What changed in this filing

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Item 1. Financial Statements

2020-06-25 compared with 2019-11-12 · 159 added, 192 removed, 230 unchanged (60% of the section changed)

3 unchanged sentences

(In Thousands)

September 30,

2020 December 31,

29 unchanged sentences

STRATUS PROPERTIES INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Unaudited)

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (Unaudited)

(In Thousands, Except Per Share Amounts)

Three Months Ended Nine Months Ended

September 30, September 30,

2019 2018 2019 2018

Three Months Ended

Real estate operations $ 12,336 $ 2,948

13 unchanged sentences

Total 28,782 16,055

Operating income (loss) 69 ( 1,037 ) 4,139 ( 1,166 )

Operating (loss) income ( 648 ) 3,643

Interest expense, net ( 3,915 ) ( 2,572 )

(Loss) gain on interest rate derivative instruments ( 9 ) 56 ( 191 ) 314

Loss on interest rate derivative instruments ( 121 ) ( 59 )

Loss on early extinguishment of debt — ( 16 )

Other income, net 19 299

Loss before income taxes and equity in unconsolidated affiliates' (loss) income

(Loss) income before income taxes

( 4,665 ) 1,295

Equity in unconsolidated affiliates' (loss) income ( 7 ) 210 ( 20 ) 204

Benefit from income taxes 401 532 186 961

Loss from continuing operations

Benefit from (provision for) income taxes 2,518 ( 433 )

Net (loss) income and total comprehensive (loss) income

( 2,147 ) 862

Total comprehensive loss attributable to noncontrolling interests in subsidiaries

Net loss and total comprehensive loss attributable to common stockholders

$ ( 2,960 ) $ ( 2,372 ) $ ( 4,487 ) $ ( 5,099 )

Basic and diluted net loss per share attributable to common stockholders

Net (loss) income and total comprehensive (loss) income attributable to common stockholders

$ ( 1,070 ) $ 862

Basic and diluted weighted-average common shares outstanding

Net (loss) income per share attributable to common stockholders:

$ ( 0.13 ) $ 0.11

Diluted $ ( 0.13 ) $ 0.10

Weighted-average common shares outstanding:

Diluted 8,200 8,213

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

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(In Thousands)

Nine Months Ended

September 30,

Three Months Ended

Cash flow from operating activities:

Net loss $ ( 4,490 ) $ ( 5,099 )

Adjustments to reconcile net loss to net cash used in operating activities:

Net (loss) income $ ( 2,147 ) $ 862

Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:

Depreciation 3,633 2,630

1 unchanged sentence

Gain on sale of assets — ( 2,113 )

Loss (gain) on interest rate derivative contracts 191 ( 314 )

Loss on interest rate derivative contracts 121 59

Loss on early extinguishment of debt — 16

Amortization of debt issuance costs and stock-based compensation 538 296

Equity in unconsolidated affiliates' loss (income) 20 ( 204 )

Increase in deposits 645 1,242

(Decrease) increase in deposits ( 185 ) 108

Deferred income taxes 2,477 291

3 unchanged sentences

Decrease in accounts payable, accrued liabilities and other ( 6,828 ) ( 83 )

Net cash used in operating activities ( 3,993 ) ( 26,593 )

Net cash (used in) provided by operating activities ( 4,434 ) 691

Cash flow from investing activities:

3 unchanged sentences

Purchase of noncontrolling interest in consolidated subsidiary — ( 4,589 )

Other, net ( 10 ) 378

Net cash used in investing activities ( 2,615 ) ( 31,168 )

6 unchanged sentences

Stock-based awards net payments ( 91 ) ( 100 )

Noncontrolling interests' contributions — 17,650

Financing costs ( 81 ) ( 209 )

Net cash provided by financing activities 6,164 25,587

Net increase in cash, cash equivalents and restricted cash 10,825 7,702

Net decrease in cash, cash equivalents and restricted cash ( 885 ) ( 4,890 )

Cash, cash equivalents and restricted cash at beginning of year 38,591 38,919

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(In Thousands)

THREE MONTHS ENDED SEPTEMBER 30

Stockholders’ Equity

2 unchanged sentences

of Shares At Par

Balance at June 30, 2019 9,305 $ 93 $ 186,334 $ ( 42,630 ) 1,128 $ ( 21,360 ) $ 122,437 $ 18,075 $ 140,512

Balance at December 31, 2019 9,330 $ 93 $ 186,082 $ ( 43,567 ) 1,133 $ ( 21,509 ) $ 121,099 $ 12,983 $ 134,082

Exercised and vested stock-based awards 17 — — — — — — — —

Stock-based compensation — — 162 — — — 162 — 162

Forfeited dividends — — 11 — — — 11 — 11

Tender of shares for stock-based awards

1 unchanged sentence

Total comprehensive loss — — — ( 1,070 ) — — ( 1,070 ) ( 1,077 ) ( 2,147 )

Balance at September 30, 2019 9,331 $ 93 $ 186,516 $ ( 45,590 ) 1,133 $ ( 21,509 ) $ 119,510 $ 18,073 $ 137,583

Balance at June 30, 2018 9,277 $ 93 $ 185,757 $ ( 39,848 ) 1,124 $ ( 21,260 ) $ 124,742 $ 7,080 $ 131,822

Exercised and vested stock-based awards 11 — — — — — — — —

Stock-based compensation — — 267 — — — 267 — 267

Noncontrolling interests contributions — — — — — — — 10,650 10,650

Total comprehensive loss — — — ( 2,372 ) — — ( 2,372 ) — ( 2,372 )

Balance at September 30, 2018 9,288 $ 93 $ 186,024 $ ( 42,220 ) 1,124 $ ( 21,260 ) $ 122,637 $ 17,730 $ 140,367

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

STRATUS PROPERTIES INC.

CONSOLIDATED STATEMENTS OF EQUITY (Unaudited)

(In Thousands)

NINE MONTHS ENDED SEPTEMBER 30

Stockholders’ Equity

Held in Treasury Total Stockholders' Equity

Common Stock Capital in Excess of Par Value Accum-ulated Deficit Noncontrolling Interests in Subsidiaries

of Shares At Par

Balance at March 31, 2020 9,347 $ 93 $ 186,244 $ ( 44,637 ) 1,137 $ ( 21,600 ) $ 120,100 $ 11,906 $ 132,006

Balance at December 31, 2018 9,288 $ 93 $ 186,256 $ ( 41,103 ) 1,124 $ ( 21,260 ) $ 123,986 $ 22,665 $ 146,651

1 unchanged sentence

Stock-based compensation — — 168 — — — 168 — 168

Forfeited dividends — — 11 — — — 11 — 11

Tender of shares for stock-based awards

2 unchanged sentences

— — — — — — — ( 4,589 ) ( 4,589 )

Total comprehensive loss — — — ( 4,487 ) — — ( 4,487 ) ( 3 ) ( 4,490 )

Balance at September 30, 2019 9,331 $ 93 $ 186,516 $ ( 45,590 ) 1,133 $ ( 21,509 ) $ 119,510 $ 18,073 $ 137,583

Balance at December 31, 2017 9,250 $ 93 $ 185,395 $ ( 37,121 ) 1,117 $ ( 21,057 ) $ 127,310 $ 80 $ 127,390

Exercised and vested stock-based awards 38 — — — — — — — —

Stock-based compensation — — 629 — — — 629 — 629

Tender of shares for stock-based awards

— — — — 7 ( 203 ) ( 203 ) — ( 203 )

Noncontrolling interests contributions — — — — — — — 17,650 17,650

Total comprehensive loss — — — ( 5,099 ) — — ( 5,099 ) — ( 5,099 )

Balance at September 30, 2018 9,288 $ 93 $ 186,024 $ ( 42,220 ) 1,124 $ ( 21,260 ) $ 122,637 $ 17,730 $ 140,367

Total comprehensive income — — — 862 — — 862 — 862

Balance at March 31, 2019 9,305 $ 93 $ 186,424 $ ( 40,241 ) 1,128 $ ( 21,360 ) $ 124,916 $ 18,076 $ 142,992

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The accompanying unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 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 unaudited consolidated financial statements, and the accompanying notes, are prepared in accordance with generally accepted accounting principles in the United States (GAAP) and should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2019, included in Stratus Properties Inc.’s (Stratus) Annual Report on Form 10-K for the year ended December 31, 2019 (Stratus 2019 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 and consist of normal recurring adjustments.

Operating results for the nine-month period ended September 30, 2019, are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.

Operating results for the three-month period ended March 31, 2020, are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.

In particular, the impact of the COVID-19 pandemic intensified late in the first quarter of 2020, has continued into the second quarter of 2020 and is expected to continue beyond the second quarter of 2020.

As a result, this interim period, as well as future interim periods in 2020, will not be comparable to past performance or indicative of future performance.

The preparation of Stratus’ consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions, including potential impacts arising from the COVID-19 pandemic and related government actions, that affect the amounts reported in these financial statements and accompanying notes.

Actual results could differ materially from those estimates.

As the impact of the COVID-19 pandemic continues to evolve, and the extent of its impact cannot be determined with certainty, estimates and assumptions about future events and their effects require increased judgement.

Stratus’ future assessment of the magnitude and duration of the COVID-19 pandemic and related economic disruption, as well as other factors, could result in material changes to the estimates and material impacts to Stratus’ consolidated financial statements in future reporting periods.

