STRATUS PROPERTIES INC 10-Q

Item 1. Financial Statements . STRATUS PROPERTIES INC. CONSOLIDATED BALANCE SHEETS (Unaudited) (In Thousands) March 31, 2020 December 31, 2019 ASSETS Cash and cash equivalents $ 23,882 $ 19,173 Restricted cash 13,824 19,418 Real estate held for sale 7,546 14,872 Real estate under development 100,953 95,026 Land available for development 46,070 45,539 Real estate held for investment, net 326,851 329,103 Lease right-of-use assets 11,222 11,378 Deferred tax assets 9,834 12,311 Other assets 18,756 14,548 Total assets $ 558,938 $ 561,368 LIABILITIES AND EQUITY Liabilities: Accounts payable $ 12,986 $ 16,053 Accrued liabilities, including taxes 6,865 11,580 Debt 373,068 365,749 Lease liabilities 12,765 12,636 Deferred gain 7,423 7,654 Other liabilities 13,825 13,614 Total liabilities 426,932 427,286 Commitments and contingencies Equity: Stockholders’ equity: Common stock 93 93 Capital in excess of par value of common stock 186,244 186,082 Accumulated deficit ( 44,637 ) ( 43,567 ) Common stock held in treasury ( 21,600 ) ( 21,509 ) Total stockholders’ equity 120,100 121,099 Noncontrolling interests in subsidiaries 11,906 12,983 Total equity 132,006 134,082 Total liabilities and equity $ 558,938 $ 561,368 The accompanying Notes to Consolidated Financial Statements (Unaudited) are an integral part of these consolidated financial statements. 2 Table of Contents STRATUS PROPERTIES INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (Unaudited) (In Thousands, Except Per Share Amounts) Three Months Ended March 31, 2020 2019 Revenues: Real estate operations $ 12,336 $ 2,948 Leasing operations 5,732 3,629 Hotel 5,911 8,325 Entertainment 4,155 4,796 Total revenues 28,134 19,698 Cost of sales: Real estate operations 10,255 46 Leasing operations 3,082 2,139 Hotel 5,899 6,675 Entertainment 3,098 3,479 Depreciation 3,633 2,630 Total cost of sales 25,967 14,969 General and administrative expenses 2,815 3,199 Gain on sale of assets — ( 2,113 ) Total 28,782 16,055 Operating (loss) income ( 648 ) 3,643 Interest expense, net ( 3,915 ) ( 2,572 ) Loss on interest rate derivative instruments ( 121 ) ( 59 ) Loss on early extinguishment of debt — ( 16 ) Other income, net 19 299 (Loss) income before income taxes ( 4,665 ) 1,295 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 1,077 — Net (loss) income and total comprehensive (loss) income attributable to common stockholders $ ( 1,070 ) $ 862 Net (loss) income per share attributable to common stockholders: Basic $ ( 0.13 ) $ 0.11 Diluted $ ( 0.13 ) $ 0.10 Weighted-average common shares outstanding: Basic 8,200 8,167 Diluted 8,200 8,213 The accompanying Notes to Consolidated Financial Statements (Unaudited) are an integral part of these consolidated financial statements. 3 Table of Contents STRATUS PROPERTIES INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In Thousands) Three Months Ended March 31, 2020 2019 Cash flow from 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 Cost of real estate sold 8,146 1,931 Gain on sale of assets — ( 2,113 ) 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 (Decrease) increase in deposits ( 185 ) 108 Deferred income taxes 2,477 291 Purchases and development of real estate properties ( 6,222 ) ( 3,298 ) Municipal utility district reimbursements applied to real estate under development — 920 Increase in other assets ( 3,967 ) ( 928 ) Decrease in accounts payable, accrued liabilities and other ( 6,828 ) ( 83 ) Net cash (used in) provided by operating activities ( 4,434 ) 691 Cash flow from investing activities: Capital expenditures ( 2,328 ) ( 29,443 ) Proceeds from sale of assets — 3,170 Payments on master lease obligations ( 287 ) ( 306 ) Purchase of noncontrolling interest in consolidated subsidiary — ( 4,589 ) Net cash used in investing activities ( 2,615 ) ( 31,168 ) Cash flow from financing activities: Borrowings from credit facility 12,500 12,086 Payments on credit facility ( 5,681 ) ( 12,911 ) Borrowings from project loans 5,905 30,744 Payments on project and term loans ( 6,380 ) ( 4,006 ) Cash dividend paid for stock-based awards ( 8 ) ( 17 ) Stock-based awards net payments ( 91 ) ( 100 ) Financing costs ( 81 ) ( 209 ) Net cash provided by financing activities 6,164 25,587 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 Cash, cash equivalents and restricted cash at end of period $ 37,706 $ 34,029 The accompanying Notes to Consolidated Financial Statements (Unaudited), which include information regarding noncash transactions, are an integral part of these consolidated financial statements. 4 Table of Contents STRATUS PROPERTIES INC. CONSOLIDATED STATEMENTS OF EQUITY (Unaudited) (In Thousands) Stockholders’ Equity Common Stock Held in Treasury Total Stockholders' Equity Common Stock Capital in Excess of Par Value Accum-ulated Deficit Noncontrolling Interests in Subsidiaries Number of Shares At Par Value Number of Shares At Cost Total Equity Balance at December 31, 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 Tender of shares for stock-based awards — — — — 4 ( 91 ) ( 91 ) — ( 91 ) Total comprehensive loss — — — ( 1,070 ) — — ( 1,070 ) ( 1,077 ) ( 2,147 ) 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 Exercised and vested stock-based awards 17 — — — — — — — — Stock-based compensation — — 168 — — — 168 — 168 Tender of shares for stock-based awards — — — — 4 ( 100 ) ( 100 ) — ( 100 ) Purchase of noncontrolling interest in consolidated subsidiary — — — — — — — ( 4,589 ) ( 4,589 ) 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. 5 Table of Contents STRATUS PROPERTIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. GENERAL 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 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): Assets: 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 Liabilities: Accounts payable and accrued liabilities, including taxes $ 7,005 Debt 141,184 Other liabilities 7,036 Total liabilities $ 155,225 6 Table of Contents 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. 7 Table of Contents 2. EARNINGS PER SHARE Stratus’ basic net (loss) income per share of common stock was calculated by dividing the net (loss) income attributable to common stockholders by the weighted-average shares of common stock outstanding during the period. A reconciliation of net (loss) income and weighted-average shares of common stock outstanding for purposes of calculating diluted net (loss) income per share (in thousands, except per share amounts) follows: Three Months Ended March 31, 2020 2019 Net (loss) income and total comprehensive (loss) income attributable to common stockholders $ ( 1,070 ) $ 862 Basic weighted-average shares of common stock outstanding 8,200 8,167 Add shares issuable upon exercise or vesting of dilutive stock options and restricted stock units (RSUs) — a 46 b Diluted weighted-average shares of common stock outstanding 8,200 8,213 Net (loss) income per share attributable to common stockholders: Basic $ ( 0.13 ) $ 0.11 Diluted $ ( 0.13 ) $ 0.10 a. Excludes 78 thousand shares of common stock associated with RSUs and stock options that were anti-dilutive as a result of the net loss. b. Excludes 31 thousand shares of common stock associated with RSUs that were anti-dilutive. 3. RELATED PARTY TRANSACTIONS The Saint Mary, L.P. On June 19, 2018, The Saint Mary, L.P., a Texas limited partnership and a subsidiary of Stratus, completed a series of financing transactions to develop The Saint Mary, a 240 -unit luxury, garden-style apartment project in the Circle C community in Austin, Texas. The financing transactions included (1) a $ 26.0 million construction loan with Texas Capital Bank, National Association and (2) an $ 8.0 million private placement. As one of the participants in the private placement offering, LCHM Holdings, LLC (LCHM), a related party as a result of its greater than 5 percent beneficial ownership of Stratus’ common stock, purchased limited partnership interests representing a 6.1 percent equity interest in The Saint Mary, L.P. Refer to Note 2 of the Stratus 2019 Form 10-K for further discussion. Stratus Kingwood Place, L.P. On August 3, 2018, Stratus Kingwood Place, L.P., a Texas limited partnership and a subsidiary of Stratus (the Kingwood, L.P.), completed a $ 10.7 million private placement, approximately $ 7 million of which, combined with a $ 6.75 million loan from Comerica Bank, was used to purchase a 54 -acre tract of land located in Kingwood, Texas for $ 13.5 million, for the development of Kingwood Place, a new H-E-B, L.P. (HEB)-anchored, mixed-use development project (Kingwood Place). As one of the participants in the private placement offering, LCHM purchased 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 has performed evaluations and concluded that The Saint Mary, L.P. and the Kingwood, L.P. are variable interest entities and that Stratus is the primary beneficiary. Stratus will continue to evaluate which entity is the primary beneficiary of The Saint Mary, L.P. and the Kingwood, L.P. in accordance with applicable accounting guidance. The Saint Mary, L.P. and the Kingwood, L.P.’s results are consolidated in Stratus’ financial statements. 8 Table of Contents Stratus’ consolidated balance sheets include the following combined assets and liabilities of The Saint Mary, L.P. and the Kingwood, L.P. (in thousands): March 31, 2020 December 31, 2019 Assets: Cash and cash equivalents $ 2,109 $ 1,110 Real estate under development 9,585 3,703 Land available for development 4,163 9,273 Real estate held for investment 64,263 64,637 Other assets 1,878 1,807 Total assets $ 81,998 $ 80,530 Liabilities: Accounts payable and accrued liabilities $ 4,973 $ 8,680 Debt 51,974 45,848 Total liabilities $ 56,947 $ 54,528 Net assets $ 25,051 $ 26,002 Other Transactions. 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 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. 4. DISPOSITIONS Circle C. 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. 5. FAIR VALUE MEASUREMENTS Fair value accounting guidance includes a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 inputs) and the lowest priority to unobservable inputs (Level 3 inputs). The carrying value for certain Stratus financial instruments (i.e., cash and cash equivalents, restricted cash, accounts payable and accrued liabilities) approximates fair value because of their short-term nature and generally negligible credit losses. A summary of the carrying amount and fair value of Stratus' other financial instruments follows (in thousands): March 31, 2020 December 31, 2019 Carrying Value Fair Value Carrying Value Fair Value Assets: Interest rate cap agreement $ 1 $ 1 $ 3 $ 3 Liabilities: 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. 9 Table of Contents 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. Debt. Stratus' debt is recorded at cost and is not actively traded. Fair value is estimated based on discounted future expected cash flows at estimated current market interest rates. Accordingly, Stratus' debt is classified within Level 2 of the fair value hierarchy. The fair value of debt does not represent the amounts that will ultimately be paid upon the maturities of the loans. 6. DEBT The components of Stratus' debt are as follows (in thousands): March 31, 2020 December 31, 2019 Goldman Sachs loan $ 140,643 $ 141,184 The Santal loan 74,065 73,972 Comerica Bank credit facility 49,300 42,482 New Caney land loan 4,918 4,908 Construction loans: Kingwood Place 26,983 23,991 The Saint Mary 24,991 21,857 Lantana Place 23,283 23,268 Jones Crossing 21,669 21,354 West Killeen Market 7,211 7,213 Amarra Villas credit facility 5 5,520 Total debt a $ 373,068 $ 365,749 a. 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 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. 10 Table of Contents 7. PROFIT PARTICIPATION INCENTIVE 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 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. 8. INCOME TAXES 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 $ 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 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. 9. BUSINESS SEGMENTS Stratus currently has four operating segments: Real Estate Operations, Leasing Operations, Hotel and Entertainment. The Real Estate Operations segment is comprised of Stratus’ real estate assets (developed for sale, under development and available for development), which consists of its properties in Austin, Texas (including the Barton Creek community; 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); in Lakeway, Texas, located in the greater Austin area (Lakeway); in College Station, Texas (a portion of Jones Crossing and vacant pad sites); in Killeen, Texas (vacant pad sites at West Killeen Market); 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. The Entertainment segment includes ACL Live, a live music and entertainment venue, and 3TEN ACL Live, both located at the W Austin Hotel & Residences. In addition to hosting concerts and private events, ACL Live is the home of Austin City Limits, the longest running music series in American television history. 11 Table of Contents Stratus uses operating income or loss to measure the performance of each segment. General and administrative expenses, which primarily consist of employee salaries, wages and other costs, are managed on a consolidated basis and are not allocated to Stratus’ operating segments. The following segment information reflects management determinations that may not be indicative of what the actual financial performance of each segment would be if it were an independent entity. Revenues from Contracts with Customers. Stratus' revenues from contracts with customers follow (in thousands): Three Months Ended March 31, 2020 2019 Real Estate Operations: Developed property sales $ 12,308 $ 2,834 Commissions and other 28 114 12,336 2,948 Leasing Operations: Rental revenue 5,732 3,629 5,732 3,629 Hotel: Rooms, food and beverage 5,075 7,737 Other 836 588 5,911 8,325 Entertainment: Event revenue 3,558 4,224 Other 597 572 4,155 4,796 Total Revenues from Contracts with Customers $ 28,134 $ 19,698 Financial Information by Business Segment. The following segment information was prepared on the same basis as Stratus’ consolidated financial statements (in thousands). Real Estate Operations a Leasing Operations Hotel Entertainment Corporate, Eliminations and Other b Total Three Months Ended March 31, 2020: Revenues: Unaffiliated customers $ 12,336 $ 5,732 $ 5,911 $ 4,155 $ — $ 28,134 Intersegment 4 227 48 15 ( 294 ) — Cost of sales, excluding depreciation 10,182 3,088 5,908 3,226 ( 70 ) 22,334 Depreciation 59 2,047 1,105 c 483 c ( 61 ) 3,633 General and administrative expenses — — — — 2,815 2,815 Operating income (loss) $ 2,099 $ 824 $ ( 1,054 ) $ 461 $ ( 2,978 ) $ ( 648 ) Capital expenditures and purchases and development of real estate properties $ 6,222 $ 2,283 $ 27 $ 18 $ — $ 8,550 Total assets at March 31, 2020 160,691 235,734 96,484 42,639 23,390 558,938 12 Table of Contents Real Estate Operations a Leasing Operations Hotel Entertainment Corporate, Eliminations and Other b Total Three Months Ended March 31, 2019: Revenues: Unaffiliated customers $ 2,948 $ 3,629 $ 8,325 $ 4,796 $ — $ 19,698 Intersegment 5 230 47 29 ( 311 ) — Cost of sales, excluding depreciation 46 d 2,144 6,698 3,607 ( 156 ) 12,339 Depreciation 61 1,407 900 394 ( 132 ) 2,630 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 a. Includes sales commissions and other revenues together with related expenses. b. Includes consolidated general and administrative expenses and eliminations of intersegment amounts. c. Includes 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. d. 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. 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) income. Refer to Note 1 of the Stratus 2019 Form 10-K for further discussion of Stratus' accounting policy for MUD reimbursements. e. 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. 10. SUBSEQUENT EVENTS 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. 13 Table of Contents