UNITED STATES | ||
SECURITIES AND EXCHANGE COMMISSION | ||
Washington, D.C. 20549 | ||
FORM 10-K | ||
(Mark One) | ||
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||
For the fiscal year ended December 31, 2017 | ||
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: 000-19989 | ||
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) | |
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
Common Stock, par value $0.01 per share | The NASDAQ Stock Market | |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. o Yes þ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o Yes þ No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes o 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 o No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
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. o Large accelerated filer þ Accelerated filer o Non-accelerated filer o Smaller reporting company o Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). o Yes þ No
The aggregate market value of common stock held by non-affiliates of the registrant was $146.4 million on February 28, 2018, and $149.3 million on June 30, 2017.
Common stock issued and outstanding was 8,133,502 shares on February 28, 2018, and 8,126,502 shares on June 30, 2017.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of our proxy statement for our 2018 annual meeting of stockholders are incorporated by reference into Part III (Items 10, 11, 12, 13 and 14) of this report.
STRATUS PROPERTIES INC. | |
TABLE OF CONTENTS | |
Page | |
PART I
Items 1. and 2. Business and Properties.
Except as otherwise described herein or the context otherwise requires, all references to “Stratus,” “we,” “us” and “our” in this Form 10-K refer to Stratus Properties Inc. and all entities owned or controlled by Stratus Properties Inc. All of our periodic reports filed with or furnished to the United States (U.S.) Securities and Exchange Commission (SEC) pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, including our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports are available, free of charge, through our website, www.stratusproperties.com, or by submitting a written request via mail to Stratus Investor Relations, 212 Lavaca St., Suite 300, Austin, Texas, 78701. These reports and amendments are available through our website or by request as soon as reasonably practicable after we electronically file or furnish such material with or to the SEC.
All references to “Notes” herein refer to the Notes to Consolidated Financial Statements located in Part II, Item 8. of this Form 10-K.
Overview
We are a diversified real estate company engaged primarily in the acquisition, entitlement, development, management, operation and sale of commercial, hotel, entertainment, and multi-family and single-family residential real estate properties, primarily located in the Austin, Texas area, and also including projects in certain other select markets in Texas.
We generate revenues and cash flows from the sale of developed properties, rental income from our leased properties and from our hotel and entertainment operations. Developed property sales can include an individual tract of land that has been developed and permitted for residential use or a developed lot with a home already built on it. We may sell properties under development, undeveloped properties or leased properties if opportunities arise that we believe will maximize overall asset value as part of our business plan. See below and Note 10 for further discussion of our operating segments.
Our principal executive offices are located in Austin, Texas, and our company was incorporated under the laws of the state of Delaware on March 11, 1992. Stratus Properties Inc. was formed to hold, operate and develop the domestic real estate and oil and gas properties of our former parent company. We sold all of our oil and gas properties during the 1990s and have since focused solely on our real estate properties. 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. See "Business Strategy" in Part II, Items 7. and 7A. for further discussion.
Operations
A description of our four operating segments follows.
Real Estate Operations. The acreage under development and undeveloped as of December 31, 2017, that comprise our real estate operations is presented in the following table. Acreage under development includes real estate for which infrastructure work over the entire property has been completed, is currently being completed or is able to be completed and for which necessary permits have been obtained. The undeveloped acreage shown in the table below is presented according to anticipated uses for multi-family units, single-family lots and commercial development based upon our understanding of the properties’ existing entitlements. However, because of the nature and cost of the approval and development process and uncertainty regarding market demand for a particular use, there is no assurance that the undeveloped acreage will ever be developed. Undeveloped acreage (i.e., planning, infrastructure or development work is not currently in progress on such property) includes real estate that can be sold “as is.”
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Under Development | Undeveloped | |||||||||||||||||||||||||
Single Family | Multi- family | Commercial | Total | Single Family | Multi- family | Commercial | Total | Total Acreage | ||||||||||||||||||
Austin: | ||||||||||||||||||||||||||
Barton Creek | 4 | 38 | — | 42 | 512 | 262 | 394 | 1,168 | 1,210 | |||||||||||||||||
Circle C | — | — | — | — | — | 36 | 216 | 252 | 252 | |||||||||||||||||
Lantana | — | — | 11 | 11 | — | — | 44 | 44 | 55 | |||||||||||||||||
Other | — | — | — | — | 7 | — | — | 7 | 7 | |||||||||||||||||
Lakewaya | — | — | — | — | 35 | — | — | 35 | 35 | |||||||||||||||||
Magnolia | — | — | — | — | — | — | 124 | 124 | 124 | |||||||||||||||||
Jones Crossing | — | — | 72 | 72 | — | — | — | — | 72 | |||||||||||||||||
Camino Real, San Antonio | — | — | — | — | — | — | 2 | 2 | 2 | |||||||||||||||||
Total | 4 | 38 | 83 | 125 | 554 | 298 | 780 | 1,632 | 1,757 | |||||||||||||||||
a. On February 15, 2017, we sold The Oaks at Lakeway, which included 52 acres of land under development at December 31, 2016, but we retained 34.7 acres of undeveloped land adjacent to the project (see "Properties - The Oaks at Lakeway" below and Note 11).
Revenue from our real estate operations segment accounted for 14 percent of our total revenue for 2017, 13 percent for 2016 and 18 percent for 2015.
The following table summarizes the estimated development potential, including 212 multi-family units and 252,913 square feet of commercial space currently under development, of our acreage as of December 31, 2017:
Single Family | Multi-family | Commercial | ||||||
(lots) | (units) | (gross square feet) | ||||||
Barton Creek | 175 | 1,794 | 88,081 | |||||
Lakeway | 100 | — | — | |||||
Circle C | — | 297 | 674,942 | |||||
Lantana | — | — | 480,000 | |||||
Magnolia | — | — | 351,000 | |||||
Jones Crossing | — | — | 258,000 | |||||
Flores Street | — | 6 | — | |||||
Total | 275 | 2,097 | 1,852,023 | |||||
Leasing Operations. Our principal leasing operations at December 31, 2017, consisted of (1) 38,316 square feet of office space, including 9,000 square feet occupied by our corporate office, and 18,327 square feet of retail space at the W Austin Hotel & Residences, (2) a 22,366-square-foot retail complex representing the first phase of Barton Creek Village, (3) a 44,000-square-foot retail complex at West Killeen Market and (4) the Santal Phase I multi-family project, a garden-style apartment complex consisting of 236 units. In February 2017, we sold The Oaks at Lakeway, the Barton Creek Village bank building and an adjacent undeveloped 4.1 acre tract of land.
Revenue from our leasing operations segment accounted for 10 percent of our total revenue for 2017, 12 percent for 2016 and 7 percent for 2015.
Hotel. The W Austin Hotel, which is part of the W Austin Hotel & Residences, includes 251 luxury rooms and suites, a full service spa, gym, rooftop pool and 9,750 square feet of meeting space. We have an agreement with Starwood Hotels & Resorts Worldwide, Inc., a subsidiary of Marriott International, Inc. (Starwood) for the management of hotel operations at the W Austin Hotel. Revenue per available room for the W Austin Hotel, which is calculated by dividing total room revenue by the average total rooms available during the year, was $253 for 2017, $259 for 2016 and $279 for 2015.
Revenue from our hotel segment accounted for 47 percent of our total revenue for 2017 and 51 percent for each of 2016 and 2015.
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Entertainment. The entertainment space at the W Austin Hotel & Residences is occupied by Austin City Limits Live at the Moody Theater (ACL Live) and includes a live music and entertainment venue and production studio with a maximum capacity of approximately 3,000 people. In addition to hosting concerts and private events, ACL Live is the home of Austin City Limits, a television program showcasing popular music legends. ACL Live hosted 224 events in 2017 with estimated attendance of 297,100, compared with 223 events in 2016 with estimated attendance of 237,000 and 210 events in 2015 with estimated attendance of 245,000. As of February 28, 2018, ACL Live has events booked through September 2019. Entertainment revenue also reflects revenues associated with events hosted at venues other than ACL Live, including 3TEN ACL Live. The 3TEN ACL Live venue, which is located on the site of the W Austin Hotel & Residences, opened in March 2016 and has a capacity of approximately 350 people. The 3TEN ACL Live venue hosted 228 events in 2017 with estimated attendance of 40,600 and 162 events in 2016 with estimated attendance of 25,500. As of February 28, 2018, 3TEN ACL Live has events booked through August 2019.
Revenue from our entertainment segment accounted for 29 percent of our total revenue for 2017 and 24 percent for both 2016 and 2015.
For further information about our operating segments see “Results of Operations” in Part II, Items 7. and 7A. See Note 10 for a summary of our revenues, operating income and total assets by operating segment.
Properties
Our Austin-area properties include the following:
Barton Creek
Amarra Drive. In 2008, we substantially completed the development of Amarra Drive Phase II, which consists of 35 lots on 51 acres. During each of 2017 and 2016, we sold one Phase II lot. As of December 31, 2017, 12 Phase II lots remain unsold. During January 2018, one Phase II lot was sold.
In first-quarter 2015, we substantially completed the development of Amarra Drive Phase III, which consists of 64 lots on 166 acres. In 2017, we identified four lots on which to build homes and began construction on two homes. We sold six Phase III lots during each of 2017 and 2016. As of December 31, 2017, 38 Phase III lots remained unsold.
In March 2018, we entered into a contract to sell one Amarra Drive Phase II lot and eight Amarra Drive Phase III lots for a total of $5.9 million. In accordance with the contract, the parties are required to close on the sale of these lots ratably before December 31, 2018. If the purchaser fails to close on the sale of the minimum number of lots by any of the specified closing dates, we may elect to terminate the contract but would retain the related $45 thousand earnest money. In addition, as of February 28, 2018, six Phase III lots were under contract, one of which closed in March.
The Villas at Amarra Drive (Amarra Villas) townhome project is a 20-unit development for which we completed sitework in late 2015. The townhomes average approximately 4,400 square feet and are being marketed as "lock and leave" properties, with golf course access and cart garages. During 2017, construction of the first five townhomes was completed and construction of the next two townhomes began. One of the completed townhomes was sold during 2017. As of February 28, 2018, two townhomes, currently under construction, were under contract.
Santal. The Santal Phase I multi-family project, a garden-style apartment complex, was completed within budget in August 2016 and consists of 236 units. As of February 28, 2018, approximately 95 percent of the units were leased. During 2017, we obtained financing and began construction of Santal Phase II, a 212-unit garden style, multi-family development located adjacent to Santal Phase I.
Barton Creek Village. The first phase of Barton Creek Village includes a 22,366-square-foot retail complex and a 3,085-square-foot bank building. In February 2017, we sold the 3,085-square-foot bank building in Barton Creek Village and an adjacent undeveloped 4.1 acre tract of land for $3.1 million (see Note 11). We intend to explore opportunities to sell the retail complex later this year depending on market conditions.
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Circle C Community
Effective August 2002, the city of Austin (the City) granted final approval of a development agreement (the Circle C settlement), which firmly established all essential municipal development regulations applicable to our Circle C properties until 2032. The City also provided us $15.0 million of cash incentives in connection with the future development of our Circle C and other Austin-area properties. These incentives, which are in the form of credit bank capacity, can be used for City fees and for reimbursement of certain infrastructure costs. Annually, we may elect to sell up to $1.5 million of the incentives to other developers for their use in paying City fees related to their projects as long as the projects are within the desired development zone, as defined within the Circle C settlement. As of December 31, 2017, we have permanently used $12.7 million of the $15.0 million City-based development fee credits, including cumulative amounts sold to third parties totaling $5.1 million. We also had $0.5 million in credit bank capacity in use as temporary fiscal deposits as of December 31, 2017. Available credit bank capacity was $2.6 million at December 31, 2017.
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. 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 2014. We sold the last 12 lots during 2017 and 19 lots during each of 2016 and 2015.
The St. Mary. We have secured final building permits for The St. Mary, a 240-unit multi-family development in the Circle C community, and, subject to obtaining construction financing, intend to commence construction by mid-2018.
As of December 31, 2017, our Circle C community had remaining entitlements for 674,942 square feet of commercial space and 297 multi-family units, including the 240 units planned for The St. Mary multi-family development.
Lantana
Lantana is a partially developed, mixed-use real-estate development project. As of December 31, 2017, we had remaining entitlements for approximately 480,000 square feet of office and retail use on 55 acres. Regional utility and road infrastructure is in place with capacity to serve Lantana at full build-out as permitted under our existing entitlements. In 2017, construction commenced on the first phase of Lantana Place, a 320,000 square foot mixed-use development project in southwest Austin. The first phase will be anchored by a 12-screen Moviehouse, a state of the art movie theater that provides a high-quality dining experience. We expect to complete construction of Moviehouse in mid-2018.
The W Austin Hotel & Residences
In December 2006, we acquired a two-acre city block in downtown Austin for $15.1 million to develop a multi-use project. In 2008, we entered into a joint venture with Canyon-Johnson Urban Fund II, L.P. (Canyon-Johnson) for the development of the W Austin Hotel & Residences. In September 2015, we completed the purchase of Canyon-Johnson's approximate 58 percent interest in the joint venture that owned the W Austin Hotel & Residences. See Note 2 for further discussion.
The W Austin Hotel & Residences contains a 251-room luxury hotel, 159 residential condominium units, 38,316 square feet of leasable office space, including 9,000 square feet occupied by our corporate office, 18,327 square feet of retail space, including 3TEN ACL Live, and entertainment space occupied by ACL Live. No sales of condominium units occurred in the last three years and as of December 31, 2017, two condominium units remained unsold and are being marketed.
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The Oaks at Lakeway
In 2013 and 2014, we acquired 87 acres in the greater Austin area to develop The Oaks at Lakeway project, an HEB Grocery Company, L.P. (HEB)-anchored retail project planned for 236,739 square feet of commercial space. The HEB store opened in October 2015, and in February 2017, we sold The Oaks at Lakeway for $114.0 million in cash. We retained 34.7 acres of undeveloped property, which is zoned for residential, hotel and civic uses (see Note 11).