Block 21 Update.

Block 21 is Stratus’ wholly owned mixed-use real estate development and entertainment business in downtown Austin, Texas that contains the 251 -room W Austin Hotel and is home to Austin City Limits Live at the Moody Theater, a 2,750 -seat entertainment venue that serves as the location for the filming of Austin City Limits, the longest running music series in American television history.

Block 21 also includes Class A office space, retail space and the 3TEN ACL Live entertainment venue and business.

On December 9, 2019, Stratus entered into definitive agreements to sell Block 21 to Ryman Hospitality Properties, Inc.

(Ryman) for $ 275 million.

Ryman deposited $ 15.0 million in earnest money to secure its performance under the agreements governing the sales.

As this represented a strategic shift for Stratus, the assets and liabilities of Block 21 were previously classified as held for sale - discontinued operations in the consolidated balance sheet at December 31, 2019.

As previously disclosed, on May 21, 2020, Ryman delivered a termination letter, which was agreed to and accepted by Stratus, terminating the agreements to sell Block 21 and authorizing the release of Ryman's $ 15.0 million in earnest money to Stratus .

Stratus used $ 13.8 million of the $ 15.0 million earnest money to pay down its Comerica Bank revolving credit facility and used the remaining $ 1.2 million for Block 21 debt service and required monthly reserves.

Stratus will record the $ 15.0 million as income in the second quarter of 2020.

As a result of the termination of the agreements to sell Block 21, Stratus has concluded that such assets and liabilities no longer qualified as held for sale as of March 31, 2020.

The carrying amounts as of December 31, 2019, of Block 21’s major classes of assets and liabilities, which were previously classified as held for sale - discontinued operations in the consolidated balance sheet follow (in thousands):

Cash and cash equivalents $ 10,408

Restricted cash 13,574

Real estate held for investment 131,286

Other assets 3,480

Total assets $ 158,748

Accounts payable and accrued liabilities, including taxes $ 7,005

Other liabilities 7,036

Total liabilities $ 155,225

COVID-19 Impact.

Since January 2020, the COVID-19 pandemic has caused substantial disruption in international and U.S.

economies and markets.

The pandemic has resulted in government restrictions of various degrees and effective at various times, including stay-at-home orders, bans on travel, limitations on the size of gatherings, limitations on the operations of businesses deemed non-essential, closures of work facilities, schools, public buildings and businesses, cancellation of events (including entertainment events, conferences and meetings), quarantines and social distancing measures.

The pandemic and responses to it have also caused a steep increase in unemployment in the U.S.

As a result, the pandemic has had a significant adverse impact on Stratus' business and operations.

As mentioned above, Stratus' previously announced transaction to sell Block 21 was terminated by Ryman as a result of the capital markets and economic environment caused by the COVID-19 pandemic.

Additionally, Stratus is deferring progress on development projects pending improvements in health and market conditions, but Stratus continues to advance its land planning, engineering and permitting activities.

Because the pandemic is unprecedented in recent history, and its severity, duration and future economic consequences are difficult to predict, Stratus cannot predict its future impact on the company with any certainty.

Stratus’ revenue, operating income and cash flow in its hotel and entertainment segments were adversely impacted in the first quarter of 2020, have been more adversely impacted in the second quarter of 2020 and are expected to continue to be adversely impacted beyond second-quarter 2020.

For example, while the hotel has remained open throughout the pandemic, average occupancy for the second quarter through June 21, 2020, was 12 percent, with June having the highest occupancy in the second quarter, averaging 24 percent.

As a result of the COVID-19 pandemic, many of Stratus’ retail leasing tenants, other than grocery and liquor stores, closed or were operating at significantly reduced capacity beginning late in the first quarter of 2020 and continuing into the second quarter of 2020.

Beginning in April 2020, Stratus agreed, generally, to 90 -day base rent deferrals with a majority of these tenants.

The deferred rent will be amortized over a 12 -month or 24 -month period starting in January 2021.

These rent deferrals have resulted in a reduction of scheduled base rent collections of approximately 30 percent for the second quarter through June 22, 2020.

As of mid-June, most of Stratus’ retail tenants have reopened.

At its multi-family properties, Stratus has granted rent deferral accommodations on a case-by-case basis, which as of June 22, 2020, had resulted in a reduction of scheduled rent collections of approximately two percent of contractual rents, with no material decline in occupancy.

In the aggregate, Stratus’ second-quarter retail and multi-family rent collections are 15 percent less than scheduled rent as of June 22, 2020.

Stratus will assess these deferred rents for potential credit losses at June 30, 2020.

In response to the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) was signed into law on March 27, 2020.

