STRATUS PROPERTIES INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations . In Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A), “we,” “us,” “our” and "Stratus" refer to Stratus Properties Inc. and all entities owned or controlled by Stratus Properties Inc. You should read the following discussion in conjunction with our consolidated financial statements and accompanying notes, related MD&A and discussion of our business and properties included in our Annual Report on Form 10-K for the year ended December 31, 2019 (2019 Form 10-K) filed with the United States (U.S.) Securities and Exchange Commission (SEC) and the unaudited consolidated financial statements and accompanying notes included in this Form 10-Q. The results of operations reported and summarized below are not necessarily indicative of future operating results, and future results could differ materially from those anticipated in forward-looking statements (refer to “Cautionary Statement” and Part II, Item 1A. "Risk Factors" herein and Part I, Item 1A. “Risk Factors” of our 2019 Form 10-K for further discussion). In particular, the impact of the COVID-19 pandemic intensified late in the first quarter of 2020 and continues to affect our 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. We expect continued uncertainty in our business and the global economy as a result of the duration and intensity of the COVID-19 pandemic and its related effects. All subsequent references to “Notes” refer to Notes to Consolidated Financial Statements (Unaudited) located in Part I, Item 1. “Financial Statements” herein, unless otherwise stated. We are a diversified real estate company with headquarters in Austin, Texas. We are engaged primarily in the acquisition, entitlement, development, management, operation and sale of commercial, and multi-family and single-family residential real estate properties, real estate leasing, and the operation of hotel and entertainment businesses located in the Austin, Texas area, and other select, fast-growing markets in Texas. We generate revenues and cash flows from the sale of our developed properties, rental income from our leased properties and from our hotel and entertainment operations. Refer to Note 9 for further discussion of our operating segments. BUSINESS STRATEGY Our portfolio consists of approximately 1,700 acres of undeveloped acreage and acreage under development for commercial, multi-family and single-family residential projects, plus several completed retail and residential projects. Our W Austin Hotel and our ACL Live and 3TEN ACL Live entertainment venues are located in downtown Austin and are central to the city's world-renowned, vibrant music scene. Our primary business objective is to create value for stockholders by methodically developing and enhancing the value of our properties and then selling them profitably. Our full cycle development program of acquiring properties, securing and maintaining development entitlements, developing and stabilizing, and then preparing them for sale or refinancing is a key element of our strategy. We currently have projects in certain of these stages as described below in “Development Activities - Current Residential Activities” and “Development Activities - Current Commercial Activities.” We believe that Austin and other select, fast-growing markets in Texas continue to be desirable locations. Many of our developments are in locations where development approvals have historically been subject to regulatory constraints, which has made it difficult to obtain entitlements. Our Austin properties, which are located in desirable areas with significant regulatory constraints, are entitled and have utility capacity for full buildout. As a result, we believe that through strategic planning, development and marketing, we can maximize and fully realize their value. Our development plans require significant additional capital, which we may pursue through joint ventures or other arrangements. Our business strategy requires us to rely on cash flow from operations and debt financing as our primary sources of funding for our liquidity needs. We have also, from time to time, relied on project-level equity financing of our subsidiaries. We have formed strategic relationships as part of our overall strategy for particular development projects and may enter into other similar arrangements in the future. On September 21, 2020, our 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). We have 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 our shareholders. If the Board determines to move forward, we expect the conversion would likely occur in 2022. At this time, we believe that the REIT conversion would require consent from our major lenders and amendments to our major loan agreements, among other third-party consents. We also expect to seek shareholder approval to implement provisions in our 16 Table of Contents organizational documents consistent with a public REIT structure, if the Board ultimately determines that a REIT conversion is in shareholders’ best interests. As part of this assessment, we are also conducting a comprehensive review of our governance practices and Board composition to ensure we have access to the appropriate expertise and mix of skillsets moving forward. We expect to provide further information after we complete our evaluation. We may add directors to replace recent departures, prior to completing our overall review. See “Cautionary Statement” below. OVERVIEW OF THE IMPACTS OF THE COVID-19 PANDEMIC Since January 2020, the COVID-19 outbreak has caused substantial disruption in international and U.S. economies and markets, intensifying in the latter part of the first quarter of 2020 and continuing through and subsequent to the third quarter of 2020, and its impact is expected to continue beyond 2020. On March 11, 2020, the World Health Organization designated the COVID-19 outbreak a pandemic. The pandemic has resulted in government restrictions of various degrees and effective at various times, including stay-at-home orders, bans on travel, limitations on the size of gatherings, limitations on the operations of businesses deemed non-essential, closures of work facilities, schools, public buildings and businesses, cancellation of events (including entertainment events, conferences and meetings), quarantines and social distancing measures. For example, on March 6, 2020, the annual South by Southwest music festival in Austin, Texas was cancelled, on July 1, 2020, the annual Austin City Limits music festival in Austin, Texas was cancelled, and on July 24, 2020, the Formula 1 U.S. Grand Prix planned to be held in Austin, Texas was cancelled. The pandemic and responses to it have also caused a steep increase in unemployment in the U.S. As a result, the pandemic is having, and we believe will continue to have, a significant adverse impact on our business and operations, particularly on the hotel and entertainment segments, as discussed further below. The pandemic remains complex and rapidly-evolving. State and local governments in Texas have implemented phased reopening processes, often with reduced capacity and social distancing 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. For example, in June 2020, the city of Austin extended its Stay Home, Mask and Otherwise Be Safe Order through December 15, 2020. On September 30, 2020, the city of Austin extended the moratorium on certain evictions through December 31, 2020. Because the pandemic is unprecedented in recent history, and its severity, duration and future economic consequences are difficult to predict, we cannot predict its future impact on our company with any certainty. Termination of Sale of Block 21 As previously disclosed, our transaction to sell Block 21, which contains the W Austin Hotel and the ACL Live and 3TEN ACL Live entertainment