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18: R6 General Information (Unaudited) HTML 19K
19: R7 Earnings Per Share (Unaudited) HTML 40K
20: R8 Related Party Transaction HTML 43K
21: R9 Dispositions HTML 19K
22: R10 Fair Value Measurements (Unaudited) HTML 39K
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
þ Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). þ Yes ¨ No
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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.
Large accelerated filer ¨
Accelerated filer þ
Non-accelerated
filer ¨
Smaller reporting company þ
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
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.01 per share
STRS
The
NASDAQ Stock Market
On April 30, 2019, there were issued and outstanding 8,176,685 shares of the registrant’s common stock, par value $0.01 per share.
Debt
issuance cost amortization and stock-based compensation
i296
i412
Equity
in unconsolidated affiliates' loss
i—
i3
Increase
in deposits
i108
i205
Deferred
income taxes
i291
(i504
)
Purchases
and development of real estate properties
(i3,298
)
(i3,612
)
Municipal
utility district reimbursements applied to real estate under development
i920
i—
Increase
in other assets
(i928
)
(i822
)
Decrease
in accounts payable, accrued liabilities and other
(i83
)
(i4,963
)
Net
cash provided by (used in) operating activities
i691
(i8,984
)
Cash
flow from investing activities:
Capital expenditures
(i29,443
)
(i24,376
)
Proceeds
from sale of assets
i3,170
i—
Payments
on master lease obligations
(i306
)
(i388
)
Purchase
of noncontrolling interest in consolidated subsidiary
(i4,589
)
i—
Other,
net
i—
(i30
)
Net
cash used in investing activities
(i31,168
)
(i24,794
)
Cash
flow from financing activities:
Borrowings from credit facility
i12,086
i16,300
Payments
on credit facility
(i12,911
)
(i1,075
)
Borrowings
from project loans
i30,744
i13,164
Payments
on project and term loans
(i4,006
)
(i563
)
Cash
dividend paid for stock-based awards
(i17
)
i—
Stock-based
awards net payments
(i100
)
(i203
)
Financing
costs
(i209
)
i—
Net
cash provided by financing activities
i25,587
i27,623
Net
decrease in cash, cash equivalents and restricted cash
(i4,890
)
(i6,155
)
Cash,
cash equivalents and restricted cash at beginning of year
i38,919
i39,390
Cash,
cash equivalents and restricted cash at end of period
$
i34,029
$
i33,235
The
accompanying Notes to Consolidated Financial Statements (Unaudited), which include information regarding noncash transactions, are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1.
iGENERAL
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, 2018, included in Stratus Properties Inc.’s (Stratus) Annual Report on Form 10-K (Stratus 2018 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. Operating results for the three-month period ended March 31, 2019, are not necessarily indicative of the results that may be expected for the year ending December 31,
2019.
2.
iEARNINGS PER SHARE
Stratus’ basic net income (loss) per share of common stock was calculated by dividing the net income (loss) attributable
to common stockholders by the weighted-average shares of common stock outstanding during the period. iA reconciliation of net income (loss) and weighted-average shares of common stock outstanding for purposes of calculating diluted net income (loss) per share (in thousands, except per share amounts) follows:
Net income (loss) and total comprehensive income (loss) attributable to common stockholders
$
i862
$
(i1,870
)
Basic
weighted-average shares of common stock outstanding
i8,167
i8,137
Add
shares issuable upon exercise or vesting of dilutive stock options and restricted stock units (RSUs)a
i46
i—
Diluted
weighted-average shares of common stock outstanding
i8,213
i8,137
Basic
net income (loss) per share attributable to common stockholders
$
i0.11
$
(i0.23
)
Diluted
net income (loss) per share attributable to common stockholders
$
i0.10
$
(i0.23
)
a.
Excludes
i31 thousand shares of common stock for first-quarter 2019 and i107
thousand shares for first-quarter 2018 associated with RSUs and outstanding stock options that were anti-dilutive.
3.
iRELATED
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 i240-unit
luxury, garden-style apartment project in the Circle C community in Austin, Texas. The financing transactions included (1) a $i26 million construction loan with Texas Capital Bank, National Association and (2) an $i8.0
million private placement. As one of the participants in the private placement offering, LCHM Holdings, LLC (LCHM), a related party as a result of its greater than 5 percent beneficial ownership of Stratus’ common stock, purchased limited partnership interests representing a i6.1 percent
equity interest in The Saint Mary, L.P. Refer to Note 2 of the Stratus 2018 Form 10-K for further discussion.
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 $i10.7 million
private placement, approximately $i7 million of which, combined with a $i6.75
million loan from Comerica Bank, was used to purchase a i54-acre tract of land located in Kingwood, Texas for $i13.5
million, for the development of Kingwood Place, a new H-E-B, L.P. (HEB)-anchored mixed-use development project (Kingwood Place). As one of the participants in the private placement offering, LCHM purchased limited partnership interests initially representing an i8.8 percent equity interest in the Kingwood, L.P. Refer to Note 2 of
the Stratus 2018 Form 10-K for further discussion.
Stratus performed evaluations and concluded that The Saint Mary, L.P. and the Kingwood, L.P. are variable interest entities and that Stratus is the primary beneficiary. iStratus
will continue to evaluate which entity is the primary beneficiary of The Saint Mary, L.P. and the Kingwood, L.P. in accordance with applicable accounting guidance. Stratus’ consolidated balance sheets include the following combined assets and liabilities of The Saint Mary, L.P. and the Kingwood, L.P. (in thousands):
Stratus has an arrangement with Austin Retail Partners for services provided by a consultant of Austin Retail Partners who is the son of Stratus' President and Chief Executive Officer. Payments to Austin Retail Partners for his general consulting services related to the entitlement and development of properties provided by the consultant and expense reimbursements during first-quarter2019 approximated $i27
thousand. Refer to Note 2 of the Stratus 2018 Form 10-K for further discussion.
4.
iDISPOSITIONS
Circle
C. On January 17, 2019, Stratus sold a retail pad subject to a ground lease located in the Circle C community for $i3.2 million. Stratus recorded a gain of $i2.1
million and used proceeds from the sale to repay $i2.5 million of its Comerica Bank credit facility borrowings.
5.
iFAIR
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.
iA
summary of the carrying amount and fair value of Stratus' other financial instruments follows (in thousands):
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 income (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. The interest rate swap agreement with Comerica Bank was entered into in 2013, is effective through December 31, 2020, and has a fixed interest rate of i2.3 percent
compared to the variable rate based on the one-month London Interbank Offered Rate (LIBOR). As of March 31, 2019, the agreement had a notional amount of $i15.6 million, which amortizes to $i14.8
million by the end of the agreement, and as of December 31, 2018, the agreement had a notional amount of $i15.8 million.
6.
iDEBT
iThe
components of Stratus' debt are as follows (in thousands):
Includes
net reductions for unamortized debt issuance costs of $i3.4 million at March 31, 2019, and $i2.8
million at December 31, 2018.
On January 17, 2019, Stratus repaid $i2.5 million
of the Comerica Bank credit facility with proceeds from the sale of a retail pad subject to a ground lease (see Note 4). As of March 31, 2019, Stratus had $i8.4 millionavailable under its $i60.0
million Comerica Bank revolving line of credit, with $i2.2 million of letters of credit committed against the credit facility.
On March 19, 2019, two Stratus subsidiaries
entered into a loan agreement with Comerica Bank to modify, increase and extend Stratus' Amarra Villas credit facility, which was scheduled to mature on July 12, 2019. The new loan agreement provides for an increase in the revolving credit facility commitment from $i8.0 million to $i15.0
million and an extension of the maturity date to March 19, 2022. Interest on the loan is variable at LIBOR plus i3.0 percent. The Amarra Villas credit facility is guaranteed by Stratus and contains financial covenants usual and customary for loan agreements of this nature, including a requirement
that Stratus maintain a net asset value, as defined in the agreement, of $i125 million and a debt-to-gross asset value of less than i50
percent. As of March 31, 2019, Stratus had $i8.4 million available under its $i15.0
million Amarra Villas revolving credit facility. As a result of entering into this new loan agreement, Stratus recognized a loss on early extinguishment of debt of $i16 thousand in first-quarter 2019.
On March 8, 2019, a Stratus subsidiary entered into a $i5.0
million land loan with Texas Capital Bank. Proceeds from the loan were used to fund the acquisition of HEB's portion of the New Caney partnership in which Stratus and HEB purchased a tract of land for the future development of an HEB-anchored mixed-use project in New Caney, Texas. The loan matures on March 8, 2021, and may be extended for 12 months, subject to certain conditions. The loan bears interest at LIBOR plus i3.0
percent. Borrowings are secured by the New Caney land. The loan agreement contains customary financial covenants including a requirement that Stratus maintain a net asset value of $i125 million.
For a description of Stratus' other debt, refer to Note 5 in the Stratus 2018
Form 10-K.
Interest Expense and Capitalization. Interest costs (before capitalized interest) totaled $i4.6 million in first-quarter2019and$i3.4
million in first-quarter2018. Stratus' capitalized interest costs totaled $i2.1 million in first-quarter2019 and $i1.8
million in first-quarter2018, primarily related to development activities at Barton Creek.
In July 2018, the Stratus Compensation Committee of the Board of Directors (the Committee) unanimously adopted the Stratus Profit Participation Incentive Plan (the Plan), which provides participants with economic incentives tied to the success of the development projects designated by the Committee as approved projects under the Plan. Refer to Note 7 of the Stratus 2018 Form 10-K for further discussion.
As of March 31, 2019, there were no significant changes to the Plan, the fair value of the awards or the assumptions used to determine the fair values of the awards at December 31, 2018. Estimates related to the awards may change over time
due to differences between projected and actual development progress and costs, market conditions and the timing of capital transactions or valuation events.
For the three months ended March 31, 2019, Stratus accrued $i0.2
million to project development costs and $i0.3 million in general and administrative expense related to the Plan. The accrued liability for the Plan totaled $i1.3
million at March 31, 2019, and $i0.8 million at December 31, 2018 (included in other liabilities). As of March 31, 2019, ino
amounts had been paid to participants under the Plan.
8.
iINCOME TAXES
Stratus’ accounting policy for and other information regarding its income taxes is further described
in Notes 1 and 6 in the Stratus 2018 Form 10-K.
Stratus had deferred tax assets (net of deferred tax liabilities) totaling $i11.5 million at March 31, 2019, and $i11.8
million at December 31, 2018. 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 first-quarter 2019 and first-quarter 2018, and the U.S. Federal statutory income tax rate of i21
percent, was primarily attributable to the Texas state margin tax and permanent differences.
9.
iBUSINESS SEGMENTS
Stratus currently
has ifour operating segments: Real Estate Operations, Leasing Operations, Hotel and Entertainment.
The Real Estate Operations segment is comprised of Stratus’ real estate assets (developed for sale, under development and available for development), which consists of its properties in Austin, Texas (the Barton Creek community; the Circle C community, including The Saint Mary; the Lantana community, including a portion of Lantana Place still under development
and vacant pad sites; and one condominium unit at the W Austin Hotel & Residences); in Lakeway, Texas, located in the greater Austin area (Lakeway); in College Station, Texas (a portion of Jones Crossing still under development and vacant pad sites); in Killeen, Texas (vacant pad sites at West Killeen Market); and in Magnolia, Texas (Magnolia), Kingwood, Texas (Kingwood Place) and New Caney, Texas (New Caney), located in the greater Houston area.
The Leasing Operations segment includes the office and retail space at the W Austin Hotel & Residences, Barton Creek Village, Santal Phase I and Phase II, West Killeen Market in Killeen, Texas, and completed 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 3TEN ACL Live, both located at the W Austin Hotel & Residences. In addition to hosting concerts and private events, ACL Live is the home of Austin City Limits, the longest running music series in American television history.
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.
Total
Revenues from Contracts with Unaffiliated Customers
$
i19,698
$
i17,765
Financial
Information by Business Segment. iThe following segment information was prepared on the same basis as Stratus’ consolidated financial statements (in thousands).
Includes
sales commissions and other revenues together with related expenses.
b.
Includes consolidated general and administrative expenses and eliminations of intersegment amounts.
c.
Stratus received $i4.6
million of bond proceeds related to MUD reimbursements of infrastructure costs incurred for development of Barton Creek. Of the total amount, Stratus recorded $i0.9 million as a reduction of real estate under
development
on the consolidated balance sheets, and $i3.4 million as a reduction in real estate cost of sales and $i0.3
million in other income, net in the consolidated statements of comprehensive income (loss). Refer to Note 1 of the Stratus 2018 Form 10-K for further discussion of Stratus' accounting policy for MUD reimbursements.
d.
Includes $i2.1
million associated with the sale of a retail pad subject to a ground lease located in the Circle C community.
10.
iNEW
ACCOUNTING STANDARDS
Leases. Effective January 1, 2019, Stratus adopted an Accounting Standards Update (ASU) that requires lessees to recognize most leases on the balance sheet. Stratus elected the practical expedients allowing it to (i) apply the provisions of the updated lease guidance at the effective date, without adjusting the comparative periods presented, and (ii) not reassess lease contracts, lease classification and initial direct costs of leases existing at adoption. Stratus also elected an accounting policy to not recognize a lease asset and liability for leases with a term of 12 months or less and a purchase option that is not expected to be exercised.
Stratus'
most significant lease is a i99-year ground lease for approximately i72
acres of land in College Station, Texas on which it is developing the Jones Crossing project. Stratus also leases various types of assets, including office space, vehicles and office equipment under non-cancelable leases. All of Stratus' leases are considered operating leases under the new ASU. Adoption of this ASU resulted in the recognition of lease right-of-use assets of $i11.9 million and lease liabilities of $i12.0
million as of January 1, 2019.
Operating lease costs were $i0.3 million in first-quarter 2019. Total lease costs were $i0.4
million in first-quarter 2018.
During first-quarter 2019, Stratus paid $i52 thousand for lease liabilities recorded in the consolidated balance sheet (included in operating cash
flows in the consolidated statements of cash flows). As of March 31, 2019, the weighted-average discount rate used to determine the lease liabilities was i6.0 percent and the weighted-average remaining lease term was i94.0
years.
iThe future minimum payments for leases recorded on the consolidated balance sheet at March 31, 2019, follow (in thousands):
Remaining
nine months of 2019
$
i173
2020
i199
2021
i145
2022
i434
2023
i497
Thereafter
i110,548
Total
payments
i111,996
Present value adjustment
(i99,738
)
Present
value of net minimum lease payments
$
i12,258
The adoption of this ASU did not materially impact Stratus' accounting for contracts in which it is the lessor. Refer to Note
8 of the Stratus 2018 Form 10-K for further disclosure of minimum rental income under non-cancelable long-term leases as of December 31, 2018.
11. iSUBSEQUENT EVENTS
Stratus evaluated events after March 31, 2019, 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.
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, 2018 (2018 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 with headquarters in Austin, Texas. We are engaged primarily in the acquisition, entitlement, development, management, operation and sale of commercial, and multi-family and single-family residential real estate properties, real estate leasing, and the operation of hotel and entertainment businesses located in the Austin, Texas area, and other select, fast-growing markets in Texas. We generate revenues and cash flows from the sale of our developed properties, rental income from our leased properties and from our hotel and entertainment operations. See Note 9 for further discussion of our operating segments.
BUSINESS
STRATEGY
Our development portfolio consists of approximately 1,800 acres of commercial, multi-family and single-family residential projects under development or undeveloped and held for future use. Our W Austin Hotel and our ACL Live and 3TEN ACL Live entertainment venues are located in downtown Austin and are central to the city's world renowned, vibrant music scene.
Our primary business objective is to create value for stockholders by methodically developing and enhancing the value of our properties and then selling them profitably. Our development program of acquiring properties, securing and maintaining development entitlements, constructing and stabilizing the properties, and then preparing them for sale or refinancing is a key element of our strategy. We currently have projects
in each of these stages as described below in “Development Activities - Current Residential Activities” and “Development Activities - Current Commercial Activities.”
We believe that Austin and other select, fast-growing markets in Texas 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 properties, which are located in desirable areas with significant regulatory constraints, are entitled and 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
capital, which we may pursue through joint ventures or other arrangements. Our business strategy requires us to rely on cash flow from operations and debt financing as our primary sources of funding for our liquidity needs. We have also, from time to time, relied on project-level equity financing of our subsidiaries. We have formed strategic relationships as part of our overall strategy for particular development projects and may enter into other similar arrangements in the future.
OVERVIEW
Our developed property sales can include an individual tract of land that has been developed and permitted for residential use, a developed lot with a residence already built on it or condominium units at the
W Austin Residences. We may also 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.
In
first-quarter 2019, our revenues totaled $19.7 million and our net income attributable to common stockholders totaled $0.9 million, compared with revenues of $17.8 million and a net loss attributable to common stockholders of $1.9 million for first-quarter 2018. The increase in revenues in first-quarter 2019, compared with first-quarter 2018, primarily reflects higher revenues from single-family residential property sales and increased revenues associated with execution of new leases for recently completed properties, partly offset by reduced hotel group business and entertainment event attendance.
We received $4.6 million of bond proceeds in first-quarter 2019 related to Travis County municipal utility district (MUD) reimbursements of infrastructure costs incurred for development of Barton Creek. Of the total amount, we recorded $0.9 million as a reduction of real estate under development on the consolidated balance sheets, and $3.4 million as a reduction in real estate cost of sales and $0.3 million in other income, net in the consolidated statements of comprehensive income (loss). First-quarter 2019 also included a gain on the sale of assets totaling $2.1
million related to the sale of a retail pad subject to a ground lease located in the Circle C community.
At March 31, 2019, we had total debt of $320.9 million and consolidated cash of $19.0 million. 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 2018 Form 10-K for further discussion.
DEVELOPMENT ACTIVITIES
Current
Residential Activities.
We sold 2 Amarra Drive Phase III lots for $1.1 million in first-quarter 2019 under the contract discussed below, and as of March 31, 2019, 28 developed Amarra Drive Phase III lots and 9 developed Amarra Drive Phase II lots remained unsold.
In March 2019, we amended a contract previously entered into in March 2018, pursuant to which we agreed to sell 2 Amarra
Drive Phase II lots and 12 Amarra Drive Phase III lots to a homebuilder for a total of $9.5 million. In accordance with the amended contract, the parties are required to close on the sale of these lots ratably by March 31, 2020. 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 first-quarter 2019, in accordance with the contract, we sold two Amarra Drive Phase III lots for $1.1
million as discussed above.
Subsequent to March 31, 2019, and through May 9, 2019, we sold two Amarra Drive Phase III lots for $1.0 million, one of which was subject to the contract discussed above. As of May 3, 2019, one Amarra Drive Phase III lot was under contract, in addition to the remaining seven Amarra Drive Phase III lots subject to the contract discussed above.
The
Villas at Amarra Drive (Amarra Villas) townhome project is a 20-unit development for which we completed site work in late 2015. Construction of the first five townhomes was completed during 2017 and an additional two townhomes were completed in 2018. We sold one townhome for $1.7 million in first-quarter 2019, and subsequent to March 31, 2019, and through May 9, 2019, we closed on the sale of the last completed townhome for $1.8 million. We expect to begin construction of the next five Amarra Villas townhomes in mid-2019.
As of March 31,
2019, Santal Phase I, a garden-style, multi-family project located in the upscale Barton Creek Community, was fully leased and stabilized. The first Santal Phase II units, located directly adjacent to the Phase I units, became available for occupancy in August 2018 and we completed construction of the remaining units during first-quarter 2019. As of March 31, 2019, 78 percent of the Phase II units were leased. We are actively exploring options to sell or refinance the combined 448-unit Santal property.
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. The project is progressing ahead of schedule
and on budget. The first units are scheduled to be delivered by the end of May 2019 and project completion is expected in fourth-quarter 2019.
For further discussion of our multi-family and single-family residential properties, see MD&A in our 2018 Form 10-K.
Construction of Kingwood Place, an H-E-B, L.P. (HEB)-anchored, mixed-use development in Kingwood, Texas, is progressing on schedule and on budget. As of March 31, 2019, we had signed leases for 79 percent of the retail space, including the HEB grocery store. The HEB grocery store is currently anticipated to open in November 2019, and the first retail buildings are expected to be turned over to tenants to begin construction of their interior spaces in August
2019. See Note 3 for further discussion of project financing.
In March 2019, we finalized the lease for the HEB store at New Caney, an HEB-anchored, mixed-use development in New Caney, Texas, and acquired HEB's interests in the partnership for approximately $5 million. We currently do not anticipate commencing construction on the New Caney project prior to 2021. See Note 6 for further discussion of the land loan.
We currently plan to begin construction of the Magnolia project, an HEB-anchored retail project planned for 351,000 square feet of commercial space, in fourth-quarter 2019. The HEB grocery store is currently anticipated to open in October 2020.
Construction
of the first phase of Lantana Place, a mixed-use real-estate project located in southwest Austin was completed in 2018. As of March 31, 2019, we had signed leases for 78 percent of the retail space, including the anchor tenant, Moviehouse & Eatery, and a ground lease for an AC Hotel by Marriott. Construction of the hotel is currently anticipated to begin in May 2019.
As of March 31, 2019, we had signed leases for 89 percent of the retail space at the first phase of Jones Crossing, an HEB-anchored, mixed-use development located in College Station, Texas, and 68 percent of the retail space at West Killeen Market, an HEB-anchored retail project located in Killeen, Texas.
For further discussion
of our commercial properties, see MD&A in our 2018 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 2018 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):
Net income (loss) attributable to common stockholders
$
862
$
(1,870
)
We
have four operating segments: Real Estate Operations, Leasing Operations, Hotel and Entertainment (see Note 9). The following is a discussion of our operating results by segment.
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 MUD reimbursements. Cost of sales totaled $0.1 million for first-quarter2019, compared with $1.6 million for first-quarter2018. The decrease in cost of sales in first-quarter2019, compared with first-quarter2018, primarily reflects $3.4 million in MUD reimbursements recorded as a reduction in real estate cost of sales as the
reimbursed property had previously been sold. The decrease is partially offset by higher costs associated with the sale of one Amarra Villas townhome, which has a higher cost basis than the other properties sold.
Leasing Operations
The following table summarizes our Leasing Operations results (in thousands):
Rental
Revenue. Rental revenue primarily includes revenue from Santal Phase I and Phase II, the office and retail space at the W Austin Hotel & Residences, West Killeen Market, Lantana Place, Jones Crossing and Barton Creek Village. The increase in rental revenue in first-quarter2019, compared with first-quarter2018, primarily reflects the commencement of new leases at our recently completed properties, Lantana Place, Jones Crossing and Santal Phase II.
Rental Cost of Sales and Depreciation. Rental cost of sales and depreciation expense increased in first-quarter2019,
compared with first-quarter2018, primarily as a result of the activity at Santal Phase I and Phase II, Lantana Place and Jones Crossing.
Gain on Sale of Assets. On January 17, 2019, Stratus sold a retail pad subject to a ground lease located in the Circle C community for $3.2 million. Stratus recorded a gain of $2.1 million and used proceeds from the sale to repay $2.5 million of its Comerica Bank credit facility borrowings.
Hotel Revenue. Hotel revenue primarily includes revenue from W Austin Hotel room reservations and food and beverage sales. Hotel revenues decreased in first-quarter 2019, compared with first-quarter 2018, primarily as a result of reduced group business and lower food and beverage sales. Revenue per available room
(RevPAR), which is calculated by dividing total room revenue by the average total rooms available, was $238 for first-quarter 2019, compared with $262 for first-quarter 2018. While we remain positive on the long-term outlook of the W Austin Hotel based on continued population growth and increased tourism in the Austin market, a continued increase in competition resulting from the anticipated opening of additional hotel rooms in downtown Austin during the remainder of 2019 and 2020 may have an ongoing impact on our hotel revenues.
Entertainment
The following table summarizes our Entertainment results (in thousands):
Entertainment
cost of sales, excluding depreciation
3,607
4,136
Depreciation
394
388
Operating income
$
824
$
735
Entertainment
Revenue. Entertainment revenue primarily reflects the results of operations for ACL Live, including ticket sales, revenue from private events, sponsorships, personal seat license and suite sales, and sales of concessions and merchandise. Entertainment revenue also reflects revenues associated with events hosted at 3TEN ACL Live. Revenues from the Entertainment segment vary from period to period as a result of factors such as the price of tickets and number of tickets sold, as well as the number and type of events hosted at ACL Live and 3TEN ACL Live. Entertainment revenue decreased in first-quarter2019, compared with first-quarter2018, primarily as a result of lower event attendance at our ACL Live venue.
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.
Entertainment
Cost of Sales. Entertainment cost of sales, excluding depreciation, totaled $3.6 million for first-quarter2019, compared with $4.1 million for first-quarter2018, primarily reflecting lower performer guarantees as a result of lower ticket prices.
Corporate, Eliminations and Other
Corporate, eliminations and other (see Note 9) includes consolidated general and administrative expenses, which primarily consist of employee salaries and other costs. Consolidated general and administrative expenses totaled $3.2 million
for first-quarter2019, compared with $3.0 million for first-quarter 2018. 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) of $4.6 million for first-quarter 2019 were higher, compared with $3.4 million for first-quarter 2018, primarily reflecting higher average debt to finance development activities in first-quarter
2019.
Capitalized interest totaled $2.1 millionfor first-quarter 2019, compared with$1.8 million for first-quarter 2018, and is primarily related to development activities at Barton Creek.
(Provision for) Benefit from Income Taxes. We recorded a (provision for) benefit from income taxes of $(0.4) million for first-quarter 2019, compared with $0.4 million for first-quarter 2018. The difference between Stratus'
consolidated effective income tax rate and the U.S. Federal statutory income tax rate of 21 percent was primarily attributable to the Texas state margin tax and permanent differences.
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 nature and location of our assets will provide us positive cash flows over time.
Comparison of Cash Flows for the Three Months EndedMarch 31, 2019 and 2018
Operating Activities. Cash
provided by (used in) operating activities totaled $0.7 million for first-quarter 2019, compared with $(9.0) million for first-quarter 2018. Expenditures for purchases and development of real estate properties totaled $3.3 million for first-quarter 2019 and $3.6 million for first-quarter 2018, primarily related to development of our Barton Creek properties. During first-quarter 2019, our operating cash flows included MUD
reimbursements totaling $4.6 million related to infrastructure costs incurred in Barton Creek (of which $0.9 million was recorded as a reduction of purchases and development of real estate properties).