The CARES Act provides retroactive tax provisions and other stimulus measures to affected companies including the ability to carryback net operating losses, raising the limitation on the deductibility of interest expense, technical corrections to accelerate tax depreciation for qualified improvement property, and delaying the payment of employer payroll taxes.

On April 22, 2020, Stratus received a $ 4.0 million loan under the Paycheck Protection Program of the CARES Act.

The loan bears interest at one percent and matures April 15, 2022.

The proceeds from the loan must be used to retain workers and maintain payroll or make mortgage interest payments, lease payments and utility payments.

As of June 25, 2020, Stratus has not used the funds.

Refer to Note 8 for further discussion of income tax benefits.

EARNINGS PER SHARE

Stratus’ net loss per share of common stock was calculated by dividing the net loss attributable to common stockholders by the weighted-average shares of common stock outstanding during the period.

The weighted-average shares exclude approximately 83 thousand shares of common stock for third-quarter 2019, 97 thousand shares for third-quarter 2018, 91 thousand shares for the first nine months of 2019 and 96 thousand shares for the first nine months of 2018 associated with restricted stock units and outstanding stock options that were anti-dilutive because of net losses.

Stratus’ basic net (loss) income per share of common stock was calculated by dividing the net (loss) income attributable to common stockholders by the weighted-average shares of common stock outstanding during the period.

A reconciliation of net (loss) income and weighted-average shares of common stock outstanding for purposes of calculating diluted net (loss) income per share (in thousands, except per share amounts) follows:

Three Months Ended

Net (loss) income and total comprehensive (loss) income attributable to common stockholders

$ ( 1,070 ) $ 862

Basic weighted-average shares of common stock outstanding

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

Diluted weighted-average shares of common stock outstanding

Net (loss) income per share attributable to common stockholders:

$ ( 0.13 ) $ 0.11

$ ( 0.13 ) $ 0.10

Excludes 78 thousand shares of common stock associated with RSUs and stock options that were anti-dilutive as a result of the net loss.

Excludes 31 thousand shares of common stock associated with RSUs that were anti-dilutive.

RELATED PARTY TRANSACTIONS

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(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 8.8 percent equity interest in the Kingwood, L.P.

As one of the participants in the private placement offering, LCHM purchased Class B limited partnership interests initially representing an 8.8 percent equity interest in the Kingwood, L.P.

Refer to Note 2 of the Stratus 2019 Form 10-K for further discussion.

Stratus performed evaluations and concluded that The Saint Mary, L.P.

Stratus has performed evaluations and concluded that The Saint Mary, L.P.

and the Kingwood, L.P.

3 unchanged sentences

in accordance with applicable accounting guidance.

The Saint Mary, L.P.

and the Kingwood, L.P.’s results are consolidated in Stratus’ financial statements.

Stratus’ consolidated balance sheets include the following combined assets and liabilities of The Saint Mary, L.P.

1 unchanged sentence

(in thousands):

September 30, 2019 December 31, 2018

March 31, 2020 December 31, 2019

Cash and cash equivalents $ 2,109 $ 1,110

Restricted cash — 2,284

Real estate under development 9,585 3,703

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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 the consultant's general consulting services related to the entitlement and development of properties and expense reimbursements during third-quarter 2019 and the first nine months of 2019 totaled approximately $ 28 thousand and $ 84 thousand, respectively.

Payments to Austin Retail Partners for the consultant's general consulting services related to the entitlement and development of properties and expense reimbursements totaled approximately $ 39 thousand in first-quarter 2020 and $ 27 thousand in first-quarter 2019.

Refer to Note 2 of the Stratus 2019 Form 10-K for further discussion.

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 used proceeds from the sale to repay $ 2.5 million of its Comerica Bank credit facility borrowings and, after adjustments recorded in the second and third quarters of 2019, recorded a gain on this sale totaling $ 2.0 million for the first nine months of 2019.

In January 2019, Stratus sold a retail pad subject to a ground lease located in the Circle C community for $ 3.2 million.

Stratus used a portion of the proceeds from the sale to repay $ 2.5 million of its Comerica Bank credit facility borrowings and recorded a gain on this sale totaling $ 2.1 million in first-quarter 2019.

FAIR VALUE MEASUREMENTS

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A summary of the carrying amount and fair value of Stratus' other financial instruments follows (in thousands):

September 30, 2019 December 31, 2018

March 31, 2020 December 31, 2019

Value Carrying

Interest rate cap agreement $ 1 $ 1 $ 3 $ 3

Interest rate swap agreement — — 53 53

Debt 373,068 377,427 365,749 370,558

Interest rate swap agreement 233 233 114 114

Interest Rate Cap and Swap Agreements.

In September 2019, a Stratus subsidiary paid $ 24 thousand to enter into an interest rate cap agreement, which caps the maximum London Interbank Offered Rate (LIBOR) at 3.0 percent, on a total notional amount of $ 75.0 million (the principal amount of The Santal loan).

