STRATUS PROPERTIES INC 10-Q

Item 1. Financial Statements . STRATUS PROPERTIES INC. CONSOLIDATED BALANCE SHEETS (Unaudited) (In Thousands) September 30, 2022 December 31, 2021 ASSETS Cash and cash equivalents $ 63,537 $ 24,229 Restricted cash 13,776 18,294 Real estate held for sale 1,773 1,773 Real estate under development 224,813 181,224 Land available for development 40,331 40,659 Real estate held for investment, net 93,446 90,284 Lease right-of-use assets 10,910 10,487 Deferred tax assets 47 6,009 Other assets 14,204 17,214 Assets held for sale - discontinued operations — 151,053 Total assets $ 462,837 $ 541,226 LIABILITIES AND EQUITY Liabilities: Accounts payable $ 13,187 $ 14,118 Accrued liabilities, including taxes 15,951 22,069 Debt 124,170 106,648 Lease liabilities 14,945 13,986 Deferred gain 3,748 4,801 Other liabilities 6,019 17,894 Liabilities held for sale - discontinued operations — 153,097 Total liabilities 178,020 332,613 Commitments and contingencies Equity: Stockholders’ equity: Common stock 94 94 Capital in excess of par value of common stock 195,123 188,759 Retained earnings (accumulated deficit) 47,559 ( 8,963 ) Common stock held in treasury ( 23,004 ) ( 21,753 ) Total stockholders’ equity 219,772 158,137 Noncontrolling interests in subsidiaries 65,045 50,476 Total equity 284,817 208,613 Total liabilities and equity $ 462,837 $ 541,226 The accompanying Notes to Consolidated Financial Statements (Unaudited) are an integral part of these consolidated financial statements. 2 Table of Contents STRATUS PROPERTIES INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (Unaudited) (In Thousands, Except Per Share Amounts) Three Months Ended Nine Months Ended September 30, September 30, 2022 2021 2022 2021 Revenues: Real estate operations $ 6,887 $ 892 $ 14,831 $ 8,216 Leasing operations 3,090 5,376 9,370 15,057 Total revenues 9,977 6,268 24,201 23,273 Cost of sales: Real estate operations 6,228 2,110 13,026 8,002 Leasing operations 1,350 2,237 3,204 6,481 Depreciation 907 1,472 2,664 4,624 Total cost of sales 8,485 5,819 18,894 19,107 General and administrative expenses 3,602 5,252 10,213 15,797 Impairment of real estate 720 625 720 625 Gain on sale of assets — — ( 4,812 ) ( 22,931 ) Total 12,807 11,696 25,015 12,598 Operating (loss) income ( 2,830 ) ( 5,428 ) ( 814 ) 10,675 Interest expense, net — ( 855 ) ( 15 ) ( 2,690 ) Net gain on extinguishment of debt — 3,680 — 3,454 Other income, net 680 70 766 74 (Loss) income before income taxes and equity in unconsolidated affiliate's loss ( 2,150 ) ( 2,533 ) ( 63 ) 11,513 Provision for income taxes ( 420 ) ( 121 ) ( 159 ) ( 290 ) Equity in unconsolidated affiliate's loss ( 4 ) ( 2 ) ( 8 ) ( 11 ) Net (loss) income from continuing operations ( 2,574 ) ( 2,656 ) ( 230 ) 11,212 Net (loss) income from discontinued operations — ( 1,541 ) 96,300 ( 9,947 ) Net (loss) income and total comprehensive (loss) income ( 2,574 ) ( 4,197 ) 96,070 1,265 Total comprehensive loss (income) attributable to noncontrolling interests 214 433 463 ( 6,248 ) Net (loss) income and total comprehensive (loss) income attributable to common stockholders $ ( 2,360 ) $ ( 3,764 ) $ 96,533 $ ( 4,983 ) Basic net (loss) income per share attributable to common stockholders: Continuing operations $ ( 0.29 ) $ ( 0.27 ) $ 0.03 $ 0.60 Discontinued operations — ( 0.19 ) 11.65 ( 1.21 ) $ ( 0.29 ) $ ( 0.46 ) $ 11.68 $ ( 0.61 ) Diluted net (loss) income per share attributable to common stockholders: Continuing operations $ ( 0.29 ) $ ( 0.27 ) $ 0.03 $ 0.60 Discontinued operations — ( 0.19 ) 11.47 ( 1.21 ) $ ( 0.29 ) $ ( 0.46 ) $ 11.50 $ ( 0.61 ) Weighted-average shares of common stock outstanding: Basic 8,275 8,239 8,266 8,232 Diluted 8,275 8,239 8,397 8,232 Dividends declared per share of common stock $ 4.67 $ — $ 4.67 $ — The accompanying Notes to Consolidated Financial Statements (Unaudited) are an integral part of these consolidated financial statements. 