What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-06-25 compared with 2019-11-12 · 278 added, 172 removed, 149 unchanged (75% of the section changed)

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and all entities owned or controlled by Stratus Properties Inc.

You should read the following discussion in conjunction with our consolidated financial statements, related MD&A and discussion of our business and properties included in our Annual Report on Form 10-K for the year ended December 31, 2018 (2018 Form 10-K) filed with the United States (U.S.) Securities and Exchange Commission (SEC).

The results of operations reported and summarized below are not necessarily indicative of future operating results, and future results could differ materially from those anticipated in forward-looking statements (refer to “Cautionary Statement” for further discussion).

You should read the following discussion in conjunction with our consolidated financial statements and accompanying notes, related MD&A and discussion of our business and properties included in our Annual Report on Form 10-K for the year ended December 31, 2019 (2019 Form 10-K) filed with the United States (U.S.) Securities and Exchange Commission (SEC) and the unaudited consolidated financial statements and accompanying notes included in this Form 10-Q.

"Risk Factors" herein and Part I, Item 1A.

“Risk Factors” of our 2019 Form 10-K for further discussion).

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.

Stratus expects continued uncertainty in its business and the global economy as a result of the duration and intensity of the COVID-19 pandemic and its related effects.

All subsequent references to “Notes” refer to Notes to Consolidated Financial Statements (Unaudited) located in Part I, Item 1.

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BUSINESS STRATEGY

Our development portfolio consists of approximately 1,800 acres of commercial and multi-family and single-family residential projects under development or undeveloped land held for future use.

Our portfolio consists of approximately 1,700 acres of undeveloped acreage and acreage under development for commercial, multi-family and single-family residential projects, plus several completed retail and residential projects.

Our W Austin Hotel and our ACL Live and 3TEN ACL Live entertainment venues are located in downtown Austin and are central to the city's world-renowned, vibrant music scene.

Our primary business objective is to create value for stockholders by methodically developing and enhancing the value of our properties and then selling them profitably.

Our development program of acquiring properties, securing and maintaining development entitlements, constructing and stabilizing the properties, and then preparing them for sale or refinancing is a key element of our strategy.

Our full cycle development program of acquiring properties, securing and maintaining development entitlements, developing and stabilizing, and then preparing them for sale or refinancing is a key element of our strategy.

We currently have projects in certain of these stages as described below in “Development Activities - Current Residential Activities” and “Development Activities - Current Commercial Activities.”

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As a result, we believe that through strategic planning, development and marketing, we can maximize and fully realize their value.

Our development plans require significant capital, which we may pursue through joint ventures or other arrangements.

Our development plans require significant additional capital, which we may pursue through joint ventures or other arrangements.

Our business strategy requires us to rely on cash flow from operations and debt financing as our primary sources of funding for our liquidity needs.

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We have formed strategic relationships as part of our overall strategy for particular development projects and may enter into other similar arrangements in the future.

Our developed property sales can include an individual tract of land that has been developed and permitted for residential use, a developed lot with a residence already built on it or our one remaining condominium unit at the W Austin Residences.

We may also sell properties under development, undeveloped properties or leased properties, if opportunities arise that we believe will maximize overall asset values as part of our business strategy.

Our net loss attributable to common stockholders totaled $3.0 million, $0.36 per share, in third-quarter 2019 and $4.5 million, $0.55 per share, for the first nine months of 2019, compared with $2.4 million, $0.29 per share, in third-quarter 2018 and $5.1 million, $0.63 per share, for the first nine months of 2018.

The increase in our net loss attributable to common stockholders in the third-quarter 2019, compared to third-quarter 2018, is primarily the result of higher interest expense related to higher average debt.

The decrease in our net loss attributable to common stockholders for the first nine months of 2019, compared to the first nine months of 2018, is primarily the result of

municipal utility district (MUD) reimbursements and a gain on sales of assets (as discussed below), partially offset by higher interest expense related to higher average debt.

Our revenues totaled $22.3 million in third-quarter 2019 and $65.7 million for the first nine months of 2019, compared with $17.9 million in third-quarter 2018 and $59.0 million for the first nine months of 2018.

The increase in revenues in the third quarter and the first nine months of 2019, compared to the 2018 periods, primarily reflects increased revenues associated with the commencement of leases at our recently completed properties and an increase in the number of events hosted and higher event attendance at ACL Live.

The increase in revenue in the first nine months of 2019, compared to the first nine months of 2018, is partly offset by lower revenues from the Hotel segment and a decrease in single-family residential property sales.

We received $4.6 million of bond proceeds in the first nine months of 2019 related to Travis County MUD reimbursements of infrastructure costs incurred for development of Barton Creek.

Of the total amount, we recorded $0.9 million as a reduction of real estate under development on the consolidated balance sheet, and $3.4 million as a reduction in real estate cost of sales and $0.3 million in other income, net in the consolidated statement of comprehensive loss for the first nine months of 2019.

The first nine months of 2019 also included a gain on the sale of assets totaling $2.0 million, primarily related to the sale of a retail pad subject to a ground lease located in the Circle C community.

At September 30, 2019, we had total debt of $367.4 million and consolidated cash of $32.5 million.

We have significant recurring costs, including property taxes, maintenance and marketing, and we believe we will have sufficient sources of existing liquidity, including debt financing and cash from operations, to meet our cash requirements over the next 12 months.

See “Capital Resources and Liquidity ” below and “Risk Factors” included in Part 1, Item 1A.

OVERVIEW OF THE IMPACTS OF THE COVID-19 PANDEMIC

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

economies and markets, intensifying in the latter part of the first quarter of 2020 and continuing into the second quarter of 2020.

On March 11, 2020, the World Health Organization designated the COVID-19 outbreak a pandemic.

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.

For example, on March 6, 2020, the annual South by Southwest music festival in Austin, Texas was cancelled.

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

As a result, the pandemic is having, and we believe will continue to have, a significant adverse impact on our business and operations, as discussed further below.

State and local governments in Texas have implemented phased reopening processes, often with reduced capacity and social distancing restrictions.

The pandemic remains complex and rapidly-evolving.

For example, in June, the city of Austin has extended its Stay-at-Home order through August 15, 2020.

Health advisors warn that a “second wave” of the pandemic is possible if reopening is pursued too soon or in the wrong manner.

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

Termination of Sale of Block 21

Our previously announced transaction to sell Block 21, which contains the W Austin Hotel and the ACL Live and 3TEN ACL Live entertainment venues, to Ryman Hospitality Properties, Inc.

(Ryman) was terminated by Ryman on May 21, 2020.

As a result of Ryman’s termination of the transaction, Ryman forfeited to us its $15.0 million of earnest money.

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

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

Impacts on our Business

As a result of the COVID-19 pandemic, we are deferring progress on development projects, including our previously announced Magnolia Place project, pending improvements in health and market conditions, but we continue to advance our land planning, engineering and permitting activities.

Many of our retail leasing tenants, other than grocery and liquor stores, have been closed or 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, we 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 our retail tenants have reopened.

At our multi-family properties, we have 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, our second-quarter retail and multi-family rent collections are 15 percent less than scheduled rent as of June 22, 2020.

Our revenue, operating income and cash flow from our 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 our 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.

We have implemented measures such as increased sanitizing, physical distancing and remote work arrangements, with the goal of protecting employees, tenants, guests, customers and suppliers.

The impacts of the COVID-19 pandemic on each of our segments are described below in more detail in “Results of Operations.”

Our current plans call for us to focus on ramping up operations at Block 21 as health and market conditions permit, advancing our land planning, engineering and permitting activities for our development projects and assessing new opportunities for future projects.