The interest rate cap agreement provides that the Stratus subsidiary will collect the difference between 3.0 percent and one-month LIBOR if one-month LIBOR is greater than 3.0 percent (refer to Note 6 in the Stratus 2019 Form 10-K for further discussion of The Santal loan).

The interest rate cap agreement terminates on October 5, 2021.

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 LIBOR.

As of March 31, 2020, the agreement had a notional amount of $ 15.2 million, which will amortize to $ 14.8 million by the end of the agreement, and as of December 31, 2019, the agreement had a notional amount of $ 15.3 million.

The interest rate cap and swap agreements do not qualify for hedge accounting so changes in the agreements' fair values are recorded in the consolidated statements of comprehensive (loss) income.

Stratus uses an interest rate pricing model that relies on market observable inputs such as LIBOR to measure the fair value of both agreements.

Stratus also evaluated the counterparty credit risk associated with both agreements, which is considered a Level 3 input, but did not consider such risk to be significant.

Therefore, the interest rate cap and swap agreements are classified within Level 2 of the fair value hierarchy.

Stratus' debt is recorded at cost and is not actively traded.

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The fair value of debt does not represent the amounts that will ultimately be paid upon the maturities of the loans.

Interest Rate Swap and Cap Agreements.

As of September 30, 2019, the agreement had a notional amount of $ 15.4 million, which will amortize to $ 14.8 million by the end of the agreement, and as of December 31, 2018, the agreement had a notional amount of $ 15.8 million.

On September 30, 2019, and as required by The Santal loan (as defined in Note 6 below), a Stratus subsidiary paid $ 24 thousand to enter into an interest rate cap agreement, which caps maximum LIBOR at 3.0 percent, on a total notional amount of $ 75.0 million (the principal amount of The Santal loan).

The interest rate cap agreement terminates on October 5, 2021.

The interest rate swap and cap agreements do not qualify for hedge accounting so changes in the agreements' fair values are recorded in the consolidated statements of comprehensive loss.

Stratus uses an interest rate pricing model that relies on market observable inputs such as LIBOR to measure the fair value of both agreements.

Stratus also evaluated the counterparty credit risk associated with both agreements, which is considered a Level 3 input, but did not consider such risk to be significant.

Therefore, the interest rate swap and cap agreements are classified within Level 2 of the fair value hierarchy.

The components of Stratus' debt are as follows (in thousands):

September 30, 2019 December 31, 2018

March 31, 2020 December 31, 2019

Goldman Sachs loan $ 140,643 $ 141,184

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Comerica Bank credit facility 49,300 42,482

Amarra Villas credit facility 5,424 3,326

New Caney land loan 4,918 4,908

Barton Creek Village term loan 3,220 3,284

Construction loans:

Kingwood Place 26,983 23,991

The Saint Mary

24,991 21,857

Lantana Place

2 unchanged sentences

21,669 21,354

The Saint Mary

Kingwood Place

West Killeen Market

The Santal Phase I

The Santal Phase II

Amarra Villas credit facility 5 5,520

$ 373,068 $ 365,749

Includes net reductions for unamortized debt issuance costs of $ 3.8 million at September 30, 2019, and $ 2.8 million at December 31, 2018.

As of September 30, 2019, Stratus had $ 6.5 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.

On September 30, 2019, a Stratus subsidiary entered into a $ 75.0 million loan with ACRC Lender LLC (The Santal loan) to refinance the Phase I and Phase II construction loans for The Santal.

The Santal loan has a three-year primary term maturing on October 5, 2022, with the possibility of two 12-month extensions, subject to satisfying specified conditions.

Interest on the loan is variable at LIBOR plus 2.85 percent (or, if applicable, a replacement rate), provided that at no time shall the interest rate be less than 4.80 percent per annum.

The Santal loan contains certain 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 $ 125 million and liquid assets of at least$ 7.5 million.

Approximately $ 57.9 million of the proceeds were used to repay, in full, The Santal Phase I and Phase II construction loans.

Remaining proceeds after paying transaction costs, were approximately $ 16 million, inclusive of reserves presented in restricted cash.

In October 2019, Stratus used $ 13.0 million of the net proceeds to reduce the outstanding balance on its Comerica Bank credit facility.

As a result of entering into The Santal loan, Stratus recognized a loss on early extinguishment of debt of $ 231 thousand in third-quarter 2019.

As required by The Santal loan, Stratus entered into an interest rate cap agreement (see Note 5 for further discussion).

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 $ 8.0 million to $ 15.0 million and an extension of the maturity date to March 19, 2022.

Interest on the loan is variable at LIBOR plus 3.0 percent.

