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Item 2. Management’s Discussion and Analysis

2022-08-15 compared with 2022-05-16 · 190 added, 206 removed, 173 unchanged (70% of the section changed)

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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, and real estate leasing 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 and the lease of our retail, mixed-use and multi-family properties.

We are engaged primarily in the acquisition, entitlement, development, management, leasing and sale of multi-family and single-family residential real estate properties and commercial properties in the Austin, Texas area and other select markets in Texas.

We generate revenues and cash flows from the sale of our developed and undeveloped properties and the lease of our retail, mixed-use and multi-family properties.

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.

Refer to Note 9 for discussion of our operating segments and “Business Strategy” below for a discussion of our business strategy.

Block 21 is our wholly owned mixed-use real estate property located on a two-acre city block in downtown Austin that contains the W Austin Hotel, consisting of a 251-room luxury hotel, and office, retail and entertainment space.

In October 2021, we entered into new agreements to sell Block 21 to Ryman Hospitality Properties, Inc.

(Ryman) for $260.0 million, subject to an expected downward adjustment of $5.0 million.

The transaction is expected to close prior to June 1, 2022, but remains subject to the timely satisfaction or waiver of various closing conditions.

The sale of Block 21 would eliminate our Hotel and Entertainment segments.

As a result, our hotel and entertainment operations, as well as the leasing operations associated with Block 21, are reported as discontinued operations for all periods presented in the financial statements included in this Form 10-Q.

Refer to "Results of Operations - Discontinued Operations" and Note 4 for further discussion.

BUSINESS STRATEGY

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 in connection with holding them for lease once the properties have been completed and stabilized.

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.

Most of 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.

However, we have increasingly relied on project-level equity financing of our subsidiaries.

We have formed and expect to continue to pursue strategic relationships as part of our overall strategy for particular development projects and may enter into similar equity financing arrangements in the future.

See Note 3 for further discussion.

Results of Our Strategic Planning Process

Over the last six quarters, we have generated pre-tax earnings of $218.9 million and after-tax cash flow of approximately $166 million from the sales of Block 21 (including $6.9 million of proceeds held in escrow for a year after the sale), The Santal and The Saint Mary.

Our Board of Directors (Board) and management team engaged in a strategic planning process, which included consideration of the uses of proceeds from the sale of Block 21 and other recent sales in 2021, and of our long-term business strategy.

As a result of our Board’s strategic planning process, in August 2022, we announced that our 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.

After streamlining our business through the sale of Block 21, our Board has decided to continue our successful development program, with our proven team focusing on pure residential and residential-focused mixed-use projects in Austin and other select markets in Texas, which we believe continue to be attractive locations.

We believe by methodically developing and enhancing the value of our properties and then selling them or holding them for lease, we can create long-term value for our stockholders.

Our development plans require significant additional capital.

We plan to continue to develop properties using project-level debt and third-party equity capital through joint ventures in which we receive development management fees and asset management fees, with our potential returns increasing above our relative equity interest in each project as negotiated return hurdles are achieved.

We expect to reduce our reliance on our revolving credit facility and retain sufficient cash to operate our business, taking into account risks associated with changing market conditions.

As previously disclosed, we are exploring a potential sale or refinancing of Kingwood Place, Jones Crossing and West Killeen Market, and we are also pursuing other projects, which may produce additional cash to return to stockholders, subject to market conditions and obtaining any required consents.

We have undeveloped properties currently undergoing active planning, including our two large projects Holden Hills and Section N.

Refer to “Recent Development Activities” below for a discussion of these projects.

We will re-evaluate our strategy as development progresses on these and other projects in our pipeline, and as market conditions stabilize.

OVERVIEW OF FINANCIAL RESULTS

On May 31, 2022, we 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.

Our 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).

We recorded a pre-tax gain on the sale of $119.7 million ($94.1 million net of taxes) in second-quarter 2022.

Block 21 was our 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.

The sale of Block 21 eliminated our Hotel and Entertainment segments.

Refer to Note 4 for further discussion.

As described in this report and in our 2021 Form 10-K, in December 2021, one of our wholly owned subsidiaries sold The Santal multi-family property for $152.0 million, which after closing costs and payment of the outstanding project loan, generated net proceeds of approximately $74 million.

In January 2021, one of our subsidiaries sold The Saint Mary multi-family property for $60.0 million of which we received approximately $21.9 million after closing costs, payment of the construction loan, reserves for remaining costs of the partnership and distributions to noncontrolling interest owners.

Net proceeds of the sales were used to pay down the balance of our $60.0 million Comerica Bank credit facility and for other corporate purposes.

As previously mentioned, the sale of Block 21 is expected to close prior to June 1, 2022, but remains subject to the timely satisfaction or waiver of various closing conditions.

If completed, the sale of Block 21 will result in substantial additional cash proceeds of approximately $115 million pre-tax and $90 million after-tax (before prorations, but including post-closing escrow amounts).

Our Board of Directors (Board) and management team are engaged in a strategic planning process, which includes consideration of the uses of proceeds from sales in 2021 and the pending sale of Block 21, and of our long-term business strategy.

Potential uses of proceeds may include a combination of further deleveraging, returning cash to shareholders and reinvesting in our project pipeline.

We expect to provide additional information after the Block 21 transaction is concluded and our Board and management have had the opportunity to assess market conditions and the capital requirements for our development pipeline.

OVERVIEW OF FINANCIAL RESULTS FOR FIRST-QUARTER 2022

As a result of the pending sale of Block 21, we have two operating segments:

Real Estate Operations and Leasing Operations.

Block 21, which encompassed our hotel and entertainment segments, along with some leasing operations, is reflected as discontinued operations.

We operate primarily in Austin, Texas and in other select, fast-growing markets in Texas.

In January 2021, one of our subsidiaries sold The Saint Mary multi-family property for $60.0 million of which we received $21.9 million after closing costs, payment of the construction loan, reserves for remaining costs of the partnership and distributions to noncontrolling interest owners.

Net proceeds from the sales were used to pay down the balance of our $60.0 million Comerica Bank credit facility and for other corporate purposes.

Our Real Estate Operations encompass our activities associated with our acquisition, entitlement, development and sale of real estate.

The current focus of our real estate operations is multi-family and single-family residential properties and retail and mixed-use properties.

The current focus of our real estate operations is multi-family and single-family residential properties and residential-focused mixed-use properties.

We may sell or lease the real estate we develop, depending on market conditions.

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We also generate income from the sale of our leased properties, depending on market conditions.

Our revenues totaled $3.1 million in first-quarter 2022, compared with $11.4 million in first-quarter 2021.

The decrease in revenues in first-quarter 2022, compared to first-quarter 2021, is primarily a result of no real estate sales occurring in first-quarter 2022 because of a decrease in available inventory of developed properties in our Real Estate Operations segment and a decrease in leasing revenue as a result of the sales of The Saint Mary and The Santal multi-family projects in 2021.

Our total stockholders’ equity increased to $262.4 million at June 20, 2022, from $158.1 million at December 31, 2021, and $98.9 million at December 31, 2020, primarily as a result of gains realized on the sale of Block 21 in May 2022 and our sales of The Santal and The Saint Mary in December 2021 and January 2021, respectively.

Our revenues totaled $11.1 million in second-quarter 2022 and $14.2 million for the first six months of 2022, compared with $5.6 million in second-quarter 2021 and $17.0 million for the first six months of 2021.

The increase in revenues in second-quarter 2022, compared to second-quarter 2021, is primarily a result of the sales of undeveloped real estate properties as well as a completed Amarra Villas home in our Real Estate Operations segment in second-quarter 2022, partially offset by a decrease in leasing revenue as a result of the sale of The Santal multi-family project in late 2021.

The decrease in revenues for the first six months of 2022, compared to the first six months of 2021, is primarily a result of a decrease in leasing revenue following the sales of The Saint Mary and The Santal multi-family projects in 2021.

Refer to "Results of Operations" below for further discussion of our segments.

Our net income attributable to common stockholders totaled $2.3 million, or $0.27 per diluted share in first-quarter 2022, compared to $8.9 million, or $1.08 per diluted share, in first-quarter 2021.

Our results for first-quarter 2022 included a $4.8 million 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.

Our net income attributable to common stockholders totaled $96.6 million, or $11.53 per diluted share in second-quarter 2022, compared to a net loss of $10.2 million, or $1.23 per diluted share, in second-quarter 2021.

During the first six months of 2022 our net income attributable to common stockholders totaled $98.9 million, or $11.82 per diluted share, compared to a net loss attributable to common stockholders of $1.2 million, or $0.15 per diluted share, during the first six months of 2021.

Our results for the 2022 periods include a $119.7 million pre-tax gain

($94.1 million net of taxes) on the sale of Block 21.

Refer to Note 4 under the heading “Block 21 - Discontinued Operations” for additional discussion.

The results during the first six months of 2022 also include a $4.8 million 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.

Refer to Note 4 under the heading “The Oaks at Lakeway” for additional discussion.

Net income attributable to common stockholders in first-quarter 2021 included a $22.9 million pre-tax gain ($16.2 million net of noncontrolling interests) on the January 2021 sale of The Saint Mary, a 240-unit luxury garden-style multi-family project in the Circle C community, partially offset by a $2.5 million net loss from discontinued operations as our hotel and entertainment operations were impacted by the COVID-19 pandemic.

Our net losses attributable to common stockholders in the 2021 periods include net losses from discontinued operations of $5.9 million and $8.4 million for second-quarter 2021 and the first six months of 2021, respectively, as our former hotel and entertainment operations included in Block 21 were impacted by the COVID-19 pandemic.

Our net losses attributable to common stockholders in the 2021 periods also include charges to general and administrative expenses for consulting, legal and public relation costs incurred in connection with our successful proxy contest and our real estate investment trust (REIT) exploration process.

Our results for the first six months of 2021 were positively impacted by the $22.9 million pre-tax gain ($16.2 million net of noncontrolling interests) on the January 2021 sale of The Saint Mary, a 240-unit luxury garden-style multi-family project in the Circle C community.

Market Conditions

Our industry has continued to experience increases in costs of land, construction materials (such as rebar, concrete and lumber) and labor, along with supply chain constraints.

In addition, interest rates have been rising and bank credit has been tightening in our industry.

These factors are having an adverse impact on the projected profitability of our new projects and have delayed projects under construction and the commencement of construction on new projects.

In addition, on completed projects, we are experiencing increased borrowing costs on our variable rate debt and increased operating costs due to inflation.

To manage these risks, we go through extensive pricing exercises culminating with competitive bids from reputable contractors based on final plans and specifications.

Because we engage third-party general contractors to construct our projects on a fixed-price or guaranteed maximum price basis, our exposure to cost increases on projects under construction is limited;

however, rising costs and delays in delivery of materials may increase the risk of default by contractors and subcontractors.

To date, these rising costs have not had a material impact on our financial results, as we have been able to realize higher rents and sales prices;

however, this may not continue to be the case in the future.

Refer to “Risk Factors” included in Part II, Item 1A.

RECENT DEVELOPMENT ACTIVITIES

Current Residential Activities

In first-quarter 2022, we sold no residential units or lots.

As of March 31, 2022, 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 on the next two Amarra Villas homes during the first quarter of 2020, which are expected to be completed in mid-2022.

In second-quarter 2022, we sold a six-acre undeveloped multi-family tract of land for $2.5 million.

As of June 30, 2022, 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 and sale of the first seven homes between 2017 and 2019.

We began construction on the next two Amarra Villas homes during first-quarter 2020, one of which was completed and sold for $2.4 million in second-quarter 2022.

In 2021, we began construction of one additional home and in March 2022, we began construction on another two homes.

As of May 13, 2022, two homes were under contract to sell (one which we began construction on in 2020 and one which we began construction on in 2021).

As of May 13, 2022, a total of 11 units (3 of which are under construction and 8 of which construction has not started) remain available for sale of the initial 20-unit project.

We began construction on the remaining eight homes in second-quarter 2022.

Construction on the last 12 units continue to progress, and as of August 12, 2022, 3 homes were under contract to sell and 9 Amarra Villas homes remain available for sale of the 20-unit project.

In third-quarter 2021, we began construction on The Saint June, a 182-unit luxury garden-style multi-family project within the Amarra development.

The Saint June is expected to be comprised of multiple buildings featuring one, two and three bedroom units for lease with amenities that include a resort-style clubhouse, fitness center, pool and extensive green space.

The Saint June is comprised of multiple buildings featuring one, two and three bedroom units for lease with amenities that include a resort-style clubhouse, fitness center, pool and extensive green space.

The first units of The Saint June are currently expected to be completed in fourth-quarter 2022 with completion of the project expected in first-quarter 2023.

This project is being built consistent with our sustainability, wellness and conservation goals.

We continue to progress the development plans for Holden Hills, our final large residential development within the Barton Creek community consisting of 495 acres and designed to feature 475 unique residences to be developed in multiple phases with a focus on health and wellness, sustainability and energy conservation.

We currently expect to secure final permits to start construction in September 2022.

Subject to obtaining financing and other market conditions, we currently expect to complete site work for Phase I, including the construction of road, utility, drainage and other required infrastructure, approximately 17 months from the issuance of our final permits.

Accordingly, our current projections anticipate that we could begin closing sales of certain home sites in Holden Hills in late 2024.

We have obtained construction permits for Phase I, and subject to obtaining financing and other market conditions, we currently expect to start infrastructure construction in late 2022 and to complete site work for Phase I, including the construction of road, utility, drainage and other required infrastructure, approximately 20 to 22 months from the start of construction.

Accordingly, our current projections anticipate that we could start building homes and/or selling home sites in late

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.

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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.

In September 2021, we purchased the land and announced plans for The Annie B, a proposed luxury high-rise rental project in downtown Austin to be developed as a 400-foot tower, consisting of approximately 420,000 square feet with approximately 300 luxury multi-family units for lease and ground level retail.

We currently expect to finalize development plans, secure development financing and begin construction by late 2022 or early 2023.

This project will be built consistent with our sustainability, wellness and conservation goals.

In September 2021, we purchased the land and announced plans for The Annie B, a proposed luxury high-rise rental project in downtown Austin to be developed as a 400-foot tower, consisting of approximately 440,000 square feet with 316 luxury multi-family units for lease.

We currently expect to begin construction in 2023, subject to obtaining financing and other market conditions.

The Saint George

In December 2021, we purchased the land for The Saint George, a proposed 316-unit luxury wrap-style multi-family project to be constructed in north-central Austin.

While we continue the planning for the project and obtaining the entitlement and permit approvals, we currently expect to begin construction in the second quarter of 2022 and to achieve substantial completion by mid-2024.

We are negotiating a construction loan for the project.

Lantana Multi-Family, Kingwood Place and Other Residential

We have advanced development plans for the multi-family component of Lantana Place, a partially developed, mixed-use development project located south of Barton Creek in Austin, and, subject to securing an acceptable capital structure and other market conditions, currently expect to begin construction in third-quarter 2022 with expected completion in mid-2024.

In December 2021, we purchased the land for The Saint George, a 316-unit luxury wrap-style, multi-family project to be constructed in north-central Austin.

We entered into a construction loan for this project in July 2022 and began construction in third-quarter 2022.

We currently expect to achieve substantial completion by mid-2024.

Lantana Multi-Family, Magnolia Place, Jones Crossing, Kingwood Place and Other Residential

The multi-family component is now known as The Saint Julia and is expected to consist of 306 units.

We are evaluating a sale of a portion of the land for the single-family and multi-family residential components of Magnolia Place, an H-E-B, L.P (H-E-B) grocery shadow-anchored, mixed-use project in Magnolia, Texas.

During second-quarter 2022, we sold an undeveloped tract of land in Austin for $0.6 million.

In August 2022, we sold 28 acres of undeveloped residential land for $3.2 million at Magnolia Place, an H-E-B, L.P (H-E-B) grocery shadow-anchored, mixed-use project in Magnolia, Texas.

We also continue to evaluate options for the multi-family component of Jones Crossing, an H-E-B grocery anchored, mixed-use development located in College Station, Texas.

In September 2021, we entered into a contract to sell a multi-family tract of land currently planned for approximately 275 multi-family units for $5.5 million at Kingwood Place, an H-E-B grocery anchored, mixed-use project in Kingwood, Texas.

If consummated, the sale is expected to close in third-quarter 2022.

If consummated, the sale is expected to close in the second half of 2022.

For further discussion of our multi-family and single-family residential properties, refer to MD&A and the related sections in Items 1.

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In August 2021, we began construction on the first phase of development of Magnolia Place, our H-E-B grocery shadow-anchored, mixed-use project in Magnolia, Texas.

Magnolia Place is currently planned to consist of 4 retail buildings totaling approximately 35,000 square feet, 5 retail pad sites to be sold or ground leased, 194 single-family lots and approximately 500 multi-family units.

The first phase of development consists of 2 retail buildings totaling 18,987 square feet, all 5 pad sites, and the road, utility and drainage infrastructure necessary to support the entire development.

The first two retail buildings are expected to be available for occupancy in third-quarter 2022.

Magnolia Place is currently planned to consist of four retail buildings totaling approximately 35,000 square feet, five retail pad sites to be sold or ground leased, 194 single-family lots and approximately 500 multi-family units.

The first phase of development consists of two retail buildings totaling 18,987 square feet, all five pad sites and the road, utility and drainage infrastructure necessary to support the entire development.

Infrastructure construction was completed in second-quarter 2022.

The two retail buildings were completed in July 2022 and turned over to our retail tenants to begin their finish-out process.

In mid-2021, H-E-B began construction on its 95,000-square-foot grocery store on an adjoining 18-acre site owned by H-E-B, which is expected to open in fourth-quarter 2022.

During second-quarter 2022, we sold one completed pad site for $2.3 million.

Lantana Place

As of March 31, 2022, we had signed leases for approximately 85 percent of the retail space at Lantana Place, including the anchor tenant, Moviehouse & Eatery, and a ground lease for an AC Hotel by Marriott.

As of June 30, 2022, we had signed leases for approximately 90 percent of the retail space at Lantana Place, including the anchor tenant, Moviehouse & Eatery, and a ground lease for an AC Hotel by Marriott.

Lantana Place is our partially developed, mixed-use development project within the Lantana community south of Barton Creek in Austin, Texas.

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One pad site remains available for lease.

As of March 31, 2022, we had signed leases for approximately 85 percent of the retail space, including the H-E-B grocery store.

As of June 30, 2022, we had signed leases for approximately 90 percent of the retail space, including the H-E-B grocery store.

We are exploring a potential sale or refinancing of Kingwood Place.

Jones Crossing

As of March 31, 2022, we had signed leases for substantially all of the retail space at the first phase of Jones Crossing.

As of June 30, 2022, we had signed leases for substantially all of the retail space at the first phase of Jones Crossing.

Jones Crossing is our H-E-B-anchored, mixed-use project in College Station, Texas.

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West Killeen Market

As of March 31, 2022, we had signed leases for 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.

Only one unsold pad site remains at West Killeen Market.

As of June 30, 2022, we had signed leases for 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.

We have entered into a contract to sell the last remaining pad site for $1.0 million and the sale is expected to close in third-quarter 2022.

We are exploring a potential sale or refinancing of West Killeen Market.

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Potential Development Projects and Pipeline

Our development plans for the Annie B, Holden Hills, Section N and The Saint Julia will require significant additional capital, which we currently intend to pursue through bank debt and third-party equity capital arrangements, and we are negotiating a loan for The Saint George project.

Our development plans for The Annie B, Holden Hills, Section N and The Saint Julia will require significant additional capital, which we currently intend to pursue through project-level debt and third-party equity capital arrangements through joint ventures in which we receive development management fees and asset management fees, and with our potential returns increasing above our relative equity interest in each project as negotiated return hurdles are achieved.

We are also pursuing other development projects.

These potential development projects and projects in our pipeline 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.

Supply Chain Disruptions

Supply chain disruptions impacting our industry have begun to delay some of our projects under construction, and may impact the timing of projects on which we plan to start construction in the future.

Our contractors have experienced delays on our projects primarily related to delivery of certain residential electrical components and laminated structural wood materials.

We understand that suppliers are taking actions to try to mitigate the delays;

however, their efforts may not be successful.

While these constraints have not had a material impact on the expected timing or cost of our projects under construction, that may change in the future.

however, supply constraints may increase our costs of or delay future projects.

Refer to “Risk Factors” included in Part II, Item 1A.

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.

RESULTS OF OPERATIONS

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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 for the first quarters of 2022 and 2021 (in thousands):

Three Months Ended March 31,

Operating (loss) income:

The following table summarizes our operating results (in thousands):

Three Months Ended Six Months Ended

June 30, June 30,

2022 2021 2022 2021

Operating income (loss):

Real Estate Operations a

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(3,441) (6,212) (6,608) (10,518)

Operating income $ 1,521 $ 21,983

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

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

Net income from continuing operations $ 1,812 $ 18,174

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

Net income (loss) from discontinued operations

$ (5,898) $ 96,300 e

Net loss (income) attributable to noncontrolling interests in subsidiaries

$ 164 $ 41 $ 249 $ (6,681)

Net income attributable to common stockholders

Net income (loss) attributable to common stockholders

$ 96,621 $ (10,163) $ 98,893 $ (1,219)

Includes sales commissions and other revenues together with related expenses.

Includes a $4.8 million 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 a $4.8 million 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.

Refer to Note 4 under the heading “The Oaks at Lakeway” for additional discussion.

Includes a $22.9 million gain on the January 2021 sale of The Saint Mary.

Includes a $22.9 million pre-tax gain on the January 2021 sale of The Saint Mary.

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

As a result of the pending sale of Block 21, we currently have two operating segments:

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 our successful proxy contest and the REIT exploration process.

Includes a $119.7 million pre-tax gain ($94.1 million net of taxes) on the May 2022 sale of Block 21.

As a result of the May 2022 sale of Block 21, we currently have two operating segments:

Real Estate Operations and Leasing Operations (refer to Note 9).

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The following table summarizes our Real Estate Operations results (in thousands):

Three Months Ended March 31,

Three Months Ended Six Months Ended

June 30, June 30,

2022 2021 2022 2021

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

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Cost of sales, including depreciation 5,456 1,580 6,847 6,004

Operating (loss) income $ (1,368) $ 2,136

Operating income (loss) $ 2,471 $ (807) $ 1,103 $ 1,329

Developed Property Sales.

The following table summarizes our developed property sales (dollars in thousands):

Three Months Ended March 31,

Lots/Units Revenues Average Cost Per Lot/Unit Lots/Units Revenues Average Cost Per Lot/Unit

Three Months Ended June 30,

Homes Revenues Average Cost Per Home Lots Revenues Average Cost Per Lot

Amarra Drive:

Amarra Villas homes 1 $ 2,382 $ 2,382 — $ — $ —

Phase III lots — — — 1 575 233

W Austin Residences at Block 21:

Total Residential 1 $ 2,382 1 $ 575

Six Months Ended June 30,

Homes Revenues Average Cost Per Home Lots/Units Revenues Average Cost Per Lot/Unit

Amarra Drive:

Amarra Villas homes 1 $ 2,382 $ 2,382 — $ — $ —

Phase III lots — — — 3 2,215 299

W Austin Hotel & Residences Project

Condominium Unit — — — 1 2,400 1,721

Total Residential 1 $ 2,382 4 $ 4,615

The decrease in revenues in first-quarter 2022, compared to first-quarter 2021, reflects no sales in first-quarter 2022, as available inventory of developed properties in our Real Estate Operations segment is limited.

The increase in revenues from developed property sales in second-quarter 2022 compared to second-quarter 2021, reflects the sale of an Amarra Villas home for $2.4 million in 2022.

The decrease in revenues from developed property sales for the first six months of 2022, compared to the first six months of 2021, reflects no lot sales in the 2022 period, as inventory of developed properties in our Real Estate Operations segment is limited.

In addition, the first six months of 2021 included revenue from the sale of our last condominium unit at the W Austin Hotel & Residences.

Undeveloped Property Sales.

In first-quarter 2021, we sold a five-acre multi-family tract of land in Amarra Drive for $2.5 million.

During second-quarter 2022 and the first six months of 2022, we closed $5.4 million of undeveloped property sales consisting 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.

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 $1.4 million in first-quarter 2022 from $4.4 million in first-quarter 2021, primarily reflecting the absence of sales in first-quarter 2022.

Cost of sales increased to $5.5 million in second-quarter 2022 and $6.8 million for the first six months of 2022, compared to $1.6 million in second-quarter 2021 and $6.0 million for the first six months of 2021, primarily reflecting higher real estate revenues in the 2022 periods.

Leasing Operations

The following table summarizes our Leasing Operations results (in thousands):

Three Months Ended March 31,

Three Months Ended Six Months Ended

June 30, June 30,

2022 2021 2022 2021

Rental revenue $ 3,200 $ 4,863 $ 6,280 $ 9,681

Rental cost of sales, excluding depreciation 870

2,192 1,854 4,244

Depreciation 865 1,532 1,717 3,076

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Rental revenue primarily includes revenue from Lantana Place, Jones Crossing, Kingwood Place and West Killeen Market, and until their sales in December 2021 and January 2021, respectively, our multi-family projects The Santal and The Saint Mary.

The decrease in rental revenue in first-quarter 2022, compared with first-quarter 2021, primarily reflects the sale of The Santal in December 2021, partly offset by increased revenue at Lantana Place.

The Santal had rental revenue of $2.2 million in first-quarter 2021.

The decrease in rental revenue in the 2022 periods, compared with 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.

Rental Cost of Sales and Depreciation.

Rental cost of sales and depreciation expense decreased in first-quarter 2022, compared with the first-quarter 2021, primarily as a result of the sale of The Santal.

Rental cost of sales and depreciation expense decreased in second-quarter 2022 and the first six months of 2022, compared with the 2021 periods, primarily as a result of the sale of The Santal.

Gain on Sale of Assets.

In the first quarter of 2022, we recognized a gain 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.

For the first six months of 2022, we recognized a gain 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.

Refer to Note 4 under the heading “The Oaks at Lakeway” for further discussion.

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In first-quarter 2021, 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 pre-tax gain on the sale of $22.9 million ($16.2 million net of noncontrolling interests) in first-quarter 2021.

We 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.

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 decreased to $3.2 million in first-quarter 2022 from $4.3 million in first-quarter 2021, primarily reflecting $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 Profit Participation Incentive Plan.

Consolidated general and administrative expenses decreased to $3.4 million in second-quarter 2022 and $6.6 million for the first six months of 2022, compared to $6.2 million in second-quarter 2021 and $10.5 million for the first six months of 2021, primarily reflecting $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 our successful proxy contest and the REIT exploration process.

Non-Operating Results

Interest Expense, Net.

Interest costs (before capitalized interest) totaled $1.1 million in first-quarter 2022 compared with $2.3 million in first-quarter 2021.

Interest costs in first-quarter 2022 were lower, compared to first-quarter 2021, primarily reflecting reductions in debt balances, including the lower outstanding balance on the Comerica Bank credit facility and the repayment of The Santal loan.

Capitalized interest totaled $1.1 million in first-quarter 2022 compared to $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 and $2.6 million for the first six months of 2022, compared with $2.1 million in second-quarter 2021 and $4.4 million for the first six months of 2021.

Interest costs in the 2022 periods were lower, compared to the 2021 periods, primarily reflecting reductions in average debt balances, including the lower outstanding balance on the Comerica Bank credit facility and the repayment of The Santal loan.

As of June 30, 2022, all of our debt was variable-rate debt, and for most of such debt, the interest rates have increased for the first six months of 2022 and may continue to rise in the future if prevailing market interest rates continue to climb.

Capitalized interest totaled $1.5 million in second-quarter 2022 and $2.6 million for the first six months of 2022, compared to $1.2 million in second-quarter 2021 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.

Loss on Extinguishment of Debt.

We recorded a $63 thousand loss on extinguishment of debt in first-quarter 2021 associated with the repayment of The Saint Mary construction loan upon the sale of the property.

Benefit from (Provision for) Income Taxes.

We recorded a benefit from income taxes of $0.3 million in first-quarter 2022, compared to a provision for income taxes of $2.7 million in first-quarter 2021.

We recorded losses on extinguishment of debt totaling $163 thousand 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 less than $(0.1) million in second-quarter 2022 and $0.3 million for the first six months of 2022, compared to $2.5 million in second-quarter 2021 and $(0.2) million for the first six months of 2021.

Refer to Note 8 for further discussion of income taxes.

Net Income (Loss) from Discontinued Operations.

Net income (loss) from discontinued operations totaled $95.9 million in second-quarter 2022 and $96.3 million for the first six months of 2022, compared to $(5.9) million in second-quarter 2021 and $(8.4) million for the first six months of 2021.

The net income in the 2022 periods primarily reflects a $119.7 million pre-tax gain ($94.1 million net of taxes) on the sale of Block 21.

The net losses in the 2021 periods reflect the negative impacts that the COVID-19 pandemic had on the hotel and entertainment operations within our discontinued operations.

Total Comprehensive Loss (Income) Attributable to Noncontrolling Interests in Subsidiaries .

Our partners' share of losses (income) totaled $0.1 million in first-quarter 2022, compared to $(6.7) million in first-quarter 2021.

In first-quarter 2021, our partners were allocated $6.7 million of the gain from the sale of The Saint Mary.

Discontinued Operations

The hotel is managed by W Hotel Management, Inc.

a subsidiary of Starwood Hotels & Resorts Worldwide, Inc., which is a subsidiary of Marriott International, Inc.

The entertainment space is occupied by Austin City Limits Live at the Moody Theater (ACL Live) and 3TEN ACL Live.

ACL Live is a 2,750-seat live music and entertainment venue and production studio that serves as the location for the filming of Austin City Limits, the longest running music series in American television history.

3TEN ACL Live, which opened in March 2016, has a capacity of approximately 350 people and is designed to be more intimate than ACL Live.

As a result of our October 2021 entry into new agreements to sell Block 21 to Ryman for $260.0 million, our hotel and entertainment operations, as well as the leasing operations associated with the Block 21 property, are reported as discontinued operations for all periods presented in the accompanying financial statements.

Refer to Note 4 for further discussion.

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 servicers 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.

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.

We expect to record a pre-tax gain of approximately $120 million upon closing of the sale (approximately $95 million after-tax).

The purchase price is payable by the assumption of the Block 21 loan with the balance to be paid in cash.

We expect the net sale proceeds before taxes to be approximately $115 million and the after-tax proceeds to be approximately $90 million before prorations, but including post-closing escrow amounts.

Net income (loss) from discontinued operations totaled $0.4 million in first-quarter 2022 and $(2.5) million in first-quarter 2021.

We reported higher hotel and entertainment revenue in first-quarter 2022 as the impacts of the COVID-19 pandemic had a significant impact on first-quarter 2021 results.

The following is a discussion of our key operating results within discontinued operations.

Hotel Revenue.

Hotel revenue primarily includes revenue from W Austin Hotel room reservations and food and beverage sales.

Hotel revenues were $5.9 million in first-quarter 2022 and $2.1 million in first-quarter 2021.

The increase in Hotel revenues in first-quarter 2022, compared to first-quarter 2021, is primarily a result of higher room reservations and food and beverage sales as the impacts of the COVID-19 pandemic had a significant impact on first-quarter 2021 results.

First-quarter 2022 Hotel revenue was approximately 70 percent of pre-pandemic Hotel revenue in first-quarter 2019.

Revenue per available room (RevPAR), which is calculated by dividing total room revenue by the average total rooms available, was $165 in first-quarter 2022, compared with $51 in first-quarter 2021.

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 totaled $5.3 million in first-quarter 2022 and $0.6 million in first-quarter 2021.

The increase in entertainment revenue primarily reflects an increase in the number of events hosted at ACL Live and 3TEN ACL Live as the impacts of the COVID-19 pandemic had a significant impact on first-quarter 2021 results.

First-quarter 2022 Entertainment revenue was approximately 10 percent greater than pre-pandemic Entertainment revenue in first-quarter 2019.

As of August 2021, ACL Live and 3TEN ACL Live are operating at full capacity.

Certain key operating statistics specific to the concert and event hosting industry are included below to provide additional information regarding our ACL Live and 3TEN ACL Live operating performance.

Three Months Ended March 31,

Events hosted 48 28

Estimated attendance 53,882 3,416

Number of tickets sold 54,947 3,710

Gross value of tickets sold (in thousands) $ 2,964 $ 373

3TEN ACL Live

Events hosted 44 22

Estimated attendance 7,100 1,828

Number of tickets sold 3,413 114

Gross value of tickets sold (in thousands) $ 99 $ 3

Our partners' share of losses (income) totaled $0.2 million in both second-quarter 2022 and for the first six months of 2022, compared to less than $0.1 million in second-quarter 2021 and $(6.7) million for the first six months of 2021.

For the first six months of 2021, our partners were allocated $6.7 million of the gain from the sale of The Saint Mary.

CAPITAL RESOURCES AND LIQUIDITY

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However, we believe that the unique nature and location of our assets will provide us positive cash flows over time.

Comparison of Cash Flows for the Three Months Ended March 31, 2022 and 2021

Comparison of Cash Flows for the Six Months Ended June 30, 2022 and 2021

Operating Activities.

Cash used in operating activities totaled $18.1 million in first-quarter 2022, compared with $10.4 million in first-quarter 2021.

Expenditures for purchases and development of real estate properties totaled $4.9 million in first-quarter 2022 and $2.5 million in first-quarter 2021, primarily related to development of our Barton Creek properties, particularly Amarra Villas and, to a lesser extent, Holden Hills.

The cash outflows resulting from the decrease in accounts payable, accrued liabilities and other in first-quarter 2022 and first-quarter 2021 are primarily related to the timing of property tax payments.

The cash outflow resulting from the increase in other assets in first-quarter 2022 is primarily related to a $4.0 million deposit that we delivered to the city of Austin to secure our obligation to construct certain subdivision improvements related to the Holden Hills project.

Cash used in operating activities totaled $43.6 million for the first six months of 2022, compared with $15.0 million for the first six months of 2021.

Expenditures for purchases and development of real estate properties totaled $12.1 million for the first six months of 2022 and $4.9 million for the first six months of 2021, both primarily related to development of our Barton Creek properties, particularly Amarra Villas and, to a lesser extent, Holden Hills.

The cash outflow resulting from the decrease in accounts payable, accrued liabilities and other during the first six months of 2022 is primarily related to the payment of awards under our Profit Participation Incentive Plan and the timing of tax payments, including property taxes.

Investing Activities.

Cash (used in) provided by investing activities totaled $(14.9) million in first-quarter 2022 and $58.2 million in first-quarter 2021.

Capital expenditures totaled $14.7 million in first-quarter 2022, primarily for The Saint June and Magnolia Place projects, and $1.0 million in first-quarter 2021, primarily for the Magnolia Place and Lantana Place projects.

In first-quarter 2021, we received proceeds, net of closing costs, from the sale of The Saint Mary of $59.5 million.

Cash provided by investing activities totaled $77.8 million for the first six months of 2022 and $56.5 million for the first six months of 2021.

During the first six months of 2022, we received net proceeds from the sale of Block 21 of $105.8 million (excluding the release of reserves previously presented as restricted cash but 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 reserves for pending claims).

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.

Capital expenditures totaled $27.6 million for the first six months of 2022, primarily for The Saint June and Magnolia Place projects, and $2.4 million for the first six months of 2021, primarily for the Magnolia Place and Lantana Place projects.

Financing Activities.

Cash provided by (used in) financing activities totaled $13.5 million in first-quarter 2022 and $(50.8) million in first-quarter 2021.

In first-quarter 2022, net borrowings on the Comerica Bank credit facility totaled $10.0 million, compared with net repayments of $9.2 million in first-quarter 2021, primarily using proceeds from the sale of The Saint Mary.

In first-quarter 2022, net borrowings on other project and term loans totaled $3.9 million, primarily reflecting borrowings on the Magnolia Place construction loan.

In first-quarter 2021, net repayments on other project and term loans totaled $28.3 million, primarily reflecting the repayment of The Saint Mary construction loan.

Refer to “Credit Facility, Other Financing Arrangements and Liquidity Outlook” below for a discussion of our outstanding debt at March 31, 2022.

In first-quarter 2021, we paid distributions to noncontrolling interest owners of $13.1 million, primarily related to the sale of The Saint Mary.

Credit Facility, Other Financing Arrangements and Liquidity Outlook

At March 31, 2022, we had total debt of $122.5 million based on the principal amounts outstanding, compared with $107.9 million at December 31, 2021.

Consolidated debt at both dates excluded the Block 21 loan of approximately $137 million.

Our Comerica Bank credit facility, which is comprised of a $60.0 million revolving line of credit, had $49.7 million available at March 31, 2022, net of letters of credit totaling $347 thousand committed against the credit facility.

In April 2022, we 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 our 2021 tax liability.

Refer to “Debt Maturities and Other Contractual Obligations” below for a table illustrating the timing of principal payments due on our outstanding debt as of March 31, 2022.

Cash provided by (used in) financing activities totaled $6.2 million for the first six months of 2022 and $(38.8) million for the first six months of 2021.

During the first six months of 2022, we had no net borrowings on the Comerica Bank credit facility, compared with net borrowings of $2.2 million for the first six months of 2021.

During the first six months of 2022, net borrowings on other project and term loans totaled $6.9 million, primarily reflecting borrowings on the Magnolia Place and The Saint June construction loans.

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.

Refer to “Credit Facility, Other Financing Arrangements and Liquidity Outlook” below for a discussion of our outstanding debt at June 30, 2022.

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.

No distributions to noncontrolling interest owners were paid during the first six months of 2022.

Liquidity Outlook, Credit Facility and Other Financing Arrangements

We had $102.4 million in cash and cash equivalents at June 30, 2022.

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

We believe that our current cash and cash equivalents, financing arrangements and cash generated from operations will provide us with sufficient liquidity to satisfy our anticipated working capital needs, debt service requirements, expected capital expenditures, project funding commitments, and the approved return of $50.0 million cash to stockholders for at least the next 12 months.

We expect to be able to extend or refinance all of our loans prior to their maturity dates.

No assurances can be given that the results anticipated by our projections will occur.

Refer to “Risk Factors” included in Part I, Item 1A.

and Note 6 in our 2021 Form 10-K.

At June 30, 2022, we had total debt of $116.0 million based on the principal amounts outstanding, compared with $107.9 million at December 31, 2021.

Consolidated debt at December 31, 2021, excluded the Block 21 loan of approximately $137 million, which was presented in liabilities held for sale - discontinued operations.

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

At June 30, 2022, we 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 our obligation to build certain roads and utilities facilities benefiting Holden Hills and Section N.

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, 2022.

Our debt agreements require compliance with specified financial covenants.

Refer to MD&A in our 2021 Form 10-K for a discussion of the financial covenants in our debt agreements.

As of March 31, 2022, we were in compliance with all of our financial covenants;

however, for each quarter since second-quarter 2020 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.

Refer to MD&A in our 2021 Form 10-K and Note 6 for a discussion of the financial covenants in our debt agreements.

As of June 30, 2022, we were in compliance with all of our financial covenants.

Stratus’ and its subsidiaries’ debt arrangements contain significant limitations that may restrict Stratus’ and its subsidiaries’ ability to, among other things:

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and engage in mergers, consolidations or other business combinations.

Our Comerica Bank credit facility and The Annie B land loan require Comerica Bank’s prior written consent for any common stock repurchases in excess of $1.0 million or any dividend payments.

The Block 21 loan agreement, which is excluded from consolidated debt and presented within liabilities held for sale, is secured by the Block 21 assets and contains financial tests that we must meet in order to avoid a “Trigger Period." 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.

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 Block 21 subsidiary's hotel operating agreement, the hotel operator may, and has, requested funds from us when 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 $13.7 million in 2021, $2.5 million in first-quarter 2022 and, depending on the timing of the sale of Block 21, we expect additional contributions to total as much as $0.6 million in second-quarter 2022.

We project that we will be able to meet our debt service and other cash obligations for at least the next 12 months.

Our 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.

In May 2022, we entered into an amendment with Comerica Bank to extend the maturity date of the Comerica Bank credit facility from September 27, 2022, to December 26, 2022.

We are in discussions with the lender to remove Holden Hills from the collateral pool for the facility, finance the Holden Hills project under a separate loan agreement and enter into a revised revolving credit facility with a lower borrowing limit secured by the remaining collateral under the facility.

We expect to be able to extend or refinance all of our loans prior to their maturity dates.

No assurances can be given that the results anticipated by our projections will occur.

Refer to “Risk Factors” included in Part I, Item 1A.

and Note 6 in our 2021 Form 10-K.

Our ability to meet our cash obligations over the longer term, including our significant debt maturities in 2023, will depend on our future operating and financial performance and cash flows, including our ability to sell or lease properties profitably and extend or refinance debt as it becomes due, which is subject to economic, financial, competitive and other factors beyond our control, including risks related to the COVID-19 pandemic.

DEBT MATURITIES AND OTHER CONTRACTUAL OBLIGATIONS

The following table summarizes our debt maturities based on the principal amounts outstanding as of March 31, 2022 (in thousands), excluding debt related to Block 21 included in liabilities held for sale:

2022 2023 2024 2025 2026 Total

The following table summarizes our debt maturities based on the principal amounts outstanding as of June 30, 2022, and the interest rate of each facility, all of which have variable rates, as of June 30, 2022, and December 31, 2021 (in thousands):

Interest Rate at

2022 2023 2024 2025 2026 Total June 30, 2022 December 31, 2021

Comerica Bank credit facility a

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New Caney land loan — 4,275 — — — 4,275 3.78 3.10

PPP loan 38 — — — — 38

Construction loans:

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Amarra Villas credit facility — — 2,469 — — 2,469 4.12 3.10

The Saint June — — 2,274 — — 2,274 3.87 —

Total $ 32,996 $ 40,081 $ 12,676 $ 5,702 $ 24,500 $ 115,955

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Matures December 6, 2022.

We have the option to extend the maturity date for two additional 12-month periods, subject to certain debt service coverage conditions, which we expect to meet for the first extension period after an approximate $5.1 million paydown upon the closing of the pending sale of the multi-family tract.

We have the option to extend the maturity date for two additional 12-month periods, subject to certain debt service coverage conditions.

The pending sale of the multi-family tract, if consummated, would result in a principal paydown of approximately $5.1 million.

We have the option to make an additional principal paydown, if necessary, in order to meet the debt service conditions.

Other than the debt transactions discussed in Note 6, there have been no material changes in our contractual obligations since December 31, 2021.

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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 whether and when the sale of Block 21 will be completed, our estimated gain and net cash proceeds from the sale of Block 21 and potential uses of such proceeds, potential results of our Board and management’s strategic planning process, the impacts of the COVID-19 pandemic, our ability to meet our future debt service and other cash obligations, future cash flows and liquidity, 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 inflation and interest rate changes, future capital expenditures and financing plans, possible joint ventures, partnerships, or other strategic relationships, other plans and objectives of management for future operations and development projects, and future dividend payments and share repurchases.

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, future cash flows and liquidity, 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 inflation and interest rate changes, future capital expenditures and financing plans, possible joint ventures, partnerships, or other strategic relationships, other plans and objectives of management for future operations and development projects, and future cash returns to stockholders, including any share repurchases and/or dividend payments.

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 repurchase our common stock in excess of $1.0 million or pay dividends on our common stock without Comerica Bank's prior written consent.

The declaration of dividends or decision to repurchase our common stock 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.

Under our Comerica Bank debt agreements, we are not permitted to repurchase our common stock in excess of $1.0 million or pay dividends on our common stock without Comerica Bank's prior written consent.

The declaration of dividends or decision to repurchase our common stock is at the discretion of our Board, subject to restrictions under our Comerica Bank debt agreements, and will depend on our financial results, cash requirements, projected compliance with covenants in our debt agreements, outlook and other factors deemed relevant by our 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, the occurrence of any event, change or other circumstance that could delay the closing of the sale of Block 21, or result in the termination of the agreements to sell Block 21, the results of our Board and management’s strategic planning process, the ongoing COVID-19 pandemic and any future major public health crisis, increases in inflation and interest rates, supply chain disruptions, declines in the market value of our assets, increases in operating costs, including real estate taxes and the cost of building materials and labor, 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 collect anticipated rental payments and close projected asset sales, the availability and terms of financing for development projects and other corporate purposes, our ability to enter into and maintain joint ventures, partnerships, or other strategic relationships, including risks associated with such joint ventures, 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, including as a result of the war in Ukraine, reductions in discretionary spending by consumers and businesses, competition from other real estate developers, 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, the failure to attract customers or tenants for our developments or such customers’ or tenants’ failure to satisfy their purchase commitments or leasing obligations, 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- and climate-related risks, loss of key personnel, environmental and litigation risks, cybersecurity incidents and other factors described in more detail under the heading “Risk Factors” in Part I, Item 1A.

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, the ongoing COVID-19 pandemic and any future major public health crisis, increases in inflation and interest rates, supply chain constraints, declines in the market value of our assets, increases in operating and construction costs, including real estate taxes and the cost of building materials and labor, 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 collect anticipated rental payments and close projected asset sales, the availability and terms of financing for development projects and other corporate purposes, our ability to enter into and maintain joint ventures, partnerships, or other strategic relationships, including risks associated with such joint ventures, 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, including as a result of the war in Ukraine, reductions in discretionary spending by consumers and businesses, competition from other real estate developers, 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, the failure to attract customers or tenants for our developments or such customers’ or tenants’ failure to satisfy their purchase commitments or leasing obligations, 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- and climate-related risks, loss of key personnel, environmental and litigation risks, cybersecurity incidents and other factors described in more detail under the heading “Risk Factors” in Part I, Item 1A.

of our 2021 Form 10-K, filed with the SEC, and “Risk Factors” included in Part II, Item 1A.

5 unchanged sentences

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What changed 10-Q

Item 2. Management’s Discussion and Analysis