STRATUS PROPERTIES INC 10-Q

Item 1. Financial Statements . STRATUS PROPERTIES INC. CONSOLIDATED BALANCE SHEETS (Unaudited) (In Thousands) June 30, 2021 December 31, 2020 ASSETS Cash and cash equivalents $ 15,272 $ 12,434 Restricted cash 21,612 21,749 Real estate held for sale 1,773 4,204 Real estate under development 113,694 98,137 Land available for development 43,670 53,432 Real estate held for investment, net 281,573 286,529 Lease right-of-use assets 10,740 10,871 Other assets 22,007 20,144 Assets held for sale - The Saint Mary — 36,516 Total assets $ 510,341 $ 544,016 LIABILITIES AND EQUITY Liabilities: Accounts payable $ 9,920 $ 8,047 Accrued liabilities, including taxes 7,491 12,868 Debt 352,096 351,055 Lease liabilities 13,709 13,269 Deferred gain 5,596 6,173 Other liabilities 17,997 17,233 Liabilities held for sale - The Saint Mary — 25,607 Total liabilities 406,809 434,252 Commitments and contingencies Equity: Stockholders’ equity: Common stock 94 94 Capital in excess of par value of common stock 188,323 186,777 Accumulated deficit ( 67,576 ) ( 66,357 ) Common stock held in treasury ( 21,753 ) ( 21,600 ) Total stockholders’ equity 99,088 98,914 Noncontrolling interests in subsidiaries 4,444 10,850 Total equity 103,532 109,764 Total liabilities and equity $ 510,341 $ 544,016 The accompanying Notes to Consolidated Financial Statements (Unaudited) are an integral part of these consolidated financial statements. 2 Table of Contents STRATUS PROPERTIES INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (Unaudited) (In Thousands, Except Per Share Amounts) Three Months Ended Six Months Ended June 30, June 30, 2021 2020 2021 2020 Revenues: Real estate operations $ 775 $ 1,893 $ 7,396 $ 14,229 Leasing operations 5,208 5,718 10,375 11,450 Hotel 3,935 1,030 6,053 6,941 Entertainment 1,658 290 2,267 4,445 Total revenues 11,576 8,931 26,091 37,065 Cost of sales: Real estate operations 1,635 1,921 5,979 12,176 Leasing operations 2,399 4,070 4,776 7,152 Hotel 3,862 1,766 6,764 7,665 Entertainment 1,558 1,208 2,865 4,306 Depreciation 2,924 3,377 5,926 7,010 Total cost of sales 12,378 12,342 26,310 38,309 General and administrative expenses 6,399 3,103 10,943 5,918 Income from forfeited earnest money — ( 15,000 ) — ( 15,000 ) Gain on sale of assets — — ( 22,931 ) — Total 18,777 445 14,322 29,227 Operating (loss) income ( 7,201 ) 8,486 11,769 7,838 Interest expense, net ( 2,772 ) ( 3,666 ) ( 5,807 ) ( 7,581 ) Loss on early extinguishment of debt ( 163 ) — ( 226 ) — Other income, net 1 131 4 29 (Loss) income before income taxes and equity in unconsolidated affiliates' loss ( 10,135 ) 4,951 5,740 286 (Provision for) benefit from income taxes ( 62 ) ( 1,148 ) ( 269 ) 1,370 Equity in unconsolidated affiliates' loss ( 7 ) — ( 9 ) — Net (loss) income and total comprehensive (loss) income ( 10,204 ) 3,803 5,462 1,656 Total comprehensive loss (income) attributable to noncontrolling interests in subsidiaries 41 331 ( 6,681 ) 1,408 Net (loss) income and total comprehensive (loss) income attributable to common stockholders $ ( 10,163 ) $ 4,134 $ ( 1,219 ) $ 3,064 Basic and diluted net (loss) income per share attributable to common stockholders $ ( 1.23 ) $ 0.50 $ ( 0.15 ) $ 0.37 Weighted-average common shares outstanding: Basic 8,235 8,210 8,229 8,205 Diluted 8,235 8,228 8,229 8,230 The accompanying Notes to Consolidated Financial Statements (Unaudited) are an integral part of these consolidated financial statements. 3 Table of Contents STRATUS PROPERTIES INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In Thousands) Six Months Ended June 30, 2021 2020 Cash flow from operating activities: Net income $ 5,462 $ 1,656 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation 5,926 7,010 Cost of real estate sold 3,341 8,732 Gain on sale of assets ( 22,931 ) — Loss on early extinguishment of debt 226 — Amortization of debt issuance costs and stock-based compensation 969 1,095 Equity in unconsolidated affiliates' loss 9 — Deferred income taxes — 2,731 Purchases and development of real estate properties ( 4,879 ) ( 8,655 ) Increase in deposits 358 46 (Increase) decrease in other assets ( 1,309 ) 1,215 Decrease in accounts payable, accrued liabilities and other ( 2,162 ) ( 8,385 ) Net cash (used in) provided by operating activities ( 14,990 ) 5,445 Cash flow from investing activities: Capital expenditures ( 2,378 ) ( 4,397 ) Proceeds from sale of assets 59,488 — Payments on master lease obligations ( 643 ) ( 691 ) Other, net 37 — Net cash provided by (used in) investing activities 56,504 ( 5,088 ) Cash flow from financing activities: Borrowings from credit facility 29,000 12,800 Payments on credit facility ( 26,778 ) ( 21,304 ) Borrowings from project loans 25,355 11,926 Payments on project and term loans ( 52,040 ) ( 6,976 ) Cash dividend paid on vested stock-based awards ( 4 ) ( 8 ) Stock-based awards net payments ( 153 ) ( 91 ) Distributions to noncontrolling interests ( 13,087 ) — Financing costs ( 1,106 ) ( 423 ) Net cash used in financing activities ( 38,813 ) ( 4,076 ) Net increase (decrease) in cash, cash equivalents and restricted cash 2,701 ( 3,719 ) Cash, cash equivalents and restricted cash at beginning of year 34,183 38,591 Cash, cash equivalents and restricted cash at end of period $ 36,884 $ 34,872 The accompanying Notes to Consolidated Financial Statements (Unaudited), which include information regarding noncash transactions, are an integral part of these consolidated financial statements. 4 Table of Contents STRATUS PROPERTIES INC. CONSOLIDATED STATEMENTS OF EQUITY (Unaudited) (In Thousands) THREE MONTHS ENDED JUNE 30 Stockholders’ Equity Common Stock Held in Treasury Total Common Stock Capital in Excess of Par Value Accum-ulated Deficit Noncontrolling Interests in Subsidiaries Number of Shares At Par Value Number of Shares At Cost Total Equity Balance at March 31, 2021 9,377 $ 94 $ 188,121 $ ( 57,413 ) 1,143 $ ( 21,753 ) $ 109,049 $ 4,485 $ 113,534 Stock-based compensation — — 202 — — — 202 — 202 Total comprehensive loss — — — ( 10,163 ) — — ( 10,163 ) ( 41 ) ( 10,204 ) Balance at June 30, 2021 9,377 $ 94 $ 188,323 $ ( 67,576 ) 1,143 $ ( 21,753 ) $ 99,088 $ 4,444 $ 103,532 Balance at March 31, 2020 9,347 $ 93 $ 186,244 $ ( 44,637 ) 1,137 $ ( 21,600 ) $ 120,100 $ 11,906 $ 132,006 Stock-based compensation — — 178 — — — 178 — 178 Total comprehensive income (loss) — — — 4,134 — — 4,134 ( 331 ) 3,803 Balance at June 30, 2020 9,347 $ 93 $ 186,422 $ ( 40,503 ) 1,137 $ ( 21,600 ) $ 124,412 $ 11,575 $ 135,987 5 Table of Contents STRATUS PROPERTIES INC. CONSOLIDATED STATEMENTS OF EQUITY (Unaudited) (In Thousands) SIX MONTHS ENDED JUNE 30 Stockholders’ Equity Common Stock Held in Treasury Total Common Stock Capital in Excess of Par Value Accum-ulated Deficit Noncontrolling Interests in Subsidiaries Number of Shares At Par Value Number of Shares At Cost Total Equity Balance at December 31, 2020 9,358 $ 94 $ 186,777 $ ( 66,357 ) 1,137 $ ( 21,600 ) $ 98,914 $ 10,850 $ 109,764 Exercised and vested stock-based awards 19 — — — — — — — — Stock-based compensation — — 384 — — — 384 — 384 Grant of restricted stock units under the Profit Participation Incentive Plan — — 1,162 — — — 1,162 — 1,162 Tender of shares for stock-based awards — — — — 6 ( 153 ) ( 153 ) — ( 153 ) Distributions to noncontrolling interests — — — — — — — ( 13,087 ) ( 13,087 ) Total comprehensive (loss) income — — — ( 1,219 ) — — ( 1,219 ) 6,681 5,462 Balance at June 30, 2021 9,377 $ 94 $ 188,323 $ ( 67,576 ) 1,143 $ ( 21,753 ) $ 99,088 $ 4,444 $ 103,532 Balance at December 31, 2019 9,330 $ 93 $ 186,082 $ ( 43,567 ) 1,133 $ ( 21,509 ) $ 121,099 $ 12,983 $ 134,082 Exercised and vested stock-based awards 17 — — — — — — — — Stock-based compensation — — 340 — — — 340 — 340 Tender of shares for stock-based awards — — — — 4 ( 91 ) ( 91 ) — ( 91 ) Total comprehensive income (loss) — — — 3,064 — — 3,064 ( 1,408 ) 1,656 Balance at June 30, 2020 9,347 $ 93 $ 186,422 $ ( 40,503 ) 1,137 $ ( 21,600 ) $ 124,412 $ 11,575 $ 135,987 The accompanying Notes to Consolidated Financial Statements (Unaudited) are an integral part of these consolidated financial statements. 6 Table of Contents STRATUS PROPERTIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. GENERAL The unaudited consolidated financial statements, and the accompanying notes, are prepared in accordance with generally accepted accounting principles in the United States (GAAP) and should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2020, included in Stratus Properties Inc.’s (Stratus) Annual Report on Form 10-K for the year ended December 31, 2020 (Stratus 2020 Form 10-K) filed with the United States (U.S.) Securities and Exchange Commission. The information furnished herein reflects all adjustments that are, in the opinion of management, necessary for a fair statement of the results for the interim periods reported and consist of normal recurring adjustments. Operating results for the second quarter of 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021. In particular, the COVID-19 pandemic continued to affect Stratus' operations. As a result, this interim period, as well as future interim periods while the COVID-19 pandemic is ongoing, will not be comparable to past performance or indicative of future performance. The preparation of Stratus’ consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions, including those related to the potential impacts arising from the COVID-19 pandemic and related government actions, that affect the amounts reported in these financial statements and accompanying notes. Actual results could differ materially from those estimates. As the impact of the COVID-19 pandemic continues to evolve, and the extent of its impact cannot be determined with certainty, estimates and assumptions about future events and their effects require increased judgement. Stratus’ assessment of the future magnitude and duration of the COVID-19 pandemic and related economic disruption, as well as other factors could result in material changes to the estimates used in and material impacts to Stratus’ consolidated financial statements in future reporting periods. COVID-19 Pandemic Impact. Since January 2020, the COVID-19 pandemic has caused substantial disruption in international and U.S. economies and markets. The impacts of the pandemic are continuing during 2021 but began to lessen as vaccines became widely available in the U.S. during the first quarter of 2021, although there has been a recent rise in the number of cases in the U.S. as a result of vaccine hesitancy and the spread of COVID-19 variants. 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, mask mandates and social distancing measures. 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. As a result of the spread of the COVID-19 variants and resurgence in infections, on July 27, 2021, the U.S. Centers for Disease Control and Prevention (CDC) changed its mask guidance to, among other things, recommend that fully vaccinated individuals wear masks indoors in areas of “substantial” or “high transmission,” which according to the CDC include Austin and much of Texas. Stratus cannot predict the extent to which individuals may decide to restrict their activities as a result of these developments nor what impact these developments may have on its business. As a result, the pandemic has had, and is expected to continue to have, a significant adverse impact on Stratus' business and operations, particularly on the hotel and entertainment segments. Because the pandemic is unprecedented in recent history, and its severity, duration and future economic consequences are difficult to predict, Stratus cannot predict its future impact on Stratus' business and operations with any certainty. Stratus’ revenue, operating income and cash flow in its hotel and entertainment segments were adversely impacted beginning late in the first quarter of 2020 and through the second quarter of 2021, and are expected to continue to be adversely impacted during the second half of 2021, although the adverse impacts began to lessen during the first quarter of 2021. The hotel has remained open throughout the pandemic and the 33 percent average occupancy rate in the second quarter of 2021 was higher than the 12 percent average occupancy rate in the second quarter of 2020 and the 21 percent average occupancy rate in the first quarter of 2021. While Stratus' entertainment venues, ACL Live and 3TEN ACL Live, were able to host events during second-quarter 2021 and the first six months of 2021, capacity remained limited. 7 Table of Contents Refer to Note 1 of the Stratus 2020 Form 10-K for further discussion of the pandemic's impacts on Stratus' business. The Saint June L.P. On June 2, 2021, The Saint June, L.P., a Texas limited partnership and a subsidiary of Stratus, entered into a construction loan to develop The Saint June, a 182 -unit, multi-family luxury garden-style apartment project within the Amarra subdivision of the Barton Creek community in Austin, Texas. Refer to Note 6 for further discussion of this loan. On July 1, 2021, an unrelated equity investor contributed $ 16.3 million to The Saint June, L.P. partnership for a 65.87 percent interest. Stratus has a 34.13 percent interest in The Saint June, L.P. following its contribution of land, development to date and $ 1.1 million of cash. The Saint June, L.P. is governed by a limited partnership agreement between Stratus and the equity investor, and a wholly owned subsidiary of Stratus serves as the general partner. The general partner will manage The Saint June, L.P. in exchange for an asset management fee of $ 210 thousand per year beginning two years after construction of The Saint June, which began in July 2021, and will earn a development management fee of 4 percent of certain construction costs for The Saint June. The partnership agreement also contains a buy-sell option pursuant to which at any time either party will have the right to initiate a buy-sell of the other party’s interests. Terminated Block 21 Sale. In December 2019, Stratus entered into definitive agreements to sell Block 21 to Ryman Hospitality Properties, Inc. (Ryman) for $ 275 million. Ryman deposited $ 15.0 million in earnest money to secure its performance under the agreements governing the sales. In May 2020, Ryman delivered a termination letter, which was agreed to and accepted by Stratus, terminating the agreements to purchase Block 21 and authorizing the release of Ryman's $ 15.0 million in earnest money to Stratus. During the second quarter of 2020, Stratus recorded the $ 15.0 million as operating income. 2. EARNINGS PER SHARE Stratus’ basic net (loss) income per share of common stock was calculated by dividing the net (loss) income attributable to common stockholders by the weighted-average shares of common stock outstanding during the period. A reconciliation of net (loss) income and weighted-average shares of common stock outstanding for purposes of calculating diluted net (loss) income per share (in thousands, except per share amounts) follows: Three Months Ended Six Months Ended June 30, June 30, 2021 2020 2021 2020 Net (loss) income and total comprehensive (loss) income attributable to common stockholders $ ( 10,163 ) $ 4,134 $ ( 1,219 ) $ 3,064 Basic weighted-average shares of common stock outstanding 8,235 8,210 8,229 8,205 Add shares issuable upon exercise or vesting of dilutive stock options and restricted stock units (RSUs) — a 18 b — a 25 b Diluted weighted-average shares of common stock outstanding 8,235 8,228 8,229 8,230 Basic and diluted net (loss) income per share attributable to common stockholders $ ( 1.23 ) $ 0.50 $ ( 0.15 ) $ 0.37 a. Excludes 147 thousand shares for second-quarter 2021 and 128 thousand shares for the first six months of 2021 of common stock associated with RSUs and stock options that were anti-dilutive as a result of the net loss. b. Excludes 59 thousand shares for second-quarter 2020 and 37 thousand shares for the first six months of 2020 of common stock associated with RSUs that were anti-dilutive. 8 Table of Contents 3. RELATED PARTY TRANSACTIONS The Saint Mary, L.P. In June 2018, The Saint Mary, L.P., a Texas limited partnership and a subsidiary of Stratus, completed a series of financing transactions to develop The Saint Mary, a 240 -unit luxury, garden-style apartment project in the Circle C community in Austin, Texas. The financing transactions included a $ 26.0 million construction loan with Texas Capital Bank, National Association and an $ 8.0 million private placement. As one of the participants in the private placement offering, LCHM Holdings, LLC (LCHM), a related party as a result of its greater than 5 percent beneficial ownership of Stratus’ common stock, purchased limited partnership interests representing a 6.1 percent equity interest in The Saint Mary, L.P. Refer to Note 2 of the Stratus 2020 Form 10-K for further discussion. The Saint Mary, L.P. sold The Saint Mary property in January 2021. In connection with the sale, The Saint Mary, L.P. distributed $ 1.8 million to LCHM. Refer to Note 4 for further discussion. Stratus Kingwood Place, L.P. In August 2018, Stratus Kingwood Place, L.P., a Texas limited partnership and a subsidiary of Stratus (the Kingwood, L.P.), completed a $ 10.7 million private placement, approximately $ 7 million of which, combined with a $ 6.75 million loan from Comerica Bank, was used to purchase a 54 -acre tract of land located in Kingwood, Texas for $ 13.5 million, for the development of Kingwood Place, a H-E-B, LP (H-E-B)-anchored, mixed-use development project (Kingwood Place). As one of the participants in the private placement offering, LCHM purchased limited partnership interests initially representing an 8.8 percent equity interest in Kingwood, L.P. Refer to Note 2 of the Stratus 2020 Form 10-K for further discussion. Stratus has performed evaluations and concluded that The Saint Mary, L.P. and the Kingwood, L.P. are variable interest entities and that Stratus is the primary beneficiary. Stratus will continue to evaluate which entity is the primary beneficiary of The Saint Mary, L.P. and the Kingwood, L.P. in accordance with applicable accounting guidance. The Saint Mary, L.P. and the Kingwood, L.P.’s results are consolidated in Stratus’ financial statements. Stratus’ consolidated balance sheets include the following assets and liabilities of the Kingwood, L.P. (in thousands). The assets and liabilities of The Saint Mary (primarily the real estate held for investment and the related debt) are presented as held for sale in Stratus' consolidated balance sheets as of December 31, 2020. June 30, 2021 December 31, 2020 Assets: Cash and cash equivalents $ 698 $ 745 Real estate under development 2,380 2,380 Land available for development 8,167 8,143 Real estate held for investment 31,609 31,962 Other assets 2,101 2,195 Total assets 44,955 45,425 Liabilities: Accounts payable and accrued liabilities 617 850 Debt 31,715 31,215 Total liabilities 32,332 32,065 Net assets $ 12,623 $ 13,360 Other Transactions. Stratus has an arrangement with Austin Retail Partners for services provided by a consultant of Austin Retail Partners who is the son of Stratus' President and Chief Executive Officer. Payments to Austin Retail Partners for the consultant's consulting services and expense reimbursements totaled $ 29 thousand in second-quarter 2021, $ 26 thousand in second-quarter 2020, $ 66 thousand for the first six months of 2021 and $ 65 thousand for the first six months of 2020. 9 Table of Contents 4. DISPOSITIONS The Saint Mary. In January 2021, The Saint Mary, L.P. 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, Stratus 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. Stratus recognized a gain on the sale of $ 22.9 million ($ 16.2 million net of noncontrolling interests) for the first six months of 2021. Stratus also recognized a $ 63 thousand loss on extinguishment of debt for the first six months of 2021 related to the repayment of The Saint Mary construction loan. Stratus reported the assets and liabilities of The Saint Mary as held for sale in its December 31, 2020, consolidated balance sheet. The carrying amounts of the major classes of assets and liabilities for The Saint Mary as of December 31, 2020, follow (in thousands): Assets: Real estate held for investment, net $ 36,341 Other assets 175 Total assets held for sale $ 36,516 Liabilities: Accrued liabilities $ 68 Debt 25,319 Other liabilities 220 Total liabilities held for sale $ 25,607 The Saint Mary had rental revenue prior to the sale of $ 0.1 million in first-quarter 2021, $ 0.7 million in second-quarter 2020, and $ 1.4 million for the first six months of 2020. Interest expense, net of capitalized amounts, related to The Saint Mary construction loan was less than $ 0.1 million in first-quarter 2021, $ 0.3 million in second-quarter 2020 and $ 0.6 million for the first six months of 2020. 5. FAIR VALUE MEASUREMENTS Fair value accounting guidance includes a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 inputs) and the lowest priority to unobservable inputs (Level 3 inputs). The carrying value for certain Stratus financial instruments (i.e., cash and cash equivalents, restricted cash, accounts payable and accrued liabilities) approximates fair value because of their short-term nature and generally negligible credit losses. A summary of the carrying amount and fair value of Stratus' debt follows (in thousands): June 30, 2021 December 31, 2020 Carrying Value Fair Value Carrying Value Fair Value Liabilities: Debt $ 352,096 $ 355,008 $ 351,055 $ 354,380 Debt. Stratus' debt is recorded at cost and is not actively traded. Fair value is estimated based on discounted future expected cash flows at estimated current market interest rates. Accordingly, Stratus' debt is classified within Level 2 of the fair value hierarchy. The fair value of debt does not represent the amounts that will ultimately be paid upon the maturities of the loans. 10 Table of Contents 6. DEBT The components of Stratus' debt follow (in thousands): June 30, 2021 December 31, 2020 Block 21 loan $ 137,855 $ 139,013 The Santal loan 74,480 74,343 Comerica Bank credit facility 45,526 43,304 Jones Crossing loan 23,995 — New Caney land loan 4,489 4,949 Paycheck Protection Program loan 3,987 3,987 Construction loans: Kingwood Place 31,715 31,215 Lantana Place 21,827 24,051 West Killeen Market 6,642 6,707 Amarra Villas credit facility 1,580 1,109 Jones Crossing — 22,377 Total debt a $ 352,096 $ 351,055 a. Includes net reductions for unamortized debt issuance costs of $ 2.1 million at June 30, 2021, and $ 2.2 million at December 31, 2020. As of June 30, 2021, Stratus had $ 14.3 million available under its $ 60.0 million Comerica Bank credit facility, with a $ 150 thousand letter of credit committed against the credit facility. The Santal Loan. In April 2021, a Stratus subsidiary entered into an amendment to The Santal loan to (i) extend the maturity date from October 5, 2022, to October 5, 2024 (and remove two options to extend the maturity date for an additional 12 months); (ii) revise the interest rate from London Interbank Offered Rate (LIBOR) (or, if applicable, a replacement rate) plus 2.85 percent, with a 4.80 percent floor, to LIBOR (or, if applicable, a replacement rate) plus 3.25 percent, with a 3.40 percent floor; (iii) eliminate the requirement that Stratus' Santal subsidiary make minimum amortization payments beginning in November 2022; (iv) extend the period during which The Santal loan may not be prepaid from April 2020 to June 2022; and (v) revise certain events or circumstances that would qualify as an event of default or violate the prohibition on conveyances under the applicable provisions. Jones Crossing Loan. In June 2021, a Stratus subsidiary entered into a $ 24.5 million loan with Regions Bank (the Jones Crossing loan). Of the proceeds from the Jones Crossing loan, $ 22.2 million was used to repay in full the original Jones Crossing construction loan. The repayment of the Jones Crossing construction loan resulted in Stratus recognizing a $ 163 thousand loss on the early extinguishment of debt representing the write-off of unamortized debt issuance costs related to the construction loan. The Jones Crossing loan has a maturity date of June 17, 2026, and bears interest at LIBOR plus 2.25 percent, provided LIBOR shall not be less than 0.15 percent. Payments of interest only on the Jones Crossing loan are due monthly through the term of the loan with the outstanding principal due at maturity. If the debt service coverage ratio falls below 1.15 to 1.00 for any fiscal quarter beginning with the quarter ending September 30, 2022, a “Cash Sweep Period” (as defined in the Jones Crossing loan) results, which limits Stratus’ ability to receive cash from its Jones Crossing subsidiary. The Jones Crossing loan is secured by the Jones Crossing project, and Stratus has provided a guaranty limited to non-recourse carve-out obligations and environmental indemnification. In addition, any default under the ground leases, which grant Stratus the right to occupy the Jones Crossing property, would trigger the carve-out guaranty. The Jones Crossing loan contains certain financial covenants, including a requirement that Stratus maintain liquid assets of at least $ 2.0 million. New Caney Land Loan. In March 2021, Stratus exercised its option to extend the New Caney land loan for an additional 12 months from March 8, 2021, to March 8, 2022, which required a principal payment of $ 0.5 million. PPP Loan. In April 2020, Stratus received a $ 4.0 million loan under the Paycheck Protection Program (PPP loan) of the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act), which was signed into law on March 27, 2020. The PPP loan accrues interest at 1 percent and will mature on April 15, 2022, except for the portion that may be forgiven. The proceeds from the loan were to be used to retain workers and maintain payroll and make mortgage interest payments. Stratus' PPP loan forgiveness application is currently under review by the Small Business Administration; however, no assurance of full forgiveness can be provided. 11 Table of Contents Lantana Place Construction Loan. In January 2021, a Stratus subsidiary entered into an amendment to the Lantana Place construction loan in which Stratus' Lantana Place subsidiary was granted a waiver of the debt service coverage ratio covenant until September 30, 2021, at which point the ratio is measured by reference to the three-month period then ended, and subsequently builds each quarter until measured by reference to the 12-month period ending June 30, 2022, and then on a trailing 12-month period for each quarter thereafter. As part of the January 2021 amendment, Stratus repaid $ 2.0 million in principal on the Lantana Place construction loan. The Saint June Construction Loan. In June 2021, The Saint June, L.P. entered into a construction loan with Texas Capital Bank to finance approximately 55 percent of the estimated $ 55 million cost of the development and construction of The Saint June. Available borrowings under the loan total the least of (i) $ 30.3 million, (ii) 60 percent of the total construction costs, or (iii) 55 percent of the as-stabilized appraised value of the property. As of June 30, 2021, no amounts were outstanding under this loan. The loan matures on October 2, 2024, with two options to extend the maturity for an additional 12 months, subject to satisfying specified conditions and the payment of an extension fee for each extension. The loan bears interest at 30-day LIBOR plus 2.75 percent, with a floor of 3.50 percent. Payments of interest only on the loan are due monthly through October 2, 2024, with the outstanding principal due at maturity. The loan is secured by The Saint June project and is fully guaranteed by Stratus, including customary carve-out obligations and environmental indemnity. However, the guaranty will convert to a 50 percent repayment guaranty upon completion of construction of The Saint June. Further, once The Saint June, L.P. is able to maintain a debt service coverage ratio of 1.25 to 1.00, the repayment guaranty will be eliminated. Stratus is also required to maintain a net asset value, as defined by the guaranty, of $ 125 million and liquid assets of at least $ 10 million. The Saint June, L.P. is not permitted to make distributions to its partners until completion of The Saint June project and after the project achieves a debt service coverage ratio of at least 1.00 for three consecutive months. Magnolia Place Construction Loan. In August 2021, a Stratus subsidiary entered into a $ 14.8 million construction loan with Veritex Community Bank secured by the Magnolia Place project. The loan matures on August 12, 2024, with two options to extend the maturity for an additional 12 months, subject to satisfying specified conditions and the payment of an extension fee. The loan bears interest at 30-day LIBOR plus 3.25 percent (or, if applicable, a replacement rate), with a floor of 3.50 percent. Payments of interest only are due monthly through August 12, 2024, with the outstanding principal due at maturity. Stratus provided a completion guaranty and 25 -percent-limited-payment guaranty. The loan agreement contains financial covenants, including that Stratus is required to maintain a net asset value, as defined in the loan agreement, of $ 125 million and liquid assets of at least $ 7.5 million. Refer to Note 10 for further discussion of the Magnolia Place project and construction loan. For additional information regarding Stratus' debt, refer to Note 6 in the Stratus 2020 Form 10-K. Interest Expense and Capitalization. Interest costs (before capitalized interest) totaled $ 4.0 million in second-quarter 2021, $ 4.9 million in second-quarter 2020, $ 8.3 million for the first six months of 2021 and $ 10.1 million for the first six months of 2020. Stratus' capitalized interest totaled $ 1.2 million in second-quarter 2021 and 2020, and $ 2.5 million for each of the first six months of 2021 and 2020. Capitalized interest is primarily related to development activities at Barton Creek. 7. PROFIT PARTICIPATION INCENTIVE PLAN In July 2018, the Compensation Committee of Stratus' Board of Directors (the Committee) unanimously adopted the Stratus Profit Participation Incentive Plan (the Plan), which provides participants with economic incentives tied to the success of the development projects designated by the Committee as approved projects under the Plan. Estimates related to the awards may change over time as a result of differences between projected and actual development progress and costs, market conditions and the timing of capital transactions or valuation events. Refer to Note 8 of the Stratus 2020 Form 10-K for further discussion. In March 2021, Stratus granted 53,411 stock-settled RSUs with a grant-date value of $ 1.5 million, based on Stratus' stock price on the date of issuance, under the Plan for West Killeen Market, which reached a valuation event under the Plan in October 2020. Stratus transferred the $ 1.2 million accrued liability balance under the Plan for West Killeen Market to capital in excess of par value and will amortize the $ 0.3 million balance of the grant date value with a charge to general and administrative expenses and a credit to capital in excess of par value over the three-year vesting period of the RSUs. The sale of The Saint Mary in January 2021, was a capital transaction under the 12 Table of Contents Plan. The accrued liability under the Plan related to The Saint Mary project totaled $ 2.2 million at June 30, 2021, and is expected to be paid in cash to eligible participants no later than March 15, 2022. A summary of Plan costs follows (in millions): Three Months Ended Six Months Ended June 30, June 30, 2021 2020 2021 2020 Charged to general and administrative expense $ 0.3 $ 0.2 $ 0.8 $ 0.2 Capitalized to project development costs 0.2 0.2 0.4 0.2 Total Plan costs $ 0.5 $ 0.4 $ 1.2 $ 0.4 The accrued liability for the Plan totaled $ 6.2 million at June 30, 2021, and December 31, 2020 (included in other liabilities). As of June 30, 2021, no amounts had been paid in cash to participants under the Plan. 8. INCOME TAXES Stratus’ accounting policy for and other information regarding its income taxes are further described in Notes 1 and 7 in the Stratus 2020 Form 10-K. Stratus had deferred tax assets (net of deferred tax liabilities and valuation allowances) totaling $ 44 thousand at June 30, 2021 , and December 31, 2020. Stratus' deferred tax assets had valuation allowances totaling $ 12.6 million at June 30, 2021, and $ 10.7 million at December 31, 2020. In evaluating the recoverability of the deferred tax assets, management considered available positive and negative evidence, giving greater weight to the recent current cumulative losses and uncertainty regarding projected future financial results. Upon a change in facts and circumstances, management may conclude that sufficient positive evidence exists to support a reversal of, or decrease in, the valuation allowance in the future, which would favorably impact Stratus' results of operations. Stratus’ future results of operations may be negatively impacted by an inability to realize a tax benefit for future tax losses or for items that will generate additional deferred tax assets that are not more likely than not to be realized. The difference between Stratus' consolidated effective income tax rate of less than 1 percent for the first six months of 2021 and the U.S. Federal statutory income tax rate of 21 percent was primarily attributable to a forecasted taxable loss for 2021, noncontrolling interests in subsidiaries, the presence of a full valuation allowance against U.S. Federal deferred tax assets, and the Texas state margin tax. The difference between Stratus' consolidated effective income tax rate for the first six months of 2020 and the U.S. Federal statutory income tax rate of 21 percent, was primarily attributable to the CARES Act, which allowed Stratus to carryback losses to 2017 when the U.S. corporate tax rate was 35 percent, among other impacts, resulting in a discrete tax benefit of $ 1.4 million, and the Texas state margin tax. 9. BUSINESS SEGMENTS Stratus has four operating segments: Real Estate Operations, Leasing Operations, Hotel and Entertainment. The Real Estate Operations segment is comprised of Stratus’ real estate assets (developed for sale, under development and available for development), which consists of its properties in Austin, Texas (including the Barton Creek community; the Circle C community; and the Lantana community, including a portion of Lantana Place planned for a future multi-family phase); in Lakeway, Texas, located in the greater Austin area (Lakeway); in College Station, Texas (a portion of Jones Crossing and vacant pad sites); in Killeen, Texas (vacant pad sites at West Killeen Market); and in Magnolia, Texas (Magnolia Place), Kingwood, Texas (land for future multi-family development and vacant pad sites) and New Caney, Texas (New Caney), located in the greater Houston area. The Leasing Operations segment is comprised of Stratus’ real estate assets, both residential and commercial, that are leased or available for lease and includes The Santal, West Killeen Market, office and retail space at Block 21 and completed portions of Lantana Place, Jones Crossing and Kingwood Place. The Hotel segment includes the W Austin Hotel located at Block 21 in downtown Austin, Texas. The Entertainment segment includes ACL Live, a live music and entertainment venue, and 3TEN ACL Live, both located at Block 21. In addition to hosting concerts and private events, ACL Live is the home of Austin City Limits, the longest running music series in American television history. 13 Table of Contents Stratus uses operating income or loss to measure the performance of each segment. General and administrative expenses, which primarily consist of employee salaries, wages and other costs, are managed on a consolidated basis and are not allocated to Stratus’ operating segments. The following segment information reflects management determinations that may not be indicative of what the actual financial performance of each segment would be if it were an independent entity. Revenues from Contracts with Customers. Stratus' revenues from contracts with customers follow (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Real Estate Operations: Developed property sales $ 575 $ 1,832 $ 4,615 $ 14,140 Undeveloped property sales — — 2,500 — Commissions and other 200 61 281 89 775 1,893 7,396 14,229 Leasing Operations: Rental revenue 5,208 5,718 10,375 11,450 Hotel: Rooms, food and beverage 3,470 932 5,230 6,007 Other 465 98 823 934 3,935 1,030 6,053 6,941 Entertainment: Event revenue 1,055 293 1,650 3,851 Other 603 ( 3 ) 617 594 1,658 290 2,267 4,445 Total revenues from contracts with customers $ 11,576 $ 8,931 $ 26,091 $ 37,065 Financial Information by Business Segment. The following segment information was prepared on the same basis as Stratus’ consolidated financial statements (in thousands). Real Estate Operations a Leasing Operations Hotel Entertainment Corporate, Eliminations and Other b Total Three Months Ended June 30, 2021: Revenues: Unaffiliated customers $ 775 $ 5,208 $ 3,935 $ 1,658 $ — $ 11,576 Intersegment 5 246 28 — ( 279 ) — Cost of sales, excluding depreciation 1,503 2,528 3,862 1,670 ( 109 ) 9,454 Depreciation 47 1,692 877 347 ( 39 ) 2,924 General and administrative expenses — — — — 6,399 c 6,399 Operating (loss) income $ ( 770 ) $ 1,234 $ ( 776 ) $ ( 359 ) $ ( 6,530 ) $ ( 7,201 ) Capital expenditures and purchases and development of real estate properties $ 2,390 $ 1,216 $ 143 $ 10 $ — $ 3,759 Total assets at June 30, 2021 165,607 194,696 91,878 33,884 24,276 510,341 14 Table of Contents Real Estate Operations a Leasing Operations Hotel Entertainment Corporate, Eliminations and Other b Total Three Months Ended June 30, 2020: Revenues: Unaffiliated customers $ 1,893 $ 5,718 $ 1,030 $ 290 $ — $ 8,931 Intersegment 4 216 16 ( 1 ) ( 235 ) — Cost of sales, excluding depreciation 1,886 4,074 d 1,767 e 1,305 ( 67 ) 8,965 Depreciation 57 2,034 931 404 ( 49 ) 3,377 General and administrative expenses — — — — 3,103 3,103 Income from forfeited earnest money — — — — ( 15,000 ) f ( 15,000 ) Operating (loss) income $ ( 46 ) $ ( 174 ) $ ( 1,652 ) $ ( 1,420 ) $ 11,778 $ 8,486 Capital expenditures and purchases and development of real estate properties $ 2,433 $ 1,682 $ 283 $ 104 $ — $ 4,502 Total assets at June 30, 2020 163,900 233,268 g 94,359 36,784 23,394 551,705 Six Months Ended June 30, 2021: Revenues: Unaffiliated customers $ 7,396 $ 10,375 $ 6,053 $ 2,267 $ — $ 26,091 Intersegment 9 476 60 — ( 545 ) — Cost of sales, excluding depreciation 5,836 4,909 6,764 3,095 ( 220 ) 20,384 Depreciation 103 3,403 1,757 748 ( 85 ) 5,926 General and administrative expenses — — — — 10,943 c 10,943 Gain on sale of assets — ( 22,931 ) h — — — ( 22,931 ) Operating income (loss) $ 1,466 $ 25,470 $ ( 2,408 ) $ ( 1,576 ) $ ( 11,183 ) $ 11,769 Capital expenditures and purchases and development of real estate properties $ 4,879 $ 2,135 $ 215 $ 28 $ — $ 7,257 Six Months Ended June 30, 2020: Revenues: Unaffiliated customers $ 14,229 $ 11,450 $ 6,941 $ 4,445 $ — $ 37,065 Intersegment 8 443 64 14 ( 529 ) — Cost of sales, excluding depreciation 12,068 7,162 d 7,675 e 4,531 ( 137 ) 31,299 Depreciation 116 4,081 2,036 i 887 i ( 110 ) 7,010 General and administrative expenses — — — — 5,918 5,918 Income from forfeited earnest money — — — — ( 15,000 ) f ( 15,000 ) Operating income (loss) $ 2,053 $ 650 $ ( 2,706 ) $ ( 959 ) $ 8,800 $ 7,838 Capital expenditures and purchases and development of real estate properties $ 8,655 $ 3,965 $ 310 $ 122 $ — $ 13,052 a. Includes sales commissions and other revenues together with related expenses. b. Includes consolidated general and administrative expenses and eliminations of intersegment amounts. c. The increases from the comparable prior year periods are primarily the result of increased consulting, legal and public relation costs for Stratus' successful proxy contest and the ongoing REIT exploration process totaling $ 3.3 million and $ 4.4 million in second-quarter 2021 and for the first six months of 2021, respectively. d. Includes a $ 1.4 million charge for estimated uncollectible rents receivable and unrealizable deferred costs. e. 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. f. Represents income from earnest money received as a result of Ryman's termination of the agreements to purchase Block 21. g. Includes assets held for sale at The Saint Mary, which totaled $ 36.6 million at June 30, 2020. h. Represents the gain on the January 2021 sale of The Saint Mary. i. Includes a $ 202 thousand adjustment in the Hotel segment and an $ 89 thousand adjustment in the Entertainment segment for the period in December 2019 when the hotel and entertainment venues were held for sale and, therefore, not depreciated. 15 Table of Contents 10. SUBSEQUENT EVENTS In August 2021, Stratus announced its new project development plans and completed construction financing for the first phase of development of Magnolia Place, an H-E-B grocery shadow-anchored, mixed-use project in Magnolia, Texas. Magnolia Place is currently planned to consist of 4 retail buildings totaling approximately 35,000 square feet, 5 retail pad sites to be sold or ground leased, 194 single-family lots and approximately 500 multi-family units. The first phase of development is expected to consist of 2 retail buildings totaling approximately 19,000 square feet, all 5 pad sites, and the road, utility and drainage infrastructure necessary to support the entire development. H-E-B recently began construction on its 95,000 -square-foot grocery store on an adjoining 18 -acre site owned by H-E-B. Stratus entered into a $ 14.8 million, three-year construction loan to finance the first phase of development of Magnolia Place. Refer to Note 6 for further discussion of the Magnolia Place construction loan. The remaining estimated project costs are being funded by equity contributed by Stratus. Stratus evaluated events after June 30, 2021, and through the date the financial statements were issued, and determined any events or transactions occurring during this period that would require recognition or disclosure are appropriately addressed in these financial statements. 16 Table of Contents