3 Table of Contents STRATUS PROPERTIES INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In Thousands) Nine Months Ended September 30, 2022 2021 Cash flow from operating activities: Net income $ 96,070 $ 1,265 Adjustments to reconcile net income to net cash used in operating activities: Depreciation 2,664 8,758 Cost of real estate sold 7,510 4,028 Impairment of real estate 720 625 Gain on sale of discontinued operations ( 119,695 ) — Gain on sale of assets ( 4,812 ) ( 22,931 ) Net gain on extinguishment of debt — ( 3,454 ) Debt issuance cost amortization and stock-based compensation 1,898 1,468 Equity in unconsolidated affiliate’s loss 8 11 Deferred income taxes 5,962 — Purchases and development of real estate properties ( 18,294 ) ( 30,841 ) Decrease (increase) in other assets 4,858 ( 997 ) (Decrease) increase in accounts payable, accrued liabilities and other ( 26,213 ) 5,699 Net cash used in operating activities ( 49,324 ) ( 36,369 ) Cash flow from investing activities: Proceeds from sale of discontinued operations 105,813 — Proceeds from sale of assets — 59,488 Capital expenditures ( 38,889 ) ( 6,708 ) Payments on master lease obligations ( 742 ) ( 1,019 ) Other, net ( 8 ) 36 Net cash provided by investing activities 66,174 51,797 Cash flow from financing activities: Borrowings from credit facility 30,000 37,700 Payments on credit facility ( 30,000 ) ( 26,778 ) Borrowings from project loans 25,798 39,445 Payments on project and term loans ( 9,761 ) ( 53,330 ) Payment of dividends ( 38,675 ) — Stock-based awards net payments ( 452 ) ( 132 ) Distributions to noncontrolling interests — ( 13,227 ) Noncontrolling interests’ contributions 15,032 27,977 Purchases of treasury stock ( 262 ) — Financing costs ( 1,356 ) ( 1,645 ) Net cash (used in) provided by financing activities ( 9,676 ) 10,010 Net increase in cash, cash equivalents and restricted cash 7,174 25,438 Cash, cash equivalents and restricted cash at beginning of year 70,139 34,183 Cash, cash equivalents and restricted cash at end of period $ 77,313 $ 59,621 The accompanying Notes to Consolidated Financial Statements (Unaudited), which include information regarding noncash transactions, are an integral part of these consolidated financial statements. 4 Table of Contents STRATUS PROPERTIES INC. CONSOLIDATED STATEMENTS OF EQUITY (Unaudited) (In Thousands) Stockholders’ Equity Retained Earnings (Accumulated Deficit) Common Stock Held in Treasury Total Noncontrolling Interests in Subsidiaries Common Stock Capital in Excess of Par Value Number of Shares At Par Value Number of Shares At Cost Total Equity Balance at December 31, 2021 9,388 $ 94 $ 188,759 $ ( 8,963 ) 1,143 $ ( 21,753 ) $ 158,137 $ 50,476 $ 208,613 Exercised and vested stock-based awards 39 — — — — — — — — Stock-based compensation — — 212 — — — 212 — 212 Tender of shares for stock-based awards — — — — 11 ( 452 ) ( 452 ) — ( 452 ) Total comprehensive income (loss) — — — 2,272 — — 2,272 ( 85 ) 2,187 Balance at March 31, 2022 9,427 94 188,971 ( 6,691 ) 1,154 ( 22,205 ) 160,169 50,391 210,560 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 Exercised and vested stock-based awards 8 — — — — — — — — Stock-based compensation — — 513 — — — 513 — 513 Common stock repurchases — — — 34 ( 799 ) ( 799 ) — ( 799 ) Cash dividend — — ( 40,011 ) — — ( 40,011 ) — ( 40,011 ) Contributions from noncontrolling interests — — — — — — — 15,032 15,032 Total comprehensive loss — — — ( 2,360 ) — — ( 2,360 ) ( 214 ) ( 2,574 ) Balance at September 30, 2022 9,435 $ 94 $ 195,123 $ 47,559 1,188 $ ( 23,004 ) $ 219,772 $ 65,045 $ 284,817 5 Table of Contents STRATUS PROPERTIES INC. CONSOLIDATED STATEMENTS OF EQUITY (Unaudited) (Continued) (In Thousands) Stockholders’ Equity Retained Earnings (Accumulated Deficit) Common Stock Held in Treasury Total Noncontrolling Interests in Subsidiaries Common Stock Capital in Excess of Par Value Number of Shares At Par Value Number of Shares At Cost Total Equity Balance at December 31, 2020 9,358 $ 94 $ 186,777 $ ( 66,357 ) 1,137 $ ( 21,600 ) $ 98,914 $ 10,850 $ 109,764 Exercised and vested stock-based awards 19 — — — — — — — — Stock-based compensation — — 182 — — — 182 — 182 Grant of RSUs under the PPIP — — 1,162 — — — 1,162 — 1,162 Tender of shares for stock-based awards — — — — 6 ( 153 ) ( 153 ) — ( 153 ) Distributions to noncontrolling interests — — — — — — — ( 13,087 ) ( 13,087 ) Total comprehensive income — — — 