STRATUS PROPERTIES INC 10-Q

Item 1. Financial Statements . STRATUS PROPERTIES INC. CONSOLIDATED BALANCE SHEETS (Unaudited) (In Thousands) June 30, 2020 December 31, 2019 ASSETS Cash and cash equivalents $ 16,138 $ 19,173 Restricted cash 18,734 19,418 Real estate held for sale 6,960 14,872 Real estate under development 94,351 95,026 Land available for development 56,574 45,539 Real estate held for investment, net 324,341 329,103 Lease right-of-use assets 11,067 11,378 Deferred tax assets 9,580 12,311 Other assets 13,960 14,548 Total assets $ 551,705 $ 561,368 LIABILITIES AND EQUITY Liabilities: Accounts payable $ 10,346 $ 16,053 Accrued liabilities, including taxes 8,861 11,580 Debt 363,849 365,749 Lease liabilities 12,894 12,636 Deferred gain 7,030 7,654 Other liabilities 12,738 13,614 Total liabilities 415,718 427,286 Commitments and contingencies Equity: Stockholders’ equity: Common stock 93 93 Capital in excess of par value of common stock 186,422 186,082 Accumulated deficit ( 40,503 ) ( 43,567 ) Common stock held in treasury ( 21,600 ) ( 21,509 ) Total stockholders’ equity 124,412 121,099 Noncontrolling interests in subsidiaries 11,575 12,983 Total equity 135,987 134,082 Total liabilities and equity $ 551,705 $ 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 INCOME (LOSS) (Unaudited) (In Thousands, Except Per Share Amounts) Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 Revenues: Real estate operations $ 1,893 $ 4,129 $ 14,229 $ 7,077 Leasing operations 5,718 4,413 11,450 8,042 Hotel 1,030 8,962 6,941 17,287 Entertainment 290 6,220 4,445 11,016 Total revenues 8,931 23,724 37,065 43,422 Cost of sales: Real estate operations 1,921 3,795 12,176 3,841 Leasing operations 4,070 2,447 7,152 4,586 Hotel 1,766 6,831 7,665 13,506 Entertainment 1,208 4,441 4,306 7,920 Depreciation 3,377 2,703 7,010 5,333 Total cost of sales 12,342 20,217 38,309 35,186 General and administrative expenses 3,103 2,919 5,918 6,118 Income from forfeited earnest money ( 15,000 ) — ( 15,000 ) — Loss (gain) on sale of assets — 161 — ( 1,952 ) Total 445 23,297 29,227 39,352 Operating income 8,486 427 7,838 4,070 Interest expense, net ( 3,666 ) ( 2,911 ) ( 7,581 ) ( 5,483 ) Gain (loss) on interest rate derivative instruments 42 ( 123 ) ( 79 ) ( 182 ) Loss on early extinguishment of debt — — — ( 16 ) Other income, net 89 12 108 311 Income (loss) before income taxes and equity in unconsolidated affiliates' loss 4,951 ( 2,595 ) 286 ( 1,300 ) Equity in unconsolidated affiliates' loss — ( 13 ) — ( 13 ) (Provision for) benefit from income taxes ( 1,148 ) 218 1,370 ( 215 ) Net income (loss) and total comprehensive income (loss) 3,803 ( 2,390 ) 1,656 ( 1,528 ) Total comprehensive loss attributable to noncontrolling interests in subsidiaries 331 1 1,408 1 Net income (loss) and total comprehensive income (loss) attributable to common stockholders $ 4,134 $ ( 2,389 ) $ 3,064 $ ( 1,527 ) Basic and diluted net income (loss) per share attributable to common stockholders $ 0.50 $ ( 0.29 ) $ 0.37 $ ( 0.19 ) Weighted-average common shares outstanding: Basic 8,210 8,177 8,205 8,172 Diluted 8,228 8,177 8,230 8,172 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) Six Months Ended June 30, 2020 2019 Cash flow from operating activities: Net income (loss) $ 1,656 $ ( 1,528 ) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation 7,010 5,333 Cost of real estate sold 8,732 4,324 Gain on sale of assets — ( 1,952 ) Loss on interest rate derivative instruments 79 182 Loss on early extinguishment of debt — 16 Amortization of debt issuance costs and stock-based compensation 1,095 546 Equity in unconsolidated affiliates' loss — 13 Increase in deposits 46 185 Deferred income taxes 2,731 ( 38 ) Purchases and development of real estate properties ( 8,655 ) ( 5,756 ) Municipal utility district reimbursements applied to real estate under development — 920 Decrease (increase) in other assets 1,215 ( 1,636 ) Decrease in accounts payable, accrued liabilities and other ( 8,464 ) ( 2,187 ) Net cash provided by (used in) operating activities 5,445 ( 1,578 ) Cash flow from investing activities: Capital expenditures ( 4,397 ) ( 44,990 ) Proceeds from sale of assets — 3,170 Payments on master lease obligations ( 691 ) ( 766 ) Purchase of noncontrolling interest in consolidated subsidiary — ( 4,589 ) Other, net — ( 4 ) Net cash used in investing activities ( 5,088 ) ( 47,179 ) Cash flow from financing activities: Borrowings from credit facility 12,800 14,086 Payments on credit facility ( 21,304 ) ( 15,648 ) Borrowings from project loans 11,926 51,006 Payments on project and term loans ( 6,976 ) ( 5,619 ) Cash dividend paid for stock-based awards ( 8 ) ( 17 ) Stock-based awards net payments ( 91 ) ( 100 ) Financing costs ( 423 ) ( 231 ) Net cash (used in) provided by financing activities ( 4,076 ) 43,477 Net decrease in cash, cash equivalents and restricted cash ( 3,719 ) ( 5,280 ) Cash, cash equivalents and restricted cash at beginning of year 38,591 38,919 Cash, cash equivalents and restricted cash at end of period $ 34,872 $ 33,639 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) THREE MONTHS ENDED JUNE 30 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 March 31, 2020 9,347 $ 93 $ 186,244 $ ( 44,637 ) 1,137 $ ( 21,600 ) $ 120,100 $ 11,906 $ 132,006 Stock-based compensation — — 178 — — — 178 — 178 Total comprehensive income (loss) — — — 4,134 — — 4,134 ( 331 ) 3,803 Balance at June 30, 2020 9,347 $ 93 $ 186,422 $ ( 40,503 ) 1,137 $ ( 21,600 ) $ 124,412 $ 11,575 $ 135,987 Balance at March 31, 2019 9,305 $ 93 $ 186,424 $ ( 40,241 ) 1,128 $ ( 21,360 ) $ 124,916 $ 18,076 $ 142,992 Stock-based compensation — — ( 90 ) — — — ( 90 ) — ( 90 ) Total comprehensive loss — — — ( 2,389 ) — — ( 2,389 ) ( 1 ) ( 2,390 ) Balance at June 30, 2019 9,305 $ 93 $ 186,334 $ ( 42,630 ) 1,128 $ ( 21,360 ) $ 122,437 $ 18,075 $ 140,512 5 Table of Contents STRATUS PROPERTIES INC. CONSOLIDATED STATEMENTS OF EQUITY (Unaudited) (In Thousands) SIX MONTHS ENDED JUNE 30 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 — — 340 — — — 340 — 340 Tender of shares for stock-based awards — — — — 4 ( 91 ) ( 91 ) — ( 91 ) Total comprehensive income (loss) — — — 3,064 — — 3,064 ( 1,408 ) 1,656 Balance at June 30, 2020 9,347 $ 93 $ 186,422 $ ( 40,503 ) 1,137 $ ( 21,600 ) $ 124,412 $ 11,575 $ 135,987 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 — — 78 — — — 78 — 78 Tender of shares for stock-based awards — — — — 4 ( 100 ) ( 100 ) — ( 100 ) Purchase of noncontrolling interest in consolidated subsidiary — — — — — — — ( 4,589 ) ( 4,589 ) Total comprehensive loss — — — ( 1,527 ) — — ( 1,527 ) ( 1 ) ( 1,528 ) Balance at June 30, 2019 9,305 $ 93 $ 186,334 $ ( 42,630 ) 1,128 $ ( 21,360 ) $ 122,437 $ 18,075 $ 140,512 The accompanying Notes to Consolidated Financial Statements (Unaudited) are an integral part of these consolidated financial statements. 6 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 second quarter of 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 and has continued during and subsequent to 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 those related to the 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’ assessment of the future 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 used in and material impacts to Stratus’ consolidated financial statements in future reporting periods. Terminated Block 21 Sale. 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 the proposed sale represented a strategic shift for Stratus, the assets and liabilities of Block 21 were classified as held for sale - discontinued operations in the consolidated balance sheet of Stratus' 2019 Form 10-K. 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. During the second quarter of 2020, Stratus recorded the $ 15.0 million as operating income, 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. 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. 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 of Stratus' 2019 Form 10-K 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 7 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. Beginning in mid-June 2020, there have been reports of increasing numbers of new COVID-19 cases throughout the United States, and in particular, Texas, resulting in some governments extending or re-imposing restrictions. 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 disclosed 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 continuing to defer 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, were 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 in the second quarter of 2020 was 12 percent. Stratus' entertainment venue, ACL Live, remains closed. All second-quarter 2020 scheduled events at ACL Live were either rescheduled or cancelled as a result of the COVID-19 pandemic. Additionally, Stratus' smaller capacity venue, 3TEN ACL Live, hosted only 15 events in second-quarter 2020. 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 during and subsequent to 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 rents are scheduled to be collected over a 12 -month or 24 -month period starting in January 2021. These rent deferrals resulted in a reduction of scheduled base rent collections of 23 percent during the second quarter of 2020. As of June 30, 2020, most of Stratus’ retail tenants had reopened. At its multi-family properties, Stratus has granted rent deferral accommodations on a case-by-case basis, which during the second quarter of 2020 resulted in a reduction of scheduled rent collections of less than one percent of contractual rents, with no material decline in occupancy. In the aggregate, Stratus’ second-quarter retail and multi-family rent collections were 10 percent less than scheduled rents. Stratus assessed its rents receivable for potential credit losses as of June 30, 2020, and recorded a $ 1.4 million charge for estimated uncollectible rents receivable and unrealizable deferred costs. The following is an update to Stratus' revenue recognition accounting policy included in Note 1 of its 2019 Form 10-K. Stratus recognizes its rental income on a straight-line basis based on the terms of its signed leases with tenants. Recoveries from tenants for taxes, insurance and other commercial property operating expenses are recognized as revenues in the period the related costs are incurred. If upon, or subsequent to, lease commencement, the assessed collectability of lease payments is not probable, recognized lease income is limited to collected lease payments. In addition, any previously recognized rents receivable and deferred lease costs associated with that lease are charged to cost of sales in the period that assessed collectability is considered not probable. 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 carry back 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 (PPP loan) of the CARES Act. The PPP loan bears interest at one percent and matures April 15, 2022, except for the portion that may be forgiven. The proceeds from the loan must be used to retain workers and maintain payroll or make mortgage interest payments, lease payments and utility payments. Refer to Note 8 for further discussion of income tax benefits. 8 Table of Contents 2. EARNINGS PER SHARE Stratus’ basic net income (loss) per share of common stock was calculated by dividing the net income (loss) attributable to common stockholders by the weighted-average shares of common stock outstanding during the period. A reconciliation of net income (loss) and weighted-average shares of common stock outstanding for purposes of calculating diluted net income (loss) per share (in thousands, except per share amounts) follows: Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 Net income (loss) and total comprehensive income (loss) attributable to common stockholders $ 4,134 $ ( 2,389 ) $ 3,064 $ ( 1,527 ) Basic weighted-average shares of common stock outstanding 8,210 8,177 8,205 8,172 Add shares issuable upon exercise or vesting of dilutive stock options and restricted stock units (RSUs) 18 a — b 25 a — b Diluted weighted-average shares of common stock outstanding 8,228 8,177 8,230 8,172 Basic and diluted net income (loss) per share attributable to common stockholders $ 0.50 $ ( 0.29 ) $ 0.37 $ ( 0.19 ) a. Excludes 59 thousand shares for second-quarter 2020 and 37 thousand shares for the first six months of 2020 of common stock associated with RSUs that were anti-dilutive. b. Excludes 94 thousand shares for second-quarter 2019 and 95 thousand shares for the first six months of 2019 of common stock associated with RSUs and stock options that were anti-dilutive as a result of the net loss. 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.-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. 9 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): June 30, 2020 December 31, 2019 Assets: Cash and cash equivalents $ 2,525 $ 1,110 Real estate under development 10,741 3,703 Land available for development 4,210 9,273 Real estate held for investment 63,901 64,637 Other assets 1,954 1,807 Total assets $ 83,331 $ 80,530 Liabilities: Accounts payable and accrued liabilities $ 5,586 $ 8,680 Debt 53,310 45,848 Total liabilities $ 58,896 $ 54,528 Net assets $ 24,435 $ 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 $ 26 thousand in second-quarter 2020, $ 29 thousand in second-quarter 2019, $ 65 thousand for the first six months of 2020 and $ 56 thousand for the first six months of 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, after adjustments recorded in second-quarter 2019, recorded a gain on this sale totaling $ 2.0 million for the first six months of 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): June 30, 2020 December 31, 2019 Carrying Value Fair Value Carrying Value Fair Value Assets: Interest rate cap agreement $ — $ — $ 3 $ 3 Liabilities: Debt 363,849 367,813 365,749 370,558 Interest rate swap agreement 190 190 114 114 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 10 Table of Contents of June 30, 2020, the agreement had a notional amount of $ 15.0 million, which will amortize to $ 14.8 million by the end of the agreement, and as of December 31, 2019, the agreement had a notional amount of $ 15.3 million. The interest rate cap and swap agreements do not qualify for hedge accounting so changes in the agreements' fair values are recorded in the consolidated statements of comprehensive income (loss). Stratus uses an interest rate pricing model that relies on market observable inputs such as LIBOR to measure the fair value of both agreements. Stratus also evaluated the counterparty credit risk associated with both agreements, which is considered a Level 3 input, but did not consider such risk to be significant. Therefore, the interest rate 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): June 30, 2020 December 31, 2019 Block 21 loan $ 140,115 $ 141,184 The Santal loan 74,158 73,972 Comerica Bank credit facility 33,977 42,482 New Caney land loan 4,929 4,908 PPP loan 3,988 — Construction loans: Kingwood Place 28,067 23,991 The Saint Mary 25,243 21,857 Lantana Place 24,085 23,268 Jones Crossing 22,095 21,354 West Killeen Market 7,187 7,213 Amarra Villas credit facility 5 5,520 Total debt a $ 363,849 $ 365,749 a. Includes net reductions for unamortized debt issuance costs of $ 2.8 million at June 30, 2020, and $ 3.5 million at December 31, 2019. As of June 30, 2020, Stratus had $ 25.9 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, Stratus 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. During second-quarter 2020, Stratus entered into amendments to the Lantana Place and West Killeen Market construction loans in which Stratus was granted waivers of the debt service coverage ratio covenants for the quarters needed such that it believes that it will be able to remain in compliance if rent payments do not further deteriorate materially as currently anticipated. 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 was 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 $ 4.9 million in second-quarter 2020, $ 5.1 million in second-quarter 2019, $ 10.1 million for the first six months of 2020 and $ 9.7 million for the first six months of 2019. Stratus' capitalized interest totaled $ 1.2 million in second-quarter 2020, $ 2.1 million in second-quarter 2019, $ 2.5 million for the first six months of 2020 and $ 4.2 million for the first six months of 2019, primarily related to development activities at Barton Creek. The 2019 periods also included capitalized interest related to development activities at Kingwood Place and The Saint Mary. 11 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 second-quarter 2020, Stratus recorded a $ 0.4 million increase to the accrued liability for the Plan of which $ 0.2 million increased project development costs and $ 0.2 million increased general and administrative expenses. During second-quarter 2019, Stratus accrued $ 0.2 million to project development costs and $ 0.2 million in general and administrative expenses related to the Plan. During the first six months of 2020, Stratus accrued $ 0.2 million to project development costs and $ 0.2 million in general and administrative expense related to the Plan. During the first six months of 2019, Stratus accrued $ 0.4 million to project development costs and $ 0.5 million in general and administrative expense related to the Plan. The accrued liability for the Plan totaled $ 2.9 million at June 30, 2020, and $ 2.5 million at December 31, 2019 (included in other liabilities). As of June 30, 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 $ 9.6 million at June 30, 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 six months of 2020 and the U.S. Federal statutory income tax rate of 21 percent, was primarily attributable to the CARES Act, which, among other impacts, allows Stratus to carry back losses to 2017 when the U.S. corporate tax rate was 35 percent, resulting in a discrete tax benefit of $ 1.4 million, and the Texas state margin tax. The difference between Stratus' consolidated effective income tax rate for the first six months of 2019 and the U.S. Federal statutory income tax rate of 21 percent, was primarily attributable to the Texas state margin tax and the Tax Cuts and Jobs Act's executive compensation deductibility limitation. 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. 12 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 June 30, Six Months Ended June 30, 2020 2019 2020 2019 Real Estate Operations: Developed property sales $ 1,832 $ 4,048 $ 14,140 $ 6,882 Commissions and other 61 81 89 195 1,893 4,129 14,229 7,077 Leasing Operations: Rental revenue 5,718 4,413 11,450 8,042 5,718 4,413 11,450 8,042 Hotel: Rooms, food and beverage 932 8,445 6,007 16,182 Other 98 517 934 1,105 1,030 8,962 6,941 17,287 Entertainment: Event revenue 293 5,598 3,851 9,822 Other ( 3 ) 622 594 1,194 290 6,220 4,445 11,016 Total revenues from contracts with customers $ 8,931 $ 23,724 $ 37,065 $ 43,422 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 June 30, 2020: Revenues: Unaffiliated customers $ 1,893 $ 5,718 $ 1,030 $ 290 $ — $ 8,931 Intersegment 4 216 16 ( 1 ) ( 235 ) — Cost of sales, excluding depreciation 1,886 4,074 c 1,767 d 1,305 ( 67 ) 8,965 Depreciation 57 2,034 931 404 ( 49 ) 3,377 General and administrative expenses — — — — 3,103 3,103 Income from forfeited earnest money — — — — ( 15,000 ) e ( 15,000 ) Operating (loss) income $ ( 46 ) $ ( 174 ) $ ( 1,652 ) $ ( 1,420 ) $ 11,778 $ 8,486 Capital expenditures and purchases and development of real estate properties $ 2,433 $ 1,682 $ 283 $ 104 $ — $ 4,502 Total assets at June 30, 2020 163,900 233,268 94,359 36,784 23,394 551,705 13 Table of Contents Real Estate Operations a Leasing Operations Hotel Entertainment Corporate, Eliminations and Other b Total Three Months Ended June 30, 2019: Revenues: Unaffiliated customers $ 4,129 $ 4,413 $ 8,962 $ 6,220 $ — $ 23,724 Intersegment 4 229 80 45 ( 358 ) — Cost of sales, excluding depreciation 3,795 2,451 6,868 4,585 ( 185 ) 17,514 Depreciation 64 1,388 899 396 ( 44 ) 2,703 General and administrative expenses — — — — 2,919 2,919 Loss on sale of assets — 161 f — — — 161 Operating income (loss) $ 274 $ 642 $ 1,275 $ 1,284 $ ( 3,048 ) $ 427 Capital expenditures and purchases and development of real estate properties $ 2,458 $ 15,391 $ 156 $ — $ — $ 18,005 Total assets at June 30, 2019 205,265 174,258 97,464 45,396 20,348 542,731 Six Months Ended June 30, 2020: Revenues: Unaffiliated customers $ 14,229 $ 11,450 $ 6,941 $ 4,445 $ — $ 37,065 Intersegment 8 443 64 14 ( 529 ) — Cost of sales, excluding depreciation 12,068 7,162 c 7,675 d 4,531 ( 137 ) 31,299 Depreciation 116 4,081 2,036 g 887 g ( 110 ) 7,010 General and administrative expenses — — — — 5,918 5,918 Income from forfeited earnest money — — — — ( 15,000 ) e ( 15,000 ) Operating income (loss) $ 2,053 $ 650 $ ( 2,706 ) $ ( 959 ) $ 8,800 $ 7,838 Capital expenditures and purchases and development of real estate properties $ 8,655 $ 3,965 $ 310 $ 122 $ — $ 13,052 Six Months Ended June 30, 2019: Revenues: Unaffiliated customers $ 7,077 $ 8,042 $ 17,287 $ 11,016 $ — $ 43,422 Intersegment 9 459 127 74 ( 669 ) — Cost of sales, excluding depreciation 3,841 h 4,595 13,566 8,192 ( 341 ) 29,853 Depreciation 125 2,795 1,799 790 ( 176 ) 5,333 General and administrative expenses — — — — 6,118 6,118 Gain on sale of assets — ( 1,952 ) f — — — ( 1,952 ) Operating income (loss) $ 3,120 $ 3,063 $ 2,049 $ 2,108 $ ( 6,270 ) $ 4,070 Capital expenditures and purchases and development of real estate properties $ 5,756 $ 44,611 $ 254 $ 125 $ — $ 50,746 Municipal utility district (MUD) reimbursements applied to real estate under development h 920 — — — — 920 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 $ 1.4 million charge for estimated uncollectible rents receivable and unrealizable deferred costs. Refer to Note 1. d. Includes a $ 0.8 million credit related to a business interruption insurance claim filed as a result of water and smoke damage in the W Austin hotel in January 2018. e. Represents income from earnest money received as a result of Ryman's termination of the agreements to sell Block 21. f. Relates to the first-quarter 2019 sale of a retail pad subject to a ground lease located in the Circle C community, including adjustments recorded in second-quarter 2019. Refer to Note 4. g. 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. h. 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 14 Table of Contents under development on the consolidated balance sheets, and $ 3.4 million as a reduction in real estate cost of sales and $ 0.3 million in other income, net in the consolidated statements of comprehensive income (loss). Refer to Note 1 of the Stratus 2019 Form 10-K for further discussion of Stratus' accounting policy for MUD reimbursements. 10. SUBSEQUENT EVENTS Stratus evaluated events after June 30, 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. 15 Table of Contents