Impacts on our Liquidity and Capital Resources

In April 2020, we extended the maturity date of our $60 million revolving credit facility to September 27, 2020, and on June 12, 2020, we further extended the maturity date of the facility to September 27, 2022.

As of June 12, 2020, we had borrowed $34.8 million on the facility and had $150 thousand of letters of credit committed against the facility, with $25.0 million available for future borrowings.

As discussed in more detail below, we project that we will be able to meet our debt service and other cash obligations for at least the next 12 months, without any significant asset sales or reductions in general and administrative expenses.

However, our projections are based on many detailed and complex underlying

assumptions, including that our hotel and entertainment businesses will begin to ramp up in the summer of 2020, that tenants granted rent deferrals will recommence rent payments as agreed and that current conditions in our leasing operations will not further deteriorate materially.

No assurances can be given that the results anticipated by our projections will occur.

See “Capital Resources and Liquidity ” below, “Risk Factors” included in Part II, Item 1A.

of this Form 10-Q and “Risk Factors” included in Part I, Item 1A.

of our 2019 Form 10-K, for further discussion.

We are continuing to closely monitor health and market conditions and are prepared to make further adjustments to our business strategy if and when appropriate.

OVERVIEW OF FINANCIAL RESULTS FOR FIRST-QUARTER 2020

Our net loss attributable to common stockholders totaled $1.1 million, $0.13 per share, in first-quarter 2020, compared with net income of $0.9 million, $0.10 per share, in first-quarter 2019.

Our net loss attributable to common stockholders in first-quarter 2020, compared to our net income in first-quarter 2019, is primarily the result of municipal utility district (MUD) reimbursements and a gain on sale of assets being recognized in first-quarter 2019 (as discussed below) and higher interest expense related to higher average debt in first-quarter 2020.

Our revenues totaled $28.1 million in first-quarter 2020, compared with $19.7 million in first-quarter 2019.

The increase in revenues in first-quarter 2020, compared to first-quarter 2019, primarily reflects the sales of two homes built on Amarra Drive Phase III lots and an increase in lot sales in first-quarter 2020, along with an increase in revenue from leasing operations.

The overall increase in revenues was net of declines in revenues in our hotel and entertainment segments caused by the COVID-19 pandemic.

In first-quarter 2019, we received $4.6 million of proceeds related to Travis County MUD reimbursements of infrastructure costs incurred for development of Barton Creek.

First-quarter 2019 also included a gain on the sale of assets totaling $2.1 million, primarily related to the sale of a retail pad subject to a ground lease located in the Circle C community.

DEVELOPMENT ACTIVITIES

Current Residential Activities.

In third-quarter 2019, we sold 4 Amarra Drive Phase III lots, 3 of which were included in the contract discussed below, for a total of $2.6 million, and during the first nine months of 2019, we sold 10 Amarra Drive Phase III lots, 7 of which were included in the contract discussed below, for a total of $6.0 million.

As of September 30, 2019, 21 developed Amarra Drive Phase III lots and 9 developed Amarra Drive Phase II lots remained unsold.

In September 2019, we amended a contract previously entered into in March 2018, pursuant to which we agreed to sell 2 Amarra Drive Phase II lots and 15 Amarra Drive Phase III lots to a homebuilder for a total of $11.6 million (the homebuilder contract).

In accordance with the homebuilder contract, the parties are required to close on the sale of these lots ratably by September 30, 2020.

In first-quarter 2020, we sold two Amarra Drive Phase II lots, six Amarra Drive Phase III lots, one of which was included in the contract discussed below, and two homes built on Amarra Drive Phase III lots for a total of $12.3 million.

As of March 31, 2020, 11 developed Amarra Drive Phase III lots and 5 developed Amarra Drive Phase II lots remained unsold, of which 4 Phase III lots and 3 Phase II lots were subject to the new homebuilder contract discussed below.

In January 2020, the original homebuilder contract was terminated and replaced with

a similar contract with the same homebuilder in which we agreed to sell the three remaining Amarra Drive Phase III

lots under the original contract as well as three new Amarra Drive Phase II lots and two new Amarra Drive Phase III

lots for $5.2 million (the new homebuilder contract).

In accordance with the new homebuilder contract the parties

are required to close on the sale of these lots ratably before March 31, 2021.

If the purchaser fails to close on the sale of the minimum number of lots by any of the specified closing dates, we may elect to terminate the homebuilder contract but would retain the related $45 thousand earnest money.

Subsequent to September 30, 2019, and through November 8, 2019, we sold one Amarra Drive Phase II lot and two Amarra Drive Phase III lots, one of which was subject to the homebuilder contract, for a total of $2.2 million.

As of November 8, 2019, three Amarra Drive Phase III lots were under contract, in addition to the remaining five Amarra Drive Phase III lots subject to the homebuilder contract.

In first-quarter 2020, in accordance with the contract, we sold one Amarra Drive Phase III lot for $695 thousand as discussed above.

Subsequent to March 31, 2020, and through June 22, 2020, we closed on the sale of one Amarra Drive Phase III lot for $650 thousand and one Amarra Drive Phase II lot for $632 thousand, both of which were subject to the new homebuilder contract.

As of June 22, 2020, one Amarra Drive Phase II lot and one Amarra Drive Phase III lot were under contract, in addition to the remaining two Amarra Drive Phase II lots and three Amarra Drive Phase III lots subject to the new homebuilder contract discussed above.

The Villas at Amarra Drive (Amarra Villas) townhome project is a 20-unit development in the Barton Creek community for which we completed construction of the first seven townhomes during 2017 and 2018.

The last completed townhome was sold in second-quarter 2019.

During the first nine months of 2019 we sold two townhomes for $3.5 million.

We expect to begin construction of the next four Amarra Villas townhomes during fourth-quarter 2019.

As of September 30, 2019, The Santal, a 448-unit, garden-style, multi-family project located in the upscale Barton Creek Community, was fully leased and stabilized.

We completed construction of the second phase of The Santal, located directly adjacent to the first phase, during first-quarter 2019.

On September 30, 2019, we closed a $75.0 million loan to refinance The Santal.

Refer to Note 6 for further discussion of The Santal refinancing.

In June 2018, we obtained project financing for, and commenced construction of The Saint Mary, a 240-unit luxury garden-style apartment project in the Circle C Community.

As of September 30, 2019, five of the nine buildings had been completed, and the first tenants took occupancy in July 2019.

Two more buildings were completed in October 2019, and the last two buildings are expected to be completed by the end of November 2019.

last two completed townhomes in 2019.

We began construction of the next two Amarra Villas townhomes during first-quarter 2020.

The Santal, a multi-family project consisting of 448 units in Section N in the Barton Creek community, is fully leased and stabilized.

The Saint Mary, a multi-family project consisting of 240 units in the Circle C community, was approximately 65 percent leased as of March 31, 2020.

For further discussion of our multi-family and single-family residential properties, see MD&A in our 2019 Form 10-K.

Current Commercial Activities.

Construction of Kingwood Place, an H-E-B, L.P.

(HEB)-anchored, mixed-use development in Kingwood, Texas, is progressing on schedule.

As of September 30, 2019, we had signed leases for approximately 80 percent of the retail space, including the HEB grocery store.

The HEB grocery store is anticipated to open November 13, 2019, and the retail buildings were completed and turned over to tenants for construction of their interior spaces in August 2019.

Refer to Note 3 for further discussion of project financing.

During 2019, we completed construction of two retail buildings totaling 41,000 square feet and a 103,000-square-foot H-E-B, L.P.

(HEB) grocery store at Kingwood Place, an HEB-anchored, mixed-use development in Kingwood, Texas.

An 8,000-square-foot retail building is under construction and expected to be completed in July 2020, and we have signed ground leases on two of the retail pads.

