Document
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UNITED STATES |
SECURITIES AND EXCHANGE COMMISSION |
Washington, D.C. 20549 |
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FORM 10-Q |
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(Mark One) |
[X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
| SECURITIES EXCHANGE ACT OF 1934 |
| For the quarterly period ended June 30, 2018 |
| or |
[ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
| SECURITIES EXCHANGE ACT OF 1934 |
| For the transition period from to |
| Commission File Number: 001-37716 |
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Stratus Properties Inc.
(Exact name of registrant as specified in its charter)
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Delaware | 72-1211572 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
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212 Lavaca St., Suite 300 | |
Austin, Texas | 78701 |
(Address of principal executive offices) | (Zip Code) |
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(512) 478-5788 |
(Registrant's telephone number, including area code) |
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
þ Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). þ Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer ¨ | | | Accelerated filer þ |
Non-accelerated filer ¨ (Do not check if a smaller reporting company) | Smaller reporting company ¨ |
| | 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. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes þ No
On July 31, 2018, there were issued and outstanding 8,153,370 shares of the registrant’s common stock, par value $0.01 per share.
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STRATUS PROPERTIES INC. |
TABLE OF CONTENTS |
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
STRATUS PROPERTIES INC.
CONSOLIDATED BALANCE SHEETS (Unaudited)
(In Thousands)
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| | | | | | | |
| June 30, 2018 | | December 31, 2017 |
ASSETS | | | |
Cash and cash equivalents | $ | 12,660 |
| | $ | 14,611 |
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Restricted cash | 24,637 |
| | 24,779 |
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Real estate held for sale | 19,677 |
| | 22,612 |
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Real estate under development | 140,210 |
| | 118,484 |
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Land available for development | 15,428 |
| | 14,804 |
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Real estate held for investment, net | 210,425 |
| | 188,390 |
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Deferred tax assets | 12,114 |
| | 11,461 |
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Other assets | 13,537 |
| | 10,852 |
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Total assets | $ | 448,688 |
| | $ | 405,993 |
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LIABILITIES AND EQUITY | | | |
Liabilities: | | | |
Accounts payable | $ | 22,195 |
| | $ | 22,809 |
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Accrued liabilities, including taxes | 7,834 |
| | 13,429 |
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Debt | 265,872 |
| | 221,470 |
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Deferred gain | 10,480 |
| | 11,320 |
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Other liabilities | 10,485 |
| | 9,575 |
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Total liabilities | 316,866 |
| | 278,603 |
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| | | |
Commitments and contingencies |
| |
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| | | |
Equity: | | | |
Stockholders’ equity: | | | |
Common stock | 93 |
| | 93 |
|
Capital in excess of par value of common stock | 185,757 |
| | 185,395 |
|
Accumulated deficit | (39,848 | ) | | (37,121 | ) |
Common stock held in treasury | (21,260 | ) | | (21,057 | ) |
Total stockholders’ equity | 124,742 |
| | 127,310 |
|
Noncontrolling interests in subsidiaries | 7,080 |
| | 80 |
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Total equity | 131,822 |
| | 127,390 |
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Total liabilities and equity | $ | 448,688 |
| | $ | 405,993 |
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The accompanying Notes to Consolidated Financial Statements (Unaudited) are an integral part of these consolidated financial statements.
STRATUS PROPERTIES INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Unaudited)
(In Thousands, Except Per Share Amounts)
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| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, | | June 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Revenues: | | | | | | | |
Real estate operations | $ | 6,979 |
| | $ | 4,021 |
| | $ | 8,173 |
| | $ | 6,185 |
|
Leasing operations | 2,331 |
| | 1,811 |
| | 4,335 |
| | 4,092 |
|
Hotel | 9,593 |
| | 9,765 |
| | 18,915 |
| | 20,079 |
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Entertainment | 4,407 |
| | 5,832 |
| | 9,652 |
| | 11,737 |
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Total revenues | 23,310 |
| | 21,429 |
| | 41,075 |
| | 42,093 |
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Cost of sales: | | | | | | | |
Real estate operations | 5,560 |
| | 3,868 |
| | 7,126 |
| | 5,844 |
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Leasing operations | 1,323 |
| | 973 |
| | 2,505 |
| | 2,658 |
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Hotel | 7,149 |
| | 7,436 |
| | 14,178 |
| | 14,601 |
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Entertainment | 3,436 |
| | 4,255 |
| | 7,404 |
| | 8,632 |
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Depreciation | 2,053 |
| | 1,756 |
| | 3,995 |
| | 3,897 |
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Total cost of sales | 19,521 |
| | 18,288 |
| | 35,208 |
| | 35,632 |
|
General and administrative expenses | 3,015 |
| | 2,846 |
| | 5,996 |
| | 6,242 |
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Profit participation in sale of The Oaks at Lakeway | — |
| | — |
| | — |
| | 2,538 |
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Gain on sale of assets | — |
| | — |
| | — |
| | (1,115 | ) |
Total | 22,536 |
| | 21,134 |
| | 41,204 |
| | 43,297 |
|
Operating income (loss) | 774 |
| | 295 |
| | (129 | ) | | (1,204 | ) |
Interest expense, net | (1,742 | ) | | (1,508 | ) | | (3,301 | ) | | (3,483 | ) |
Gain (loss) on interest rate derivative instruments | 80 |
| | (4 | ) | | 258 |
| | 82 |
|
Loss on early extinguishment of debt | — |
| | — |
| | — |
| | (532 | ) |
Other income, net | 11 |
| | 13 |
| | 22 |
| | 18 |
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Loss before income taxes and equity in unconsolidated affiliates' loss | (877 | ) | | (1,204 | ) | | (3,150 | ) | | (5,119 | ) |
Equity in unconsolidated affiliates' loss | (3 | ) | | (2 | ) | | (6 | ) | | (19 | ) |
Benefit from income taxes | 23 |
| | 321 |
| | 429 |
| | 1,583 |
|
Net loss and total comprehensive loss | (857 | ) | | (885 | ) | | (2,727 | ) | | (3,555 | ) |
Total comprehensive income attributable to noncontrolling interests in subsidiaries | — |
| | (8 | ) | | — |
| | (8 | ) |
Net loss and total comprehensive loss attributable to common stockholders | $ | (857 | ) | | $ | (893 | ) | | $ | (2,727 | ) | | $ | (3,563 | ) |
| | | | | | | |
Basic and diluted net loss per share attributable to common stockholders | $ | (0.11 | ) | | $ | (0.11 | ) | | $ | (0.33 | ) | | $ | (0.44 | ) |
| | | | | | | |
Basic and diluted weighted average common shares outstanding | 8,153 |
| | 8,127 |
| | 8,145 |
| | 8,114 |
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| | | | | | | |
Dividends declared per share of common stock | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1.00 |
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The accompanying Notes to Consolidated Financial Statements (Unaudited) are an integral part of these consolidated financial statements.
