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Item 1. Financial Statements

2022-08-15 compared with 2022-05-16 · 213 added, 137 removed, 303 unchanged (54% of the section changed)

28 unchanged sentences

Capital in excess of par value of common stock 194,610 188,759

Accumulated deficit ( 6,691 ) ( 8,963 )

Retained earnings (accumulated deficit) 89,930 ( 8,963 )

Common stock held in treasury ( 22,205 ) ( 21,753 )

5 unchanged sentences

STRATUS PROPERTIES INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)

(In Thousands, Except Per Share Amounts)

Three Months Ended

Three Months Ended Six Months Ended

June 30, June 30,

2022 2021 2022 2021

Real estate operations $ 7,925 $ 768 $ 7,944 $ 7,324

9 unchanged sentences

Total 10,630 11,511 12,208 902

Operating income 1,521 21,983

Operating income (loss) 495 ( 5,880 ) 2,016 16,103

Interest expense, net — ( 779 ) ( 15 ) ( 1,835 )

1 unchanged sentence

Other income, net 80 1 86 4

Income before income taxes and equity in unconsolidated affiliates' loss

Benefit from (provision for) income taxes 302 ( 2,691 )

Income (loss) before income taxes and equity in unconsolidated affiliates' loss 575 ( 6,821 ) 2,087 14,046

(Provision for) benefit from income taxes ( 41 ) 2,522 261 ( 169 )

Equity in unconsolidated affiliates' loss ( 2 ) ( 7 ) ( 4 ) ( 9 )

Net income from continuing operations

Net income (loss) from continuing operations 532 ( 4,306 ) 2,344 13,868

Net income (loss) from discontinued operations 95,925 ( 5,898 ) 96,300 ( 8,406 )

375 ( 2,508 )

Net income and total comprehensive income

Net income (loss) and total comprehensive income (loss) 96,457 ( 10,204 ) 98,644 5,462

Total comprehensive loss (income) attributable to noncontrolling interests 164 41 249 ( 6,681 )

Net income and total comprehensive income attributable to common stockholders

$ 2,272 $ 8,944

Net income (loss) and total comprehensive income (loss) attributable to common stockholders $ 96,621 $ ( 10,163 ) $ 98,893 $ ( 1,219 )

Basic net income (loss) per share attributable to common stockholders:

9 unchanged sentences

Weighted-average shares of common stock outstanding:

8,273 8,235 8,262 8,229

Diluted 8,383 8,235 8,369 8,229

3 unchanged sentences

(In Thousands)

Three Months Ended

Six Months Ended

Cash flow from operating activities:

3 unchanged sentences

Cost of real estate sold 3,599 3,341

Gain on sale of discontinued operations ( 119,695 ) —

Gain on sale of assets ( 4,812 ) ( 22,931 )

4 unchanged sentences

Purchases and development of real estate properties ( 12,091 ) ( 4,879 )

(Increase) decrease in other assets ( 5,559 ) 238

Decrease (increase) in other assets 3,112 ( 1,309 )

Decrease in accounts payable, accrued liabilities and other ( 21,098 ) ( 1,804 )

1 unchanged sentence

Cash flow from investing activities:

Capital expenditures ( 14,724 ) ( 1,009 )

Proceeds from sale of discontinued operations 105,813 —

Proceeds from sale of assets — 59,488

Capital expenditures ( 27,575 ) ( 2,378 )

Payments on master lease obligations ( 418 ) ( 643 )

Other, net — 37

Net cash (used in) provided by investing activities ( 14,906 ) 58,204

Net cash provided by investing activities 77,820 56,504

Cash flow from financing activities:

7 unchanged sentences

Net cash provided by (used in) financing activities 6,216 ( 38,813 )

Net decrease in cash, cash equivalents and restricted cash ( 19,556 ) ( 2,941 )

Net increase in cash, cash equivalents and restricted cash 40,395 2,701

Cash, cash equivalents and restricted cash at beginning of year 70,139 34,183

4 unchanged sentences

(In Thousands)

THREE MONTHS ENDED JUNE 30

Stockholders’ Equity

Held in Treasury Total

Common Stock Capital in Excess of Par Value Accum-ulated Deficit Noncontrolling Interests in Subsidiaries

Common Stock Capital in Excess of Par Value Retained Earnings (Accumulated Deficit) Noncontrolling Interests in Subsidiaries

of Shares At Par

Balance at March 31, 2022 9,427 $ 94 $ 188,971 $ ( 6,691 ) 1,154 $ ( 22,205 ) $ 160,169 $ 50,391 $ 210,560

Stock-based compensation — — 347 — — — 347 — 347

Grant of restricted stock units (RSUs) under the Profit Participation Incentive Plan (PPIP) — — 5,292 — — — 5,292 — 5,292

Total comprehensive income (loss) — — — 96,621 — — 96,621 ( 164 ) 96,457

Balance at June 30, 2022 9,427 $ 94 $ 194,610 $ 89,930 1,154 $ ( 22,205 ) $ 262,429 $ 50,227 $ 312,656

Balance at March 31, 2021 9,377 $ 94 $ 188,121 $ ( 57,413 ) 1,143 $ ( 21,753 ) $ 109,049 $ 4,485 $ 113,534

Stock-based compensation — — 202 — — — 202 — 202

Total comprehensive loss — — — ( 10,163 ) — — ( 10,163 ) ( 41 ) ( 10,204 )

Balance at June 30, 2021 9,377 $ 94 $ 188,323 $ ( 67,576 ) 1,143 $ ( 21,753 ) $ 99,088 $ 4,444 $ 103,532

STRATUS PROPERTIES INC.

CONSOLIDATED STATEMENTS OF EQUITY (Unaudited) (Continued)

(In Thousands)

SIX MONTHS ENDED JUNE 30

Stockholders’ Equity

Held in Treasury Total

Common Stock Capital in Excess of Par Value Retained Earnings (Accumulated Deficit) Noncontrolling Interests in Subsidiaries

of Shares At Par

Balance at December 31, 2021 9,388 $ 94 $ 188,759 $ ( 8,963 ) 1,143 $ ( 21,753 ) $ 158,137 $ 50,476 $ 208,613

1 unchanged sentence

Stock-based compensation — — 559 — — — 559 — 559

Grant of RSUs under the PPIP — — 5,292 — — — 5,292 — 5,292

Tender of shares for stock-based awards

1 unchanged sentence

Total comprehensive income (loss) — — — 98,893 — — 98,893 ( 249 ) 98,644

Balance at March 31, 2022 9,427 $ 94 $ 188,971 $ ( 6,691 ) 1,154 $ ( 22,205 ) $ 160,169 $ 50,391 $ 210,560

Balance at June 30, 2022 9,427 $ 94 $ 194,610 $ 89,930 1,154 $ ( 22,205 ) $ 262,429 $ 50,227 $ 312,656

Balance at December 31, 2020 9,358 $ 94 $ 186,777 $ ( 66,357 ) 1,137 $ ( 21,600 ) $ 98,914 $ 10,850 $ 109,764

1 unchanged sentence

Stock-based compensation — — 384 — — — 384 — 384

Grant of restricted stock units under the Profit Participation Incentive Plan — — 1,162 — — — 1,162 — 1,162

Grant of RSUs under the PPIP — — 1,162 — — — 1,162 — 1,162

Tender of shares for stock-based awards

2 unchanged sentences

— — — — — — — ( 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

Total comprehensive (loss) income — — — ( 1,219 ) — — ( 1,219 ) 6,681 5,462

Balance at June 30, 2021 9,377 $ 94 $ 188,323 $ ( 67,576 ) 1,143 $ ( 21,753 ) $ 99,088 $ 4,444 $ 103,532

The accompanying Notes to Consolidated Financial Statements (Unaudited) are an integral part of these consolidated financial statements.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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 unaudited consolidated financial statements and the accompanying notes are prepared in accordance with generally accepted accounting principles (GAAP) in the United States (U.S.) 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 U.S.

Securities and Exchange Commission on March 31, 2022.

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.

The results of operations for any interim period are not necessarily indicative of the results of operations for any other future interim period or for a full fiscal year.

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.

Through 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.

In April 2022, Stratus hired the consultant as an employee at an annual salary of $ 100 thousand.

As an employee, he is eligible for the same health and retirement benefits provided to all Stratus employees and is also eligible for annual incentive awards and for awards under Stratus’ Profit Participation Incentive Plan (PPIP).

In the first half of 2022, he received $ 20 thousand as an annual incentive award for 2021 and a $ 135 thousand cash payment under the PPIP.

As of June 30, 2022, the employee has one outstanding award under the PPIP.

In addition, during first-quarter 2022, the Compensation Committee (Compensation Committee) of Stratus' Board of Directors (Board) approved an award to be granted to the employee under the PPIP related to another development project, which was granted in August 2022.

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.

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

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

Stratus’ basic net income (loss) per share of common stock was calculated by dividing the net income (loss) 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 (loss) per share (in thousands, except per share amounts) follows:

Three Months Ended Six Months Ended

June 30, June 30,

2022 2021 2022 2021

Net income (loss) from continuing operations $ 532 $ ( 4,306 ) $ 2,344 $ 13,868

Net income (loss) from discontinued operations 95,925 ( 5,898 ) 96,300 ( 8,406 )

Net income (loss) and total comprehensive income (loss) 96,457 ( 10,204 ) 98,644 5,462

Total comprehensive loss (income) attributable to noncontrolling interests 164 41 249 ( 6,681 )

Net income (loss) and total comprehensive income (loss) attributable to common stockholders $ 96,621 $ ( 10,163 ) $ 98,893 $ ( 1,219 )

Basic weighted-average shares of common stock outstanding

Add shares issuable upon exercise or vesting of dilutive stock options and restricted stock units (RSUs) a

8,273 8,235 8,262 8,229

Add shares issuable upon vesting of dilutive restricted stock units (RSUs)

Diluted weighted-average shares of common stock outstanding

8,383 8,235 8,369 8,229

Basic net income (loss) per share attributable to common stockholders:

6 unchanged sentences

$ 11.53 $ ( 1.23 ) $ 11.82 $ ( 0.15 )

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.

Excludes 147 thousand shares for second-quarter 2021 and 128 thousand shares for the first six months of 2021 of common stock associated with RSUs that were anti-dilutive as a result of the net loss.

Excludes 2 thousand shares for the first six months of 2022 of common stock associated with RSUs that were anti-dilutive.

LIMITED PARTNERSHIPS

Stratus has entered into strategic partnerships for certain development projects.

Stratus, through its subsidiaries, is a partner in the following limited partnerships:

2 unchanged sentences

For additional information regarding Stratus' partnerships, refer to Note 2 in the Stratus 2021 Form 10-K.

The Saint George Apartments, L.P.

In July 2022, The Saint George Apartments, L.P.

entered into a construction loan agreement to finance construction of The Saint George, a 316 -unit luxury wrap-style, multi-family project located in north-central Austin, Texas.

Refer to Note 6 for further discussion of the loan agreement.

In connection with closing the construction financing, Stratus made an additional capital contribution of $ 1.7 million and the unaffiliated Class B limited partner made an additional capital contribution of $ 15.0 million, bringing Stratus’ total capital contributions to $ 3.7 million and the Class B limited partner’s total capital contributions to $ 33.4 million.

As of June 30, 2022, Stratus holds a 10.0 percent interest in The Saint George Apartments, L.P.

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.

In first-quarter 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.

As of June 30, 2022, Stratus holds, in the aggregate, a 31.0 percent indirect controlling equity interest in Stratus Block 150, L.P.

As of June 30, 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.

6 unchanged sentences

Stratus’ consolidated balance sheets include the following assets and liabilities of the partnerships (in thousands):

March 31, 2022 December 31, 2021

2022 December 31,

Cash and cash equivalents $ 6,172 $ 7,432

9 unchanged sentences

Net assets $ 72,376 $ 71,376

Block 21 Pending Sale - Discontinued Operations.

Block 21 is Stratus’ wholly owned mixed-use real estate property in downtown Austin, Texas.

Block 21 - Discontinued Operations.

On May 31, 2022, Stratus completed the previously announced sale of Block 21 to Ryman Hospitality Properties, Inc.

(Ryman) for $ 260.0 million, subject to certain purchase price adjustments, and including Ryman’s assumption of $ 136.2 million of existing mortgage debt, with the remainder paid in cash.

Stratus’ net proceeds of cash and restricted cash totaled $ 112.3 million (including $ 6.9 million of post-closing escrow amounts to be held for 12 months after the closing, subject to a longer retention period with respect to any required reserve for pending claims).

Stratus recorded a pre-tax gain on the sale of $ 119.7 million ($ 94.1 million net of taxes) in second-quarter 2022 included in net income (loss) from discontinued operations.

Block 21 was 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.

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.

In accordance with accounting guidance, Stratus reported the results of operations of Block 21 as discontinued operations in the consolidated statements of comprehensive income (loss) 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

The carrying amounts of Block 21's major classes of assets and liabilities in the consolidated balance sheet at December 31, 2021, follow (in thousands):

Cash and cash equivalents $ 9,172

Restricted cash a

17,942 18,444

Real estate held for investment, net 120,452

2 unchanged sentences

Accounts payable and accrued liabilities, including taxes $ 6,200

136,054 136,684

Other liabilities 10,213

Total liabilities $ 153,097

Most restricted cash would be received by Ryman upon the closing of the sale.

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,

Most restricted cash was received by Ryman upon the closing of the sale.

Block 21’s results of operations in the consolidated statements of comprehensive income (loss) consists of the following (in thousands):

Two Months Ended Three Months Ended Five Months Ended Six Months Ended

May 31, 2022 June 30, 2021 May 31, 2022 June 30, 2021

Hotel $ 6,782 $ 3,934 $ 12,653 $ 6,052

9 unchanged sentences

General and administrative expenses 136 178 236 398

Gain on sale of assets ( 119,695 ) — ( 119,695 ) —

Operating income (loss) 122,755 ( 1,322 ) 125,239 ( 4,335 )

1 unchanged sentence

(Provision for) benefit from income taxes ( 25,539 ) ( 2,584 ) ( 25,703 ) ( 100 )

Net income (loss) $ 375 $ ( 2,508 )

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.

Net income (loss) from discontinued operations $ 95,925 $ ( 5,898 ) $ 96,300 $ ( 8,406 )

In accordance with accounting guidance, amounts are net of eliminations of intercompany sales totaling $ 189 thousand for the two months ended May 31, 2022, $ 274 thousand in second-quarter 2021, $ 510 thousand for the five months ended May 31, 2022, and $ 536 thousand for the first six months of 2021.

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.

Capital expenditures associated with discontinued operations totaled $ 31 thousand in second-quarter 2022, $ 158 thousand in second-quarter 2021, $ 213 thousand for the first six months of 2022 and $ 265 thousand the first six months of 2021.

The Oaks at Lakeway.

2 unchanged sentences

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).

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.”

2 unchanged sentences

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.

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 thousand 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.

In first-quarter 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.

A contract liability of $ 4.1 million is presented as a deferred gain in the consolidated balance sheets at June 30, 2022, compared with $ 4.8 million at December 31, 2021.

The reduction in the deferred gain balance primarily reflects Pad Site Master Lease payments.

The remaining deferred gain balance is expected to be reduced primarily by future Pad Site Master Lease payments.

The Saint Mary.

3 unchanged sentences

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.

Stratus recognized a pre-tax gain on the sale of $ 22.9 million ($ 16.2 million net of noncontrolling interests) for the first six months of 2021.

Stratus also recognized a $ 63 thousand loss on extinguishment of debt for the first six months of 2021 related to the repayment of The Saint Mary construction loan.

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.

FAIR VALUE MEASUREMENTS

3 unchanged sentences

A summary of the carrying amount and fair value of Stratus' debt follows (in thousands):

March 31, 2022 December 31, 2021

2022 December 31,

Value Carrying

4 unchanged sentences

The fair value of debt does not represent the amounts that will ultimately be paid upon the maturities of the loans.

DEBT AND EQUITY

The components of Stratus' debt follow (in thousands):

March 31, 2022 December 31, 2021

2022 December 31,

Comerica Bank credit facility $ — $ —

10 unchanged sentences

Amarra Villas credit facility 2,469 1,605

The Saint June 1,865 —

$ 114,591 $ 106,648

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.

Includes net reductions for unamortized debt issuance costs of $ 1.4 million at June 30, 2022, and $ 1.2 million at December 31, 2021.

Total debt at December 31, 2021, does not include debt associated with Block 21, which is reflected in liabilities held for sale - discontinued operations.

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.

Using proceeds from the sale of Block 21, Stratus repaid the outstanding amount under its $ 60.0 million Comerica Bank credit facility prior to June 30, 2022.

As of June 30, 2022, Stratus had $ 49.0 million available under the credit facility.

Letters of credit, totaling $ 11.0 million, have been issued under the credit facility, and secure the company’s obligation to build certain roads and utilities facilities benefiting Holden Hills and Section N.

In May 2022, Stratus and Comerica Bank entered into an amendment to extend the maturity date of the 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 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.

In March 2022, Stratus extended the maturity of the New Caney land 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 to the Term Secured Overnight Financing Rate (Term SOFR).

The loan now bears interest at Term SOFR plus 3.0 percent, subject to the applicable margin adjustment.

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.

The PPP loan matured and the remaining balance was repaid by Stratus in April 2022.

Of the original loan amount, $ 3.7 million was forgiven in August 2021.

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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.

West Killeen Market construction loan.

In June 2022, Stratus and Southside Bank amended the West Killeen Market construction loan.

Pursuant to the agreement, the principal amount of the loan is fully advanced and funded at an amount of $ 6.0 million, the interest rate for the loan was changed to Term SOFR plus 2.75 percent, subject to a 3.0 percent floor, and the maturity date of the loan was extended three years to July 31, 2025.

Principal and interest payments of approximately $ 30 thousand are due monthly and the remaining balance is payable at maturity.

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.

In June 2022, Stratus subsidiaries and Comerica Bank entered into a modification agreement pursuant to which the commitment amount of the Amarra Villas credit facility was increased from $ 15.0 million to $ 18.0 million, the interest rate was changed to the one-month BSBY Rate (with a floor of 0.0 percent) plus 3.0 percent, and the maturity date was extended to June 19, 2024.

The Saint George construction loan.

In July 2022, The Saint George Apartments, L.P., a Stratus subsidiary entered into a $ 56.8 million loan with Comerica Bank to provide financing for the construction of The Saint George multi-family project.

The construction loan has a maturity date of July 19, 2026, with two options to extend the maturity for an additional 12 months, subject to satisfying specified conditions, including the applicable debt service coverage ratios, and the payment of an extension fee for each extension.

Advances under the construction loan bear interest at the one-month BSBY Rate (with a floor of 0.0 percent ) plus 2.35 percent.

Payments of interest only on the construction loan are due monthly through July 19, 2026, with the outstanding principal due at maturity.

During any extension periods, the principal balance of the construction loan will be payable in monthly installments of principal and interest based on a 30-year amortization calculated at 6.50 percent with the outstanding principal due at maturity.

The construction loan may be prepaid without premium or penalty.

Borrowings on the construction loan are secured by The Saint George project and are guaranteed by Stratus.

Stratus provided a full completion guaranty and 25 percent repayment guaranty, which will be eliminated once the project meets specified conditions including a debt service coverage ratio of at least 1.20 to 1.00 and confirmation that the loan-to-value ratio does not exceed 65 percent.

Notwithstanding the foregoing, Stratus remains liable for customary carve-out obligations and environmental indemnity.

The loan agreement contains financial covenants, including a requirement that Stratus maintain a net asset value, as defined in the agreement, of $ 125.0 million and an aggregate debt-to-gross asset value of less than 50 percent.

The Saint George Apartments, L.P.

is not permitted to make distributions to its partners until The Saint George project is completed and achieves a debt service coverage ratio of at least 1.20 to 1.00.

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.

Interest costs (before capitalized interest) totaled $ 1.5 million in second-quarter 2022, $ 2.1 million in second-quarter 2021, $ 2.6 million for the first six months of 2022 and $ 4.4 million for the first six months of 2021.

Stratus' capitalized interest totaled $ 1.5 million in second-quarter 2022, $ 1.2 million in second-quarter 2021, $ 2.6 million for the first six months of 2022 and $ 2.5 million for the first six months of 2021.

Capitalized interest is primarily related to development activities at Barton Creek (primarily Section N), The Annie B, The Saint George and Magnolia Place.

The Comerica Bank credit facility, Amarra Villas credit facility, The Annie B land loan, The Saint George construction loan and Kingwood Place construction loan require Comerica Bank’s prior written consent for any common stock repurchases in excess of $ 1.0 million or any dividend payments.

As a result of the Board’s strategic planning process, in August 2022, Stratus announced that the Board has approved returning $ 50.0 million cash to stockholders, subject to obtaining required consents from Comerica Bank.

This return of capital could be in the form of share repurchases, dividends or a combination.

PROFIT PARTICIPATION INCENTIVE PLAN

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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.

During the first quarter of 2022, the Compensation Committee designated The Saint June as an approved project under the PPIP, and the awards were granted in August 2022.

Refer to Note 8 of the Stratus 2021 Form 10-K for further discussion.

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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 profit pool was $ 3.9 million, of which $ 0.2 million was paid in cash during February 2022 and the remaining accrued liability of $ 3.7 million was settled in RSUs with a three-year vesting period awarded to eligible participants during second-quarter 2022 following stockholder approval of Stratus’ new stock incentive plan.

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.

The profit pool was $ 6.7 million, of which $ 5.0 million was paid in cash to eligible participants during February 2022.

The PPIP contains limits on cash compensation paid to certain officers and amounts due above the limits are converted to an equivalent number of RSUs with a one-year vesting period.

The remaining accrued liability related to The Santal totaled $ 1.6 million

and was settled in RSUs awarded to one participant during second-quarter 2022 following stockholder approval of Stratus’ new stock incentive plan.

Under the terms of the PPIP, the number of RSUs granted in connection with settlement of approved projects is determined by reference to the 12-month trailing average stock price for the year the project reaches a payment event, whereas the grant date fair value of the RSUs for accounting purposes is based on the grant date closing price.

For the RSUs awarded in connection with Lantana Place and The Santal, the aggregate grant date value was $ 2.1 million greater than the accrued liability for the two projects as a result of this different valuation methodology.

During second-quarter 2022, Stratus transferred the $ 5.3 million accrued liability balance under the PPIP for Lantana Place and The Santal that was settled in RSUs to capital in excess of par value and is amortizing the $ 2.1 million balance of the grant-date value with a charge to general and administrative expenses and a credit to capital in excess of par value over the three-year or one-year vesting periods of the related RSUs.

A summary of PPIP costs follows (in thousands):

Three Months Ended March 31,

Three Months Ended Six Months Ended

June 30, June 30,

2022 2021 2022 2021

Charged to general and administrative expense

$ 119 $ 250 $ 134 $ 745

Capitalized to project development costs 51 203 102 427

Total PPIP costs

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).

$ 170 $ 453 $ 236 $ 1,172

The accrued liability for the PPIP totaled $ 2.7 million at June 30, 2022, and $ 15.2 million at December 31, 2021 (included in other liabilities).

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 had deferred tax assets (net of deferred tax liabilities) totaling $ 6.0 million at June 30, 2022, and $ 12.4 million at December 31, 2021.

Stratus' deferred tax assets had valuation allowances totaling $ 5.8 million at June 30, 2022, and $ 6.4 million at December 31, 2021.

Prior to the sale of Block 21, management concluded that the pending sale of Block 21 was 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 fourth-quarter 2021 to reduce the related valuation allowance.

Stratus continues to maintain a valuation allowance on its remaining deferred tax assets.

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Stratus’ future results of operations may be negatively impacted by an inability to realize a tax benefit for future tax losses or for items that will generate additional deferred tax assets that are not more likely than not to be realized.

The difference between Stratus' consolidated effective income tax rate of ( 20 ) percent in first-quarter 2022 and the U.S.

The difference between Stratus' consolidated effective income tax rate of ( 13 ) percent for the first six months of 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 tax audit, which was closed in first-quarter 2022.

The difference between Stratus' consolidated effective income tax rate of 1 percent for the first six months of 2021 and the U.S.

Federal statutory income tax rate of 21 percent was primarily attributable to 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.

Federal deferred tax assets as of June 30, 2021, and the Texas state margin tax.

BUSINESS SEGMENTS

As a result of the pending sale of Block 21, Stratus has two operating segments:

As a result of the 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.

Block 21, which encompassed Stratus’ hotel and entertainment segments, along with some leasing operations, is reflected as discontinued operations through its sale in May 2022.

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 Section N, Holden Hills, Amarra multi-family and commercial land, Amara Villas, The Saint June and other vacant land in 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);

the Lantana community, including a portion of Lantana Place planned for a multi-family phase now known as The Saint Julia;

The Saint George;

and the land for 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);

in Killeen, Texas (one vacant pad site at West Killeen Market, for which a sale is pending);

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.

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Stratus' revenues from contracts with customers follow (in thousands):

Three Months Ended March 31,

Three Months Ended Six Months Ended

June 30, June 30,

2022 2021 2022 2021

Real Estate Operations:

Developed property sales $ 2,382 $ 575 $ 2,382 $ 4,615

Undeveloped property sales — 2,500

Undeveloped property sales 5,444 a

Commissions and other 99 193 118 209

7,925 768 7,944 7,324

Leasing Operations:

Rental revenue 3,080 4,818

Rental revenue b

3,200 4,863 6,280 9,681

Total revenues from contracts with customers $ 11,125 $ 5,631 $ 14,224 $ 17,005

Includes the sale of (i) a six-acre multi-family tract of land in Amarra Drive for $ 2.5 million, (ii) a completed pad site at Magnolia Place for $ 2.3 million and (iii) a tract of land in Austin for $ 0.6 million.

Decreases in the 2022 periods, compared to the 2021 periods, primarily reflects the sale of The Santal in December 2021, partly offset by increased revenue at Lantana Place.

The Santal had rental revenue of $ 2.3 million in second-quarter 2021 and $ 4.5 million during the first six months of 2021.

Financial Information by Business Segment.

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Leasing Operations Corporate, Eliminations and Other b

Three Months Ended March 31, 2022:

Three Months Ended June 30, 2022:

Unaffiliated customers $ 7,925 $ 3,200 $ — $ 11,125

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General and administrative expenses — — 3,444 c

Gain on sale of assets — ( 4,812 ) d

Operating income (loss) $ 2,471 $ 1,465 $ ( 3,441 ) $ 495

Capital expenditures and purchases and development of real estate properties

$ 7,227 $ 12,820 $ 31 $ 20,078

Total assets at June 30, 2022 265,929 106,020 112,711 d

Three Months Ended June 30, 2021:

Unaffiliated customers $ 768 $ 4,863 $ — $ 5,631

Intersegment 5 — ( 5 ) —

Cost of sales, excluding depreciation 1,532 2,192 — 3,724

Depreciation 48 1,532 ( 14 ) 1,566

General and administrative expenses — — 6,221 6,221

Operating (loss) income $ ( 807 ) $ 1,139 $ ( 6,212 ) $ ( 5,880 )

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$ 2,390 $ 1,211 $ 158 $ 3,759

Total assets at March 31, 2022 254,212 106,652 183,904 e

Three Months Ended March 31, 2021:

Total assets at June 30, 2021 165,624 180,428 e

Six Months Ended June 30, 2022:

Unaffiliated customers $ 7,944 $ 6,280 $ — $ 14,224

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Cost of sales, excluding depreciation 6,798 1,854 — 8,652

Depreciation 49 1,717 ( 9 ) 1,757

General and administrative expenses — — 6,611 c

Gain on sale of assets — ( 4,812 ) g

Operating income (loss) $ 1,103 $ 7,521 $ ( 6,608 ) $ 2,016

Capital expenditures and purchases and development of real estate properties

$ 12,091 $ 27,362 $ 213 $ 39,666

Six Months Ended June 30, 2021:

Unaffiliated customers $ 7,324 $ 9,681 $ — $ 17,005

Intersegment 9 — ( 9 ) —

Cost of sales, excluding depreciation 5,892

4,244 — 10,136

112 3,076 ( 36 ) 3,152

General and administrative expenses — — 10,545 10,545

Gain on sale of assets — ( 22,931 ) f

Gain on sale of assets — ( 22,931 ) h

Operating income (loss)

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$ 4,879 $ 2,113 $ 265 $ 7,257

Total assets at March 31, 2021 161,488 180,758 g

Includes sales commissions and other revenues together with related expenses.

Includes consolidated general and administrative expenses and eliminations of intersegment amounts.

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.

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.

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.

Represents the gain on the January 2021 sale of The Saint Mary.

Includes $ 68.5 million of assets held for sale related to The Santal, which was sold in the fourth quarter of 2021.

The decreases in 2022 from the comparable prior-year periods are primarily the result of $ 3.3 million incurred in second-quarter 2021 and $ 4.4 million incurred for the first six months of 2021 for consulting, legal and public relation costs for Stratus' successful proxy contest and the real estate investment trust exploration process.

Includes $ 102.3 million of cash and cash equivalents, primarily received from the May 2022 sale of Block 21.

Includes $ 67.9 million of assets held for sale related to the December 2021 sale of The Santal.

Includes $ 144.2 million of assets held for sale associated with discontinued operations at Block 21.

Represents a pre-tax 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.

Represents the pre-tax gain on the January 2021 sale of The Saint Mary.

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.

Stratus evaluated events after June 30, 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.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements