NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business and Principles of Consolidation.
Stratus Properties Inc. (Stratus), a Delaware corporation, is 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 primarily located in the Austin, Texas area, and other select markets in Texas. The real estate development and marketing operations of Stratus are conducted primarily through its wholly owned subsidiaries. Stratus consolidates its wholly owned subsidiaries, subsidiaries in which Stratus has a controlling interest and variable interest entities (VIEs) in which Stratus is deemed the primary beneficiary. All significant intercompany transactions have been eliminated in consolidation.
Concentration of Risks.
Stratus primarily conducts its operations in Austin, Texas. Consequently, any significant economic downturn in the Austin market could potentially have an effect on Stratus’ business, results of operations and financial condition.
Use of Estimates.
The preparation of Stratus’ financial statements in conformity with accounting principles generally accepted in the United States (U.S.) requires management to make estimates and assumptions that affect the amounts reported in these financial statements and accompanying notes. The more significant areas requiring the use of management estimates include the estimates of future cash flow from development and sale of real estate properties used in the assessment of impairments; profit recognition related to the sales of real estate; deferred taxes and related valuation allowances; income taxes; allocation of certain indirect costs; profit pools under the Profit Participation Plan; and asset lives for depreciation. Actual results could differ from those estimates.
Cash and cash equivalents.
All highly liquid investments with a maturity of three months or less when purchased are considered cash equivalents.
Real Estate and Leasing Assets.
Real estate held for sale is stated at the lower of cost or fair value less costs to sell. The cost of real estate held for sale includes acquisition, development, construction and carrying costs, and other related costs incurred through the development stage. Real estate under development and land available for development are stated at cost. Real estate held for investment, which includes the hotel and entertainment venues at the W Austin Hotel & Residences and Stratus’ Leasing Operations assets, is stated at cost, less accumulated depreciation. Stratus capitalizes interest on funds used in developing properties from the date of initiation of development activities through the date the property is substantially complete and ready for use, sale or lease. Common costs are allocated based on the relative fair value of individual land parcels. Certain carrying costs are capitalized for properties currently under active development. Stratus capitalizes improvements that increase the value of Leasing Operations properties and have useful lives greater than one year. Costs related to repairs and maintenance are charged to expense as incurred.
Stratus performs an impairment test when events or circumstances indicate that an asset’s carrying amount may not be recoverable. Events or circumstances that Stratus considers indicators of impairment include significant decreases in market values, adverse changes in regulatory requirements (including environmental laws), significant budget overruns for properties under development, and current period or projected operating cash flow losses from properties held for investment. Impairment tests for properties held for investment and properties under development involve the use of estimated future net undiscounted cash flows expected to be generated from the operation of the property and its eventual disposition. If projected undiscounted cash flow is less than the related carrying amount, then a reduction of the carrying amount of the long-lived asset to fair value is required. Generally, Stratus determines fair value using valuation techniques such as discounted expected future cash flows. Impairment tests for properties held for sale involve management estimates of fair value based on estimated market values for similar properties in similar locations and management estimates of costs to sell. If estimated fair value less costs to sell is less than the related carrying amount, then a reduction of the carrying amount of the asset to fair value less costs to sell is required.
Stratus recorded
no
impairment charges for the two years ended December 31,
2018
. Should market conditions deteriorate in the future or other events occur that indicate the carrying amount of Stratus’ real estate assets may not be recoverable, Stratus will reevaluate the expected cash flows from each property to determine whether any impairment exists.
Depreciation.
Properties associated with Leasing Operations are depreciated on a straight-line basis over their estimated lives of
30
to
40
years. The hotel and entertainment venue properties are depreciated on a straight-line basis over their estimated lives of
35
years. Furniture, fixtures and equipment are depreciated on a straight-line basis over a
3
to
15
-year period. Tenant improvements are depreciated over the related lease terms.
Accrued Property Taxes.
Stratus estimates its property taxes based on prior year property tax payments and other current events that may impact the amount. Upon receipt of the property tax bill, Stratus adjusts its accrued property tax balance at year-end to the actual amount of taxes due for such year. Accrued property taxes included in accrued liabilities totaled
$7.2 million
at
December 31, 2018
, and
$7.4 million
at
December 31, 2017
.
Revenue Recognition.
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. Consideration is reasonably determined and deemed likely of collection when Stratus has signed sales agreements and has determined that the buyer has demonstrated a commitment to pay. The buyer’s commitment to pay is supported by the level of its initial investment, Stratus’ assessment of the buyer’s credit standing and Stratus’ assessment of whether the buyer’s stake in the property is sufficient to motivate the buyer to honor its obligation to pay.
Stratus’ revenues from hotel operations are primarily derived from room reservations and food and beverage sales. Revenue is recognized when rooms are occupied and services have been rendered. Taxes collected from customers and submitted to taxing authorities are not recorded in revenue.
Stratus’ revenues from entertainment operations are primarily derived from ticket sales, revenue from private events, sponsorships, personal seat license sales and suite sales, and sales of concessions and merchandise. Revenues from ticket sales are recognized after the corresponding performance occurs. Revenues from sponsorships and other revenue not related to a single event are classified as deferred revenue and generally amortized over the operating season or term of the contract. Revenues from concessions and merchandise sales are recognized at the time of sale.
Stratus recognizes its rental income on a straight-line basis based on the terms of its signed leases with tenants. Recoveries from tenants for taxes, insurance and other commercial property operating expenses are recognized as revenues in the period the related costs are incurred. Stratus recognizes sales commissions and management and development fees when earned, as properties are sold or when the services are performed.
A summary of Stratus’ revenues follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2018
|
|
2017
|
|
Hotel
|
$
|
37,905
|
|
|
$
|
38,360
|
|
|
Entertainment
|
22,506
|
|
|
22,998
|
|
|
Developed property sales
|
16,509
|
|
|
10,286
|
|
|
Leasing Operations
|
10,389
|
|
|
7,981
|
|
|
Undeveloped property sales
|
—
|
|
|
544
|
|
|
Commissions and other
|
291
|
|
|
171
|
|
|
Total revenues
|
$
|
87,600
|
|
|
$
|
80,340
|
|
Cost of Sales.
Cost of sales includes the cost of real estate sold as well as costs directly attributable to the properties sold, properties held for sale, and land available for development, such as marketing, maintenance and property taxes. Cost of sales also includes operating costs and depreciation for properties held for investment and municipal utility district reimbursements. A summary of Stratus’ cost of sales follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2018
|
|
2017
|
|
Hotel
|
$
|
28,160
|
|
|
$
|
28,478
|
|
|
Entertainment
|
17,089
|
|
|
17,121
|
|
|
Depreciation
|
8,571
|
|
|
7,853
|
|
|
Leasing Operations
|
5,056
|
|
|
4,797
|
|
|
Project expenses and allocation of overhead costs (see below)
|
5,103
|
|
|
4,343
|
|
|
Cost of developed property sales
|
10,664
|
|
|
5,776
|
|
|
Other, net
|
(515
|
)
|
|
(93
|
)
|
|
Cost of undeveloped property sales
|
25
|
|
|
352
|
|
|
Total cost of sales
|
$
|
74,153
|
|
|
$
|
68,627
|
|
Allocation of Overhead Costs.
Stratus allocates a portion of its overhead costs to both capitalized real estate costs and cost of sales based on the percentage of time certain employees worked in the related areas (i.e. costs of construction and development activities are capitalized to real estate under development, and costs of project management, sales and marketing activities are charged to expense as cost of sales). Stratus capitalizes only direct and certain indirect project costs associated with the acquisition, development and construction of a real estate project. Indirect costs include allocated costs associated with certain pooled resources (such as office supplies, telephone and postage) which are used to support Stratus’ development projects, as well as general and administrative functions. Allocations of pooled resources are based only on those employees directly responsible for development (i.e., project managers and subordinates). Stratus charges to expense indirect costs that do not clearly relate to a real estate project, such as all salaries and costs related to its Chief Executive Officer and Chief Financial Officer.
Municipal Utility District Reimbursements.
Stratus capitalizes infrastructure costs and receives Barton Creek municipal utility district (MUD) reimbursements for certain infrastructure costs incurred in the Barton Creek area. MUD reimbursements received for infrastructure projects are recorded as a reduction of the related asset’s carrying amount or cost of sales if the property has been sold. Stratus has long-term agreements with seven independent MUDs in Barton Creek to build the MUDs’ utility systems and to be eligible for future reimbursements for the related costs.
In November 2017, the city of Magnolia and the state of Texas approved the creation of a MUD which will provide an opportunity for Stratus to recoup approximately $26 million over the life of the project for future road and utility infrastructure costs incurred in connection with its development of the Magnolia project, an H-E-B, L.P. (HEB)-anchored retail project.
The amount and timing of MUD reimbursements depends upon the respective MUD having a sufficient tax base within its district to issue bonds and obtain the necessary state approval for the sale of the bonds. Because the timing of the issuance and approval of the bonds is subject to considerable uncertainty, coupled with the fact that interest rates on such bonds cannot be fixed until they are approved, the amounts associated with MUD reimbursements are not known until approximately one month before the MUD reimbursements are received. To the extent the reimbursements are less than the costs capitalized, Stratus records a loss when such determination is made. MUD reimbursements represent the actual amounts received.
Advertising Costs.
Advertising costs are expensed as incurred and are included as a component of cost of sales. Advertising costs totaled
$0.9 million
in
2018
and
$1.0 million
in
2017
.
Income Taxes.
Stratus accounts for deferred income taxes under an asset and liability method, whereby deferred tax assets and liabilities are recognized based on the tax effects of temporary differences between the financial statements and the tax basis of assets and liabilities, as measured by currently enacted tax rates. The effect on deferred income tax assets and liabilities of a change in tax rates or laws is recognized in income or loss in the period in which such changes are enacted. Stratus periodically evaluates the need for a valuation allowance to reduce deferred tax assets to estimated recoverable amounts. Stratus establishes a valuation allowance to reduce its deferred tax assets and records a corresponding charge to earnings if it is determined, based on available
evidence at the time, that it is more likely than not that any portion of the deferred tax assets will not be realized. In evaluating the need for a valuation allowance, Stratus estimates future taxable income based on projections and ongoing tax strategies. This process involves significant management judgment about assumptions that are subject to change based on variances between projected and actual operating performance and changes in Stratus’ business environment or operating or financial plans. See Note
6
for further discussion.
Earnings Per Share.
Stratus’ basic net (loss) income per share of common stock was calculated by dividing the net (loss) income attributable to common stockholders by the weighted-average shares of common stock outstanding during the period. A reconciliation of net (loss) income and weighted-average shares of common stock outstanding for purposes of calculating diluted net (loss) income per share for the years ended December 31 follow (in thousands, except per share amounts) follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
|
Net (loss) income
|
$
|
(3,986
|
)
|
|
$
|
3,884
|
|
|
|
Net loss (income) attributable to noncontrolling interests in subsidiaries
|
4
|
|
|
(5
|
)
|
|
|
Net (loss) income attributable to Stratus common stockholders
|
$
|
(3,982
|
)
|
|
$
|
3,879
|
|
|
|
|
|
|
|
|
|
Basic weighted-average shares of common stock outstanding
|
8,153
|
|
|
8,122
|
|
|
|
|
|
|
|
|
|
Add shares issuable upon exercise or vesting of dilutive stock options and
restricted stock units (RSUs)
a
|
—
|
|
|
49
|
|
|
|
|
|
|
|
|
|
Diluted weighted-average shares of common stock outstanding
|
8,153
|
|
|
8,171
|
|
|
|
|
|
|
|
|
|
Basic net (loss) income per share attributable to common stockholders
|
$
|
(0.49
|
)
|
|
$
|
0.48
|
|
|
|
|
|
|
|
|
|
Diluted net (loss) income per share attributable to common stockholders
|
$
|
(0.49
|
)
|
|
$
|
0.47
|
|
|
|
|
|
|
a.
|
Excludes approximately
96 thousand
shares of common stock for
2018
and
26 thousand
shares of common stock for
2017
associated with RSU’s and outstanding stock options that were anti-dilutive.
|
Stock-Based Compensation.
Compensation costs for share-based payments to employees are measured at fair value and charged to expense over the requisite service period for awards that are expected to vest. The fair value of stock options is determined using the Black-Scholes-Merton option valuation model. The fair value of RSUs and performance based RSUs is based on Stratus’ stock price on the date of grant. Stratus estimates forfeitures at the time of grant and revises those estimates in subsequent periods if actual forfeitures differ from those estimates through the final vesting date of the awards. See Note
7
for further discussion.
Stratus grants awards that settle in either cash or RSUs to employees and nonemployees under a profit participation plan. As required for liability-based awards under Accounting Standards Codification 718, at the date of grant, Stratus estimates the fair value of each award and adjusts the fair value in each subsequent reporting period. The awards are amortized on a straight-line basis over the estimated service period. See Note
7
for further discussion.
New Accounting Standards.
Following is a discussion of new accounting standards.
Revenue Recognition.
In May 2014, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) related to revenue recognition. Stratus adopted this ASU 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 financial statement impacts. See Revenue Recognition policy in this note for Stratus’ policy.
Financial Instruments.
In January 2016, FASB issued an ASU that amends the current 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 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. Stratus adopted this ASU effective January 1, 2019, and elected the practical expedient allowing it to apply the provisions of the updated lease guidance at the January 1, 2019, effective date, without adjusting the comparative periods presented. 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
completed an assessment of its lease portfolio and designed processes and controls to account for its leases in accordance with the new standard. Upon the adoption of this ASU, Stratus will record right-of-use assets of approximately
$12 million
and corresponding lease liabilities in its consolidated balance sheet. Stratus will begin making the required lease disclosures under the ASU beginning with its March 31, 2019, quarterly report on Form 10-Q.
Statement of Cash Flows.
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 year ended December 31, 2017, to include restricted cash (Stratus has no restricted cash equivalents) with cash and cash equivalents.
The impact of adopting this ASU for the year ended December 31, 2017, follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Previously Reported
|
|
Impact of Adoption
|
|
Current Presentation
|
|
Net increase in cash, cash equivalents and restricted cash
|
|
$
|
1,014
|
|
|
$
|
12,887
|
|
|
$
|
13,901
|
|
|
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 year
|
|
$
|
14,611
|
|
|
$
|
24,779
|
|
|
$
|
39,390
|
|
|
|
|
|
|
|
|
|
Share-Based Payment Transactions.
In March 2016, the FASB issued an ASU that simplifies various aspects of the accounting for share-based payment transactions, including the income tax consequences, statutory tax withholding requirements, an accounting policy election for forfeitures and the classification on the statement of cash flows. Stratus adopted this ASU effective January 1, 2017, on a modified retrospective basis and recorded a cumulative effect adjustment of
$143 thousand
to its 2017 opening accumulated deficit balance.
NOTE 2.
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
5
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
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 (LCHM), a related party as a result of its greater than
5 percent
beneficial ownership of Stratus’ common stock, 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:
|
|
|
|
•
|
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 thousand
per year beginning one year after construction of The Saint Mary begins.
|
|
|
|
|
•
|
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.
|
|
|
|
|
•
|
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.
|
|
|
|
|
•
|
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
December 31, 2018
, Stratus’ consolidated balance sheet included the following assets and liabilities of The Saint Mary, L.P. (in thousands):
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
Cash and cash equivalents
|
|
$
|
32
|
|
|
Restricted cash
|
|
2,284
|
|
|
Real estate held under development
|
|
11,095
|
|
|
Other assets
|
|
742
|
|
|
Total assets
|
|
$
|
14,153
|
|
|
Liabilities:
|
|
|
|
Accounts payable
|
|
$
|
2,459
|
|
|
Accrued liabilities, including taxes
|
|
21
|
|
|
Total liabilities
|
|
2,480
|
|
|
Net assets
|
|
$
|
11,673
|
|
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
$13.5 million
, for the development of Kingwood Place, a new 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
$11 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 an
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:
|
|
|
|
•
|
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 thousand
per year beginning one year after construction of Kingwood Place begins.
|
|
|
|
|
•
|
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.
|
|
|
|
|
•
|
The partners are entitled to preferred returns, which change after certain returns are achieved as specified in the Kingwood Partnership Agreement.
|
On December 6, 2018, the Kingwood, L.P., entered into a construction loan agreement with Comerica Bank, which supersedes and replaces the land acquisition loan agreement discussed above and provides for a loan totaling approximately
$32.9 million
to finance nearly
70 percent
of the costs associated with construction of Kingwood Place (see Note
5
for further discussion). The remaining
30 percent
of the project’s cost (totaling approximately
$15 million
) is being funded by borrower equity, contributed by Stratus and private equity investors.
Stratus has performed evaluations and concluded that the Kingwood, 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 Kingwood, L.P. in accordance with applicable accounting guidance. As of
December 31, 2018
, Stratus’ consolidated balance sheet included the following assets and liabilities of the Kingwood, L.P. (in thousands):
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,907
|
|
|
Real estate held under development
|
|
16,833
|
|
|
Other assets
|
|
50
|
|
|
Total assets
|
|
$
|
18,790
|
|
|
Liabilities:
|
|
|
|
Accounts payable
|
|
$
|
992
|
|
|
Accrued liabilities, including taxes
|
|
12
|
|
|
Debt
|
|
6,125
|
|
|
Total liabilities
|
|
7,129
|
|
|
Net assets
|
|
$
|
11,661
|
|
Other Transactions
There are no transactions between Stratus and the immediate family of its related parties except for an arrangement between Stratus and Austin Retail Partners for services to be provided by the son of Stratus' Chief Executive Officer. Under the terms of the agreement dated September 1, 2018, Stratus pays Austin Retail Partners
$100 thousand
per year, discretionary annual bonuses, and reimbursement of costs for healthcare premiums and a real estate license for this individual’s services. Payments to Austin Retail Partners for his services and expense reimbursements during 2018 totaled approximately
$35 thousand
.
NOTE 3.
REAL ESTATE, NET
Stratus’ consolidated balance sheets include the following net real estate assets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2018
|
|
2017
|
|
|
Real estate held for sale:
|
|
|
|
|
|
Developed lots, townhomes and condominium units
|
$
|
16,396
|
|
|
$
|
22,612
|
|
|
|
|
|
|
|
|
|
Real estate under development:
|
|
|
|
|
|
Acreage, multi-family units, commercial square footage and townhomes
|
136,678
|
|
|
118,484
|
|
|
|
|
|
|
|
|
|
Land available for development:
|
|
|
|
|
|
Undeveloped acreage
|
24,054
|
|
|
14,804
|
|
|
|
|
|
|
|
|
|
Real estate held for investment:
|
|
|
|
|
|
Barton Creek Village
|
4,937
|
|
|
5,075
|
|
|
|
Santal Phase I
|
38,012
|
|
|
38,023
|
|
|
|
Santal Phase II
|
31,663
|
|
|
—
|
|
|
|
West Killeen Market
|
9,742
|
|
|
8,818
|
|
|
|
Lantana Place
|
25,648
|
|
|
—
|
|
|
|
Jones Crossing
|
13,098
|
|
|
—
|
|
|
|
Circle C
|
629
|
|
|
—
|
|
|
|
W Austin Hotel & Residences
|
|
|
|
|
|
Hotel
|
112,263
|
|
|
111,808
|
|
|
|
Entertainment venue
|
42,862
|
|
|
42,687
|
|
|
|
Office and retail
|
19,523
|
|
|
19,515
|
|
|
|
Furniture, fixtures and equipment
|
1,300
|
|
|
1,290
|
|
|
|
Total
|
299,677
|
|
|
227,216
|
|
|
|
Accumulated depreciation
|
(46,603
|
)
|
|
(38,826
|
)
|
|
|
Total real estate held for investment, net
|
253,074
|
|
|
188,390
|
|
|
|
Total real estate, net
|
$
|
430,202
|
|
|
$
|
344,290
|
|
|
Real estate held for sale.
Developed lots, Amarra Villas townhomes and condominium units include individual tracts of land that have been developed and permitted for residential use, developed lots with homes already built on them or condominium units at the W Austin Hotel & Residences. As of
December 31, 2018
, Stratus owned
38
developed lots,
2
townhomes in Amarra Villas and
1
condominium unit at the W Austin Hotel & Residences.
Real estate under development.
Acreage under development includes real estate for which infrastructure work over the entire property has been completed, is currently being completed or is able to be completed and for which necessary permits have been obtained. Real estate under development also includes commercial and residential properties under construction.
Land available for development.
Undeveloped acreage includes real estate that can be sold “as is” (i.e., planning, infrastructure or development work is not currently in progress on such property). Stratus’ undeveloped acreage as of
December 31, 2018
, included land permitted for residential and commercial development.
Real estate held for investment.
Following is a discussion of real estate held for investment as of December 31, 2018.
Barton Creek Village, a
22,366
-square-foot retail building, was
54 percent
leased, and leasing activities for the vacant space are ongoing. The Santal Phase I multi-family project, a garden-style apartment complex consisting of
236
units, was
95 percent
leased and stabilized, and the Santal Phase II multi-family project, a
212
-unit garden style, multi-family project, was
33 percent
leased. The West Killeen Market project includes
44,493
square feet of commercial space and 3 pad sites adjacent to a 90,000 square-foot HEB grocery store. Leases for
68 percent
of the space at West Killeen Market have been executed, all tenants are currently open for business and leasing activities for the vacant space are ongoing. The first 99,379-square-foot retail phase of the Lantana Place project has signed leases for
71 percent
of the retail space, and tenant improvement work is progressing. The first phase of the retail component of Jones Crossing, an HEB-anchored, mixed-use development in College Station, Texas, had signed leases for
87 percent
of the retail space, including the HEB lease.
The W Austin Hotel & Residences includes a
251
-room hotel,
38,316
square feet of leasable office space, including 9,000 square feet occupied by Stratus’ corporate office, and
18,327
square feet of retail space, including the 3TEN ACL Live venue, which has a capacity of approximately
350
people. Both the office and retail space were
substantially fully
occupied. The W Austin Hotel & Residences also includes entertainment space, occupied by ACL Live, an entertainment venue and production studio with a maximum capacity of
3,000
people.
Capitalized interest.
Stratus recorded capitalized interest of
$8.2 million
in
2018
and
$5.9 million
in
2017
.
NOTE 4. FAIR VALUE MEASUREMENTS
Fair value accounting guidance includes a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 inputs) and the lowest priority to unobservable inputs (Level 3 inputs).
The carrying value for certain Stratus financial instruments (i.e., cash and cash equivalents, restricted cash, accounts payable and accrued liabilities) 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
December 31, 2017
|
|
|
Carrying
Value
|
|
Fair
Value
|
|
Carrying
Value
|
|
Fair
Value
|
|
Assets:
|
|
|
|
|
|
|
|
|
Interest rate swap agreement
|
$
|
53
|
|
|
$
|
53
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Debt
|
$
|
295,531
|
|
|
$
|
299,615
|
|
|
$
|
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 instrument rate swap does not qualify for hedge accounting and changes in its fair value are recorded in the consolidated statements of comprehensive (loss) income. 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
2.3 percent
compared to the variable rate based on the one-month London Interbank Offered Rate (LIBOR). As of
December 31, 2018
, the agreement had a notional amount of
$15.8 million
which amortizes to
$14.8 million
by the end of the agreement.
NOTE 5.
DEBT
Stratus’ debt follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2018
|
|
2017
|
|
Goldman Sachs loan,
|
|
|
|
|
average interest rate of 5.58% in 2018 and 2017
|
$
|
143,250
|
|
|
$
|
145,195
|
|
|
Comerica Bank credit facility,
|
|
|
|
|
average interest rate of 6.02% in 2018 and 5.96% in 2017
|
50,221
|
|
|
25,765
|
|
|
Santal Phase I construction loan,
|
|
|
|
|
average interest rate of 4.70% in 2018 and 3.74% in 2017
|
32,622
|
|
|
31,864
|
|
|
Santal Phase II construction loan,
|
|
|
|
|
average interest rate of 5.18% in 2018
|
19,867
|
|
|
—
|
|
|
Lantana Place construction loan,
|
|
|
|
|
average interest rate of 4.85% in 2018
|
18,416
|
|
|
—
|
|
|
Jones Crossing construction loan
|
|
|
|
|
average interest rate of 5.29% in 2018 and 4.56% in 2017
|
11,784
|
|
|
4,646
|
|
|
West Killeen Market construction loan,
|
|
|
|
|
average interest rate of 4.76% in 2018 and 3.89% in 2017
|
6,636
|
|
|
5,378
|
|
|
Kingwood Place construction loan
|
|
|
|
|
average interest rate of 4.88% in 2018
|
6,125
|
|
|
—
|
|
|
Amarra Villas credit facility,
|
|
|
|
|
average interest rate of 4.92% in 2018 and 4.12% in 2017
|
3,326
|
|
|
5,247
|
|
|
Barton Creek Village term loan,
|
|
|
|
|
average interest rate of 4.19% in 2018 and 2017
|
3,284
|
|
|
3,375
|
|
|
Total debt
a
|
$
|
295,531
|
|
|
$
|
221,470
|
|
a. Includes net reductions for unamortized debt issuance costs of
$2.8 million
at
December 31, 2018
, and
$2.1 million
at
December 31, 2017
.
Goldman Sachs loan.
In
2016, Stratus completed the refinancing of the W Austin Hotel & Residences. Goldman Sachs Mortgage Company provided a
$150.0 million
, ten-year, non-recourse term loan (the Goldman Sachs loan) with a fixed interest rate of
5.58 percent
per annum and payable monthly based on a 30-year amortization. Stratus used the proceeds from the Goldman Sachs loan to fully repay its existing obligations under Stratus’ term loan with Bank of America, N.A. and the
$20.0 million
Comerica Bank term loan included as part of the Comerica Bank credit facility.
The obligations of Stratus Block 21, LLC (Block 21), a wholly-owned subsidiary of Stratus and borrower under the Goldman Sachs loan, are secured by all assets owned from time to time by Block 21. Additionally, certain obligations of Block 21 under the Goldman Sachs loan are guaranteed by Stratus, including environmental indemnification and other customary carve-out obligations. In connection with any acceleration of the Goldman Sachs loan, Block 21 must pay a yield maintenance premium in the amount of at least three percent of the amount of indebtedness prepaid. Prepayment of the Goldman Sachs loan is not permitted except for certain prepayments resulting from casualty or condemnation and in whole within 90 days of the maturity date.
Lakeway construction loan.
In 2014, a Stratus subsidiary entered into a
$62.9 million
construction loan agreement with PlainsCapital Bank (the Lakeway construction loan) to fund the construction, development and leasing of The Oaks at Lakeway in Lakeway, Texas. In February 2017, Stratus repaid the Lakeway construction loan with proceeds from the sale of The Oaks at Lakeway (see Note
10
). In connection with prepayment of the Lakeway construction loan, Stratus recorded a loss on early extinguishment of debt totaling
$0.5 million
in
2017
.
Comerica Bank credit facility.
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 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, as defined in the agreement, of $125 million and an aggregate promissory note debt-to-gross asset value of less than 50 percent.
As of
December 31, 2018
, Stratus had
$7.6 million
available under its
$60.0 million
Comerica Bank revolving line of credit, with
$2.2 million
of letters of credit committed against the credit facility.
Santal construction loans.
In
2015, a Stratus subsidiary entered into a
$34.1 million
construction loan with Comerica Bank (Santal Phase I construction loan) to fund the development and construction of Santal Phase I, a 236-unit, garden-style, multi-family development in Section N of Barton Creek, which was completed in August 2016. On September 11, 2017, the same Stratus subsidiary entered into an amended and restated construction loan agreement with Comerica Bank to increase the original commitment to
$59.2 million
, which includes
$32.8 million
for the Santal Phase I construction loan and
$26.4 million
to finance the construction of Santal Phase II, a 212-unit garden style, multi-family, development located adjacent to Santal Phase I (Santal Phase II construction loan). Both the Santal Phase I and the Santal Phase II construction loans have a maturity date of
September 11, 2020
. As of
December 31, 2018
,
$32.8 million
was drawn on the Santal Phase I construction loan and
$20.1 million
was drawn on the Santal Phase II construction loan. The interest rates applicable to the construction loans are LIBOR plus
2.5 percent
for Santal Phase I and LIBOR plus
3.0 percent
for Santal Phase II. Payments of interest only on each loan are due monthly. Outstanding amounts are secured by Santal Phase I and Phase II and all subsequent improvements, including all leases and rents associated with the developments as well as related permits and other entitlements. The loan agreements and related documents contain affirmative and negative covenants usual and customary for loan agreements of this nature. Stratus may extend the maturity of each loan for up to
two
additional
12
-month periods subject to satisfaction of certain conditions, including a
debt service coverage ratio of at least 1.10 to 1.00 on the date immediately preceding the commencement of the first extension period and 1.20 to 1.00 on the date immediately preceding the commencement of the second extension period. The Santal Phase I and Phase II construction loans contain a covenant requirement that Stratus maintain a minimum total stockholders’ equity balance of $110.0 million.
Lantana Place construction loan.
On April 28, 2017, a Stratus subsidiary entered into a
$26.3 million
construction loan with Southside Bank (the Lantana Place construction loan) to finance the initial phase of Lantana Place, a
320,000
-square-foot, mixed-use development project in southwest Austin, Texas. Construction of the
99,379
-square-foot first phase of Lantana Place was completed during third-quarter 2018 and leasing for the retail space is ongoing. As of
December 31, 2018
,
$18.7 million
was drawn on the Lantana Place construction loan. Interest is variable at one-month LIBOR plus
2.75 percent
, subject to a minimum interest rate of
3.0 percent
. Payments of interest only are due monthly, through November 1, 2020. The principal balance outstanding after November 1, 2020, will be payable in equal monthly installments of principal and interest based on a 30-year amortization. Outstanding amounts must be repaid in full on or before
April 28, 2023
, and can be prepaid without penalty. Outstanding amounts are secured by the Lantana Place project and all subsequent improvements, including all leases and rents associated with the development.
The loan agreement contains affirmative and negative covenants usual and customary for loan agreements of this nature, including but not limited to, a requirement that Stratus maintains a net asset value, as defined in the agreement, of $125 million and a financial covenant to maintain a debt service coverage ratio of at least 1.35 to 1.00 beginning on December 31, 2019. Stratus will guarantee outstanding amounts under the loan until the development is able to maintain a debt service ratio of 1.50 to 1.00 for a period of six consecutive months.
Jones Crossing construction loan.
On September 1, 2017, a Stratus subsidiary entered into a
$36.8 million
construction loan with Southside Bank (the Jones Crossing construction loan) to finance construction of Phases 1 and 2, the retail component, of Stratus’ Jones Crossing project, an HEB-anchored, mixed use development in College Station, Texas. Construction of the first phase of the retail component of Jones Crossing was completed during third-quarter 2018. The HEB store opened in September 2018, as scheduled. As of
December 31, 2018
,
$12.1 million
was drawn on the Jones Crossing construction loan. Interest is variable at one-month LIBOR plus
3.75 percent
, subject to a minimum interest rate of
4.0 percent
. Payments of interest only are due monthly through March 1, 2021. The principal balance of the loan outstanding after March 1, 2021, will be payable in equal monthly installments of principal and interest based on a 30-year amortization. Outstanding amounts must be repaid in full on or before
September 1, 2023
. The loan is secured by the Jones Crossing project and all subsequent improvements, including all leases and rents associated with the development as well as related permits and other entitlements.