STRATUS PROPERTIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In Thousands)
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| | | | | | | |
| Six Months Ended |
| June 30, |
| 2018 | | 2017 |
Cash flow from operating activities: | | | |
Net loss | $ | (2,727 | ) | | $ | (3,555 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | | | |
Depreciation | 3,995 |
| | 3,897 |
|
Cost of real estate sold | 5,053 |
| | 3,897 |
|
Gain on sale of assets | — |
| | (1,115 | ) |
Gain on interest rate derivative contracts | (258 | ) | | (82 | ) |
Loss on early extinguishment of debt | — |
| | 532 |
|
Debt issuance cost amortization and stock-based compensation | 791 |
| | 647 |
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Equity in unconsolidated affiliates' loss | 6 |
| | 19 |
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Increase (decrease) in deposits | 588 |
| | (851 | ) |
Deferred income taxes | (653 | ) | | (12,607 | ) |
Purchases and development of real estate properties | (7,699 | ) | | (7,974 | ) |
Municipal utility district reimbursement | — |
| | 2,172 |
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(Increase) decrease in other assets | (2,297 | ) | | 910 |
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Decrease in accounts payable, accrued liabilities and other | (5,505 | ) | | (895 | ) |
Net cash used in operating activities | (8,706 | ) | | (15,005 | ) |
| | | |
Cash flow from investing activities: | | | |
Capital expenditures | (42,982 | ) | | (5,100 | ) |
Proceeds from sale of assets | — |
| | 117,261 |
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Payments on master lease obligations | (932 | ) | | (927 | ) |
Other, net | (87 | ) | | (48 | ) |
Net cash (used in) provided by investing activities | (44,001 | ) |
| 111,186 |
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| | | |
Cash flow from financing activities: | | | |
Borrowings from credit facility | 22,336 |
| | 20,200 |
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Payments on credit facility | (4,225 | ) | | (51,775 | ) |
Borrowings from project loans | 29,948 |
| | 7,766 |
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Payments on project and term loans | (3,266 | ) | | (63,723 | ) |
Cash dividend paid | — |
| | (8,127 | ) |
Stock-based awards net payments | (203 | ) | | (234 | ) |
Noncontrolling interests contributions | 7,000 |
| | — |
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Financing costs | (976 | ) | | (375 | ) |
Net cash provided by (used in) financing activities | 50,614 |
| | (96,268 | ) |
Net decrease in cash, cash equivalents and restricted cash | (2,093 | ) | | (87 | ) |
Cash, cash equivalents and restricted cash at beginning of year | 39,390 |
| | 25,489 |
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Cash, cash equivalents and restricted cash at end of period | $ | 37,297 |
| | $ | 25,402 |
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The accompanying Notes to Consolidated Financial Statements (Unaudited), which include information regarding noncash transactions, are an integral part of these consolidated financial statements.
STRATUS PROPERTIES INC.
CONSOLIDATED STATEMENTS OF EQUITY (Unaudited)
(In Thousands)
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Stockholders’ Equity | | | | |
| | | | | | | | | | Common Stock Held in Treasury | | Total Stockholders' Equity | | | | |
| | Common Stock | | Capital in Excess of Par Value | | Accum-ulated Deficit | | | | Noncontrolling Interests in Subsidiaries | | |
| | Number of Shares | | At Par Value | | | | Number of Shares | | At Cost | | | | Total Equity |
Balance at December 31, 2017 | | 9,250 |
| | $ | 93 |
| | $ | 185,395 |
| | $ | (37,121 | ) | | 1,117 |
| | $ | (21,057 | ) | | $ | 127,310 |
| | $ | 80 |
| | $ | 127,390 |
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Vested stock-based awards | | 27 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Stock-based compensation | | — |
| | — |
| | 362 |
| | — |
| | — |
| | — |
| | 362 |
| | — |
| | 362 |
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Tender of shares for stock-based awards | | — |
| | — |
| | — |
| | — |
| | 7 |
| | (203 | ) | | (203 | ) | | — |
| | (203 | ) |
Noncontrolling interests contributions | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 7,000 |
| | 7,000 |
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Total comprehensive loss | | — |
| | — |
| | — |
| | (2,727 | ) | | — |
| | — |
| | (2,727 | ) | | — |
| | (2,727 | ) |
Balance at June 30, 2018 | | 9,277 |
| | $ | 93 |
| | $ | 185,757 |
| | $ | (39,848 | ) | | 1,124 |
| | $ | (21,260 | ) | | $ | 124,742 |
| | $ | 7,080 |
| | $ | 131,822 |
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2016 | | 9,203 |
| | $ | 92 |
| | $ | 192,762 |
| | $ | (41,143 | ) | | 1,105 |
| | $ | (20,760 | ) | | $ | 130,951 |
| | $ | 75 |
| | $ | 131,026 |
|
Adjustment for cumulative effect of change in accounting for stock-based compensation | | — |
| | — |
| | — |
| | 143 |
| | — |
| | — |
| | 143 |
| | — |
| | 143 |
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Cash dividend | | — |
| | — |
| | (8,127 | ) | | — |
| | — |
| | — |
| | (8,127 | ) | | — |
| | (8,127 | ) |
Exercised and vested stock-based awards | | 40 |
| | 1 |
| | 62 |
| | — |
| | — |
| | — |
| | 63 |
| | — |
| | 63 |
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Stock-based compensation | | — |
| | — |
| | 383 |
| | — |
| | — |
| | — |
| | 383 |
| | — |
| | 383 |
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Tender of shares for stock-based awards | | — |
| | — |
| | — |
| | — |
| | 12 |
| | (297 | ) | | (297 | ) | | — |
| | (297 | ) |
Total comprehensive (loss) income | | — |
| | — |
| | — |
| | (3,563 | ) | | — |
| | — |
| | (3,563 | ) | | 8 |
| | (3,555 | ) |
Balance at June 30, 2017 | | 9,243 |
| | $ | 93 |
| | $ | 185,080 |
| | $ | (44,563 | ) | | 1,117 |
| | $ | (21,057 | ) | | $ | 119,553 |
| | $ | 83 |
| | $ | 119,636 |
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The accompanying Notes to Consolidated Financial Statements (Unaudited) are an integral part of these consolidated financial statements.
STRATUS PROPERTIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The accompanying unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2017, included in Stratus Properties Inc.’s (Stratus) Annual Report on Form 10-K (Stratus 2017 Form 10-K) filed with the United States (U.S.) Securities and Exchange Commission. The information furnished herein reflects all adjustments that are, in the opinion of management, necessary for a fair statement of the results for the interim periods reported. With the exception of the accounting for the deferred gain on the 2017 sale of The Oaks at Lakeway, all such adjustments are, in the opinion of management, of a normal recurring nature. Operating results for the six-month period ended June 30, 2018, are not necessarily indicative of the results that may be expected for the year ending December 31, 2018.
Stratus’ net loss per share of common stock was calculated by dividing the net loss attributable to common stockholders by the weighted-average shares of common stock outstanding during the period. The weighted-average shares exclude approximately 85 thousand shares of common stock for second-quarter 2018, 102 thousand shares for second-quarter 2017, 96 thousand shares for the first six months of 2018 and 115 thousand shares for the first six months of 2017 associated with restricted stock units and outstanding stock options that were anti-dilutive because of the net losses.
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3. | RELATED PARTY TRANSACTIONS |
The Saint Mary, L.P.
On June 19, 2018, The Saint Mary, L.P., a Texas limited partnership and a subsidiary of Stratus, completed a series of financing transactions to develop The Saint Mary, a 240-unit luxury, garden-style apartment project in the Circle C community in Austin, Texas. The financing transactions included (1) a $26 million construction loan with Texas Capital Bank, National Association (see Note 6 for further discussion) and (2) an $8.0 million private placement. The Saint Mary, L.P. issued, in a private placement exempt from registration under federal and state securities laws, Class B limited partnership interests to a limited number of investors (the Saint Mary Class B limited partners), for $8.0 million (the Saint Mary Offering) resulting in the Saint Mary Class B limited partners owning an aggregate of 49.1 percent equity interest in The Saint Mary, L.P.
In accordance with the terms of the Saint Mary Offering, Circle C Land, L.P., a Texas limited partnership and a subsidiary of Stratus and the sole Class A limited partner of The Saint Mary, L.P. (Circle C) purchased Class B limited partnership interests representing a 6.1 percent equity interest in The Saint Mary, L.P. for $1.0 million. Upon completion of the Saint Mary Offering, Stratus holds, in aggregate, a 57 percent indirect equity interest in The Saint Mary, L.P. Additionally, among the participants in the Saint Mary Offering, LCHM Holdings, LLC, a related party as a result of its greater than 5 percent beneficial ownership of Stratus’ common stock (LCHM), purchased Saint Mary Class B limited partnership interests representing a 6.1 percent equity interest in The Saint Mary, L.P. for $1.0 million.
In connection with the Saint Mary Offering, The Saint Mary GP, L.L.C., a Texas limited liability company (the Saint Mary General Partner) and a subsidiary of Stratus, Circle C, and the Saint Mary Class B limited partners entered into an Amended and Restated Limited Partnership Agreement (the Saint Mary Partnership Agreement) effective as of June 18, 2018. The Saint Mary Partnership Agreement includes the following key provisions:
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• | The Saint Mary, L.P. will be managed by the Saint Mary General Partner, and The Saint Mary, L.P. will pay the Saint Mary General Partner, or another affiliate of Stratus, an asset management fee of $210,000 per year beginning one year after construction of The Saint Mary begins. |
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• | The Saint Mary, L.P. will pay the Saint Mary General Partner, or another affiliate of Stratus, a development management fee of approximately $1.4 million for the overall coordination and management of the development and construction of The Saint Mary. |
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• | Circle C contributed an approximate 14.35 acre tract of land upon which The Saint Mary will be developed and constructed and $0.7 million of cash. |
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• | The partners are entitled to preferred returns, which change after certain returns are achieved as specified in the Saint Mary Partnership Agreement. |
Stratus has performed evaluations and concluded that The Saint Mary, L.P. is a variable interest entity and that Stratus is the primary beneficiary. Stratus will continue to evaluate which entity is the primary beneficiary of The Saint Mary, L.P. in accordance with applicable accounting guidance. As of June 30, 2018, Stratus’ consolidated balance sheet includes the following assets and liabilities of The Saint Mary, L.P. (in thousands):
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| | | | |
| | June 30, 2018 |
Assets: | | |
Restricted cash | | $ | 8,670 |
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Real estate held under development | | 3,130 |
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Other assets | | 400 |
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Total assets | | $ | 12,200 |
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Liabilities: | | |
Accounts payable | | $ | 521 |
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Total liabilities | | 521 |
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Net assets | | $ | 11,679 |
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Stratus Kingwood Place, L.P.
On August 3, 2018, Stratus Kingwood Place, L.P., a Texas limited partnership and a subsidiary of Stratus (the Kingwood, L.P.), completed a $10.7 million private placement, approximately $7 million of which, combined with a $6.75 million loan from Comerica Bank, was used to purchase a 54-acre tract of land located in Kingwood, Texas, for the development, subject to obtaining a construction loan and building permits, of Kingwood Place, a new H-E-B, L.P. (HEB)-anchored mixed-use development project (Kingwood Place). The development plan for Kingwood Place includes a 103,000-square-foot HEB store, 41,000 square feet of retail space, 6 retail pads, and an 11-acre parcel planned for approximately 300 multi-family units. The Kingwood, L.P. issued, in a private placement exempt from registration under federal and state securities laws, Class B limited partnership interests to a limited number of investors (the Kingwood Class B limited partners), for $10.7 million (the Kingwood Offering), representing approximately 70 percent of the projected partnership equity. Among the participants in the Kingwood Offering, LCHM purchased Kingwood Class B limited partnership interests initially representing a 8.8 percent equity interest in the Kingwood, L.P. for $1.0 million.
In connection with the Kingwood Offering, Stratus Northpark, L.L.C., a Texas limited liability company, a subsidiary of Stratus and the general partner of the Kingwood, L.P. (the Kingwood General Partner), Stratus Properties Operating Co., L.P., a Delaware limited partnership, also a subsidiary of Stratus (the Class A limited partner), and the Kingwood Class B limited partners entered into an Amended and Restated Limited Partnership Agreement (the Kingwood Partnership Agreement) effective as of August 3, 2018. The Kingwood Partnership Agreement includes the following key provisions:
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• | The Kingwood, L.P. will be managed by the Kingwood General Partner, and the Kingwood, L.P. will pay the Kingwood General Partner, or another affiliate of Stratus, an asset management fee of $283,000 per year beginning one year after construction of Kingwood Place begins. |
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• | The Kingwood, L.P. will pay the Kingwood General Partner, or another affiliate of Stratus, a development management fee equal to four percent of the construction costs for Kingwood Place for the overall coordination and management of the development and construction of Kingwood Place. |
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• | The partners are entitled to preferred returns, which change after certain returns are achieved as specified in the Kingwood Partnership Agreement. |
The Oaks at Lakeway. On February 15, 2017, Stratus sold The Oaks at Lakeway to FHF I Oaks at Lakeway, LLC for $114.0 million in cash. Net cash proceeds were $50.8 million after repayment of the Lakeway construction loan. Stratus 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 property will be removed from the master lease, reducing Stratus' master lease payment obligations. Stratus' 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.
Stratus agreed to guarantee the obligations of its selling subsidiary under the sales agreement, up to a liability cap of two percent of the purchase price. This cap does not apply to Stratus' obligation to satisfy the selling subsidiary's indemnity obligations for its broker commissions or similar compensation or Stratus' liability in guaranteeing the selling subsidiary's obligations under the master leases. To secure its obligations under the master leases, Stratus has provided a $1.5 million irrevocable letter of credit with a three-year term.
At the date of sale, Stratus allocated the purchase price for The Oaks at Lakeway between two performance obligations based on the relative fair values of each. The first performance obligation, to deliver the completed and leased portion of the property, was performed on the date of sale. The second performance obligation was to complete construction of the remaining buildings and leasing of the vacant space. The obligations under master leases were considered variable consideration and are recorded as reductions to the contract liability. 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 or construction of the hotel. At the date of the sale, primarily because of the uncertainty related to the hotel tenant’s performance under its ground lease, the probability-weighted estimate of the obligations under the master leases reduced the sale consideration such that no gain was recognized on the sale.
Once the hotel tenant began paying rent in May 2017 and obtained construction financing and commenced construction of the hotel in August 2017, the probability-weighted estimate of Stratus’ obligations under the master leases was significantly reduced, and a gain of $24.3 million related to the first performance obligation was recognized in third-quarter 2017. A contract liability of $10.5 million is presented as a deferred gain in the consolidated balance sheets at June 30, 2018, compared with $11.3 million at December 31, 2017. The reduction in the deferred gain balance primarily reflects master lease payments. The contract liability, as reduced by future master lease payments, will be recognized as additional gain as Stratus fulfills the remaining performance obligation.
Upon the sale of The Oaks at Lakeway, HEB earned a profit participation of $2.5 million (of which $2.2 million was paid at closing), which is presented separately in the consolidated statements of comprehensive loss.
Barton Creek Village. On February 28, 2017, Stratus completed the sale of its 3,085-square-foot bank building and an adjacent undeveloped 4.1 acre tract of land in Barton Creek, for $3.1 million and recorded a gain on the sale of $1.1 million. In connection with the sale, a $2.1 million paydown was made on the Barton Creek Village term loan.
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5. | FAIR VALUE MEASUREMENTS |
Fair value accounting guidance includes a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 inputs) and the lowest priority to unobservable inputs (Level 3 inputs).
The carrying value for certain Stratus financial instruments (i.e., cash and cash equivalents, restricted cash, accounts payable and accrued liabilities) approximates fair value because of their short-term nature and generally negligible credit losses.
A summary of the carrying amount and fair value of Stratus' other financial instruments follows (in thousands):
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| | | | | | | | | | | | | | | |
| June 30, 2018 | | December 31, 2017 |
| Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
Assets: | | | | | | | |
Interest rate swap agreement | $ | 123 |
| | $ | 123 |
| | $ | — |
| | $ | — |
|
Liabilities: | | | | | | | |
Debt | $ | 265,872 |
| | $ | 269,404 |
| | $ | 221,470 |
| | $ | 224,632 |
|
Interest rate swap agreement | — |
| | — |
| | 134 |
| | 134 |
|
Debt. Stratus' debt is recorded at cost and is not actively traded. Fair value is estimated based on discounted future expected cash flows at estimated current market interest rates. Accordingly, Stratus' debt is classified within Level 2 of the fair value hierarchy. The fair value of debt does not represent the amounts that will ultimately be paid upon the maturities of the loans.
Interest Rate Swap Agreement. The interest rate swap does not qualify for hedge accounting and changes in its fair value are recorded in the consolidated statements of comprehensive loss. Stratus evaluated the counterparty credit risk associated with the interest rate swap agreement, which is considered a Level 3 input, but did not consider such risk to be significant. Therefore, the interest rate swap agreement is classified within Level 2 of the fair value hierarchy.
Debt. The components of Stratus' debt are as follows (in thousands):
|
| | | | | | | | |
| June 30, 2018 | | December 31, 2017 | |
Goldman Sachs loan | $ | 144,226 |
| | $ | 145,195 |
| |
Comerica Bank credit facility | 43,877 |
| | 25,765 |
| |
Santal Phase I construction loan | 32,572 |
| | 31,864 |
| |
Barton Creek Village term loan | 3,330 |
| | 3,375 |
| |
Amarra Villas credit facility | 4,490 |
| | 5,247 |
| |
West Killeen Market construction loan | 5,936 |
| | 5,378 |
| |
Jones Crossing construction loan | 10,170 |
| | 4,646 |
| |
Lantana Place construction loan | 14,080 |
| | — |
| |
Santal Phase II construction loan | 7,191 |
| | — |
| |
Total debta | $ | 265,872 |
| | $ | 221,470 |
| |
| |
a. | Includes net reductions for unamortized debt issuance costs of $2.5 million at June 30, 2018, and $2.1 million at December 31, 2017. |
On June 29, 2018, Stratus entered into a loan agreement with Comerica Bank to modify, increase and extend Stratus’ Comerica Bank credit facility, which was scheduled to mature on November 30, 2018. The new loan agreement provides for (1) an increase in the revolving credit facility from $45.0 million to $60.0 million, (2) a $7.5 million sublimit for letters of credit issuance and (3) an extension of the maturity date from November 30, 2018, to June 29, 2020. Advances under the credit facility bear interest at the annual London Interbank Offered Rate (LIBOR) plus 4.0 percent. The Comerica Bank credit facility is secured by substantially all of Stratus' assets, except for properties that are encumbered by separate debt financing. The loan agreement contains financial covenants usual and customary for loan agreements of this nature, including a requirement that Stratus maintains a net asset value of $125 million and an aggregate promissory note debt-to-gross asset value of less than 50 percent. As of June 30, 2018, Stratus had $12.0 million available under its $60.0 million Comerica Bank revolving credit facility, with $4.1 million of letters of credit committed against the available balance.
As discussed in Note 3, on June 19, 2018, Stratus entered into a $26 million construction loan with Texas Capital Bank (The Saint Mary construction loan) to finance the initial phase of The Saint Mary. Stratus will fully guaranty The Saint Mary construction loan. The repayment guaranty will be reduced to 50 percent upon issuance of a certificate of occupancy for The Saint Mary and will be eliminated when the project debt service coverage ratio equals or exceeds 1.25:1.0. Interest is variable at the one-month LIBOR plus 3.0 percent. Payments of interest only will be due and payable monthly, and outstanding principal is payable at maturity of June 19, 2021. Outstanding amounts will be secured by The Saint Mary and all subsequent improvements. The construction loan agreement and related document contain affirmative and negative covenants usual and customary for loan agreements of this nature. Stratus may extend the maturity of this loan for up to two additional 12-month periods if certain conditions are met, including debt service coverage ratio thresholds. As of June 30, 2018, no amounts were drawn on The Saint Mary construction loan.
For a description of Stratus' other debt, refer to Note 6 in the Stratus 2017 Form 10-K.
Interest Expense and Capitalization. Interest costs (before capitalized interest) totaled $3.8 million in second-quarter 2018, $2.9 million in second-quarter 2017, $7.2 million for the first six months of 2018 and $6.3 million for the first six months of 2017. Stratus' capitalized interest costs totaled $2.0 million in second-quarter 2018, $1.4 million in second-quarter 2017, $3.9 million for the first six months of 2018 and $2.8 million for the first six months of 2017, primarily related to development activities at Barton Creek.