The Amarra Villas credit facility 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 $ 125 million and a debt-to-gross asset value of less than 50 percent.

As of September 30, 2019, Stratus had $ 9.3 million available under its $ 15.0 million Amarra Villas credit facility.

As a result of entering into this new loan agreement, Stratus recognized a loss on early extinguishment of debt of $ 16 thousand for the first nine months of 2019.

On March 8, 2019, a Stratus subsidiary entered into a $ 5.0 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 3.0 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 $ 125 million.

Includes net reductions for unamortized debt issuance costs of $ 3.1 million at March 31, 2020, and $ 3.5 million at December 31, 2019.

As of March 31, 2020, Stratus had $ 10.6 million available under its $ 60.0 million Comerica Bank credit facility, with $ 150 thousand of letters of credit committed against the credit facility.

Effective April 14, 2020, Stratus and Comerica Bank agreed to modify the Comerica Bank credit facility to (i) extend the maturity date of the credit facility from June 29, 2020, to September 27, 2020, and (ii) revise the definition of LIBOR to provide for an increase in the LIBOR floor from zero percent to one percent.

On June 12, 2020, the Company entered into a further amendment to its credit facility agreement with Comerica Bank to extend the maturity date of the facility to September 27, 2022.

As of June 12, 2020, Stratus had $ 25.0 million available under its $ 60.0 million Comerica Bank credit facility, with $ 150 thousand of letters of credit committed against the credit facility.

In January 2020, the Kingwood Place construction loan was modified to increase the loan amount by $ 2.5 million to a total of $ 35.4 million.

The increase is being used to fund the construction of a retail building on an existing Kingwood Place retail pad.

For a description of Stratus' other debt, refer to Note 6 in the Stratus 2019 Form 10-K.

Interest Expense and Capitalization.

Interest costs (before capitalized interest) totaled $ 5.2 million in third-quarter 2019, $ 4.3 million in third-quarter 2018, $ 14.9 million for the first nine months of 2019 and $ 11.4 million for the first nine months of 2018.

Stratus' capitalized interest costs totaled $ 2.0 million in third-quarter 2019, $ 2.1 million in third-quarter 2018, $ 6.2 million for the first nine months of 2019 and $ 6.0 million for the first nine months of 2018, primarily related to development activities at Barton Creek.

The 2019 periods also included capitalized interest costs related to development activities at Kingwood Place and The Saint Mary.

Interest costs (before capitalized interest) totaled $ 5.2 million in first-quarter 2020 and $ 4.6 million in first-quarter 2019.

Stratus' capitalized interest totaled $ 1.3 million in first-quarter 2020 and $ 2.1 million in first-quarter 2019, primarily related to development activities at Barton Creek.

The 2019 period also included capitalized interest related to development activities at Kingwood Place and The Saint Mary.

PROFIT PARTICIPATION INCENTIVE PLAN

In July 2018, the 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.

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.

Estimates related to the awards may change over time as a result of differences between projected and actual development progress and costs, market conditions and the timing of capital transactions or valuation events.

Refer to Note 8 of the Stratus 2019 Form 10-K for further discussion.

During third-quarter 2019, the Committee designated Magnolia Place as an approved project under the Plan.

As of September 30, 2019, there were no other significant changes to 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.

During third-quarter 2019, Stratus accrued $ 0.2 million to project development costs and $ 0.2 million in general and administrative expense related to the Plan.

During the nine months ended September 30, 2019, Stratus accrued $ 0.6 million to project development costs and $ 0.7 million in general and administrative expense related to the Plan.

The accrued liability for the Plan totaled $ 2.1 million at September 30, 2019, and $ 0.8 million at December 31, 2018 (included in other liabilities).

As of September 30, 2019, no amounts had been paid to participants under the Plan.

During first-quarter 2020, Stratus recorded a $ 49 thousand reduction to the accrued liability for the Plan of which $ 4 thousand reduced project development costs and $ 45 thousand reduced general and administrative expenses.

During first-quarter 2019, Stratus accrued $ 0.2 million to project development costs and $ 0.3 million in general and administrative expenses related to the Plan.

The accrued liability for the Plan totaled $ 2.4 million at March 31, 2020, and $ 2.5 million at December 31, 2019 (included in other liabilities).

As of March 31, 2020, no amounts had been paid to participants under the Plan.

Stratus’ accounting policy for and other information regarding its income taxes is further described in Notes 1 and 7 in the Stratus 2019 Form 10-K.

Stratus had deferred tax assets (net of deferred tax liabilities) totaling $ 12.4 million at September 30, 2019 , and $ 11.8 million at December 31, 2018.

Stratus had deferred tax assets (net of deferred tax liabilities) totaling $ 9.8 million at March 31, 2020 , and $ 12.3 million at December 31, 2019.