Our other Texas properties and development projects include:
Magnolia
In 2014, we acquired 142 acres in the greater Houston area to develop the Magnolia project, an HEB-anchored retail project planned for 351,000 square feet of commercial space. Planning and infrastructure work by the city of Magnolia is complete and road expansion by the Texas Department of Transportation is in progress and expected to be completed in early 2018. The HEB grocery store is currently expected to open in 2020.
West Killeen Market
In 2015, we acquired approximately 21 acres in Killeen, Texas, to develop the West Killeen Market project, an HEB-anchored retail project with 44,000 square feet of commercial space and three pad sites adjacent to a 90,000 square-foot HEB grocery store. Construction began in August 2016 and was completed on schedule and under budget in June 2017. The HEB store opened in April 2017. As of December 31, 2017, leases for approximately 60 percent of the space at West Killeen Market have been executed, and leasing for the remaining space continues. We intend to explore opportunities to sell West Killeen Market later this year depending on leasing progress and market conditions.
Jones Crossing
In 2017, we acquired a 72-acre tract of land in College Station, Texas, for Jones Crossing, a HEB-anchored, mixed-use project. The Jones Crossing project is expected to total approximately 258,000 square feet of commercial space, including a 106,000 square-foot HEB grocery store. Construction of the retail component of the Jones Crossing project began in September 2017, and the HEB grocery store is expected to open in August 2018.
Competition
We operate in highly competitive industries, namely the real estate development, leasing, hotel and entertainment industries. In the real estate development industry, we compete with numerous public and private developers of varying sizes, ranging from local to national in scope. As a result, we may be competing for investment opportunities, financing and potential buyers with developers that may possess greater financial, marketing or other resources than we have. Our prospective customers generally have a variety of choices of new and existing homes and homesites when considering a purchase. We attempt to differentiate our properties primarily on the basis of community design, quality, uniqueness, amenities, location and developer reputation.
The leasing industry is highly fragmented among individuals, partnerships and public and private entities, with no dominant single entity or person. Although we may compete against large sophisticated owners and operators, owners and operators of any size can provide effective competition for prospective tenants. We compete for tenants primarily on the basis of property location, rent charged, and the design and condition of improvements.
In the hotel industry, competition is generally based on quality and consistency of rooms, restaurant and meeting facilities and services, attractiveness of location, price and other factors. Management believes that we compete favorably in these areas. Our W Austin Hotel competes with other hotels and resorts in our geographic market, including hotels owned locally and facilities owned by national and international chains.
In the entertainment industry, we compete with other venues in Austin, Texas, and venues in other markets for artists likely to perform in the Austin, Texas region. Touring artists have several alternatives to our venue when scheduling tours. Some of our competitors in venue management have a greater number of venues in certain markets and may have greater financial resources in those markets. We differentiate our entertainment businesses
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by providing a quality live music experience and promoting our ACL Live entertainment space through KLRU's broadcast of Austin City Limits.
See Part I, Item 1A. "Risk Factors" for further discussion.
Credit Facility and Other Financing Arrangements
Obtaining and maintaining adequate financing is a critical component of our business. For information about our credit facility and other financing arrangements, see “Capital Resources and Liquidity - Credit Facility and Other Financing Arrangements” in Part II, Items 7. and 7A. and Note 6.
Regulation and Environmental Matters
Our real estate investments are subject to extensive local, city, county and state rules and regulations regarding permitting, zoning, subdivision, utilities and water quality as well as federal rules and regulations regarding air and water quality and protection of endangered species and their habitats. Such regulation has delayed and may continue to delay development of our properties and may result in higher development and administrative costs. See Part I, Item 1A. "Risk Factors" for further discussion.
We have made, and will continue to make, expenditures for the protection of the environment with respect to our real estate development activities. Emphasis on environmental matters will result in additional costs in the future. Based on an analysis of our operations in relation to current and presently anticipated environmental requirements, we currently do not anticipate that these costs will have a material adverse effect on our future operations or financial condition.
Employees
At December 31, 2017, we had a total of 139 employees, 48 of which were full-time employees, located at our Austin, Texas headquarters. We believe we have a good relationship with our employees, none of whom are represented by a union. Since 1996, certain services necessary for our business and operations, including certain administrative, financial reporting and other services, have been performed by FM Services Company (FM Services) pursuant to a services agreement. FM Services is a wholly owned subsidiary of Freeport-McMoRan Inc. Either party may terminate the services agreement at any time upon 60 days notice or earlier upon mutual written agreement.
Item 1A. Risk Factors
This report contains "forward-looking statements" within the meaning of U.S. federal securities laws. Forward-looking statements are all statements other than statements of historical facts, such as statements regarding projections or expectations related to operational and financial performance or liquidity, reimbursements for infrastructure costs, financing and regulatory matters, development plans and sales of properties, leasing activities, timeframes for development, construction and completion of our projects, capital expenditures, liquidity and capital resources, the impact of tax reform on our operations, and other plans and objectives of management for future operations and activities. We undertake no obligation to update any forward-looking statements. We caution readers that forward-looking statements are not guarantees of future performance and our actual results may differ materially from those anticipated, projected or assumed in the forward-looking statements. Important factors that can cause our actual results to differ materially from those anticipated in the forward-looking statements include the following:
Risks Relating to our Business and Industries
We need significant amounts of cash to service our debt. If we are unable to generate sufficient cash to service our debt, our liquidity, financial condition and results of operations could be negatively affected.
Our business strategy requires us to rely on cash flow from operations and our debt agreements as our primary sources of funding for our liquidity needs. As of December 31, 2017, our outstanding debt totaled $221.5 million and our cash and cash equivalents totaled $14.6 million. Our level of indebtedness could have significant consequences. For example, it could:
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• | Increase our vulnerability to adverse changes in economic and industry conditions; |
• | Require us to dedicate a substantial portion of our cash flow from operations and proceeds from asset sales to pay or provide for our indebtedness, thus reducing the availability of cash flows to fund working capital, capital expenditures, acquisitions, investments and other general corporate purposes; |
• | Limit our flexibility to plan for, or react to, changes in our business and the market in which we operate; |
• | Place us at a competitive disadvantage to our competitors that have less debt; and |
• | Limit our ability to borrow money to fund our working capital, capital expenditures, debt service requirements and other financing needs. |
Historically, much of our debt has been renewed or refinanced in the ordinary course of business. Any deterioration of current economic conditions in our areas of operations could impact our ability to refinance our debt and obtain renewals or replacement of credit enhancement devices on favorable terms or at all. In the future we may not be able to obtain sufficient external sources of liquidity on attractive terms, if at all, or otherwise renew, extend or refinance a significant portion of our outstanding debt scheduled to become due in the near future. There can be no assurance that we will maintain cash reserves and generate sufficient cash flow from operations in an amount sufficient to enable us to service our debt or to fund our other liquidity needs. Any of these occurrences may have a material adverse effect on our liquidity, financial condition and results of operations. For example, our inability to extend, repay or refinance our debt when it becomes due, including upon a default or acceleration event, could force us to sell properties on unfavorable terms or ultimately result in foreclosure on properties pledged as collateral, which could result in a loss of our investment and harm our reputation.
The terms of the agreements governing our indebtedness include restrictive covenants and require that certain financial ratios be maintained. For example, the minimum stockholders' equity covenant contained in several of our debt agreements requires us to maintain total stockholders’ equity of no less than $110.0 million. At December 31, 2017, our total stockholders’ equity was $127.3 million and, as a result, we were in compliance with this covenant. Failure to comply with any of the covenants in our loan documents could result in a default that may, if not cured, accelerate the payment under our debt obligations which would likely have a material adverse effect on our liquidity, financial condition and results of operations. Our ability to comply with our covenants will depend upon our future economic performance. These covenants may adversely affect our ability to finance our future operations, satisfy our capital needs or engage in other business activities that may be desirable or advantageous to us.
In order to maintain compliance with the covenants in our debt agreements and carry out our business plan, we may need to raise additional capital through equity transactions or obtain waivers or modifications of covenants from our lenders. Such additional funding may not be available on acceptable terms, if at all, when needed. We also may need to incur additional indebtedness in the future in the ordinary course of business to fund our development projects and our operations. There can be no assurance that such additional financing will be available when needed or, if available, offered on acceptable terms. If new debt is added to our current debt levels, the risks described above could intensify.
We are periodically rated by nationally recognized credit rating agencies. Any downgrades in our credit rating could impact our ability to borrow by increasing borrowing costs as well as limiting our access to capital. In addition, a downgrade could require us to post cash collateral and/or letters of credit, which would adversely affect our cash flow and liquidity.
Additionally, a portion of our outstanding debt bears interest at variable rates. See “Disclosures About Market Risks” in Part II, Items 7. and 7A. for more information.
We are vulnerable to concentration risks because our operations are almost exclusive to the Austin, Texas market.
Our real estate operations are primarily, and our hotel and entertainment venue operations are entirely, located in Austin, Texas. While our real estate operations have expanded to include select Texas markets outside of Austin, including College Station, Magnolia and West Killeen, the geographic concentration of the majority of our operations and limited number of projects we may have under development at a given time means that our operations are more vulnerable to local economic downturns and adverse project-specific risks than those of larger, more
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diversified companies. The performance of the Austin economy greatly affects our sales and consequently the underlying values of our properties. Our geographic concentration may create increased vulnerability during regional economic downturns, which can significantly affect our financial condition and results of operations. See "Overview - Real Estate Market Conditions" in Part II, Items 7. and 7A. for more information.
The success of our business is significantly related to general economic conditions and, accordingly, our business could be harmed by any slowdown or deterioration in the economy.
Periods of economic weakness or recession; significantly rising interest rates; declining employment levels; declining demand for real estate; declining real estate values; conditions which negatively shape public perception of travel, including travel-related accidents, the financial condition of the airline, automotive and other transportation-related industries; or the public perception that any of these events or conditions may occur or be present, may negatively affect our business. These economic conditions can result in a general decline in acquisition, disposition and leasing activity, demand for hotel rooms and related lodging services, a general decline in the value of real estate and in rents, which in turn reduces revenue derived from property sales and leases and hotel operations as well as revenues associated with development activities. These conditions can also lead to a decline in property sales prices as well as a decline in funds invested in existing commercial real estate and related assets and properties planned for development. In addition, during periods of economic slowdown and recession, many consumers have historically reduced their discretionary spending, and our entertainment businesses depend on discretionary consumer and corporate spending. A reduction in consumer spending historically is accompanied by a decrease in attendance at live entertainment, sporting and leisure events, which may result in reductions in ticket sales, sponsorship opportunities and our ability to generate revenue with our entertainment businesses.
During an economic downturn, investment capital is usually constrained and it may take longer for us to dispose of real estate investments. As a result, the value of our real estate investments may be reduced and we could realize losses or diminished profitability. If economic and market conditions decline, our business performance and profitability could deteriorate. If this were to occur, we could fail to comply with certain financial covenants in our debt agreements, which would force us to seek waivers or amendments with our lenders. No assurance can be given that we would be able to obtain any necessary waivers or amendments on satisfactory terms, if at all.
Changes in weather conditions or natural disasters could adversely affect our business, financial condition and results of operations.
Our performance may be adversely affected by weather conditions in or near our areas of operations. For our real estate operations, adverse weather may delay development or damage property, resulting in substantial repair or replacement costs to the extent not covered by insurance, a reduction in property values, or a loss of revenue, each of which could have a material adverse effect on our business, financial condition and results of operations. Our competitors may be affected differently by such changes in weather conditions or natural disasters depending on the location of their supplies or operations. Adverse weather conditions also may affect our live music events. Due to weather conditions, we may be required to reschedule an event to another available day, which would increase our costs for the event and could negatively affect the attendance at the event, as well as concession and merchandise sales, which could adversely affect our financial condition and results of operations.
Our insurance coverage on our properties may be inadequate to cover any losses we may incur.
We maintain insurance on our properties, including property, liability, fire and extended coverage. However, there are certain types of losses, generally of a catastrophic nature, such as hurricanes and floods or acts of war or terrorism that may be uninsurable or not economical to insure. We use our discretion when determining amounts, coverage limits and deductibles for insurance. These terms are determined based on retaining an acceptable level of risk at a reasonable cost. This may result in insurance coverage that in the event of a substantial loss would not be sufficient to pay the full current market value or current replacement cost of our lost investment. Inflation, changes in building codes and ordinances, environmental considerations and other factors also may make it unfeasible to use insurance proceeds to replace a building or other facility after it has been damaged or destroyed. Under such circumstances, the insurance proceeds we receive may be inadequate to restore our economic position in a property. In addition, we may become liable for injuries and accidents occurring during the construction process that are underinsured.
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The loss of certain key senior management personnel could negatively affect our business.
We depend on our two executive officers and other key personnel. Our Chairman, President and Chief Executive Officer has been employed by the company since its inception in 1992. He has served as President since August 1996, Chief Executive Officer since May 1998 and Chairman of the Board since August 1998. Our Senior Vice President and Chief Financial Officer has been employed by the company since 2009. The loss of any of our key senior management personnel could negatively affect our business.
Our business may be adversely affected by information technology disruptions.
Cybersecurity incidents are increasing in frequency, evolving in nature and include, but are not limited to, installation of malicious software, unauthorized access to data and other electronic security breaches that could lead to disruptions in systems, unauthorized release of confidential or otherwise protected information and the corruption of data. Although we have not experienced cybersecurity incidents in the past, there can be no assurance that we will not experience them in the future. Given the unpredictability of the timing, nature and scope of information technology disruptions, we could be subject to manipulation or improper use of our systems and networks or financial losses from remedial actions, any of which could have a material adverse effect on our cash flow, results of operations and financial condition.
Risks Relating to Real Estate Operations
The real estate business is highly competitive and many of our competitors are larger and financially stronger than we are.
The real estate business is highly competitive. We compete with a large number of companies and individuals that have significantly greater financial, sales, marketing and other resources than we have. Our competitors include local developers who are committed primarily to particular markets and also national developers who acquire properties throughout the United States. A downturn in the real estate industry could significantly increase competition among developers. Increased competition could cause us to increase our selling incentives and/or reduce our prices. An oversupply of real estate properties available for sale or lease, as well as the potential significant discounting of prices by some of our competitors, may adversely affect our results of operations.
Our results of operations, cash flows and financial condition are greatly affected by the performance of the real estate industry.
Revenue from our real estate operations segment accounted for 14 percent of our total revenue for the fiscal year ended December 31, 2017. The U.S. real estate industry is highly cyclical and is affected by changes in global, national and local economic conditions and events such as general employment and income levels, availability of financing, interest rates, consumer confidence and overbuilding of or decrease in demand for residential and commercial real estate. Our real estate activities are subject to numerous factors beyond our control, including local real estate market conditions (both where our properties are located and in areas where our potential customers reside), substantial existing and potential competition, general national, regional and local economic conditions, fluctuations in interest rates and mortgage availability, changes in demographic conditions and changes in government regulations or requirements. Any of the foregoing factors could result in a reduction or cancellation of sales and/or lower gross margins for sales. Lower than expected sales could have a material adverse effect on the level of our profits and the timing and amounts of our cash flows.
Real estate investments often cannot easily be converted into cash and market values may be adversely affected by these economic circumstances, market fundamentals, and competitive and demographic conditions. Because of the effect these factors have on real estate values, it is difficult to predict the level of future sales or sales prices that will be realized for individual assets.
Our operations are subject to an intensive regulatory approval process and opposition from environmental groups, either or both of which could cause delays and increase the costs of our development efforts or preclude such developments entirely.
Before we can develop a property, we must obtain a variety of approvals from local and state governments with respect to such matters as zoning and other land use issues, and subdivision, site planning and environmental issues under applicable regulations. Some of these approvals are discretionary. Because government agencies and
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special interest groups have in the past expressed concerns about our development plans in or near Austin, our ability to develop these properties and realize future income from our properties could be delayed, reduced, prevented or made more expensive.
Several special interest groups have in the past opposed our plans in the Austin area and have taken various actions to partially or completely restrict development in some areas, including areas where some of our most valuable properties are located. We have actively opposed these actions. However, because of the regulatory environment that has existed in the Austin area and the opposition of these special interest groups, there can be no assurance that an unfavorable ruling would not have a significant long-term adverse effect on the overall value of our property holdings.
Our operations are subject to environmental regulation, which can change at any time and could increase our costs.
Real estate development is subject to state and federal environmental regulations and to possible interruption or termination because of environmental considerations, including, without limitation, air and water quality and protection of endangered species and their habitats.
Certain of the Barton Creek and Lantana properties include nesting territories for the Golden-cheeked Warbler, a federally listed endangered species. In 1995, we received a permit from the U.S. Wildlife Service pursuant to the Endangered Species Act, which to date has allowed the development of the Barton Creek and Lantana properties free of restrictions under the Endangered Species Act related to the maintenance of habitat for the Golden-cheeked Warbler.
Additionally, in April 1997, the U.S. Department of Interior listed the Barton Springs salamander as an endangered species after a federal court overturned a March 1997 decision by the Department of Interior not to list the Barton Springs Salamander based on a conservation agreement between the State of Texas and federal agencies. The listing of the Barton Springs Salamander has not affected, nor do we anticipate it will affect, our Barton Creek and Lantana properties for several reasons, including the results of technical studies and the U.S. Fish and Wildlife Service 10(a) permit obtained by us in 1995. The development permitted by the 2002 Circle C settlement with the city of Austin has been reviewed and approved by the U.S. Fish and Wildlife Service and, as a result, we also do not anticipate that the 1997 listing of the Barton Springs Salamander will affect our Circle C properties.
In January 2013, the U.S. Department of the Interior announced that it had conducted an economic assessment of the potential designation of critical habitat for four species of Central Texas salamanders. Although this potential designation of habitat has not affected, nor do we anticipate that it will affect, our Barton Creek, Lantana or Circle C properties for several reasons, including prior studies and approvals, and our existing U.S. Fish and Wildlife Service 10(a) permit obtained in 1995, future endangered species listings or habitat designations could impact development of our properties.
We are making, and will continue to make, expenditures with respect to our real estate development for the protection of the environment. Emphasis on environmental matters will result in additional costs in the future. New environmental regulations or changes in existing regulations or their enforcement may be enacted and such new regulations or changes may require significant expenditures by us. The recent trend toward stricter standards in environmental legislation and regulations is likely to continue and could have a material adverse effect on our operating costs.
Risks Relating to Leasing Operations
Unfavorable changes in market and economic conditions could negatively affect occupancy or rental rates, which could negatively affect our financial condition and results of operations.
A decline in the real estate market and economic conditions could significantly affect rental rates. Occupancy and rental rates in our market, in turn, could significantly affect our profitability and our ability to satisfy our financial obligations. The risks that could affect conditions in our market include the following:
• | Local conditions, such as an oversupply of office space, a decline in the demand for office space or increased competition from other available office buildings; |
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• | The inability or unwillingness of tenants to pay their current rent or rent increases; and |
• | Declines in market rental rates. |
Additionally, tenants at our retail properties face continual competition in attracting customers from various on-line and other competitors. Our competitors and those of our tenants could have a material adverse effect on our ability to lease space in our retail properties and on the rents we can charge or the concessions we can grant. Further, as new technologies emerge, the relationship among customers, retailers, and shopping centers are evolving on a rapid basis. If we are unable to adapt to such new technologies and relationships on a timely basis, our financial performance will be adversely impacted.
We cannot predict with certainty whether any of these conditions will occur or whether, and to what extent, they will have an adverse effect on our operations.
Risks Relating to Hotel Operations
We are subject to the business, financial and operating risks common to the hotel industry, any of which could reduce our revenues.
Revenue from our hotel segment accounted for 47 percent of our total revenue for the fiscal year ended December 31, 2017. Business, financial and operating risks common to the hotel industry include:
• | Changes in desirability of geographic regions and geographic concentration of our operations and customers; |
• | Decreases in the demand for hotel rooms and related lodging services, including a reduction in business travel as a result of alternatives to in-person meetings (including virtual meetings hosted online or over private teleconferencing networks) or due to general economic conditions; |
• | Decreased corporate or governmental travel-related budgets and spending, as well as cancellations, deferrals or renegotiations of group business such as industry conventions; |
• | Negative public perception of corporate travel-related activities; |
• | The effect of internet intermediaries and other new industry entrants on pricing and our increasing reliance on technology; |
• | The costs and administrative burdens associated with complying with applicable laws and regulations in the U.S., including health, safety and environmental laws, rules and regulations and other governmental and regulatory actions; |
• | Changes in operating costs including, but not limited to, energy, water, labor costs (including the effect of labor shortages and unionization), food costs, workers’ compensation and health-care related costs, insurance and unanticipated costs related to acts of nature and their consequences; and |
• | Cyclical over-building in the hotel industry. |
External perception of the W Austin Hotel could negatively affect our results of operations.
Starwood manages hotel operations at the W Austin Hotel. Our ability to attract and retain guests depends, in part, upon the external perceptions of Starwood and the quality of the W Austin Hotel and its services and we have to spend money periodically to keep the property well maintained, modernized and refurbished. The reputation of the W Austin Hotel may be negatively affected if Starwood fails to act responsibly or comply with regulatory requirements in a number of areas, such as safety and security, sustainability, responsible tourism, environmental management, human rights and support for the local communities where Starwood manages and/or owns properties. The considerable increase in the use of social media over recent years has greatly expanded the potential scope and scale, and increased the rapidity of the dissemination of negative publicity that could be generated by any adverse incident or failure on the part of hotel operators. An adverse incident involving associates
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or guests and any media coverage resulting therefrom may cause a loss of consumer confidence in the Starwood brand which could negatively affect our results of operations.
Our revenues, profits or market share could be harmed if we are unable to compete effectively in the hotel industry in Austin.
The hotel industry in Austin is highly competitive. The W Austin Hotel competes for customers with other hotel and resort properties in Austin, ranging from national and international hotel brands to independent, local and regional hotel operators. We compete based on a number of factors, including quality and consistency of rooms, restaurant and meeting facilities and services, attractiveness of location and price. Some of our competitors may have substantially greater marketing and financial resources than we do, and if we are unable to successfully compete in these areas, our operating results could be adversely affected.
Historically, the Austin market has had a limited number of high-end hotel accommodations. However, hotel capacity is being expanded by other hotel operators in Austin, including several properties in close proximity to the W Austin Hotel in downtown Austin. This increase in competition as well as the anticipated opening of additional hotel rooms in downtown Austin during 2018, is expected to further impact future hotel revenues. As new rooms come on-line, increased competition could lead to an excess supply of hotel rooms in the Austin market, thereby causing Starwood to increase promotional incentives for hotel guests and/or reduce rates. Increased competition in the Austin market from new hotels or hotels that have recently undergone substantial renovation could have an adverse effect on occupancy, average daily rate and revenue per available room.
Additionally, some of our hotel rooms are booked through third-party internet travel intermediaries as well as lesser-known online travel service providers. In addition, travelers can book stays on websites that facilitate the short-term rental of homes and apartments from owners, thereby providing an alternative to hotel rooms. Increased internet bookings could have an adverse effect on occupancy, average daily rate and revenue per available room.
Risks Relating to Entertainment Businesses
We face intense competition in the live music industry, and we may not be able to maintain or increase our current revenue, which could adversely affect our business, financial condition and results of operations.
Revenue from our entertainment businesses accounted for 29 percent of our total revenue for the fiscal year ended December 31, 2017. Our entertainment businesses compete in a highly competitive industry, and we may not be able to maintain or increase our current revenue as a result of such competition. The live music industry competes with other forms of entertainment for consumers’ discretionary spending and within this industry we compete with other venues to book artists. Our competitors compete with us for key employees who have relationships with popular music artists and that have a history of being able to book such artists for concerts and tours. These competitors may engage in more extensive development efforts, undertake more far-reaching marketing campaigns, adopt more aggressive pricing policies and make more attractive offers to existing and potential artists. Our competitors may develop services, advertising options or music venues that are equal or superior to those we provide or that achieve greater market acceptance and brand recognition than we achieve. It is possible that new competitors may emerge and rapidly acquire significant market share.
Other variables related to our entertainment businesses that could adversely affect our financial performance by, among other things, leading to decreases in overall revenue, the number of sponsors, event attendance, ticket prices and fees or profit margins include:
• | An increased level of competition for advertising dollars, which may lead to lower sponsorships as we attempt to retain advertisers or which may cause us to lose advertisers to our competitors offering better programs that we are unable or unwilling to match; |
• | Unfavorable fluctuations in operating costs, which we may be unwilling or unable to pass through to our customers via ticket prices; |
• | Competitors’ offerings that may include more favorable terms than we do in order to obtain events for the venues they operate; |
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• | Technological changes and innovations that we are unable to adopt or are late in adopting that offer more attractive entertainment alternatives than we or other live entertainment providers currently offer, which may lead to a reduction in attendance at live events, a loss of ticket sales or lower ticket fees; |
• | Other entertainment options available to our audiences that we do not offer; |
• | General economic conditions which could cause our consumers to reduce discretionary spending; |
• | Unfavorable changes in labor conditions which may require us to spend more to retain and attract key employees; |
• | Interruptions in our ticketing systems and infrastructures and data loss or other breaches of our network security; and |
• | Changes in consumer preferences. |
Additionally, our entertainment operations are seasonal. The results of operations from our entertainment segment vary from quarter to quarter and year to year, and the financial performance in certain quarters or years may not be indicative of, or comparable to, our financial performance in subsequent quarters or years.
Personal injuries and accidents may occur in connection with our live music events, which could subject us to personal injury or other claims and increase our expenses, as well as reduce attendance at our live music events, causing a decrease in our revenue.
There are inherent risks involved with producing live music events. As a result, personal injuries and accidents have, and may, occur from time to time, which could subject us to claims and liabilities for personal injuries. Incidents in connection with our live music events at ACL Live or festival sites that we rent through our joint ventures could also result in claims or reduce attendance at our events, which could cause a decrease in our revenue or reduce our operating income. We maintain insurance policies that provide coverage for personal injuries sustained by persons at our venues or events or accidents in the ordinary course of business, and there can be no assurance that such insurance will be adequate at all times and in all circumstances.
Risks Relating to Ownership of Shares of Our Common Stock
Our common stock is thinly traded; therefore, our stock price may fluctuate more than the stock market as a whole.
As a result of the thin trading market for shares of our common stock, our stock price may fluctuate significantly more than the stock market as a whole or the stock prices of similar companies. Without a larger public float, shares of our common stock will be less liquid than the shares of common stock of companies with broader public ownership, and as a result, the trading prices for shares of our common stock may be more volatile. Among other things, trading of a relatively small volume of shares of our common stock may have a greater effect on the trading price than would be the case if our public float were larger.
Item 1B. Unresolved Staff Comments
None.
Item 3. Legal Proceedings
We are from time to time involved in legal proceedings that arise in the ordinary course of our business. We do not believe, based on currently available information, that the outcome of any legal proceeding will have a material adverse effect on our financial condition or results of operations. We maintain liability insurance to cover some, but not all, potential liabilities normally incident to the ordinary course of our business as well as other insurance coverage customary in our business, with such coverage limits as management deems prudent.
Item 4. Mine Safety Disclosures
Not applicable.
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Executive Officers of the Registrant
Certain information as of February 28, 2018, regarding our executive officers is set forth in the following table and accompanying text. Each of our executive officers serves at the discretion of our Board of Directors.
Name | Age | Position or Office | ||
William H. Armstrong III | 53 | Chairman of the Board, President and Chief Executive Officer | ||
Erin D. Pickens | 56 | Senior Vice President and Chief Financial Officer | ||
Mr. Armstrong has been employed by us since our inception in 1992. Mr. Armstrong has served as President since August 1996, Chief Executive Officer since May 1998 and Chairman of the Board since August 1998.
Ms. Pickens has served as our Senior Vice President since May 2009 and as our Chief Financial Officer since June 2009. Ms. Pickens previously served as Executive Vice President and Chief Financial Officer of Tarragon Corporation from November 1998 until April 2009, and as Vice President and Chief Accounting Officer from September 1996 until November 1998 and Accounting Manager from June 1995 until August 1996 for Tarragon and its predecessors.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Performance Graph
The following graph compares the change in the cumulative total stockholder return on our common stock from December 31, 2012, through December 31, 2017, with the cumulative total return of (a) the Standard & Poor's (S&P) 500 Stock Index, (b) the Dow Jones U.S. Real Estate Index and (c) the below custom peer group of real estate related companies:
Alexander & Baldwin, Inc. (ALEX)
Consolidated-Tomoka Land Co. (CTO)
Forestar Group Inc. (FOR)
The Howard Hughes Corporation (HHC)
Maui Land & Pineapple Company, Inc. (MLP)
The St. Joe Company (JOE)
Tejon Ranch Co. (TRC)
This comparison assumes $100 invested on December 31, 2012, in (a) our common stock, (b) the S&P 500 Stock Index, (c) the Dow Jones U.S. Real Estate Index and (d) the custom peer group.
The total returns shown assume that dividends are reinvested. The stock price performance shown below is not necessarily indicative of future price performance.
Comparison of Cumulative Total Return
Stratus Properties Inc., S&P 500 Stock Index,
Dow Jones U.S. Real Estate Index and Custom Peer Group
December 31, | |||||||||||||||||||||||
2012 | 2013 | 2014 | 2015 | 2016 | 2017 | ||||||||||||||||||
Stratus Properties Inc. | $ | 100 | $ | 201 | $ | 162 | $ | 240 | $ | 385 | $ | 362 | |||||||||||
S&P 500 Stock Index | 100 | 132 | 151 | 153 | 171 | 201 | |||||||||||||||||
Dow Jones U.S. Real Estate Index | 100 | 102 | 129 | 132 | 142 | 156 | |||||||||||||||||
Custom Peer Group | 100 | 131 | 131 | 115 | 126 | 139 | |||||||||||||||||
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Common Stock
Our common stock trades on The Nasdaq Stock Market (NASDAQ) under the symbol "STRS". The following table sets forth, for the periods indicated, the range of high and low sales prices of our common stock, as reported by NASDAQ.
2017 | 2016 | ||||||||||||||
High | Low | High | Low | ||||||||||||
First Quarter | $ | 33.96 | $ | 24.35 | $ | 25.05 | $ | 18.45 | |||||||
Second Quarter | 30.30 | 25.20 | 24.24 | 15.75 | |||||||||||
Third Quarter | 30.95 | 27.25 | 25.50 | 17.11 | |||||||||||
Fourth Quarter | 32.15 | 27.25 | 36.06 | 23.17 | |||||||||||
As of February 28, 2018, there were 337 holders of record of our common stock.
Common Stock Dividends
The declaration of dividends is at the discretion of our Board of Directors (the Board); however, our ability to pay dividends is restricted by the terms of our Comerica credit facility which prohibits us from paying a dividend on or repurchasing shares of our common stock without the bank’s prior written consent. In March 2017, we announced that our Board, after receiving written consent from Comerica Bank, declared a special cash dividend of $1.00 per share that was paid on April 18, 2017, to stockholders of record on March 31, 2017. The dividend was declared after the Board’s consideration of the results of our sale of The Oaks at Lakeway. Comerica’s consent to the payment of this special dividend is not indicative of the bank’s willingness to consent to the payment of future dividends. The declaration of future dividends, which is subject to our Board's discretion and the restrictions under our Comerica credit facility, will depend on our financial results, cash requirements, projected compliance with covenants in our debt agreements, outlook and other factors deemed relevant by our Board.
Unregistered Sales of Equity Securities
None.
Issuer Purchases of Equity Securities
The following table sets forth information with respect to shares of our common stock that we repurchased under the board-approved open market share purchase program during the three-month period ended December 31, 2017.
Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programsa | Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programsa | |||||||||
October 1 to 31, 2017 | — | $ | — | — | 991,695 | ||||||||
November 1 to 30, 2017 | — | — | — | 991,695 | |||||||||
December 1 to 31, 2017 | — | — | — | 991,695 | |||||||||
Total | — | $ | — | — | 991,695 | ||||||||
a. | In November 2013, the Board approved an increase in our open-market share purchase program, initially authorized in 2001, for up to 1.7 million shares of our common stock. The program does not have an expiration date. |
As stated above, our Comerica credit facility requires lender approval of any common stock repurchases.
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Item 6. Selected Financial Data
The selected consolidated financial data shown below is derived from our audited consolidated financial statements. These historical results are not necessarily indicative of results that you can expect for any future period. You should read this data in conjunction with Items 7. and 7A. "Management’s Discussion and Analysis of Financial Condition and Results of Operations and Quantitative and Qualitative Disclosures About Market Risk" and Item 8. "Financial Statements and Supplementary Data".
2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||||
(In Thousands, Except Per Share Amounts) | ||||||||||||||||||||
Years Ended December 31: | ||||||||||||||||||||
Revenues | $ | 80,340 | $ | 80,341 | $ | 80,871 | $ | 94,111 | $ | 127,710 | ||||||||||
Operating income | 23,237 | a | 1,177 | 25,732 | b,c | 10,364 | d,e | 14,151 | c,e | |||||||||||
Equity in unconsolidated affiliates' (loss) income | (49 | ) | 51 | (1,299 | ) | 1,112 | (76 | ) | ||||||||||||
Income (loss) from continuing operations, net of taxes | 3,884 | (5,999 | ) | 14,377 | 18,157 | 5,894 | ||||||||||||||
Income from discontinued operations, net of taxes | — | — | 3,218 | f | — | — | ||||||||||||||
Net income (loss) | 3,884 | a,g,h | (5,999 | ) | g | 17,595 | b,c,f | 18,157 | d,e,i | 5,894 | ||||||||||
Net income (loss) attributable to common stockholders | 3,879 | a,g,h | (5,999 | ) | g | 12,177 | b,c,f | 13,403 | d,e,i | 2,585 | c,e | |||||||||
Basic net income (loss) per share: | ||||||||||||||||||||
Continuing operations | $ | 0.48 | $ | (0.74 | ) | $ | 1.11 | $ | 1.67 | $ | 0.32 | |||||||||
Discontinued operations | — | — | 0.40 | — | — | |||||||||||||||
Basic net income (loss) per share | $ | 0.48 | $ | (0.74 | ) | $ | 1.51 | $ | 1.67 | $ | 0.32 | |||||||||
Diluted net income (loss) per share: | ||||||||||||||||||||
Continuing operations | $ | 0.47 | a,g,h | $ | (0.74 | ) | g | $ | 1.11 | b,c | $ | 1.66 | d,e,i | $ | 0.32 | c,e | ||||
Discontinued operations | — | — | 0.40 | f | — | — | ||||||||||||||
Diluted net income (loss) per share | $ | 0.47 | a,g,h | $ | (0.74 | ) | g | $ | 1.51 | b,c | $ | 1.66 | d,e,i | $ | 0.32 | c,e | ||||
Average shares outstanding: | ||||||||||||||||||||
Basic | 8,122 | 8,089 | 8,058 | 8,037 | 8,077 | |||||||||||||||
Diluted | 8,171 | 8,089 | 8,091 | 8,078 | 8,111 | |||||||||||||||
Dividends declared per share of common stock | $ | 1.00 | $ | — | $ | — | $ | — | $ | — | ||||||||||
At December 31: | ||||||||||||||||||||
Real estate held for sale | $ | 22,612 | $ | 21,236 | $ | 25,944 | $ | 12,245 | $ | 18,133 | ||||||||||
Real estate held for investment, net | 188,390 | 239,719 | 186,626 | 178,065 | 182,530 | |||||||||||||||
Real estate under development | 118,484 | 111,373 | 139,171 | 123,921 | 76,891 | |||||||||||||||
Land available for development | 14,804 | 19,153 | 23,397 | 21,368 | 21,404 | |||||||||||||||
Total assets | 405,993 | 452,175 | 430,105 | 400,117 | 344,498 | |||||||||||||||
Debt | 221,470 | 291,102 | 260,592 | 193,907 | 148,887 | |||||||||||||||
Stockholders' equity | 127,310 | 130,951 | 136,599 | 136,443 | 123,621 | |||||||||||||||
Noncontrolling interests in subsidiaries | 80 | 75 | 75 | 38,643 | 45,695 | |||||||||||||||
a. | Includes a gain of $25.5 million ($16.4 million to net income attributable to common stockholders or $2.01 per share), primarily associated with recognition of $24.3 million of the gain on the sale of The Oaks at Lakeway, and the sales of a bank building and an adjacent undeveloped 4.1 acre tract of land in Barton Creek, partly offset by a charge of $2.5 million ($1.6 million to net income attributable to common stockholders or $0.20 per share) for profit participation associated with the sale of The Oaks at Lakeway. |
b. | Includes a gain of $20.7 million ($10.8 million to net income attributable to common stockholders or $1.34 per share) associated with the sales of Parkside Village and 5700 Slaughter. |
c. | Includes a gain of $0.6 million ($0.4 million to net income attributable to common stockholders or $0.05 per share) in 2015 associated with the sale of a tract of undeveloped land and $2.1 million ($2.1 million to net income attributable to common stockholders or $0.26 per share) in 2013 associated with undeveloped land sales. |
d. | Includes a gain of $1.5 million ($1.0 million to net income attributable to common stockholders or $0.12 per share) associated with a litigation settlement. |
e. | Includes income of $0.6 million ($0.4 million to net income attributable to common stockholders or $0.05 per share) in 2014 and $1.8 million ($1.8 million to net income attributable to common stockholders or $0.22 per share) in 2013 related to insurance settlements, and $0.4 million ($0.3 million to net income attributable to common stockholders or $0.03 per share) in 2014 and $1.1 million ($1.1 million to net income attributable to common stockholders or $0.13 per share) in 2013, for the recovery of building repair costs. |
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f. | Includes recognition of a previously deferred gain of $5.0 million ($3.2 million to net income attributable to common stockholders or $0.40 per share) associated with 7500 Rialto Boulevard, which was sold in February 2012. |
g. | Includes losses on early extinguishment of debt totaling $0.5 million ($0.3 million to net income attributable to stockholders or $0.04 per share) in 2017 associated with the prepayment of the Lakeway construction loan, and $0.8 million ($0.5 million to net loss attributable to common stockholders or $0.06 per share) in 2016 associated with prepayment of the Bank of America loan (see Note 6). |
h. | Includes a charge of $7.6 million ($0.93 per share) associated with U.S. tax reform (see Note 7). |
i. | Includes a credit to provision for income taxes of $12.1 million, $1.50 per share, for the reversal of valuation allowances on deferred tax assets. |
Items 7. and 7A. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Quantitative and Qualitative Disclosures About Market Risk
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 consolidated financial statements and the related discussion of “Business and Properties” and “Risk Factors” included elsewhere in this Form 10-K. 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 located in Part II, Item 8. “Financial Statements and Supplementary Data.”
We are a diversified real estate company engaged primarily in the acquisition, entitlement, development, management, operation and sale of commercial, hotel, entertainment, and multi-family and single-family residential real estate properties, primarily located in the Austin, Texas area, and also including projects in certain other select markets in Texas. We generate revenues and cash flows from the sale of developed properties, rental income from our leased properties and from our hotel and entertainment operations. See Note 10 for further discussion of our operating segments and "Business Strategy and Related Risks" for a discussion of our business strategy.
General. 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 Residences. We may sell properties under development, undeveloped properties or leased properties, if opportunities arise that we believe will maximize overall asset values as part of our business strategy.
Our acreage under development and undeveloped as of December 31, 2017, is presented in the following table.
Under Development | Undeveloped | ||||||||||||||||||||||||||
Single Family | Multi-family | Commercial | Total | Single Family | Multi- family | Commercial | Total | Total Acreage | |||||||||||||||||||
Austin: | |||||||||||||||||||||||||||
Barton Creek | 4 | 38 | — | 42 | 512 | 262 | 394 | 1,168 | 1,210 | ||||||||||||||||||
Circle C | — | — | — | — | — | 36 | 216 | 252 | 252 | ||||||||||||||||||
Lantana | — | — | 11 | 11 | — | — | 44 | 44 | 55 | ||||||||||||||||||
Other | — | — | — | — | 7 | — | — | 7 | 7 | ||||||||||||||||||
Lakewaya | — | — | — | — | 35 | — | — | 35 | 35 | ||||||||||||||||||
Magnolia | — | — | — | — | — | — | 124 | 124 | 124 | ||||||||||||||||||
Jones Crossing | — | — | 72 | 72 | — | — | — | — | 72 | ||||||||||||||||||
Camino Real, San Antonio | — | — | — | — | — | — | 2 | 2 | 2 | ||||||||||||||||||
Total | 4 | 38 | 83 | 125 | 554 | 298 | 780 | 1,632 | 1,757 | ||||||||||||||||||
a. | On February 15, 2017, we sold The Oaks at Lakeway, which included 52 acres of land under development at December 31, 2016, but we retained 34.7 acres of undeveloped land adjacent to the project. |
Our single-family residential holdings at December 31, 2017, are principally in southwest Austin, Texas, and include developed lots and townhomes and townhomes under development in Barton Creek and condominium units at the W Austin Residences. See "Development Activities - Residential" for further discussion. Our multi-family and commercial holdings at December 31, 2017, consist of the first phase of Barton Creek Village, the Santal multi-
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family project, the office and retail space at the W Austin Hotel & Residences, Lantana Place, Phases I and II of Jones Crossing and West Killeen Market. See "Development Activities - Commercial" and "Development Activities - Residential" 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 and office, retail and entertainment space. The hotel is managed by Starwood Hotels & Resorts Worldwide, Inc., a subsidiary of Marriott International, Inc. (Starwood). The entertainment space, occupied by Austin City Limits Live at the Moody Theater (ACL Live) and 3TEN ACL Live, includes a live music and entertainment venue and production studio. The 3TEN ACL Live venue which opened in March 2016, has a capacity of approximately 350 people and is designed to be more intimate than ACL Live, which can accommodate approximately 3,000 people.
In 2017, our revenues totaled $80.3 million and our net income attributable to common stockholders totaled $3.9 million, compared with revenues of $80.3 million and net loss attributable to common stockholders of $6.0 million for 2016 and revenues of $80.9 million and net income attributable to common stockholders of $12.2 million for 2015.
Our results for 2017 include pre-tax gains on the sale of assets totaling $25.5 million ($16.4 million to net income attributable to common stockholders), primarily associated with recognition of a majority of the gain on the sale of The Oaks at Lakeway, and a bank building and an adjacent undeveloped 4.1 acre tract of land in Barton Creek (see Note 11). Our results for 2017 also included a tax charge of $7.6 million associated with the Tax Cuts and Jobs Act enacted on December 22, 2017 (U.S. tax reform), and a charge of $2.5 million ($1.6 million to net income attributable to common stockholders) for profit participation costs and a loss of $0.5 million ($0.3 million to net income attributable to common stockholders) on early extinguishment of debt, both related to our sale of The Oaks at Lakeway.
Our results for 2016 included higher net interest expense and an increase in general and administrative expenses totaling $3.1 million, primarily associated with our successful proxy contest and review of strategic alternatives. Higher interest expense reflects increased borrowings and higher interest rates associated with our refinancing of the W Austin Hotel & Residences with longer-term, fixed-rate debt. The W Austin Hotel & Residences refinancing resulted in a loss on early extinguishment of debt totaling $0.8 million in 2016.
Our results for 2015 included a pre-tax gain of $20.7 million on the sales of our Parkside Village and 5700 Slaughter commercial developments and the recognition of a previously deferred gain associated with the 2012 sale of 7500 Rialto totaling $5.0 million (see Note 11 for further discussion). The results for 2015 also included a gain of $0.6 million associated with an undeveloped land sale.
At December 31, 2017, we had total debt of $221.5 million (see "Debt Maturities and Other Contractual Obligations" for further discussion) and consolidated cash of $14.6 million. For discussion of operating cash flows and debt transactions see "Capital Resources and Liquidity" below.
Real Estate Market Conditions.
Because of the concentration of our assets primarily in the Austin, Texas area, and in other select, fast-growing Texas markets, market conditions in these regions significantly affect our business. Our future operating cash flows and our ability to develop and sell our properties will be dependent on the level and profitability of our real estate sales. In turn, these sales will be significantly affected by future real estate market conditions in and around Austin and the other markets in which we operate, including development costs, interest rate levels, the availability of credit to finance real estate transactions, demand for residential and commercial real estate, and regulatory factors including our use and development entitlements. These market conditions historically move in periodic cycles, and can be volatile.
In addition to the traditional influence of state and federal government employment levels on the local economy, the Austin-Round Rock, Texas area (Austin-Round Rock) has been influenced by growth in the technology sector. The Austin-Round Rock-area population increased by 25 percent from 2009 through 2016, largely because of growing interest in Austin's local job market. Median family income levels in the Austin-Round Rock area increased by 16 percent during the period from 2009 through 2016. The expanding economy resulted in rising demands for residential housing, commercial office space and retail services. From 2009 through 2016, sales tax receipts in the city of Austin (the City) rose by 52 percent, an indication of the increase in business activity during the period.
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The following chart compares Austin-Round Rock's five-county median family income and metro area population for 1999, 2009 and the most current information available for 2016 and 2017, based on United States (U.S.) Census Bureau data and Austin-Round Rock's data.
Based on the City's fiscal year of October 1 through September 30, the chart below compares the City’s sales tax revenues for 1999, 2009 and 2016 (the latest period for which data is available).
Source: Comprehensive Annual Financial Report for the City of Austin, Texas
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Real estate development in southwest Austin, where most of our real estate under development and undeveloped real estate is located, has historically been constrained as a result of various restrictions imposed by the City. Additionally, several special interest groups have traditionally opposed development in southwest Austin. Vacancy rates as of December 31, 2017 and 2016, are noted below.
Vacancy Rates | |||||||
Building Type | 2017 | 2016 | |||||
Office Buildings (Class A) | 9 | % | a | 9 | % | a | |
Multi-Family Buildings | 6 | % | b | 4 | % | b | |
Retail Buildings | 3.5 | % | b | 4 | % | b | |
a. | CB Richard Ellis: Austin MarketView |
b. | Marcus & Millichap Research Services, CoStar Group, Inc. |
BUSINESS STRATEGY
Stratus Properties Inc. was formed in 1992 to hold, operate and develop the domestic real estate and oil and gas properties of our former parent company. We sold all of our oil and gas properties during the 1990s and have since focused solely on our real estate properties. Our overall strategy has been to manage our diverse asset base of residential, commercial, hotel and entertainment real estate located in the premier Austin, Texas market and in other select, fast-growing Texas markets. We enhance the value of our residential and commercial properties by securing and maintaining development entitlements and developing and building real estate projects on these properties for sale or investment. Our hotel and entertainment venues, including ACL Live, are located in downtown Austin and are central to the city's world renowned, vibrant music scene.
We are continuing our successful program of actively developing our properties and strategically marketing and selling developed assets at appropriate times to maximize stockholder value. Our active development plan includes completion of both residential and commercial development projects. Our development portfolio consists of approximately 1,800 acres of commercial, multi-family and single-family projects under development or undeveloped and held for future use. We believe that our portfolio, along with management's extensive experience in Austin-area real estate development, support our ability to obtain project financing and/or seek joint venture partners including for the development projects described in "Development Activities - Residential" and "Development Activities - Commercial".
As discussed below in “Development Activities - Commercial”, in February 2017, we sold (i) The Oaks at Lakeway for $114.0 million in cash and (ii) our 3,085-square-foot bank building in Barton Creek Village and an adjacent undeveloped 4.1 acre tract of land for $3.1 million in cash. In 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.
In addition, during 2017 we made significant progress in advancing our development projects. We (i) completed construction of West Killeen Market, a retail development project in Killeen Texas, anchored by a 90,000-square-foot HEB grocery store and consisting of approximately 44,000 square feet of total tenant leasing space, on schedule and under budget, (ii) secured project financing and commenced construction of phase one of Lantana Place, a mixed-use development in southwest Austin consisting of approximately 320,000 square feet of retail, hotel and office space, (iii) secured project financing and commenced construction of the retail component of Jones Crossing, an HEB-anchored, mixed use development in College Station, Texas, which is expected to total approximately 258,000 square feet of commercial space, including the 106,000-square-foot HEB grocery store which is currently expected to open in August 2018, (iv) secured project financing and commenced construction of Santal Phase II, a 212-unit garden style, multi-family project located directly adjacent to Santal Phase I in the upscale, highly populated Barton Creek community, (v) advanced development plans for Magnolia, an HEB-anchored retail development project in Magnolia, Texas, which includes 351,000 square feet of total tenant leasing space and 1,200 multi-family units; and (vii) secured final building permits for The St. Mary, a 240-unit multi-family development in the Circle C community, and subject to obtaining project financing, we intend to commence construction in the second quarter of 2018.
We believe that Austin and surrounding sub-markets continue to be desirable locations. Many of our developments are in locations where development approvals have historically been subject to regulatory constraints, which has made it difficult to obtain entitlements. Our Austin assets, which are located in desirable areas with significant
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regulatory constraints, are highly entitled and now have utility capacity for full buildout. As a result, we believe that through strategic planning, development and marketing, we can maximize and fully realize their value. Our development plans require significant additional capital, and may be pursued through joint ventures or other means.
CRITICAL ACCOUNTING POLICIES
Management’s discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the U.S. The preparation of these financial statements requires that we make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. We base these estimates on historical experience and on assumptions that we consider reasonable under the circumstances; however, reported results could differ from those based on the current estimates under different assumptions and/or conditions. The areas requiring the use of management’s estimates are discussed in Note 1 under the heading “Use of Estimates.” We believe that our most critical accounting policies relate to our real estate and leasing assets, deferred tax assets, income taxes and profit recognition.
Management has reviewed the following discussion of its development and selection of critical accounting estimates with the audit committee of our board of directors.
Real Estate, Hotel, Entertainment Venue and Leasing Assets. Real estate held for sale is stated at the lower of cost or fair value less costs to sell. The cost of real estate sold includes acquisition, development, construction and carrying costs and other related costs through the development stage. Real estate under development and land available for development are stated at cost. Real estate held for investment, which includes the hotel and entertainment venues at the W Austin Hotel & Residences and our leasing assets, is also stated at cost. When events or circumstances indicate that an asset’s carrying amount may not be recoverable, an impairment test is performed. For real estate held for sale, if estimated fair value less costs to sell is less than the related carrying amount, a reduction of the asset’s carrying value to fair value less costs to sell is required. For real estate under development, land available for development and real estate held for investment, if the projected undiscounted cash flow from the asset is less than the related carrying amount, a reduction of the carrying amount of the asset to fair value is required. Measurement of an impairment loss is based on the fair value of the asset. Generally, we determine fair value using valuation techniques such as discounted expected future cash flows.
In developing estimated future cash flows for impairment testing for our real estate assets, we have incorporated our own market assumptions including those regarding real estate prices, sales pace, sales and marketing costs, and infrastructure costs. Our assumptions are based, in part, on general economic conditions, the current state of the real estate industry, expectations about the short- and long-term outlook for the real estate market, and competition from other developers in the area in which we develop our properties. These assumptions can significantly affect our estimates of future cash flows. For those properties held for sale and deemed to be impaired, we determine fair value based on appraised values, adjusted for estimated costs to sell, as we believe this is the value for which the property could be sold. We recorded no impairment losses during the three-year period ended December 31, 2017 (see Note 1).
Deferred Tax Assets. The carrying amounts of deferred tax assets are required to be reduced by a valuation allowance if, based on the available evidence, it is more likely than not that such assets will not be realized. Accordingly, we assess the need to establish valuation allowances for deferred tax assets periodically based on the more-likely-than-not realization threshold criterion. In the assessment for a valuation allowance, appropriate consideration is given to all positive and negative evidence related to the realization of the deferred tax assets. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the duration of statutory carryforward periods, our experience with operating loss and tax credit carryforwards not expiring unused, and tax planning alternatives. This process involves significant management judgment about assumptions that are subject to change based on variances between projected and actual operating performance and changes in our business environment or operating or financing plans.
We regularly evaluate the recoverability of our deferred tax assets, considering available positive and negative evidence, including earnings history and the forecast of future taxable income. We had deferred tax assets (net of deferred tax liabilities) totaling $11.5 million at December 31, 2017.
Income Taxes. In preparing our annual consolidated financial statements, we estimate the actual amount of income taxes currently payable or receivable as well as deferred income tax assets and liabilities attributable to
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temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which these temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates or laws is recognized in income in the period in which such changes are enacted. Our income tax provision for 2017 includes a net tax charge of $7.6 million associated with U.S. tax reform. As the provisions related to U.S. tax reform are numerous and complex, we continue to evaluate their impact. See Note 7 for further discussion.
Profit Recognition on Sales of Real Estate. Sales of real estate do not qualify for the full accrual method of profit recognition until all of the following criteria are met: (i) a sale is consummated, (ii) the buyer's initial and continuing investments are adequate to demonstrate a commitment to pay for the property, (iii) the seller's receivable is not subject to future subordination, and (iv) the seller has transferred to the buyer the usual risks and rewards of ownership in a transaction that is in substance a sale and does not have a substantial continuing involvement with the party.
In February 2017, upon the sale of The Oaks at Lakeway, the gain on sale of $39.7 million was deferred as a result of Stratus’ continuing involvement under the master lease agreements with the purchaser (see Note 11). Stratus estimates its maximum probable exposure to loss using a probability-weighted assessment of future lease payments based on the master lease agreements. The rent payments related to the 99-year hotel pad master lease represent the greatest exposure to loss. In May 2017, the hotel tenant began paying rent and, in August 2017, obtained construction financing and commenced construction of its building. The achievement of these milestones significantly reduced Stratus' probability weighted estimated maximum exposure to loss and $24.3 million of the gain was recognized during third-quarter 2017 based on the performance of services method.
DEVELOPMENT ACTIVITIES
Residential. As of December 31, 2017, the number of our residential developed lots/units, lots/units under development and lot/units for potential development by area are shown below:
Residential Lots/Units | |||||||||||
Developed | Under Development | Potential Developmenta | Total | ||||||||
Barton Creek: | |||||||||||
Amarra Drive: | |||||||||||
Phase II | 12 | — | — | 12 | |||||||
Phase III | 38 | 4 | — | 42 | |||||||
Amarra Villas | 4 | 15 | — | 19 | |||||||
Other townhomes | — | — | 170 | 170 | |||||||
Section N multi-family: | |||||||||||
Santal Phase I | 236 | — | — | 236 | |||||||
Santal Phase II | — | 212 | — | 212 | |||||||
Other Section N | — | — | 1,412 | 1,412 | |||||||
Other Barton Creek sections | — | — | 156 | 156 | |||||||
Circle C multi-family: | |||||||||||
The St. Mary | — | — | 240 | 240 | |||||||
Tract 102 | — | — | 56 | 56 | |||||||
Lakeway | — | — | 100 | 100 | |||||||
Other | — | — | 7 | 7 | |||||||
W Austin Residences | 2 | — | — | 2 | |||||||
Total Residential Lots/Units | 292 | 231 | 2,141 | 2,664 | |||||||
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 we may be proceeding with approved infrastructure projects or planning activities for some of these properties, they are not considered to be “under development” for disclosure in this table until construction activities have begun. |
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Barton Creek
Amarra Drive. In 2008, we substantially completed the development of Amarra Drive Phase II, which consists of 35 lots on 51 acres. We sold one lot for $0.6 million in 2017, one lot for $0.6 million in 2016 and none in 2015. As of December 31, 2017, 12 Phase II lots remained unsold. During January 2018, one Phase II lot was sold.
In 2015, we substantially completed the development of Amarra Drive Phase III, which consists of 64 lots on 166 acres. In 2017, we identified four lots on which to build homes and began construction on two homes. We sold 6 Phase III lots for $4.1 million in 2017, 6 Phase III lots for $4.4 million in 2016 and 10 Phase III lots for $7.0 million in 2015. As of December 31, 2017, 38 Phase III lots remain unsold.
In March 2018, we entered into a contract to sell one Amarra Drive Phase II lot and eight Amarra Drive Phase III lots for a total of $5.9 million. In accordance with the contract, the parties are required to close on the sale of these lots ratably before December 31, 2018. If the purchaser fails to close on the sale of the minimum number of lots by any of the specified closing dates, we may elect to terminate the contract but would retain the related $45 thousand earnest money. In addition, as of February 28, 2018, six Phase III lots were under contract, one of which closed in March.
The Villas at Amarra Drive (Amarra Villas) townhome project is a 20-unit development for which we completed site work in late 2015. During 2017, construction of the first five townhomes was completed and construction of the next two townhomes began. One of the completed townhomes was sold during 2017. As of February 28, 2018, two townhomes, currently under construction, were under contract.
Section N
Santal. The Santal Phase I multi-family project, a garden-style apartment complex, was completed within budget in August 2016 and consists of 236 units. We began recognizing rental revenue, which is included in the Leasing Operations segment, in January 2016. As of February 28, 2018, approximately 95 percent of the units were leased. In September 2017, we entered into an amended loan agreement that increased the original commitment of $34.1 million to $59.2 million, which includes a $32.8 million loan for Santal Phase I and an additional $26.4 million for construction of Santal Phase II, a 212-unit garden-style apartment complex located adjacent to Santal Phase I. We began construction of Santal Phase II in September 2017 and expect the first building to be complete in third-quarter 2018.
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. See "Properties" under Part 1, Items 1. and 2. for further discussion of our Circle C settlement with the City.
Meridian. 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 2014. We sold the last 12 lots for $3.4 million in 2017, 19 lots for $5.3 million in 2016 and 19 lots for $5.4 million in 2015.
The St. Mary. We have secured final building permits for The St. Mary, a 240-unit multi-family development in the Circle C community, and, subject to obtaining construction financing, intend to commence construction by mid-2018.
W Austin Residences
As of December 31, 2017, two remaining condominium units are available for sale and are being marketed.
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Commercial. As of December 31, 2017, 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 Trammell Crow Central Texas Development, Inc. relating to Crestview Station in Austin (the Crestview Station Joint Venture), and the W Austin Hotel and ACL Live entertainment venue) are shown below:
Commercial Property | |||||||||||
Developed | Under Development | Potential Development a | Total | ||||||||
Barton Creek: | |||||||||||
Barton Creek Village | 22,366 | — | — | 22,366 | |||||||
Entry corner | — | — | 5,000 | 5,000 | |||||||
Amarra retail/office | — | — | 83,081 | 83,081 | |||||||
Section N | — | — | 1,500,000 | 1,500,000 | |||||||
Circle C | — | — | 674,942 | 674,942 | |||||||
Lantana: | |||||||||||
Lantana Place | — | 99,663 | 220,337 | 320,000 | |||||||
Tract G07 | — | — | 160,000 | 160,000 | |||||||
W Austin Hotel & Residences: | |||||||||||
Office | 38,316 | — | — | 38,316 | |||||||
Retail | 18,327 | — | — | 18,327 | |||||||
Magnolia | — | — | 351,000 | 351,000 | |||||||
West Killeen Market | 44,000 | — | — | 44,000 | |||||||
Jones Crossing | — | 153,250 | 104,750 | 258,000 | |||||||
Total Square Feet | 123,009 | 252,913 | 3,099,110 | 3,475,032 | |||||||
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 we may be proceeding with approved infrastructure projects or planning activities for some of these properties, they are not considered to be “under development” for disclosure in this table until construction activities have begun. |
The Oaks at Lakeway
On February 15, 2017, we sold The Oaks at Lakeway to FHF I Oaks at Lakeway, LLC for $114.0 million in cash. Net cash proceeds totaled $50.8 million after repayment of the Lakeway construction loan (see Note 11). We used a portion of these net cash proceeds to pay indebtedness outstanding under the Comerica Bank credit facility. The parties entered into three master lease agreements at closing: (1) one covering unleased in-line retail space, with a 5-year term, (2) one covering four unleased pad sites, three of which have 10-year terms, and one of which has a 15-year term, and (3) one covering the hotel pad with a 99-year term. As specified conditions are met, primarily consisting of the tenant executing a lease, commencing payment of rent and taking occupancy, leases will be assigned to the purchaser and the corresponding leased space will be removed from the master lease, reducing our master lease payment obligations. Our master lease payment obligation, which currently approximates $180 thousand per month, is expected to decline over time until leasing is complete and all leases are assigned to the purchaser.
We agreed to guarantee the obligations of our selling subsidiary under the sales agreement, up to a liability cap of two percent of the purchase price. This cap does not apply to our obligation to satisfy the selling subsidiary's indemnity obligations for its broker commissions or similar compensation or our liability in guaranteeing the selling subsidiary's obligations under the master leases. To secure the subsidiary's obligations under the master leases, we provided a $1.5 million irrevocable letter of credit with a three-year term.
The gain on sale of $39.7 million was deferred as a result of our continuing involvement under the master lease agreements with the purchaser. The hotel pad was leased to a hotel operator under a ground lease at the date of sale. However, the hotel tenant had not commenced rent payments under the ground lease or construction of its building. At the date of the sale, primarily because of the uncertainty related to the hotel tenant’s performance under its ground lease, our estimated maximum probable exposure to loss using a probability-weighted assessment of future lease payments based on the master lease agreements exceeded the gain on sale. The rent payments under the master lease agreements represent continuing support obligations and are recorded as a reduction of the
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deferred gain. We recognized $24.3 million of the gain during third-quarter 2017 and $11.3 million remains deferred at December 31, 2017 (see Note 11).
Barton Creek
The first phase of Barton Creek Village includes a 22,366-square-foot retail complex that was fully occupied at December 31, 2017. In February 2017, we sold the 3,085-square-foot bank building in Barton Creek Village and an adjacent undeveloped 4.1 acre tract of land for $3.1 million (see Note 11). We intend to explore opportunities to sell the retail complex later this year depending on market conditions.
Circle C
In 2015, we sold our Austin-area Parkside Village and 5700 Slaughter commercial properties, both located in the Circle C community. The Parkside Village retail project, which we owned in a joint venture with LCHM Holdings, LLC, consisted of 90,184 leasable square feet and was sold for $32.5 million. The 5700 Slaughter retail project, which we previously wholly owned, consisted of 25,698 leasable square feet and was sold for $12.5 million. See Note 11 for further discussion.
Lantana
Lantana is a partially developed, mixed-use real-estate development project. As of December 31, 2017, we had remaining entitlements for approximately 480,000 square feet of office and retail use on 55 acres. Regional utility and road infrastructure is in place with capacity to serve Lantana at full build-out as permitted under our existing entitlements. In 2017, construction commenced on the first phase of Lantana Place, a 320,000 square foot mixed-use development project in southwest Austin. The first phase will be anchored by a 12-screen Moviehouse, a state of the art movie theater that provides a high-quality dining experience. We expect to complete construction of Moviehouse in mid-2018.
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 December 31, 2017, both the office and retail space were substantially fully occupied.
Magnolia
The Magnolia project is an HEB-anchored retail project planned for 351,000 square feet of commercial space. Planning and infrastructure work by the city of Magnolia is complete and road expansion by the Texas Department of Transportation is in progress and expected to be completed in early-2018. The HEB store is currently expected to open in 2020.
West Killeen Market
In 2015, we acquired approximately 21 acres in Killeen, Texas, to develop the West Killeen Market project, an HEB-anchored retail project with 44,000 square feet of commercial space and three pad sites adjacent to a 90,000 square-foot HEB grocery store. Construction began in August 2016 and was completed on schedule and under budget in June 2017. The HEB store opened in April 2017. As of December 31, 2017, leases for approximately 60 percent of the space at West Killeen Market have been executed, and leasing for the remaining space continues. We intend to explore opportunities to sell West Killeen Market later this year depending on leasing progress and market conditions.
Jones Crossing
In September 2017, we entered in to a $36.8 million loan to finance the construction of Phases 1 and 2, the retail component, of Stratus' Jones Crossing project, a new HEB-anchored, mixed-use development in College Station, Texas. The Jones Crossing project is expected to total approximately 258,000 square feet of commercial space, including a 106,000 square-foot HEB grocery store. Construction of the retail component of the Jones Crossing project began in September 2017, and the HEB grocery store is expected to open in August 2018.
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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, including possible joint ventures or other arrangements. 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. We use operating income or loss to measure the performance of each operating segment. Corporate, eliminations and other includes consolidated general and administrative expenses, which primarily consist of employee salaries and other costs.
The following table summarizes our operating results for the years ended December 31 (in thousands):
2017 | 2016 | 2015 | ||||||||||
Operating income (loss): | ||||||||||||
Real estate operations | $ | 522 | $ | 824 | $ | 3,671 | ||||||
Leasing operations | 24,217 | a | 2,369 | 22,514 | b | |||||||
Hotel | 6,553 | 8,058 | 5,065 | |||||||||
Entertainment | 4,045 | 2,546 | 3,086 | |||||||||
Corporate, eliminations and other | (12,100 | ) | (12,620 | ) | (8,604 | ) | ||||||
Operating income | $ | 23,237 | $ | 1,177 | $ | 25,732 | ||||||
Interest expense, net | $ | (6,742 | ) | $ | (9,408 | ) | $ | (4,065 | ) | |||
Income from discontinued operations, net of taxes | $ | — | $ | — | $ | 3,218 | ||||||
Net income (loss) | $ | 3,884 | c | $ | (5,999 | ) | $ | 17,595 | ||||
Net income attributable to noncontrolling interests in subsidiaries | $ | (5 | ) | $ | — | $ | (5,418 | ) | d | |||
Net income (loss) attributable to common stockholders | $ | 3,879 | $ | (5,999 | ) | $ | 12,177 | |||||
a. | Includes the recognition of a gain of $24.3 million associated with the sale of The Oaks at Lakeway and $11.3 million remains deferred at December 31, 2017. Also includes a $1.1 million gain on the sale of a 3,085-square-foot bank building and an adjacent undeveloped 4.1 acre tract of land in Barton Creek. These gains were partially offset by a $2.5 million profit participation charge associated with the sale of The Oaks at Lakeway. |
b. | Includes a gain of $20.7 million on the sales of our Parkside Village and 5700 Slaughter commercial developments. |
c. | Includes a tax charge totaling $7.6 million to reduce the carrying amount of deferred tax assets as a result of U.S. tax reform (see Note 7). |
d. | Primarily relates to Canyon-Johnson's share in the Block 21 Joint Venture, which we acquired in 2015. |
We have four operating segments: Real Estate Operations, Leasing Operations, Hotel and Entertainment (see Note 10). The following is a discussion of our operating results by segment.
Real Estate Operations
The following table summarizes our Real Estate Operations results for the years ended December 31 (in thousands):
2017 | 2016 | 2015 | |||||||||
Revenues: | |||||||||||
Developed property sales | $ | 10,286 | $ | 10,223 | $ | 12,320 | |||||
Undeveloped property sales | 544 | 73 | 1,175 | ||||||||
Commissions and other | 314 | 454 | 848 | ||||||||
Total revenues | 11,144 | 10,750 | 14,343 | ||||||||
Cost of sales, including depreciation | 10,609 | 9,926 | 10,672 | ||||||||
Loss on sales of assets | 13 | — | — | ||||||||
Operating income | $ | 522 | $ | 824 | $ | 3,671 | |||||
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Developed Property Sales. The following table summarizes our developed property sales for the years ended December 31 (in thousands):
2017 | 2016 | 2015 | ||||||||||||||||||||||||||||||
Lots/Units | Revenues | Average Cost per Lot/Unit | Lots/Units | Revenues | Average Cost per Lot/Unit | Lots/Units | Revenues | Average Cost per Lot/Unit | ||||||||||||||||||||||||
Barton Creek | ||||||||||||||||||||||||||||||||
Amarra Drive: | ||||||||||||||||||||||||||||||||
Phase II lots | 1 | $ | 560 | $ | 193 | 1 | $ | 550 | $ | 190 | — | $ | — | $ | — | |||||||||||||||||
Phase III lots | 6 | 4,090 | 292 | 6 | 4,408 | 338 | 10 | 6,955 | 334 | |||||||||||||||||||||||
Amarra Villas | 1 | 2,193 | 1,886 | — | — | — | — | — | — | |||||||||||||||||||||||
Circle C | ||||||||||||||||||||||||||||||||
Meridian | 12 | 3,443 | 162 | 19 | 5,265 | 156 | 19 | 5,365 | 160 | |||||||||||||||||||||||
Total Residential | 20 | $ | 10,286 | 26 | $ | 10,223 | 29 | $ | 12,320 | |||||||||||||||||||||||
Undeveloped Property Sales. In 2017, we sold a six-acre tract of land at the Circle C community, which had entitlements for 14,000 square feet of commercial space, for $0.5 million. In 2015, we sold a nine-acre tract of land in Austin, Texas, with entitlements for approximately 20,000 square feet of commercial space for $1.2 million.
Commissions and Other. Commissions and other primarily includes sales commissions, design fees and sales of our development fee credits to third parties. We received the development fee credits as part of the Circle C settlement (see Note 9).
Cost of Sales. Cost of sales includes cost of property sold, project operating and marketing expenses and allocated overhead costs, partly offset by reductions for certain municipal utility district (MUD) reimbursements. Cost of sales totaled $10.6 million in 2017, $9.9 million in 2016 and $10.7 million in 2015. The increase in cost of sales in 2017, compared with 2016, primarily reflects higher costs associated with the sale of the Amarra Villas townhome in 2017. The decrease in cost of sales in 2016, compared with 2015, primarily reflects fewer Barton Creek lot sales in 2016.
Cost of sales for our real estate operations also includes significant recurring costs (including property taxes, maintenance and marketing), which totaled $4.3 million in 2017, $4.5 million in 2016 and $3.5 million in 2015. The increase in these recurring costs for 2016, compared with 2015, primarily reflects higher property taxes and homeowner association assessments associated with Barton Creek lots not yet sold.
Leasing Operations
The following table summarizes our Leasing Operations results for the years ended December 31 (in thousands):
2017a | 2016 | 2015ab | ||||||||||
Rental revenue | $ | 8,856 | $ | 10,449 | $ | 6,179 | ||||||
Rental cost of sales, excluding depreciation | 4,829 | 4,936 | 2,838 | |||||||||
Depreciation | 2,693 | 3,144 | 1,556 | |||||||||
Profit participation | 2,538 | c | — | — | ||||||||
Gain on sales of assets | (25,421 | ) | — | (20,729 | ) | |||||||
Operating income | $ | 24,217 | $ | 2,369 | $ | 22,514 | ||||||
a. | Includes the results of the The Oaks at Lakeway through February 21, 2017 (see Note 11). |
b. | Includes the results of the Parkside Village and 5700 Slaughter commercial properties through July 2, 2015 (see Note 11). |
c. | Relates to the sale of The Oaks at Lakeway (see Note 11). |
Rental Revenue. Rental revenue primarily includes revenue from the office and retail space at the W Austin Hotel & Residences, Barton Creek Village, Santal Phase I, The Oaks at Lakeway (which was sold in February 2017), and Parkside Village and 5700 Slaughter, which were both sold in 2015. The decrease in rental revenue in 2017, compared with 2016, primarily reflects the sales of The Oaks at Lakeway in February 2017, partly offset by an increase in revenue from Santal Phase I. The increase in rental revenue in 2016, compared with 2015, primarily reflects rental revenues from The Oaks at Lakeway and Santal Phase I, partially offset by a decrease related to the sales of Parkside Village and 5700 Slaughter.
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Rental Cost of Sales. Rental costs of sales, excluding depreciation, totaled $4.8 million in 2017, compared with $4.9 million in 2016 and $2.8 million in 2015. The decrease in rental costs in 2017, compared with 2016, primarily reflects the sale of The Oaks at Lakeway, mostly offset by increased operating expenses associated with Santal Phase I. The increase in rental costs in 2016, compared with 2015, primarily reflects increased operating costs relating to The Oaks at Lakeway and Santal Phase I, partially offset by a decrease in operating expenses related to the sales of Parkside Village and 5700 Slaughter.
Depreciation. Depreciation costs totaled $2.7 million in 2017, compared with $3.1 million in 2016 and $1.6 million in 2015. The decrease in 2017, compared with 2016, primarily reflects lower depreciation costs associated with The Oaks at Lakeway, partially offset by higher depreciation costs associated with Santal Phase I. The increase in 2016, compared with 2015, primarily reflects higher depreciation costs relating to The Oaks at Lakeway and Santal Phase I.
Gain on Sales of Assets. During 2017, we recorded a $25.4 million gain on the sales of assets, primarily related to the sale of The Oaks at Lakeway and a bank building and an adjacent undeveloped 4.1 acre tract of land in Barton Creek. During 2015, we recorded a $13.6 million gain on the sale of Parkside Village and a $7.1 million gain on the sale of 5700 Slaughter.
Hotel
The following table summarizes our Hotel results for the years ended December 31 (in thousands):
2017 | 2016 | 2015 | |||||||||
Hotel revenue | $ | 38,681 | $ | 40,727 | $ | 41,651 | |||||
Hotel cost of sales, excluding depreciation | 28,584 | 29,248 | 30,789 | ||||||||
Depreciation | 3,544 | 3,421 | 5,797 | ||||||||
Operating income | $ | 6,553 | $ | 8,058 | $ | 5,065 | |||||
Hotel Revenue. Hotel revenue primarily includes revenue from W Austin Hotel room reservations and food and beverage sales. Revenue per available room (RevPAR), which is calculated by dividing total room revenue by the average total rooms available during the year, was $253 in 2017, compared with $259 in 2016 and $279 in 2015. In 2015 and 2016, over 2,600 new hotel rooms were added to the Austin hotel market, and approximately 600 more rooms were added in 2017. The increase in competition from several newly completed hotels in the downtown Austin area, including the anticipated opening of additional rooms during 2018, is expected to impact hotel revenues.
Hotel Cost of Sales. Hotel operating costs totaled $28.6 million in 2017, $29.2 million in 2016 and $30.8 million in 2015. Lower costs in 2017, compared with 2016 and 2015, primarily reflect lower variable costs related to lower revenue.
Hotel Depreciation. Hotel depreciation totaled $3.5 million in 2017. Hotel depreciation decreased to $3.4 million in 2016, compared to $5.8 million in 2015, primarily reflecting certain furniture and equipment being fully depreciated as of December 31, 2015.
Entertainment
The following table summarizes our Entertainment results for the years ended December 31 (in thousands):
2017 | 2016 | 2015 | |||||||||
Entertainment revenue | $ | 23,232 | $ | 19,705 | $ | 19,800 | |||||
Entertainment cost of sales, excluding depreciation | 17,719 | 15,698 | 15,426 | ||||||||
Depreciation | 1,523 | 1,461 | 1,288 | ||||||||
Gain on sale of assets | (55 | ) | — | — | |||||||
Operating income | $ | 4,045 | $ | 2,546 | $ | 3,086 | |||||
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, 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
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of events hosted at ACL Live and 3TEN ACL Live. Entertainment revenue increased in 2017, compared with 2016 and 2015, primarily reflecting higher ticket sales at ACL Live from headliners such as Dave Chappelle and Louis CK, and growing visibility of our 3TEN ACL Live venue, which opened in March 2016.
Certain key operating statistics specific to the concert and event hosting industry are included below to provide additional information regarding our ACL Live and 3TEN ACL Live operating performance, for the years ended December 31.
2017 | 2016 | 2015 | |||||||||
ACL Live | |||||||||||
Events: | |||||||||||
Events hosted | 224 | 223 | 210 | ||||||||
Estimated attendance | 297,100 | 237,000 | 245,000 | ||||||||
Ancillary net revenue per attendee | $ | 40.47 | $ | 46.21 | $ | 44.89 | |||||
Ticketing: | |||||||||||
Number of tickets sold | 221,340 | 175,023 | 168,506 | ||||||||
Gross value of tickets sold (in thousands) | $ | 13,392 | $ | 9,679 | $ | 11,191 | |||||
3TEN ACL Livea | |||||||||||
Events: | |||||||||||
Events hosted | 228 | 162 | — | ||||||||
Estimated attendance | 40,600 | 25,500 | — | ||||||||
Ancillary net revenue per attendee | $ | 42.02 | $ | 35.19 | — | ||||||
Ticketing: | |||||||||||
Number of tickets sold | 18,770 | 12,777 | — | ||||||||
Gross value of tickets sold (in thousands) | $ | 430 | $ | 289 | — | ||||||
a. | This venue opened in March 2016. |
Entertainment Cost of Sales. Entertainment cost of sales, excluding depreciation, totaled $17.7 million in 2017, compared with $15.7 million in 2016 and $15.4 million in 2015. Entertainment costs were higher in 2017, compared with 2016 and 2015, primarily reflecting higher production costs for larger events.
Corporate, Eliminations and Other
Corporate, eliminations and other (see Note 10) includes consolidated general and administrative expenses, which primarily consist of employee salaries and other costs. Consolidated general and administrative expenses totaled $11.4 million in 2017, $12.2 million in 2016 and $8.1 million in 2015. Beginning January 1, 2016, general and administrative expenses are managed on a consolidated basis and are not allocated to our operating segments. The segment disclosures for 2015 have been recast to be consistent with 2016. Costs were higher for 2016, compared with 2017 and 2015, primarily reflecting higher legal and consulting fees mainly because of $3.1 million associated with Stratus' successful proxy contest and review of strategic alternatives. Corporate, eliminations and other also includes eliminations of intersegment amounts incurred by the four operating segments.
Non-Operating Results
Interest Expense, Net. Interest costs (before capitalized interest) totaled $12.6 million in 2017, $15.7 million in 2016 and $9.5 million in 2015. The decrease in interest costs in 2017, compared with 2016, primarily reflects lower average debt balances resulting from repayment of the loan for The Oaks at Lakeway after its sale in February 2017. The increase in interest expense in 2016, compared with 2015, primarily reflects higher average debt balances associated with refinancing the W Austin Hotel & Residences and higher interest rates.
Capitalized interest totaled $5.9 million in 2017, $6.3 million in 2016 and $5.5 million in 2015, and is primarily related to development activities at Barton Creek in 2017, and development activities at Barton Creek and The Oaks at Lakeway in 2016 and 2015.
Gain (Loss) on Interest Rate Derivative Instruments. We recorded gains of $0.3 million in 2017 and $0.2 million in 2016 associated with changes in the fair value of our interest rate derivative instruments. In 2015, we recorded a loss of $(0.7) million associated with the recognition of cumulative changes in the fair value of our interest rate swap agreement because it no longer qualified for hedge accounting treatment and changes in the fair value of our interest rate cap agreement. See Note 5 for further discussion.
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Loss on Early Extinguishment of Debt. We recorded losses on early extinguishment of debt of $0.5 million in 2017 associated with the repayment of The Oaks at Lakeway Loan and $0.8 million in 2016 related to the repayment of the Bank of America loan with the proceeds from the Goldman Sachs loan.
Equity in Unconsolidated Affiliates' (Loss) Income. We account for our interests in our unconsolidated affiliates, primarily Crestview Station, using the equity method. Our equity in the net income (loss) of these entities totaled less than $(0.1) million in 2017, $0.1 million in 2016 and $(1.3) million in 2015. The loss in 2015 primarily reflects operating losses at two of these affiliates.
(Provision for) Benefit from Income Taxes. We recorded a (provision for) benefit from income taxes of $(13.9) million in 2017, $2.8 million in 2016 and $(5.6) million in 2015. Each period also includes the Texas state margin tax. The difference between our consolidated effective income tax rate for 2017 and the U.S. federal statutory income tax rate of 35 percent was primarily attributable to a $7.6 million charge to reduce the carrying amount of deferred tax assets based on lower federal corporate tax rates associated with U.S. tax reform (see Note 7). The difference between our consolidated effective income tax rate for 2016 and the U.S. federal statutory income tax rate of 35 percent was primarily attributable to the Texas state margin tax. The difference between our consolidated effective income tax rate for 2015 and the U.S. federal statutory income tax rate of 35 percent was primarily attributable to state margin taxes, partially offset by the tax effect of income attributable to non-controlling interests.
Net Income Attributable to Noncontrolling Interests in Subsidiaries. Net income attributable to noncontrolling interests in subsidiaries totaled $5.4 million in 2015 and primarily related to our former joint venture partner's interest in the W Austin Hotel & Residences project (see Note 2).
DISCONTINUED OPERATIONS
In 2012, we sold 7500 Rialto, an office building in Lantana. In connection with the sale, we recognized a gain of $5.1 million and deferred a gain of $5.0 million because of a guaranty provided to the lender in connection with the buyer's assumption of the loan related to 7500 Rialto. The guaranty was released and we recognized the deferred gain totaling $5.0 million ($3.2 million to net income attributable to common stockholders) in 2015.
CAPITAL RESOURCES AND LIQUIDITY
Volatility in the real estate market, including the markets in which we operate, can impact sales of our properties from period to period. However, we believe that the unique nature and location of our assets will provide us positive cash flows over time. See "Business Strategy and Related Risks" for further discussion of our liquidity.
Comparison of Year-to-Year Cash Flows
Operating Activities. Cash provided by (used in) operating activities totaled $10.3 million in 2017, $(3.7) million in 2016 and $(1.8) million in 2015. Expenditures for purchases and development of real estate properties totaled $14.4 million in 2017, $14.6 million in 2016 and $26.2 million in 2015 primarily related to the development of our Barton Creek properties. The increase in accounts payable, accrued liabilities and other primarily relates to increased development activity in 2017. During 2017, we also paid $2.2 million of the $2.5 million profit participation due to HEB as a result of the sale of The Oaks at Lakeway.
We received MUD reimbursements relating to substantially all of the infrastructure costs incurred to date in Barton Creek, totaling $13.8 million in 2017, $12.3 million in 2016 and $5.3 million in 2015. In November 2017, the city of Magnolia and the state of Texas approved the creation of a MUD, which will provide an opportunity for us to recoup
approximately $26 million over the life of the project for future road and utility infrastructure costs incurred in connection with our development of the Magnolia project.
Investing Activities. Cash provided by (used in) investing activities totaled $70.6 million in 2017, $(28.2) million in 2016 and $(12.6) million in 2015. The year 2017 included $117.3 million in proceeds from the sales of The Oaks at Lakeway, and a bank building and an adjacent undeveloped 4.1 acre tract of land in Barton Creek. The year 2015 included $43.3 million in proceeds from the sales of the Parkside Village and 5700 Slaughter commercial properties. Capital expenditures totaled $34.1 million in 2017, primarily related to the development of Lantana Place, Santal Phase II, West Killeen Market and Jones Crossing. Capital expenditures totaled $28.2 million in 2016 and $55.2 million in 2015, and primarily included costs to develop Leasing Operations' properties related to Santal Phase I and The Oaks at Lakeway projects.
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In 2017, Stratus also made payments totaling $2.2 million under its master lease obligations associated with the sale of The Oaks at Lakeway. The use of cash for site development escrow deposit and other, net during the year 2017, primarily relates to restricted cash associated with the Jones Crossing project.
Financing Activities. Cash (used in) provided by financing activities totaled $(79.8) million in 2017, $28.5 million in 2016 and $1.8 million in 2015. Net repayments on the Comerica Bank credit facility totaled $20.8 million in 2017, compared with net borrowings of $13.4 million in 2016 and $10.1 million in 2015. Net repayments on other project and term loans totaled $49.0 million in 2017, primarily for The Oaks at Lakeway term loan, compared with net borrowings of $16.8 million in 2016 and $56.6 million in 2015. In 2016, we used $150 million of borrowings under the Goldman Sachs loan to refinance our Bank of America loan ($129.5 million) for the W Austin Hotel & Residences. Other project borrowings in 2016 were primarily used to fund the development of the Santal Phase I and The Oaks at Lakeway projects. In 2015, we borrowed $32.3 million under project loans and $20.0 million under our Comerica credit facility, plus $9.7 million of cash that was used to purchase Canyon-Johnson's noncontrolling interest in the Block 21 Joint Venture for $62.0 million. Other project borrowings in 2015 were primarily associated with Santal Phase I and The Oaks at Lakeway projects. Noncontrolling interest distributions for the Parkside Village Joint Venture and the Block 21 Joint Venture totaled $4.2 million in 2015.
See Note 6 and “Credit Facility and Other Financing Arrangements” for a discussion of our outstanding debt at December 31, 2017.
On March 15, 2017, we announced that our Board, after receiving written consent from Comerica Bank, declared a special cash dividend of $1.00 per share, which was paid on April 18, 2017, to stockholders of record on March 31, 2017. The special cash dividend was declared after the Board’s consideration of the results of the recent sale of The Oaks at Lakeway. The declaration of future dividends is at the discretion of our Board subject to the restrictions contained in our Comerica credit facility, which prohibit us from paying a dividend on our common stock without the bank's prior written consent. Comerica's approval of the special dividend declared in March 2017 is not indicative of the bank's willingness to approve future dividends.
In 2013, our Board approved an increase in the open market share purchase program from 0.7 million shares to 1.7 million shares of our common stock. There were no purchases under this program during 2017, 2016 or 2015. As of December 31, 2017, a total of 991,695 shares of our common stock remain available under this program. Our ability to repurchase shares of our common stock is restricted by the terms of our Comerica credit facility, which prohibits us from repurchasing shares of our common stock without the bank's prior written consent.
Credit Facility and Other Financing Arrangements
At December 31, 2017, we had total debt of $221.5 million based on the principal amounts outstanding, compared with $291.1 million at December 31, 2016. The principal amounts of our debt outstanding at December 31, 2017, consisted of the following:
• | $146.3 million under the Goldman Sachs loan. |
• | $25.8 million under the $52.5 million Comerica credit facility, which is comprised of a $45.0 million revolving line of credit, $19.2 million of which was available at December 31, 2017, and a $7.5 million letters of credit tranche, against which $4.1 million was committed and $3.4 million was available at December 31, 2017. |
• | $32.1 million under the construction loan to fund Phase I of the multi-family development in Section N of Barton Creek (the Santal Phase I loan). |
• | $5.3 million under the stand-alone revolving credit facility with Comerica Bank to fund the construction and development of the Amarra Villas (the Amarra Villas credit facility). |
• | $5.5 million under the construction loan with Southside Bank to fund the development and construction of the West Killeen Market retail project (the West Killeen Market construction loan). |
• | $5.1 million under the construction loan with Southside Bank to finance the development and construction of Phases 1 and 2, the retail component, of Jones Crossing (the Jones Crossing construction loan). |
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• | $3.4 million under the term loan with PlainsCapital Bank secured by assets at Barton Creek Village (the Barton Creek Village term loan). |
No amounts have been drawn under the construction loan with Southside Bank to finance the development and construction of the initial phase of Lantana Place, nor under the agreement with Comerica Bank to finance the development and construction of Santal Phase II.
Several of our financing instruments contain customary financial covenants. The Comerica credit facility, the Santal Phase I and Phase II loans, the Amarra Villas credit facility and the West Killeen Market construction loan include a requirement that we maintain a minimum total stockholders’ equity balance of $110.0 million. The Comerica credit facility also includes a requirement that we obtain Comerica's prior written consent for any common stock repurchases or dividend payments. As of December 31, 2017, Stratus' total stockholders' equity was $127.3 million and Stratus was in compliance with all financial covenants. See Note 6 for further discussion of our outstanding debt as of December 31, 2017.
DEBT MATURITIES AND OTHER CONTRACTUAL OBLIGATIONS
The following table summarizes our total debt maturities based on the principal amounts outstanding as of December 31, 2017 (in thousands):
2018 | 2019 | 2020 | 2021 | 2022 | Thereafter | Total | ||||||||||||||||||||||
Goldman Sachs loan | $ | 2,086 | $ | 2,207 | $ | 2,313 | $ | 2,470 | $ | 2,613 | $ | 134,636 | $ | 146,325 | ||||||||||||||
Santal Phase I loan | — | — | 32,133 | a | — | — | — | 32,133 | ||||||||||||||||||||
Comerica credit facility | 25,765 | b | — | — | — | — | — | 25,765 | ||||||||||||||||||||
Amarra Villas credit facility | — | 5,342 | — | — | — | — | 5,342 | |||||||||||||||||||||
West Killeen Market construction loan | — | — | — | — | 5,544 | — | 5,544 | |||||||||||||||||||||
Barton Creek Village term loan | 100 | 105 | 109 | 114 | 119 | 2,877 | 3,424 | |||||||||||||||||||||
Jones Crossing construction loan | — | — | — | — | — | 5,066 | — | 5,066 | ||||||||||||||||||||
Total | $ | 27,951 | $ | 7,654 | $ | 34,555 | $ | 2,584 | $ | 8,276 | $ | 142,579 | $ | 223,599 | ||||||||||||||
a. | Stratus has the option to extend the maturity date for two additional twelve-month periods, subject to certain debt service coverage conditions. |
b. | On November 7, 2017, Stratus extended the maturity by one year to November 30, 2018 (see Note 6). |
The following table summarizes our contractual cash obligations, other than debt, as of December 31, 2017 (in thousands):
Total | 2018 | 2019-2020 | 2021-2022 | Thereafter | ||||||||||||||||
Scheduled interest payment obligationsa | $ | 14,910 | $ | 4,236 | $ | 5,045 | $ | 2,723 | $ | 2,906 | ||||||||||
Construction contracts | 47,497 | 47,497 | — | — | — | |||||||||||||||
Operating lease obligations | 113,090 | 372 | 808 | 865 | 111,045 | |||||||||||||||
Total | $ | 175,497 | $ | 52,105 | $ | 5,853 | $ | 3,588 | $ | 113,951 | ||||||||||
a. | Scheduled interest payments were calculated using stated coupon rates for fixed-rate debt and interest rates applicable at December 31, 2017, for variable-rate debt. |
Not reflected in the table above are the master lease obligations entered into in conjunction with the sale of The Oaks at Lakeway. As more fully explained in Note 11, the master lease payment obligation currently approximates $180 thousand per month and is expected to decline as vacant space is leased and the new leases are assigned to the purchaser. Stratus currently estimates its aggregate master lease payment obligation through 2022, the date all master leases are currently projected to be terminated, will total $6.9 million.
We had commitments under noncancelable contracts totaling $47.5 million at December 31, 2017.
We also had guarantees related to the W Austin Hotel & Residences at December 31, 2017 (see Note 6).
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DISCLOSURES ABOUT MARKET RISKS
We derive our revenues from the acquisition, entitlement, development, management, operation and sale of our commercial, hotel, entertainment, and multi- and single-family residential real estate properties. Our results of operations can vary significantly with fluctuations in the market prices of real estate, which are influenced by numerous factors, including interest rate levels. Changes in interest rates also affect interest expense on our debt.
We also have an interest rate swap agreement with Comerica Bank that was previously designated as a cash flow hedge with changes in fair value recorded in other comprehensive income. The instrument effectively converted the variable rate portion of Parkside Village's loan from Comerica Bank (the Parkside Village loan) from one-month LIBOR to a fixed rate of 2.3 percent. On July 2, 2015, we completed the sale of the Parkside Village property and fully repaid the amount outstanding under the Parkside Village loan. We assumed the interest rate swap agreement and, as a result, the instrument no longer qualifies for hedge accounting. Accordingly, the liability balance of $0.6 million on July 2, 2015, was reclassified to the statement of operations as a loss on interest rate derivative instruments and future changes in the fair value of the instrument are being recorded in the statement of operations, including gains of $0.3 million in 2017 and $0.2 million in 2016, and a loss of $0.1 million in 2015. See Note 5 for further discussion.
At December 31, 2017, $73.9 million of our total principal amount of debt outstanding of $223.6 million bears interest at variable rates. An increase of 100 basis points in annual interest rates for this variable-rate debt would increase our annual interest costs by $0.7 million.
NEW ACCOUNTING STANDARDS
Refer to Note 1 for discussion of new accounting standards.
OFF-BALANCE SHEET ARRANGEMENTS
Refer to Note 9 for discussion of our off-balance sheet arrangements.
CAUTIONARY STATEMENT
Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements in which we discuss our future performance. Forward-looking statements are all statements other than statements of historical fact, such as statements regarding the implementation and potential results of our active development plan, and projections or expectations related to operational and financial performance or liquidity, reimbursements for infrastructure costs, financing and regulatory matters, development plans and sales of properties, including Amarra Drive lots and exploring opportunities to sell West Killeen Market and the retail complex in Barton Creek Village, leasing activities, timeframes for development, construction and completion of our projects, capital expenditures, possible joint venture or other arrangements, our projections with respect to our obligations under the master lease agreements entered into in connection with the sale of The Oaks at Lakeway in 2017, and other plans and objectives of management for future operations and activities, and future dividend payments. The words “anticipate,” “may,” “can,” “plan,” “believe,” “potential,” “estimate,” “expect,” “project,” “intend,” “likely,” “will,” “should,” “to be” and any similar expressions and/or statements that are not historical facts are intended to identify those assertions as forward-looking statements.
Under our Comerica credit facility, we are not permitted to pay dividends on common stock without Comerica’s prior written consent, which was obtained in connection with the special dividend paid in April 2017, but not required to be granted by Comerica in the future. The declaration of dividends is at the discretion of our Board, subject to restrictions under our Comerica credit facility, and will depend on our financial results, cash requirements, projected compliance with covenants in our debt agreements, outlook and other factors deemed relevant by the Board. Our discussion also contains forward-looking statements and estimates regarding the anticipated effects of U.S. tax reform. These statements and estimates are based on our current interpretation of this legislation, which may change as a result of additional implementation guidance, changes in assumptions, and potential future refinements of or revisions to calculations.
We caution readers that forward-looking statements are not guarantees of future performance and actual results may differ materially from those anticipated, projected or assumed in the forward-looking statements. Important factors that can cause our actual results to differ materially from those anticipated in the forward-looking statements
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include, but are not limited to, our ability to refinance and service our debt and the availability of financing for development projects and other corporate purposes, our ability to sell properties at prices our Board considers acceptable, a decrease in the demand for real estate in the Austin, Texas area and other select Texas markets where Stratus operates, changes in economic and business conditions, reductions in discretionary spending by consumers and corporations, competition from other real estate developers, hotel operators and/or entertainment venue operators and promoters, the termination of sales contracts or letters of intent due to, among other factors, the failure of one or more closing conditions or market changes, the failure to attract customers for our developments or such customers' failure to satisfy their purchase commitments, our ability to secure qualifying tenants for the space subject to the master lease agreements entered into in connection with the sale of The Oaks at Lakeway in 2017 and to assign such leases to the purchaser and remove the corresponding property from the master leases, increases in interest rates, declines in the market value of our assets, increases in operating costs, including real estate taxes and the cost of construction materials, changes in external perception of the W Austin Hotel, changes in consumer preferences, changes in laws, regulations or the regulatory environment affecting the development of real estate, opposition from special interest groups with respect to development projects, and other factors described in more detail under the heading “Risk Factors” in Part I, Item 1A. of this Form 10-K.
Investors are cautioned that many of the assumptions upon which our forward-looking statements are based are likely to change after the forward-looking statements are made. Further, we may make changes to our business plans that could affect our results. We caution investors that we do not intend to update our forward-looking statements more frequently than quarterly notwithstanding any changes in our assumptions, business plans, actual experience, or other changes, and we undertake no obligation to update any forward-looking statements.
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Item 8. Financial Statements and Supplementary Data
MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Stratus Properties Inc.’s (the Company’s) management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
• |