Equity. Stratus' Comerica Bank credit facility requires the bank's prior written consent to pay a dividend on Stratus' common stock. On March 15, 2017, Stratus' Board of Directors (the Board), after receiving written consent from Comerica Bank, declared a special cash dividend of $1.00 per share ($8.1 million), 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 sale of The Oaks at Lakeway. Comerica Bank’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 is at the discretion of the Board, subject to the restrictions under Stratus' Comerica Bank credit facility, and will depend on Stratus' financial results, cash requirements, projected compliance with covenants in its debt agreements, outlook and other factors deemed relevant by the Board.
Stratus’ accounting policy for and other information regarding its income taxes is further described in Notes 1 and 7 in the Stratus 2017 Form 10-K.
Stratus had deferred tax assets (net of deferred tax liabilities) totaling $12.1 million at June 30, 2018, and $11.5 million at December 31, 2017. Stratus’ income tax benefit for the first six months of 2018 includes a deferred tax benefit of $0.7 million, partly offset by income tax expense of $0.2 million. Stratus’ future results of operations may be negatively impacted by an inability to realize a tax benefit for future tax losses or for items that will generate additional deferred tax assets.
The difference between Stratus' consolidated effective income tax rate for the first six months of 2018 and the first six months of 2017, and the U.S. Federal statutory income tax rate of 21 percent for 2018 and 35 percent for 2017, was primarily attributable to the Texas state margin tax.
Stratus currently has four operating segments: Real Estate Operations, Leasing Operations, Hotel and Entertainment.
The Real Estate Operations segment is comprised of Stratus’ real estate assets (developed, under development and available for development), which consists of its properties in Austin, Texas (the Barton Creek community, including Santal Phase II; the Circle C community, including The Saint Mary; the Lantana community, including Lantana Place; and the condominium units at the W Austin Hotel & Residences); in Lakeway, Texas, located in the greater Austin area (Lakeway); in College Station, Texas (Jones Crossing); and in Magnolia, Texas, located in the greater Houston area (Magnolia).
The Leasing Operations segment includes the office and retail space at the W Austin Hotel & Residences, a retail building in Barton Creek Village, Santal Phase I, the West Killeen Market in Killeen, Texas, and portions of the Lantana Place and Jones Crossing projects.
The Hotel segment includes the W Austin Hotel located at the W Austin Hotel & Residences in downtown Austin, Texas.
The Entertainment segment includes ACL Live, a live music and entertainment venue and production studio at the W Austin Hotel & Residences. In addition to hosting concerts and private events, this venue is the home of Austin City Limits, a television program showcasing popular music legends. The Entertainment segment also includes revenues and costs associated with events hosted at other venues, including 3TEN ACL Live, which opened in March 2016 on the site of the W Austin Hotel & Residences.
Stratus uses operating income or loss to measure the performance of each segment. General and administrative expenses, which primarily consist of employee salaries, wages and other costs, are managed on a consolidated basis and are not allocated to Stratus' operating segments. The following segment information reflects management determinations that may not be indicative of what the actual financial performance of each segment would be if it were an independent entity.
Revenues From Contracts with Customers. Stratus' revenues from contracts with customers for the second quarters and the first six months of 2018 and 2017 follow (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Real Estate Operations: | | | | | | | |
Developed property sales | $ | 6,856 |
| | $ | 3,443 |
| | $ | 8,011 |
| | $ | 5,576 |
|
Undeveloped property sales | — |
| | 544 |
| | — |
| | 544 |
|
Commissions and other | 123 |
| | 34 |
| | 162 |
| | 65 |
|
| 6,979 |
| | 4,021 |
| | 8,173 |
| | 6,185 |
|
Leasing Operations: | | | | | | | |
Rental revenue | 2,331 |
| | 1,811 |
| | 4,335 |
| | 4,092 |
|
| 2,331 |
| | 1,811 |
| | 4,335 |
| | 4,092 |
|
Hotel: | | | | | | | |
Rooms, food and beverage | 8,908 |
| | 9,122 |
| | 17,602 |
| | 18,911 |
|
Other | 685 |
| | 643 |
| | 1,313 |
| | 1,168 |
|
| 9,593 |
| | 9,765 |
| | 18,915 |
| | 20,079 |
|
Entertainment: | | | | | | | |
Event revenue | 3,729 |
| | 5,215 |
| | 8,378 |
| | 10,510 |
|
Other | 678 |
| | 617 |
| | 1,274 |
| | 1,227 |
|
| 4,407 |
| | 5,832 |
| | 9,652 |
| | 11,737 |
|
| | | | | | | |
Total Revenues from Contracts with Unaffiliated Customers | $ | 23,310 |
| | $ | 21,429 |
| | $ | 41,075 |
| | $ | 42,093 |
|
Financial Information by Business Segment. The following segment information was prepared on the same basis as Stratus’ consolidated financial statements (in thousands).
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Real Estate Operationsa | | Leasing Operations | | Hotel | | Entertainment | | Eliminations and Otherb | | Total |
Three Months Ended June 30, 2018: | | | | | | | | | | | |
Revenues: | | | | | | | | | | | |
Unaffiliated customers | $ | 6,979 |
| | $ | 2,331 |
| | $ | 9,593 |
| | $ | 4,407 |
| | $ | — |
| | $ | 23,310 |
|
Intersegment | 8 |
| | 225 |
| | 50 |
| | 44 |
| | (327 | ) | | — |
|
Cost of sales, excluding depreciation | 5,560 |
| c | 1,331 |
| | 7,184 |
| | 3,560 |
| | (167 | ) | | 17,468 |
|
Depreciation | 64 |
| | 738 |
| | 894 |
| | 392 |
| | (35 | ) | | 2,053 |
|
General and administrative expenses | — |
| | — |
| | — |
| | — |
| | 3,015 |
| | 3,015 |
|
Operating income (loss) | $ | 1,363 |
| | $ | 487 |
| | $ | 1,565 |
| | $ | 499 |
| | $ | (3,140 | ) | | $ | 774 |
|
Capital expenditures and purchases and development of real estate properties | $ | 4,087 |
| | $ | 18,486 |
| | $ | 97 |
| | $ | 23 |
| | $ | — |
| | $ | 22,693 |
|
Total assets at June 30, 2018 | 207,437 |
| | 95,954 |
| | 101,487 |
| | 36,263 |
| | 7,547 |
| | 448,688 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended June 30, 2017: | | | | | | | | | | | |
Revenues: | | | | | | | | | | | |
Unaffiliated customers | $ | 4,021 |
| | $ | 1,811 |
| | $ | 9,765 |
| | $ | 5,832 |
| | $ | — |
| | $ | 21,429 |
|
Intersegment | 8 |
| | 221 |
| | 82 |
| | 85 |
| | (396 | ) | | — |
|
Cost of sales, excluding depreciation | 3,868 |
| | 980 |
| | 7,456 |
| | 4,449 |
| | (221 | ) | | 16,532 |
|
Depreciation | 57 |
| | 568 |
| | 789 |
| | 377 |
| | (35 | ) | | 1,756 |
|
General and administrative expenses | — |
| | — |
| | — |
| | — |