The loan agreement contains affirmative and negative covenants usual and customary for loan agreements of this nature, including, but not limited to, a requirement that Stratus maintains a net asset value, as defined in the agreement, of $125 million and a financial covenant to maintain a debt service coverage ratio of at least 1.35 to 1.00 beginning on March 31, 2020. Outstanding amounts under the loan are guaranteed by Stratus until Phases 1 and 2 of the Jones Crossing development are completed and the development is able to maintain a debt service ratio of 1.50 to 1.00 as of the end of each fiscal quarter.
West Killeen Market construction loan.
In 2016, a Stratus subsidiary entered into a
$9.9 million
construction loan agreement with Southside Bank (the West Killeen Market loan) for the construction of the West Killeen Market project. Interest on the loan is variable at one-month LIBOR plus
2.75 percent
, with a minimum interest rate of
3.0 percent
. Payments of interest only are being made monthly during the initial
42
months of the
72
-month term, followed by
30
months of monthly principal and interest payments based on a 30-year amortization. Borrowings on the West Killeen Market loan are secured by assets at Stratus’ West Killeen Market retail project in Killeen, Texas, and are guaranteed by Stratus until construction is completed and certain customary debt service coverage ratios are met.
The loan agreement contains customary financial covenants including a requirement that Stratus maintain a minimum total stockholders’ equity balance of $110.0 million and a debt service coverage ratio of at least 1.35 to 1.00.
Kingwood Place construction loan.
On December 6, 2018, the Kingwood, L.P., entered into a construction loan agreement with Comerica Bank (the Kingwood Place construction loan), which superseded and replaced a land acquisition loan agreement obtained from Comerica Bank on August 6, 2018, and provides for a loan in the amount of approximately
$32.9 million
to finance nearly
70 percent
of the costs associated with construction of Kingwood Place. The total loan of
$32.9 million
includes the original commitment of
$6.75 million
used to purchase a
54
-acre tract of land located in Kingwood, Texas, and an additional
$26.1 million
for the future development of Kingwood Place. The remaining
30 percent
of the project’s cost (totaling approximately
$15 million
) is being funded by borrower equity, contributed by Stratus and private equity investors. 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 loan has a maturity date of
December 6, 2022
, with the possibility of
two
12
-month extensions if certain debt service coverage ratios are met. The loan bears interest at LIBOR plus
2.5 percent
. Borrowings on the Kingwood Place construction loan are secured by the Kingwood project, and are guaranteed by Stratus.
The loan agreement contains the same financial covenants in place on Stratus’ Comerica Bank Credit Facility, 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.
Amarra Villas credit facility.
In
2016, a Stratus subsidiary entered into the Amarra Villas credit facility. The Amarra Villas credit facility matures on
July 12, 2019
, and is secured by assets at Stratus’ Villas at Amarra Drive townhome project. Interest on the loan is variable at LIBOR plus
3.0 percent
. The Amarra Villas credit facility is guaranteed by Stratus and contains financial covenants including a requirement that Stratus maintain a minimum total stockholders’ equity balance of
$110.0 million
. Principal paydowns occur as townhomes are sold, and additional amounts are borrowed as additional townhomes are constructed.
Barton Creek Village term loan.
In 2014, a Stratus subsidiary entered into a
$6.0 million
term loan agreement with PlainsCapital Bank (the Barton Creek Village term loan), that matures on June 27, 2024. The interest rate is fixed at
4.19 percent
and payments of principal and interest are due monthly. The Barton Creek Village term loan is secured by assets at Stratus’ Barton Creek Village project. In February 2017, in connection with the sale of a portion of the property, Stratus prepaid
$2.1 million
of this loan.
The Barton Creek Village term loan includes a requirement that the subsidiary maintain a minimum debt service coverage ratio, as defined in the agreement, of 1.35 to 1.00.
As of December 31, 2018, the subsidiary's minimum debt service coverage ratio calculated in accordance with the Barton Creek Village term loan agreement was 1.29 to 1.00, and it 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.
The Saint Mary construction loan.
On June 19, 2018, Stratus entered into a
$26.0 million
construction loan with Texas Capital Bank (The Saint Mary construction loan) to finance the initial phase of The Saint Mary. Stratus will fully guarantee The Saint Mary construction loan.
The repayment guarantee 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 to 1.00.
Interest is variable at the one-month LIBOR plus
3.0 percent
. Payments of interest only will be due 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 loan agreement contains 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
December 31, 2018
,
no
amounts were drawn on The Saint Mary construction loan.
Maturities.
The following table summarizes Stratus’ debt maturities based on the principal amounts outstanding as of
December 31, 2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
Thereafter
|
|
Total
|
|
Goldman Sachs loan
|
$
|
2,207
|
|
|
$
|
2,313
|
|
|
$
|
2,470
|
|
|
$
|
2,613
|
|
|
$
|
2,765
|
|
|
$
|
131,871
|
|
|
$
|
144,239
|
|
|
Comerica Bank credit facility
|
—
|
|
|
50,221
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
50,221
|
|
|
Santal Phase I construction loan
a
|
—
|
|
|
32,790
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
32,790
|
|
|
Santal Phase II construction loan
a
|
—
|
|
|
20,119
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
20,119
|
|
|
Lantana Place construction loan
|
—
|
|
|
22
|
|
|
258
|
|
|
272
|
|
|
18,110
|
|
|
—
|
|
|
18,662
|
|
|
Jones Crossing construction loan
|
—
|
|
|
—
|
|
|
110
|
|
|
157
|
|
|
11,863
|
|
|
—
|
|
|
12,130
|
|
|
West Killeen Market construction loan
|
—
|
|
|
78
|
|
|
97
|
|
|
6,591
|
|
|
—
|
|
|
—
|
|
|
6,766
|
|
|
Kingwood Place construction loan
a
|
—
|
|
|
—
|
|
|
—
|
|
|
6,750
|
|
|
—
|
|
|
—
|
|
|
6,750
|
|
|
Amarra Villas credit facility
|
3,358
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,358
|
|
|
Barton Creek Village term loan
|
103
|
|
|
106
|
|
|
112
|
|
|
117
|
|
|
121
|
|
|
2,766
|
|
|
3,325
|
|
|
Total
|
$
|
5,668
|
|
|
$
|
105,649
|
|
|
$
|
3,047
|
|
|
$
|
16,500
|
|
|
$
|
32,859
|
|
|
$
|
134,637
|
|
|
$
|
298,360
|
|
|
|
|
|
a.
|
Stratus has the option to extend the maturity date for two additional 12-month periods, subject to certain debt service coverage conditions.
|
NOTE 6.
INCOME TAXES
Stratus’ benefit from (provision for) income taxes consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2018
|
|
2017
|
|
Current
|
$
|
(68
|
)
|
|
$
|
(7,998
|
)
|
|
Deferred
|
373
|
|
|
(5,906
|
)
|
|
Benefit from (provision for) income taxes
|
$
|
305
|
|
|
$
|
(13,904
|
)
|
The components of deferred income taxes follow (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2018
|
|
2017
|
|
Deferred tax assets and liabilities:
|
|
|
|
|
Real estate, commercial leasing assets and facilities
|
$
|
9,838
|
|
|
$
|
10,179
|
|
|
Employee benefit accruals
|
373
|
|
|
464
|
|
|
Accrued liabilities
|
58
|
|
|
53
|
|
|
Deferred income
|
21
|
|
|
81
|
|
|
Charitable contribution carryforward
|
78
|
|
|
—
|
|
|
Other assets
|
800
|
|
|
711
|
|
|
Net operating loss credit carryforwards
|
1,181
|
|
|
5
|
|
|
Other liabilities
|
(515
|
)
|
|
(32
|
)
|
|
Deferred tax assets, net
|
$
|
11,834
|
|
|
$
|
11,461
|
|
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 realization of the deferred tax assets recorded as of
December 31, 2018
, and
December 31, 2017
, is primarily dependent upon Stratus’ ability to generate future taxable income.
A reconciliation of the U.S. federal statutory tax rate to Stratus’ effective income tax rate for the years ended December 31 follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2018
|
|
2017
|
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Income tax benefit (expense) computed at the
|
|
|
|
|
|
|
|
|
federal statutory income tax rate
|
$
|
901
|
|
|
21
|
%
|
|
$
|
(6,220
|
)
|
|
(35
|
)%
|
|
Adjustments attributable to:
|
|
|
|
|
|
|
|
|
Change in statutory rate
|
19
|
|
|
—
|
|
|
(7,580
|
)
|
|
(42
|
)
|
|
Executive compensation limitation
|
(444
|
)
|
|
(10
|
)
|
|
—
|
|
|
—
|
|
|
State taxes and other, net
|
(171
|
)
|
|
(4
|
)
|
|
(104
|
)
|
|
(1
|
)
|
|
Benefit from (provision for) income taxes
|
$
|
305
|
|
|
7
|
%
|
|
$
|
(13,904
|
)
|
|
(78
|
)%
|
Stratus paid federal income taxes and state margin taxes totaling
$2.0 million
in
2018
and
$6.9 million
in
2017
. Stratus received income tax refunds of
$0.3 million
in
2018
and
$2.3 million
in
2017
.
Uncertain Tax Positions.
During the two years ended December 31,
2018
, Stratus recorded unrecognized tax benefits related to state margin tax filing positions and federal examinations. A summary of the changes in unrecognized tax benefits follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2018
|
|
2017
|
|
Balance at January 1
|
$
|
507
|
|
|
$
|
773
|
|
|
Additions for tax positions related to prior years
|
178
|
|
|
—
|
|
|
Subtractions for tax positions related to prior years
|
(371
|
)
|
|
(266
|
)
|
|
Balance at December 31
|
$
|
314
|
|
|
$
|
507
|
|
As of
December 31, 2018
, Stratus had
$0.3 million
of unrecognized tax benefits that if recognized would affect its annual effective tax rate. During 2019, approximately
$0.3 million
of unrecognized tax benefits could be recognized as a result of the expiration of statutes of limitations and completion of federal and state examinations.
Stratus records liabilities offsetting the tax provision benefits of uncertain tax positions to the extent it estimates that a tax position is more likely than not to not be sustained upon examination by the taxing authorities. Stratus has elected to classify any interest and penalties related to income taxes within income tax expense in its
consolidated statements of comprehensive (loss) income. As of
December 31, 2018
, less than $0.1 million of interest costs have been accrued.
Stratus files both U.S. federal income tax and state margin tax returns. With limited exceptions, Stratus is no longer subject to U.S. federal income tax examinations by tax authorities for the years prior to 2014, and state margin tax examinations for the years prior to 2013. Currently, Stratus is under examination by the Internal Revenue Service for tax years 2015 to 2017 and under examination by the Texas Comptroller for tax years 2014 to 2017.
Tax Reform.
The Tax Cuts and Jobs Act (the Act) enacted on December 22, 2017, included significant changes to the then-existing U.S. Internal Revenue Code of 1986, as amended (the Code). The Act reduced the corporate income tax rate to
21 percent
, eliminated the corporate alternative minimum tax, allowed for immediate expensing of capital investments, and limited the deduction of interest expense and executive compensation.
Reduction in Corporate Income Tax Rate.
The Act reduced the U.S. federal corporate income tax rate from 35 percent to 21 percent. While applicable for years after December 31, 2017, existing income tax accounting guidance requires the effects of changes in tax rates and laws on deferred tax balances to be recognized in the period in which the legislation is enacted. Stratus recognized this change in the federal statutory rate and recorded a tax benefit of approximately
$19 thousand
in fourth-quarter 2018 and a tax provision of
$7.6 million
in fourth-quarter 2017, to reflect the impact on its deferred tax assets.
Executive Compensation Limitation.
For tax years beginning after December 31, 2017, tax deductible compensation of covered employees is limited to
$1.0 million
. In addition, the definition of covered employees is revised to include the principal executive officer, the principal financial officer, and the three other highest paid officers. If an individual is a covered employee for a tax year beginning after December 31, 2016, the individual remains a covered employee for all future years. Under a transition rule, the changes do not apply to any remuneration under specified contracts in effect on November 2, 2017. During fourth-quarter 2018, Stratus recognized a
$0.2 million
tax charge related to the executive compensation limitation associated with the Act.
NOTE 7.
EQUITY TRANSACTIONS, STOCK-BASED COMPENSATION AND EMPLOYEE BENEFITS
Equity
Dividends.
Stratus’ Comerica Bank credit facility requires the bank’s prior written consent to pay a dividend on Stratus’ common stock. On March 15, 2017, the 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.
Share Purchase Program.
In November 2013, Stratus’ Board approved an increase in the open market share purchase program from
0.7 million
shares to
1.7 million
shares of Stratus common stock. The purchases may occur over time depending on many factors, including the market price of Stratus common stock; Stratus’ operating results, cash flow and financial position; and general economic and market conditions. There were
no
purchases under this program during
2018
or
2017
. As of
December 31, 2018
,
991,695
shares remained available under this program.
Stock-based Compensation
Stock Award Plans.
Stratus currently has four stock-based compensation plans, all of which have awards available for grant. In 2017, Stratus’ stockholders approved the 2017 Stock Incentive Plan, which provides for the issuance of stock-based compensation awards, including stock options and RSUs, relating to
180,000
shares of Stratus common stock. Stratus’ 2013 and 2010 Stock Incentive Plans provide for the issuance of stock-based compensation awards, including stock options and RSUs, relating to
180,000
shares and
140,000
shares, respectively, of Stratus common stock. The 2017, 2013 and 2010 plans permit awards to Stratus employees, non-employee directors and consultants. Stratus’ 1996 Stock Option plan for Non-Employee Directors provides for the issuance of stock options only to Stratus' non-employee directors. Stratus common stock issued upon option exercises or RSU vestings represents newly issued shares of common stock. Awards with respect to
180,000
shares under the 2017 Stock Incentive Plan,
2,200
shares under the 2013 Stock Incentive Plan,
4,375
shares under the 2010 Stock Incentive Plan and
2,500
shares under the 1996 Stock Option Plan for Non-Employee Directors were available for new grants as of
December 31, 2018
.
Stock-Based Compensation Costs.
Compensation costs charged against earnings for RSUs, the only awards granted over the last several years, totaled
$0.8 million
for each of
2018
and
2017
. Stock-based compensation costs are capitalized when appropriate. Stratus does not currently apply a forfeiture rate when estimating stock-based compensation costs for RSUs.
RSUs.
RSUs granted under the plans provide for the issuance of common stock to non-employee directors and certain officers of Stratus at no cost to the directors and officers. The RSUs are converted into shares of Stratus common stock ratably and generally vest in one-quarter increments over the
four
years following the grant date. For officers, the awards will fully vest upon retirement, death and disability, and upon a qualifying termination of employment in connection with a change of control. For directors, the awards will fully vest upon a change of control and there will be a partial acceleration of vesting because of retirement, death and disability.
During 2016, Stratus’ executive officers were granted performance-based RSUs with a three-year performance period. The final number of shares to be issued to the executive officers will be determined based on achievement of certain performance targets. The total grant date target shares related to the performance-based RSU grants was
21,000
, of which the executive officers can earn from
0 percent
to
100 percent
.
A summary of outstanding unvested RSUs, including performance-based RSUs, as of
December 31, 2018
, and activity during the year ended
December 31, 2018
, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
Number of
RSUs
|
|
Aggregate
Intrinsic
Value
($000)
|
|
Balance at January 1
|
99,200
|
|
|
|
|
Granted
|
23,600
|
|
|
|
|
Vested
|
(56,050
|
)
|
|
|
|
Balance at December 31
|
66,750
|
|
|
$
|
990
|
|
The total fair value of RSUs granted was
$0.7 million
for each of
2018
and
2017
. The total intrinsic value of RSUs vested was
$1.1 million
during
2018
and
$0.6 million
during
2017
. As of
December 31, 2018
, Stratus had
$1.3 million
of total unrecognized compensation cost related to unvested RSUs expected to be recognized over a weighted-average period of
1.3
years.
Stock Options.
Stock options granted under the plans generally expire
10
years after the date of grant and vest in 25 percent annual increments beginning
one
year from the date of grant. Stratus has not granted stock options since 2011. A summary of stock options outstanding as of
December 31, 2018
, and changes during the year ended
December 31, 2018
, follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Options
|
|
Weighted
Average
Option Price
|
|
Weighted
Average
Remaining
Contractual
Term (years)
|
|
Aggregate
Intrinsic
Value
($000)
|
|
Balance at January 1
|
12,500
|
|
|
$
|
16.64
|
|
|
|
|
|
|
Exercised
|
(2,500
|
)
|
|
29.03
|
|
|
|
|
|
|
Expired
|
(2,500
|
)
|
|
29.03
|
|
|
|
|
|
|
Balance at December 31
|
7,500
|
|
|
8.37
|
|
|
1.7
|
|
$
|
117
|
|
|
Vested and exercisable at December 31
|
7,500
|
|
|
8.37
|
|
|
1.7
|
|
$
|
117
|
|
The intrinsic value of options exercised totaled
$3 thousand
during
2018
and
$142 thousand
during
2017
.
The following table includes amounts related to vesting of RSUs and exercises of stock options (in thousands, except shares of Stratus common stock tendered):
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2018
|
|
2017
|
|
Stratus shares tendered to pay the exercise
|
|
|
|
|
price and/or the minimum required taxes
a
|
6,682
|
|
|
11,888
|
|
|
Cash received from stock option exercises
|
$
|
73
|
|
|
$
|
63
|
|
|
Amounts Stratus paid for employee taxes
|
$
|
204
|
|
|
$
|
297
|
|
|
|
|
|
a.
|
Under terms of the related plans and agreements, upon vesting of RSUs and exercise of stock options, employees may tender shares of Stratus common stock to Stratus to pay the exercise price and/or the minimum required taxes.
|
Employee Benefits
Stratus maintains 401(k) defined contribution plans subject to the provisions of the Employee Retirement Income Security Act of 1974 (ERISA). The 401(k) plans provide for an employer matching contribution equal to
100 percent
of the participant’s contribution, subject to a limit of
5 percent
of the participant’s annual salary. Stratus’ policy is to make an additional safe harbor contribution equal to
3 percent
of each participant’s total compensation. The 401(k) plans also provide for discretionary contributions. Stratus’ contributions to the 401(k) plans totaled
$0.6 million
in
2018
and
$0.5 million
in
2017
.
Profit Participation Plan.
On July 11, 2018, the Stratus Compensation Committee of the Board (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. Under the Plan,
25 percent
of the profit for each approved project following a capital transaction (each as defined in the Plan) will be set aside in a pool. The Committee will allocate participation interests in each pool to certain officers, employees and consultants determined to be instrumental in the success of the project. The profit is equal to the net proceeds to Stratus from a capital transaction after Stratus has received a return of its costs and expenses, any capital contributions and a preferred return of
10 percent
per year on the approved project. Provided the applicable service conditions are met, each participant is eligible to earn a bonus equal to his or her allocated participation interest in the applicable profit pool. Bonuses under the Plan are payable in cash prior to March 15th of the year following the capital transaction, unless the participant is an executive officer, in which case annual cash payouts under the Plan are limited to no more than four times the executive officer’s base salary, and any amounts due under the Plan in excess of that amount will be converted to an equivalent number of stock-settled restricted stock units with a
one
-year vesting period.
If a capital transaction has not occurred prior to the third anniversary of the date an approved project is substantially complete (a valuation event), the Committee will obtain a third-party appraisal of the approved project as of the valuation event. Based on the appraised value, the Committee will determine if any profit would have been generated after applying the hurdles described above, and if so, the amount of any bonus that would have been attributable to each participant. Any such amount will convert into an equivalent number of stock-settled restricted stock units that will vest in annual installments over a
three
-year period, provided that the participant satisfies the applicable service conditions.
On August 2, 2018, the Committee designated
seven
existing development projects as approved projects under the Plan, and allocated participation interests in profit pools of each approved project to certain officers, employees and consultants. Stratus determined that the fair value of the awards at
December 31, 2018
, was approximately
$8 million
of which approximately
$3 million
will be capitalized to the related projects and the balance will be charged to expense on a straight-line basis over the estimated service period.
Stratus estimated the profit pool of each approved project by projecting the cash flow from operations, the net sales price, the timing of a capital transaction or valuation event and Stratus' equity and preferred return including costs to complete for projects under development. The primary Level 3 fair value assumptions used at
December 31, 2018
, were projected cash flows, estimated capitalization rates ranging from
5.0 percent
to
7.1 percent
, projected service periods for each project ranging from
2.2
years to
4.6
years, and estimated transaction costs of approximately
1.4 percent
to
4.0 percent
.
For the period August 2, 2018, to December 31, 2018, Stratus accrued
$0.3 million
to project cost and
$0.5 million
in general and administrative expense related to the Plan. Estimates related to the Plan 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. As of
December 31, 2018
,
no
amounts had been paid to participants under the Plan.
NOTE 8.
COMMITMENTS AND CONTINGENCIES
Construction Contracts.
Stratus had commitments under noncancelable construction contracts totaling
$36.9 million
at
December 31, 2018
. These commitments primarily included contracts for construction of The Saint Mary, Kingwood Place and Santal Phase II projects.
Letters of Credit.
As of
December 31, 2018
, Stratus had letters of credit committed totaling
$2.2 million
under its credit facility with Comerica Bank (see Note
5
).
Jones Crossing Ground Lease.
In September 2017, a Stratus subsidiary entered into a 99-year ground lease for approximately 72 acres of land in College Station, Texas. Stratus began construction of the Jones Crossing Project in September 2017. The annual contractual payments under this noncancelable long-term operating lease total less than $0.1 million for 2021,
$0.4 million
for
2022
,
$0.5 million
for 2023 and
$110.5 million
thereafter.
Rental Income.
As of
December 31, 2018
, Stratus’ minimum rental income, including scheduled rent increases under noncancelable long-term leases which extend through
2039
, totaled
$5.7 million
in
2019
,
$5.8 million
in
2020
,
$5.8 million
in
2021
,
$5.6 million
in
2022
,
$5.4 million
in
2023
and
$46.6 million
thereafter.
Other Operating Leases.
As of
December 31, 2018
, Stratus’ minimum annual contractual payments under its noncancelable long-term operating leases excluding the Jones Crossing ground lease discussed above, totaled
$0.2 million
for
2019
,
$0.2 million
for
2020
and less than $0.1 million for both
2021
and 2022. Total expense under Stratus’ operating leases totaled
$0.2 million
for
2018
and
$0.1 million
for
2017
.
HEB Profit Participation.
HEB has profit participation rights in the Jones Crossing, Kingwood, Lakeway and New Caney projects. HEB is entitled to
10 percent
of any cash flow from operations or profit from the sale of these properties after Stratus receives a return of its equity plus a preferred return of
10 percent
. Stratus may enter into similar profit participation agreements for future projects.
New Caney Partnership.
In October 2018, Stratus, in partnership with HEB, purchased a tract of land for approximately
$9.5 million
in New Caney, Texas, for the future development of an HEB-anchored, mixed-use project. Stratus committed to acquiring HEB's interest in the partnership upon finalization of the lease for the HEB grocery store. In March 2019, the lease was executed and Stratus acquired HEB’s interests for approximately
$5 million
, which was funded with loan proceeds from Texas Capital Bank.
Circle C Settlement.
In 2002, the city of Austin (the City) granted final approval of a development agreement (the Circle C settlement) and permanent zoning for Stratus’ real estate located within the Circle C community in southwest Austin. The Circle C settlement firmly established all essential municipal development regulations applicable to Stratus’ Circle C properties until 2032. The City also provided Stratus
$15.0 million
of development fee credits, which are in the form of credit bank capacity, in connection with its future development of its Circle C and other Austin-area properties for waivers of fees and reimbursement for certain infrastructure costs. In addition, Stratus can elect to sell up to
$1.5 million
of the incentives per year to other developers for their use in paying City fees related to their projects as long as the projects are within the desired development zone, as defined within the Circle C settlement. To the extent Stratus sells the incentives to other developers, Stratus recognizes the income from the sale when title is transferred and compensation is received. As of
December 31, 2018
, Stratus had permanently used
$12.7 million
of its City-based development fee credits, including cumulative amounts sold to third parties totaling
$5.1 million
. Fee credits used for the development of Stratus’ properties effectively reduce the basis of the related properties and defer recognition of any gain associated with the use of the fees until the affected properties are sold. Stratus also had
$0.5 million
in credit bank capacity in use as temporary fiscal deposits as of
December 31, 2018
. Available credit bank capacity was
$2.7 million
at
December 31, 2018
.
Environmental Regulations.
Stratus has made, and will continue to make, expenditures for protection of the environment. Increasing emphasis on environmental matters can be expected to result in additional costs, which will be charged against Stratus’ operations in future periods. Present and future environmental laws and regulations applicable to Stratus’ operations may require substantial capital expenditures that could adversely affect the development of its real estate interests or may affect its operations in other ways that cannot be accurately predicted at this time.
Litigation.
Stratus may from time to time be involved in various legal proceedings of a character normally incident to the ordinary course of its business. Stratus believes that potential liability from any of these pending or threatened proceedings will not have a material adverse effect on Stratus’ financial condition or results of operations.
NOTE 9.
BUSINESS SEGMENTS
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 for sale, under development and available for development), which include its properties in Austin, Texas (the Barton Creek community, including a portion of Santal Phase II still under development; the Circle C community, including The Saint Mary; the Lantana community, including a portion of Lantana Place still under development; 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 in Magnolia, Texas (Magnolia), Kingwood, Texas (Kingwood Place) and New Caney, Texas, 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, West Killeen Market in Killeen, Texas, and completed portions of the Santal Phase II, 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.
Revenues From Contracts with Customers.
Stratus’ revenues from contracts with customers for the years ended December 31, follow (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2018
|
|
2017
|
|
Real Estate Operations:
|
|
|
|
|
Developed property sales
|
$
|
16,509
|
|
|
$
|
10,286
|
|
|
Undeveloped property sales
|
—
|
|
|
544
|
|
|
Commissions and other
|
291
|
|
|
171
|
|
|
|
16,800
|
|
|
11,001
|
|
|
Leasing Operations:
|
|
|
|
|
Rental revenue
|
10,389
|
|
|
7,981
|
|
|
|
10,389
|
|
|
7,981
|
|
|
Hotel:
|
|
|
|
|
Rooms, food and beverage
|
35,357
|
|
|
35,910
|
|
|
Other
|
2,548
|
|
|
2,450
|
|
|
|
37,905
|
|
|
38,360
|
|
|
Entertainment:
|
|
|
|
|
Event revenue
|
19,844
|
|
|
20,358
|
|
|
Other
|
2,662
|
|
|
2,640
|
|
|
|
22,506
|
|
|
22,998
|
|
|
|
|
|
|
|
Total Revenues from Contracts with Unaffiliated Customers
|
$
|
87,600
|
|
|
$
|
80,340
|
|
Financial Information by Business Segment.
The following segment information was prepared on the same basis as Stratus’ consolidated financial statements (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate
Operations
a
|
|
Leasing Operations
|
|
Hotel
|
|
Entertainment
|
|
Eliminations and Other
b
|
|
Total
|
|
Year Ended December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaffiliated customers
|
$
|
16,800
|
|
|
$
|
10,389
|
|
|
$
|
37,905
|
|
|
$
|
22,506
|
|
|
$
|
—
|
|
|
$
|
87,600
|
|
|
Intersegment
|
31
|
|
|
930
|
|
|
317
|
|
|
185
|
|
|
(1,463
|
)
|
|
—
|
|
|
Cost of sales, excluding depreciation
|
15,276
|
|
c
|
5,088
|
|
|
28,312
|
|
|
17,702
|
|
|
(796
|
)
|
|
65,582
|
|
|
Depreciation
|
250
|
|
|
3,334
|
|
|
3,562
|
|
|
1,563
|
|
|
(138
|
)
|
|
8,571
|
|
|
General and administrative expenses
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
11,274
|
|
|
11,274
|
|
|
Operating income (loss)
|
$
|
1,305
|
|
|
$
|
2,897
|
|
|
$
|
6,348
|
|
|
$
|
3,426
|
|
|
$
|
(11,803
|
)
|
|
$
|
2,173
|
|
|
Capital expenditures and purchases and development of real estate properties
|
$
|
43,660
|
|
|
$
|
60,759
|
|
|
$
|
775
|
|
|
$
|
398
|
|
|
$
|
—
|
|
|
$
|
105,592
|
|
|
Total assets at December 31, 2018
|
177,617
|
|
|
175,889
|
|
|
100,248
|
|
|
35,899
|
|
|
6,840
|
|
|
496,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaffiliated customers
|
$
|
11,001
|
|
|
$
|
7,981
|
|
|
$
|
38,360
|
|
|
$
|
22,998
|
|
|
$
|
—
|
|
|
$
|
80,340
|
|
|
Intersegment
|
143
|
|
|
875
|
|
|
321
|
|
|
234
|
|
|
(1,573
|
)
|
|
—
|
|
|
Cost of sales, excluding depreciation
|
10,377
|
|
|
4,829
|
|
|
28,584
|
|
|
17,719
|
|
|
(735
|
)
|
|
60,774
|
|
|
Depreciation
|
232
|
|
|
2,693
|
|
|
3,544
|
|
|
1,523
|
|
|
(139
|
)
|
|
7,853
|
|
|
General and administrative expenses
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
11,401
|
|
|
11,401
|
|
|
Profit participation
|
—
|
|
|
2,538
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,538
|
|
|
Loss (gain) on sales of assets
|
13
|
|
|
(25,421
|
)
|
d
|
—
|
|
|
(55
|
)
|
|
—
|
|
|
(25,463
|
)
|
|
Operating income (loss)
|
$
|
522
|
|
|
$
|
24,217
|
|
|
$
|
6,553
|
|
|
$
|
4,045
|
|
|
$
|
(12,100
|
)
|
|
$
|
23,237
|
|
|
Capital expenditures and purchases and development of real estate properties
|
$
|
14,395
|
|
|
$
|
33,290
|
|
|
$
|
506
|
|
|
$
|
283
|
|
|
$
|
—
|
|
|
$
|
48,474
|
|
|
Total assets at December 31, 2017
|
189,832
|
|
|
71,851
|
|
|
102,491
|
|
|
35,446
|
|
|
6,373
|
|
|
405,993
|
|
|
|
|
|
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.
|
|
|
|
|
d.
|
Includes
$24.3 million
associated with recognition of the majority of the gain on the sale of The Oaks at Lakeway (see Note
10
).
|
NOTE 10. ASSET SALES
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 (see Note
5
). 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
$150 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 that time. 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
$9.3 million
is presented as a deferred gain in the consolidated balance sheets at
December 31, 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) income.
FFF Presents LLC.
In October 2017, Stratus sold intangible assets of FFF Presents, LLC, primarily the rights to host the Fun Fun Fun Festival. The purchaser paid a base purchase price of
$0.3 million
. The purchaser will also pay Stratus a contingent purchase price based on a portion of festival profit between 2018 and 2022 and a deferred purchase price based on a multiple of a portion of average festival profit in 2021 and 2022. Stratus recognized a gain on the sale of
$0.2 million
.
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 Village, 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.
NOTE 11.
SUBSEQUENT EVENTS
In January 2019, Circle C Land, L.P., a wholly owned subsidiary of Stratus, completed the sale of a CVS store ground lease for a subdivided retail pad located in the Circle C community for
$3.2 million
. Stratus used proceeds from the sale to repay
$2.5 million
of its Comerica Bank credit facility.
In February 2019, a MUD bond issue closed and Stratus received
$4.6 million
in March 2019.
Stratus evaluated events after
December 31, 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.