venues, to Ryman Hospitality Properties, Inc. (Ryman) for $275 million was terminated by Ryman on May 21, 2020. As a result of Ryman’s termination of the transaction, Ryman forfeited to us its $15.0 million of earnest money. We used $13.8 million of the earnest money to pay down our Comerica Bank credit facility and used the remaining $1.2 million for Block 21 debt service and required monthly reserves. We recorded the $15.0 million as operating income during the second quarter of 2020. Impacts on our Business Despite the COVID-19 pandemic, we continue to advance our land planning, engineering and permitting activities. We have implemented measures such as increased sanitizing, physical distancing and remote work arrangements, with the goal of protecting employees, tenants, guests, customers and suppliers. Losses resulting from the pandemic contributed to us recording a $9.6 million non-cash tax charge in third-quarter 2020 to record a valuation allowance on our deferred tax assets. Refer to Note 8 for further discussion. Many of our 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, we agreed, generally, to 90-day base rent deferrals with a majority of these tenants. The deferred rents are expected 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 17 percent during the period from April through September 2020. As of September 30, 2020, all of our retail tenants who were open prior to the pandemic had reopened, although operating with capacity restrictions. At our multi-family properties, we have 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. We will continue to consider rent deferral accommodations on a case-by-case basis. In the aggregate, our retail and multi-family rent collections were eight percent less than scheduled rents during the period from April through September 2020. We also terminated one lease during second-quarter 17 Table of Contents 2020 and recorded charges related to this lease totaling $1.3 million, primarily related to uncollectible rents receivable and unrealizable deferred costs. Subsequently, in July 2020, we entered into a new six-month lease agreement with this tenant, in which the amount of the lessee's rent is based on a percentage of its revenue. Our revenue, operating income and cash flow from our hotel and entertainment segments were adversely impacted in the second and third quarters of 2020 and are expected to continue to be adversely impacted beyond third-quarter 2020. For example, while our hotel has remained open throughout the pandemic, average occupancy in the third quarter of 2020 was 16 percent, which was a slight increase since the second-quarter average occupancy rate of 12 percent. The impacts of the COVID-19 pandemic on each of our segments are described below in more detail in “Results of Operations.” At this time, we are focusing on taking action to maintain liquidity and implement cost controls; close routine asset sales; closely monitor our income properties and continue to lease up certain properties; regularly communicate with our lenders and investor groups; advance our land planning, engineering and permitting activities; and evaluate refinance opportunities for our larger, stabilized assets to take advantage of historic low interest rates. All major construction projects have been completed and no new construction is scheduled until the first quarter of 2021. We will closely monitor market conditions before initiating construction and may defer a construction start if prudent. Impacts on our Liquidity and Capital Resources On June 12, 2020, we extended the maturity date of our $60 million revolving credit facility to September 27, 2022. As of September 30, 2020, we had $24.5 million available under our $60.0 million Comerica Bank credit facility, with a $150 thousand letter of credit committed against the credit facility. We project that we will be able to meet our debt service and other cash obligations for at least the next 12 months. Our projections are based on many detailed and complex underlying assumptions, including (1) that operating income for our Block 21 businesses will gradually ramp up to a break-even point in the first half of 2021 and that Block 21 will generate sufficient cash to cover debt service by late 2021, (2) that current conditions in our leasing operations will not further deteriorate materially, (3) that we continue to close on routine asset sales, and (4) that we sell or refinance The Saint Mary on terms consistent with our expectations. No assurances can be given that the results anticipated by our projections will occur. See Note 6, “Capital Resources and Liquidity” below, “Risk Factors” included in Part II, Item 1A. herein and “Risk Factors” included in Part I, Item 1A. of our 2019 Form 10-K, for further discussion. We are continuing to closely monitor health and market conditions and are prepared to make further adjustments to our business strategy if and when appropriate. OVERVIEW OF FINANCIAL RESULTS FOR THIRD-QUARTER 2020 Our net loss attributable to common stockholders totaled $15.1 million, $1.84 per share, in third-quarter 2020, compared with a net loss of $3.0 million, $0.36 per share, in third-quarter 2019. During the first nine months of 2020 our net loss attributable to common stockholders totaled $12.0 million, $1.46 per share, compared with a net loss of $4.5 million, $0.55 per share, during the first nine months of 2019. Our net losses attributable to common stockholders in the 2020 periods, compared to the 2019 periods, were primarily the result of (i) a non-cash tax charge of $9.6 million in third-quarter 2020 to record a valuation allowance on our deferred tax assets, (ii) operating losses from our hotel and entertainment segments in the 2020 periods, primarily as a result of the COVID-19 pandemic, and (iii) higher interest expense related to lower capitalized interest as projects under development are completed. Our higher net loss attributable to common stockholders during the first nine months of 2020, compared to the first nine months of 2019, was also impacted by municipal utility district (MUD) reimbursements and a gain on sale of assets being recognized in the first nine months of 2019, offset by $15.0 million in income from earnest money received as a result of the termination of the Block 21 transaction. Our revenues totaled $12.8 million in third-quarter 2020, compared with $22.3 million in third-quarter 2019. During the first nine months of 2020, our revenues totaled $49.9 million, compared with $65.7 million, during the first nine months of 2019. The decrease in revenues in the 2020 periods, compared to the 2019 periods, primarily reflects the decrease in revenue from our hotel and entertainment segments caused by the COVID-19 pandemic, partially offset by an increase in revenue from real estate and leasing operations. 18 Table of Contents DEVELOPMENT ACTIVITIES Current Residential Activities. In third-quarter 2020, we sold four Amarra Drive Phase III lots, including two premium hilltop lots, for a total of $5.0 million. During the first nine months of 2020, we sold 4 Amarra Drive Phase II lots, 11 Amarra Drive Phase III lots and 2 homes built on Amarra Drive Phase III lots for a total of $19.1 million. For further discussion, see "Results of Operations — Real Estate Operations." Sales include lots sold under the new homebuilder contract discussed below. As of September 30, 2020, six developed Amarra Drive Phase III lots and three developed Amarra Drive Phase II lots remained unsold, of which three Phase III lots and two Phase II lots were subject to the new homebuilder contract discussed below. In September 2019, we amended a contract previously entered into in March 2018, pursuant to which we agreed to sell 2 Amarra Drive Phase II lots and 15 Amarra Drive Phase III lots to a homebuilder for a total of $11.6 million (the original homebuilder contract). In January 2020, the original homebuilder contract was terminated and replaced with a similar contract with the same homebuilder in which we agreed to sell the three remaining Amarra Drive Phase III lots under the original contract as well as three new Amarra Drive Phase II lots and two new Amarra Drive Phase III lots for $5.2 million (the new homebuilder contract). In September 2020, the new homebuilder contract was further amended to add one additional Amarra Drive Phase III lot to the contract at a sales price of $0.7 million. In accordance with the new homebuilder contract the parties are required to close on the sale of these lots ratably before April 30, 2021. If the purchaser fails to close on the sale of the minimum number of lots by any of the specified closing dates, we may elect to terminate the homebuilder contract but would retain the related $45 thousand earnest money. In third-quarter 2020, in accordance with the contract, we sold one Amarra Drive Phase III lot for a total of $0.7 million under the terms of the new homebuilder contract. During the first nine months of 2020, we sold one Amarra Drive Phase II lot and three Amarra Drive Phase III lots for a total of $2.7 million under the terms of the new homebuilder contract. Subsequent to September 30, 2020, and through November 2, 2020, we sold three Amarra Drive Phase II lots, two of which were subject to the new homebuilder contract, for a total of $2.0 million. As of November 2, 2020, all of our developed single family lots in Barton Creek were either sold or under contract to sell, except for three Amarra Drive Phase III lots. The Villas at Amarra Drive (Amarra Villas) townhome project is a 20-unit development in the Barton Creek community for which we completed construction of the first seven townhomes during 2017 and 2018. We sold the last two completed townhomes in 2019. We began construction of the next two Amarra Villas townhomes during the first quarter of 2020, which are expected to be completed in mid-2021. The Santal, a multi-family project consisting of 448 units in Section N in the Barton Creek community, is fully leased and stabilized. The Saint Mary, a multi-family project consisting of 240 units in the Circle C community, was approximately 85 percent leased as of September 30, 2020, and we expect to sell or refinance The Saint Mary before June 2021. For further discussion of our multi-family and single-family residential properties, see MD&A in our 2019 Form 10-K. Current Commercial Activities. During 2019, we completed construction of two retail buildings totaling 41,000 square feet and a 103,000-square-foot H-E-B, L.P. (HEB) grocery store at Kingwood Place, an HEB-anchored, mixed-use development in Kingwood, Texas. An 8,000-square-foot retail building was completed in July 2020, and we have signed ground leases on two of the retail pads. As of September 30, 2020, we had signed leases for approximately 85 percent of the retail space, including the HEB grocery store. We continue to advance the potential multi-family project at Kingwood Place, which is currently planned for 261 units. In March 2019, we finalized the lease for the HEB store at New Caney, an HEB-anchored, mixed-use development in New Caney, Texas, and acquired HEB's interest in the partnership for approximately $5 million. We currently do not anticipate commencing construction on the New Caney project prior to 2021. 19 Table of Contents Lantana Place is a partially developed, mixed-use development project located in southwest Austin. As of September 30, 2020, we had signed leases for approximately 80 percent of the retail space. We also have a ground lease for an AC Hotel by Marriott. Construction of the hotel began in May 2019 and is expected to be completed in January 2021. We rezoned a portion of the Lantana property for a potential multi-family development of up to 350 units. As of September 30, 2020, we had signed leases for approximately 95 percent of the retail space at the first phase of Jones Crossing, an HEB-anchored, mixed-use development located in College Station, Texas, and approximately 70 percent of the retail space at West Killeen Market, our retail project located in Killeen, Texas, shadow-anchored by an adjacent HEB grocery store. In October 2020, we sold a pad site at West Killeen Market for $0.7 million. For further discussion of our commercial properties, see MD&A in our 2019 Form 10-K. Projects in Planning. We are advancing the planning and permitting process for development of future phases of Barton Creek, including residential Section KLO and commercial and multi-family Section N. We redesigned Section KLO using a combination of single family lots and residential condominium lots, which is expected to increase our density from 154 to approximately 450 home sites. The city of Austin and Travis County approved initial subdivision permit applications for Section KLO in October 2019. The engineering for roads and utilities for the initial phases of Section KLO is in process. Using a conceptual approach similar to that used for Section KLO, we are also evaluating a redesign of Section N, our approximately 570 acre tract located along Southwest Parkway in the southern portion of the Barton Creek community. If successful, this new project would be designed as a dense, mid-rise, mixed-use project surrounded by an extensive greenspace amenity and result in an increase in potential densities. These potential development projects require extensive additional permitting and will be dependent on market conditions. Because of the nature and cost of the approval and development process and uncertainty regarding market demand for a particular use, there is uncertainty regarding the nature of the final development plans and whether we will be able to successfully execute the plans. In addition, our development plans for Section KLO and Section N will require significant capital, which we may pursue through debt and/or equity financings, joint ventures, commercial, partner or other arrangements. We are evaluating a sale of the land for the single family residential component of Magnolia Place, a mixed-use project in Magnolia, Texas, currently planned for 133,605 square feet of commercial space; 7 pad sites; 2 hotel sites; and 96 single-family lots and 588 multi-family units. Magnolia Place will be shadow-anchored by a 95,000-square-foot HEB grocery store to be constructed by HEB on an adjoining 18-acre site owned by HEB. In the first quarter of 2021, we expect to commence work on The Saint June, a 182-unit multi-family project within the Amarra subdivision in Barton Creek, subject to financing and market conditions. We will closely monitor the market before initiating construction and may defer the start of construction if prudent. RESULTS OF OPERATIONS We are continually evaluating the development and sale potential of our properties and will continue to consider opportunities to enter into transactions involving our properties, including possible sales, joint ventures or other arrangements. As a result, and because of the COVID-19 pandemic and numerous other factors affecting our business activities as described herein and in our 2019 Form 10-K, our past operating results are not necessarily indicative of our future results. We use operating income or loss to measure the performance of each operating segment. Corporate, eliminations and other includes consolidated general and administrative expenses, which primarily consist of employee salaries and other costs. 20 Table of Contents The following table summarizes our results (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Operating income (loss): Real Estate Operations a $ 1,388 $ 211 $ 3,441 $ 3,331 b Leasing Operations 1,186 1,256 1,836 c 4,319 Hotel (2,594) 930 (5,300) 2,979 Entertainment (1,267) 1,063 (2,226) 3,171 Corporate, eliminations and other d (2,937) (3,391) 5,863 e (9,661) Operating (loss) income $ (4,224) $ 69 $ 3,614 $ 4,139 Interest expense, net $ (3,587) $ (3,203) $ (11,168) $ (8,686) Net loss attributable to common stockholders $ (15,078) f $ (2,960) $ (12,014) f $ (4,487) a. Includes sales commissions and other revenues together with related expenses. b. Includes $3.4 million of MUD reimbursements, which were recorded as a reduction of cost of sales. c. Includes a $1.4 million charge for estimated uncollectible rents receivable and unrealizable deferred costs. d. Includes consolidated general and administrative expenses and eliminations of intersegment amounts. e. Includes $15.0 million in income from earnest money received as a result of Ryman's termination of the agreements to sell Block 21. f. Includes a $9.6 million tax charge to record a valuation allowance on our deferred tax assets. We have four operating segments: Real Estate Operations, Leasing Operations, Hotel and Entertainment (refer to Note 9). The following is a discussion of our operating results by segment. Real Estate Operations COVID-19 Pandemic Impact Despite the COVID-19 pandemic, we continue to advance our land planning, engineering and permitting activities. For further discussion, see Part II, Item 1A. "Risk Factors." Third-Quarter Results The following table summarizes our Real Estate Operations results (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Revenues: Developed property sales $ 5,001 $ 2,601 $ 19,141 $ 9,483 Commissions and other 29 19 126 223 Total revenues 5,030 2,620 19,267 9,706 Cost of sales, including depreciation 3,642 2,409 15,826 6,375 a Operating income $ 1,388 $ 211 $ 3,441 $ 3,331 a. Includes $3.4 million credit related to MUD reimbursements. 21 Table of Contents Developed Property Sales. The following table summarizes our developed property sales (dollars in thousands): Three Months Ended September 30, 2020 2019 Lots Revenues Average Cost Per Lot Lots Revenues Average Cost Per Lot Barton Creek Amarra Drive: Phase III lots 4 $ 5,001 $ 535 4 $ 2,601 $ 261 Total Residential 4 $ 5,001 4 $ 2,601 Nine Months Ended September 30, 2020 2019 Lots/Homes Revenues Average Cost Per Lot/Home Lots/Homes Revenues Average Cost Per Lot/Home Barton Creek Amarra Drive: Phase II lots 4 $ 2,372 $ 193 — $ — $ — Phase III lots 11 9,591 389 10 6,033 242 Homes built on Phase III lots 2 7,178 3,273 — — — Amarra Villas townhomes — — — 2 3,450 1,607 Total Residential 17 $ 19,141 12 $ 9,483 Real Estate Revenues. The increase in revenues in third-quarter 2020, compared to third-quarter 2019, primarily reflects the sales of two premium Amarra Drive Phase III hilltop lots in third-quarter 2020. The increase in revenues in the first nine months of 2020, compared to the first nine months of 2019, primarily reflects the sales of two homes built on Amarra Drive Phase III lots and an increase in lot sales in the first nine months of 2020. Cost of Sales. Cost of sales includes costs of property sold, project operating and marketing expenses and allocated overhead costs, partly offset by reductions for certain MUD reimbursements. Cost of sales increased to $3.6 million in third-quarter 2020 from $2.4 million in third-quarter 2019, primarily reflecting an increase in real estate sales of higher priced lots, which typically have a higher average cost per lot. Cost of sales increased to $15.8 million for the first nine months of 2020 from $6.4 million for the first nine months of 2019, primarily reflecting the sales of two homes in first-quarter 2020 built on Phase III lots, which have a higher average cost, and an increase in the number of lots sold during the first nine months of 2020. The increase also results from $3.4 million in MUD reimbursements received in the first nine months of 2019 recorded as a reduction in real estate cost of sales as the reimbursed property had previously been sold. Leasing Operations COVID-19 Pandemic Impact The pandemic is negatively affecting our leasing operations, primarily at our retail properties. Tenants at our retail locations are diverse and include grocery and liquor stores, which have remained open and have paid rent owed to-date, and restaurants, healthcare services, fitness centers, a movie house and other retail products and services, many of which closed or have been operating at significantly reduced capacity since late in the first quarter of 2020. Beginning in April 2020, we agreed, generally, to 90-day base rent deferrals with a majority of these tenants. The deferred rents are expected 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 17 percent during the period from April through September 2020. At our multi-family properties, we have 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. We will continue to consider rent deferral accommodations on a case-by-case basis. In the aggregate, our retail and multi-family rent collections were eight percent less than scheduled rents during the period from April through September 2020. We cannot assure you that our tenants will recommence rental payments in accordance with our agreements when the deferral period ends nor whether tenants will request additional accommodations or be willing or able to meet future lease obligations. For further discussion, see Part II, Item 1A. "Risk Factors." 22 Table of Contents Third-Quarter Results The following table summarizes our Leasing Operations results (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Rental revenue $ 6,030 $ 5,243 $ 17,923 $ 13,744 Rental cost of sales, excluding depreciation 2,793 2,495 9,955 a 7,090 Depreciation 2,051 1,529 6,132 4,324 Gain on sale of assets — (37) — (1,989) Operating income $ 1,186 $ 1,256 $ 1,836 $ 4,319 a. Includes a $1.4 million charge for estimated uncollectible rents receivable and unrealizable deferred costs. Rental Revenue. Rental revenue primarily includes revenue from The Santal, Lantana Place, Jones Crossing, The Saint Mary, Kingwood Place, the office and retail space at the W Austin Hotel & Residences, and West Killeen Market. The increase in rental revenue in the 2020 periods, compared with the 2019 periods, primarily reflects the commencement of new leases at The Saint Mary, Kingwood Place and The Santal. Rental Cost of Sales and Depreciation. Rental cost of sales and depreciation expense increased in the 2020 periods, compared with the 2019 periods, primarily as a result of the completion of construction and the start of leasing operations at The Saint Mary and Kingwood Place. During the second-quarter of 2020, our lease with Moviehouse, our anchor tenant at Lantana Place, was terminated and we charged $1.3 million to cost of sales to write off uncollectible rents receivable and unrealizable deferred costs associated with this lease. In July 2020, we entered into a new six-month lease agreement with Moviehouse in which rent is based on a percentage of Moviehouse's revenue. Gain on Sale of Assets. In January 2019, we sold a retail pad subject to a ground lease located in the Circle C community for $3.2 million. We used a portion of the proceeds from the sale to repay $2.5 million of our Comerica Bank credit facility borrowings and, after adjustments recorded in the second and third quarters of 2019, recorded a gain of $2.0 million for the first nine months of 2019. Hotel COVID-19 Pandemic Impact The pandemic has had, and we believe will continue to have, a significant adverse impact on the hospitality industry, as it has resulted in dramatically curtailed business and leisure travel and caused cancellations of events or rescheduling of events until later in 2020 and beyond. Accordingly, the pandemic has resulted in a significant decrease in revenue and expected revenue from our hotel rooms, conference facilities and hotel amenities. For example, while our hotel has remained open throughout the pandemic, average occupancy in the third quarter of 2020 was 16 percent, which was a slight increase since the second-quarter average occupancy of 12 percent. As a result of the pandemic, hotel revenue for the three and nine months ended September 30, 2020, was significantly lower than in the prior-year periods and hotel revenue for the fourth quarter of 2020 will be significantly lower than hotel revenue in the prior-year quarter. We incurred significant operating losses in the three and nine months ended September 30, 2020, and expect to incur a significant operating loss in the segment during the fourth quarter of 2020. We are working with the hotel operator on plans to gradually ramp up hotel operations to a break-even point in the first half of 2021, health and market conditions permitting. The pandemic is expected to continue to negatively affect our hotel business, and the extent to which such adverse impacts continue depends on numerous evolving factors that we cannot predict. Moreover, even as travel advisories and restrictions are lifted, travel demand may remain weak for a significant length of time and attractions and events that previously brought visitors to the city of Austin may not proceed or may proceed with limited capacity. We cannot predict if or when our hotel will return to pre-pandemic demand or pricing. For further discussion, see Part II, Item 1A. "Risk Factors." 23 Table of Contents Third-Quarter Results The following table summarizes our Hotel results (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Hotel revenue $ 1,614 $ 8,764 $ 8,619 $ 26,178 Hotel cost of sales, excluding depreciation 3,317 6,931 10,992 a 20,497 Depreciation 891 903 2,927 2,702 Operating (loss) income $ (2,594) $ 930 $ (5,300) $ 2,979 a. 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. Hotel Revenue. Hotel revenue primarily includes revenue from W Austin Hotel room reservations and food and beverage sales. The decrease in Hotel revenues in the 2020 periods, compared to the 2019 periods, is primarily a result of lower room reservations and food and beverage sales as a result of the COVID-19 pandemic. Revenue per available room (RevPAR), which is calculated by dividing total room revenue by the average total rooms available, was $36 in third-quarter 2020 and $71 for the first nine months of 2020, compared with $222 in third-quarter 2019 and $234 for the first nine months of 2019. Hotel Cost of Sales. The decrease in Hotel cost of sales, excluding depreciation, in the 2020 periods, compared to the 2019 periods, is primarily a result of lower room reservations and food and beverage sales. The increase in depreciation during the first nine months of 2020, compared to the first nine months of 2019, is primarily because of a $202 thousand adjustment for the period in December 2019 when the hotel was held for sale and, therefore, not depreciated. Hotel Renovation. We are considering proceeding with a modest renovation of the hotel guest rooms and public spaces, subject to various approvals, including from our lender, and coordination with the hotel operator. We expect to use approximately $7 million of reserves previously set aside for hotel improvements under our agreement with the hotel operator and reflected in restricted cash on our balance sheet. Entertainment COVID-19 Pandemic Impact The pandemic has had, and we believe will continue to have, a significant adverse impact on the entertainment industry and our entertainment operations. Our entertainment venues, ACL Live and 3TEN ACL Live, continue to be subject to capacity restrictions and have held only a limited number of events. Many events previously scheduled during the remainder of 2020 have been rescheduled and some have been cancelled. As a result of the pandemic, our Entertainment revenue for the three and nine months ended September 30, 2020, was significantly lower than in the prior-year periods and entertainment revenue for the fourth quarter of 2020 will be significantly lower than in the prior-year period. It is also unclear whether and to what extent pandemic-related concerns will continue to impact the use of and/or demand for our entertainment venues, even as government restrictions are modified or lifted. We hosted a small number of events at our venues during the third quarter, and have several events scheduled later in the year, but they have been, and will continue to be, subject to capacity restrictions as in effect at the time. Our scheduled programs will occur only to the extent health and safety conditions, and regulations, permit. We incurred significant operating losses in the three and nine months ended September 30, 2020, and expect to incur an operating loss in the segment during the fourth quarter of 2020. For further discussion, see Part II, Item 1A. "Risk Factors." Third-Quarter Results The following table summarizes our Entertainment results (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Entertainment revenue $ 367 $ 6,226 $ 4,826 $ 17,316 Entertainment cost of sales, excluding depreciation 1,242 4,770 5,773 12,962 Depreciation 392 393 1,279 1,183 Operating (loss) income $ (1,267) $ 1,063 $ (2,226) $ 3,171 24 Table of Contents Entertainment Revenue. Entertainment revenue primarily reflects the results of operations for ACL Live, including ticket sales, revenue from private events, sponsorships, personal seat license and suite sales, and sales of concessions and merchandise. Entertainment revenue also reflects revenues associated with events hosted at 3TEN ACL Live. Revenues from the Entertainment segment vary from period to period as a result of factors such as the price of tickets and number of tickets sold, as well as the number and type of events hosted at ACL Live and 3TEN ACL Live. Entertainment revenues decreased in the 2020 periods, compared to the 2019 periods, primarily as a result of a decrease in the number of events hosted at ACL Live and 3TEN ACL Live, as many scheduled events in the first nine months of 2020 were cancelled or rescheduled as a result of the COVID-19 pandemic. Certain key operating statistics specific to the concert and event hosting industry are included below to provide additional information regarding our ACL Live and 3TEN ACL Live operating performance. Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 ACL Live Events: Events hosted 17 59 55 192 Estimated attendance 656 81,088 46,102 225,300 Ticketing: Number of tickets sold — 60,704 37,703 177,605 Gross value of tickets sold (in thousands) — $ 3,413 $ 1,881 $ 9,672 3TEN ACL Live Events: Events hosted 19 46 70 148 Estimated attendance 1,607 9,308 9,839 27,798 Ticketing: Number of tickets sold — 5,565 5,278 17,890 Gross value of tickets sold (in thousands) — $ 130 $ 126 $ 425 Entertainment Cost of Sales. The decrease in Entertainment cost of sales, excluding depreciation, in the 2020 periods, compared to the 2019 periods, reflects that many scheduled events in the first nine months of 2020 were rescheduled or cancelled as a result of the COVID-19 pandemic. The increase in depreciation for the first nine months of 2020, compared to the first nine months of 2019, is primarily because of an $89 thousand adjustment for the period in December 2019 when the entertainment venues were held for sale and, therefore, not depreciated. Corporate, Eliminations and Other Corporate, eliminations and other (refer to Note 9) includes consolidated general and administrative expenses, which primarily consist of employee salaries and other costs. Consolidated general and administrative expenses decreased slightly to $2.9 million in third-quarter 2020 from $3.0 million in third-quarter 2019. Consolidated general and administrative expenses decreased to $8.8 million for the first nine months of 2020 compared to $9.1 million for the first nine months of 2019, primarily reflecting lower incentive compensation for the first nine months of 2020, including amounts related to our Profit Participation Incentive Plan. Refer to Note 7 for further discussion of the Profit Participation Incentive Plan. Corporate, eliminations and other also includes eliminations of intersegment transactions among the four operating segments. For the first nine months of 2020, corporate, eliminations and other includes $15.0 million in income from earnest money that was received from Ryman in May 2020 upon their termination of the agreements to acquire Block 21. Non-Operating Results Interest Expense, Net. Interest costs (before capitalized interest) totaled $4.7 million in third-quarter 2020 and $14.8 million for the first nine months of 2020, compared with $5.2 million in third-quarter 2019 and $14.9 million for the first nine months of 2019. Interest costs in the 2020 periods were lower, compared to the 2019 periods, primarily reflecting a decrease in average interest rates. 25 Table of Contents Capitalized interest totaled $1.1 million in third-quarter 2020 and $3.6 million for the first nine months of 2020, compared with $2.0 million in third-quarter 2019 and $6.2 million for the first nine months of 2019, and is 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. Other Income, Net. Other income, net of $111 thousand for the first nine months of 2020 decreased, compared with $329 thousand for the first nine months of 2019, as a result of receiving proceeds in first-quarter 2019 related to MUD reimbursements of infrastructure costs incurred for development of Barton Creek. Of the total MUD reimbursements received in first-quarter 2019, we recorded $0.3 million as interest income in other income, net in the consolidated statements of comprehensive loss. (Provision for) Benefit from Income Taxes. We recorded a (provision for) benefit from income taxes of $(7.5) million in third-quarter 2020 and $(6.2) million for the first nine months of 2020, compared with $0.4 million in third-quarter 2019 and $0.2 million for the first nine months of 2019. The third quarter and first nine months of 2020 included a $9.6 million non-cash tax charge to record a valuation allowance on our deferred tax assets. Refer to Note 8 for further discussion of income taxes. Total Comprehensive Loss Attributable to Noncontrolling Interests in Subsidiaries . Our partners' share of losses totaled $0.2 million in third-quarter 2020 and $1.6 million for the first nine months of 2020 for projects that began operations in late 2019, primarily The Saint Mary. Of the total share of losses for the first nine months of 2020, $573 thousand relates to losses incurred prior to 2020. CAPITAL RESOURCES AND LIQUIDITY Volatility in the real estate market, including the markets in which we operate, can impact the timing of and proceeds received from sales of our properties, which may cause uneven cash flows from period to period. Our cash flows have also been, and will continue for some time to be, adversely affected by the pandemic, as discussed throughout this report. However, we believe that the unique nature and location of our assets will provide us positive cash flows over time. Comparison of Cash Flows for the Nine Months Ended September 30, 2020 and 2019 Operating Activities. Cash provided by (used in) operating activities totaled $0.5 million for the first nine months of 2020, compared with $(4.0) million for the first nine months of 2019. Expenditures for purchases and development of real estate properties totaled $11.6 million for the first nine months of 2020, primarily related to development of our Barton Creek properties and the purchase of an office building in Austin, and $8.9 million for the first nine months of 2019, primarily related to development of our Barton Creek properties. The cash outflow resulting from the decrease in accounts payable, accrued liabilities and other for the first nine months of 2020 is primarily related to the timing of property tax payments as well as contractor retention payments associated with the completion of The Saint Mary and Kingwood Place. During the first nine months of 2019, our operating cash flows included MUD reimbursements totaling $4.6 million related to infrastructure costs incurred in Barton Creek (of which $3.7 million increased net income before taxes for the period and $0.9 million reduced purchases and development of real estate properties). Investing Activities. Cash used in investing activities totaled $6.4 million for the first nine months of 2020 and $53.8 million for the first nine months of 2019. Capital expenditures totaled $5.3 million for the first nine months of 2020, primarily related to development of the Kingwood Place and Lantana Place projects, and $51.2 million for the first nine months of 2019, primarily related to development of the Kingwood Place and The Saint Mary projects. Capital expenditures were lower in the first nine months of 2020, compared to the first nine months of 2019, primarily as a result of the completion of The Saint Mary and Kingwood Place in late 2019. During the first nine months of 2019, we recorded a purchase of noncontrolling interest totaling $4.6 million as a result of our acquisition of HEB's interests in the New Caney partnership in which we and HEB collectively purchased a tract of land for the future development of an HEB-anchored mixed-use project in New Caney, Texas. We also made payments totaling $1.1 million for the first nine months of 2020 and $1.2 million for the first nine months of 2019 under our master lease obligations associated with the 2017 sale of The Oaks at Lakeway. 26 Table of Contents Financing Activities. Cash provided by financing activities totaled $0.4 million for the first nine months of 2020 and $68.6 million for the first nine months of 2019. During the first nine months of 2020, net repayments on the Comerica Bank credit facility totaled $7.2 million, reflecting the use of $13.8 million of the $15.0 million earnest money to pay down the revolving credit facility, compared to net borrowings of $1.1 million for the first nine months of 2019. Net borrowings from project and term loans totaled $8.1 million for the first nine months of 2020, primarily from the Paycheck Protection Program loan (refer to Note 1 for further information) and for the Kingwood and The Saint Mary projects, partially offset by repayment of the Amarra Villas credit facility, compared with net borrowings of $69.2 million for the first nine months of 2019, primarily related to the Santal refinancing and The Saint Mary, Kingwood Place, Jones Crossing and New Caney projects. See “Credit Facility, Other Financing Arrangements and Liquidity Outlook” below for a discussion of our outstanding debt at September 30, 2020. Credit Facility, Other Financing Arrangements and Liquidity Outlook At September 30, 2020, the total principal amount of our outstanding debt was $371.1 million, compared with $369.2 million at December 31, 2019. We had borrowings of $35.3 million under the $60.0 million Comerica Bank revolving credit facility, $24.5 million of which was available at September 30, 2020, net of a $150 thousand letter of credit committed against the credit facility. On June 12, 2020, we amended our credit facility agreement with Comerica Bank to extend the maturity date from September 27, 2020, to September 27, 2022. Refer to Note 6 in our 2019 Form 10-K for further discussion of our outstanding debt. Refer to “Debt Maturities and Other Contractual Obligations” below for a table illustrating the timing of principal payments due on our outstanding debt as of September 30, 2020. The Santal loan includes a requirement that we maintain liquid assets, as defined in the agreement, of not less than $7.5 million. The Saint Mary construction loan and the New Caney land loan include a requirement that we maintain liquid assets, as defined in each agreement, of not less than $10 million. The Comerica Bank credit facility, the Lantana Place construction loan, the Jones Crossing construction loan, The Saint Mary construction loan, the Amarra Villas credit facility, the Kingwood Place construction loan, the West Killeen Market construction loan, the New Caney land loan and The Santal loan include a requirement that we maintain a net asset value, as defined in each agreement, of $125 million. The Comerica Bank credit facility, the Amarra Villas credit facility and the Kingwood Place construction loan also include a requirement that we maintain a promissory note debt-to-gross asset value, as defined in the agreement, of less than 50 percent. The Santal loan, the West Killeen Market construction loan, and the Lantana Place construction loan each include a financial covenant to maintain a debt service coverage ratio as defined in each agreement. In addition, our loan agreements with Comerica Bank require Comerica Bank’s prior written consent for any common stock repurchases in excess of $1.0 million or dividend payments. As of September 30, 2020, we were in compliance with all of our financial covenants except for the debt service coverage ratio covenant under the Block 21 loan as discussed below. We proactively engaged and will continue to proactively engage with our project lenders in connection with formulating rent deferral arrangements for tenants at our projects as a result of the pandemic. Each of our projects is expected to generate sufficient revenue to pay debt service. During second-quarter 2020, we entered into amendments to the Lantana Place and West Killeen Market construction loans in which we were granted waivers of the debt service coverage ratio covenants for the quarters needed such that we believe we will be able to remain in compliance if rent payments do not further deteriorate materially as currently anticipated. Effective November 2, 2020, the West Killeen Market construction loan was modified to replace the financial covenant that we maintain a minimum total stockholders’ equity balance of $110 million with a financial covenant that we maintain a minimum net asset value, as defined in the agreement, of $125 million. The Block 21 loan agreement secured by the Block 21 assets contains financial covenant requirements that we maintain (i) a net worth in excess of $125 million, (ii) liquid assets of not less than $10 million and (iii) a trailing-12-month debt service coverage ratio, tested quarterly, each as defined in the agreement. If any of these financial covenants are not met, a “Trigger Period”, which is not a default, results. As a result of the pandemic, we did not meet the debt service coverage ratio test on the June 30, 2020, and September 30, 2020, test dates, resulting in a Trigger Period. During a Trigger Period, any cash generated from Block 21's hotel, entertainment and office and retail space in excess of amounts necessary to fund loan obligations, budgeted operating expenses and specified reserves would not be available to be distributed to us until after we meet a higher debt service coverage ratio requirement for two consecutive quarters. As the ratio is calculated on a trailing-12-month basis, we currently expect the Trigger Period to continue through at least 2021. 27 Table of Contents The Block 21 loan agreement requires us to contribute cash to our Block 21 subsidiary if funds from Block 21’s operations are insufficient to fund all payments and reserves as required under our loan agreement. Additionally, under our hotel operating agreement, the hotel operator may request funds from us if it reasonably determines that such funds are required in order to fund the operation of the hotel and specified reserves. We have been required to contribute such funds during 2020, and our projections reflect that we will be required to do so in early 2021. As of September 30, 2020, we had $5.8 million of liabilities for deferred income and deposits that primarily related to ticket and sponsorship presales at our venues. We have refunded amounts related to events that have been cancelled, and we may refund additional amounts if more events are cancelled in the future. We project that we will be able to meet our debt service and other cash obligations for at least the next 12 months. Our projections are based on many detailed and complex underlying assumptions, including (1) that operating income for our Block 21 businesses will gradually ramp up to a break-even point in the first half of 2021 and that Block 21 will generate sufficient cash to cover debt service by late 2021, (2) that current conditions in our leasing operations will not further deteriorate materially, (3) that we continue to close on routine asset sales, and (4) that we sell or refinance The Saint Mary on terms consistent with our expectations. No assurances can be given that the results anticipated by our projections will occur. See Note 6 and “Risk Factors” included in Part II, Item 1A. herein and “Risk Factors” included in Part I, Item 1A. of our 2019 Form 10-K, for further discussion. DEBT MATURITIES AND OTHER CONTRACTUAL OBLIGATIONS The following table summarizes our debt maturities based on the principal amounts outstanding as of September 30, 2020 (in thousands): 2020 2021 2022 2023 2024 Thereafter Total Block 21 loan $ 601 $ 2,470 $ 2,613 $ 2,765 $ 2,904 $ 128,967 $ 140,320 The Santal loan a — — 75,000 — — — 75,000 Comerica Bank credit facility — — 35,307 — — — 35,307 New Caney land loan b — 5,000 — — — — 5,000 PPP loan — — 3,987 — — — 3,987 Construction loans: Kingwood Place a — — 31,415 — — — 31,415 The Saint Mary c — 25,395 — — — — 25,395 Lantana Place 42 497 513 23,194 — — 24,246 Jones Crossing — 283 396 21,841 — — 22,520 West Killeen Market 37 149 7,040 — — — 7,226 Amarra Villas credit facility — — 702 — — — 702 Total $ 680 $ 33,794 $ 156,973 $ 47,800 $ 2,904 $ 128,967 $ 371,118 a. We have the option to extend the maturity date for two additional 12-month periods, subject to certain conditions. b. We expect to exercise our option to extend the loan for an additional 12 months, which requires a principal payment of approximately $500 thousand. c. We expect to refinance or sell The Saint Mary prior to the June 19, 2021, maturity date of the loan. Other than debt transactions (as discussed in Note 6), there have been no material changes in our contractual obligations since December 31, 2019. Refer to Part II, Items 7. and 7A. in our 2019 Form 10-K for further information regarding our contractual obligations. CRITICAL ACCOUNTING ESTIMATES There have been no changes in our critical accounting estimates from those discussed in our 2019 Form 10-K. NEW ACCOUNTING STANDARDS There have been no changes in new accounting standards from those discussed in Note 1 to the financial statements included in our 2019 Form 10-K. 28 Table of Contents OFF-BALANCE SHEET ARRANGEMENTS There have been no material changes in our off-balance sheet arrangements since December 31, 2019. Refer to Note 9 in our 2019 Form 10-K for further information. CAUTIONARY STATEMENT This Quarterly Report on Form 10-Q contains forward-looking statements in which we discuss factors we believe may affect our future performance. Forward-looking statements are all statements other than statements of historical fact, such as plans, projections or expectations related to the impacts of the COVID-19 pandemic, our ability to meet our future debt service and other cash obligations, potential future rent deferrals or other concessions to our tenants, our ability to collect rents timely, our ability to ramp-up operations at Block 21 according to our currently anticipated timeline, our ability to open and hold events at our venues, future cash flows and liquidity, our ability to comply with or obtain waivers of financial and other covenants in debt agreements, our intention to engage in an in-depth exploration of conversion to a REIT, potential benefits of conversion to a REIT, our potential attractiveness as a REIT to REIT investors and analysts, potential steps necessary prior to conversion to a REIT, the potential timing of any REIT conversion, our expectations about the Austin and Texas real estate markets, potential changes in governance practices and Board composition, the planning, financing, development, construction, completion and stabilization of our development projects, plans to sell, recapitalize or refinance properties, future operational and financial performance, MUD reimbursements for infrastructure costs, regulatory matters, leasing activities, estimated costs and timeframes for development and stabilization of properties, tax rates, the impact of interest rate changes, future capital expenditures and financing plans, possible joint ventures, partnerships, strategic relationships or other arrangements, our projections with respect to our obligations under the master lease agreements entered into in connection with the 2017 sale of The Oaks at Lakeway, other plans and objectives of management for future operations and development projects, future dividend payments and share repurchases. The words “anticipate,” “may,” “can,” “plan,” “believe,” “potential,” “estimate,” “expect,” “project,” "target," “intend,” “likely,” “will,” “should,” “to be” and any similar expressions and/or statements that are not historical facts are intended to identify those assertions as forward-looking statements. Under our loan agreements with Comerica Bank, we are not permitted to pay dividends on common stock without Comerica Bank’s prior written consent. The declaration of dividends is at the discretion of our Board, subject to restrictions under our loan agreements with Comerica Bank, and will depend on our financial results, cash requirements, projected compliance with covenants in our debt agreements, outlook and other factors deemed relevant by the Board. We caution readers that forward-looking statements are not guarantees of future performance and actual results may differ materially from those anticipated, expected, projected or assumed in the forward-looking statements. Important factors that can cause our actual results to differ materially from those anticipated in the forward-looking statements include, but are not limited to, evolving risks relative to the COVID-19 pandemic and its economic effects, including the impact of the actions taken by governmental authorities to contain the virus or address the impact of the virus on the economy, fear of the further spread or further accelerated spread of COVID-19, the duration and scope of the COVID-19 pandemic and impact thereof including the pace of recovery, the effects of the COVID-19 pandemic on us and the hospitality and entertainment industries generally, including the demand for travel, hotel rooms, group gathering and events at our venues, our ability to pay or refinance our debt or comply with or obtain waivers of financial and other covenants in debt agreements and to meet other cash obligations, our ability to ramp up operations at Block 21, collect anticipated rental payments, close routine asset sales and sell or refinance The Saint Mary on terms consistent with our expectations, the availability and terms of financing for development projects and other corporate purposes, implementation, operational, financing and tax complexities to be evaluated and addressed before we decide whether to pursue a REIT conversion, our ability to qualify as a REIT, which involves the application of highly technical and complex provisions of the Internal Revenue Code of 1986, as amended, our ability to complete the steps that must be taken in order to convert to a REIT and the timing thereof, the potential costs of converting to and operating as a REIT, whether our Board will determine that conversion to a REIT is in the best interests of our shareholders, whether shareholders will approve changes to our organizational documents consistent with a public REIT structure, our ability to enter into and maintain joint ventures, partnerships, strategic relationships or other arrangements, our ability to effect our business strategy successfully, including our ability to develop, construct and sell properties at prices our Board considers acceptable, market conditions or corporate developments that could preclude, impair or delay any opportunities with respect to plans to sell, recapitalize or refinance properties, our ability to obtain various entitlements and permits, a decrease in the demand for real estate in select markets in Texas where we operate, changes in economic, market and business conditions, reductions in discretionary spending by consumers and businesses, competition from other real estate developers, 29 Table of Contents hotel operators and/or entertainment venue operators and promoters, our ability to open and hold events at our venues, challenges associated with booking events and selling tickets and event cancellations at our entertainment venues, which may result in refunds to customers, the termination of sales contracts or letters of intent because of, among other factors, the failure of one or more closing conditions or market changes, our ability to secure qualifying tenants for the space subject to the master lease agreements entered into in connection with the 2017 sale of The Oaks at Lakeway and to assign such leases to the purchaser and remove the corresponding property from the master leases, the failure to attract customers or tenants for our developments or such customers’ or tenants’ failure to satisfy their purchase commitments or leasing obligations, increases in interest rates and the phase out of the London Interbank Offered Rate, declines in the market value of our assets, increases in operating costs, including real estate taxes and the cost of building materials and labor, changes in external perception of the W Austin Hotel, unanticipated issues experienced by the third-party operator of the W Austin Hotel, changes in consumer preferences, industry risks, changes in laws, regulations or the regulatory environment affecting the development of real estate, opposition from special interest groups or local governments with respect to development projects, weather-related risks, loss of key personnel, cybersecurity incidents and other factors described in more detail under the heading “Risk Factors” in Part I, Item 1A. of our 2019 Form 10-K, filed with the SEC, and “Risk Factors” included in Part II, Item 1A. herein. We can provide no assurance as to when, if at all, we will convert to a REIT. We can give no assurance that our Board will approve a conversion to a REIT, even if there are no impediments to such conversion. Our exploration of a potential REIT conversion may divert management's attention from traditional business concerns. If we determine to convert to a REIT, we cannot give assurance that we will qualify or remain qualified as a REIT. If we elect to convert to a REIT, we can provide no assurance that our Board will declare, or that we will be able to make, future distributions to shareholders. Investors are cautioned that many of the assumptions upon which our forward-looking statements are based are likely to change after the forward-looking statements are made, some of which we may not be able to control. Further, we may make changes to our business plans that could affect our results. We caution investors that we do not intend to update our forward-looking statements more frequently than quarterly notwithstanding any changes in our assumptions, business plans, actual experience, or other changes, and we undertake no obligation to update any forward-looking statements. Item 3. Quantitative and Qualitative Disclosures About Market Risk . Not applicable.