| | 2,846 |
| | 2,846 |
|
Operating income (loss) | $ | 104 |
| | $ | 484 |
| | $ | 1,602 |
| | $ | 1,091 |
| | $ | (2,986 | ) | | $ | 295 |
|
Capital expenditures and purchases and development of real estate properties | $ | 4,306 |
| | $ | 2,748 |
| | $ | 11 |
| | $ | 40 |
| | $ | — |
| | $ | 7,105 |
|
Total assets at June 30, 2017 | 160,713 |
| | 69,629 |
| | 103,154 |
| | 37,392 |
| | 24,566 |
| | 395,454 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Real Estate Operationsa | | Leasing Operations | | Hotel | | Entertainment | | Eliminations and Otherb | | Total |
Six Months Ended June 30, 2018: | | | | | | | | | | | |
Revenues: | | | | | | | | | | | |
Unaffiliated customers | $ | 8,173 |
| | $ | 4,335 |
| | $ | 18,915 |
| | $ | 9,652 |
| | $ | — |
| | $ | 41,075 |
|
Intersegment | 16 |
| | 476 |
| | 122 |
| | 58 |
| | (672 | ) | | — |
|
Cost of sales, excluding depreciation | 7,126 |
| c | 2,521 |
| | 14,222 |
| | 7,696 |
| | (352 | ) | | 31,213 |
|
Depreciation | 125 |
| | 1,371 |
| | 1,789 |
| | 780 |
| | (70 | ) | | 3,995 |
|
General and administrative expenses | — |
| | — |
| | — |
| | — |
| | 5,996 |
| | 5,996 |
|
Operating income (loss) | $ | 938 |
| | $ | 919 |
| | $ | 3,026 |
| | $ | 1,234 |
| | $ | (6,246 | ) | | $ | (129 | ) |
Capital expenditures and purchases and development of real estate properties | $ | 7,699 |
| | $ | 42,285 |
| | $ | 336 |
| | $ | 361 |
| | $ | — |
| | $ | 50,681 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
Six Months Ended June 30, 2017: | | | | | | | | | | | |
Revenues: | | | | | | | | | | | |
Unaffiliated customers | $ | 6,185 |
| | $ | 4,092 |
| | $ | 20,079 |
| | $ | 11,737 |
| | $ | — |
| | $ | 42,093 |
|
Intersegment | 21 |
| | 431 |
| | 173 |
| | 125 |
| | (750 | ) | | — |
|
Cost of sales, excluding depreciation | 5,844 |
| | 2,673 |
| | 14,645 |
| | 8,957 |
| | (384 | ) | | 31,735 |
|
Depreciation | 114 |
| | 1,331 |
| | 1,768 |
| | 753 |
| | (69 | ) | | 3,897 |
|
General and administrative expenses | — |
| | — |
| | — |
| | — |
| | 6,242 |
| | 6,242 |
|
Profit participation | — |
| | 2,538 |
| | — |
| | — |
| | — |
| | 2,538 |
|
Gain on sales of assets | — |
| | (1,115 | ) | | — |
| | — |
| | — |
| | (1,115 | ) |
Operating income (loss) | $ | 248 |
| | $ | (904 | ) | | $ | 3,839 |
| | $ | 2,152 |
| | $ | (6,539 | ) | | $ | (1,204 | ) |
Capital expenditures and purchases and development of real estate properties | $ | 7,974 |
| | $ | 4,779 |
| | $ | 258 |
| | $ | 63 |
| | $ | — |
| | $ | 13,074 |
|
| |
a. | Includes sales commissions and other revenues together with related expenses. |
| |
b. | Includes consolidated general and administrative expenses and eliminations of intersegment amounts. |
| |
c. | Includes $0.4 million of reductions to cost of sales associated with collection of prior-years' assessments of properties in Barton Creek. |
| |
9. | NEW ACCOUNTING STANDARDS |
Revenue Recognition. In May 2014, the Financial Accounting Standards Board (FASB) issued a new Accounting Standards Update (ASU) related to revenue recognition. Stratus adopted this standard effective January 1, 2018, under the modified retrospective approach applied to contracts that remain in force at the adoption date. The adoption of this standard did not result in any changes to Stratus' revenue recognition policies or processes (refer to Note 1 of Stratus' 2017 Form 10-K for disclosure of Stratus' revenue recognition policy) except as follows:
Revenue or gains on sales of real estate are recognized when control of the asset has been transferred to the buyer if collection of substantially all of the consideration to which Stratus will be entitled is probable and Stratus has satisfied all other performance obligations under the contract. Consideration is allocated among multiple performance obligations or distinct nonfinancial assets to be transferred to the buyer based on relative fair value.
Financial Instruments. In January 2016, FASB issued an ASU that amends the guidance on the classification and measurement of financial instruments. This ASU makes limited changes to prior guidance and amends certain disclosure requirements. Stratus adopted this ASU effective January 1, 2018, and the adoption did not have a material impact on its financial statements.
Leases. In February 2016, FASB issued an ASU that will require lessees to recognize most leases on the balance sheet. This ASU allows lessees to make an accounting policy election to not recognize a lease asset and liability for leases with a term of 12 months or less and do not have a purchase option that is expected to be exercised. For public entities, this ASU is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. In July 2018, FASB issued a practical expedient allowing for entities to apply the provisions of the updated lease guidance at the January 1, 2019, effective date, without adjusting the comparative periods presented. Stratus continues to review the impact of the new guidance on its financial reporting and disclosures, including the impact of the College Station ground lease.
Statement of Cash Flows: Restricted Cash. In November 2016, FASB issued an ASU that changes the classification and presentation of restricted cash and restricted cash equivalents on the statement of cash flows. The ASU
requires that a statement of cash flows include the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. Stratus adopted this ASU effective January 1, 2018, and adjusted its consolidated statement of cash flows for the six months ended June 30, 2017, to include restricted cash (Stratus has no restricted cash equivalents) with cash and cash equivalents.
The impact of adopting this ASU for the six months ended June 30, 2017, follows (in millions): |
| | | | | | | | | | | | |
| | Previously Reported | | Impact of Adoption | | Current Presentation |
Net increase (decrease) in cash, cash equivalents and restricted cash | | $ | 1,208 |
| | $ | (1,295 | ) | | $ | (87 | ) |
Cash, cash equivalents and restricted cash at beginning of year | | 13,597 |
| | 11,892 |
| | 25,489 |
|
Cash, cash equivalents and restricted cash at end of period | | $ | 14,805 |
| | $ | 10,597 |
| | $ | 25,402 |
|
| | | | | | |
10. SUBSEQUENT EVENTS
On July 11, 2018, Stratus' Compensation Committee (the Committee) of the Board unanimously adopted the Stratus Profit Participation Incentive Plan to enable Stratus to attract and retain highly qualified employees who will contribute to Stratus’ long-term success by providing award opportunities that align the interests of Stratus’ executives, other employees and consultants designated by the Committee with those of Stratus’ stockholders.
On August 6, 2018, Stratus purchased a 54-acre tract of land in Kingwood, Texas to be developed as Kingwood Place. See Note 3 for further discussion.
Stratus evaluated events after June 30, 2018, and through the date the financial statements were issued, and determined any events or transactions occurring during this period that would require recognition or disclosure are appropriately addressed in these financial statements.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
OVERVIEW
In Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A), “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, related MD&A and discussion of our business and properties included in our Annual Report on Form 10-K for the year ended December 31, 2017 (2017 Form 10-K) filed with the United States (U.S.) Securities and Exchange Commission (SEC). The results of operations reported and summarized below are not necessarily indicative of future operating results, and future results could differ materially from those anticipated in forward-looking statements (refer to “Cautionary Statement” for further discussion). All subsequent references to “Notes” refer to Notes to Consolidated Financial Statements (Unaudited) located in Part I, Item 1. “Financial Statements” of this Form 10-Q, unless otherwise stated.
We are a diversified real estate company engaged primarily in the acquisition, entitlement, development, management, operation and sale of commercial, hotel, entertainment, and multi-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 8 for further discussion of our operating segments.
Developed property sales can include an individual tract of land that has been developed and permitted for residential use, a developed lot with a home already built on it or condominium units at the W Austin 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 plan. See "Business Strategy" below.
Our acreage under development and undeveloped as of June 30, 2018, 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 |
| | 41 |
| | — |
| | 45 |
| | 512 |
| | 266 |
| | 394 |
| | 1,172 |
| | 1,217 |
|
Circle C | | — |
| | 15 |
| | — |
| | 15 |
| | — |
| | 21 |
| | 216 |
| | 237 |
| | 252 |
|
Lantana | | — |
| | — |
| | 6 |
| | 6 |
| | — |
| | — |
| | 39 |
| | 39 |
| | 45 |
|
Other | | — |
| | — |
| | — |
| | — |
| | 7 |
| | — |
| | — |
| | 7 |
| | 7 |
|
Lakeway | | — |
| | — |
| | — |
| | — |
| | 35 |
| | — |
| | — |
| | 35 |
| | 35 |
|
Magnolia | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 124 |
| | 124 |
| | 124 |
|
Jones Crossing | | — |
| | — |
| | 16 |
| | 16 |
| | — |
| | — |
| | 48 |
| | 48 |
| | 64 |
|
Camino Real, San Antonio | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2 |
| | 2 |
| | 2 |
|
Total | | 4 |
| | 56 |
| | 22 |
| | 82 |
| | 554 |
| | 287 |
| | 823 |
| | 1,664 |
| | 1,746 |
|
In second-quarter 2018, our revenues totaled $23.3 million and our net loss attributable to common stockholders totaled $0.9 million, compared with revenues of $21.4 million and a net loss attributable to common stockholders of $0.9 million for second-quarter 2017. During the first six months of 2018, our revenues totaled $41.1 million and our net loss attributable to common stockholders totaled $2.7 million, compared with revenues of $42.1 million and a net loss attributable to common stockholders of $3.6 million for the first six months of 2017.
The increase in revenues in second-quarter 2018, compared with second-quarter 2017, primarily reflects higher developed property sales. The decrease in revenues for the first six months of 2018, compared with the first six months of 2017, primarily reflects lower revenues from the Entertainment and Hotel segments, partly offset by higher revenues from developed property sales.
The net loss attributable to common stockholders for the first six months of 2017 includes a $2.5 million charge ($1.6 million to net loss attributable to common stockholders) for profit participation costs and a $0.5 million loss ($0.3 million to net loss attributable to common stockholders) on early extinguishment of debt, both related to our
sale of The Oaks at Lakeway, partly offset by a $1.1 million gain ($0.7 million to net loss attributable to common stockholders) on the sale of a bank building and an adjacent undeveloped 4.1 acre tract of land at Barton Creek.
At June 30, 2018, we had total debt of $265.9 million and total cash and cash equivalents of $12.7 million, compared with total debt of $221.5 million and cash and cash equivalents of $14.6 million at December 31, 2017. We have significant recurring costs, including property taxes, maintenance and marketing, and we believe we will have sufficient sources of debt financing and cash from operations to meet our cash requirements. See “Capital Resources and Liquidity” below and “Risk Factors” included in Part 1, Item 1A. of our 2017 Form 10-K for further discussion.
BUSINESS STRATEGY
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 projects. Our portfolio consists of approximately 1,700 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”.
DEVELOPMENT ACTIVITIES
Residential. As of June 30, 2018, the number of our multi-family and single-family residential developed lots/units, lots under development and lots for potential development by area are shown below:
|
| | | | | | | | | | | | |
| | Residential Lots/Units |
| | Developed | | Under Development | | Potential Developmenta | | Total |
Barton Creek: | | | | | | | | |
Amarra Drive: | | | | | | | | |
Phase II | | 11 |
| | — |
| | — |
| | 11 |
|
Phase III | | 34 |
| | 4 |
| | — |
| | 38 |
|
Amarra Villas | | 3 |
| | 14 |
| | — |
| | 17 |
|
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 Saint Mary | | — |
| | 240 |
| | — |
| | 240 |
|
Tract 102 | | — |
| | — |
| | 56 |
| | 56 |
|
Lakeway | | — |
| | — |
| | 100 |
| | 100 |
|
Other | | — |
| | — |
| | 7 |
| | 7 |
|
W Austin Residences | | 1 |
| | — |
| | — |
| | 1 |
|
Total Residential Lots/Units | | 285 |
| | 470 |
| | 1,901 |
| | 2,656 |
|
| |
a. | Our development of the properties identified under the heading “Potential Development” is dependent upon the approval of our development plans and permits by governmental agencies, including the City of Austin (the City) and other cities in our Texas markets. 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.
Current Activities.
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 these lots ratably before March 1, 2019. If the purchaser fails to close on 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. During second-quarter 2018, we closed on the sale of three Amarra Drive Phase III lots, two Amarra Villas townhomes and one W Austin Hotel Residence for a total of $6.9 million. During the first six months of 2018, we sold one Amarra Drive Phase II lot, four Amarra Drive Phase III lots, two Amarra Villas townhomes and one W Austin Hotel Residence for a total of $8.0 million. In July 2018, we closed on the sale of one Amarra Drive Phase III lot for $0.7 million and as of July 31, 2018, three Amarra Drive Phase III lots were under contract, in addition to the nine lots subject to the contract discussed above. As of July 31, 2018, two Amarra Villas townhomes were under contract, including one currently under construction, and are expected to close later this year.
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 is advancing on schedule. We expect the first units to be available for occupancy in August 2018 and to substantially complete construction by year-end 2018.
In June 2018, we obtained project financing for, and commenced construction of The Saint Mary, a 240-unit luxury garden-style apartment project in the Circle C Community. Refer to Notes 3 and 6 for further discussion.
We are actively marketing the sale of the 22,366 square-foot retail complex in Barton Creek Village and intend to sell this retail complex by the end of the year, subject to market conditions.
For further discussion of our multi-family and single-family residential properties listed in the table above, see MD&A in our 2017 Form 10-K.
Commercial. As of June 30, 2018, the number of square feet of our commercial property developed, under development and our remaining entitlements for potential development (excluding property associated with our unconsolidated joint venture with Tramell Crow Central Texas Development, Inc. relating to Crestview Station in Austin, and the W Austin Hotel and ACL Live entertainment venue) are shown below:
|
| | | | | | | | | | | |
| Commercial Property |
| Developed | | Under Development | | Potential Developmenta | | Total |
| (in square feet) |
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 | 64,232 |
| | 35,147 |
| | 220,621 |
| | 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 | 44,493 |
| | — |
| | — |
| | 44,493 |
|
Jones Crossing | 48,117 |
| | 106,000 |
| | 104,750 |
| | 258,867 |
|
Total Square Feet | 235,851 |
| | 141,147 |
| | 3,099,394 |
| | 3,476,392 |
|
| |
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 and other cities in our Texas markets. 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.
Current Activities.
We have executed leases for approximately 70 percent of the space at West Killeen Market as of June 30, 2018, and leasing activities for the vacant space is ongoing. We intend to explore opportunities to sell West Killeen Market later this year depending on leasing progress and market conditions.
Construction of the retail component of Jones Crossing, an H-E-B, L.P., (HEB)-anchored, mixed-use development in College Station, Texas, is nearing completion. We have signed leases for approximately 80 percent of the retail space, including the HEB lease. One retail lease commenced at the end of June 2018, and two additional leases commenced in July 2018. The HEB grocery store is currently expected to open in September 2018.
Construction of phase one at Lantana Place, a mixed-use development in southwest Austin consisting of approximately 320,000 square feet of retail, hotel and office space is nearing completion. The anchor tenant, Moviehouse & Eatery, opened in May 2018, and construction of the remainder of the 99,379 square-foot first phase of the project is expected to be completed during third-quarter 2018. We also entered into a ground lease for a Marriott A/C Hotel, which is anticipated to commence construction in early 2019. We have signed leases for approximately 25 percent of the in-line retail space as of June 30, 2018, and leasing activities are ongoing.
On August 6, 2018, we purchased a 54-acre tract of land in Kingwood, Texas to be developed as Kingwood Place, a new mixed-use development project. The Kingwood project is expected to total approximately 144,000 square feet of retail lease space, anchored by a 103,000-square-foot HEB grocery store, 41,000 square feet of retail space, six retail pads and an 11-acre parcel planned for approximately 300 multi-family units. Subject to obtaining building permits and construction financing, we expect to break ground on the project in November 2018 to meet HEB's current projected store opening. Refer to Note 3 for further discussion.
For further discussion of our commercial properties listed in the table above, see MD&A in our 2017 Form 10-K.
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 and in our 2017 Form 10-K, 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 results (in thousands): |
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Operating income (loss): | | | | | | | |
Real estate operations | $ | 1,363 |
| | $ | 104 |
| | $ | 938 |
| | $ | 248 |
|
Leasing operations | 487 |
| | 484 |
| | 919 |
| | (904 | ) |
Hotel | 1,565 |
| | 1,602 |
| | 3,026 |
| | 3,839 |
|
Entertainment | 499 |
| | 1,091 |
| | 1,234 |
| | 2,152 |
|
Corporate, eliminations and other | (3,140 | ) | | (2,986 | ) | | (6,246 | ) | | (6,539 | ) |
Operating income (loss) | $ | 774 |
| | $ | 295 |
| | $ | (129 | ) | | $ | (1,204 | ) |
Interest expense, net | $ | (1,742 | ) | | $ | (1,508 | ) | | $ | (3,301 | ) | | $ | (3,483 | ) |
Net loss attributable to common stockholders | $ | (857 | ) | | $ | (893 | ) | | $ | (2,727 | ) | | $ | (3,563 | ) |
We have four operating segments: Real Estate Operations, Leasing Operations, Hotel and Entertainment (see Note 8). The following is a discussion of our operating results by segment:
Real Estate Operations
The following table summarizes our Real Estate Operations results (in thousands): |
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Revenues: | | | | | | | |
Developed property sales | $ | 6,856 |
| | $ | 3,443 |
| | $ | 8,011 |
| | $ | 5,576 |
|
Undeveloped property sales | — |
| | 544 |
| | — |
| | 544 |
|
Commissions and other | 131 |
| | 42 |
| | 178 |
| | 86 |
|
Total revenues | 6,987 |
| | 4,029 |
| | 8,189 |
| | 6,206 |
|
Cost of sales, including depreciation | 5,624 |
| a | 3,925 |
| | 7,251 |
| a | 5,958 |
|
Operating income | $ | 1,363 |
| | $ | 104 |
| | $ | 938 |
| | $ | 248 |
|
| | | | | | | |
| |
a. | Includes $0.4 million of reductions to cost of sales associated with collection of prior-years' assessments of properties in Barton Creek. |
Developed Property Sales. The following table summarizes our developed property sales (dollars in thousands): |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
| Three Months Ended June 30, |
| 2018 | | 2017 |
| Lots/Units | | Revenues | | Average Cost Per Lot/Unit | | Lots | | Revenues | | Average Cost Per Lot |
Barton Creek | | | | | | | | | | | |
Amarra Drive: | | | | | | | | | | | |
Phase III | 3 |
| | $ | 1,895 |
| | $ | 272 |
| | 1 |
| | $ | 700 |
| | $ | 303 |
|
Amarra Villas | 2 |
| | 3,821 |
| | 1,670 |
| | 1 |
| | 2,193 |
| | 2,004 |
|
| | | | | | | | | | | |
Circle C | | | | | | | | | | | |
Meridian | — |
| | — |
| | — |
| | 2 |
| | 550 |
| | 156 |
|
| | | | | | | | | | | |
W Austin Hotel & Residences Project | | | | | | | | | | | |
Condominium Units | 1 |
| | 1,140 |
| | 726 |
| | — |
| | — |
| | — |
|
Total Residential | 6 |
| | $ | 6,856 |
| | | | 4 |
| | $ | 3,443 |
| | |
| | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, |
| 2018 | | 2017 |
| Lots | | Revenues | | Average Cost Per Lot | | Lots | | Revenues | | Average Cost Per Lot |
Barton Creek | | | | | | | | | | | |
Amarra Drive: | | | | | | | | | | | |
Phase II | 1 |
| | $ | 605 |
| | $ | 209 |
| | — |
| | $ | — |
| | $ | — |
|
Phase III | 4 |
| | 2,445 |
| | 263 |
| | 2 |
| | 1,365 |
| | 292 |
|
Amarra Villas | 2 |
| | 3,821 |
| | 1,670 |
| | 1 |
| | 2,193 |
| | 2,004 |
|
| | | | | | | | | | | |
Circle C | | | | | | | | | | | |
Meridian | — |
| | — |
| | — |
| | 7 |
| | 2,018 |
| | 161 |
|
W Austin Hotel & Residences Project | | | | | | | | | | | |
Condominium Units | 1 |
| | 1,140 |
| | 726 |
| | — |
| | — |
| | — |
|
Total Residential | 8 |
| | $ | 8,011 |
| | | | 10 |
| | $ | 5,576 |
| | |
| | | | | |