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, 2020 (2020 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” herein and Part I, Item 1A. “Risk Factors” of our 2020 Form 10-K for further discussion). In particular, the impacts of the COVID-19 pandemic continue to affect our operations. As a result, our performance during 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 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 and “Business Strategy” below for a discussion of our business strategy. BUSINESS STRATEGY Our portfolio consists of approximately 1,700 acres of undeveloped acreage and acreage under development for commercial and multi-family and single-family residential projects, as well as several completed commercial and residential projects. Our W Austin Hotel and our ACL Live and 3TEN ACL Live entertainment venues are located in downtown Austin at our Block 21 property 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 or holding them for lease. Our full cycle development program of acquiring properties, securing and maintaining development entitlements, developing and stabilizing properties, and selling them or holding them as part of our leasing operations is a key element of our strategy. We may also seek to refinance properties, in order to benefit from the increased value of the property, from lower interest rates or for other reasons. We believe that Austin and other select, fast-growing markets in Texas continue to be attractive 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 or change 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. In January 2021, we sold The Saint Mary, a 240-unit luxury garden-style apartment project in the Circle C community, for $60.0 million. After closing costs and payment of the outstanding construction loan, the sale generated net proceeds of approximately $34 million. After establishing a reserve for remaining costs of the partnership, we received $20.9 million from the subsidiary in connection with the sale and $12.9 million of the net proceeds were distributed to the noncontrolling interest owners. We recognized a gain on the sale of $22.9 million ($16.2 million net of noncontrolling interests) in the first quarter of 2021. 13 Table of Contents Our Board of Directors (Board) has authorized 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 stockholders. If the Board determines to move forward, we expect the conversion would occur no earlier than 2022. We believe that the REIT conversion would require consent from our major lenders and amendments to our major debt agreements, among other third-party consents. We also expect to seek stockholder approval to implement provisions in our organizational documents consistent with a public REIT structure, if the Board ultimately determines that a REIT conversion is in stockholders’ best interests. OVERVIEW OF THE IMPACTS OF THE COVID-19 PANDEMIC Since January 2020, the COVID-19 pandemic has caused substantial disruption in international and U.S. economies and markets. The World Health Organization designated the COVID-19 outbreak a pandemic in mid-March 2020. The impacts of the pandemic are expected to continue during 2021 but are anticipated to lessen through the year. The pandemic has resulted in government restrictions of various degrees and effective at various times, resulting in limitations on normal daily activities for individuals and capacity restrictions and, in some cases, closures for many businesses. Effective March 10, 2021, the Governor of Texas issued an executive order lifting the mask mandate in Texas and increasing the capacity of all businesses and facilities in the state to 100 percent. Businesses in Texas may still limit capacity or implement additional safety protocols at their own discretion. While we are ramping up our hotel and entertainment operations, we will continue to increase capacity gradually and safely and in compliance with all applicable regulations. We are optimistic about a post-pandemic recovery. We are encouraged by indications that the vaccines have been effective and believe they will help increase consumer confidence and deliver a resurgence in travel and live entertainment. Impacts on our Business The COVID-19 pandemic has had, and is expected to continue to have, a significant adverse impact on our business and operations, particularly on the hotel and entertainment segments which were adversely impacted beginning late in the first quarter of 2020 and to date in 2021, and are expected to continue to be adversely impacted during 2021, although the impacts are anticipated to lessen through the year. For example, while the hotel has remained open throughout the pandemic, average occupancy in the first quarter of 2021 was 21 percent, compared to 50 percent in the first quarter of 2020. However, the average occupancy in the first quarter of 2021 was higher than the average occupancy in the fourth quarter of 2020, which was 13 percent. Our entertainment venues, ACL Live and 3TEN ACL Live, hosted a limited number of events with restricted capacity during first-quarter 2021. Our team continues to create innovative programming at our entertainment venues, and we currently expect to see improved results as schedules are filled and capacity increases over time. The extent to which the adverse impacts of the pandemic continue depends on numerous evolving factors that we cannot predict. Moreover, even as travel advisories and restrictions are lifted, travel and entertainment demand may remain weak for a significant length of time, and attractions and events that previously brought visitors and artists to the city of Austin may not proceed or may proceed with limited capacity. The Austin market, as well as the other Texas markets where we operate, continue to rebound from pandemic lows. Our residential properties have been positively impacted by home-centric trends resulting from the pandemic and from the increased attractiveness of Austin, Texas as a desirable place to live. For example, we have sold almost all of our single-family lot inventory at Barton Creek at attractive prices. However, with increased demand and construction activity in our markets, we have also experienced cost increases in certain construction materials, particularly lumber. We continue to actively manage and monitor these costs. In addition, the ongoing trend toward online shopping has accelerated during the COVID-19 pandemic. We have been adjusting to these retail trends by incorporating more multi-family residential space and more food and beverage and entertainment space into our development plans. Despite the COVID-19 pandemic, we have continued to advance our land planning, engineering and permitting activities. In the first quarter of 2021, we completed site clearing on The Saint June, a 182-unit multi-family project in Barton Creek. In April 2021, we announced development plans for Holden Hills, a new residential development formerly known as Section KLO, in the Barton Creek community. The project consists of 495 acres and the community is designed to feature 475 unique residences to be developed in multiple phases with a focus on sustainability and energy conservation. 14 Table of Contents As a result of the COVID-19 pandemic, and beginning in April 2020, we agreed, generally, to 90-day base rent deferrals with a majority of our retail leasing tenants, which had closed or were operating at significantly reduced capacities. Rent deferrals with our retail tenants resulted in a reduction of scheduled base rent collections of 10 percent during the period from April through December 2020. The deferred rents are scheduled to be collected over a 12-month or 24-month period that started in January 2021. During the first quarter of 2021, we began collecting these rent deferrals and as of March 31, 2021, all of our retail tenants that were open prior to the pandemic had reopened, although some were still operating at reduced capacity. Further, despite the pandemic, we have added new tenants and all of our tenants are currently paying rent per their leases, as well as monthly payments pursuant to the base rent deferral arrangements. At our multi-family properties, we have granted rent deferral accommodations on a case-by-case basis, with no material decline in rent collections or occupancy. Our previously disclosed transaction to sell Block 21 for $275 million was terminated by the purchaser in May 2020 as a result of the negative impact on capital markets and the overall economic environment caused by the COVID-19 pandemic. 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 the company with any certainty. At this time, we are focusing on taking action to maintain liquidity and control costs; closing on asset sales in our real estate operations segment; closely monitoring our income-producing properties and continuing to lease up certain properties; regularly communicating with our lenders and investor groups; advancing our land planning, engineering and permitting activities; and evaluating refinance opportunities for our larger, stabilized assets to take advantage of historic low interest rates. As previously discussed, we are also moving forward to complete the financing for The Saint June, and to secure financing for our Holden Hills and Magnolia Place developments. Further, we are considering a refinancing of our Jones Crossing construction loan. Impacts on our Liquidity and Capital Resources As of March 31, 2021, we had $25.8 million available under our $60.0 million Comerica Bank credit facility, with a $150 thousand letter of credit committed against the credit facility. During the pandemic we have proactively engaged with our project lenders in connection with formulating rent deferral arrangements for our tenants, receiving waivers of and amendments to certain financial covenants for specific project loans and extending maturity dates on project loans with near-term maturities. See Note 6 for further discussion. With respect to our Block 21 loan, Stratus Block 21, LLC, our wholly owned subsidiary that owns Block 21 (the Block 21 subsidiary) continues to not meet the quarterly debt service coverage ratio test resulting in a "Trigger Period," which is not a default but restricts our ability to receive cash distributions from the project. Although the Block 21 loan agreement is a non-recourse loan, we may contribute cash to our Block 21 subsidiary in order to prevent our Block 21 subsidiary from defaulting under the Block 21 loan agreement. Additionally, under our subsidiary’s hotel operating agreement, the hotel operator has and may continue to 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. Pursuant to such provisions, we contributed $6.3 million during 2020 and $5.0 million during first-quarter 2021, and based on current projections, we expect to make additional contributions of approximately $12 million through early 2022. 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 early 2022, (2) that current conditions in our leasing operations will not deteriorate materially and that our anchor tenant at Lantana Place will renew its lease on terms acceptable to us, (3) that we close on projected asset sales in our real estate operations segment, including certain land sales at our mixed-use properties, on anticipated terms, and (4) that we are able to secure anticipated financing for certain development projects. No assurances can be given that the results anticipated by our projections will occur. See Note 6 and “Capital Resources and Liquidity” below 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. 15 Table of Contents OVERVIEW OF FINANCIAL RESULTS FOR FIRST-QUARTER 2021 Our net income attributable to common stockholders totaled $8.9 million, or $1.08 per share, in first-quarter 2021, compared with a net loss of $1.1 million, or $0.13 per share, in first-quarter 2020. Our net income attributable to common stockholders in first-quarter 2021, compared to the net loss in first-quarter 2020, was primarily the result of the $22.9 million gain on the sale of The Saint Mary in January 2021 ($16.2 million net of noncontrolling interests), partially offset by operating losses from our hotel and entertainment segments caused by the pandemic in the first quarter of 2021. Our revenues totaled $14.5 million in first-quarter 2021, compared with $28.1 million in first-quarter 2020. The decrease in revenues in first-quarter 2021, compared to first-quarter 2020, primarily reflects decreases in revenue from our hotel and entertainment segments caused by the pandemic and from a decrease in the number of developed residential lots and homes sold as available inventory decreased. See "Results of Operations" below for further discussion of our segments. UPDATE ON PROJECT AND DEVELOPMENT ACTIVITIES Current Residential Activities. In first-quarter 2021, we sold two Amarra Drive Phase III lots, a five-acre multi-family tract of land in Amarra Drive and our last remaining condominium unit at the W Austin Residences for a total of $6.5 million. For further discussion, see "Results of Operations — Real Estate Operations." As of March 31, 2021, three developed Amarra Drive Phase III lots remained unsold, one of which was under contract and subsequently sold in April 2021 for $0.6 million. The Villas at Amarra Drive (Amarra Villas) project is a 20-unit development in the Barton Creek community for which we completed construction of the first seven homes during 2017 and 2018. We sold the last two completed homes in 2019. We began construction of the next two Amarra Villas homes during the first quarter of 2020, which are expected to be completed in mid-2021. As of May 10, 2021, one home was under contract, and a contract had been signed to sell one home on which we began construction in second-quarter 2021. As of May 10, 2021, a total of 11 units (1 of which is under construction and 10 of which construction has not started) remain available of the initial 20-unit development. The Santal, a garden-style luxury apartment complex consisting of 448 units in Section N in the Barton Creek community, is fully leased and stabilized. For further discussion of our multi-family and single-family residential properties, see MD&A in our 2020 Form 10-K. Current Commercial Activities. We have constructed approximately 152,000 square feet of retail space at Kingwood Place, including an HEB grocery store, and we have signed ground leases on two of the retail pads. Three pad sites remain available for lease. As of March 31, 2021, 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 approximately 275 units. Lantana Place is a partially developed, mixed-use development project located in southwest Austin. As of March 31, 2021, we had signed leases for approximately 85 percent of the retail space in the first phase, including the anchor tenant, Moviehouse & Eatery (Moviehouse). 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. The new lease was amended in December 2020 to extend the term through June 30, 2021. We are currently in discussions with Moviehouse to extend this lease. 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 June 2021. We rezoned a portion of the Lantana property for a potential multi-family development of up to 320 units. As of March 31, 2021, we had signed leases for substantially all 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. Block 21's Class A leasable office space was approximately 60 percent leased as of March 31, 2021, including 9,000 square feet occupied by our corporate office, and the retail space was substantially fully leased as of March 31, 2021. Currently, we are considering a refinance of the Jones Crossing construction loan to improve loan terms and take advantage of the low-interest rate market. 16 Table of Contents For further discussion of our commercial properties, see MD&A in our 2020 Form 10-K. Projects in Planning. We are advancing the planning and permitting process for development of future phases of Barton Creek, including Holden Hills, a new residential development formerly known as Section KLO, and commercial and multi-family Section N. Holden Hills, our final residential development within the Barton Creek community, consists of 495 acres and the community is designed to feature 475 unique residences to be developed in multiple phases with a focus on sustainability and energy conservation. The city of Austin and Travis County approved initial subdivision permit applications for Holden Hills in October 2019 and the engineering for roads and utilities for the initial phase has been completed. We anticipate securing final permits in the second or third quarter of 2021. We currently expect to complete site work for phase one, including the construction of road, utility, drainage and other required infrastructure, approximately 17 months from the issuance of the final permits. Accordingly, our projections anticipate that we would begin sales in Holden Hills in late 2022 or early 2023. Phases one and two of the Holden Hills development plan encompass the development of the home sites. We may sell the developed home sites, or may elect to build and sell, or build and lease, homes on some or all of the home sites, depending on financing and market conditions. Using a conceptual approach similar to that used for Holden Hills, 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, resulting in a significant potential increase in development density, as compared to our prior plans. These potential development projects require extensive additional permitting and will be dependent on market conditions and financing. 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 Holden Hills and Section N will require significant capital, which we currently intend to pursue through bank debt and third-party equity capital arrangements. We are planning to proceed, subject to financing, with the first phase of development of Magnolia Place, a mixed-use project in Magnolia, Texas, currently planned for 18,410 square feet of commercial space, 9 pad sites, 194 single-family lots and 495 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, with a targeted opening date in May 2022. We have targeted the commencement of construction on Magnolia Place for June 2021, and are in the process of negotiating financing and terms with lenders and HEB. We are also evaluating a sale of the land for the single-family residential component of Magnolia Place. In March 2021, we completed site clearing on The Saint June, a 182-unit multi-family project within the Amarra subdivision. We expect to begin project construction in the second quarter of 2021, subject to completion of financing. 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 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 2020 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 compensation and other costs. 17 Table of Contents The following table summarizes our operating results for the first quarters of 2021 and 2020 (in thousands): Three Months Ended March 31, 2021 2020 Operating income (loss): Real Estate Operations a $ 2,236 $ 2,099 Leasing Operations 24,236 b 824 Hotel (1,632) (1,054) Entertainment (1,217) 461 Corporate, eliminations and other c (4,653) (2,978) Operating income (loss) $ 18,970 $ (648) Interest expense, net $ (3,035) $ (3,915) Net (income) loss attributable to noncontrolling interests in subsidiaries $ (6,722) $ 1,077 Net income (loss) attributable to common stockholders $ 8,944 $ (1,070) a. Includes sales commissions and other revenues together with related expenses. b. Includes a $22.9 million gain on the sale of The Saint Mary. c. Includes consolidated general and administrative expenses and eliminations of intersegment amounts. 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 The following table summarizes our Real Estate Operations results for the first quarters of 2021 and 2020 (in thousands): Three Months Ended March 31, 2021 2020 Revenues: Developed property sales $ 4,040 $ 12,308 Undeveloped property sales 2,500 — Commissions and other 85 32 Total revenues 6,625 12,340 Cost of sales, including depreciation 4,389 10,241 Operating income $ 2,236 $ 2,099 Developed Property Sales. The following table summarizes our developed property sales (dollars in thousands): Three Months Ended March 31, 2021 2020 Lots/Units Revenues Average Cost Per Lot/Unit Lots/Homes Revenues Average Cost Per Lot/Home Barton Creek Amarra Drive: Phase II lots — $ — $ — 2 $ 1,190 $ 208 Phase III lots 2 1,640 332 6 3,940 314 Homes built on Phase III lots — — — 2 7,178 3,273 W Austin Residences at Block 21: Condominium Unit 1 2,400 1,721 — — — Total Residential 3 $ 4,040 10 $ 12,308 The decrease in revenues in first-quarter 2021, compared to first-quarter 2020, primarily reflects a decrease in the number of lots and homes sold during first-quarter 2021, compared to first-quarter 2020, as available inventory decreased. Undeveloped Property Sales. During the first quarter of 2021, we sold a five-acre multi-family tract of land in Amarra Drive for $2.5 million. 18 Table of Contents 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 municipal utility district (MUD) reimbursements. Cost of sales decreased to $4.4 million in first-quarter 2021 from $10.2 million in first-quarter 2020, primarily reflecting a decrease in the number of lots and homes sold during first-quarter 2021. First-quarter 2020 included the sale of two homes built on Amarra Drive Phase III lots that had higher average costs. Leasing Operations The following table summarizes our Leasing Operations results for the first quarters of 2021 and 2020 (in thousands): Three Months Ended March 31, 2021 2020 Rental revenue $ 5,397 $ 5,959 Rental cost of sales, excluding depreciation 2,381 3,088 Depreciation 1,711 2,047 Gain on sale of assets (22,931) — Operating income $ 24,236 $ 824 Rental Revenue. Rental revenue primarily includes revenue from The Santal, Lantana Place, Jones Crossing, Kingwood Place, the office and retail space at Block 21, West Killeen Market, and The Saint Mary until our sale of it in January 2021. The decrease in rental revenue in first-quarter 2021, compared with first-quarter 2020 primarily reflects the sale of The Saint Mary. The Saint Mary had rental revenue of $0.1 million in first-quarter 2021 prior to the sale compared to $0.7 million in first-quarter 2020. Rental Cost of Sales and Depreciation. Rental cost of sales and depreciation expense decreased in first-quarter 2021, compared with first-quarter 2020, primarily as a result of the sale of The Saint Mary. Gain on Sale of Assets. In January 2021, our subsidiary sold The Saint Mary for $60.0 million. After closing costs and payment of the outstanding construction loan, the sale generated net proceeds of approximately $34 million. After establishing a reserve for remaining costs of the partnership, we received $20.9 million from the subsidiary in connection with the sale and $12.9 million of the net proceeds were distributed to the noncontrolling interest owners. We recognized a gain on the sale of $22.9 million ($16.2 million net of noncontrolling interests) in the first quarter of 2021. Hotel The following table summarizes our Hotel results for the first quarters of 2021 and 2020 (in thousands): Three Months Ended March 31, 2021 2020 Hotel revenue $ 2,150 $ 5,959 Hotel cost of sales, excluding depreciation 2,902 5,908 Depreciation 880 1,105 Operating loss $ (1,632) $ (1,054) Hotel Revenue. Hotel revenue primarily includes revenue from W Austin Hotel room reservations and food and beverage sales. The decrease in Hotel revenues in first-quarter 2021, compared to first-quarter 2020, is primarily a result of lower room reservations and food and beverage sales as a result of the COVID-19 pandemic, which had a less significant impact in the first quarter of 2020 prior to the pandemic being declared in mid-March 2020. The hotel's average occupancy in the first quarter of 2021 was 21 percent, compared to 50 percent in the first quarter of 2020. Revenue per available room (RevPAR), which is calculated by dividing total room revenue by the average total rooms available, was $51 in first-quarter 2021, compared with $150 in first-quarter 2020. Our hotel operations are beginning to show improvement compared to during the peak of the pandemic in 2020. The average occupancy in the first quarter of 2021 of 21 percent was higher than the average occupancy in the fourth quarter of 2020, which was 13 percent. In addition, RevPAR of $51 for first-quarter 2021 was up from $31 in fourth-quarter 2020. 19 Table of Contents Hotel Cost of Sales. The decrease in Hotel cost of sales, excluding depreciation, in first-quarter 2021, compared to first-quarter 2020, is primarily a result of lower room reservations and food and beverage sales. The decrease in depreciation in first-quarter 2021, compared to first-quarter 2020, is primarily because of a $202 thousand adjustment made in first-quarter 2020 for the period in December 2019 when the hotel was held for sale and, therefore, not depreciated. Entertainment The following table summarizes our Entertainment results for the first quarters of 2021 and 2020 (in thousands): Three Months Ended March 31, 2021 2020 Entertainment revenue $ 609 $ 4,170 Entertainment cost of sales, excluding depreciation 1,425 3,226 Depreciation 401 483 Operating (loss) income $ (1,217) $ 461 Entertainment Revenue. Entertainment revenue primarily reflects the results of operations for ACL Live, including ticket sales, revenue from private events, sponsorships, personal seat license sales 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 first-quarter 2021, compared to first-quarter 2020, which primarily reflects the COVID-19 pandemic preventing a full show schedule, with reduced capacity at events that could be held. Our team continues to create innovative programming at our entertainment venues, and we currently expect to see improved results as schedules are filled and capacity increases over time. 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 March 31, 2021 2020 ACL Live Events: Events hosted 28 38 Estimated attendance 3,416 45,446 Ticketing: Number of tickets sold 3,710 37,703 Gross value of tickets sold (in thousands) $ 373 $ 1,881 3TEN ACL Live Events: Events hosted 22 36 Estimated attendance 1,828 7,455 Ticketing: Number of tickets sold 114 5,278 Gross value of tickets sold (in thousands) $ 3 $ 126 Entertainment Cost of Sales. The decrease in Entertainment cost of sales, excluding depreciation, in first-quarter 2021, compared to first-quarter 2020, reflects the limited number of events that were held in the first quarter of 2021 as a result of the COVID-19 pandemic. The decrease in depreciation in first-quarter 2021, compared to first-quarter 2020, is primarily because of an $89 thousand adjustment made in first-quarter 2020 for the period in December 2019 when the entertainment venues were held for sale and, therefore, not depreciated. 20 Table of Contents Corporate, Eliminations and Other Corporate, eliminations and other (refer to Note 9) includes consolidated general and administrative expenses, which primarily consist of employee compensation and other costs. Consolidated general and administrative expenses increased to $4.5 million in first-quarter 2021 from $2.8 million in first-quarter 2020, primarily reflecting a $1.1 million increase in consulting, legal, and public relation costs mostly for the REIT exploration process and proxy contest. The remaining increase is primarily the result of higher employee incentive compensation costs in first-quarter 2021 as the first quarter of 2020 included significant reductions to estimated incentive compensation accruals. Corporate, eliminations and other also includes eliminations of intersegment transactions among the four operating segments. Non-Operating Results Interest Expense, Net. Interest costs (before capitalized interest) totaled $4.3 million in first-quarter 2021, compared with $5.2 million in first-quarter 2020. Interest costs in first-quarter 2021 were lower, compared to the 2020 periods, primarily reflecting decreases in average interest rates and average debt balances. Capitalized interest totaled $1.3 million in both first-quarter 2021 and first-quarter 2020, and is primarily related to development activities at Barton Creek. Loss on Early Extinguishment of Debt. We recorded a loss on early extinguishment of debt of $0.1 million in first-quarter 2021 associated with the repayment of The Saint Mary construction loan upon the sale of the property. (Provision for) Benefit from Income Taxes. We recorded a provision for income taxes of $0.2 million in first-quarter 2021, compared to a benefit of $2.5 million in first-quarter 2020. Refer to Note 8 for further discussion of income taxes. Total Comprehensive (Income) Loss Attributable to Noncontrolling Interests in Subsidiaries . Our partners' share of income totaled $6.7 million in first-quarter 2021 compared to their share of losses of $1.1 million in first-quarter 2020. In first-quarter 2021, our partners were allocated $6.7 million of the gain from the sale of The Saint Mary. In first-quarter 2020, $0.6 million related 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 Three Months Ended March 31, 2021 and 2020 Operating Activities. Cash used in operating activities totaled $10.4 million in first-quarter 2021, compared with $4.4 million in first-quarter 2020. Expenditures for purchases and development of real estate properties totaled $2.5 million in first-quarter 2021 and $6.2 million in first-quarter 2020, primarily related to development of our Barton Creek properties, including Amarra Villas. The cash outflows resulting from the decrease in accounts payable, accrued liabilities and other in both first-quarter 2021 and first-quarter 2020 are primarily related to the timing of property tax payments. Investing Activities. Cash provided by (used in) investing activities totaled $58.2 million in first-quarter 2021 and $(2.6) million in first-quarter 2020. Capital expenditures totaled $1.0 million in first-quarter 2021, primarily related to the Magnolia Place and Lantana Place projects, and $2.3 million in first-quarter 2020, primarily related to the Lantana Place, Kingwood Place and Jones Crossing projects. In first-quarter 2021, we received proceeds, net of closing costs, from the sale of The Saint Mary of $59.5 million. We also made payments totaling $0.3 million in both first-quarter 2021 and first-quarter 2020 under our master lease obligations associated with the 2017 sale of The Oaks at Lakeway. Financing Activities. Cash (used in) provided by financing activities totaled $(50.8) million in first-quarter 2021 and $6.2 million in first-quarter 2020. During first-quarter 2021, net repayments on the Comerica Bank credit facility totaled $9.2 million, primarily using proceeds from the sale of The Saint Mary, compared with net borrowings of $6.8 million in first-quarter 2020, primarily to fund working capital changes. In first-quarter 2021, net repayments on other 21 Table of Contents project and term loans totaled $28.3 million, primarily reflecting the repayment of The Saint Mary construction loan, compared to net repayments of $0.5 million in first-quarter 2020, primarily related to repayment of the Amarra Villas credit facility partially offset by borrowings for The Saint Mary and Kingwood Place projects. See “Credit Facility, Other Financing Arrangements and Liquidity Outlook” below for a discussion of our outstanding debt at March 31, 2021. In first-quarter 2021, we paid distributions to noncontrolling interest owners of $13.1 million, primarily related to the sale of The Saint Mary. Credit Facility, Other Financing Arrangements and Liquidity Outlook At March 31, 2021, the total principal amount of our outstanding debt was $341.2 million, compared with $353.2 million at December 31, 2020. We had borrowings of $34.1 million under our $60.0 million Comerica Bank revolving credit facility, $25.8 million of which was available at March 31, 2021, net of a $150 thousand letter of credit committed against the credit facility. During the pandemic we have proactively engaged with our project lenders in connection with formulating rent deferral arrangements for our tenants, receiving waivers of and amendments to certain financial covenants for specific project loans and extending maturity dates on project loans with near-term maturities. Refer to Note 6 in this report and in our 2020 Form 10-K for further discussion. Refer to “Debt Maturities and Other Contractual Obligations” below for a table illustrating the timing of principal payments due on our outstanding debt as of March 31, 2021. Our debt agreements require compliance with specified financial covenants. The Santal loan includes a requirement that we maintain liquid assets, as defined in the agreement, of not less than $7.5 million. The New Caney land loan includes a requirement that we maintain liquid assets, as defined in the agreement, of not less than $10 million. The Comerica Bank credit facility, the Lantana Place construction loan, the Jones Crossing 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 debt-to-gross asset value, as defined in the agreement, of less than 50 percent. The Santal loan, the West Killeen Market construction loan, the Jones Crossing construction loan, and the Lantana Place construction loan each include a financial covenant requiring the applicable Stratus subsidiary to maintain a debt service coverage ratio as defined in each agreement. As of March 31, 2021, we were in compliance with all of our financial covenants; however, for the last three quarters of 2020 and the first quarter of 2021, our Block 21 subsidiary did not pass the debt service coverage ratio financial test under the Block 21 loan, which, though not a financial covenant, caused the Block 21 subsidiary to enter into a “Trigger Period” as discussed below. Stratus’ and its subsidiaries’ debt arrangements contain significant limitations that may restrict Stratus’ and its subsidiaries’ ability to, among other things: borrow additional money or issue guarantees; pay dividends, repurchase equity or make other distributions to equityholders; make loans, advances or other investments; create liens on assets; sell assets; enter into sale-leaseback transactions; enter into transactions with affiliates; permit a change of control; sell all or substantially all of its assets; and engage in mergers, consolidations or other business combinations. Our Comerica Bank credit facility requires Comerica Bank’s prior written consent for any common stock repurchases in excess of $1.0 million or any dividend payments. Our project loans are generally secured by all or substantially all of the assets of the project, and our Comerica Bank credit facility is secured by substantially all of our assets other than those encumbered by separate project financing. In addition, we are typically required to guarantee the payment of our project loans, in some cases until certain development milestones and/or financial conditions are met, except for the Block 21 loan and The Santal loan guarantees that are generally limited to non-recourse carve-out obligations. Refer to Note 6 in our 2020 Form 10-K for additional discussion. The Block 21 loan agreement secured by the Block 21 assets contains financial tests that we must meet in order to avoid a “Trigger Period” (as described below). Specifically, we must maintain (i) a net worth in excess of $125 million and (ii) liquid assets having a market value of at least $10 million, each as defined in the Block 21 loan agreement. Additionally, our Block 21 subsidiary must maintain a trailing-12-month debt service coverage ratio, tested quarterly, as defined in the Block 21 loan agreement. If any of these financial tests are not met, a “Trigger Period”, which is not a default, results. As a result of the pandemic, our Block 21 subsidiary did not meet the debt 22 Table of Contents service coverage ratio test on the June 30, 2020, September 30, 2020, December 31, 2020, and March 31, 2021, test dates, resulting in a "Trigger Period." During a "Trigger Period," any cash generated from the Block 21 project 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 2022. Although the Block 21 loan agreement is a non-recourse loan, we may contribute cash to our Block 21 subsidiary in order to prevent our Block 21 subsidiary from defaulting under the Block 21 loan agreement. Additionally, under our subsidiary’s hotel operating agreement, the hotel operator has and may continue to 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. Pursuant to such provisions, we contributed $6.3 million during 2020 and $5.0 million during first-quarter 2021, and based on current projections, we expect to make additional contributions of approximately $12 million through early 2022. As of March 31, 2021, we had $6.0 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 early 2022, (2) that current conditions in our leasing operations will not deteriorate materially and that our anchor tenant at Lantana Place will renew its lease on terms acceptable to us, (3) that we close on projected asset sales in our real estate operations segment, including certain land sales at our mixed-use properties, on anticipated terms, and (4) that we are able to secure anticipated financing for certain development projects. No assurances can be given that the results anticipated by our projections will occur. See Note 6 in our 2020 Form 10-K and “Risk Factors” included in Part I, Item 1A. of our 2020 Form 10-K, for further discussion. Our ability to meet our cash obligations over the longer term, including our significant debt maturities in 2022, will depend on our future operating and financial performance and cash flows, including our ability to sell or lease properties profitably and extend or refinance debt as it becomes due, which is subject to economic, financial, competitive and other factors beyond our control, including risks related to the COVID-19 pandemic. DEBT MATURITIES AND OTHER CONTRACTUAL OBLIGATIONS The following table summarizes our debt maturities based on the principal amounts outstanding as of March 31, 2021 (in thousands): 2021 2022 2023 2024 2025 Thereafter Total Block 21 loan $ 1,839 $ 2,613 $ 2,765 $ 2,905 $ 3,094 $ 125,872 $ 139,088 The Santal loan a — 75,000 — — — — 75,000 Comerica Bank credit facility — 34,077 — — — — 34,077 New Caney land loan — 4,500 — — — — 4,500 PPP loan — 3,987 — — — — 3,987 Construction loans: Kingwood Place b — 31,791 — — — — 31,791 Jones Crossing 293 409 21,878 — — — 22,580 Lantana Place 604 830 20,610 — — — 22,044 West Killeen Market 126 6,597 — — — — 6,723 Amarra Villas credit facility — 1,369 — — — — 1,369 Total $ 2,862 $ 161,173 $ 45,253 $ 2,905 $ 3,094 $ 125,872 $ 341,159 a. In April 2021, we entered into an amendment to The Santal loan to, among other provisions, extend the maturity date from October 5, 2022 to October 5, 2024. b. We have the option to extend the maturity date for two additional 12-month periods, subject to certain debt service coverage conditions. 23 Table of Contents Other than debt transactions (as discussed in Note 6), there have been no material changes in our contractual obligations since December 31, 2020. Refer to Part II, Items 7. and 7A. "Management’s Discussion and Analysis of Financial Condition and Results of Operations and Quantitative and Qualitative Disclosures About Market Risk" in our 2020 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 2020 Form 10-K. NEW ACCOUNTING STANDARDS No new accounting standards in 2021 have had a material impact on us. OFF-BALANCE SHEET ARRANGEMENTS There have been no material changes in our off-balance sheet arrangements since December 31, 2020. Refer to Note 9 in our 2020 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, 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, our ability to collect rents timely, future cash flows and liquidity, our ability to comply with or obtain waivers of financial and other covenants in debt agreements, our ongoing in-depth exploration of conversion to a REIT, 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, tax rates, the impact of interest rate changes, future capital expenditures and financing plans, possible joint ventures, partnerships, or other strategic relationships, 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, and 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 are not historical facts and are intended to identify those assertions as forward-looking statements. Under our Comerica Bank credit facility, 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 Comerica Bank credit facility, 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 our 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, 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 and close projected asset sales, the availability and terms of financing for development projects and other corporate purposes, the implementation, operational, financing and tax complexities to be evaluated and addressed before our Board decides whether to recommend a REIT conversion to shareholders, 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 24 Table of Contents ability to enter into and maintain joint ventures, partnerships, or other strategic relationships, our ability to implement our business strategy successfully, including our ability to develop, construct and sell or lease properties on terms our Board considers acceptable, market conditions or corporate developments that could preclude, impair or delay any opportunities with respect to plans to sell, recapitalize or refinance properties, our ability to obtain various entitlements and permits, a decrease in the demand for real estate in select markets in Texas where we operate, changes in economic, market and business conditions, reductions in discretionary spending by consumers and businesses, competition from other real estate developers, hotel operators and/or entertainment venue operators and promoters, our ability to hold events and increase attendance 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, including lumber, 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 2020 Form 10-K, filed with the SEC. 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. Investors are cautioned that many of the assumptions upon which our forward-looking statements are based are likely to change after the date the forward-looking statements are made. Further, we may make changes to our business plans that could affect our results. We caution investors that we undertake no obligation to update our forward-looking statements, which speak only as of the date made, notwithstanding any changes in our assumptions, business plans, actual experience, or other changes. 25 Table of Contents Item 3. Quantitative and Qualitative Disclosures About Market Risk . Not applicable.