As of March 31, 2020, we had signed leases for approximately 85 percent of the retail space, including the HEB grocery store.

In March 2019, we finalized the lease for the HEB store at New Caney, an HEB-anchored, mixed-use development in New Caney, Texas, and acquired HEB's interest in the partnership for approximately $5 million.

We currently do not anticipate commencing construction on the New Caney project prior to 2021.

Refer to Note 6 for further discussion of the land loan.

Construction of the first phase of Lantana Place, a mixed-use development project located in southwest Austin was completed in 2018.

As of September 30, 2019, we had signed leases for approximately 80 percent of the retail space, including the anchor tenant, Moviehouse & Eatery, and a ground lease for an AC Hotel by Marriott.

Construction of the hotel began in May 2019.

As of September 30, 2019, we had signed leases for approximately 95 percent of the retail space at the first phase of Jones Crossing, an HEB-anchored, mixed-use development located in College Station, Texas, and approximately 70 percent of the retail space at West Killeen Market, our retail project located in Killeen, Texas, shadow-anchored by an HEB grocery store.

Lantana Place is a partially developed, mixed-use development project located in southwest Austin.

As of March 31, 2020, we had signed leases for approximately 80 percent of the retail space, including the anchor tenant, Moviehouse & Eatery, and a ground lease for an AC Hotel by Marriott.

As of June 24, 2020, Moviehouse & Eatery had not reopened and we were in the process of renegotiating the lease.

Construction of the hotel began in May 2019 and is expected to be completed in January 2021.

We have rezoned a portion of the Lantana property for a potential multi-family development of up to 350 units.

As of March 31, 2020, we had signed leases for approximately 95 percent of the retail space at the first phase of Jones Crossing, an HEB-anchored, mixed-use development located in College Station, Texas, and approximately 70 percent of the retail space at West Killeen Market, our retail project located in Killeen, Texas, shadow-anchored by an adjacent HEB grocery store.

For further discussion of our commercial properties, see MD&A in our 2019 Form 10-K.

Projects in Planning.

We are planning to proceed, subject to financing, with the first phase of development of Magnolia Place, a new mixed-use project in Magnolia, Texas, currently planned for 81,000 square feet of retail space;

six pad sites;

two hotel sites;

and 50 acres of residential land allowing up to 1,200 multi-family units.

Magnolia Place will be shadow-anchored by a 95,000-square-foot HEB grocery store to be constructed by HEB on an adjoining 18-acre site owned by HEB.

The first phase of development is expected to consist of approximately 41,000 square feet of retail space, three pads for lease and three pads to be held for sale, and we are currently evaluating the initial phase of multi-family development.

We are currently in the process of securing a construction loan to finance the first phase of development and expect to begin site clearing in early 2020, followed by site work and joint use road and utility infrastructure that will support the entire project.

We expect substantially all of the infrastructure costs to be eligible for future reimbursement by the Magnolia East MUD.

Refer to Note 1 in our 2018 Form 10-K for further discussion of this MUD and our accounting policy for MUD reimbursements.

The HEB grocery store is currently expected to open in mid-2021.

We are deferring progress on our development projects, including the previously announced first phase of development of Magnolia Place, a mixed-use project in Magnolia, Texas, currently planned for 133,605 square feet of commercial space;

2 hotel sites;

and 96 single-family lots and 588 multi-family units, pending improvements in health and market conditions.

We are advancing the planning and permitting process for development of future phases of Barton Creek, including residential Section KLO and commercial and multi-family Section N.

We redesigned Section KLO using a combination of single family lots and residential condominium lots, which is expected to double our density from 154 to 316 home sites.

We submitted initial subdivision permit applications to the City of Austin and Travis County for Section KLO, which were approved in October 2019.

We redesigned Section KLO using a combination of single family lots and residential condominium lots, which is expected to increase our density from 154 to approximately 420 home sites.

The city of Austin and Travis County approved initial subdivision permit applications for Section KLO in October 2019.

The engineering for roads and utilities for the initial phases of Section KLO is in process.

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Because of the nature and cost of the approval and development process and uncertainty regarding market demand for a particular use, there is uncertainty regarding the nature of the final development plans and whether we will be able to successfully execute the plans.

In addition, our development plans for Section

KLO and Section N will require significant capital, which we may pursue through debt and/or equity financings, joint ventures, commercial, partner or other arrangements.

In addition, our development plans for Section KLO and Section N will require significant capital, which we may pursue through debt and/or equity financings, joint ventures, commercial, partner or other arrangements.

RESULTS OF OPERATIONS

We are continually evaluating the development and sale potential of our properties and will continue to consider opportunities to enter into transactions involving our properties, including possible sales, joint ventures or other arrangements.

However, because of the pandemic we are deferring progress on development projects as we monitor health and market conditions.

In addition, the pandemic has adversely affected the market for the sale of real estate in our operating areas at this time, and as a result, and because we project that we will not need to sell properties for liquidity purposes in the near term, we do not expect to sell significant assets at what we believe to be temporarily depressed market prices.

As a result, and because of numerous other factors affecting our business activities as described herein and in our 2019 Form 10-K, our past operating results are not necessarily indicative of our future results.

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The following table summarizes our results (in thousands):

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

2019 2018 2019 2018

Three Months Ended March 31,

Operating income (loss):

Real Estate Operations $ 211 $ (236) $ 3,331 $ 702

Real Estate Operations a

$ 2,099 $ 2,846

Leasing Operations 824 2,421

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Entertainment 461 824

Corporate, eliminations and other (3,391) (2,776) (9,661) (9,022)

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

Corporate, eliminations and other b

(2,978) (3,222)

Operating (loss) income $ (648) $ 3,643

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

Net loss attributable to common stockholders

Net (loss) income attributable to common stockholders

$ (1,070) $ 862

Includes sales commissions and other revenues together with related expenses.

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

We have four operating segments:

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Real Estate Operations

COVID-19 Pandemic Impact

The pandemic is negatively affecting our real estate operations.

We are deferring progress on development projects, as we continue to monitor developments in the market, but we continue to advance our land planning, engineering and permitting activities.

We cannot predict when we will be able to recommence the active pursuit of our development projects.

Also, the economic downturn caused by the pandemic has adversely affected the market for the sale of real estate in our operating areas.

During second-quarter 2020 and through June 22, 2020, we have sold two lots, compared with eight lots and two homes in first-quarter 2020.

For further discussion, see Part II, Item 1A.

"Risk Factors."

First-Quarter Results

The following table summarizes our Real Estate Operations results (in thousands):

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

2019 2018 2019 2018

Three Months Ended March 31,

Developed property sales $ 12,308 $ 2,834

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Total revenues 12,340 2,953

Cost of sales, including depreciation 2,409 2,344 6,375 9,595

Operating income (loss) $ 211 $ (236) $ 3,331 $ 702

Cost of sales, including depreciation 10,241 107 a

Operating income $ 2,099 $ 2,846

Includes $3.4 million credit related to MUD reimbursements.

Developed Property Sales.

The following table summarizes our developed property sales (dollars in thousands):

Three Months Ended September 30,

Lots/Units Revenues Average Cost Per Lot/Unit Lots/Units Revenues Average Cost Per Lot/Unit

Amarra Drive:

Phase II — $ — $ — 1 $ 670 $ 211

Phase III 4 2,601 261 2 1,355 289

Total Residential 4 $ 2,601 3 $ 2,025

Nine Months Ended September 30,

Lots/Units Revenues Average Cost Per Lot/Unit Lots/Units Revenues Average Cost Per Lot/Unit

Three Months Ended March 31,

Lots/Homes Revenues Average Cost Per Lot/Home Lots/Homes Revenues Average Cost Per Lot/Home

Amarra Drive:

Phase II — $ — $ — 2 $ 1,275 $ 210

Phase III 10 6,033 242 6 3,800 272

Amarra Villas 2 3,450 1,607 2 3,821 1,666

W Austin Hotel & Residences Project

Condominium Unit — — — 1 1,140 726

Phase II lots 2 $ 1,190 $ 208 — — —

Phase III lots 6 3,940 314 2 $ 1,149 $ 226

Homes built on Phase III lots 2 7,178 3,273 — — —

Amarra Villas townhomes — — — 1 1,685 1,588

Total Residential 10 $ 12,308 3 $ 2,834

Real Estate Revenue.

