facility with Comerica, which we extended the maturity of from August 2012 to November 2012. In addition, our loan agreements contain a covenant that we maintain a minimum stockholders' equity balance of $120.0 million. As of September 30, 2012, our total stockholders' equity was $121.7 million. We also have significant recurring costs, including property taxes, maintenance and marketing, that do not vary significantly with our level of property sales.
Although we did not comply with the minimum stockholders' equity balance requirement at December 31, 2011, we were able to complete certain transactions during 2012 that allowed us to exceed the minimum stockholders' equity balance at March 31, 2012, June 30, 2012, and September 30, 2012. It is reasonably possible that we will again be out of compliance with the minimum stockholders' equity covenant in the near-term unless current trends improve or we are able to accomplish other mitigating measures. To further address our liquidity needs, we are pursuing extensions of the maturity dates for the loans that mature in 2012 and expect to pursue additional financing to fund our capital requirements and ongoing operations. There can be no assurance we will be successful in these efforts. Our inability to succeed in these efforts would have a detrimental effect on our ability to continue to operate.
We continue to focus on our near-term goal of developing our properties and projects in an uncertain economic climate through prudent use of available resources and our long-term goal of maximizing the value of our development projects. We believe that Austin, Texas, continues to be a desirable market and many of our developments are in locations that are unique and where approvals and entitlements, which we have already obtained, are difficult to secure. Real estate development in southwest Austin historically has been constrained as a result of various restrictions imposed by the City of Austin (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 ability to meet our debt obligations will be dependent upon our future performance, which will be subject to financial, business and other factors affecting our operations, many of which are beyond our control. See “Risk Factors” located in Item 1A. of our 2011 Form 10-K.
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 a two-acre city block and contains a mixture of hotel, residential, office, retail and entertainment space. In 2008, we entered into a joint venture with Canyon-Johnson Urban Fund II, L.P. (Canyon-Johnson) for the development of the project. Construction of the approximate $300 million project commenced in second-quarter 2008 and is complete.
We currently consolidate the joint venture with Canyon-Johnson based on our assessment that it is a variable interest entity (VIE) and that we are the primary beneficiary. If it is determined that the W Austin Hotel & Residences project is no longer a VIE or that we are no longer the primary beneficiary of the entity, the project will be deconsolidated from our financial statements. For a discussion of the ownership and financing structure for the W Austin Hotel & Residences project see Note 2 in our 2011 Form 10-K.
W Austin Residences. Delivery of the first condominium units began in January 2011. Condominium units were completed on a floor-by-floor basis with delivery of pre-sold units as they were completed. As of October 31, 2012, sales of 112 of the 159 condominium units had closed for $119.0 million (including 11 units for $10.1 million in third-quarter 2012) and 6 of the remaining 47 units were under contract. Net operating income of the joint venture with Canyon-Johnson, including proceeds from the sales of the condominium units, has been and must continue to be offered first to Beal Bank to repay debt incurred in connection with the project. The joint venture had $14.7 million of cash at September 30, 2012, after a $2.0 million distribution to us in third-quarter 2012 ($2.0 million payable to Canyon-Johnson at September 30, 2012). The joint venture made an additional $4.0 million distribution to us in October 2012 ($4.0 million payable to Canyon-Johnson at October 31, 2012). Canyon-Johnson's share of the distributions are available at their request. After determining the appropriate amount of cash to maintain as an operating reserve, the joint venture may make additional distributions of any excess cash to us and Canyon-Johnson.
W Austin Hotel. We have an agreement with Starwood Hotels & Resorts Worldwide, Inc. for the management of hotel operations. The hotel includes 251 luxury rooms and suites, a full service spa, gym, rooftop pool and 9,750 square feet of meeting space.
ACL Live. The project also includes ACL Live, a live music and entertainment venue and production studio with a maximum capacity of approximately 3,000 people. In addition to hosting concerts and private events, this venue is the new home of Austin City Limits, a television program showcasing popular music legends. ACL Live opened in February 2011, has hosted 139 events during the first nine months of 2012 (including 40 events in third-quarter 2012) and currently has booked events through February 2013.
