What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2020-11-09 compared with 2020-08-10 · 119 added, 112 removed, 346 unchanged (40% of the section changed)

3 unchanged sentences

(In Thousands)

September 30,

2020 December 31,

29 unchanged sentences

STRATUS PROPERTIES INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Unaudited)

(In Thousands, Except Per Share Amounts)

Three Months Ended Six Months Ended

June 30, June 30,

Three Months Ended Nine Months Ended

September 30, September 30,

2020 2019 2020 2019

13 unchanged sentences

Income from forfeited earnest money — — ( 15,000 ) —

Loss (gain) on sale of assets — 161 — ( 1,952 )

Gain on sale of assets — ( 37 ) — ( 1,989 )

Total 17,025 22,186 46,252 61,538

Operating income 8,486 427 7,838 4,070

Operating (loss) income ( 4,224 ) 69 3,614 4,139

Interest expense, net ( 3,587 ) ( 3,203 ) ( 11,168 ) ( 8,686 )

2 unchanged sentences

Other income, net 3 18 111 329

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

Loss before income taxes and equity in unconsolidated affiliates' loss

( 7,726 ) ( 3,356 ) ( 7,440 ) ( 4,656 )

1 unchanged sentence

(Provision for) benefit from income taxes ( 7,536 ) 401 ( 6,166 ) 186

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

Net loss and total comprehensive loss

( 15,271 ) ( 2,962 ) ( 13,615 ) ( 4,490 )

1 unchanged sentence

193 2 1,601 3

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

Net loss and total comprehensive loss attributable to common stockholders

$ ( 15,078 ) $ ( 2,960 ) $ ( 12,014 ) $ ( 4,487 )

Weighted-average common shares outstanding:

Basic and diluted net loss per share attributable to common stockholders $ ( 1.84 ) $ ( 0.36 ) $ ( 1.46 ) $ ( 0.55 )

Basic and diluted weighted-average common shares outstanding

8,214 8,188 8,208 8,177

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.

2 unchanged sentences

(In Thousands)

Six Months Ended

Nine Months Ended

September 30,

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:

Net loss $ ( 13,615 ) $ ( 4,490 )

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

Depreciation 10,339 8,168

1 unchanged sentence

Gain on sale of assets — ( 1,989 )

Loss on interest rate derivative instruments 79 182

(Gain) loss on interest rate derivative instruments ( 3 ) 191

Loss on early extinguishment of debt — 247

5 unchanged sentences

Municipal utility district reimbursements applied to real estate under development

Decrease (increase) in other assets 1,215 ( 1,636 )

Increase in other assets ( 2,971 ) ( 3,529 )

Decrease in accounts payable, accrued liabilities and other ( 6,356 ) ( 1,120 )

12 unchanged sentences

Payments on project and term loans ( 7,584 ) ( 64,118 )

Cash dividend paid for stock-based awards ( 8 ) ( 17 )

Stock-based awards net payments ( 79 ) ( 265 )

Financing costs ( 423 ) ( 1,342 )

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 )

Net cash provided by financing activities 429 68,630

Net (decrease) increase in cash, cash equivalents and restricted cash ( 5,542 ) 10,825

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

4 unchanged sentences

(In Thousands)

THREE MONTHS ENDED JUNE 30

THREE MONTHS ENDED SEPTEMBER 30

Stockholders’ Equity

2 unchanged sentences

of Shares At Par

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

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

Exercised and vested stock-based awards 11 — 22 — — — 22 — 22

Stock-based compensation — — 176 — — — 176 — 176

Total comprehensive loss — — — ( 15,078 ) — — ( 15,078 ) ( 193 ) ( 15,271 )

Balance at September 30, 2020 9,358 $ 93 $ 186,620 $ ( 55,581 ) 1,137 $ ( 21,600 ) $ 109,532 $ 11,382 $ 120,914

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

Exercised and vested stock-based awards 26 — 15 — — — 15 — 15

Stock-based compensation — — 156 — — — 156 — 156

Forfeited dividends — — 11 — — — 11 — 11

Tender of shares for stock-based awards

— — — — 5 ( 149 ) ( 149 ) — ( 149 )

Total comprehensive loss — — — ( 2,960 ) — — ( 2,960 ) ( 2 ) ( 2,962 )

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

STRATUS PROPERTIES INC.

1 unchanged sentence

(In Thousands)

SIX MONTHS ENDED JUNE 30

NINE MONTHS ENDED SEPTEMBER 30

Stockholders’ Equity

7 unchanged sentences

— — — — 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

Total comprehensive loss — — — ( 12,014 ) — — ( 12,014 ) ( 1,601 ) ( 13,615 )

Balance at September 30, 2020 9,358 $ 93 $ 186,620 $ ( 55,581 ) 1,137 $ ( 21,600 ) $ 109,532 $ 11,382 $ 120,914

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

1 unchanged sentence

Stock-based compensation — — 234 — — — 234 — 234

Forfeited dividends — — 11 — — — 11 — 11

Tender of shares for stock-based awards

3 unchanged sentences

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

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

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

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

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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.

Operating results for the third 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 continues to affect Stratus' operations.

As a result, this interim period, as well as future interim periods while the COVID-19 pandemic is ongoing, 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.

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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.

Stratus’ assessment of the future magnitude and duration of the COVID-19 pandemic and related economic disruption, as well as other factors, have contributed to the recognition of a $ 9.6 million valuation allowance on Stratus' deferred tax assets at September 30, 2020, and could result in other material changes to the estimates used in and material impacts to Stratus’ consolidated financial statements in future reporting periods.

Real Estate Investment Trust Exploration.

On September 21, 2020, Stratus' Board of Directors (Board) announced its approval of the initiation of an in-depth exploration of a conversion from a C-Corporation to a real estate investment trust (REIT).

Stratus has engaged financial, tax, accounting and legal advisors, and the Board will closely monitor and evaluate the findings to ultimately determine if conversion to a REIT is in the best interest of Stratus' shareholders.

If the Board determines to move forward, Stratus expects the conversion would likely occur in 2022, subject to a variety of factors, including its ability to complete the steps that must be taken in order to convert to a REIT and the timing thereof, and whether its shareholders will approve changes to Stratus’ organizational documents consistent with a public REIT structure.

Terminated Block 21 Sale.

7 unchanged sentences

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.

As a result of the termination of the agreements to sell Block 21, Stratus 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):

11 unchanged sentences

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.

Recently, 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.

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

As mentioned above, Stratus' previously disclosed transaction to sell Block 21 for $ 275 million was terminated by Ryman as a result of the capital markets and economic environment caused by the COVID-19 pandemic.

The COVID-19 pandemic and related economic disruption, as well as other factors, have contributed to the recognition of a $ 9.6 million valuation allowance on Stratus' deferred tax assets at September 30, 2020.

Stratus continues to advance its land planning, engineering and permitting activities.

All major construction projects have been completed and no new construction is scheduled until the first quarter of 2021 and may be deferred if health and market conditions warrant.

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.

Stratus’ revenue, operating income and cash flow in its hotel and entertainment segments were adversely impacted during the first three quarters of 2020 and are expected to continue to be adversely impacted beyond third-quarter 2020.

For example, while the hotel has remained open throughout the pandemic, average occupancy in the third quarter of 2020 was 16 percent.

Stratus' entertainment venues, ACL Live and 3TEN ACL Live, hosted a limited number of events with restricted capacity during third-quarter 2020 as most events were either rescheduled or cancelled as a result of the COVID-19 pandemic.

As a result of the COVID-19 pandemic, many of Stratus’ retail leasing tenants, other than grocery and liquor stores, closed or have been operating at significantly reduced capacity since late in the first 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.

These rent deferrals resulted in a reduction of scheduled base rent collections of 17 percent during the period from April through September 2020.

As of September 30, 2020, all of Stratus’ retail tenants who were open prior to the pandemic had reopened, although operating with capacity restrictions.

At its multi-family properties, Stratus has granted rent deferral accommodations on a case-by-case basis, which during the period from April through September 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’ retail and multi-family rent collections were eight percent less than scheduled rents during the period from April through September 2020.

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.

Stratus again assessed its rents receivable for potential credit losses as of September 30, 2020, and concluded that no additional charges for estimated uncollectible rents receivable and unrealizable deferred costs were required.

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.

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.

8 unchanged sentences

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)

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 )

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.

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.

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

The weighted-average shares exclude approximately 90 thousand shares of common stock for third-quarter 2020, 83 thousand shares for third-quarter 2019, 86 thousand shares for the first nine months of 2020 and 91 thousand shares for the first nine months of 2019 associated with restricted stock units and outstanding stock options that were anti-dilutive as a result of the net losses for the periods.

RELATED PARTY TRANSACTIONS

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(in thousands):

June 30, 2020 December 31, 2019

September 30, 2020 December 31, 2019

Cash and cash equivalents $ 3,212 $ 1,110

10 unchanged sentences

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.

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 $ 28 thousand in both third-quarter 2020 and third-quarter 2019, $ 93 thousand for the first nine months of 2020 and $ 84 thousand for the first nine months of 2019.

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

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.

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 the second and third quarters of 2019, recorded a gain on this sale totaling $ 2.0 million for the first nine months of 2019.

FAIR VALUE MEASUREMENTS

3 unchanged sentences

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

June 30, 2020 December 31, 2019

September 30, 2020 December 31, 2019

Value Carrying

7 unchanged sentences

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.

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).

of September 30, 2020, the agreement had a notional amount of $ 14.9 million, which will amortize to $ 14.8 million by the end of the agreement, and as of December 31, 2019, the agreement had a notional amount of $ 15.3 million.

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

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

6 unchanged sentences

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

June 30, 2020 December 31, 2019

September 30, 2020 December 31, 2019

Block 21 loan $ 139,578 $ 141,184

14 unchanged sentences

$ 368,601 $ 365,749

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.

Includes net reductions for unamortized debt issuance costs of $ 2.5 million at September 30, 2020, and $ 3.5 million at December 31, 2019.

As of September 30, 2020, Stratus had $ 24.5 million available under its $ 60.0 million Comerica Bank credit facility, with a $ 150 thousand letter 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.

The Saint Mary construction loan matures June 19, 2021.

Stratus expects to refinance the loan or sell The Saint Mary prior to the maturity date.

The New Caney land loan matures March 8, 2021.

Stratus expects to exercise its option to extend the loan for an additional 12 months, which requires a principal payment of approximately $ 500 thousand.

Effective November 2, 2020, the West Killeen Market construction loan was modified to replace the financial covenant that Stratus maintain a minimum total stockholders’ equity balance of $ 110.0 million with a financial covenant that Stratus maintain a minimum net asset value, as defined in the agreement, of $ 125 million.

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.

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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.

Interest costs (before capitalized interest) totaled $ 4.7 million in third-quarter 2020, $ 5.2 million in third-quarter 2019, $ 14.8 million for the first nine months of 2020 and $ 14.9 million for the first nine months of 2019.

Stratus' capitalized interest totaled $ 1.1 million in third-quarter 2020, $ 2.0 million in third-quarter 2019, $ 3.6 million for the first nine months of 2020 and $ 6.2 million for the first nine 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.

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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.

During third-quarter 2020, Stratus recorded a $ 0.3 million increase to the accrued liability for the Plan of which $ 0.1 million increased project development costs and $ 0.2 million increased general and administrative expenses.

During third-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 nine months of 2020, Stratus accrued $ 0.3 million to project development costs and $ 0.4 million in general and administrative expense related to the Plan.

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

The accrued liability for the Plan totaled $ 3.2 million at September 30, 2020, and $ 2.5 million at December 31, 2019 (included in other liabilities).

As of September 30, 2020, no amounts had been paid to participants under the Plan.

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

Stratus had deferred tax assets (net of deferred tax liabilities) totaling $ 9.6 million at June 30, 2020 , and $ 12.3 million at December 31, 2019.

Stratus had deferred tax assets (net of deferred tax liabilities) totaling $ 34 thousand at September 30, 2020 , and $ 12.3 million at December 31, 2019.

The decrease in Stratus' net deferred tax assets is primarily attributed to a valuation allowance recorded in the third quarter of 2020 totaling $ 9.6 million.

In evaluating the recoverability of the deferred tax assets, management considered available positive and negative evidence, giving greater weight to the recent current losses and uncertainty regarding projected future financial results.

Upon a change in facts and circumstances, management may conclude that sufficient positive evidence exists to support a reversal of, or decrease in, the valuation allowance in the future, which would favorably impact Stratus' results of operations.

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.

The difference between Stratus' consolidated effective income tax rate of ( 83 ) percent for the first nine months of 2020 and the U.S.

Federal statutory income tax rate of 21 percent was primarily attributable to the discrete tax charge of $ 9.6 million to record a valuation allowance on Stratus' deferred tax assets;

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 of four percent for the first nine months of 2019 and the U.S.

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

4 unchanged sentences

the Circle C community;

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

the Lantana community, including a portion of Lantana Place planned for a future multi-family phase;

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

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

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

and in Magnolia, Texas (Magnolia Place), Kingwood, Texas (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.

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

Three Months Ended June 30, Six Months Ended June 30,

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

2020 2019 2020 2019

5 unchanged sentences

Rental revenue 5,807 5,024 17,257 13,066

5,718 4,413 11,450 8,042

Rooms, food and beverage 1,504 8,097 7,511 24,279

9 unchanged sentences

Leasing Operations Hotel Entertainment Corporate, Eliminations and Other b

Three Months Ended June 30, 2020:

Three Months Ended

September 30, 2020:

Unaffiliated customers $ 5,025 $ 5,807 $ 1,596

5 unchanged sentences

General and administrative expenses — — — — 2,868 2,868

Income from forfeited earnest money

— — — — ( 15,000 ) e

Operating (loss) income $ ( 46 ) $ ( 174 ) $ ( 1,652 ) $ ( 1,420 ) $ 11,778 $ 8,486

Operating income (loss) $ 1,388 $ 1,186 $ ( 2,594 ) $ ( 1,267 ) $ ( 2,937 ) $ ( 4,224 )

Capital expenditures and purchases and development of real estate properties

$ 2,952 $ 716 $ 213 $ 2 $ — $ 3,883

Total assets at June 30, 2020 163,900 233,268 94,359 36,784 23,394 551,705

Leasing Operations Hotel Entertainment Corporate, Eliminations and Other b

Three Months Ended June 30, 2019:

Total assets at September 30, 2020 160,890 236,970 93,666 35,495 16,198 543,219

Three Months Ended

September 30, 2019:

Unaffiliated customers $ 2,616 $ 5,024 $ 8,696 $ 5,919 $ — $ 22,255

3 unchanged sentences

General and administrative expenses — — — — 3,025 3,025

Loss on sale of assets — 161 f

Gain on sale of assets — ( 37 ) c

Operating income (loss)

2 unchanged sentences

$ 3,110 $ 5,871 $ 294 $ 12 $ — $ 9,287

Total assets at June 30, 2019 205,265 174,258 97,464 45,396 20,348 542,731

Six Months Ended June 30, 2020:

Total assets at September 30, 2019 193,421 197,052 97,414 43,810 36,235 567,932

Nine Months Ended

September 30, 2020:

Unaffiliated customers $ 19,254 $ 17,257 $ 8,537 $ 4,818 $ — $ 49,866

Intersegment 13 666 82 8 ( 769 ) —

Cost of sales, excluding depreciation 12,068 7,162 c

Cost of sales, excluding depreciation 15,653 9,955 d

5,773 ( 246 ) 42,127

Depreciation 116 4,081 2,036 g

Depreciation 173 6,132 2,927 f

( 172 ) 10,339

General and administrative expenses — — — — 8,786 8,786

Income from forfeited earnest money — — — — ( 15,000 ) e

Income from forfeited earnest money — — — — ( 15,000 ) g

Operating income (loss) $ 3,441 $ 1,836 $ ( 5,300 ) $ ( 2,226 ) $ 5,863 $ 3,614

1 unchanged sentence

$ 11,607 $ 4,681 $ 523 $ 124 $ — $ 16,935

Six Months Ended June 30, 2019:

Leasing Operations Hotel Entertainment Corporate, Eliminations and Other b

Nine Months Ended

September 30, 2019:

Unaffiliated customers $ 9,693 $ 13,066 $ 25,983 $ 16,935 $ — $ 65,677

4 unchanged sentences

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

Gain on sale of assets — ( 1,952 ) f

Gain on sale of assets — ( 1,989 ) c

— — — ( 1,989 )

6 unchanged sentences

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

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

Refer to Note 4.

Includes a $ 1.4 million charge for estimated uncollectible rents receivable and unrealizable deferred costs.

1 unchanged sentence

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.

Represents income from earnest money received as a result of Ryman's termination of the agreements to sell Block 21.

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.

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.

Represents income from earnest money received as a result of Ryman's termination of the agreements to sell Block 21.

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 income (loss).

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.

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

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.

Stratus evaluated events after September 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.

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

What changed 10-Q

Item 1. Financial Statements