The increase in revenue in third-quarter 2019, compared to third-quarter 2018, primarily reflects more sales of developed properties in third-quarter 2019.

The decrease in revenue during the first nine months of 2019, compared to the first nine months of 2018, primarily reflects the sale of a W Austin Hotel & Residences condominium in the 2018 period.

The increase in revenue in first-quarter 2020, compared to first-quarter 2019, primarily reflects the sales of two homes built on Amarra Drive Phase III lots and an increase in lot sales in first-quarter 2020.

Cost of Sales.

Cost of sales includes cost of property sold, project operating and marketing expenses and allocated overhead costs, partly offset by reductions for certain MUD reimbursements.

Cost of sales totaled $2.4 million in third-quarter 2019 and $6.4 million for the first nine months of 2019, compared with $2.3 million in third-quarter 2018 and $9.6 million for the first nine months of 2018.

The increase in cost of sales in third-quarter 2019, compared with third-quarter 2018, primarily reflects higher real estate sales in the 2019 quarter.

The decrease in cost of sales for the first nine months of 2019, compared with the first nine months of 2018, primarily reflects $3.4 million in MUD reimbursements in the first nine months of 2019 recorded as a reduction in real estate cost of sales as the reimbursed property had previously been sold.

Costs of sales for the first nine months of 2018 includes $0.4 million of reductions to cost of sales associated with collection of prior-years' assessments of properties in Barton Creek.

Cost of sales totaled $10.2 million in first-quarter 2020, compared with $0.1 million in first-quarter 2019.

The increase in cost of sales in first-quarter 2020, compared with first-quarter 2019, primarily reflects the sales of two homes built on Phase III lots, which have a higher average cost, and an increase in the number of lots sold first-quarter 2020.

The increase also reflects $3.4 million in MUD reimbursements received in first-quarter 2019 recorded as a reduction in real estate cost of sales as the reimbursed property had previously been sold.

Leasing Operations

COVID-19 Pandemic Impact

The pandemic is negatively affecting our leasing operations, primarily at our retail properties.

Tenants at our retail locations are diverse and include grocery and liquor stores, which have remained open and have paid rent owed to-date, and restaurants, healthcare services, fitness centers, a movie house and other retail products and services, many of which have been closed or operating at significantly reduced capacity beginning late in the first quarter of 2020 and continuing during 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 our retail tenants have reopened.

We will continue to consider rent deferral accommodations on a case-by-case basis.

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

As a result of these rent deferral arrangements, and as a result of some other tenants not paying rent, our rental collections in our leasing segment are expected to decline significantly for the second quarter of 2020 and into the third quarter of 2020.

We cannot assure you that our tenants will recommence rental payments in accordance with our agreements when the deferral period ends nor whether tenants will request additional accommodations or be willing or able to meet future lease obligations.

For further discussion, see Part II, Item 1A.

"Risk Factors."

First-Quarter Results

The following table summarizes our Leasing Operations results (in thousands):

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

2019 2018 2019 2018

Three Months Ended March 31,

Rental revenue $ 5,959 $ 3,859

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Rental Revenue.

Rental revenue primarily includes revenue from The Santal, the office and retail space at the W Austin Hotel & Residences, West Killeen Market, Lantana Place, Jones Crossing and Barton Creek Village.

The increase in rental revenue in the 2019 periods, compared with the 2018 periods, primarily reflects the commencement of new leases at The Santal, Lantana Place and Jones Crossing.

Rental revenue primarily includes revenue from The Santal, Lantana Place, Jones Crossing, The Saint Mary, Kingwood Place, the office and retail space at the W Austin Hotel & Residences, and West Killeen Market.

The increase in rental revenue in first-quarter 2020, compared with first-quarter 2019, primarily reflects the commencement of new leases at The Saint Mary, Kingwood Place, The Santal, Jones Crossing and Lantana Place.

Rental Cost of Sales and Depreciation.

Rental cost of sales and depreciation expense increased in the 2019 periods, compared with the 2018 periods, primarily as a result of the leasing activity at The Santal, Lantana Place, Jones Crossing and The Saint Mary.

Rental cost of sales and depreciation expense increased in first-quarter 2020, compared with first-quarter 2019, primarily as a result of the completion of construction and the start of leasing operations at The Saint Mary and Kingwood Place.

Gain on Sale of Assets.

On January 17, 2019, Stratus sold a retail pad subject to a ground lease located in the Circle C community for $3.2 million.

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

We recorded a gain of $2.1 million and used a portion of the proceeds from the sale to repay $2.5 million of our Comerica Bank credit facility borrowings.

COVID-19 Pandemic Impact

The pandemic has had, and we believe will continue to have, a significant adverse impact on the hospitality industry, as it has resulted in dramatically curtailed business and leisure travel and caused cancellations of events or rescheduling of events until later in 2020 and beyond.

Accordingly, the pandemic has resulted in a significant decrease in revenue and expected revenue from our hotel rooms, conference facilities and hotel amenities.

As a result of the pandemic, hotel revenue for the second quarter of 2020 will be significantly lower than hotel revenue in the first quarter of 2020, and we expect to incur higher operating losses in the segment during the second quarter of 2020.

We are working with the hotel operator on plans to gradually ramp up hotel operations over the next 12 months, health and market conditions permitting.

The pandemic is expected to continue to negatively affect our hotel business, and the extent to which such adverse impacts continue depends on numerous evolving factors that we cannot predict.

Moreover, even as travel advisories and restrictions are lifted, travel demand may remain weak for a significant length of time and attractions and events that previously brought visitors to the city of Austin may not proceed or may proceed with limited capacity.

We cannot predict if or when our hotel will return to pre-pandemic demand or pricing.

For further discussion, see Part II, Item 1A.

"Risk Factors."

First-Quarter Results

The following table summarizes our Hotel results (in thousands):

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

2019 2018 2019 2018

Three Months Ended March 31,

Hotel revenue $ 5,959 $ 8,372

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Depreciation 1,105 900

Operating income $ 930 $ 719 $ 2,979 $ 3,745

Operating (loss) income $ (1,054) $ 774

Hotel Revenue.

Hotel revenue primarily includes revenue from W Austin Hotel room reservations and food and beverage sales.

The increase in Hotel revenues in third-quarter 2019, compared to third-quarter 2018, is primarily a result of higher food and beverage sales and increased weekday group and transient business.

The decrease in Hotel revenues during the first nine months of 2019, compared to the first nine months of 2018, is primarily a result of reduced transient weekend business and overall group business and lower food and beverage sales.

Revenue per available room (RevPAR), which is calculated by dividing total room revenue by the average total rooms available, was $222 in third-quarter 2019 and $234 for the first nine months of 2019, compared with $214 in third-quarter 2018 and $243 for the first nine months of 2018.

While we remain optimistic about the long-term outlook of the W Austin Hotel based on increased office space growth downtown, continued population growth and increased tourism in the Austin market, a continued increase in competition resulting from the anticipated opening of additional hotel rooms in downtown Austin during the remainder of 2019 and throughout 2020 are expected to have an ongoing impact on our hotel revenues.