Investing Activities. Cash used in investing activities totaled $31.2 million for first-quarter 2019 and $24.8 million for first-quarter 2018. Capital expenditures totaled $29.4 million for first-quarter 2019, primarily related to development of The Saint Mary, Kingwood Place and Santal Phase II projects,
and $24.4 millionfor first-quarter 2018, primarily related to development of Lantana Place, Jones Crossing and Barton Creek properties, which include Santal Phase II.
We also made payments totaling $0.3 million in first-quarter 2019 and $0.4 million in first-quarter 2018 under our master lease obligations associated with the 2017 sale of The Oaks at Lakeway.
We recorded a purchase of noncontrolling interest totaling $4.6 million in first-quarter 2019 as a result of our acquisition of HEB's interests
in the New Caney partnership in which we and HEB purchased a tract of land for the future development of an HEB-anchored mixed-use project in New Caney, Texas.
Financing Activities. Cash provided by financing activities totaled $25.6 million for first-quarter 2019 and $27.6 million for first-quarter 2018. During first-quarter 2019, net repayments on the Comerica Bank credit facility totaled $0.8 million, compared with net borrowings of $15.2 million for first-quarter 2018. Net borrowings for first-quarter 2019
and first-quarter 2018 were used primarily to fund development projects and capital expenditures. Net borrowings on other project and term loans totaled $26.7 million for first-quarter 2019, primarily for Jones Crossing, Amarra Villas, The Saint Mary and New Caney, compared with net borrowings of $12.6 million for first-quarter 2018, primarily for Lantana Place and Jones Crossing. See “Credit Facility and Other Financing Arrangements” below for a discussion of our outstanding debt at March 31, 2019.
Credit Facility and Other Financing Arrangements
At March 31,
2019, the total principal amount of our outstanding debt was $324.3 million, compared with $298.4 million at December 31, 2018. We had borrowings of $49.4 million under the $60.0 million Comerica Bank credit facility, which is comprised of a $60.0 million revolving line of credit, $8.4 million of which was available at March 31, 2019, net of $2.2 million of letters of credit committed against the credit facility.
See
Note 5 in our 2018 Form 10-K for further discussion of our outstanding debt.
Several of our financing instruments contain customary financial covenants. The West Killeen Market construction loan includes a requirement that we maintain a minimum total stockholders’ equity balance of $110.0 million. As of March 31, 2019, Stratus' total stockholders' equity was $124.9 million. The Comerica credit facility, the Goldman Sachs loan, the Lantana Place construction loan, the Jones Crossing construction loan, The Saint Mary construction loan, the Santal Phase I and Phase II construction loans, the Amarra Villas credit facility, the Kingwood Place loan and the New Caney land loan include a requirement that we maintain a net asset value, as defined in
the agreements, of $125 million. The Comerica credit facility, the Santal Phase I and Phase II construction loans, the Amarra Villas credit facility and the Kingwood Place construction loan also include a requirement that we maintain a promissory note debt-to-gross asset value, as defined in the agreement, of less than 50 percent. In addition, our Comerica Bank credit facility and the Amarra Villas credit facility require Comerica's prior written consent for any common stock repurchases in excess of $1.0 million in aggregate or dividend payments. Our Barton Creek Village term loan includes a requirement that Stratus' subsidiary maintain a minimum debt service coverage ratio, as defined in the agreement, of 1.35 to 1.00. As of December 31, 2018, and March 31, 2019, the subsidiary's
minimum debt service coverage ratio calculated in accordance with the Barton Creek Village term loan agreement was not in compliance with this requirement. PlainsCapital Bank waived the subsidiary's obligation to comply with the minimum debt service coverage ratio from December 31, 2018, through September 30, 2019. As of March 31, 2019, Stratus was in compliance with all other financial covenants.
The
following table summarizes our debt maturities based on the principal amounts outstanding as of March 31, 2019 (in thousands):
2019
2020
2021
2022
2023
Thereafter
Total
Goldman
Sachs loan
$
1,639
$
2,313
$
2,470
$
2,613
$
2,765
$
131,871
$
143,671
Comerica
Bank credit facilitya
—
49,395
—
—
—
—
49,395
Santal
Phase I loanb
—
32,790
—
—
—
—
32,790
Santal
Phase II loanb
—
25,117
—
—
—
—
25,117
Lantana
Place construction loan
—
22
262
276
18,904
—
19,464
Jones
Crossing construction loan
—
—
169
242
18,794
—
19,205
West
Killeen Market construction loan
—
79
99
6,919
—
—
7,097
Kingwood
Place construction loanb
—
—
—
6,830
—
—
6,830
Amarra
Villas credit facility
—
—
—
6,585
—
—
6,585
The
Saint Mary construction loan
—
—
5,819
—
—
—
5,819
New
Caney land loanc
—
—
5,000
—
—
—
5,000
Barton
Creek Village term loan
77
106
112
117
121
2,766
3,299
Total
$
1,716
$
109,822
$
13,931
$
23,582
$
40,584
$
134,637
$
324,272
a.
See
Note 6 for further information regarding our Comerica Bank credit facility.
b.
We have the option to extend the maturity date for two additional twelve-month periods, subject to certain debt service coverage conditions.
c.
We have the option to extend the maturity date for one additional twelve-month period, subject to certain conditions.
CONTRACTUAL OBLIGATIONS
There
have been no material changes in our contractual obligations since December 31, 2018. Refer to Part II, Items 7. and 7A. in our 2018 Form 10-K, for further information regarding our contractual obligations.
NEW ACCOUNTING STANDARDS
Refer to Note 10 for discussion of a recently adopted accounting standards update.
OFF-BALANCE SHEET ARRANGEMENTS
There have been no material changes in our off-balance sheet arrangements since December 31, 2018. See Note 8 in our 2018 Form 10-K
for further information.
MD&A contains forward-looking statements in which we discuss factors we believe may affect our future performance. Forward-looking statements are all statements other than statements of historical fact, such as statements regarding projections or expectations related to the planning, financing, development, construction, completion and stabilization of our development projects, plans to sell or refinance properties (including, but not limited to, Amarra Drive lots, Amarra Villas townhomes, West Killeen
Market, the retail building at Barton Creek Village, The Saint Mary and Santal), operational and financial performance, expectations regarding future cash flows, MUD reimbursements for infrastructure costs, regulatory matters, leasing activities, estimated costs and timeframes for expenditures, financing plans, possible joint venture, partnership, strategic relationships or other relationships 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, other plans and objectives of management for future operations and development projects, future dividend payments and share repurchases. The words “anticipate,”“may,”“can,”“plan,”“believe,”“potential,”“estimate,”“expect,”“project,”"target,"“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 loan agreements with Comerica Bank, we are not permitted to pay dividends on common stock without Comerica Bank’s prior written consent. The declaration of dividends is at the discretion of our Board of Directors (Board), subject to restrictions under our loan agreements with Comerica Bank, 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.
We caution readers that forward-looking statements are not guarantees of future performance and actual results may differ materially from those anticipated, expected, 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, but are not limited to, our ability to refinance and service our debt, the availability and terms of financing for development projects and other corporate purposes, our ability to enter into and maintain joint venture, partnership, strategic relationships or other arrangements, our ability to effect our business strategy, including our ability to sell properties at prices our Board considers acceptable, our ability to obtain various entitlements and permits, a decrease in the demand for real estate in the Austin, Texas area and other select markets in Texas where we operate, changes in economic, market 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, challenges associated with booking events and selling tickets and event cancellations
at our entertainment venues, the termination of sales contracts or letters of intent because of, among other factors, the failure of one or more closing conditions or market changes, 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, the failure to attract customers or tenants for our developments or such customers' or tenants' failure to satisfy their purchase commitments or leasing obligations, increases in interest rates and the phase out of the London Interbank Offered Rate, declines in the market value of our assets, increases in operating costs, including real estate taxes and the cost of building materials and labor, changes in external perception of the
W Austin Hotel, changes in consumer preferences, industry risks, changes in laws, regulations or the regulatory environment affecting the development of real estate, opposition from special interest groups or local governments with respect to development projects, weather-related risks, loss of key personnel, cybersecurity incidents and other factors described in more detail under the heading “Risk Factors” in Part I, Item 1A. of our 2018 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item
4. Controls and Procedures.
(a) Evaluation of disclosure controls and procedures. Our Chief Executive Officer and Chief Financial Officer, with the participation of management, have evaluated the effectiveness of our “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this quarterly report on Form 10-Q. Based on this evaluation, they have concluded that our disclosure controls and procedures were effective as of March 31, 2019.
(b) Changes
in internal control over financial reporting. There was no change in our internal control over financial reporting that occurred during the quarter ended March 31, 2019, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
There
were no unregistered sales of equity securities during the three months ended March 31, 2019.
In November 2013, our Board of Directors approved an increase in our 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 in first-quarter2019. As of March 31, 2019, a total of 991,695 shares of our common stock remain available for repurchase under this program. The program does not have an expiration date.
Our Comerica Bank
credit facility and Amarra Villas credit facility require lender approval of common stock repurchases in excess of $1.0 million in the aggregate.
For a discussion of restrictions on our ability to pay dividends, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Capital Resources and Liquidity" in Part I, Item 2. of this quarterly report on Form 10-Q.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.