8,944 — — 8,944 6,722 15,666 Balance at March 31, 2021 9,377 94 188,121 ( 57,413 ) 1,143 ( 21,753 ) 109,049 4,485 113,534 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 Exercised and vested stock-based awards 11 — 25 — — — 25 — 25 Stock-based compensation — — 205 — — — 205 — 205 Distributions to noncontrolling interests — — — — — — — ( 140 ) ( 140 ) Contributions from noncontrolling interests — — — — — — — 27,977 27,977 Total comprehensive loss — — — ( 3,764 ) — — ( 3,764 ) ( 433 ) ( 4,197 ) Balance at September 30, 2021 9,388 $ 94 $ 188,553 $ ( 71,340 ) 1,143 $ ( 21,753 ) $ 95,554 $ 31,848 $ 127,402 The accompanying Notes to Consolidated Financial Statements (Unaudited) are an integral part of these consolidated financial statements. 6 Table of Contents STRATUS PROPERTIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. GENERAL The unaudited consolidated financial statements and the accompanying notes are prepared in accordance with generally accepted accounting principles (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. 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. 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 nine months of 2022, he received $ 20 thousand as an annual incentive award for 2021 and a $ 135 thousand cash payment under the PPIP. As of September 30, 2022, the employee has two outstanding awards under the PPIP. Refer to Note 7 for discussion of the PPIP. 7 Table of Contents 2. EARNINGS PER SHARE Stratus’ basic net (loss) income per share of common stock was calculated by dividing the net (loss) income attributable to common stockholders by the weighted-average shares of common stock outstanding during the period. A reconciliation of net (loss) income and weighted-average shares of common stock outstanding for purposes of calculating diluted net (loss) income per share (in thousands, except per share amounts) follows: Three Months Ended Nine Months Ended September 30, September 30, 2022 2021 2022 2021 Net (loss) income from continuing operations $ ( 2,574 ) $ ( 2,656 ) $ ( 230 ) $ 11,212 Net (loss) income from discontinued operations — ( 1,541 ) 96,300 ( 9,947 ) Net (loss) income and total comprehensive (loss) income ( 2,574 ) ( 4,197 ) 96,070 1,265 Total comprehensive loss (income) attributable to noncontrolling interests 214 433 463 ( 6,248 ) Net (loss) income and total comprehensive (loss) income attributable to common stockholders $ ( 2,360 ) $ ( 3,764 ) $ 96,533 $ ( 4,983 ) Basic weighted-average shares of common stock outstanding 8,275 8,239 8,266 8,232 Add shares issuable upon vesting of dilutive restricted stock units (RSUs) a — — 131 — Diluted weighted-average shares of common stock outstanding 8,275 8,239 8,397 8,232 Basic net (loss) income per share attributable to common stockholders: Continuing operations $ ( 0.29 ) $ ( 0.27 ) $ 0.03 $ 0.60 Discontinued operations — ( 0.19 ) 11.65 ( 1.21 ) $ ( 0.29 ) $ ( 0.46 ) $ 11.68 $ ( 0.61 ) Diluted net (loss) income per share attributable to common stockholders: Continuing operations $ ( 0.29 ) $ ( 0.27 ) $ 0.03 $ 0.60 Discontinued operations — ( 0.19 ) 11.47 ( 1.21 ) $ ( 0.29 ) $ ( 0.46 ) $ 11.50 $ ( 0.61 ) a. Excludes 6 thousand shares for the first nine months of 2022 of common stock associated with RSUs that were anti-dilutive. Excludes 296 thousand shares for third-quarter 2022, 145 thousand shares for third-quarter 2021 and 134 thousand shares for the first nine months of 2021 of common stock associated with RSUs that were anti-dilutive as a result of net losses. 3. LIMITED PARTNERSHIPS Stratus has entered into strategic partnerships for certain development projects. Stratus, through its subsidiaries, is a partner in the following limited partnerships: The Saint George Apartments, L.P., Stratus Block 150, L.P., The Saint June, L.P., Stratus Kingwood Place, L.P. and The Saint Mary, L.P. For additional information regarding Stratus' partnerships, refer to Note 2 in the Stratus 2021 Form 10-K. 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 September 30, 2022, Stratus holds a 10.0 percent indirect controlling equity interest in The Saint George Apartments, L.P. 