We continue to explore various opportunities with respect to Block 21, our mixed-use development in downtown Austin, Texas, that contains the W Austin Hotel & Residences and office, retail and entertainment space, which may include, but are not limited to, a possible sale, recapitalization or other venture.

Our review of potential opportunities is in advanced stages.

Our broker and management are working diligently to complete this review, which we currently expect to conclude within the next 30-60 days at which time we plan to present potential opportunities to our Board of Directions (Board) for consideration.

Any transaction is subject to market conditions and we can give no assurances regarding the timing of any transaction, or whether any transaction will occur.

The decrease in Hotel revenues in first-quarter 2020, compared to first-quarter 2019, is primarily a result of lower room reservations and food and beverage sales as a result of the COVID-19 pandemic.

Revenue per available room (RevPAR), which is calculated by dividing total room revenue by the average total rooms available, was $150 in first-quarter 2020, compared with $238 in first-quarter 2019.

Hotel Cost of Sales.

The decrease in Hotel cost of sales, excluding depreciation, in first-quarter 2020, compared to first-quarter 2019, is primarily a result of lower room reservations and food and beverage sales.

The increase in depreciation in first-quarter 2020, compared to first-quarter 2019, is primarily because of an adjustment for the period in December 2019 when the hotel was held for sale and, therefore, not depreciated.

Hotel Renovation.

We are considering proceeding with a renovation of the hotel guest rooms and public spaces, subject to various approvals, including from our lender, and coordination with the hotel operator.

We expect to use approximately $7 million of reserves previously set aside for hotel improvements under our agreement with the hotel operator and reflected in restricted cash on our balance sheet.

Entertainment

COVID-19 Pandemic Impact

The pandemic has had, and we believe will continue to have, a significant adverse impact on the entertainment industry and our entertainment operations.

Our entertainment venue ACL Live remains closed, and our entertainment venue 3TEN ACL Live is open at limited capacity.

Many events previously scheduled for the rest of 2020 have been rescheduled and some have been cancelled.

As a result of the pandemic, our Entertainment revenues will be much lower in the second quarter of 2020 and into the third quarter of 2020.

It is also unclear whether and to what extent pandemic-related concerns will impact the use of and/or demand for our entertainment venues, even as government restrictions are modified or lifted.

We have several events scheduled at our venues over the summer and expect an increasing number of events over the rest of the year.

However, our scheduled programs will occur only to the extent health and safety conditions, and regulations, permit.

As a result of the pandemic, entertainment revenue for the second quarter of 2020 will be significantly lower than entertainment revenue in the first quarter of 2020, and we expect to incur an operating loss in the segment during the second quarter of 2020.

For further discussion, see Part II, Item 1A.

"Risk Factors."

First-Quarter Results

The following table summarizes our Entertainment results (in thousands):

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

2019 2018 2019 2018

Three Months Ended March 31,

Entertainment revenue $ 4,170 $ 4,825

Entertainment cost of sales, excluding depreciation 3,226 3,607

4,770 4,154 12,962 11,850

Depreciation 483 394

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Revenues from the Entertainment segment vary from period to period as a result of factors such as the price of tickets and number of tickets sold, as well as the number and type of events hosted at ACL Live and 3TEN ACL Live.

Entertainment revenues increased in the 2019 periods, compared to the 2018 periods, primarily as a result of an increase in the number of events hosted and higher event attendance at ACL Live.

Entertainment revenues decreased in first-quarter 2020, compared to first-quarter 2019, primarily as a result of a decrease in the number of events hosted at ACL Live, as many scheduled events in first-quarter 2020 were cancelled as a result of the COVID-19 pandemic.

Certain key operating statistics specific to the concert and event hosting industry are included below to provide additional information regarding our ACL Live and 3TEN ACL Live operating performance.

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

2019 2018 2019 2018

Three Months Ended March 31,

Events hosted 38 64

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Entertainment Cost of Sales.

Entertainment cost of sales, excluding depreciation, totaled $4.8 million in third-quarter 2019 and $13.0 million for the first nine months of 2019, compared to $4.2 million in third-quarter 2018 and $11.9 million for the first nine months of 2018, primarily reflecting increases in the number of events at ACL Live (20 percent increase for the quarterly period and 27 percent increase for the nine-month period).

Entertainment cost of sales, excluding depreciation, totaled $3.2 million in first-quarter 2020, compared to $3.6 million in first-quarter 2019, primarily reflecting decreases in the number of events at ACL Live (41 percent decrease).

As mentioned previously, many scheduled events in first-quarter 2020 were rescheduled or cancelled as a result of the COVID-19 pandemic.

The increase in depreciation in first-quarter 2020, compared to first-quarter 2019, is primarily because of an adjustment for the period in December 2019 when the entertainment venues were held for sale and, therefore, not depreciated.

Corporate, Eliminations and Other

Corporate, eliminations and other (refer to Note 9) includes consolidated general and administrative expenses, which primarily consist of employee salaries and other costs.

Consolidated general and administrative expenses totaled $3.0 million in third-quarter 2019 and $9.1 million for the first nine months of 2019, compared with $2.7 million in third-quarter 2018 and $8.6 million for the first nine months of 2018.

The increases in general and administrative expenses in the 2019 periods, compared with the 2018 periods, primarily reflect charges associated with our Profit Participation Incentive Plan, which was approved in 2018 and did not have charges in the comparative 2018 periods.

Consolidated general and administrative expenses of $2.8 million in first-quarter 2020 were lower, compared with $3.2 million in first-quarter 2019, primarily reflecting lower bonus accruals in first-quarter 2020, including those related to our Profit Participation Incentive Plan.

The overall decrease was partially offset by increases in legal fees incurred in connection with the Block 21 sale that ultimately did not close.

Corporate, eliminations and other also includes eliminations of intersegment transactions among the four operating segments.

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Interest Expense, Net.

Interest costs (before capitalized interest) of $5.2 million in third-quarter 2019 and $14.9 million for the first nine months of 2019 were higher, compared with $4.3 million in third-quarter 2018 and $11.4 million for the first nine months of 2018, primarily reflecting higher average debt to finance development activities.

Capitalized interest totaled $2.0 million in third-quarter 2019 and $6.2 million for the first nine months of 2019, compared with $2.1 million in third-quarter 2018 and $6.0 million for the first nine months of 2018, and is primarily related to development activities at Barton Creek.

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

Loss on Early Extinguishment of Debt.

We recorded losses on early extinguishment of debt of $231 thousand in third-quarter 2019 and $247 thousand for the first nine months of 2019, primarily related to the refinancing of The Santal construction loans.

Refer to Note 6 for further discussion.

Benefit from Income Taxes.

We recorded a benefit from income taxes of $0.4 million for third-quarter 2019 and $0.2 million for the first nine months of 2019, compared with a benefit of $0.5 million in third-quarter 2018 and $1.0 million for the first nine months of 2018.

Interest costs (before capitalized interest) of $5.2 million in first-quarter 2020 were higher, compared with $4.6 million in first-quarter 2019, primarily reflecting higher average debt to finance development activities.

Capitalized interest totaled $1.3 million in first-quarter 2020, compared with $2.1 million in first-quarter 2019 and is primarily related to development activities at Barton Creek.

Other Income, Net.

Other income, net of $19 thousand in first-quarter 2020 decreased, compared with $299 thousand in first-quarter 2019, as a result of receiving proceeds in first-quarter 2019 related to MUD reimbursements of infrastructure costs incurred for development of Barton Creek.

Of the total amount received in first-quarter 2019, we recorded $0.3 million as interest income in other income, net in the consolidated statements of comprehensive (loss) income.

Benefit from (Provision for) Income Taxes.

We recorded a benefit from (provision for) income taxes of $2.5 million in first-quarter 2020, compared with $(0.4) million in first-quarter 2019.

