STRS Q3 2013 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2013
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
 
Stratus Properties Inc.
(Exact name of registrant as specified in its charter)
Delaware
72-1211572
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
212 Lavaca St., Suite 300
 
Austin, Texas
78701
(Address of principal executive offices)
(Zip Code)
 
(512) 478-5788
(Registrant's telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
þ Yes   ¨ No

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

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

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

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

On October 31, 2013, there were issued and outstanding 8,044,795 shares of the registrant’s common stock, par value $0.01 per share.



STRATUS PROPERTIES INC.
TABLE OF CONTENTS
 
 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Table of Contents




STRATUS PROPERTIES INC.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

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

 
September 30,
2013
 
December 31,
2012
ASSETS
 
 
 
Cash and cash equivalents
$
45,438

 
$
12,784

Restricted cash
9,345

 
17,657

Real estate held for sale
23,229

 
60,244

Real estate under development
52,943

 
31,596

Land available for development
41,510

 
49,569

Real estate held for investment, net
183,407

 
189,331

Investment in unconsolidated affiliates
4,500

 
3,402

Other assets
16,036

 
14,545

Total assets
$
376,408

 
$
379,128

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Accounts payable
$
5,709

 
$
13,845

Accrued liabilities
7,037

 
8,605

Deposits
3,379

 
2,073

Debt
155,850

 
137,035

Other liabilities and deferred gain
10,449

 
8,675

Total liabilities
182,424

 
170,233

 
 
 
 
Commitments and contingencies

 

 
 
 
 
Equity:
 
 
 
Stratus stockholders’ equity:
 
 
 
Common stock
91

 
90

Capital in excess of par value of common stock
203,621

 
203,298

Accumulated deficit
(61,564
)
 
(63,309
)
Common stock held in treasury
(19,301
)
 
(18,392
)
Total Stratus stockholders’ equity
122,847

 
121,687

Noncontrolling interests in subsidiaries
71,137

 
87,208

Total equity
193,984

 
208,895

Total liabilities and equity
$
376,408

 
$
379,128


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


2
Table of Contents


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

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
Revenues:
 
 
 
 
 
 
 
Real estate
$
10,810

 
$
27,960

 
$
57,715

 
$
49,047

Hotel
8,312

 
7,567

 
28,207

 
25,191

Entertainment
3,310

 
3,155

 
9,942

 
9,258

Rental
1,391

 
1,189

 
3,943

 
3,244

Total revenues
23,823

 
39,871

 
99,807

 
86,740

Cost of sales:
 
 
 
 
 
 
 
Real estate
6,942

 
24,440

 
46,727

 
45,278

Hotel
6,893

 
6,377

 
21,705

 
19,809

Entertainment
3,000

 
2,798

 
8,435

 
7,592

Rental
644

 
561

 
1,991

 
1,576

Depreciation
2,252

 
2,644

 
6,790

 
6,927

Total cost of sales
19,731

 
36,820

 
85,648

 
81,182

Insurance settlement
—

 
—

 
(1,785
)
 
—

General and administrative expenses
1,578

 
1,542

 
5,356

 
4,870

Total costs and expenses
21,309

 
38,362

 
89,219

 
86,052

Operating income
2,514

 
1,509

 
10,588

 
688

Interest expense, net
(1,833
)
 
(2,835
)
 
(6,140
)
 
(9,443
)
Loss on early extinguishment of debt
(1,379
)
 
—

 
(1,379
)
 
—

Other income, net
7

 
11

 
1,352

 
51

(Loss) income from continuing operations before income taxes and equity in unconsolidated affiliates' (loss) income
(691
)
 
(1,315
)
 
4,421

 
(8,704
)
Equity in unconsolidated affiliates' (loss) income
(114
)
 
(61
)
 
(3
)
 
14

Provision for income taxes
(192
)
 
(224
)
 
(617
)
 
(523
)
(Loss) income from continuing operations
(997
)
 
(1,600
)
 
3,801

 
(9,213
)
Income from discontinued operations
—

 
—

 
—

 
4,805

Net (loss) income and total comprehensive (loss) income
(997
)
 
(1,600
)
 
3,801

 
(4,408
)
Net loss (income) and total comprehensive loss (income) attributable to noncontrolling interests in subsidiaries
957

 
1,923

 
(2,056
)
 
2,876

Net (loss) income and total comprehensive (loss) income attributable to Stratus common stock
$
(40
)
 
$
323

 
$
1,745

 
$
(1,532
)
 
 
 
 
 
 
 
 
Basic and diluted net (loss) income per share attributable to Stratus common stock:
 
 
 
 
 
 
 
Continuing operations
$
—

 
$
0.04

 
$
0.22

 
$
(0.80
)
Discontinued operations
—

 
—

 
—

 
0.61

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

 
$
0.04

 
$
0.22

 
$
(0.19
)
 
 
 
 
 
 
 
 
Weighted-average shares of common stock outstanding:
 
 
 
 
 
 
 
Basic
8,057

 
8,095

 
8,087

 
7,923

Diluted
8,057

 
8,095

 
8,118

 
7,923


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

3
Table of Contents


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

 
Nine Months Ended
 
September 30,
 
2013
 
2012
Cash flow from operating activities:
 
 
 
Net income (loss)
$
3,801

 
$
(4,408
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation
6,790

 
6,922

Cost of real estate sold
37,341

 
35,643

Loss on early extinguishment of debt
1,379

 
—

Gain on sale of 7500 Rialto
—

 
(5,146
)
Stock-based compensation
245

 
198

Equity in unconsolidated affiliates' loss (income)
3

 
(14
)
Deposits
1,306

 
1,029

Development of real estate properties
(14,054
)
 
(8,446
)
Recovery of land previously sold
(485
)
 
—

Municipal utility districts reimbursement
208

 
—

Decrease (increase) in other assets
7,991

 
(5,689
)
Increase (decrease) in accounts payable, accrued liabilities and other
2,340

 
(4,499
)
Net cash provided by operating activities
46,865

 
15,590

 
 
 
 
Cash flow from investing activities:
 
 
 
Capital expenditures:
 
 
 
Commercial leasing properties
(677
)
 
(3,413
)
Entertainment
(299
)
 
(170
)
Hotel
(15
)
 
(3
)
Proceeds from sale of 7500 Rialto
—

 
5,697

Investment in unconsolidated affiliates
(1,100
)
 
(185
)
Net cash (used in) provided by investing activities
(2,091
)

1,926

 
 
 
 
Cash flow from financing activities:
 
 
 
Borrowings from credit facility
18,000

 
22,500

Payments on credit facility
(32,924
)
 
(29,554
)
Borrowings from project and term loans
101,577

 
10,532

Payments on project and term loans
(68,511
)
 
(17,436
)
Noncontrolling interests (distributions) contributions
(28,026
)
 
341

Common stock issuance
—

 
4,817

Repurchase of treasury stock
(820
)
 
—

Net payments for stock-based awards
(10
)
 
(19
)
Financing costs
(1,406
)
 
—

Net cash used in financing activities
(12,120
)
 
(8,819
)
Net increase in cash and cash equivalents
32,654

 
8,697

Cash and cash equivalents at beginning of year
12,784

 
8,085

Cash and cash equivalents at end of period
$
45,438

 
$
16,782


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

4
Table of Contents


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

 
 
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, 2012
 
9,037

 
$
90

 
$
203,298

 
$
(63,309
)
 
940

 
$
(18,392
)
 
$
121,687

 
$
87,208

 
$
208,895

Common stock repurchases
 
—

 
—

 
—

 
—

 
71

 
(810
)
 
(810
)
 
—

 
(810
)
Exercised and issued stock-based awards
 
38

 
1

 
78

 
—

 
—

 
—

 
79

 
—

 
79

Stock-based compensation
 
—

 
—

 
245

 
—

 
—

 
—

 
245

 
—

 
245

Tender of shares for stock-based awards
 
—

 
—

 
—

 
—

 
8

 
(99
)
 
(99
)
 
—

 
(99
)
Noncontrolling interests distributions
 
—

 
—

 
—

 
—

 
—

 
—

 
—

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

 
—

 
—

 
1,745

 
—

 
—

 
1,745

 
2,056

 
3,801

Balance at September 30, 2013
 
9,075

 
$
91

 
$
203,621

 
$
(61,564
)
 
1,019

 
$
(19,301
)
 
$
122,847

 
$
71,137

 
$
193,984


Balance at December 31, 2011
 
8,387

 
$
84

 
$
198,175

 
$
(61,723
)
 
935

 
$
(18,347
)
 
$
118,189

 
$
99,493

 
$
217,682

Common stock issuance
 
625

 
6

 
4,811

 
—

 
—

 
—

 
4,817

 
—

 
4,817

Exercised and issued stock-based awards
 
23

 
—

 
26

 
—

 
—

 
—

 
26

 
—

 
26

Stock-based compensation
 
—

 
—

 
198

 
—

 
—

 
—

 
198

 
—

 
198

Tender of shares for stock-based awards
 
—

 
—

 
—

 
—

 
5

 
(45
)
 
(45
)
 
—

 
(45
)
Noncontrolling interests distributions
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(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


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



5
Table of Contents


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

1.
GENERAL
The accompanying unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2012, included in Stratus Properties Inc.’s (Stratus) Annual Report on Form 10-K (Stratus 2012 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, 2013, are not necessarily indicative of the results that may be expected for the year ending December 31, 2013.

2.
EARNINGS PER SHARE
Stratus’ basic net income per share of common stock was calculated by dividing the net (loss) income attributable to Stratus common stock by the weighted-average shares of common stock outstanding during the period. Following is a reconciliation of net (loss) income and weighted-average shares of common stock outstanding for purposes of calculating diluted net (loss) income per share (in thousands, except per share amounts):
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2013
 
2012
 
2013
 
2012
Net (loss) income
 
$
(997
)
 
$
(1,600
)
 
$
3,801

 
$
(4,408
)
Net loss (income) attributable to noncontrolling interests
 
957

 
1,923

 
(2,056
)
 
2,876

Net (loss) income attributable to Stratus common stock
 
$
(40
)
 
$
323

 
$
1,745

 
$
(1,532
)
 
 
 
 
 
 
 
 
 
Weighted-average shares of common stock outstanding
 
8,057

 
8,095

 
8,087

 
7,923

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

 
—

 
7

a 
—

Restricted stock units
 
—

 
—

 
24

 
—

 
 
 
 
 
 
 
 
 
Weighted-average shares of common stock outstanding for purposes of calculating diluted net (loss) income per share
 
8,057

 
8,095

 
8,118

 
7,923

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

 
$
0.04

 
$
0.22

 
$
(0.19
)
a. Excludes shares of common stock associated with outstanding stock options with exercise prices less than the average market price of Stratus' common stock that were anti-dilutive based on the treasury stock method totaling approximately 1,700 shares for the first nine months of 2013.

Outstanding stock options with exercise prices greater than the average market price for Stratus' common stock during the period are excluded from the computation of diluted net (loss) income per share of common stock. Excluded were approximately 65,800 stock options with a weighted average exercise price of $20.65 for the first nine months of 2013. Stock options and restricted stock units representing approximately 100,000 shares for third-quarter 2013, 125,200 shares for third-quarter 2012 and 135,500 shares for the first nine months of 2012 were excluded from weighted-average common shares outstanding for purposes of calculating diluted net (loss) income per share because they were anti-dilutive.

3.
JOINT VENTURE WITH CANYON-JOHNSON URBAN FUND II, L.P.
Stratus and Canyon-Johnson Urban Fund II, L.P. (Canyon-Johnson) are participants in a joint venture, CJUF II Stratus Block 21, LLC (the 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, 2013, cumulative capital contributions totaled $71.9 million for Stratus and $94.0 million for Canyon-Johnson. Distributions to each of Stratus and Canyon-Johnson totaled $3.8 million in third-quarter 2013 and $18.0 million for the first nine months of 2013, and the Joint Venture distributed $14.8 million to Stratus and $20.1 million to Canyon-Johnson in October 2013. As of October 31, 2013, inception-to-date distributions totaled $42.8 million for Stratus and $48.0 million for Canyon-Johnson, including Canyon-Johnson' accumulated distributions that were previously reflected as restricted cash in Stratus' consolidated balance sheet and were paid in third-quarter 2013. The Joint Venture is consolidated in Stratus’ financial statements based on its assessment that the Joint Venture is a variable interest entity (VIE) and that Stratus is the primary

6
Table of Contents


beneficiary. Stratus reevaluated and reaffirmed its previous conclusion as to the VIE status and primary beneficiary of the Joint Venture as of September 30, 2013, the date of the Bank of America (BoA Loan) refinancing transaction (see Note 6). Stratus will continue to evaluate which entity is the primary beneficiary of the Joint Venture in accordance with applicable accounting guidance. See Note 2 of the Stratus 2012 Form 10-K for further discussion.

Stratus’ consolidated balance sheets include the following assets and liabilities of the Joint Venture (in thousands):
 
September 30,
 
December 31,
 
2013
 
2012
Assets:
 
 
 
Cash and cash equivalents
$
42,698

 
$
7,461

Restricted cash
9,336

 
17,657

Real estate held for sale
14,934

 
45,320

Real estate held for investment, net
158,211

 
163,666

Other assets
7,709

 
8,398

    Total assets
232,888

 
242,502

Liabilities:
 
 
 
Accounts payable
3,393

 
13,592

Accrued liabilities
5,002

 
6,322

Deposits
2,905

 
1,714

Debt
100,000

 
67,670

Other liabilities
4,328

 
2,386

    Total liabilities
115,628

 
91,684

Net assets
$
117,260

 
$
150,818

 
 
 
 

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 Joint Venture’s net assets as of each balance sheet date. As of September 30, 2013, the cumulative earnings for the W Austin Hotel & Residences project were allocated based on 42 percent for Stratus and 58 percent for Canyon-Johnson.

On October 3, 2012, the Joint Venture and Pedernales Entertainment LLC (Pedernales) formed Stageside Productions (Stageside) to promote, market and commercialize the production, sale, distribution and general oversight of audio and video recordings of events or performances occurring at Austin City Limits Live at the Moody Theater (ACL Live). The Joint Venture's initial capital contributions to Stageside totaled $0.3 million, and the Joint Venture will contribute additional capital as necessary to fund the working capital needs of Stageside. The Joint Venture has a 100 percent capital funding interest and has a 40 percent residual and voting interest in Stageside. The Joint Venture performed an evaluation and concluded Stageside is a VIE and that the Joint Venture is the primary beneficiary. Accordingly, the results of Stageside are consolidated in the Joint Venture's financial statements.

4.
FAIR VALUE MEASUREMENTS
Fair value accounting guidance includes a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 inputs) and the lowest priority to unobservable inputs (Level 3 inputs).

The carrying value for certain Stratus financial instruments (i.e., cash and cash equivalents, restricted cash, accounts payable and accrued liabilities) 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 instruments follows (in thousands):

7
Table of Contents


 
September 30, 2013
 
December 31, 2012
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
Interest rate cap agreement
$
487

 
$
487

 
$
—

 
$
—

Debt
155,850

 
156,001

 
137,035

 
136,774


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.

Interest Rate Cap Agreement. On September 30, 2013, the Joint Venture paid $0.5 million to enter into an interest rate cap agreement, which caps the one-month London Interbank Offered Rate (LIBOR), the variable rate in the BoA Loan agreement, at 1 percent for the first year the BoA Loan is outstanding, 1.5 percent for the second year and 2 percent for the third year. Stratus uses an interest rate pricing model that relies on market observable inputs such as LIBOR to measure the fair value of the interest rate cap agreement. Stratus also evaluated the counterparty credit risk associated with the interest rate cap agreement, which is considered a Level 3 input, but did not consider such risk to be significant. Therefore, the interest rate cap agreement is classified within Level 2 of the fair value hierarchy. See Note 6 for more information on the BoA Loan.

5.
INVESTMENT IN UNCONSOLIDATED AFFILIATES
In April 2013, Stratus formed a joint venture, Stump Fluff LLC (Stump Fluff), with Transmission Entertainment, LLC (Transmission) to own, operate, manage and sell live music and entertainment promotion, booking, production, merchandising, venue services and other related products and services. As of September 30, 2013, Stratus' capital contributions to Stump Fluff totaled $0.8 million. Stratus will contribute additional capital to Stump Fluff as necessary to fund its working capital needs. Transmission contributed its existing assets to Stump Fluff. In addition, Stump Fluff assumed specified liabilities of Transmission totaling $0.2 million. Transmission is not required to make any future capital contributions to Stump Fluff. Stratus and Transmission each have a 50 percent voting interest in Stump Fluff. After Stratus is repaid its original capital contributions and a preferred return (10 percent annually) on those contributions, Stratus will receive 33 percent of any distributions from Stump Fluff and Transmission will receive 67 percent.

In May 2013, Stratus and Austin Pachanga Partners, LLC (Pachanga Partners) formed a joint venture, Guapo Enterprises LLC (Guapo) to own, operate, manage and sell the products and services of the Pachanga music festival business. As of September 30, 2013, Stratus' capital contributions to Guapo totaled $0.3 million. Stratus will contribute additional capital to Guapo as necessary to fund its working capital needs. Pachanga Partners contributed its existing assets to Guapo and is not required to make any future capital contributions. Stratus and Pachanga Partners each have a 50 percent voting interest in Guapo. After Stratus is repaid its original capital contributions and a preferred return (10 percent annually) on those contributions, Stratus will receive 33 percent of any distributions from Guapo and Pachanga Partners will receive 67 percent.

Stratus has concluded that both Stump Fluff and Guapo are VIEs and that no partner in either joint venture is the primary beneficiary because decision-making about the activities that most significantly impact the VIEs' economic performance is shared equally by the partners. Stratus accounts for its investments in Stump Fluff and Guapo using the equity method.

6.
DEBT
Bank of America Loan. On September 30, 2013, the Joint Venture entered into a term loan agreement for a $100 million non-recourse loan (the BoA Loan).
 
The initial maturity date of the BoA Loan is September 29, 2016, but the Joint Venture has the option to extend the maturity date for up to three additional one-year terms. The BoA Loan accrues interest at the LIBOR Daily Floating Rate plus 2.5 percent. Such interest rate is subject to a separate interest rate cap agreement (see Note 4). The Joint Venture’s obligations under the BoA Loan are secured by certain property and assets related to the W Austin Hotel & Residences project, excluding the remaining unsold condominium residences. Additionally, Stratus and Canyon-Johnson guarantee certain Joint Venture obligations, including environmental indemnification and other customary carve-out obligations, and the BoA Loan contains customary financial covenants and other restrictions. As required by the BoA Loan, $67.3 million of the proceeds were used to fully repay the Joint Venture’s existing

8
Table of Contents


obligations to Beal Bank USA (the Beal Bank Loan). In connection with the repayment of the Beal Bank Loan, the Joint Venture paid a prepayment premium equal to 1 percent of the outstanding principal balance. As required, Stratus used a portion of its distribution to repay the $11.7 million balance outstanding under its revolving line of credit with Comerica Bank.

Kahn Loan. On May 15, 2013, Stratus entered into a loan agreement and promissory note with D.N. Kahn (the Kahn loan) to finance the purchase of a tract of land for future development in Lakeway, Texas. Pursuant to the Kahn loan, Stratus borrowed $1.6 million, which bears interest at a per annum rate of 5 percent. The outstanding principal balance of the Kahn promissory note is due on May 15, 2015, and interest is due quarterly, beginning on August 15, 2013. The Kahn loan is secured by the related land.

Debt Covenants. Stratus' credit facility with Comerica Bank (the Comerica credit facility) and its American Strategic Income Portfolio (ASIP) unsecured term loans contain customary financial covenants, including a requirement that Stratus maintain a minimum total stockholders' equity balance. On May 9, 2013, Stratus entered into a modification agreement with ASIP which reduced the amount of the total stockholders' equity required to be maintained by Stratus from $120.0 million to $110.0 million. Concurrently with this modification, the minimum stockholders' equity covenant of the Comerica credit facility was also reduced to $110.0 million.

Interest Expense and Capitalization. Interest expense (before capitalized interest) totaled $2.9 million for third-quarter 2013, $3.5 million for third-quarter 2012, $8.9 million for the first nine months of 2013 and $12.2 million for the first nine months of 2012. Stratus capitalized interest costs totaling $1.1 million for third-quarter 2013, $0.7 million for third-quarter 2012, $2.8 million for the first nine months of 2013 and $2.7 million for the first nine months of 2012. Capitalized interest is primarily related to development activity at Section N at Barton Creek for the 2013 periods and at the W Austin Hotel & Residences project for the 2012 periods.

7.
STOCKHOLDERS' EQUITY
During third-quarter 2013, Stratus purchased 19,130 shares of its common stock for $0.2 million (or $12.81 per share). Refer to Note 11 for further discussion of common stock repurchases permitted under debt agreements.

8.
INCOME TAXES
Stratus’ accounting policy for and other information regarding its income taxes is further described in Notes 1 and 8 of the Stratus 2012 Form 10-K.

Stratus evaluated the recoverability of its deferred tax assets, and considered available positive and negative evidence, giving greater weight to losses in recent years, the absence of taxable income in the carry back period and uncertainty regarding projected future financial results. As a result, Stratus concluded that there was not sufficient positive evidence supporting the realizability of its deferred tax assets beyond an amount totaling $0.3 million at September 30, 2013, and December 31, 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 2013 and 2012, and the U.S. federal statutory tax rate of 35 percent was primarily attributable to the realization of deferred tax assets for the first nine months of 2013 and additional valuation allowances recorded against deferred tax assets for the first nine months of 2012.

9.
BUSINESS SEGMENTS
Stratus currently has four operating segments: Real Estate Operations, Hotel, Entertainment and Commercial Leasing.

The Real Estate Operations segment is comprised of Stratus’ real estate assets (developed, under development and undeveloped), which consists of its properties in 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.


9
Table of Contents


The Entertainment segment includes ACL Live, a live music and entertainment venue and production studio at the W Austin Hotel & Residences project. In addition to hosting concerts and private events, this venue is the new home of Austin City Limits, a television program showcasing popular music legends. The Entertainment segment also includes revenues and costs associated with events hosted at other venues, and the results of Stageside (see Note 3).

The Commercial Leasing segment includes the office and retail space at the W Austin Hotel & Residences project, a retail building and a bank building in Barton Creek Village, and 5700 Slaughter and Parkside Village in the Circle C community. 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 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. 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
 
Commercial Leasing
 
Eliminations and Otherb
 
Total
Three Months Ended September 30, 2013:
 
 
 
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Unaffiliated customers
$
10,810

 
$
8,312

 
$
3,310

 
$
1,391

 
$
—

 
$
23,823

Intersegment
9

 
59

 
37

 
121

 
(226
)
 
—

Cost of sales, excluding depreciation
6,954

 
6,893

 
3,035

 
666

 
(69
)
 
17,479

Depreciation
58

 
1,501

 
309

 
421

 
(37
)
 
2,252

General and administrative expenses
1,362

 
68

 
27

 
273

 
(152
)
 
1,578

Operating income (loss)
$
2,445

 
$
(91
)
 
$
(24
)
 
$
152

 
$
32

 
$
2,514

Capital expenditures
$
5,326

 
$
12

 
$
180

 
$
167

 
$
—

 
$
5,685

Total assets at September 30, 2013
$
170,243

 
$
116,959

 
$
48,217

 
$
46,913

 
$
(5,924
)
 
$
376,408

 
 
 
 
 
 
 
 
 
 
 
 
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


10
Table of Contents


 
 
 
 
 
 
 
 
 
 
 
 
 
Real Estate
Operationsa
 
Hotel
 
Entertainment Venue
 
Commercial Leasing
 
Eliminations and Otherb
 
Total
Nine Months Ended September 30, 2013:
 
 
 
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
  Unaffiliated customers
$
57,715

 
$
28,207

 
$
9,942

 
$
3,943

 
$
—

 
$
99,807

  Intersegment
49

 
191

 
60

 
402

 
(702
)
 
—

Cost of sales, excluding depreciation
46,795

 
21,705

 
8,524

 
2,053

 
(219
)
 
78,858

Depreciation
181

 
4,536

 
926

 
1,258

 
(111
)
 
6,790

Insurance settlement
(1,785
)
 
—

 
—

 
—

 
—

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

 
258

 
101

 
900

 
(429
)
 
5,356

Operating income (loss)
$
8,047

 
$
1,899

 
$
451

 
$
134

 
$
57

 
$
10,588

Capital expenditures
$
14,054

 
$
15

 
$
299

 
$
677

 
$
—

 
$
15,045

 
 
 
 
 
 
 
 
 
 
 
 
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

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 (see Note 3).

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, which is 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 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):
 
 
Nine Months Ended
 
 
September 30, 2012
Revenues
 
$
287

Rental property costs
 
(370
)
Interest expensea
 
(198
)
Gain on sale
 
5,146

Provision for income taxes
 
(60
)
Income from discontinued operations
 
$
4,805

 
 
 
a.
Relates to interest on the Lantana Promissory Note and does not include any additional allocations of interest.


11
Table of Contents


11.
SUBSEQUENT EVENTS
In November 2013, the Board of Directors approved an increase in the open market share purchase program from 0.7 million shares to 1.7 million shares of Stratus common stock.

Stratus' Comerica credit facility and its ASIP unsecured term loans, as modified, allow for common stock purchases up to $1.0 million and as of October 31, 2013, Stratus had purchased 82 thousand shares for $958 thousand under the modified agreements.

Effective October 30, 2013, the joint venture between Stratus and Moffett Holdings modified its construction loan with Comerica Bank to extend the maturity date to December 31, 2013, and is pursuing a refinancing of this loan. As of October 30, 2013, the principal balance of this construction loan was $10.2 million.

Stratus evaluated events after September 30, 2013, 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.

12
Table of Contents


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 Annual Report on Form 10-K for the year ended December 31, 2012 (2012 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/or sale of commercial, hotel, entertainment, multi- and single-family residential real estate properties located primarily in the Austin, Texas, area. We generate revenues from sales of developed properties, from our hotel and entertainment operations and from rental income from our commercial properties. 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.

Our principal real estate holdings are in southwest Austin, Texas. The number of developed lots/units and under development or undeveloped acreage as of September 30, 2013, that comprise our principal real estate development projects are presented in the following table.
 
 
 
 
 
Acreage
 
 
 
 
 
Under Development
 
Undeveloped
 
 
 
Developed
Lots/Units
 
Single
Family
 
Commercial
 
Total
 
Single
family
 
Multi-family
 
Commercial
 
Total
 
Total
Acreage
Austin:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Barton Creek
48

 
—

 
—

 
—

 
678

 
327

 
418

 
1,423

 
1,423

Circle C
—

 
132

 
23

 
155

 
—

 
—

 
335

 
335

 
490

Lantana
—

 
—

 
—

 
—

 
—

 
—

 
43

 
43

 
43

Lakeway
—

 
—

 
—

 
—

 
—

 
—

 
29

 
29

 
29

W Austin Residences
12

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

San Antonio:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Camino Real
—

 
—

 
—

 
—

 
—

 
—

 
2

 
2

 
2

Total
60

 
132

 
23

 
155

 
678

 
327

 
827

 
1,832

 
1,987


Our principal residential holdings at September 30, 2013, included developed lots at Barton Creek and condominium units at the W Austin Hotel & Residences project. See "Development Activities - Residential" for further discussion. Our principal commercial holdings at September 30, 2013, in addition to the W Austin Hotel & Residences project, consisted of the first phase of Barton Creek Village, and the 5700 Slaughter retail complex and Parkside Village in the Circle C community. See "Development Activities - Commercial" for further discussion.

The W Austin Hotel & Residences project is located on a two-acre city block in downtown Austin and contains a 251-room luxury hotel, 159 residential condominium units, and office, retail and entertainment space. The hotel is managed by Starwood Hotels & Resorts Worldwide, Inc. The office space totals 39,328 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.

For third-quarter 2013, our revenues totaled $23.8 million and our net loss attributable to common stock totaled less than $0.1 million, compared with revenues of $39.9 million and net income attributable to common stock of $0.3 million for third-quarter 2012. For the first nine months of 2013, our revenues totaled $99.8 million and our net income attributable to common stock totaled $1.7 million, compared with revenues of $86.7 million and a net loss attributable to common stock of $1.5 million for the first nine months of 2012. The decrease in revenues for the quarterly period primarily relates to the sale of eight undeveloped tracts at Lantana for $15.8 million in third-quarter 2012. The increase in revenues for the first nine months of 2013 primarily relates to a higher average sales price

13
Table of Contents


associated with larger units at the W Austin Hotel & Residences project, as well as increased lot sales at Barton Creek. Third-quarter 2013 and the first nine months of 2013 include losses on early extinguishment of debt totaling $1.4 million. The results for the first nine months of 2013 also include a gain of $1.5 million associated with the sale of a 16-acre tract of land at Lantana and an insurance settlement of $1.8 million. The results for the first nine months of 2012 included a gain of $4.3 million associated with the sale of eight undeveloped tracts at Lantana and a gain of $5.1 million associated with the sale of two office buildings at 7500 Rialto Boulevard (7500 Rialto) in February 2012 (See Note 10 for further discussion).

BUSINESS STRATEGY AND RELATED RISKS

Our business strategy is to create value for shareholders by methodically developing high-quality residential and commercial projects using our existing assets and selectively pursuing new development opportunities. We believe that Austin, and other Texas markets, continue to be desirable. Many of our developments are in unique locations where development approvals have historically been subject to regulatory constraints making it difficult to obtain entitlements. Our Austin assets, which are located in desirable areas with significant regulatory constraints, are highly entitled and, as a result, we believe that through strategic planning and development, we can maximize and fully exploit their value. Additionally, we believe our hotel sets a high standard for contemporary luxury in downtown Austin and competes favorably with other hotels and resorts in our geographic market. Our entertainment operations provide quality live music experiences that create awareness for our ACL Live venue and brand, enhancing the overall value of the W Austin Hotel & Residences project. Our current focus is to proceed with the development of our properties, to seek new opportunities to acquire additional properties for potential mixed-use and retail development projects, with strategic partners where beneficial, and to operate our hotel and entertainment assets.
In years past, economic conditions, including the constrained capital and credit markets, negatively affected the execution of our business plan, primarily by decreasing the pace of development to match economic and market conditions. We responded to these conditions by successfully restructuring our existing debt, including reducing interest rates and extending maturities, which enabled us to preserve our development opportunities until market conditions improved. Economic conditions have improved and we now have the financial flexibility (see “Capital Resources and Liquidity” for further discussion) to fully exploit our development opportunities and resources. As of September 30, 2013, we had $23.3 million of availability under our revolving line of credit with Comerica Bank (the Comerica credit facility) and $1.3 million in cash and cash equivalents available for use in our real estate operations, excluding $1.4 million of cash associated with Parkside Village and $42.7 million of cash associated with the W Austin Hotel & Residences project. In the first nine months of 2013 the joint venture for the W Austin Hotel & Residences project paid $18.0 million in distributions to each of us and Canyon-Johnson Urban Fund II, L.P. (Canyon-Johnson), our joint venture partner in the W Austin Hotel & Residences project. Subsequently, in October 2013, in connection with refinancing the project, the Joint Venture distributed $14.8 million to us and $20.1 million to Canyon-Johnson. After determining the appropriate amount of cash to maintain as an operating reserve, the joint venture may make additional distributions to us and Canyon-Johnson.
Although we have upcoming debt maturities and significant recurring costs, including property taxes, maintenance and marketing, that do not vary significantly with our level of property sales, we believe we have sufficient liquidity to address our near term requirements. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” in our 2012 Form 10-K for further discussion.

14
Table of Contents


DEVELOPMENT ACTIVITIES

Residential. As of September 30, 2013, 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
 
Under
Development
 
Potential Developmenta
 
Total
W Austin Hotel & Residences project:
 
 
 
 
 
 
 
 
Condominium unitsb
 
12

 
—

 
—

 
12

Barton Creek:
 
 
 
 
 
 
 
 
Calera:
 
 
 
 
 
 
 
 
Calera Drive
 
1

 
—

 
—

 
1

Verano Drive
 
15

 
—

 
—

 
15

Amarra Drive:
 
 
 
 
 
 
 
 
Phase II Lots
 
32

 
—

 
—

 
32

Townhomes
 
—

 
—

 
221

 
221

Phase III Lots
 
—

 
—

 
64

 
64

Section N Multi-family
 
—

 
—

 
1,860

 
1,860

Other Barton Creek Sections
 
—

 
—

 
155

 
155

Circle C:
 
 
 
 
 
 
 
 
Meridian
 
—

 
57

 
—

 
57

Total Residential Lots/Units
 
60

 
57

 
2,300

 
2,417

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 project.  Delivery of the first condominium units began in January 2011. As of October 31, 2013, sales of 148 of the 159 condominium units had closed for $170.2 million (including 3 units for $4.4 million in third-quarter 2013) and one of the remaining 11 units was under contract.

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 during 2011. During the first nine months of 2013, we sold 33 Verano Drive lots and five Calera Drive lots. As of September 30, 2013, 15 lots at Verano Drive and one lot at Calera Drive remain unsold. During October 2013, we sold three Verano Drive lots, and as of October 31, 2013, we had four Verano Drive lots and the final Calera Drive lot under contract.

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. In 2008, we commenced development of Amarra Drive Phase II, which consists of 35 lots on 51 acres. Development was substantially completed in October 2008. During the first nine months of 2013, we sold two Phase I lots (including the final lot in third-quarter 2013) and one Phase II lot. As of September 30, 2013, 32 Phase II lots remain unsold and as of October 31, 2013, three Phase II lots were under contract.


15
Table of Contents


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. During 2011, we sold the final 21 lots of the initial phases. In May 2013, development of the final phase of Meridian, consisting of 57 one-acre lots commenced and is expected to be complete by the end of the year.

Commercial. As of September 30, 2013, the number of square feet of our commercial property developed, under development and our remaining entitlements (i.e., potential development) are shown below (excluding property associated with our Crestview Station joint venture):
 
Commercial Property
 
Developed
 
Under Development
 
Potential Developmenta
 
Total
W Austin Hotel & Residences project:
 
 
 
 
 
 
 
Officeb
39,328

 
—

 
—

 
39,328

Retailb
18,362

 
—

 
—

 
18,362

Barton Creek:
 
 
 
 
 
 
 
Treaty Oak Bank
3,085

 
—

 
—

 
3,085

Barton Creek Village Phase I
22,366

 
—

 
—

 
22,366

Barton Creek Village Phase II
—

 
—

 
16,000

 
16,000

Entry Corner
—

 
—

 
5,000

 
5,000

Amarra Retail/Office
—

 
—

 
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
77,641

 
12,000

 
—

 
89,641

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

Austin 290 Tract
—

 
—

 
20,000

 
20,000

Total Square Feet
186,480

 
12,000

 
2,921,000

 
3,119,480

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 project. The project has 39,328 square feet of leasable office space, including 9,000 square feet for our corporate office. As of September 30, 2013, occupancy for the office space was 64 percent and a lease has been signed for an additional 20 percent of the office space with leasing activities for the remaining office space ongoing. The project also has 18,362 square feet of leasable retail space, all of which is leased. As of September 30, 2013, occupancy for the retail space was 86 percent (with the lessee of the remaining retail space expected to take occupancy in early 2014).

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, 2013, occupancy was 100 percent for the retail complex and the bank building is leased through January 2023.


16
Table of Contents


Circle C. In 2008, we completed the construction of two retail buildings, totaling 21,248 square feet, at 5700 Slaughter in the Circle C community (5700 Slaughter). This retail project also includes a 4,450-square-foot bank building on an existing ground lease, which expires in 2025. As of September 30, 2013, occupancy was approximately 91 percent for the two retail buildings combined.

The Circle C community also includes Parkside Village, a 89,641-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 4,500-square-foot building and a stand-alone 5,000-square-foot building. In February 2011, we entered into a joint venture with Moffett Holdings, LLC (Moffett Holdings) to develop Parkside Village, obtained final permits and entitlements and began construction. Construction of the final two buildings at Parkside Village is expected to be completed in May 2014. As of September 30, 2013, occupancy of the completed 77,641 square feet was 95 percent. Of the remaining buildings under development, the 7,500-square-foot building is fully pre-leased, and leasing activities are ongoing for the 4,500-square-foot building.

Lantana. Lantana is a partially developed, mixed-use real estate development project. In August 2012, we sold eight of the remaining 11 undeveloped commercial tracts of land for $15.8 million. These tracts, which totaled approximately 154 acres, had entitlements for approximately 1.1 million square feet of office space. During first-quarter 2013, we sold a 16-acre tract for $2.1 million, which had entitlements for approximately 70,000 square feet of office space. As of September 30, 2013, we had entitlements for approximately 485,000 square feet of office and retail space on the remaining 43 acres. Regional utility and road infrastructure is in place with capacity to serve Lantana at full build-out permitted under our existing entitlements.

Crestview Station. Crestview Station is a single-family, multi-family, retail and office development, which is located on the site of a commuter line. 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. The second closing of 59 lots for $3.4 million occurred in May 2013, and Crestview Station recognized gross profit on the sale of $0.7 million. At September 30, 2013, our investment in the Crestview Station project totaled $3.7 million and the joint venture partnership had $0.9 million of outstanding debt, for which each partner has executed a joint and several guaranty of $0.2 million, or 25 percent of the outstanding balance. If the third closing of 59 lots contemplated by the contract with DR Horton 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.


17
Table of Contents


RESULTS OF OPERATIONS

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

The following table summarizes our results (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
Operating income (loss):
 
 
 
 
 
 
 
Real estate operations
$
2,445

 
$
2,163

 
$
8,047

 
$
(442
)
Hotel
(91
)
 
(681
)
 
1,899

 
556

Entertainment
(24
)
 
(36
)
 
451

 
586

Commercial leasing
152

 
37

 
134

 
(103
)
Eliminations and other
32

 
26

 
57

 
91

Operating income
$
2,514

 
$
1,509

 
$
10,588

 
$
688

Interest expense, net
$
(1,833
)
 
$
(2,835
)
 
$
(6,140
)
 
$
(9,443
)
Income from discontinued operations
$
—

 
$
—

 
$
—

 
$
4,805

Net (loss) income
$
(997
)
 
$
(1,600
)
 
$
3,801

 
$
(4,408
)
Net loss (income) attributable to noncontrolling interests in subsidiaries
$
957

 
$
1,923

 
$
(2,056
)
 
$
2,876

Net (loss) income attributable to Stratus common stock
$
(40
)
 
$
323

 
$
1,745

 
$
(1,532
)

We have four operating segments: Real Estate Operations, Hotel, Entertainment and Commercial Leasing (see Note 9 for further discussion). 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, 2013
 
September 30,
 
2013
 
2012
 
2013
 
2012
Revenues:
 
 
 
 
 
 
 
Developed property sales
$
10,549

 
$
12,029

 
$
55,050

 
$
32,749

Undeveloped property sales
—

 
15,837

 
2,100

 
15,837

Commissions and other
270

 
112

 
614

 
497

Total revenues
10,819

 
27,978

 
57,764

 
49,083

Cost of sales, including depreciation
7,012

 
24,525

 
46,976

 
45,558

Insurance settlement
—

 
—

 
(1,785
)
 
—

General and administrative expenses
1,362

 
1,290

 
4,526

 
3,967

Operating income (loss)
$
2,445

 
$
2,163

 
$
8,047

 
$
(442
)
 
 
 
 
 
 
 
 


18
Table of Contents


Developed Property Sales. Developed property sales for the 2013 and 2012 periods included the following (dollars in thousands):
 
Three Months Ended September 30,
 
2013
 
2012
 
Units/Lots
 
Revenues
 
Average Cost per Unit/Lot
 
Units/Lots
 
Revenues
 
Average Cost Per Unit/Lot
W Austin Hotel & Residences Project
 
 
 
 
 
 
 
 
 
 
 
Condominium Units
3

 
$
4,360

 
$
1,252

 
11

 
$
10,062

 
$
923

 
 
 
 
 
 
 
 
 
 
 
 
Barton Creek
 
 
 
 
 
 
 
 
 
 
 
Calera:
 
 
 
 
 
 
 
 
 
 
 
Verano Drive
18

 
5,603

 
154

 
3

 
1,014

 
191

Calera Drive
1

 
236

 
148

 
—

 
—

 
—

Amarra Drive:
 
 
 
 
 
 
 
 
 
 
 
Phase I Lots
1

 
350

 
298

 
—

 
—

 
—

Phase II Lots
—

 
—

 
—

 
2

 
953

 
201

 
 
 
 
 
 
 
 
 
 
 
 
Total Residential
23

 
$
10,549

 
 
 
16

 
$
12,029

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
2013
 
2012
 
Units/Lots
 
Revenues
 
Average Cost per Unit/Lot
 
Units/Lots
 
Revenues
 
Average Cost per Unit/Lot
W Austin Hotel & Residences Project
 
 
 
 
 
 
 
 
 
 
 
Condominium Units
29

 
$
42,122

 
$
1,231

 
31

 
$
27,238

 
$
797

 
 
 
 
 
 
 
 
 
 
 
 
Barton Creek
 
 
 
 
 
 
 
 
 
 
 
Calera:
 
 
 
 
 
 
 
 
 
 
 
Verano Drive
33