Document

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 June 30, 2016
 
or
[  ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
 
SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from to
 
Commission File Number: 001-37716
 
Stratus Properties Inc.
(Exact name of registrant as specified in its charter)
Delaware
72-1211572
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
212 Lavaca St., Suite 300
 
Austin, Texas
78701
(Address of principal executive offices)
(Zip Code)
 
(512) 478-5788
(Registrant's telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
þ Yes   ¨ No

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

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

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

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

On July 29, 2016, there were issued and outstanding 8,092,140 shares of the registrant’s common stock, par value $0.01 per share.

Table of Contents



STRATUS PROPERTIES INC.
TABLE OF CONTENTS
 
 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Table of Contents


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

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

 
June 30,
2016
 
December 31,
2015
ASSETS
 
 
 
Cash and cash equivalents
$
10,566

 
$
17,036

Restricted cash
10,081

 
8,731

Real estate held for sale
24,323

 
25,944

Real estate under development
122,386

 
139,171

Land available for development
13,711

 
23,397

Real estate held for investment, net
238,984

 
186,626

Deferred tax assets
15,367

 
15,329

Other assets
18,840

 
13,871

Total assets
$
454,258

 
$
430,105

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Liabilities:
 
 
 
Accounts payable
$
12,000

 
$
14,182

Accrued liabilities
12,018

 
10,356

Debt
288,143

 
260,592

Other liabilities
9,414

 
8,301

Total liabilities
321,575

 
293,431

 
 
 
 
Commitments and contingencies

 

 
 
 
 
Equity:
 
 
 
Stockholders’ equity:
 
 
 
Common stock
92

 
91

Capital in excess of par value of common stock
192,586

 
192,122

Accumulated deficit
(39,310
)
 
(35,144
)
Common stock held in treasury
(20,760
)
 
(20,470
)
Total stockholders’ equity
132,608

 
136,599

Noncontrolling interests in subsidiaries
75

 
75

Total equity
132,683

 
136,674

Total liabilities and equity
$
454,258

 
$
430,105


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


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Table of Contents


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

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
Revenues:
 
 
 
 
 
 
 
Hotel
$
10,658

 
$
11,054

 
$
21,233

 
$
22,673

Entertainment
4,903

 
4,995

 
9,046

 
9,304

Commercial leasing
2,141

 
1,703

 
4,194

 
3,524

Real estate operations
1,448

 
2,234

 
3,703

 
4,710

Total revenues
19,150

 
19,986

 
38,176

 
40,211

Cost of sales:
 
 
 
 
 
 
 
Hotel
7,676

 
8,295

 
15,357

 
16,377

Entertainment
3,775

 
3,688

 
6,819

 
7,091

Commercial leasing
1,043

 
959

 
1,905

 
1,700

Real estate operations
1,889

 
2,011

 
4,098

 
4,121

Depreciation
1,983

 
2,346

 
3,665

 
4,650

Total cost of sales
16,366

 
17,299

 
31,844

 
33,939

General and administrative expenses
4,146

 
2,145

 
7,221

 
4,121

Total costs and expenses
20,512

 
19,444

 
39,065

 
38,060

Operating (loss) income
(1,362
)
 
542

 
(889
)
 
2,151

Interest expense, net
(2,346
)
 
(1,031
)
 
(4,315
)
 
(1,881
)
Loss on interest rate derivative instruments
(101
)
 
(13
)
 
(475
)
 
(68
)
Loss on early extinguishment of debt
—

 
—

 
(837
)
 
—

Other income, net
4

 
285

 
8

 
289

(Loss) income before income taxes and equity in unconsolidated affiliates' (loss) income
(3,805
)
 
(217
)
 
(6,508
)
 
491

Equity in unconsolidated affiliates' (loss) income
(25
)
 
(239
)
 
73

 
(118
)
Benefit from (provision for) income taxes
1,347

 
216

 
2,269

 
(47
)
(Loss) income from continuing operations
(2,483
)
 
(240
)
 
(4,166
)
 
326

Income from discontinued operations, net of taxes
—

 
—

 
—

 
3,218

Net (loss) income
(2,483
)
 
(240
)
 
(4,166
)
 
3,544

Net income attributable to noncontrolling interests in subsidiaries
—

 
(879
)
 
—

 
(1,921
)
Net (loss) income attributable to common stockholders
$
(2,483
)
 
$
(1,119
)
 
$
(4,166
)
 
$
1,623

 
 
 
 
 
 
 
 
Basic and diluted net (loss) income per share attributable to common stockholders:
 
 
 
 
 
 
 
Continuing operations
$
(0.31
)
 
$
(0.14
)
 
$
(0.52
)
 
$
(0.20
)
Discontinued operations
—

 
—

 
—

 
0.40

Basic and diluted net (loss) income per share attributable to common stockholders
$
(0.31
)
 
$
(0.14
)
 
$
(0.52
)
 
$
0.20

 
 
 
 
 
 
 
 
Weighted-average shares of common stock outstanding:
 
 
 
 
 
 
 
Basic
8,092

 
8,061

 
8,082

 
8,051

Diluted
8,092

 
8,061

 
8,082

 
8,081


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

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Table of Contents


STRATUS PROPERTIES INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (Unaudited)
(In Thousands)

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Net (loss) income
$
(2,483
)
 
$
(240
)
 
$
(4,166
)
 
$
3,544

 
 
 
 
 
 
 
 
Other comprehensive income, net of taxes:
 
 
 
 
 
 
 
Gain on interest rate swap agreement
—

 
182

 
—

 
19

Other comprehensive income
—

 
182

 
—

 
19

 
 
 
 
 
 
 
 
Total comprehensive (loss) income
(2,483
)
 
(58
)
 
(4,166
)
 
3,563

Total comprehensive income attributable to noncontrolling interests
—

 
(952
)
 
—

 
(1,926
)
Total comprehensive (loss) income attributable to common stockholders
$
(2,483
)
 
$
(1,010
)
 
$
(4,166
)
 
$
1,637

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



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

 
Six Months Ended
 
June 30,
 
2016
 
2015
Cash flow from operating activities:
 
 
 
Net (loss) income
$
(4,166
)
 
$
3,544

Adjustments to reconcile net (loss) income to net cash used in operating activities:
 
 
 
Depreciation
3,665

 
4,650

Cost of real estate sold
1,691

 
2,098

Loss on early extinguishment of debt
837

 
—

Loss on interest rate derivative contracts
475

 
68

Debt issuance cost amortization and stock-based compensation
698

 
777

Gain on sale of 7500 Rialto, net of tax
—

 
(3,218
)
Equity in unconsolidated affiliates' (income) loss
(73
)
 
118

Deposits
21

 
82

Deferred income taxes
(38
)
 
47

Purchases and development of real estate properties
(7,629
)
 
(15,703
)
Municipal utility district reimbursement
—

 
5,307

Increase in other assets
(5,843
)
 
(383
)
Increase in accounts payable, accrued liabilities and other
98

 
2,022

Net cash used in operating activities
(10,264
)
 
(591
)
 
 
 
 
Cash flow from investing activities:
 
 
 
Capital expenditures
(22,435
)
 
(16,740
)
Other, net
(17
)
 
62

Net cash used in investing activities
(22,452
)

(16,678
)
 
 
 
 
Cash flow from financing activities:
 
 
 
Borrowings from credit facility
12,000

 
23,500

Payments on credit facility
(3,139
)
 
(15,366
)
Borrowings from project loans
168,875

 
15,810

Payments on project and term loans
(150,345
)
 
(9,662
)
Stock-based awards net payments, including excess tax benefit
(158
)
 
(144
)
Noncontrolling interests distributions
—

 
(1,040
)
Financing costs
(987
)
 
—

Net cash provided by financing activities
26,246

 
13,098

Net decrease in cash and cash equivalents
(6,470
)
 
(4,171
)
Cash and cash equivalents at beginning of year
17,036

 
29,645

Cash and cash equivalents at end of period
$
10,566

 
$
25,474


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

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

 
 
Stockholders’ Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accum-
ulated
Other
Compre-
hensive
Loss
 
Common Stock
Held in Treasury
 
Total Stockholders' Equity
 
 
 
 
 
 
Common Stock
 
Capital in Excess of Par Value
 
Accum-ulated Deficit
 
 
 
 
Noncontrolling Interests in Subsidiaries
 
 
 
 
Number
of Shares
 
At Par
Value
 
 
 
 
Number
of Shares
 
At
Cost
 
 
 
Total
Equity
Balance at December 31, 2015
 
9,160

 
$
91

 
$
192,122

 
$
(35,144
)
 
$
—

 
1,093

 
$
(20,470
)
 
$
136,599

 
$
75

 
$
136,674

Exercised and issued stock-based awards
 
37

 
1

 
(1
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Stock-based compensation
 
—

 
—

 
333

 
—

 
—

 
—

 
—

 
333

 
—

 
333

Tax benefit for stock-based awards

 
—

 
—

 
132

 
—

 
—

 
—

 
—

 
132

 
—

 
132

Tender of shares for stock-based awards
 
—

 
—

 
—

 
—

 
—

 
12

 
(290
)
 
(290
)
 
—

 
(290
)
Total comprehensive loss
 
—

 
—

 
—

 
(4,166
)
 
—

 
—

 
—

 
(4,166
)
 
—

 
(4,166
)
Balance at June 30, 2016
 
9,197

 
$
92

 
$
192,586

 
$
(39,310
)
 
$
—

 
1,105

 
$
(20,760
)
 
$
132,608

 
$
75

 
$
132,683


Balance at December 31, 2014
 
9,116

 
$
91

 
$
204,269

 
$
(47,321
)
 
$
(279
)
 
1,081

 
$
(20,317
)
 
$
136,443

 
$
38,643

 
$
175,086

Exercised and issued stock-based awards
 
37

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Stock-based compensation
 
—

 
—

 
269

 
—

 
—

 
—

 
—

 
269

 
—

 
269

Tax benefit for stock-based awards
 
—

 
—

 
8

 
—

 
—

 
—

 
—

 
8

 
—

 
8

Tender of shares for stock-based awards
 
—

 
—

 
—

 
—

 
—

 
12

 
(153
)
 
(153
)
 
—

 
(153
)
Noncontrolling interests distributions
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(1,040
)
 
(1,040
)
Total comprehensive income
 
—

 
—

 
—

 
1,623

 
14

 
—

 
—

 
1,637

 
1,926

 
3,563

Balance at June 30, 2015
 
9,153

 
$
91

 
$
204,546

 
$
(45,698
)
 
$
(265
)
 
1,093

 
$
(20,470
)
 
$
138,204

 
$
39,529

 
$
177,733


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



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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, 2015, included in Stratus Properties Inc.’s (Stratus) Annual Report on Form 10-K (Stratus 2015 Form 10-K) filed with the United States Securities and Exchange Commission. In the opinion of management, the accompanying consolidated financial statements reflect all adjustments (consisting only of normal recurring items) considered necessary for a fair statement of the results for the interim periods reported. Operating results for the three-month and six-month periods ended June 30, 2016, are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.

2.
EARNINGS PER SHARE
Stratus’ basic net (loss) income per share of common stock was calculated by dividing the net (loss) income attributable to common stockholders by the weighted-average shares of common stock outstanding during the period. 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) follows:
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2016
 
2015
 
2016
 
2015
 
Net (loss) income
$
(2,483
)
 
$
(240
)
 
$
(4,166
)
 
$
3,544

 
Net income attributable to noncontrolling interests in subsidiaries
—

 
(879
)
 
—

 
(1,921
)
 
Net (loss) income attributable to Stratus common stockholders
$
(2,483
)
 
$
(1,119
)
 
$
(4,166
)
 
$
1,623

 
 
 
 
 
 
 
 
 
 
Basic weighted-average shares of common stock outstanding
8,092

 
8,061

 
8,082

 
8,051

 
 
 
 
 
 
 
 
 
 
Add shares issuable upon exercise or vesting of dilutive stock options and restricted stock units (RSUs)
—

a 
—

b 
—

a 
30

b 
 
 
 
 
 
 
 
 
 
Diluted weighted-average shares of common stock outstanding
8,092

 
8,061

 
8,082

 
8,081

 
 
 
 
 
 
 
 
 
 
Basic and diluted net (loss) income per share attributable to common stockholders
$
(0.31
)
 
$
(0.14
)
 
$
(0.52
)
 
$
0.20

 
a. Excludes approximately 123 thousand shares of common stock for second-quarter 2016 and 124 thousand shares of common stock for the first six months of 2016 associated with outstanding stock options with exercise prices less than the average market price of Stratus' common stock and RSUs that were anti-dilutive.
b. Excludes approximately 26 thousand shares of common stock for second-quarter 2015 and 31 thousand shares of common stock for the first six months of 2015 associated with RSUs that were anti-dilutive.
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 stock options totaled approximately 15 thousand for both the second quarter and first six months of 2016, 25 thousand for second-quarter 2015 and 26 thousand for the first six months of 2015.

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

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


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A summary of the carrying amount and fair value of Stratus' other financial instruments follows (in thousands):
 
June 30, 2016
 
December 31, 2015
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
Assets:
 
 
 
 
 
 
 
Interest rate cap agreement
$
—

 
$
—

 
$
1

 
$
1

Liabilities:
 
 
 
 
 
 
 
Interest rate swap agreement
1,120

 
1,120

 
646

 
646

Debt
288,143

 
290,522

 
260,592

 
263,303


Interest Rate Cap Agreement. On September 30, 2013, Stratus’ joint venture with Canyon-Johnson Urban Fund II, L.P. (the Block 21 Joint Venture) paid $0.5 million to enter into an interest rate cap agreement, which capped the one-month London Interbank Offered Rate (LIBOR), the variable rate in the Bank of America loan agreement relating to the W Austin Hotel & Residences (the BoA loan), at 1 percent until October 5, 2014, 1.5 percent from October 6, 2014, to October 4, 2015, and 2 percent from October 5, 2015, to September 29, 2016 (see Note 4 for additional information regarding repayment of the BoA loan in January 2016). Stratus uses an interest rate pricing model that relies on market observable inputs such as LIBOR to measure the fair value of the interest rate cap agreement. Stratus also evaluated the counterparty credit risk associated with the interest rate cap agreement, which is considered a Level 3 input, but did not consider such risk to be significant. Therefore, the interest rate cap agreement is classified within Level 2 of the fair value hierarchy.

Interest Rate Swap Agreement. On December 13, 2013, Stratus' joint venture with LCHM Holdings, LLC, formerly Moffett Holdings, LLC, for the development of Parkside Village (the Parkside Village Joint Venture), entered into an interest rate swap agreement with Comerica Bank that Stratus had designated as a cash flow hedge with changes in fair value of the instrument recorded in other comprehensive income (loss). The instrument effectively converted the variable rate portion of the Parkside Village Joint Venture's loan from Comerica Bank (the Parkside Village loan) from one-month LIBOR to a fixed rate of 2.3 percent. In connection with the sale of the Parkside Village property on July 2, 2015, Stratus fully repaid the amount outstanding under the Parkside Village loan. Stratus assumed the interest rate swap agreement and, as a result, the instrument no longer qualifies for hedge accounting. Accordingly, the accumulated other comprehensive loss balance of $0.6 million on July 2, 2015, was reclassified to the Consolidated Statement of Operations as a loss on interest rate derivative instruments, and changes in the fair value of the instrument are being recorded in the Consolidated Statement of Operations (including a loss of $0.1 million in second-quarter 2016 and $0.5 million for the first six months of 2016). Stratus also evaluated the counterparty credit risk associated with the interest rate swap agreement, which is considered a Level 3 input, but did not consider such risk to be significant. Therefore, the interest rate swap agreement is classified within Level 2 of the fair value hierarchy.

Debt. Stratus' debt is recorded at cost and is not actively traded. Fair value is estimated based on discounted future expected cash flows at estimated current market interest rates. Accordingly, Stratus' debt is classified within Level 2 of the fair value hierarchy. The fair value of debt does not represent the amounts that will ultimately be paid upon the maturities of the loans.

4.
DEBT
The components of Stratus' debt are as follows:
 
June 30, 2016
 
December 31, 2015
 
Goldman Sachs loan
$
147,906

 
$
—

 
BoA loan
—

 
128,230

 
Lakeway construction loan
52,477

 
45,931

 
Comerica credit facility
42,010

 
53,149

 
Santal construction loan
28,388

 
15,874

 
Diversified Real Asset Income Fund (DRAIF) term loan
7,997

 
7,993

 
Barton Creek Village term loan
5,623

 
5,689

 
Magnolia loan
3,742

 
3,726

 
Total debta
$
288,143

 
$
260,592

 

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a.
Includes net reductions for unamortized debt issuance costs of $2.4 million at June 30, 2016, and $2.5 million at December 31, 2015. See Note 7 for a discussion of a change in presentation of debt issuance costs.

On January 5, 2016, Stratus completed the refinancing of the W Austin Hotel & Residences. Goldman Sachs Mortgage Company provided a $150.0 million, ten-year, non-recourse term loan (the Goldman Sachs loan) with a fixed interest rate of 5.58 percent per annum and payable monthly based on a 30-year amortization. Stratus used the proceeds from the Goldman Sachs loan to fully repay its existing obligations under the BoA loan and the $20.0 million Comerica term loan included as part of the Comerica credit facility.

The obligations of Stratus Block 21, LLC (Block 21), a wholly-owned subsidiary of Stratus and borrower under the Goldman Sachs loan, are secured by all assets owned from time to time by Block 21. Additionally, certain obligations of Block 21 under the Goldman Sachs loan are guaranteed by Stratus, including environmental indemnification and other customary carve-out obligations. In connection with any acceleration of the Goldman Sachs loan, Block 21 must pay a yield maintenance premium in the amount of at least three percent of the amount of indebtedness prepaid. Prepayment of the Goldman Sachs loan is not permitted except (1) for certain prepayments resulting from casualty or condemnation and (2) in whole within 90 days of the maturity date. For a description of Stratus' other loans, refer to Note 7 in the Stratus 2015 Form 10-K.

Interest Expense and Capitalization. Interest expense (before capitalized interest) totaled $3.9 million for second-quarter 2016, $2.3 million for second-quarter 2015, $7.6 million for the first six months of 2016 and $4.6 million for the first six months of 2015. Stratus' capitalized interest costs totaled $1.6 million for second-quarter 2016, $1.3 million for second-quarter 2015, $3.3 million for the first six months of 2016 and $2.7 million for the first six months of 2015. Capitalized interest costs for the 2016 and 2015 periods primarily related to development activities at Barton Creek and The Oaks at Lakeway.

5.
INCOME TAXES
Stratus’ accounting policy for and other information regarding its income taxes is further described in Notes 1 and 8 in the Stratus 2015 Form 10-K.

Stratus had deferred tax assets (net of deferred tax liabilities) totaling $15.4 million at June 30, 2016, and $15.3 million at December 31, 2015. Stratus’ future results of operations may be negatively impacted by an inability to realize a tax benefit for future tax losses or for items that will generate additional deferred tax assets.

The difference between Stratus' consolidated effective income tax rate for the first six months of 2016, and the U.S. Federal statutory income tax rate of 35 percent, was primarily attributable to the state margin tax. The difference between Stratus' consolidated effective income tax rate for the first six months of 2015, and the U.S. Federal statutory income tax rate of 35 percent, was primarily attributable to the state margin tax partially offset by the tax effect of income attributable to noncontrolling interests.

6.
BUSINESS SEGMENTS
Stratus currently has four operating segments: Hotel, Entertainment, Commercial Leasing and Real Estate Operations.

The Hotel segment includes the W Austin Hotel located at the W Austin Hotel & Residences.

The Entertainment segment includes ACL Live, a live music and entertainment venue and production studio at the W Austin Hotel & Residences. In addition to hosting concerts and private events, this venue is the home of Austin City Limits, a television program showcasing popular music legends. The Entertainment segment also includes revenues and costs associated with events hosted at other venues, including the recently opened 3TEN ACL Live, which opened in March 2016 on the site of the W Austin Hotel & Residences, and the results of the Stageside Productions joint venture with Pedernales Entertainment LLC (see Note 2 in the Stratus 2015 Form 10-K for further discussion).

The Commercial Leasing segment includes the office and retail space at the W Austin Hotel & Residences, a retail building and a bank building in Barton Creek Village, a retail property at The Oaks at Lakeway and the Santal multi-family project. On July 2, 2015, Stratus completed the sales of the Parkside Village and 5700 Slaughter properties, which were included in the Commercial Leasing segment.


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The Real Estate Operations segment is comprised of Stratus’ real estate assets (developed, under development and available for development), which consists of its properties in Austin, Texas (the Barton Creek community, the Circle C community, Lantana and the condominium units at the W Austin Hotel & Residences); in Lakeway, Texas (The Oaks at Lakeway) located in the greater Austin area; in Magnolia, Texas located in the greater Houston area; and in Killeen, Texas (The West Killeen Market).

Stratus uses operating income or loss to measure the performance of each segment. General and administrative expenses primarily consist of employee salaries, wages and other costs, and beginning January 1, 2016, are managed on a consolidated basis and are not allocated to Stratus' operating segments. The segment disclosures for the 2015 periods have been recast to be consistent with the presentation of the 2016 periods. The following segment information reflects management determinations that may not be indicative of what the actual financial performance of each segment would be if it were an independent entity.

Segment data presented below were prepared on the same basis as Stratus’ consolidated financial statements (in thousands).
 
Hotel
 
Entertainment
 
Commercial Leasinga
 
Real Estate
Operationsb
 
Corporate, Eliminations and Otherc
 
Total
Three Months Ended June 30, 2016:
 
 
 
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Unaffiliated customers
$
10,658

 
$
4,903

 
$
2,141

 
$
1,448

 
$
—

 
$
19,150

Intersegment
71

 
51

 
225

 
8

 
(355
)
 
—

Cost of sales, excluding depreciation
7,719

 
3,927

 
1,051

 
1,889

 
(203
)
 
14,383

Depreciation
851

 
371

 
766

 
54

 
(59
)
 
1,983

General and administrative expenses
—

 
—

 
—

 
—

 
4,146

d 
4,146

Operating income (loss)
$
2,159

 
$
656

 
$
549

 
$
(487
)
 
$
(4,239
)
 
$
(1,362
)
Capital expenditurese
$
174

 
$
255

 
$
8,138

 
$
4,504

 
$
—

 
$
13,071

Total assets at June 30, 2016
105,167

 
39,405

 
116,554

 
180,039

 
13,093

 
454,258

Three Months Ended June 30, 2015:
 

 
 
 
 

 
 

 
 

 
 

Revenues:
 
 
 
 
 
 
 
 
 
 
 
Unaffiliated customers
$
11,054

 
$
4,995

 
$
1,703

 
$
2,234

 
$
—

 
$
19,986

Intersegment
69

 
79

 
166

 
25

 
(339
)
 
—

Cost of sales, excluding depreciation
8,353

 
3,744

 
985

 
2,011

 
(140
)
 
14,953

Depreciation
1,496

 
318

 
501

 
68

 
(37
)
 
2,346

General and administrative expenses
—

 
—

 
—

 
—

 
2,145

 
2,145

Operating income (loss)
$
1,274

 
$
1,012

 
$
383

 
$
180

 
$
(2,307
)
 
$
542

Capital expenditurese
$
57

 
$
8

 
$
8,399

 
$
9,140

 
$
—

 
$
17,604

Total assets at June 30, 2015
109,069

 
49,116

 
47,883

 
203,471

 
4,648

 
414,187

Six Months Ended June 30, 2016:
 
 
 
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
  Unaffiliated customers
$
21,233

 
$
9,046

 
$
4,194

 
$
3,703

 
$
—

 
$
38,176

  Intersegment
160

 
84

 
361

 
16

 
(621
)
 
—

Cost of sales, excluding depreciation
15,429

 
7,032

 
1,921

 
4,098

 
(301
)
 
28,179

Depreciation
1,697

 
706

 
1,242

 
114

 
(94
)
 
3,665

General and administrative expenses
—

 
—

 
—

 
—

 
7,221

d 
7,221

Operating income (loss)
$
4,267

 
$
1,392

 
$
1,392

 
$
(493
)
 
$
(7,447
)
 
$
(889
)
Capital expenditurese
$
261

 
$
279

 
$
21,895

 
$
7,629

 
$
—

 
$
30,064


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Hotel
 
Entertainment
 
Commercial Leasinga
 
Real Estate
Operationsb
 
Corporate, Eliminations and Otherc
 
Total
Six Months Ended June 30, 2015:
 
 
 
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
  Unaffiliated customers
$
22,673

 
$
9,304

 
$
3,524

 
$
4,710

 
$
—

 
$
40,211

  Intersegment
141

 
102

 
252

 
50

 
(545
)
 
—

Cost of sales, excluding depreciation
16,455

 
7,173

 
1,750

 
4,122

 
(211
)
 
29,289

Depreciation
2,990

 
642

 
968

 
125

 
(75
)
 
4,650

General and administrative expenses
—

 
—

 
—

 
—

 
4,121

 
4,121

Operating income (loss)
$
3,369

 
$
1,591

 
$
1,058

 
$
513

 
$
(4,380
)
 
$
2,151

Income from discontinued operationsf
$
—

 
$
—

 
$
3,218

 
$
—

 
$
—

 
$
3,218

Capital expenditurese
448

 
69

 
16,223

 
15,703

 
—

 
32,443

a.
Includes the results of the Parkside Village and 5700 Slaughter commercial properties through July 2, 2015.
b.
Includes sales commissions and other revenues together with related expenses.
c.
Includes consolidated general and administrative expenses and eliminations of intersegment amounts.
d.
General and administrative costs were higher in the second quarter and first six months of 2016, compared with the second quarter and first six months of 2015, primarily reflecting higher legal and consulting fees mainly due to $1.9 million in second-quarter 2016 and $2.5 million for the first six months of 2016 associated with Stratus' successful proxy contest.
e.
Also includes purchases and development of residential real estate held for sale.
f.
Represents a deferred gain, net of taxes, associated with the 2012 sale of 7500 Rialto that was recognized in first-quarter 2015.

7.
NEW ACCOUNTING STANDARDS
In May 2014, the Financial Accounting Standards Board (FASB) issued an Accounting Standard Update (ASU) that provides a single comprehensive revenue recognition model, which will replace most existing revenue recognition guidance, and also requires expanded disclosures. The core principle of the model is that revenue is recognized when control of goods or services has been transferred to customers at an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. For public entities, this ASU is effective for annual reporting periods beginning after December 15, 2017 (following the FASB’s August 2015 ASU providing for a one-year deferral of the effective date), and interim reporting periods within that reporting period. Early adoption is permitted for annual reporting periods beginning after December 15, 2016, and interim reporting periods within that reporting period. This ASU may be applied either retrospectively to each period presented or prospectively as a cumulative-effect adjustment as of the date of adoption. Stratus is currently evaluating the impact of the new guidance on its financial reporting and disclosures, but at this time does not expect the adoption of this ASU to have a material impact on its financial statements.

In April and August 2015, the FASB issued ASUs to simplify the presentation of debt issuance costs. These ASUs require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. Stratus adopted these ASUs on January 1, 2016, and retrospectively adjusted its previously issued financial statements. Upon adoption, Stratus adjusted its December 31, 2015, balance sheet by decreasing other assets and long-term debt by $2.5 million for debt issuance costs related to corresponding debt balances. Stratus elected to continue presenting debt issuance costs for its revolving credit facility as a deferred charge (asset) because of the volatility of its borrowings and repayments under the facility.

In January 2016, the FASB issued an ASU that amends the current guidance on the classification and measurement of financial instruments. This ASU makes limited changes to existing guidance and amends certain disclosure requirements. For public entities, this ASU is effective for interim and annual periods beginning after December 15, 2017. Early adoption is not permitted, except for the provision on recording fair value changes for financial liabilities under the fair value option. Stratus is currently evaluating the impact this ASU will have on its financial reporting and disclosures, but at this time does not expect the adoption of this ASU will have a material impact on its financial statements.

In February 2016, the FASB issued an ASU that will require lessees to recognize most leases on the balance sheet. This ASU allows lessees to make an accounting policy election to not recognize a lease asset and liability for leases with a term of 12 months or less and that do not have a purchase option that is expected to be exercised. For public entities, this ASU is effective for interim and annual reporting periods beginning after December 15, 2018, with early

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adoption permitted. This ASU must be applied using the modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. Stratus is currently evaluating the impact this guidance will have on its financial statements.

In March 2016, the FASB issued an ASU that simplifies various aspects of the accounting for share-based payment
transactions, including the income tax consequences, statutory tax withholding requirements, an accounting policy
election for forfeitures and the classification on the statement of cash flows. For public entities, this ASU is effective
for interim and annual periods beginning after December 15, 2016, with early adoption permitted. Each of the amendments in this ASU provides specific transition requirements. Stratus is currently evaluating the impact this
guidance will have on its financial statements.

8.
SUBSEQUENT EVENTS
On July 12, 2016, a Stratus subsidiary entered into an $8.0 million stand-alone revolving credit facility with Comerica Bank (the Amarra Drive credit facility). The variable interest rate applicable to amounts borrowed under the Amarra Drive credit facility is LIBOR plus 3.0 percent. The Amarra Drive credit facility matures on July 12, 2019, and is secured by assets at Stratus’ 20-unit Villas at Amarra Drive townhome project (the Amarra Villas), which had a net book value of $6.9 million at June 30, 2016. The Amarra Drive credit facility is guaranteed by Stratus and contains financial covenants including a requirement that Stratus maintain a minimum total stockholders' equity balance of $110.0 million. Principal paydowns will be made as townhomes sell, and additional amounts will be borrowed as additional townhomes are constructed. The remaining principal balance of the loan is due at maturity. The proceeds of the Amarra Drive credit facility will be used for the construction of single family townhomes and related improvements at the Amarra Villas. As of July 31, 2016, Stratus had $0.8 million outstanding under the Amarra Drive credit facility.

On August 2, 2016, the Travis County municipal utility district awarded the sale of $14.6 million in tax bonds. The closing of the sale is scheduled for early September 2016, and Stratus expects to receive $12.3 million of proceeds as reimbursement of infrastructure costs incurred in its development of Barton Creek.

On August 5, 2016, a Stratus subsidiary entered into a $9.9 million construction loan agreement with Southside Bank (the West Killeen Market loan). The variable interest rate is one-month LIBOR plus 2.75 percent, with a minimum interest rate of 3.0 percent. Payments of interest only will be made monthly during the initial 42 months of the 72-month term, followed by 30 months of monthly principal and interest payments based on a 30-year amortization. The West Killeen Market loan is secured by assets at Stratus’ West Killeen Market retail project in Killeen, Texas, which had a net book value of $3.9 million at June 30, 2016, and is guaranteed by Stratus until construction is completed and certain debt service coverage ratios are met. The proceeds of the West Killeen Market loan will be used for the construction of the West Killeen Market project. Stratus will not make an initial draw on the West Killeen Market loan until certain site improvements have been completed.



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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

OVERVIEW

In Management’s Discussion and Analysis of Financial Condition and Results of Operations, “we,” “us,” “our” and "Stratus" refer to Stratus Properties Inc. and all entities owned or controlled by Stratus Properties Inc. You should read the following discussion in conjunction with our financial statements, the related Management's Discussion and Analysis of Financial Condition and Results of Operations and the discussion of our business and properties included in our Annual Report on Form 10-K for the year ended December 31, 2015 (2015 Form 10-K) filed with the United States Securities and Exchange Commission (SEC). The results of operations reported and summarized below are not necessarily indicative of future operating results, and future results could differ materially from those anticipated in forward-looking statements (refer to "Cautionary Statement" for further discussion). All subsequent references to “Notes” refer to Notes to Consolidated Financial Statements (Unaudited) located in Part I, Item 1. “Financial Statements” of this Form 10-Q, unless otherwise stated.

We are a diversified real estate company engaged primarily in the acquisition, entitlement, development, management, operation and sale of commercial, hotel, entertainment, and multi- and single-family residential real estate properties, primarily located in the Austin, Texas area, but including projects in certain other select markets in Texas. We generate revenues from sales of developed properties, from our hotel and entertainment operations and from rental income from our commercial properties. See Note 6 for further discussion of our operating segments.

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

The number of developed lots/units, acreage under development and undeveloped acreage as of June 30, 2016, that comprise our real estate development operations are presented in the following table.
 
 
 
Acreage
 
 
 
 
 
Under Development
 
Undeveloped
 
 
 
Developed
Lots/Units
 
Multi-
family
 
Commercial
 
Total
 
Single
family
 
Multi-family
 
Commercial
 
Total
 
Total
Acreage
Austin:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Barton Creek
259

 
38

 
—

 
38

 
512

 
289

 
398

 
1,199

 
1,237

Circle C
21

 
—

 
—

 
—

 
—

 
36

 
216

 
252

 
252

Lantana
—

 
—

 
—

 
—

 
—

 
—

 
56

 
56

 
56

W Austin Residences
2

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

The Oaks at Lakeway
—

 
—

 
87

 
87

 
—

 
—

 
—

 
—

 
87

Magnolia
—

 
—

 
—

 
—

 
—

 
—

 
124

 
124

 
124

West Killeen Market
—

 
—

 
—

 
—

 
—

 
—

 
9

 
9

 
9

San Antonio:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Camino Real
—

 
—

 
—

 
—

 
—

 
—

 
2

 
2

 
2

Total
282

 
38

 
87

 
125

 
512

 
325

 
805

 
1,642

 
1,767


Our residential holdings at June 30, 2016, are principally in southwest Austin, Texas, and included developed lots at Barton Creek and the Circle C community, and condominium units at the W Austin Hotel & Residences. See "Development Activities - Residential" for further discussion. Our commercial leasing holdings at June 30, 2016, consisted of the office and retail space at the W Austin Hotel & Residences, the first phase of Barton Creek Village, The Oaks at Lakeway and the first phase of the Santal multi-family project. See "Development Activities - Commercial" for further discussion.

The W Austin Hotel & Residences is located on a two-acre city block in downtown Austin and contains a 251-room luxury hotel, 159 residential condominium units (of which the remaining two unsold units were being marketed as of June 30, 2016), and office, retail and entertainment space. The hotel is managed by Starwood Hotels & Resorts Worldwide, Inc. The entertainment space, occupied by Austin City Limits Live at the Moody Theater (ACL Live), includes a live music and entertainment venue and production studio. Our 3TEN ACL Live venue, which is located

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on the site of the W Austin Hotel & Residences opened in March 2016. The 3TEN ACL Live venue has a capacity of approximately 350 people and is designed to be more intimate than ACL Live, which can accommodate approximately 3,000 people.

For second-quarter 2016, our revenues totaled $19.2 million and our net loss attributable to common stockholders totaled $2.5 million, compared with revenues of $20.0 million and net loss attributable to common stockholders of $1.1 million for second-quarter 2015. For the first six months of 2016, our revenues totaled $38.2 million and our net loss attributable to common stockholders totaled $4.2 million, compared with revenues of $40.2 million and net income attributable to common stockholders of $1.6 million for the first six months of 2015.

The decrease in revenues in the 2016 periods primarily reflects the sale of lower-priced lots and lower room revenues from the W Austin Hotel, partially offset by increased commercial leasing revenue relating to The Oaks at Lakeway and Santal. The results for the 2016 periods also reflect an increase in general and administrative expenses primarily due to costs of $1.9 million in second-quarter 2016 and $2.5 million for the first six months of 2016 associated with our successful proxy contest, and higher interest expense. Higher interest expense in the 2016 periods reflects increased borrowings and higher interest rates associated with our refinancing of the W Austin Hotel & Residences and increased construction loans to support the development of The Oaks at Lakeway and Santal. In January 2016, we refinanced debt associated with our wholly owned W Austin Hotel & Residences with longer-term, fixed-rate debt, and reported a loss on early extinguishment of debt totaling $0.8 million ($0.5 million to net loss attributable to common stockholders) for the first six months of 2016. The results for the first six months of 2015 included the recognition of a gain associated with the 2012 sale of 7500 Rialto totaling $5.0 million ($3.2 million to net income attributable to common stockholders). Results for the second quarter and first six months of 2015 included reductions of $0.9 million and $1.9 million, respectively, for net income attributable to noncontrolling interests in subsidiaries relating to our former joint venture partner’s interest in the W Austin Hotel & Residences.

For discussion of operating cash flows and debt transactions, including our refinancing of the W Austin Hotel & Residences, see "Capital Resources and Liquidity" below.

BUSINESS STRATEGY AND RELATED RISKS

Our overall strategy has been to enhance the value of our properties by securing and maintaining development entitlements and developing and building real estate projects on these properties for sale or investment. We have also pursued opportunities for new projects that offer the possibility of acceptable returns and risks.
In March 2015, we announced that our board of directors had unanimously approved a five-year plan to create value for stockholders by methodically developing certain existing assets and strategically marketing other assets for sale at appropriate values. Under the plan, any future new projects will be complementary to existing operations and will be projected to be developed and sold within a five-year time frame. Consistent with our five-year plan, on July 2, 2015, we completed the sales of our Austin-area Parkside Village and 5700 Slaughter commercial properties, both located in the Circle C community, for $32.5 million and $12.5 million, respectively. As discussed further below under “Development Activities,” we are in negotiations to sell The Oaks at Lakeway, continue to market our completed single-family homesites, continue planning for the second phase of our Santal multi-family project at Barton Creek Section N, and continue to progress our development projects and plans, including additional HEB-anchored projects.

In April 2016, we announced that our board of directors authorized management to explore a full range of strategic alternatives to enhance value for our stockholders, including, but not limited to, a sale of Stratus, a sale of certain of our core assets, a share repurchase program, and continuing our long-term plans to develop the value of our properties. After conducting a thorough process of evaluating several financial advisors, we have engaged Hentschel & Company, a premier boutique investment banking advisory firm focused on the real estate industry, as financial advisor in connection with the review of strategic alternatives. The board of directors has not set a definitive timeline for completion of this review process and has not determined to pursue any particular strategic alternative or enter into any transaction. There can be no assurance that this process will result in any change to the previously announced five-year plan, a sale transaction or any other transaction.
We believe that the Austin and surrounding sub-markets continue to be desirable. Many of our developments are in locations where development approvals have historically been subject to regulatory constraints, which has made it difficult to obtain entitlements. Our Austin assets, which are located in desirable areas with significant regulatory constraints, are highly entitled and now have utility capacity for full buildout. As a result, we believe that through

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strategic planning, development and marketing, as provided in our five-year plan, we can maximize and fully realize their value. Our development plans require significant additional capital, and may be pursued through joint ventures or other means. In addition, our strategy is subject to continued review by our board of directors and may change as a result of the outcome of our recently-announced review of strategic alternatives, market conditions or other factors deemed relevant by our board of directors.
In years past, economic conditions, including the constrained capital and credit markets, negatively affected the execution of our business plan, primarily by decreasing our pace of development to match economic and market conditions. We responded to these conditions by successfully restructuring our existing debt, including reducing interest rates and extending maturities, which enabled us to preserve our development opportunities until market conditions improved. Economic conditions have improved and we believe we have the financial flexibility to fully exploit our development opportunities and resources in accordance with our five-year plan. During the first six months of 2016, our operating cash flows reflect purchases and development of real estate properties totaling $7.6 million, funded primarily from construction and term loans, to invest in new development opportunities to be executed over the next 24 months. As of June 30, 2016, we had $3.0 million of availability under our revolving line of credit with Comerica Bank, which matures in August 2017.

Although as of June 30, 2016, we have scheduled debt maturities of $12.9 million occurring in fourth-quarter 2016 and $44.6 million in 2017, and significant recurring costs, including property taxes, maintenance and marketing, we believe we will have sufficient sources of debt financing and cash from operations to address our cash requirements. See "Capital Resources and Liquidity" below regarding recent debt repayments and refinancing and “Risk Factors” included in Part 1, Item 1A. of our 2015 Form 10-K for further discussion.
DEVELOPMENT ACTIVITIES

Residential. As of June 30, 2016, the number of our residential developed lots/units, lots under development and lots for potential development by area are shown below:
 
 
Residential Lots/Units
 
 
Developed
 
Under
Development
 
Potential Developmenta
 
Total
Barton Creek:
 
 
 
 
 
 
 
 
Amarra Drive:
 
 
 
 
 
 
 
 
Phase II Lots
 
13

 
—

 
—

 
13

Phase III Lots
 
54

 
—

 
—

 
54

Townhomes
 
—

 
20

 
170

 
190

Section N Multi-family
 
 
 
 
 
 
 
 
Santal Multi-family
 
192

 
44

 
—

 
236

Other Section N
 
—

 
—

 
1,624

 
1,624

Other Barton Creek sections
 
—

 
—

 
156

 
156

Circle C:
 
 
 
 
 
 
 
 
Meridian
 
21

 
—

 
—

 
21

Tract 101 Multi-family
 
—

 
—

 
240

 
240

Tract 102 Multi-family
 
—

 
—

 
56

 
56

Flores Street
 
—

 
—

 
6

 
6

W Austin Residences:
 
 
 
 
 
 
 
 
Condominium units
 
2

 
—

 
—

 
2

Total Residential Lots/Units
 
282

 
64

 
2,252

 
2,598

a.
Our development of the properties identified under the heading “Potential Development” is dependent upon the approval of our development plans and permits by governmental agencies, including the City of Austin (the City). Those governmental agencies may not approve one or more development plans and permit applications related to such properties or may require us to modify our development plans. Accordingly, our development strategy with respect to those properties may change in the future. While we may be proceeding with approved infrastructure projects on some of these properties, they are not considered to be “under development” for disclosure in this table unless other development activities necessary to fully realize the properties’ intended final use are in progress or scheduled to commence in the near term.

Amarra Drive. Amarra Drive Phase I, which was the initial phase of the Amarra Drive subdivision, was completed in 2007 and included six lots with sizes ranging from approximately one to four acres. Amarra Drive Phase II, which

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consists of 35 lots on 51 acres, was substantially completed in October 2008. During the first six months of 2016, we sold one Phase II lot for $0.6 million and as of June 30, 2016, 13 Phase II lots remained available for sale.
In first-quarter 2015, we substantially completed the development of Amarra Drive Phase III, which consists of 64 lots on 166 acres. As of June 30, 2016, 54 Phase III lots remained available for sale. During July 2016, one Amarra Drive Phase III lot was sold, and as of July 31, 2016, three Phase III lots were under contract.

The Villas at Amarra Drive townhome project is a 20-unit development. We completed site work in late 2015, construction began in March 2016 on the first five townhomes, and as of July 31, 2016, we are marketing the townhomes for sale. These townhomes are scheduled for substantial completion by mid-2017.

Section N. The Santal multi-family project, a garden-style apartment complex, was substantially completed in July 2016 and includes 236 apartment units. We recognized rental revenue, which is included in the Commercial Leasing segment, beginning in January 2016. As of July 31, 2016, 55 units were leased.

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 the final phase of Meridian, which consisted of 57 one-acre lots, was completed in first-quarter 2014. During the first six months of 2016, we sold 10 Meridian lots for $2.8 million and as of June 30, 2016, 21 lots remained available for sale. During July 2016, we sold one additional Meridian lot and as of July 31, 2016, nine lots were under contract.

W Austin Residences. As of June 30, 2016, two condominium units remained available for sale and are being marketed for sale.

Commercial. As of June 30, 2016, the number of square feet of our commercial property developed, under development and our remaining entitlements for potential development (excluding property associated with our unconsolidated joint venture with Tramell Crow Central Texas Development, Inc. relating to Crestview Station in Austin (the Crestview Station Joint Venture)) are shown below:
 
Commercial Property
 
Developed
 
Under Development
 
Potential Developmenta
 
Total
Barton Creek:
 
 
 
 
 
 
 
Treaty Oak Bank
3,085

 
—

 
—

 
3,085

Barton Creek Village Phase I
22,366

 
—

 
—

 
22,366

Barton Creek Village Phase II
—

 
—

 
16,000

 
16,000

Entry corner
—

 
—

 
5,000

 
5,000

Amarra retail/office
—

 
—

 
83,081

 
83,081

Section N
—

 
—

 
1,500,000

 
1,500,000

Circle C:
 
 
 
 
 
 
 
Tract 110
—

 
—

 
614,500

 
614,500

Tract 114
—

 
—

 
78,357

 
78,357

Lantana:
 
 
 
 
 
 
 
Tract GR1
—

 
—

 
325,000

 
325,000

Tract G07
—

 
—

 
160,000

 
160,000

W Austin Hotel & Residences:
 
 
 
 
 
 
 
Office
38,316

 
—

 
—

 
38,316

Retail
18,327

 
—

 
—

 
18,327

The Oaks at Lakeway
217,736

 
13,700

 
—

 
231,436

Magnolia
—

 
—

 
351,000

 
351,000

West Killeen Market
—

 
—

 
44,000

 
44,000

Total Square Feet
299,830

 
13,700

 
3,176,938

 
3,490,468

a.
Our development of the properties identified under the heading “Potential Development” is dependent upon the approval of our development plans and permits by governmental agencies, including the City. Those governmental agencies may not approve one or more development plans and permit applications related to such properties or may require us to modify our development plans. Accordingly, our development strategy with respect to those properties may change in the future. While

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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.
 
Barton Creek. The first phase of Barton Creek Village consists of a 22,366-square-foot retail complex and a 3,085-square-foot bank building. As of June 30, 2016, occupancy was 100 percent for the retail complex, and the bank building is leased through January 2023.

Lantana.  Lantana is a partially developed, mixed-use real-estate development project. As of June 30, 2016, we had entitlements for approximately 485,000 square feet of office and retail space on the remaining 56 acres. Regional utility and road infrastructure is in place with capacity to serve Lantana at full build-out as permitted under our existing entitlements. We received final approval from the City in August 2015 for a 325,000 square-foot mixed-use development and we expect to move forward with development during 2016.

W Austin Hotel & Residences. The W Austin Hotel & Residences has 38,316 square feet of leasable office space, including 9,000 square feet occupied by our corporate office, and 18,327 square feet of retail space. As of June 30, 2016, both the office and retail space were substantially all occupied.

The Oaks at Lakeway. The Oaks at Lakeway is a HEB Grocery Company, L.P. (HEB) anchored retail project planned for 231,436 square feet of commercial space. As of June 30, 2016, leases for approximately 90 percent of the space, including the HEB lease, have been executed and leasing for the remaining space is under way. The HEB store opened in October 2015, and 16 retail tenants have opened in 2016. Construction of 217,736 square feet was substantially complete as of June 30, 2016, and construction of the remaining space will be started once leases have been executed. We have received attractive bids for the project and are in active negotiations to sell the property.

Magnolia. The Magnolia project is a HEB-anchored retail project planned for 351,000 square feet of commercial space. Planning and infrastructure work by the city of Magnolia and road expansion by the Texas Department of Transportation are in progress and construction is expected to be completed in 2017. The HEB store is expected to open in fourth-quarter 2017.

West Killeen Market. In 2015, we acquired approximately 21 acres in Killeen, Texas, to develop the West Killeen Market project, a HEB-anchored retail project planned for 44,000 square feet of commercial space and three pad sites adjacent to a 90,000 square-foot HEB grocery store. Construction is expected to begin in August 2016, and the HEB store is expected to open in March 2017.

UNCONSOLIDATED AFFILIATE

Crestview Station. Crestview Station is a single-family, multi-family, retail and office development, located on the site of a commuter rail line. As of June 30, 2016, the Crestview Station Joint Venture has sold all of its properties except for one commercial site (see Note 6 in our 2015 Form 10-K). We account for our 50 percent interest in the Crestview Station Joint Venture under the equity method.

RESULTS OF OPERATIONS

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


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The following table summarizes our results (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Operating income (loss):
 
 
 
 
 
 
 
Hotel
$
2,159

 
$
1,274

 
$
4,267

 
$
3,369

Entertainment
656

 
1,012

 
1,392

 
1,591

Commercial leasing
549

 
383

 
1,392

 
1,058

Real estate operations
(487
)
 
180

 
(493
)
 
513

Corporate, eliminations and other
(4,239
)
 
(2,307
)
 
(7,447
)
 
(4,380
)
Operating (loss) income
$
(1,362
)
 
$
542

 
$
(889
)
 
$
2,151

Interest expense, net
$
(2,346
)
 
$
(1,031
)
 
$
(4,315
)
 
$
(1,881
)
Income from discontinued operations, net of taxes
$
—

 
$
—

 
$
—

 
$
3,218

Net (loss) income
$
(2,483
)
 
$
(240
)
 
$
(4,166
)
 
$
3,544

Net income attributable to noncontrolling interests in subsidiaries
$
—

 
$
(879
)
 
$
—

 
$
(1,921
)
Net (loss) income attributable to common stockholders
$
(2,483
)
 
$
(1,119
)
 
$
(4,166
)
 
$
1,623


We have four operating segments: Hotel, Entertainment, Commercial Leasing and Real Estate Operations (see Note 6 for further discussion). The following is a discussion of our operating results by segment.

Hotel
The following table summarizes our Hotel operating results (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Hotel revenue
$
10,729

 
$
11,123

 
$
21,393

 
$
22,814

Hotel cost of sales, excluding depreciation
7,719

 
8,353

 
15,429

 
16,455

Depreciation
851

 
1,496

 
1,697

 
2,990

Operating income
$
2,159

 
$
1,274

 
$
4,267

 
$
3,369


Hotel Operating Income. Operating income for the Hotel segment increased during the 2016 periods, primarily reflecting lower depreciation expense.

Hotel Revenue. Hotel revenue primarily includes revenue from W Austin Hotel room reservations and food and beverage sales. Revenue per available room, which is calculated by dividing total room revenue by the average total rooms available, averaged $285 for second-quarter 2016 and $283 for the first six months of 2016, compared with $287 for second-quarter 2015 and $303 for the first six months of 2015. Lower Hotel revenues in the 2016 periods primarily reflect lower room rates and lower food and beverage sales, partly attributable to increased hotel capacity in the Austin area.

Hotel Cost of Sales. Hotel operating costs (excluding depreciation) totaled $7.7 million in second-quarter 2016 and $15.4 million for for the first six months of 2016, compared with $8.4 million in second-quarter 2015 and $16.5 million for the first six months of 2015. Lower costs in the 2016 periods primarily reflect lower management fees and decreased food and beverage costs.

Hotel Depreciation. Hotel depreciation totaled $0.9 million in second-quarter 2016 and $1.7 million for the first six months of 2016, compared with $1.5 million in second-quarter 2015 and $3.0 million for the first six months of 2015. Lower depreciation expense in the 2016 periods primarily reflects certain furniture and equipment being fully depreciated as of December 31, 2015.


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Entertainment
The following table summarizes our Entertainment operating results (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Entertainment revenue
$
4,954

 
$
5,074

 
$
9,130

 
$
9,406

Entertainment cost of sales, excluding depreciation
3,927

 
3,744

 
7,032

 
7,173

Depreciation
371

 
318

 
706

 
642

Operating income
$
656

 
$
1,012

 
$
1,392

 
$
1,591


Entertainment Operating Income. Operating income for the Entertainment segment decreased in the 2016 periods, primarily as a result of lower revenues and, in the second quarter of 2016, higher cost of sales.

Certain key operating statistics specific to the concert and event hosting industry are included below to provide additional information regarding our ACL Live operating performance.
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Events:
 
 
 
 
 
 
 
Events hosted
59

 
55

 
110

 
103

Estimated attendance
58,700

 
63,400

 
113,100

 
119,200

Ancillary net revenue per attendee
$
46.06

 
$
48.67

 
$
51.09

 
$
48.83

Ticketing:
 
 
 
 
 
 
 
Number of tickets sold
42,400

 
43,900

 
76,000

 
77,700

Gross value of tickets sold (in thousands)
$
2,670

 
$
3,009

 
$
4,000

 
$
4,790


Entertainment Revenue. Entertainment revenue primarily reflects the results of operations for ACL Live, including ticket sales, revenue from private events, sponsorships, personal seat license sales and suite sales, and sales of concessions and merchandise. Entertainment revenue also reflects revenues associated with events hosted at venues other than ACL Live, including 3TEN ACL Live, and production of recorded content for artists performing at ACL Live or 3TEN ACL Live, as well as the results of the Stageside Productions joint venture with Pedernales Entertainment LLC. Revenues from the Entertainment segment will vary from period to period as a result of factors such as the price of tickets and number of tickets sold, as well as the number and type of events. The decrease in entertainment revenue in the 2016 periods primarily reflects lower event attendance and lower ticket sales.

Entertainment Cost of Sales. Entertainment operating costs (excluding depreciation) totaled $3.9 million in second-quarter 2016 and $7.0 million for the first six months of 2016, compared with $3.7 million in second-quarter 2015 and $7.2 million for the first six months of 2015. Costs from the Entertainment segment will vary from period to period as a result of the number and types of events hosted.

Commercial Leasing
The following table summarizes our Commercial Leasing operating results (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Rental revenue
$
2,366

 
$
1,869

 
$
4,555

 
$
3,776

Rental cost of sales, excluding depreciation
1,051

 
985

 
1,921

 
1,750

Depreciation
766

 
501

 
1,242

 
968

Operating income
$
549

 
$
383

 
$
1,392

 
$
1,058


Commercial Leasing Operating Income. Operating income from the Commercial Leasing segment increased in the 2016 periods, primarily as a result of rental revenue from The Oaks at Lakeway and Santal, which opened in 2016, partly offset by a decrease in revenue from Parkside Village and 5700 Slaughter, which were sold in July 2015.

Rental Revenue. Rental revenue for 2016 primarily includes revenue from The Oaks at Lakeway, office and retail space at the W Austin Hotel & Residences, Barton Creek Village and the Santal multi-family project. Rental revenue

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for the 2015 periods included revenue from Parkside Village and 5700 Slaughter, which were both sold on July 2, 2015. The increase in rental revenue in the 2016 periods reflects rental revenues from The Oaks at Lakeway and the Santal multi-family project, partially offset by a decrease related to the sales of Parkside Village and 5700 Slaughter.

Rental Cost of Sales. Rental operating costs totaled $1.1 million in second-quarter 2016 and $1.9 million for the first six months of 2016, compared with $1.0 million in second-quarter 2015 and $1.8 million for the first six months of 2015. The increase in rental costs in the 2016 periods primarily reflects increased operating costs relating to The Oaks at Lakeway and Santal, partially offset by a decrease in operating expenses related to the sales of Parkside Village and 5700 Slaughter.

Real Estate Operations
The following table summarizes our Real Estate Operations operating results (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Revenues:
 
 
 
 
 
 
 
Developed property sales
$
1,300

 
$
2,045

 
$
3,365

 
$
4,250

Undeveloped property sales
73

 
—