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

Total Comprehensive Loss Attributable to Noncontrolling Interests in Subsidiaries .

During first-quarter 2020 our partners' share of losses totaled $1.1 million for projects that began operations in late 2019, primarily The Saint Mary.

Of this total, $573 thousand relates to losses incurred prior to 2020.

CAPITAL RESOURCES AND LIQUIDITY

Volatility in the real estate market, including the markets in which we operate, can impact sales of our properties from period to period.

However, we believe that the nature and location of our assets will provide us positive cash flows over time.

Comparison of Cash Flows for the Nine Months Ended September 30, 2019 and 2018

Volatility in the real estate market, including the markets in which we operate, can impact the timing of and proceeds received from sales of our properties, which may cause uneven cash flows from period to period.

Our cash flows have also been, and will continue for some time to be, adversely affected by the pandemic, as discussed throughout this report.

However, we believe that the unique nature and location of our assets will provide us positive cash flows over time.

Comparison of Cash Flows for the Three Months Ended March 31, 2020 and 2019

Operating Activities.

Cash used in operating activities totaled $4.0 million for the first nine months of 2019, compared with $26.6 million for the first nine months of 2018.

Expenditures for purchases and development of real estate properties totaled $8.9 million for the first nine months of 2019 and $28.9 million for the first nine months of 2018, primarily related to development of our Barton Creek properties.

Expenditures for purchases and development of real estate properties in the 2018 period also reflect the purchase of the Kingwood Place land.

During the first nine months of 2019, our operating cash flows included MUD reimbursements totaling $4.6 million related to infrastructure costs incurred in Barton Creek (of which $3.7 million reduced the net loss before taxes for the period and $0.9 million was applied to real estate under development).

Cash (used in) provided by operating activities totaled $(4.4) million in first-quarter 2020, compared with $0.7 million in first-quarter 2019.

Expenditures for purchases and development of real estate properties totaled $6.2 million in first-quarter 2020 and $3.3 million in first-quarter 2019, primarily related to development of our Barton Creek properties.

The cash outflow resulting from the increase in other assets in first-quarter 2020 is primarily related to the increase in tax receivables as a result of the CARES Act allowing net operating losses to be carried back to 2017.

Refer to Note 8 for further discussion.

Additionally, the cash outflow resulting from the decrease in accounts payable, accrued liabilities and other in first-quarter 2020 is primarily related to the timing of property tax payments as well contractor retention payments associated with the completion of The Saint Mary and Kingwood Place.

During first-quarter 2019, our operating cash flows included MUD reimbursements totaling $4.6 million related to infrastructure costs incurred in Barton Creek (of which $3.7 million increased net income before taxes for the period and $0.9 million reduced purchases and development of real estate properties).

Investing Activities.

Cash used in investing activities totaled $53.8 million for the first nine months of 2019 and $54.6 million for the first nine months of 2018.

Capital expenditures totaled $51.2 million for the first nine months of 2019, primarily related to development of the Kingwood Place and The Saint Mary projects, and $53.5 million for the first nine months of 2018, primarily related to development of The Santal, Lantana Place, Jones Crossing and The Saint Mary projects.

We also made payments totaling $1.2 million for the first nine months of 2019 and $1.5 million for the first nine months of 2018 under our master lease obligations associated with the 2017 sale of The Oaks at Lakeway.

We recorded a purchase of noncontrolling interest totaling $4.6 million for the first nine months of 2019 as a result of our acquisition of HEB's interests in the New Caney partnership in which we and HEB collectively purchased a tract of land for the future development of an HEB-anchored mixed-use project in New Caney, Texas.

Cash used in investing activities totaled $2.6 million in first-quarter 2020 and $31.2 million in first-quarter 2019.

Capital expenditures totaled $2.3 million in first-quarter 2020, primarily related to development of the Lantana Place, Kingwood Place and Jones Crossing projects, and $29.4 million in first-quarter 2019, primarily related to development of The Saint Mary, Kingwood Place and The Santal projects.

Capital expenditures were lower in first-quarter 2020, compared to first-quarter 2019, primarily as a result of the completion of The Saint Mary and Kingwood Place in late 2019.

In first-quarter 2019, we recorded a purchase of noncontrolling interest totaling $4.6 million as a result of our acquisition of HEB's interests in the New Caney partnership in which we and HEB collectively purchased a tract of land for the future development of an HEB-anchored mixed-use project in New Caney, Texas.

Financing Activities.

Cash provided by financing activities totaled $68.6 million for the first nine months of 2019 and $88.9 million for the first nine months of 2018.

During the first nine months of 2019, net borrowings on the Comerica Bank credit facility totaled $1.1 million, compared with net borrowings of $26.3 million for the first nine months of 2018, primarily to fund development projects and capital expenditures.

Net borrowings on other project and term loans totaled $69.2 million for the first nine months of 2019, primarily related to The Santal refinancing and The Saint Mary, Kingwood Place, Jones Crossing and New Caney, compared with net borrowings of $46.3 million for the first nine months of 2018, primarily for The Santal, Lantana Place and Jones Crossing.

The first nine months of 2018 also include $17.7 million of capital contributions from the Class B limited partners in The Saint Mary and Kingwood Place limited partnerships (refer to Note 3).

See “Credit Facility and Other Financing Arrangements” below for a discussion of our outstanding debt at September 30, 2019.

Credit Facility and Other Financing Arrangements

At September 30, 2019, the total principal amount of our outstanding debt was $371.1 million, compared with $298.4 million at December 31, 2018.

We had borrowings of $51.3 million under the $60.0 million Comerica Bank credit facility, which is comprised of a $60.0 million revolving line of credit, $6.5 million of which was available at September 30, 2019, net of $2.2 million of letters of credit committed against the credit facility.

On September 30, 2019, one of our subsidiaries entered into a $75.0 million loan with ACRC Lender LLC to refinance The Santal construction loans.

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

Refer to Notes 5 and 6 for further discussion.

Cash provided by financing activities totaled $6.2 million in first-quarter 2020 and $25.6 million in first-quarter 2019.

During first-quarter 2020, net borrowings on the Comerica Bank credit facility totaled $6.8 million, primarily to fund working capital changes, compared with net repayments of $0.8 million in first-quarter 2019.

Net repayments on other project and term loans totaled $0.5 million in first-quarter 2020, primarily related to repayment of the Amarra Villas credit facility partially offset by borrowings for The Saint Mary and Kingwood Place projects, compared with net borrowings of $26.7 million in first-quarter 2019, primarily for the Jones Crossing, Amarra Villas, The Saint Mary and New Caney projects.

See “Credit Facility, Other Financing Arrangements and Liquidity Outlook” below for a discussion of our outstanding debt at March 31, 2020.

Credit Facility, Other Financing Arrangements and Liquidity Outlook

At March 31, 2020, the total principal amount of our outstanding debt was $376.1 million, compared with $369.2 million at December 31, 2019.

We had borrowings of $49.3 million under the $60.0 million Comerica Bank credit facility, which is comprised of a $60.0 million revolving line of credit, $10.6 million of which was available at March 31, 2020, net of $150 thousand of letters of credit committed against the credit facility.

On June 12, 2020, we amended our credit facility agreement with Comerica Bank to extend the maturity date from September 27, 2020, to September 27, 2022.

As of June 12, 2020, we had borrowed $34.8 million on the facility and had $150 thousand of letters of credit committed against the facility, with $25.0 million available for future borrowings.

Refer to Note 6 in our 2019 Form 10-K for further discussion of our outstanding debt.

Refer to “Debt Maturities and Other Contractual Obligations” below for a table illustrating the timing of principal payments due on our outstanding debt as of March 31, 2020.

Several of our financing instruments contain customary financial covenants.

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The Santal loan includes a requirement that we maintain liquid assets, as defined in the agreement, of not less than $7.5 million.

The Comerica credit facility, the Goldman Sachs loan, the Lantana Place construction loan, the Jones Crossing construction loan, The Saint Mary construction loan, the Amarra Villas credit facility, the Kingwood Place loan, the New Caney land loan and The Santal loan include a requirement that we maintain a net asset value, as defined in the agreements, of $125 million.

The Comerica credit facility, the Amarra Villas credit facility and the Kingwood Place construction loan also include a requirement that we maintain a promissory note debt-to-gross

asset value, as defined in the agreement, of less than 50 percent.

In addition, our Comerica Bank credit facility and the Amarra Villas credit facility require Comerica's prior written consent for any common stock repurchases in excess of $1.0 million in aggregate and for any dividend payments.

Our Barton Creek Village term loan includes a requirement that Stratus' subsidiary maintain a minimum debt service coverage ratio, as defined in the agreement, of 1.35 to 1.00.

As of December 31, 2018, and September 30, 2019, the subsidiary's minimum debt service coverage ratio calculated in accordance with the Barton Creek Village term loan agreement was not in compliance with this requirement.

PlainsCapital Bank waived the subsidiary's obligation to comply with the minimum debt service coverage ratio until December 31, 2019.

As of September 30, 2019, Stratus was in compliance with all other financial covenants.

The Saint Mary construction loan and the New Caney land loan include a requirement that we maintain liquid assets, as defined in each agreement, of not less than $10 million.

The Comerica Bank credit facility, the Lantana Place construction loan, the Jones Crossing construction loan, The Saint Mary construction loan, the Amarra Villas credit facility, the Kingwood Place construction loan, the New Caney land loan and The Santal loan include a requirement that we maintain a net asset value, as defined in each agreement, of $125 million.

The Comerica Bank credit facility, the Amarra Villas credit facility and the Kingwood Place construction loan also include a requirement that we maintain a promissory note debt-to-gross asset value, as defined in the agreement, of less than 50 percent.

The Santal loan, the West Killeen Market construction loan, and the Lantana Place construction loan each include a financial covenant to maintain a debt service coverage ratio as defined in each agreement.

In addition, our loan agreements with Comerica Bank require Comerica Bank’s prior written consent for any common stock repurchases in excess of $1.0 million or dividend payments.

As of March 31, 2020, we were in compliance with all of our financial covenants.

We proactively engaged with our project lenders in connection with formulating rent deferral arrangements for tenants at our projects as a result of the pandemic.

Although each of our projects is expected to generate sufficient revenue to pay debt service, our projections showed that we would not meet the debt service coverage ratio covenant at June 30, 2020, under the Lantana Place construction loan, and we have been granted a waiver of the covenant for the quarters needed such that we believe we will be able to remain in compliance if rent payments recover as anticipated.

The Goldman Sachs loan agreement secured by the Block 21 assets contains financial covenant requirements that we maintain (i) a net worth in excess of $125 million, (ii) liquid assets of not less than $10 million and (iii) a trailing-12-month debt service coverage ratio, tested quarterly, each as defined in the agreement.

If any of these financial covenants are not met, a “Trigger Period”, which is not a default, results.

As of March 31, 2020, we were in compliance with all of the financial covenants in the Goldman Sachs loan.

However, as a result of the pandemic, we expect that we will not meet the debt service coverage ratio test on the June 30, 2020, test date.

During a Trigger Period, any cash generated from Block 21's hotel, entertainment and office and retail space in excess of amounts necessary to fund loan obligations, budgeted operating expenses and specified reserves would not be available to be distributed to us until after we meet a higher debt service coverage ratio requirement for two consecutive quarters.

As the ratio is calculated on a trailing-12-month basis, we do not expect the Trigger Period to terminate until early 2022.

The Goldman Sachs loan agreement requires us to contribute cash to our Block 21 subsidiary if funds from Block 21’s operations are insufficient to fund all payments and reserves as required under our loan agreement.

Additionally, under our hotel operating agreement, the hotel operator may request funds from us if it reasonably determines that such funds are required in order to fund the operation of the hotel and specified reserves.

We have been required to contribute such funds during 2020, and our projections reflect that we will be required to do so in future periods in 2020 and early 2021.

In addition, our projections reflect that we will need to contribute funds to certain of our leasing projects in future periods in 2020 and early 2021.

As of March 31, 2020, we had $7.8 million of liabilities for deferred income and deposits that primarily related to ticket and sponsorship presales at our venues.

We have refunded amounts related to events that have been cancelled, and we may refund additional amounts if more events are cancelled in the future.

We project that we will be able to meet our debt service and other cash obligations for at least the next 12 months, without any significant asset sales or reductions in general and administrative expenses.

Prior to the start of the pandemic, our retail and multi-family projects were in advanced lease-up phases, and we expect that they will generate sufficient revenue to pay debt service.

We have no significant principal maturities of debt during the remainder of 2020.

In addition, we have no material commitments for capital expenditures and have deferred progress on development projects as we continue to evaluate market conditions.

Our projections are based on many detailed and complex underlying assumptions, including that our hotel and entertainment businesses will

begin to ramp up in the summer of 2020, that tenants granted rent deferrals will recommence rent payments as agreed and that current conditions in our leasing operations will not further deteriorate materially.

No assurances can be given that the results anticipated by our projections will occur.

See “Risk Factors” included in Part II, Item 1A.

of this Form 10-Q and “Risk Factors” included in Part I, Item 1A.

of our 2019 Form 10-K , for further discussion.

DEBT MATURITIES AND OTHER CONTRACTUAL OBLIGATIONS

The following table summarizes our debt maturities based on the principal amounts outstanding as of September 30, 2019 (in thousands):

The following table summarizes our debt maturities based on the principal amounts outstanding as of March 31, 2020 (in thousands):

2020 2021 2022 2023 2024 Thereafter Total

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49,300 — — — — — 49,300

Amarra Villas credit facility

— — — 5,674 — — 5,674

New Caney land loan c

— 5,000 — — — — 5,000

Barton Creek Village term loan 23 94 100 105 112 2,822 3,256

Construction loans:

Lantana Place

Kingwood Place a

— — 27,498 — — — 27,498

Jones Crossing

Lantana Place

32 382 399 22,645 — — 23,458

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— 25,181 — — — — 25,181

Kingwood Place a

Jones Crossing

— 237 334 21,355 — — 21,926

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87 122 7,087 — — — 7,296

Amarra Villas credit facility — — 5 — — — 5

Total $ 51,155 $ 33,392 $ 112,936 $ 46,765 $ 2,904 $ 128,967 $ 376,119

We have the option to extend the maturity date for two additional twelve-month periods, subject to certain conditions.

Refer to Note 6 for further information regarding our Comerica Bank credit facility.

We have the option to extend the maturity date for one additional twelve-month period, subject to certain conditions.

We have the option to extend the maturity date for two additional 12-month periods, subject to certain conditions.

Refer to Note 6 for further information, including the June 2020 amendment to extend the maturity to September 27, 2022.

We have the option to extend the maturity date for one additional 12-month period, subject to certain conditions.

Other than debt transactions (as discussed in Note 6), there have been no material changes in our contractual obligations since December 31, 2019.

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in our 2019 Form 10-K for further information regarding our contractual obligations.

CRITICAL ACCOUNTING ESTIMATES

There have been no changes in our critical accounting estimates from those discussed in our 2019 Form 10-K.

NEW ACCOUNTING STANDARDS

Refer to Note 10 for discussion of a recently adopted accounting standards update.

There have been no changes in new accounting standards from those discussed in Note 1 to the financial statements included in our 2019 Form 10-K.

OFF-BALANCE SHEET ARRANGEMENTS

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CAUTIONARY STATEMENT

MD&A contains forward-looking statements in which we discuss factors we believe may affect our future performance.

Forward-looking statements are all statements other than statements of historical fact, such as statements regarding projections or expectations related to the planning, financing, development, construction, completion and stabilization of our development projects, plans to sell, recapitalize, or refinance properties, operational and financial performance, expectations regarding future cash flows, MUD reimbursements for infrastructure costs, regulatory matters, leasing activities, estimated costs and timeframes for development and stabilization of properties, financing plans, possible joint venture, partnership, strategic relationships or other relationships or other arrangements, our projections with respect to our obligations under the master lease agreements entered into in connection with the sale of The Oaks at Lakeway in 2017, other plans and objectives of management for future operations and development projects, future dividend payments and share repurchases.

words “anticipate,” “may,” “can,” “plan,” “believe,” “potential,” “estimate,” “expect,” “project,” "target," “intend,” “likely,” “will,” “should,” “to be” and any similar expressions and/or statements that are not historical facts are intended to identify those assertions as forward-looking statements.

This Quarterly Report on Form 10-Q contains forward-looking statements in which we discuss factors we believe may affect our future performance.

Forward-looking statements are all statements other than statements of historical fact, such as plans, projections or expectations related to the impacts of the COVID-19 pandemic and its economic effects, future cash flows and liquidity, and our ability to remain in compliance with financial and other covenants in debt agreements and to meet other cash obligations, the planning, financing, development, construction, completion and stabilization of our development projects, plans to sell, recapitalize or refinance properties, operational and financial performance, MUD reimbursements for infrastructure costs, regulatory matters, leasing activities, estimated costs and timeframes for development and stabilization of properties, tax rates, the impact of interest rate changes, capital expenditures, financing plans, possible joint venture, partnership, strategic relationships or other arrangements, our projections with respect to our obligations under the master lease

agreements entered into in connection with the 2017 sale of The Oaks at Lakeway, other plans and objectives of management for future operations and development projects, future dividend payments and share repurchases.

The words “anticipate,” “may,” “can,” “plan,” “believe,” “potential,” “estimate,” “expect,” “project,” "target," “intend,” “likely,” “will,” “should,” “to be” and any similar expressions and/or statements that are not historical facts are intended to identify those assertions as forward-looking statements.

Under our loan agreements with Comerica Bank, we are not permitted to pay dividends on common stock without Comerica Bank’s prior written consent.

The declaration of dividends is at the discretion of our Board, subject to restrictions under our loan agreements with Comerica Bank, and will depend on our financial results, cash requirements, projected compliance with covenants in our debt agreements, outlook and other factors deemed relevant by the Board.

We caution readers that forward-looking statements are not guarantees of future performance and actual results may differ materially from those anticipated, expected, projected or assumed in the forward-looking statements.

Important factors that can cause our actual results to differ materially from those anticipated in the forward-looking statements include, but are not limited to, our ability to refinance and service our debt, the availability and terms of financing for development projects and other corporate purposes, our ability to enter into and maintain joint venture, partnership, strategic relationships or other arrangements, our ability to effect our business strategy, including our ability to sell properties at prices our Board considers acceptable, market conditions or corporate developments that could preclude, impair or delay any opportunities with respect to plans to sell, recapitalize or refinance properties, our ability to obtain various entitlements and permits, a decrease in the demand for real estate in the Austin, Texas area and other select markets in Texas where we operate, changes in economic, market and business conditions, reductions in discretionary spending by consumers and corporations, competition from other real estate developers, hotel operators and/or entertainment venue operators and promoters, challenges associated with booking events and selling tickets and event cancellations at our entertainment venues, the termination of sales contracts or letters of intent because of, among other factors, the failure of one or more closing conditions or market changes, our ability to secure qualifying tenants for the space subject to the master lease agreements entered into in connection with the 2017 sale of The Oaks at Lakeway and to assign such leases to the purchaser and remove the corresponding property from the master leases, the failure to attract customers or tenants for our developments or such customers' or tenants' failure to satisfy their purchase commitments or leasing obligations, increases in interest rates and the phase out of the London Interbank Offered Rate, declines in the market value of our assets, increases in operating costs, including real estate taxes and the cost of building materials and labor, changes in external perception of the W Austin Hotel, unanticipated issues experienced by the third-party operator of the W Austin Hotel, changes in consumer preferences, industry risks, changes in laws, regulations or the regulatory environment affecting the development of real estate, opposition from special interest groups or local governments with respect to development projects, weather-related risks, loss of key personnel, cybersecurity incidents and other factors described in more detail under the heading “Risk Factors” in Part I, Item 1A.

of our 2018 Form 10-K.

Investors are cautioned that many of the assumptions upon which our forward-looking statements are based are likely to change after the forward-looking statements are made.

We caution readers that forward-looking statements are not guarantees of future performance and actual results

may differ materially from those anticipated, expected, projected or assumed in the forward-looking statements.

Important factors that can cause our actual results to differ materially from those anticipated in the forward-looking

statements include, but are not limited to, evolving risks relative to the COVID-19 pandemic and its economic effects, including the impact of the actions taken by governmental authorities to contain the virus or address the impact of the virus on the economy, fear of the further spread or second wave of COVID-19, the duration and scope of the COVID-19 pandemic and impact thereof including the pace of recovery, our ability to pay or refinance our debt or remain in compliance with financial and other covenants in debt agreements and to meet other cash obligations, the availability and terms of financing for development projects and other corporate purposes, our ability to enter into and maintain joint venture, partnership, strategic relationships or other arrangements, our ability to affect our business strategy successfully, including our ability to develop, construct and sell properties at prices our Board considers acceptable, market conditions or corporate developments that could preclude, impair or delay any opportunities with respect to plans to sell, recapitalize or refinance properties, our ability to obtain various entitlements and permits, a decrease in the demand for real estate in select markets in Texas where we operate, changes in economic, market and business conditions, reductions in discretionary spending by consumers and businesses, competition from other real estate developers, hotel operators and/or entertainment venue operators and promoters, challenges associated with booking events and selling tickets and event cancellations at Stratus’ entertainment venues, which may result in refunds to customers, the termination of sales contracts or letters of intent because of, among other factors, the failure of one or more closing conditions or market changes, our ability to secure qualifying tenants for the space subject to the master lease agreements entered into in connection with the 2017 sale of The Oaks at Lakeway and to assign such leases to the purchaser and remove the corresponding property from the master leases, the failure to attract customers or tenants for our developments or such customers’ or tenants’ failure to satisfy their purchase commitments or leasing obligations, grants of rent deferral accommodations to our tenants and ability of our tenants to resume rent payments as agreed, increases in interest rates and the phase out of the London Interbank Offered Rate, declines in the market value of our assets, increases in operating costs, including real estate taxes and the cost of building materials and labor, changes in external perception of the W Austin Hotel, unanticipated issues experienced by the third-party operator of the W Austin Hotel, changes in consumer preferences, industry risks, changes in laws, regulations or the regulatory environment affecting the development of real estate, opposition from special interest groups or local governments with respect to development projects, weather-related risks, loss of key personnel, cybersecurity incidents and other factors described in more detail under the heading “Risk Factors” in Part I, Item 1A.

of our 2019 Form 10-K, filed with the SEC, and “Risk Factors” included in Part II, Item 1A.

of this Form 10-Q.

Investors are cautioned that many of the assumptions upon which our forward-looking statements are based are likely to change after the forward-looking statements are made, some of which we may not be able to control.

Further, we may make changes to our business plans that could affect our results.

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What changed 10-Q

Item 2. Management’s Discussion and Analysis