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) for the first six months of 2021. 17 Table of Contents Refer to Notes 1, 6 and 10 for a discussion of financing transactions we entered into during 2021, including for the construction and development of The Saint June and Magnolia Place, and the refinancing of The Santal and Jones Crossing projects. 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 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 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. 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. We 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 our business. We are optimistic about a post-pandemic recovery and are encouraged by indications that the vaccines are effective and by the rising levels of economic activity in our markets. Although the pandemic has had an adverse impact on our hotel and entertainment operations, our residential properties and opportunities have been positively impacted. Despite the pandemic, we have retained substantially all of our pre-pandemic retail tenants, added new tenants, and all of our tenants are currently paying rent per their leases, as well as monthly payments pursuant to previously disclosed base rent deferral arrangements if applicable, as further discussed below. 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 the second half of 2021, although the impacts continued to lessen during second-quarter 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. Our entertainment venues, ACL Live and 3TEN ACL Live, hosted a limited number of events with restricted capacity during second-quarter 2021. 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. Demand for residential properties is strong in our markets, currently exceeding available supply. For example, we have sold almost all of our single-family lot inventory at Barton Creek at attractive prices, and we have been able to increase rents on apartments with renewing lease terms at The Santal. After the successful sale of The Saint Mary multi-family project in the first quarter of 2021, we began construction on The Saint June multi-family project in July 2021 and we have announced 18 Table of Contents and are currently seeking financing for our Holden Hills residential project. We believe we have attractive opportunities to develop or sell residential components of our projects at Magnolia Place, Lantana Place, Kingwood Place, Jones Crossing and our remaining land in Lakeway. However, with increased demand and construction activity in our markets, we have also experienced cost increases in certain construction materials. 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, permitting and development activities. In August 2021, we closed on a construction loan and began construction on the first phase of development of Magnolia Place, an H-E-B, LP (H-E-B) grocery shadow-anchored, mixed-use project in Magnolia, Texas (see Notes 6 and 10). During the second quarter of 2021, we began site work on The Saint June, a 182-unit multi-family project in Barton Creek, and closed on a construction loan for the project (see Note 6). In July 2021, an unrelated equity investor acquired a 65.87 percent interest in The Saint June partnership for $16.3 million (see Note 1) and construction began on The Saint June. 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. 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. Further, we have retained substantially all of our pre-pandemic retail tenants, added new tenants, and all of our tenants are currently paying rent per their leases, as well as monthly payments pursuant to previously disclosed base rent deferral arrangements if applicable. 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 Ryman Hospitality Properties, Inc. (Ryman) in May 2020 as a result of the negative impact on capital markets and the overall economic environment caused by the COVID-19 pandemic. As a result of Ryman’s termination of the transaction, it forfeited to us $15.0 million of earnest money. We recorded the $15.0 million as operating income during the second quarter of 2020. Because the pandemic is unprecedented in recent history, and its severity, duration and future economic consequences are difficult to predict, we cannot predict its future impact on the company with any certainty. At this time, we continue our focus on maintaining liquidity and controlling costs. As previously discussed, we are also moving forward to secure financing for our Holden Hills development. Impacts on our Liquidity and Capital Resources As of June 30, 2021, we had $14.3 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 $9.1 million during the first six months of 2021, including $4.1 million during the second quarter. Based on current projections, additional contributions are expected to total $4.4 million through early 2022. 19 Table of Contents 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 our Block 21 businesses will generate positive operating income in the second 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, (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, (4) that we are able to secure anticipated financing for certain development projects, and (5) that we can repay, extend or refinance debt coming due in the next 12 months, including loans at Amarra Villas, West Killeen Market and New Caney. 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. OVERVIEW OF FINANCIAL RESULTS FOR SECOND-QUARTER 2021 Our net loss attributable to common stockholders totaled $10.2 million, or $1.23 per share, in second-quarter 2021, compared with net income of $4.1 million, or $0.50 per share, in second-quarter 2020. During the first six months of 2021 our net loss attributable to common stockholders totaled $1.2 million, or $0.15 per share, compared with net income attributable to common stockholders of $3.1 million, or $0.37 per share, during the first six months of 2020. Our results for the first six months of 2021 were positively impacted by the $22.9 million gain on the sale of The Saint Mary in January 2021 ($16.2 million net of noncontrolling interests). Our net losses attributable to common stockholders in the 2021 periods include charges to general and administrative expenses for consulting, legal and public relation costs incurred in connection with our successful proxy contest and our ongoing REIT exploration process. The net income reported in the 2020 periods includes $15.0 million in income from earnest money received as a result of the termination of the Block 21 transaction in second-quarter 2020. Our revenues totaled $11.6 million in second-quarter 2021 and $26.1 million for the first six months of 2021, compared with $8.9 million in second-quarter 2020 and $37.1 million for the first six months of 2020. The increase in revenues in second-quarter 2021, compared to second-quarter 2020, primarily reflects increases in revenue from our hotel and entertainment segments as the negative impacts from the COVID-19 pandemic continued to lessen during second-quarter 2021. The decrease in revenue for the first six months of 2021, compared to the first six months of 2020, primarily reflects 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 second-quarter 2021, we sold one Amarra Drive Phase III lot for $0.6 million. During the first six months of 2021, we sold three 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 $7.1 million. For further discussion, see "Results of Operations — Real Estate Operations." As of June 30, 2021, two developed Amarra Drive Phase III lots remained unsold. 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 later in 2021. As of August 13, 2021, one of these homes was under contract. In addition, a contract had been signed to sell a second home on which we began construction in second-quarter 2021. As of August 13, 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. In second-quarter 2021, we began site work on The Saint June, after the completion of financing. The Saint June is a 182-unit multi-family project within the Amarra subdivision. See Note 1 for a discussion of project financing. The first units of The Saint June are currently expected to be completed in third-quarter 2022 with final completion of the project expected in first-quarter 2023. 20 Table of Contents For further discussion of our multi-family and single-family residential properties, see MD&A in our 2020 Form 10-K. Current Commercial Activities In August 2021, we announced new development plans for Magnolia Place, an H-E-B grocery shadow-anchored, mixed-use project in Magnolia, Texas that is fully owned by Stratus. We began construction on the first phase of development of Magnolia Place in August 2021. 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. We are evaluating a sale of the land for the single-family residential component. We have constructed approximately 152,000 square feet of retail space at Kingwood Place, including an H-E-B grocery store, and we have signed ground leases on two of the retail pads. Three pad sites remain available for lease. As of June 30, 2021, we had signed leases for approximately 85 percent of the retail space, including the H-E-B 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 June 30, 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, which was further extended through July 31, 2021, with Moviehouse in which rent was based on a percentage of Moviehouse's revenue. The lease agreement provided Moviehouse the right to extend the lease to the original 20-year term through October 31, 2039, at the original rent schedule, which Moviehouse exercised effective August 1, 2021. The lease is secured by a $1.4 million letter of credit. 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 September 2021. We rezoned a portion of the Lantana property for a potential multi-family development of up to 320 units. As of June 30, 2021, we had signed leases for substantially all of the retail space at the first phase of Jones Crossing, an H-E-B-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 H-E-B grocery store. Block 21's Class A leasable office space was approximately 60 percent leased as of June 30, 2021, including 9,000 square feet occupied by our corporate office, and the retail space was substantially fully leased as of June 30, 2021. During second-quarter 2021, we refinanced the Jones Crossing project to improve loan terms and take advantage of the low-interest-rate market. 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 large 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 to start construction in the first quarter of 2022. 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. 21 Table of Contents 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 additional capital, which we currently intend to pursue through bank debt and third-party equity capital arrangements. RESULTS OF OPERATIONS We are continually evaluating the development and sale potential of our properties and will continue to consider opportunities to enter into transactions involving our properties, including possible sales, joint ventures or other arrangements. As a result, and because of the COVID-19 pandemic and numerous other factors affecting our business activities as described herein and in our 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 described herein. The following table summarizes our operating results (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Operating (loss) income: Real Estate Operations a $ (770) $ (46) $ 1,466 $ 2,053 Leasing Operations 1,234 (174) b 25,470 c 650 b Hotel (776) (1,652) (2,408) (2,706) Entertainment (359) (1,420) (1,576) (959) Corporate, eliminations and other d (6,530) 11,778 e (11,183) 8,800 e Operating (loss) income $ (7,201) $ 8,486 $ 11,769 $ 7,838 Interest expense, net $ (2,772) $ (3,666) $ (5,807) $ (7,581) Net loss (income) attributable to noncontrolling interests in subsidiaries $ 41 $ 331 $ (6,681) $ 1,408 Net (loss) income attributable to common stockholders $ (10,163) $ 4,134 $ (1,219) $ 3,064 a. Includes sales commissions and other revenues together with related expenses. b. Includes a $1.4 million charge for estimated uncollectible rents receivable and unrealizable deferred costs. c. Includes a $22.9 million gain on the sale of The Saint Mary. d. Includes consolidated general and administrative expenses and eliminations of intersegment amounts. The increases in general and administrative expenses 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 in second-quarter 2021 and $4.4 million for the first six months of 2021. e. Includes $15.0 million in income from earnest money received as a result of Ryman's termination of the agreements to purchase Block 21. 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. 22 Table of Contents Real Estate Operations The following table summarizes our Real Estate Operations results (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Revenues: Developed property sales $ 575 $ 1,833 $ 4,615 $ 14,140 Undeveloped property sales — — 2,500 — Commissions and other 205 64 290 97 Total revenues 780 1,897 7,405 14,237 Cost of sales, including depreciation 1,550 1,943 5,939 12,184 Operating (loss) income $ (770) $ (46) $ 1,466 $ 2,053 Developed Property Sales. The following table summarizes our developed property sales (dollars in thousands): Three Months Ended June 30, 2021 2020 Lots Revenues Average Cost Per Lot Lots Revenues Average Cost Per Lot Barton Creek Amarra Drive: Phase II lots — $ — $ — 2 $ 1,183 $ 179 Phase III lots 1 575 233 1 650 257 Total Residential 1 $ 575 3 $ 1,833 Six Months Ended June 30, 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 — — — 4 $ 2,372 $ 193 Phase III lots 3 2,215 299 7 4,590 306 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 4 $ 4,615 13 $ 14,140 The decrease in revenues in second-quarter 2021 and for the first six months of 2021, compared to the 2020 periods, reflects a decrease in the number of lots and homes sold in 2021 as available inventory decreased. Undeveloped Property Sales. During the first six months of 2021, we sold a five-acre multi-family tract of land in Amarra Drive for $2.5 million. 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 $1.6 million in second-quarter 2021 from $1.9 million in second-quarter 2020, primarily reflecting a decrease in the number of lots sold during second-quarter 2021. Cost of sales decreased to $5.9 million for first six months of 2021 from $12.2 million for first six months of 2020, primarily reflecting a decrease in the number of lots and homes sold during the first six months of 2021. The first six months of 2020 included the sale of two homes built on Amarra Drive Phase III lots that had higher average costs. 23 Table of Contents Leasing Operations The following table summarizes our Leasing Operations results (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Rental revenue $ 5,454 $ 5,934 $ 10,851 $ 11,893 Rental cost of sales, excluding depreciation 2,528 4,074 a 4,909 7,162 a Depreciation 1,692 2,034 3,403 4,081 Gain on sale of assets — — (22,931) — Operating income (loss) $ 1,234 $ (174) $ 25,470 $ 650 a. Includes a $1.4 million charge for estimated uncollectible rents receivable and unrealizable deferred costs. Rental Revenue. Rental revenue primarily includes revenue from The Santal, Lantana Place, Jones Crossing, Kingwood Place, the office and retail space at Block 21, West Killeen Market, and The Saint Mary until its sale in January 2021. The decrease in rental revenue in the 2021 periods, compared with the 2020 periods, 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 second-quarter 2020 and $1.4 million during the first six months of 2020. Rental Cost of Sales and Depreciation. Rental cost of sales and depreciation expense decreased in second-quarter 2021 and for the first six months of 2021, compared with the 2020 periods, primarily as a result of the $1.4 million charge in second-quarter 2020 for estimated uncollectible rents receivable and unrealizable deferred costs, as well as the sale of The Saint Mary. During the second quarter of 2020, our lease with Moviehouse, our anchor tenant at Lantana Place, was terminated and we charged $1.3 million to cost of sales to write off uncollectible rents receivable and unrealizable deferred costs associated with this lease. Subsequently, in July 2020, we entered into a new lease agreement with Moviehouse, which was further extended through July 31, 2021. The new lease agreement provided Moviehouse the right to extend the lease to the original 20-year term through October 31, 2039, at the original rent schedule, which Moviehouse exercised effective August 1, 2021. The lease is secured by a $1.4 million letter of credit. 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) for the first six months of 2021. Hotel The following table summarizes our Hotel results (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Hotel revenue $ 3,963 $ 1,046 $ 6,113 $ 7,005 Hotel cost of sales, excluding depreciation 3,862 1,767 a 6,764 7,675 a Depreciation 877 931 1,757 2,036 Operating loss $ (776) $ (1,652) $ (2,408) $ (2,706) a. Includes a $0.8 million credit related to a business interruption insurance claim filed as a result of water and smoke damage in the W Austin Hotel in January 2018. Hotel Revenue. Hotel revenue primarily includes revenue from W Austin Hotel room reservations and food and beverage sales. The increase in Hotel revenues in second-quarter 2021, compared to second-quarter 2020, is primarily a result of higher room reservations and food and beverage sales as the impacts of the COVID-19 pandemic continued to lessen during second-quarter 2021. The decrease in revenue during the first six months of 2021, compared to the first six months of 2020, is a result of the COVID-19 pandemic having a less significant impact in the first three months of 2020. 24 Table of Contents The hotel's average occupancy rate in the second quarter of 2021 was 33 percent, compared to the 12 percent average occupancy rate in the second quarter of 2020. Revenue per available room (RevPAR), which is calculated by dividing total room revenue by the average total rooms available, was $95 in second-quarter 2021 and $73 for the first six months of 2021, compared with $29 in second-quarter 2020 and $89 for the first six months of 2020. Hotel Cost of Sales. The increase in Hotel cost of sales, excluding depreciation, in second-quarter 2021, compared to second-quarter 2020, is primarily a result of higher room reservations and food and beverage sales as the impacts of the COVID-19 pandemic continued to lessen during second-quarter 2021. The decrease in Hotel cost of sales, excluding depreciation, in the first six months of 2021, compared to the first six months of 2020, is primarily a result of the COVID-19 pandemic having a less significant impact in the first three months of 2020. The decrease in depreciation during the first six months of 2021, compared to the first six months of 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 (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Entertainment revenue $ 1,658 $ 289 $ 2,267 $ 4,459 Entertainment cost of sales, excluding depreciation 1,670 1,305 3,095 4,531 Depreciation 347 404 748 887 Operating loss $ (359) $ (1,420) $ (1,576) $ (959) 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 increased in second-quarter 2021, compared to second-quarter 2020, primarily reflecting an increase in the number of events hosted at ACL Live and 3TEN ACL Live as the impacts of the COVID-19 pandemic continued to lessen during second-quarter 2021. In addition, we resumed recognizing revenue from sponsorships and sales of personal seat licenses and suites in second-quarter 2021, which had been suspended during the period in which the entertainment venues were closed. Revenue from sponsorships and sales of personal seat licenses and suites in second-quarter 2021 totaled $535 thousand compared to none in second-quarter 2020. Entertainment revenues decreased in the first six months of 2021, compared to the first six months of 2020, which primarily reflects the COVID-19 pandemic having a less significant impact in the first three months of 2020. The COVID-19 pandemic also prevented a full show schedule in the first six months of 2020, with government restrictions on gatherings forcing ACL Live to close. 25 Table of Contents 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 June 30, Six Months Ended June 30, 2021 2020 2021 2020 ACL Live Events: Events hosted 26 — 54 38 Estimated attendance 10,814 — 14,230 45,446 Ticketing: Number of tickets sold 6,060 — 9,770 37,703 Gross value of tickets sold (in thousands) $ 302 $ — $ 675 $ 1,881 3TEN ACL Live Events: Events hosted 49 15 71 51 Estimated attendance 6,773 777 8,601 8,232 Ticketing: Number of tickets sold 2,225 — 2,339 5,278 Gross value of tickets sold (in thousands) $ 37 $ — $ 40 $ 126 Entertainment Cost of Sales. The increase in Entertainment cost of sales, excluding depreciation, in second-quarter 2021, compared to second-quarter 2020, reflects an increase in the number of events hosted. The decrease in Entertainment cost of sales, excluding depreciation, during the first six months of 2021, compared to the first six months of 2020, reflects a decrease in the attendance of events hosted by ACL Live as a result of reduced capacities. The decrease in depreciation for the first six months of 2021, compared to the first six months of 2020, is primarily because of an $89 thousand adjustment made for the period in December 2019 when the entertainment venues were held for sale and, therefore, not depreciated. Corporate, Eliminations and Other Corporate, eliminations and other (refer to Note 9) includes consolidated general and administrative expenses, which primarily consist of employee compensation and other costs. Consolidated general and administrative expenses increased to $6.4 million in second-quarter 2021 from $3.1 million in second-quarter 2020, primarily reflecting a $3.3 million increase in consulting, legal and public relation costs for our successful proxy contest and our ongoing REIT exploration process and a $0.2 million increase in incentive compensation costs. Second-quarter 2020 costs included $0.4 million in legal fees associated with the Block 21 sales agreements and subsequent termination. Consolidated general and administrative expenses increased to $10.9 million for the first six months of 2021 from $5.9 million for the first six months of 2020, primarily reflecting a $4.4 million increase in consulting, legal and public relation costs mostly for our successful proxy contest and our ongoing REIT exploration process. The remaining increase is primarily the result of an increase of $1.3 million in employee incentive compensation costs during the first six months of 2021 as the first six months 2020 included significant reductions to estimated incentive compensation accruals. The first six months of 2020 included $0.6 million in legal fees associated with the Block 21 sales agreements and subsequent termination. Corporate, eliminations and other also includes eliminations of intersegment transactions among the four operating segments. For the second quarter and first six months of 2020, corporate, eliminations and other includes $15.0 million in income from earnest money that was received from Ryman in May 2020 upon its termination of the agreements to purchase Block 21. Non-Operating Results Interest Expense, Net. Interest costs (before capitalized interest) totaled $4.0 million in second-quarter 2021 and $8.3 million for the first six months of 2021 compared with $4.9 million in second-quarter 2020 and $10.1 million for the first six months of 2020. Interest costs in the 2021 periods were lower, compared to the 2020 periods, primarily reflecting decreases in average interest rates. 26 Table of Contents Capitalized interest totaled $1.2 million in second-quarter 2021 and $2.5 million for the first six months of 2021 compared to $1.2 million in second-quarter 2020 and $2.5 million for the first six months of 2020. Capitalized interest is primarily related to development activities at Barton Creek. Loss on Early Extinguishment of Debt. We recorded a $163 thousand loss on early extinguishment of debt in second-quarter 2021 and $226 thousand for the first six months of 2021 associated with the repayment of The Saint Mary construction loan upon the sale of the property in first-quarter 2021 and the refinancing of the Jones Crossing construction loan in second-quarter 2021. (Provision for) Benefit from Income Taxes. We recorded a (provision for) benefit from income taxes of $(0.1) million in second-quarter 2021 and $(0.3) million for the first six months of 2021, compared to $(1.1) million in second-quarter 2020 and $1.4 million for the first six months of 2020. Refer to Note 8 for further discussion of income taxes. Total Comprehensive Loss (Income) Attributable to Noncontrolling Interests in Subsidiaries . Our partners' share of losses (income) totaled $41 thousand in second-quarter 2021 and $(6.7) million for the first six months of 2021, compared to $0.3 million in second-quarter 2020 and $1.4 million for the first six months of 2020. For the first six months of 2021, our partners were allocated $6.7 million of the gain from the sale of The Saint Mary. For the first six months of 2020, $0.6 million of the losses were 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 Six Months Ended June 30, 2021 and 2020 Operating Activities. Cash (used in) provided by operating activities totaled $(15.0) million for the first six months of 2021, compared with $5.4 million for the first six months of 2020. Expenditures for purchases and development of real estate properties totaled $4.9 million for the first six months of 2021 and $8.7 million for the first six months of 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 for the first six months of 2021 and 2020 are primarily related to the timing of property tax payments. The first six months of 2020 include $15.0 million from earnest money received as a result of Ryman's termination of the agreements to purchase Block 21. Investing Activities. Cash provided by (used in) investing activities totaled $56.5 million for the first six months of 2021 and $(5.1) million for the first six months of 2020. Capital expenditures totaled $2.4 million for the first six months of 2021, primarily related to the Lantana Place and Magnolia Place projects, and $4.4 million for the first six months of 2020, primarily related to the Kingwood Place, Lantana Place and Jones Crossing projects. During the first six months of 2021, we received proceeds, net of closing costs, from the sale of The Saint Mary of $59.5 million. We also made payments totaling $0.6 million for the first six months of 2021 and $0.7 million for the first six months of 2020 under our master lease obligations associated with the 2017 sale of The Oaks at Lakeway. Financing Activities. Cash used in financing activities totaled $38.8 million for the first six months of 2021 and $4.1 million for the first six months of 2020. During the first six months of 2021, net borrowings on the Comerica Bank credit facility totaled $2.2 million, compared with net repayments of $8.5 million for the first six months of 2020, reflecting the use of $13.8 million of the $15.0 million earnest money received from Ryman in 2020 to pay down the revolving credit facility. During the first six months of 2021, net repayments on other project and term loans totaled $26.7 million, primarily reflecting the repayment of The Saint Mary construction loan upon the sale of the project. During the first six months of 2020, net borrowings on other project and term loans totaled $5.0 million, primarily reflecting borrowings from the Paycheck Protection Program loan (PPP loan) (refer to Note 6 for further information) and borrowings for the Kingwood Place and The Saint Mary projects, partially offset by repayment of the Amarra Villas credit facility. See “Credit Facility, Other Financing Arrangements and Liquidity Outlook” below for a discussion of our outstanding debt at June 30, 2021. 27 Table of Contents During the first six months of 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 June 30, 2021, the total principal amount of our outstanding debt was $354.2 million, compared with $353.2 million at December 31, 2020. We had borrowings of $45.5 million under our $60.0 million Comerica Bank revolving credit facility, $14.3 million of which was available at June 30, 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 June 30, 2021. Our debt agreements require compliance with specified financial covenants. The Santal loan and the Magnolia Place construction loan include a requirement that we maintain liquid assets, as defined in the agreements, of not less than $7.5 million. The Jones Crossing loan includes a requirement that we maintain liquid assets, as defined in the agreement, of not less than $2 million. The New Caney land loan and The Saint June construction loan include a requirement that we maintain liquid assets, as defined in the agreements, of not less than $10 million. The Comerica Bank credit facility, the Lantana Place construction loan, the Amarra Villas credit facility, the Kingwood Place construction loan, the West Killeen Market construction loan, the New Caney land loan, The Saint June construction loan, The Santal loan and the Magnolia Place construction 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 agreements, of less than 50 percent. The Santal loan, the West Killeen Market construction loan, the Jones Crossing loan, the Lantana Place construction loan, and The Saint June 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 June 30, 2021, we were in compliance with all of our financial covenants; however, for the last three quarters of 2020 and the first two quarters 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, The Santal loan and the Jones Crossing 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 has not met the debt service coverage ratio test each quarter beginning with the June 30, 2020, test date, 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 28 Table of Contents calculated on a trailing-12-month basis, we currently expect the "Trigger Period" to continue through the end of 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 it 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 $9.1 million during the first six months of 2021, including $4.1 million in the second quarter. Based on current projections, additional contributions are expected to total $4.4 million through early 2022. As of June 30, 2021, we had $7.5 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 our Block 21 businesses will generate positive operating income in the second 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, (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, (4) that we are able to secure anticipated financing for certain development projects, and (5) that we can repay, extend or refinance debt coming due in the next 12 months, including loans at Amarra Villas, West Killeen Market and New Caney. 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 June 30, 2021 (in thousands): 2021 2022 2023 2024 2025 Thereafter Total Block 21 loan $ 1,242 $ 2,613 $ 2,765 $ 2,904 $ 3,094 $ 125,872 $ 138,490 The Santal loan — — — 75,000 — — 75,000 Comerica Bank credit facility — 45,526 — — — — 45,526 Jones Crossing loan — — — — — 24,500 24,500 New Caney land loan — 4,500 — — — — 4,500 PPP loan — 3,987 — — — — 3,987 Construction loans: Kingwood Place a — 31,989 — — — — 31,989 Lantana Place 404 827 20,700 — — — 21,931 West Killeen Market 84 6,597 — — — — 6,681 Amarra Villas credit facility — 1,580 — — — — 1,580 Total $ 1,730 $ 97,619 $ 23,465 $ 77,904 $ 3,094 $ 150,372 $ 354,184 a. We have the option to extend the maturity date for two additional 12-month periods, subject to certain debt service coverage conditions. Other than the debt transactions discussed in Note 6 and Note 10, 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. 29 Table of Contents 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, 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 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 (including the recent resurgences related to the spread of COVID-19 variants) 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 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, 30 Table of Contents 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 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. Item 3. Quantitative and Qualitative Disclosures About Market Risk . Not applicable.