Stratus’ future results of operations may be negatively impacted by an inability to realize a tax benefit for future tax losses or for items that will generate additional deferred tax assets.

The difference between Stratus' consolidated effective income tax rate for the first nine months of 2019 and the U.S.

Federal statutory income tax rate of 21 percent, was primarily attributable to the Texas state margin tax and the Tax Cuts and Jobs Act's executive compensation limitation.

The difference between Stratus' consolidated effective income tax rate for the first nine months of 2018 and the U.S.

Federal statutory income tax rate of 21 percent, was primarily attributable to the Texas state margin tax.

The difference between Stratus' consolidated effective income tax rate for the first three months of 2020 and the U.S.

Federal statutory income tax rate of 21 percent, was primarily attributable to the CARES Act, which allows Stratus to carryback losses to 2017 when the U.S.

corporate tax rate was 35 percent among other impacts, resulting in a first-quarter 2020 tax benefit of $ 1.3 million, and the Texas state margin tax.

The difference between Stratus' consolidated effective income tax rate for the first three months of 2019 and the U.S.

Federal statutory income tax rate of 21 percent, was primarily attributable to the Texas state margin tax and permanent differences.

BUSINESS SEGMENTS

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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 a portion of The Saint Mary;

the Lantana community, including a portion of Lantana Place still under development and vacant pad sites;

the Circle C community;

the Lantana community, including a portion of Lantana Place planned for a future commercial phase;

and one condominium unit at the W Austin Hotel & Residences);

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in Killeen, Texas (vacant pad sites at West Killeen Market);

and in Magnolia, Texas (Magnolia), Kingwood, Texas (a portion of Kingwood Place and vacant pad sites) 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, The Santal, West Killeen Market in Killeen, Texas, and completed portions of The Saint Mary, Lantana Place, Jones Crossing and Kingwood Place.

and in Magnolia, Texas (Magnolia), Kingwood, Texas (a portion of Kingwood Place, land for future multi-family development and vacant pad sites) and New Caney, Texas (New Caney), located in the greater Houston area.

The Leasing Operations segment is comprised of Stratus’ real estate assets, both residential and commercial, that are leased or available for lease and includes The Santal, West Killeen Market, The Saint Mary, office and retail space at the W Austin Hotel & Residences and completed portions of Lantana Place, Jones Crossing and Kingwood Place.

The Hotel segment includes the W Austin Hotel located at the W Austin Hotel & Residences in downtown Austin, Texas.

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Stratus' revenues from contracts with customers follow (in thousands):

Three Months Ended September 30, Nine Months Ended September 30,

2019 2018 2019 2018

Three Months Ended March 31,

Real Estate Operations:

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Commissions and other 28 114

2,616 2,100 9,693 10,273

Leasing Operations:

Rental revenue 5,732 3,629

5,024 2,813 13,066 7,148

Rooms, food and beverage 5,075 7,737

Other 836 588

8,696 8,172 25,983 27,087

Entertainment:

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Other 597 572

5,919 4,838 16,935 14,490

Total Revenues from Contracts with Customers $ 28,134 $ 19,698

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Leasing Operations Hotel Entertainment Corporate, Eliminations and Other b

Three Months Ended September 30, 2019:

Three Months Ended March 31, 2020:

Unaffiliated customers $ 12,336 $ 5,732 $ 5,911 $ 4,155 $ — $ 28,134

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3,088 5,908 3,226 ( 70 ) 22,334

Depreciation 57 1,529 903 393 ( 47 ) 2,835

Depreciation 59 2,047 1,105 c

General and administrative expenses — — — — 2,815 2,815

Gain on sale of assets — ( 37 ) c

Operating income (loss) $ 2,099 $ 824 $ ( 1,054 ) $ 461 $ ( 2,978 ) $ ( 648 )

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$ 6,222 $ 2,283 $ 27 $ 18 $ — $ 8,550

Total assets at September 30, 2019 225,912 193,878 98,062 43,855 6,225 567,932

Total assets at March 31, 2020 160,691 235,734 96,484 42,639 23,390 558,938

Leasing Operations Hotel Entertainment Corporate, Eliminations and Other b

Three Months Ended September 30, 2018:

Unaffiliated customers $ 2,100 $ 2,813 $ 8,172 $ 4,838 $ — $ 17,923

Intersegment 8 227 72 21 ( 328 ) —

Cost of sales, excluding depreciation 2,279

1,235 6,639 4,154 ( 168 ) 14,139

65 863 886 391 ( 34 ) 2,171

General and administrative expenses — — — — 2,650 2,650

Operating (loss) income

$ ( 236 ) $ 942 $ 719 $ 314 $ ( 2,776 ) $ ( 1,037 )

Capital expenditures and purchases and development of real estate properties

$ 21,201 $ 10,334 $ 128 $ 24 $ — $ 31,687

Total assets at September 30, 2018 183,857 157,706 102,069 36,377 8,047 488,056

Nine Months Ended September 30, 2019:

Three Months Ended March 31, 2019:

Unaffiliated customers $ 2,948 $ 3,629 $ 8,325 $ 4,796 $ — $ 19,698

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2,144 6,698 3,607 ( 156 ) 12,339

Depreciation 182 4,324 2,702 1,183 ( 223 ) 8,168

General and administrative expenses — — — — 9,143 9,143

Gain on sale of assets — ( 1,989 ) c

61 1,407 900 394 ( 132 ) 2,630

Operating income (loss) $ 3,331 $ 4,319 $ 2,979 $ 3,171 $ ( 9,661 ) $ 4,139

Capital expenditures and purchases and development of real estate properties

$ 8,866 $ 50,482 $ 548 $ 137 $ — $ 60,033

Municipal utility district (MUD) reimbursements applied to real estate under development d

920 — — — — 920

Nine Months Ended September 30, 2018:

Unaffiliated customers $ 10,273 $ 7,148 $ 27,087 $ 14,490 $ — $ 58,998

Intersegment 24 703 194 79 ( 1,000 ) —

Cost of sales, excluding depreciation

3,756 20,861 11,850 ( 520 ) 45,352

Depreciation 190 2,234 2,675 1,171 ( 104 ) 6,166

General and administrative expenses — — — — 3,199 3,199

Gain on sales of assets — ( 2,113 ) e

— — — ( 2,113 )

Operating income (loss)

$ 2,846 $ 2,421 $ 774 $ 824 $ ( 3,222 ) $ 3,643

Capital expenditures and purchases and development of real estate properties

$ 3,298 $ 29,220 $ 98 $ 125 $ — $ 32,741

Municipal utility district (MUD) reimbursements classified as a reduction of real estate under development d

920 — — — — 920

Total assets at March 31, 2019 198,447 164,811 98,503 43,846 23,176 528,783

Includes sales commissions and other revenues together with related expenses.

Includes consolidated general and administrative expenses and eliminations of intersegment amounts.

Relates to the first-quarter 2019 sale of a retail pad subject to a ground lease located in the Circle C community, including adjustments recorded in the second and third quarters of 2019.

Stratus received $ 4.6 million of bond proceeds related to MUD reimbursements of infrastructure costs incurred for development of Barton Creek.

Of the total amount, Stratus 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 loss.

Includes a $ 202 thousand adjustment in the Hotel segment and an $ 89 thousand adjustment in the Entertainment segment for the period in December 2019 when the hotel and entertainment venues were held for sale and, therefore, not depreciated.

In the first quarter of 2019, Stratus received $ 4.6 million of proceeds related to MUD reimbursements of infrastructure costs incurred for development of Barton Creek.

Refer to Note 1 of the Stratus 2019 Form 10-K for further discussion of Stratus' accounting policy for MUD reimbursements.

Includes $ 0.4 million of reductions to cost of sales associated with collection of prior-years' assessments of properties in Barton Creek.

NEW ACCOUNTING STANDARDS

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 99 -year ground lease for approximately 72 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 ASU.

Adoption of this ASU resulted in the recognition of lease right-of-use assets of $ 11.9 million and lease liabilities of $ 12.0 million as of January 1, 2019.

Operating lease costs were $ 0.3 million in third-quarter 2019 and $ 1.0 million for the first nine months of 2019.

Total lease costs were $ 0.4 million in third-quarter 2018 and $ 1.2 million for the first nine months of 2018.

During the first nine months of 2019, Stratus paid $ 164 thousand for lease liabilities recorded in the consolidated balance sheet (included in operating cash flows in the consolidated statements of cash flows).

As of September 30, 2019, the weighted-average discount rate used to determine the lease liabilities was 6.0 percent and the weighted-average remaining lease term was 94.3 years.

The future minimum payments for leases recorded on the consolidated balance sheet at September 30, 2019, follow (in thousands):

Remaining three months of 2019 $ 57

Thereafter 110,548

Total payments 111,880

Present value adjustment ( 99,372 )

Present value of net minimum lease payments $ 12,508

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.

Relates to the first-quarter 2019 sale of a retail pad subject to a ground lease located in the Circle C community.

Refer to Note 4.

SUBSEQUENT EVENTS

Stratus evaluated events after September 30, 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.

In June 2020, Stratus received $ 0.8 million related to a business interruption insurance claim that it filed as a result of water and smoke damage in the W Austin hotel in January 2018.

Stratus will recognize these proceeds as a reduction of hotel costs of sales in the second quarter of 2020.

Stratus evaluated events after March 31, 2020, 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.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements