STRATUS PROPERTIES INC 10-Q

Item 1. Financial Statements . STRATUS PROPERTIES INC. CONSOLIDATED BALANCE SHEETS (Unaudited) (In Thousands) March 31, 2022 December 31, 2021 ASSETS Cash and cash equivalents $ 12,273 $ 24,229 Restricted cash 10,859 18,294 Real estate held for sale 1,773 1,773 Real estate under development 206,191 181,224 Land available for development 34,816 40,659 Real estate held for investment, net 89,760 90,284 Lease right-of-use assets 10,460 10,487 Deferred tax assets 4,843 6,009 Other assets 22,621 17,214 Assets held for sale - discontinued operations 151,172 151,053 Total assets $ 544,768 $ 541,226 LIABILITIES AND EQUITY Liabilities: Accounts payable $ 14,573 $ 14,118 Accrued liabilities, including taxes 19,682 22,069 Debt 121,446 106,648 Lease liabilities 14,135 13,986 Deferred gain 4,274 4,801 Other liabilities 10,381 17,894 Liabilities held for sale - discontinued operations 149,717 153,097 Total liabilities 334,208 332,613 Commitments and contingencies Equity: Stockholders’ equity: Common stock 94 94 Capital in excess of par value of common stock 188,971 188,759 Accumulated deficit ( 6,691 ) ( 8,963 ) Common stock held in treasury ( 22,205 ) ( 21,753 ) Total stockholders’ equity 160,169 158,137 Noncontrolling interests in subsidiaries 50,391 50,476 Total equity 210,560 208,613 Total liabilities and equity $ 544,768 $ 541,226 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 INCOME (Unaudited) (In Thousands, Except Per Share Amounts) Three Months Ended March 31, 2022 2021 Revenues: Real estate operations $ 19 $ 6,556 Leasing operations 3,080 4,818 Total revenues 3,099 11,374 Cost of sales: Real estate operations 1,366 4,360 Leasing operations 984 2,052 Depreciation 873 1,586 Total cost of sales 3,223 7,998 General and administrative expenses 3,167 4,324 Gain on sale of assets ( 4,812 ) ( 22,931 ) Total 1,578 ( 10,609 ) Operating income 1,521 21,983 Interest expense, net ( 15 ) ( 1,056 ) Loss on extinguishment of debt — ( 63 ) Other income, net 6 3 Income before income taxes and equity in unconsolidated affiliates' loss 1,512 20,867 Benefit from (provision for) income taxes 302 ( 2,691 ) Equity in unconsolidated affiliates' loss ( 2 ) ( 2 ) Net income from continuing operations 1,812 18,174 Net income (loss) from discontinued operations 375 ( 2,508 ) Net income and total comprehensive income 2,187 15,666 Total comprehensive loss (income) attributable to noncontrolling interests 85 ( 6,722 ) Net income and total comprehensive income attributable to common stockholders $ 2,272 $ 8,944 Basic net income (loss) per share attributable to common stockholders: Continuing operations $ 0.23 $ 1.39 Discontinued operations 0.05 ( 0.30 ) $ 0.28 $ 1.09 Diluted net income (loss) per share attributable to common stockholders: Continuing operations $ 0.23 $ 1.38 Discontinued operations 0.04 ( 0.30 ) $ 0.27 $ 1.08 Weighted-average shares of common stock outstanding: Basic 8,251 8,223 Diluted 8,355 8,273 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) Three Months Ended March 31, 2022 2021 Cash flow from operating activities: Net income $ 2,187 $ 15,666 Adjustments to reconcile net income to net cash used in operating activities: Depreciation 873 3,002 Cost of real estate sold — 3,112 Gain on sale of assets ( 4,812 ) ( 22,931 ) Loss on extinguishment of debt — 63 Debt issuance cost amortization and stock-based compensation 515 529 Equity in unconsolidated affiliates' loss 2 2 Deferred income taxes 1,167 — Purchases and development of real estate properties ( 4,864 ) ( 2,489 ) (Increase) decrease in other assets ( 5,559 ) 238 Decrease in accounts payable, accrued liabilities and other ( 7,629 ) ( 7,563 ) Net cash used in operating activities ( 18,120 ) ( 10,371 ) Cash flow from investing activities: Capital expenditures ( 14,724 ) ( 1,009 ) Proceeds from sale of assets — 59,488 Payments on master lease obligations ( 182 ) ( 270 ) Other, net — ( 5 ) Net cash (used in) provided by investing activities ( 14,906 ) 58,204 Cash flow from financing activities: Borrowings from credit facility 10,000 17,000 Payments on credit facility — ( 26,227 ) Borrowings from project loans 5,111 458 Payments on project and term loans ( 1,172 ) ( 28,708 ) Stock-based awards net payments ( 452 ) ( 157 ) Distributions to noncontrolling interests — ( 13,087 ) Financing costs ( 17 ) ( 53 ) Net cash provided by (used in) financing activities 13,470 ( 50,774 ) Net decrease in cash, cash equivalents and restricted cash ( 19,556 ) ( 2,941 ) Cash, cash equivalents and restricted cash at beginning of year 70,139 34,183 Cash, cash equivalents and restricted cash at end of period $ 50,583 $ 31,242 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) 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, 2021 9,388 $ 94 $ 188,759 $ ( 8,963 ) 1,143 $ ( 21,753 ) $ 158,137 $ 50,476 $ 208,613 Exercised and vested stock-based awards 39 — — — — — — — — Stock-based compensation — — 212 — — — 212 — 212 Tender of shares for stock-based awards — — — — 11 ( 452 ) ( 452 ) — ( 452 ) Total comprehensive income (loss) — — — 2,272 — — 2,272 ( 85 ) 2,187 Balance at March 31, 2022 9,427 $ 94 $ 188,971 $ ( 6,691 ) 1,154 $ ( 22,205 ) $ 160,169 $ 50,391 $ 210,560 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 — — 182 — — — 182 — 182 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 income — — — 8,944 — — 8,944 6,722 15,666 Balance at March 31, 2021 9,377 $ 94 $ 188,121 $ ( 57,413 ) 1,143 $ ( 21,753 ) $ 109,049 $ 4,485 $ 113,534 The accompanying Notes to Consolidated Financial Statements (Unaudited) are an integral part of these consolidated financial statements. 5 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, 2021, included in Stratus Properties Inc.’s (Stratus) Annual Report on Form 10-K for the year ended December 31, 2021 (Stratus 2021 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 first quarter of 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. Refer to Note 4 for a discussion of Stratus' discontinued operations. Related Party Transactions. During the first quarter of 2022, Stratus had an arrangement with Whitefish Partners, LLC (Whitefish Partners), formerly known as Austin Retail Partners, LLC, for services provided by a consultant of Whitefish Partners who is the son of Stratus' President and Chief Executive Officer. Payments to Whitefish Partners for the consultant's consulting services and expense reimbursements totaled $ 173 thousand in first-quarter 2022 and $ 37 thousand in first-quarter 2021. The first quarter of 2022 included a cash payment under Stratus’ Profit Participation Incentive Plan (PPIP). As of March 31, 2022, the consultant has one outstanding award under the PPIP. In addition, during first-quarter 2022, the Compensation Committee of Stratus' Board of Directors (the Compensation Committee) approved an award to be granted to the consultant under the PPIP related to another development project. Refer to Note 7 for discussion of the PPIP. In April 2022, Stratus hired the consultant as an employee at the same annual salary as his compensation under the contract with Whitefish Partners. As an employee, he is eligible for the same health and retirement benefits provided to all Stratus employees. 2. EARNINGS PER SHARE Stratus’ basic net income per share of common stock was calculated by dividing the net income attributable to common stockholders by the weighted-average shares of common stock outstanding during the period. A reconciliation of net income and weighted-average shares of common stock outstanding for purposes of calculating diluted net income per share (in thousands, except per share amounts) follows: Three Months Ended March 31, 2022 2021 Income from continuing operations $ 1,812 $ 18,174 Net income (loss) from discontinued operations 375 ( 2,508 ) Net income 2,187 15,666 Net loss (income) attributable to noncontrolling interests in subsidiaries 85 ( 6,722 ) Net income attributable to Stratus common stockholders $ 2,272 $ 8,944 Basic weighted-average shares of common stock outstanding 8,251 8,223 Add shares issuable upon exercise or vesting of dilutive stock options and restricted stock units (RSUs) a 104 50 Diluted weighted-average shares of common stock outstanding 8,355 8,273 Basic net income (loss) per share attributable to common stockholders Continuing operations $ 0.23 $ 1.39 Discontinued operations 0.05 ( 0.30 ) $ 0.28 $ 1.09 Diluted net income (loss) per share attributable to common stockholders Continuing operations $ 0.23 $ 1.38 Discontinued operations 0.04 ( 0.30 ) $ 0.27 $ 1.08 a. Excludes 4 thousand shares of common stock for the three months ended March 31, 2022, and 16 thousand shares of common stock for the three months ended March 31, 2021, associated with RSUs that were anti-dilutive. 6 Table of Contents 3. LIMITED PARTNERSHIPS Stratus, through its subsidiaries, is a partner in the following limited partnerships: The Saint George Apartments, L.P., Stratus Block 150, L.P., The Saint June, L.P., Stratus Kingwood Place, L.P. and The Saint Mary, L.P. For additional information regarding Stratus' partnerships, refer to Note 2 in the Stratus 2021 Form 10-K. Stratus Block 150, L.P. In the first quarter of 2022, pursuant to the limited partnership agreement, wholly owned subsidiaries of Stratus contributed an additional $ 1.4 million in cash to Stratus Block 150, L.P. No additional capital contributions are required to be made by the partners. As of March 31, 2022, Stratus holds, in the aggregate, a 31.0 percent indirect controlling equity interest in Stratus Block 150, L.P. As of March 31, 2022, JBM Trust, a related party to Stratus, holds a 5.9 percent equity interest in Stratus Block 150, L.P. For additional information regarding Stratus' related parties, including JBM Trust, refer to Notes 1 and 2 in the Stratus 2021 Form 10-K. Accounting for Limited Partnerships. Stratus has performed evaluations and concluded that The Saint George Apartments, L.P., Stratus Block 150, L.P., The Saint June, L.P., Stratus Kingwood, L.P. and The Saint Mary, L.P. are variable interest entities and that Stratus is the primary beneficiary. Accordingly, the partnerships’ results are consolidated in Stratus’ financial statements. Stratus will continue to evaluate which entity is the primary beneficiary of these partnerships in accordance with applicable accounting guidance. Stratus’ consolidated balance sheets include the following assets and liabilities of the partnerships (in thousands): March 31, 2022 December 31, 2021 Assets: Cash and cash equivalents $ 8,504 $ 7,432 Restricted cash 5,170 11,809 Real estate under development 72,776 62,692 Land available for development 7,702 7,641 Real estate held for investment 31,417 31,399 Other assets 3,159 3,160 Total assets 128,728 124,133 Liabilities: Accounts payable and accrued liabilities 9,894 6,661 Debt 46,334 46,096 Total liabilities 56,228 52,757 Net assets $ 72,500 $ 71,376 4. ASSET SALES Block 21 Pending Sale - Discontinued Operations. Block 21 is Stratus’ wholly owned mixed-use real estate property in downtown Austin, Texas. Block 21 contains the 251 -room W Austin Hotel and is home to Austin City Limits Live at the Moody Theater, a 2,750 -seat entertainment venue that serves as the location for the filming of Austin City Limits, the longest running music series in American television history. Block 21 also includes Class A office space, retail space and the 3TEN ACL Live entertainment venue and business. In December 2019, Stratus announced that it had agreed to sell Block 21 to Ryman Hospitality Properties, Inc. (Ryman) for $ 275.0 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 sell Block 21 and authorizing the release of Ryman’s $ 15.0 million in earnest money to Stratus, which Stratus recorded as operating income in 2020. In October 2021, Stratus entered into new agreements to sell Block 21 to Ryman for $ 260.0 million. The purchase price includes Ryman’s assumption of approximately $ 137 million of existing Block 21 mortgage debt and is subject to an expected downward adjustment of $ 5.0 million. The remainder of the purchase price will be paid in cash. The transaction is expected to close prior to June 1, 2022, but remains subject to the timely satisfaction or waiver of various closing conditions, including the consent of the loan servicer to the purchaser’s assumption of the existing mortgage loan; the consent of the hotel operator, an affiliate of Marriott, to the purchaser’s assumption of the hotel operating agreement; the absence of a material adverse effect; and other customary closing conditions. The Block 21 purchase agreement will terminate if all conditions to closing are not satisfied or waived by the parties. Ryman has deposited $ 5.0 million in earnest money to secure its performance under the agreements governing the sale. Of the total purchase price, $ 6.9 million will be held in escrow for 12 months after the closing, subject to a longer retention period with respect to any required reserve for pending claims. 7 Table of Contents In accordance with accounting guidance, Stratus reported the results of operations of Block 21 as discontinued operations in the consolidated statements of comprehensive income because the disposal represents a strategic shift that had a major effect on operations, and presented the assets and liabilities of Block 21 as held for sale - discontinued operations in the consolidated balance sheets for all periods presented. Block 21 did not have any other comprehensive income and Stratus' consolidated statements of cash flows are reported on a combined basis without separately presenting discontinued operations. The carrying amounts of Block 21's major classes of assets and liabilities in the consolidated balance sheets follow (in thousands): March 31, 2022 December 31, 2021 Assets: Cash and cash equivalents $ 9,509 $ 9,172 Restricted cash a 17,942 18,444 Real estate held for investment, net 120,634 120,452 Other assets 3,087 2,985 Total assets $ 151,172 $ 151,053 Liabilities: Accounts payable and accrued liabilities, including taxes $ 4,268 $ 6,200 Debt b 136,054 136,684 Other liabilities 9,395 10,213 Total liabilities $ 149,717 $ 153,097 a. Most restricted cash would be received by Ryman upon the closing of the sale. b. In 2016, Stratus completed the refinancing of the W Austin Hotel & Residences. Goldman Sachs Mortgage Company provided a $ 150.0 million, ten-year, non-recourse term loan with a fixed interest rate of 5.58 percent per annum and payable monthly based on a 30-year amortization. Balances include net reductions for unamortized debt issuance costs of $ 0.5 million at March 31, 2022, and $ 0.6 million at December 31, 2021. Block 21’s results of operations in the consolidated statements of comprehensive income consists of the following (in thousands): Three Months Ended March 31, 2022 2021 Revenues: a Hotel $ 5,871 $ 2,118 Entertainment 5,340 608 Leasing operations and other 726 414 Total revenue 11,937 3,140 Cost of sales: Hotel 4,743 2,901 Entertainment 4,139 1,279 Leasing operations and other 471 337 Depreciation — b 1,416 Total cost of sales 9,353 5,933 General and administrative expenses 100 220 Operating income (loss) 2,484 ( 3,013 ) Interest expense, net ( 1,945 ) ( 1,979 ) (Provision for) benefit from income taxes ( 164 ) 2,484 Net income (loss) $ 375 $ ( 2,508 ) a. In accordance with accounting guidance, amounts are net of eliminations of intercompany sales totaling $ 321 thousand in first-quarter 2022 and $ 262 thousand in first-quarter 2021. b. In accordance with accounting guidance, depreciation is not recognized subsequent to classification as assets held for sale, which occurred in the fourth quarter of 2021. Capital expenditures associated with discontinued operations totaled $ 182 thousand in first-quarter 2022 and $ 107 thousand in first-quarter 2021. 8 Table of Contents The Oaks at Lakeway. In 2017, Stratus sold The Oaks at Lakeway to FHF I Oaks at Lakeway, LLC for $ 114.0 million in cash. The Oaks at Lakeway is an H-E-B, L.P.-anchored retail project located in Lakeway, Texas. The parties entered into three master lease agreements at closing: (1) one covering unleased in-line retail space, with a 5 -year term (the In-line Master Lease), (2) one covering the hotel pad with a 99 -year term (the Hotel Master Lease) and (3) one covering four unleased pad sites, three of which have 10 -year terms, and one of which has a 15 -year term (the Pad Site Master Lease). For additional information, refer to Note 9 in the Stratus 2021 Form 10-K under the heading “Deferred Gain on Sale of The Oaks at Lakeway.” The In-Line Master Lease expired in February 2022 and the Hotel Master Lease was terminated in November 2020. As such, Stratus has no further obligations under these two master leases. With respect to the Pad Site Master Lease, Stratus has leased the one pad site with a 15-year term, reducing the monthly rent payment net of rent collections for this pad site to approximately $ 2,500 . Stratus may assign this lease to the purchaser and terminate the obligation under the Pad Site Master Lease for this pad site with a payment of $ 560,000 to the purchaser. The lease term for the remaining three unleased pad sites under the Pad Site Master Lease expires in February 2027. To the extent leases are executed for the remaining three unleased pad sites, tenants open for business, and the leases are then assigned to the purchaser, the master lease obligation could be reduced further. In the first quarter of 2022, Stratus reassessed its plans with respect to construction of the remaining buildings on the three remaining unleased pad sites and determined that, rather than execute leases and build the buildings, it is less costly to continue to pay the monthly rent (approximately $ 77 thousand per month) pursuant to the Pad Site Master Lease until the lease expires in February 2027. In connection with this determination, Stratus reversed an accrual of costs to lease and construct these buildings, resulting in recognition of an additional $ 4.8 million of gain in first-quarter 2022. A contract liability of $ 4.3 million is presented as a deferred gain in the consolidated balance sheets at March 31, 2022, compared with $ 4.8 million at December 31, 2021. The reduction in the deferred gain balance primarily reflects master lease payments. The remaining deferred gain balance is expected to be reduced primarily by future master lease payments. 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. In first-quarter 2021, 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 pre-tax gain on the sale of $ 22.9 million ($ 16.2 million net of noncontrolling interests) in first-quarter 2021. Stratus also recognized a $ 63 thousand loss on extinguishment of debt in first-quarter 2021 related to the repayment of The Saint Mary construction loan. The Saint Mary had rental revenue of $ 0.1 million in first-quarter 2021 prior to the sale. Interest expense, net of capitalized amounts, related to The Saint Mary construction loan was less than $ 0.1 million in first-quarter 2021. Kingwood Place Pending Land Sale. In September 2021, Stratus entered into a contract to sell the multi-family tract of land at Kingwood Place, which was planned for approximately 275 multi-family units, for $ 5.5 million. The sale, if consummated, is expected to close by mid-2022. 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): March 31, 2022 December 31, 2021 Carrying Value Fair Value Carrying Value Fair Value Liabilities: Debt $ 121,446 $ 122,747 $ 106,648 $ 108,091 9 Table of Contents 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. 6. DEBT The components of Stratus' debt follow (in thousands): March 31, 2022 December 31, 2021 Comerica Bank credit facility $ 10,000 $ — Jones Crossing loan 24,067 24,042 The Annie B land loan 13,877 13,847 New Caney land loan 4,262 4,496 Paycheck Protection Program loan 38 156 Construction loans: Kingwood Place 32,457 32,249 Lantana Place 21,997 22,098 Magnolia Place 6,542 2,077 West Killeen Market 6,040 6,078 Amarra Villas credit facility 2,166 1,605 Total debt a $ 121,446 $ 106,648 a. Includes net reductions for unamortized debt issuance costs of $ 1.1 million at March 31, 2022, and $ 1.2 million at December 31, 2021. Total debt does not include debt associated with Block 21, which is reflected in liabilities held for sale. Refer to Note 4 for further discussion. Comerica Bank credit facility. As of March 31, 2022, Stratus had $ 49.7 million available under its $ 60.0 million Comerica Bank credit facility, with letters of credit totaling $ 347 thousand committed against the credit facility. In April 2022, Stratus borrowed $ 20.0 million on the credit facility, of which the majority of the funds were used to make a U.S. Federal tax payment for Stratus’ 2021 tax liability. In May 2022, Stratus and Comerica Bank entered into an amendment to extend the maturity date of the Comerica Bank credit facility from September 27, 2022, to December 26, 2022, increase the letter of credit sublimit from $ 7.5 million to $ 11.5 million and change the benchmark rate from the London Interbank Offered Rate (LIBOR) to the Bloomberg Short-Term Bank Yield Index (BSBY) Rate. Advances under the credit facility now bear interest at the one-month BSBY Rate (with a floor of 0.0 percent) plus 4.0 percent. New Caney land loan. In March 2022, Stratus extended the maturity of the loan for an additional 12 months to March 8, 2023, which required a principal payment of $ 0.2 million and will require a second principal payment of $ 0.2 million in September 2022. Stratus also entered into an amendment to the New Caney land loan to convert the benchmark rate from LIBOR to the Secured Overnight Financing Rate (SOFR). The loan now bears interest at SOFR plus 3.0 percent, subject to the applicable margin adjustment. 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, which was signed into law on March 27, 2020. The PPP loan matured and the remaining balance was repaid by Stratus on April 15, 2022. Of the original loan amount, $ 3.7 million was forgiven in August 2021. Lantana Place construction loan. In January 2022, Stratus entered into an amendment to the Lantana Place construction loan to extend the date through which Stratus can request advances under the loan through December 31, 2022. Amarra Villas credit facility. In March 2022, Stratus subsidiaries and Comerica Bank agreed to an extension of the maturity date to June 19, 2022, while they negotiate a modification of this facility. For additional information regarding Stratus' debt, refer to Note 6 in the Stratus 2021 Form 10-K. Interest Expense and Capitalization. Interest costs (before capitalized interest) totaled $ 1.1 million in first-quarter 2022 and $ 2.3 million in first-quarter 2021. Stratus' capitalized interest totaled $ 1.1 million in first-quarter 2022 and $ 1.3 million in first-quarter 2021. Capitalized interest is primarily related to development activities at Barton Creek, The Annie B, The Saint George and Magnolia Place. 10 Table of Contents 7. PROFIT PARTICIPATION INCENTIVE PLAN In July 2018, the Compensation Committee unanimously adopted the PPIP, which provides participants with economic incentives tied to the success of the development projects designated by the Compensation Committee as approved projects under the PPIP. 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. During the first quarter of 2022, the Compensation Committee designated The Saint June as an approved project under the PPIP although no awards for this project were granted as of March 31, 2022. Refer to Note 8 of the Stratus 2021 Form 10-K for further discussion. The sale of The Saint Mary in January 2021 was a capital transaction under the PPIP. During February 2022, $ 2.1 million was paid in cash to eligible participants. In September 2021, Lantana Place reached a valuation event under the PPIP. The profit pool was $ 3.9 million, of which $ 0.2 million was paid in cash during February 2022. The remaining accrued liability under the PPIP related to Lantana Place totaled $ 3.7 million at March 31, 2022, and is expected to be settled in RSUs awarded to eligible participants in the first half of 2022. The sale of The Santal in December 2021 was a capital transaction under the PPIP. During February 2022, $ 5.0 million was paid in cash to eligible participants, subject to the PPIP’s limits on cash compensation paid to certain officers. Amounts due under the PPIP above the limits are converted to an equivalent number of RSUs with a one-year vesting period. The remaining accrued liability under the PPIP related to The Santal totaled $ 1.7 million at March 31, 2022, and is expected to be settled in RSUs awarded to eligible participants in the first half of 2022. A summary of PPIP costs follows (in thousands): Three Months Ended March 31, 2022 2021 Charged to general and administrative expense $ 15 $ 495 Capitalized to project development costs 51 224 Total PPIP costs $ 66 $ 719 The accrued liability for the PPIP totaled $ 7.9 million at March 31, 2022, and $ 15.2 million at December 31, 2021 (included in other liabilities). 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 2021 Form 10-K. Stratus had deferred tax assets (net of deferred tax liabilities) totaling $ 11.3 million at March 31, 2022 and $ 12.4 million at December 31, 2021. Stratus' deferred tax assets had valuation allowances totaling $ 6.5 million at March 31, 2022, and $ 6.4 million at December 31, 2021. Management has concluded that the pending sale of Block 21 is sufficient positive evidence to support the ability to realize certain deferred tax assets expected to be realized from the sale, which resulted in Stratus recording a $ 4.2 million non-cash tax credit in the fourth quarter of 2021 to reduce the related valuation allowance. Stratus continues to maintain a valuation allowance on its remaining deferred tax assets. In evaluating the recoverability of the remaining deferred tax assets, management considered available positive and negative evidence, giving greater weight to the 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. 11 Table of Contents The difference between Stratus' consolidated effective income tax rate of ( 20 ) percent in first-quarter 2022 and the U.S. Federal statutory income tax rate of 21 percent was primarily attributable to the release of a reserve on uncertain tax positions related to the 2015 through 2017 U.S. Federal tax audit, which was closed in the first quarter of 2022. The difference between Stratus' consolidated effective income tax rate of 13 percent in first-quarter 2021 and the U.S. Federal statutory income tax rate of 21 percent was primarily attributable to noncontrolling interests in subsidiaries, the presence of a full valuation allowance against certain U.S. Federal deferred tax assets as of March 31, 2021, and the Texas state margin tax. 9. BUSINESS SEGMENTS As a result of the pending sale of Block 21, Stratus has two operating segments: Real Estate Operations and Leasing Operations. Block 21, which encompassed Stratus’ hotel and entertainment segments, along with some leasing operations, is reflected as discontinued operations. 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; the Lantana community, including a portion of Lantana Place planned for a multi-family phase now known as The Saint Julia, and the land for The Saint George and The Annie B); 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 (one vacant pad site at West Killeen Market); and in Magnolia, Texas (Magnolia Place), Kingwood, Texas (land for future multi-family development, for which a sale is pending, and a vacant pad site) 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 West Killeen Market, Lantana Place, Kingwood Place and the completed portion of Jones Crossing. The segment also included The Saint Mary until its sale in January 2021 and The Santal until its sale in December 2021. 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 March 31, 2022 2021 Real Estate Operations: Developed property sales $ — $ 4,040 Undeveloped property sales — 2,500 Commissions and other 19 16 19 6,556 Leasing Operations: Rental revenue 3,080 4,818 3,080 4,818 Total revenues from contracts with customers $ 3,099 $ 11,374 12 Table of Contents 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 Corporate, Eliminations and Other b Total Three Months Ended March 31, 2022: Revenues: Unaffiliated customers $ 19 $ 3,080 $ — $ 3,099 Intersegment 4 — ( 4 ) — Cost of sales, excluding depreciation 1,366 984 — 2,350 Depreciation 25 852 ( 4 ) 873 General and administrative expenses — — 3,167 c 3,167 Gain on sale of assets — ( 4,812 ) d — ( 4,812 ) Operating (loss) income $ ( 1,368 ) $ 6,056 $ ( 3,167 ) $ 1,521 Capital expenditures and purchases and development of real estate properties $ 4,864 $ 14,542 $ 182 $ 19,588 Total assets at March 31, 2022 254,212 106,652 183,904 e 544,768 Three Months Ended March 31, 2021: Revenues: Unaffiliated customers $ 6,556 $ 4,818 $ — $ 11,374 Intersegment 4 — ( 4 ) — Cost of sales, excluding depreciation 4,360 2,052 — 6,412 Depreciation 64 1,544 ( 22 ) 1,586 General and administrative expenses — — 4,324 4,324 Gain on sale of assets — ( 22,931 ) f — ( 22,931 ) Operating income (loss) $ 2,136 $ 24,153 $ ( 4,306 ) $ 21,983 Capital expenditures and purchases and development of real estate properties $ 2,489 $ 902 $ 107 $ 3,498 Total assets at March 31, 2021 161,488 180,758 g 159,625 e 501,871 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 decrease in first-quarter 2022, compared to first-quarter 2021, is primarily the result of $ 0.8 million incurred in first-quarter 2021 for consulting, legal and public relation costs for Stratus' successful proxy contest and the real estate investment trust exploration process as well as a $ 0.5 million decrease in employee incentive compensation costs associated with the PPIP. d. Represents a gain recognized on the reversal of accruals for costs to lease and construct buildings under a master lease arrangement that Stratus entered into in connection with its sale of The Oaks at Lakeway in 2017. e. Includes assets held for sale associated with discontinued operations at Block 21, which totaled $ 151.2 million at March 31, 2022, and $ 140.5 million at March 31, 2021. f. Represents the gain on the January 2021 sale of The Saint Mary. g. Includes $ 68.5 million of assets held for sale related to The Santal, which was sold in the fourth quarter of 2021. 10. SUBSEQUENT EVENTS Stratus evaluated events after March 31, 2022, 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. 13 Table of Contents