Office and Retail. The project has 37,551 square feet of leasable office space, of which 17,500 square feet opened in March 2011, including 9,000 square feet for our corporate office. The project also has 18,362 square feet of leasable retail space, of which 14,500 square feet opened in August 2011. As of September 30, 2012, occupancy was 57 percent for the office space and 82 percent for the retail space. Leasing activities for the remaining office and retail space are ongoing.
Residential. As of September 30, 2012, the number of our residential developed lots/units and potential development by area are shown below (excluding lots associated with our Crestview Station joint venture):
|
| | | | | | | | | |
| | Residential Lots/Units |
| | Developed | | Potential Developmenta | | Total |
W Austin Hotel & Residences project: | | | | | | |
Condominium unitsb | | 50 |
| | — |
| | 50 |
|
Barton Creek: | | | | | | |
Calera: | | | | | | |
Calera Drive | | 7 |
| | — |
| | 7 |
|
Verano Drive | | 55 |
| | — |
| | 55 |
|
Amarra Drive: | | | | | | |
Phase I Lots | | 2 |
| | — |
| | 2 |
|
Phase II Lots | | 33 |
| | — |
| | 33 |
|
Townhomes | | — |
| | 221 |
| | 221 |
|
Phase III Lots | | — |
| | 64 |
| | 64 |
|
Mirador Estate | | 1 |
| | — |
| | 1 |
|
Section N Multi-family | | — |
| | 1,860 |
| | 1,860 |
|
Other Barton Creek Sections | | — |
| | 154 |
| | 154 |
|
Circle C: | | | | | | |
Meridian | | — |
| | 57 |
| | 57 |
|
Total Residential Lots/Units | | 148 |
| | 2,356 |
| | 2,504 |
|
| |
a. | Our development of the properties identified under the heading “Potential Development” is dependent upon the approval of our development plans and permits by governmental agencies, including the City. Those governmental agencies may either not approve one or more development plans and permit applications related to such properties or require us to modify our development plans. Accordingly, our development strategy with respect to those properties may change in the future. While we may be proceeding with approved infrastructure projects on some of these properties, they are not considered to be “under development” for disclosure in this table unless other development activities necessary to fully realize the properties’ |
intended final use are in progress or scheduled to commence in the near term.
| |
b. | Owned through a joint venture. |
W Austin Hotel & Residences. See "Development and Other Activities - W Austin Hotel & Residences" for further discussion.
Calera. Calera is a residential subdivision with plat approval for 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. Construction of the final phase, known as Verano Drive, was completed in July 2008 and includes 71 single-family lots. We sold the final Calera Court Courtyard home for $0.5 million during second-quarter 2011. During the first nine months of 2012, we sold ten Verano Drive lots for $3.2 million and one Calera Drive lot for $0.2 million. As of September 30, 2012, seven lots at Calera Drive and 55 lots at Verano Drive remained unsold, including two Calera Drive lots and three Verano Drive lots under contract as of October 31, 2012.
Amarra Drive. Amarra Drive Phase I, which is the initial phase of the Amarra Drive subdivision, was completed in 2007 and includes six lots 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. As of September 30, 2012, two lots remained unsold. In 2008, we commenced development of Amarra Drive Phase II, which consists of 35 lots on 51 acres. Development was substantially completed in October 2008 and during the first nine months of 2012 we sold two Phase I lots for $0.7 million and two Phase II lots for $1.0 million.
Mirador Estate. The Mirador subdivision consists of 34 estate lots, with each lot averaging approximately 3.5 acres in size. We sold one Mirador lot for $0.4 million in first-quarter 2012 and as of October 31, 2012, the final Mirador estate lot was under contract.
Circle C. We are developing the Circle C community based on the entitlements secured in our Circle C settlement with the City. Our Circle C settlement, as amended in 2004, permits development of 1.16 million square feet of commercial space, 504 multi-family units and 830 single-family residential lots. Meridian is an 800-lot residential development at the Circle C community. Development of Meridian included contracts with three national homebuilders to complete the construction and sales of 494 lots. We sold the final 13 lots in first-quarter 2010.
In 2006, we signed another contract with a national homebuilder for 42 additional lots. Development of those lots was substantially completed in April 2008. In June 2009, the contract was terminated by the homebuilder, and during 2011 and 2010 we sold the remaining unclosed lots (including one lot in first-quarter 2011 for $0.1 million).
The final phase of Meridian is expected to consist of 57 one-acre lots.
Commercial. As of September 30, 2012, the number of square feet of our commercial property developed, under development and our remaining entitlements are shown below (excluding property associated with our Crestview Station joint venture):
|
| | | | | | | | | | | |
| Commercial Property |
| Developed | | Under Development | | Potential Development a | | Total |
W Austin Hotel & Residences project: | | | | | | | |
Officeb | 37,551 |
| | — |
| | — |
| | 37,551 |
|
Retailb | 18,362 |
| | — |
| | — |
| | 18,362 |
|
Barton Creek: | | | | | | | |
Treaty Oak Bank | 3,085 |
| | — |
| | — |
| | 3,085 |
|
Barton Creek Village Phase I | 22,366 |
| | — |
| | — |
| | 22,366 |
|
Barton Creek Village Phase II | — |
| | — |
| | 16,000 |
| | 16,000 |
|
Entry Corner | — |
| | — |
| | 5,000 |
| | 5,000 |
|
Amarra Retail/Office | — |
| | — |
| | 90,000 |
| | 90,000 |
|
Section N | — |
| | — |
| | 1,500,000 |
| | 1,500,000 |
|
Circle C: | | | | | | | |
Chase Bank Ground Lease | 4,450 |
| | — |
| | — |
| | 4,450 |
|
5700 Slaughter | 21,248 |
| | — |
| | — |
| | 21,248 |
|
Parkside Villageb | 65,942 |
| | 24,699 |
| | — |
| | 90,641 |
|
Tract 110 | — |
| | — |
| | 685,000 |
| | 685,000 |
|
Tract 101 | — |
| | — |
| | 90,000 |
| | 90,000 |
|
Tract 102 | — |
| | — |
| | 25,000 |
| | 25,000 |
|
Tract 114 | — |
| | — |
| | 5,000 |
| | 5,000 |
|
Lantana: | | | | | | | |
Tract GR1 | — |
| | — |
| | 325,000 |
| | 325,000 |
|
Tract G07 | — |
| | — |
| | 160,000 |
| | 160,000 |
|
Tract L04 | — |
| | — |
| | 70,000 |
| | 70,000 |
|
Austin 290 Tract | — |
| | — |
| | 20,000 |
| | 20,000 |
|
Total Square Feet | 173,004 |
| | 24,699 |
| | 2,991,000 |
| | 3,188,703 |
|
| |
a. | Our development of the properties identified under the heading “Potential Development” is dependent upon the approval of our development plans and permits by governmental agencies, including the City. Those governmental agencies may either not approve one or more development plans and permit applications related to such properties or require us to modify our development plans. Accordingly, our development strategy with respect to those properties may change in the future. While we may be proceeding with approved infrastructure projects on some of these properties, they are not considered to be “under development” for disclosure in this table unless other development activities necessary to fully realize the properties’ intended final use are in progress or scheduled to commence in the near term. |
| |
b. | Owned through a joint venture. |
W Austin Hotel & Residences. See "Development and Other Activities - W Austin Hotel & Residences" for further discussion.
Barton Creek. The first phase of the Barton Creek Village includes a 22,366-square-foot retail complex and a 3,085-square-foot bank building within this retail complex. As of September 30, 2012, occupancy was 100 percent for the retail complex and the bank building is leased through January 2023.
Circle C. In 2008, we completed the construction of two retail buildings, totaling 21,248 square feet, at 5700 Slaughter. This retail project also includes a 4,000-square-foot bank building on an existing ground lease, which expires in 2025. As of September 30, 2012, occupancy was approximately 91 percent for the two retail buildings.
The Circle C community also includes Parkside Village, a 90,641-square-foot retail project under construction. The project consists of a 33,650-square-foot full-service movie theater and restaurant, a 13,890-square-foot medical clinic and five other retail buildings including, a 14,926-square-foot building, a 10,175-square-foot building, a 7,500-square-foot building, a 5,500-square-foot building and a stand-alone 5,000-square-foot building. In February 2011, we entered into a joint venture with Moffett Holdings, LLC (Moffett Holdings) to develop Parkside Village, obtained final permits and entitlements and began construction (see Note 4). Construction activities continue on schedule,
and are expected to be completed in fourth-quarter 2012. As of September 30, 2012, occupancy was 73 percent of the total project and as of October 31, 2012, we had executed leases for 13,707 additional square feet with leasing activities ongoing.
Lantana. Lantana is a partially developed, mixed-use real estate development project. In August 2012, we completed the sale of eight of the remaining eleven undeveloped commercial tracts of land for $15.8 million. The tracts of land sold, which total approximately 154 acres, have entitlements for approximately 1,131,200 square feet of office space. As of September 30, 2012, we had remaining entitlements for approximately 555,000 square feet of office and retail space on 72 acres. Regional utility and road infrastructure is in place with capacity to serve Lantana at full build-out, permitted under our existing entitlements.
Crestview Station. In 2005, we formed a joint venture with Trammell Crow Central Texas Development, Inc. (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 commuter rail line. The joint venture completed environmental remediation, which the State of Texas certified as complete in 2007, and permitting of the property. The joint venture obtained permits to develop Crestview Station as a 450-unit transit-oriented neighborhood. Crestview Station sold substantially all of its multi-family and commercial properties in 2007 and one commercial site in 2008, while retaining the single-family component. Crestview Station has entered into an agreement to sell the remaining residential land to DR Horton. The contract provides for the sale of 304 lots over four years for a total contract price of $15.8 million. The first closing of 73 lots for $3.8 million occurred in April 2012, and Crestview Station recognized gross profit on the sale of $0.4 million. At September 30, 2012, our investment in the Crestview Station project totaled $3.4 million and the joint venture partnership had $4.2 million of outstanding debt, for which each partner has executed a joint and several guarantee of $1.1 million, or 25 percent of the outstanding balance. If the third take-down contemplated by the purchase and sale agreement does not occur by April 2014, our guaranty increases to 100 percent of the then outstanding loan balance. We account for our 50 percent interest in the Crestview Station joint venture under the equity method.
RESULTS OF OPERATIONS
We are continually evaluating the development potential of our properties and will continue to consider opportunities to enter into transactions involving our properties. As a result, and because of numerous other factors affecting our business activities as described herein, our past operating results are not necessarily indicative of our future results.
The following table summarizes our operating results (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2012 | | 2011 | | 2012 | | 2011 |
Operating income (loss): | | | | | | | |
Real estate operations | $ | 2,163 |
| | $ | 564 |
| | $ | (442 | ) | | $ | 9,005 |
|
Hotel | (681 | ) | | (1,342 | ) | | 556 |
| | (1,951 | ) |
Entertainment venue | (36 | ) | | (483 | ) | | 586 |
| | (1,201 | ) |
Commercial leasing | 37 |
| | (226 | ) | | (103 | ) | | (683 | ) |
Eliminations and other | 26 |
| | 26 |
| | 91 |
| | 59 |
|
Operating income (loss) | $ | 1,509 |
| | $ | (1,461 | ) | | $ | 688 |
| | $ | 5,229 |
|
Interest expense, net | $ | (2,835 | ) | | $ | (1,889 | ) | | $ | (9,443 | ) | | $ | (4,041 | ) |
Net loss (income) attributable to noncontrolling interests in subsidiaries | 1,923 |
| | 109 |
| | 2,876 |
| | (7,353 | ) |
Net income (loss) attributable to Stratus common stock | 323 |
| | (3,576 | ) | | (1,532 | ) | | (6,109 | ) |
We have four operating segments, “Real Estate Operations,” “Hotel,” “Entertainment Venue” and “Commercial Leasing” (see Note 9). The following is a discussion of our operating results by segment.
Real Estate Operations
The following table summarizes our real estate operating results (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2012 | | September 30, |
| 2012 | | 2011 | | 2012 | | 2011 |
Revenues: | | | | | | | |
Developed property sales | $ | 12,029 |
| | $ | 13,354 |
| | $ | 32,749 |
| | $ | 77,936 |
|
Undeveloped property sales | 15,837 |
| | 1,985 |
| | 15,837 |
| | 1,985 |
|
Commissions and other | 112 |
| | 210 |
| | 497 |
| | 477 |
|
Total revenues | 27,978 |
| | 15,549 |
| | 49,083 |
| | 80,398 |
|
Cost of sales, including depreciation | 24,525 |
| | 13,599 |
| | 45,558 |
| | 66,813 |
|
General and administrative expenses | 1,290 |
| | 1,386 |
| | 3,967 |
| | 4,580 |
|
Operating income (loss) | $ | 2,163 |
| | $ | 564 |
| | $ | (442 | ) | | $ | 9,005 |
|
Developed Property Sales. Developed property sales for the 2012 and 2011 periods included the following (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, |
| 2012 | | 2011 |
| Units/Lots | | Revenues | | Average Cost per Lot/Unit | | Units/Lots | | Revenues | | Average Cost Per Lot/Unit |
W Austin Hotel & Residences | | | | | | | | | | | |
Condominium Units | 11 |
| | $ | 10,062 |
| | $ | 923 |
| | 10 |
| | $ | 13,207 |
| | $ | 1,022 |
|
| | | | | | | | | | | |
Barton Creek | | | | | | | | | | | |
Calera: | | | | | | | | | | | |
Verano Drive | 3 |
| | 1,014 |
| | 191 |
| | — |
| | — |
| | — |
|
Amarra Drive: | | | | | | | | | | | |
Phase II Lots | 2 |
| | 953 |
| | 201 |
| | — |
| | — |
| | — |
|
Meridian | — |
| | — |
| | — |
| | 1 |
| | 147 |
| | 122 |
|
Total Residential | 16 |
| | $ | 12,029 |
| | | | 11 |
| | $ | 13,354 |
| | |
|
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2012 | | 2011 |
| Units/Lots | | Revenues | | Average Cost per Lot/Unit | | Units/Lots | | Revenues | | Average Cost per Lot/Unit |
W Austin Hotel & Residences | | | | | | | | | | | |
Condominium Units | 31 |
| | $ | 27,238 |
| | $ | 797 |
| | 69 |
| | $ | 76,604 |
| | $ | 852 |
|
| | | | | | | | | | | |
Barton Creek | | | | | | | | | | | |
Calera: | | | | | | | | | | | |
Verano Drive | 10 |
| | 3,198 |
| | 178 |
| | — |
| | — |
| | — |
|
Calera Drive | 1 |
| | 240 |
| | 142 |
| | — |
| | — |
| | — |
|
Calera Court Courtyard Homes | — |
| | — |
| | — |
| | 1 |
| | 490 |
| | 501 |
|
Amarra: | | | | | | | | | | | |
Phase I Lots | 2 |
| | 745 |
| | 313 |
| | 1 |
| | 550 |
| | 198 |
|
Phase II Lots | 2 |
| | 953 |
| | 201 |
| | — |
| | — |
| | — |
|
Mirador Estate | 1 |
| | 375 |
| | 228 |
| | — |
| | — |
| | — |
|
| | | | | | | | | | | |
Circle C | | | | | | | | | | | |
Meridian | — |
| | — |
| | — |
| | 2 |
| | 292 |
| | 122 |
|
Total Residential | 47 |
| | $ | 32,749 |
| | | | 73 |
| | $ | 77,936 |
| | |
The increase in developed units/lots sales in third-quarter 2012 primarily resulted from an increase in lot sales at Barton Creek, but revenues were lower compared with third-quarter 2011 because of lower revenues from sold condominium units. The decrease in developed property sales revenues in the first nine months of 2012 primarily resulted from fewer sales of condominium units at the W Austin Hotel & Residences project because the sales for the 2011 periods included presales from prior years that closed and were delivered as the units were completed during 2011. In addition, the inventory of condominium units has declined because of sales, leaving a remaining inventory of 47 units at October 31, 2012, from the original inventory of 159 units. The decrease in condominium unit sales in the first nine months of 2012 was partly offset by an increase in lot sales at Barton Creek.
In October 2012, we sold 3 condominium units and as of October 31, 2012, we had 6 condominium units under contract at the W Austin Hotel & Residences project.
Undeveloped Property Sales. During third-quarter 2012, we sold eight undeveloped commercial tracts of land at Lantana for $15.8 million in cash. During third-quarter 2011, we sold a 28-acre tract of undeveloped land at Circle C for $2.0 million.
Commissions and Other. Commissions and other primarily included sales of our development fee credits to third parties for less than $0.1 million in third-quarter 2012, $0.1 million in third-quarter 2011 and $0.2 million for the first nine months of 2012 and 2011. We received these development fee credits as part of the Circle C settlement (see Note 10 of our 2011 Form 10-K).
Cost of Sales. Cost of sales includes cost of property sold, project operating and marketing expenses and allocated overhead costs, partly offset by reductions for certain municipal utility district reimbursements. Cost of sales totaled $24.5 million for third-quarter 2012 compared with $13.6 million for third-quarter 2011, and $45.6 million for the first nine months of 2012 compared with $66.8 million for the first nine months of 2011. The increase in cost of sales for the third quarter of 2012, compared with the third quarter of 2011, primarily relates to the undeveloped commercial tracts at Lantana sold in third-quarter 2012. The decrease in cost of sales in the nine months ended September 30, 2012, compared with the nine months ended September 30, 2011, primarily resulted from fewer sales of condominium units at the W Austin Hotel & Residences project. Cost of sales for the 2012 periods also include a margin reduction charge on the condominium units totaling $1.5 million, associated with revised estimates of future revenues. When estimates of sales value or project costs are revised, gross profit is adjusted in the period of change so that cumulative project earnings reflect the revised profit estimate. Cost of sales for our real estate operations also include significant, recurring costs (including property taxes, maintenance and marketing), which totaled $1.7 million for third-quarter 2012, $1.4 million for third-quarter 2011, $5.4 million for the first nine months of 2012 and $4.5 million for the first nine months of 2011. These recurring costs do not vary significantly with the level of property sales.
General and Administrative Expenses. Consolidated general and administrative expenses totaled approximately $1.5 million for both the third quarters of 2012 and 2011, $4.9 million for the first nine months of 2012 and $5.2 million for the first nine months of 2011. Lower general and administrative expenses in the first nine months of 2012 primarily reflect lower travel and lodging expense, which more than offset lower capitalized general and administrative expenses. General and administrative expenses allocated to real estate operations totaled $1.3 million for third-quarter 2012, $1.4 million for third-quarter 2011, $4.0 million for the first nine months of 2012 and $4.6 million for the first nine months of 2011. For more information about the allocation of general and administrative expenses to our operating segments, see Note 9.
Hotel
The following table summarizes our hotel operating results (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2012 | | 2011 | | 2012 | | 2011 |
Hotel revenue | $ | 7,615 |
| | $ | 6,007 |
| | $ |