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 September 30, 2022, Stratus holds, in the aggregate, a 8 Table of Contents 31.0 percent indirect controlling equity interest in Stratus Block 150, L.P. As of September 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. Accounting for Limited Partnerships. Stratus has performed evaluations and concluded that The Saint George Apartments, L.P., Stratus Block 150, L.P., The Saint June, L.P., Stratus Kingwood, L.P. and The Saint Mary, L.P. are variable interest entities and that Stratus is the primary beneficiary. Accordingly, the partnerships’ results are consolidated in Stratus’ financial statements. Stratus will continue to evaluate which entity is the primary beneficiary of these partnerships in accordance with applicable accounting guidance. Stratus’ consolidated balance sheets include the following assets and liabilities of the partnerships (in thousands): September 30, 2022 December 31, 2021 Assets: Cash and cash equivalents $ 17,621 $ 7,432 Restricted cash — 11,809 Real estate under development 93,586 62,692 Land available for development 8,286 7,641 Real estate held for investment 30,955 31,399 Other assets 4,723 3,160 Total assets 155,171 124,133 Liabilities: Accounts payable and accrued liabilities 10,151 6,661 Debt 56,366 46,096 Total liabilities 66,517 52,757 Net assets $ 88,654 $ 71,376 4. ASSET SALES 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 in second-quarter 2022 included in net (loss) income 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 accordance with accounting guidance, Stratus reported the results of operations of Block 21 as discontinued operations in the consolidated statements of comprehensive (loss) income because the disposal represents a strategic shift that had a major effect on operations, and presented the assets and liabilities of Block 21 as held for sale - discontinued operations in the consolidated balance sheets for all periods presented. Block 21 did not have any other comprehensive income and Stratus' consolidated statements of cash flows are reported on a combined basis without separately presenting discontinued operations. 9 Table of Contents 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): Assets: Cash and cash equivalents $ 9,172 Restricted cash a 18,444 Real estate held for investment, net 120,452 Other assets 2,985 Total assets $ 151,053 Liabilities: Accounts payable and accrued liabilities, including taxes $ 6,200 Debt 136,684 Other liabilities 10,213 Total liabilities $ 153,097 a. 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 (loss) income consist of the following (in thousands): Three Months Ended Nine Months Ended September 30, September 30, 2022 2021 2022 2021 Revenues: a Hotel $ — $ 5,199 $ 12,653 $ 11,251 Entertainment — 3,657 9,990 5,923 Leasing operations and other — 356 932 1,124 Total revenue — 9,212 23,575 18,298 Cost of sales: Hotel — 4,312 9,230 11,076 Entertainment — 2,749 7,763 5,559 Leasing operations and other — 196 802 871 Depreciation b — 1,360 — 4,134 Total cost of sales — 8,617 17,795 21,640 General and administrative expenses — 170 236 568 Gain on sale of assets — — ( 119,695 ) — Operating income (loss) — 425 125,239 ( 3,910 ) Interest expense, net — ( 2,005 ) ( 3,236 ) ( 5,976 ) Benefit from (provision for) income taxes — 39 ( 25,703 ) ( 61 ) Net (loss) income from discontinued operations $ — $ ( 1,541 ) $ 96,300 $ ( 9,947 ) a. In accordance with accounting guidance, amounts are net of eliminations of intercompany sales totaling $ 286 thousand in third-quarter 2021, $ 510 thousand for the first nine months of 2022, and $ 822 thousand for the first nine months of 2021. b. In accordance with accounting guidance, depreciation is not recognized subsequent to classification as assets held for sale, which occurred in the fourth quarter of 2021. Capital expenditures associated with discontinued operations totaled $ 210 thousand in third-quarter 2021, $ 213 thousand for the first nine months of 2022 and $ 475 thousand the first nine months of 2021. The Oaks at Lakeway. In 2017, Stratus sold The Oaks at Lakeway to FHF I Oaks at Lakeway, LLC for $ 114.0 million in cash. The Oaks at Lakeway is an H-E-B, L.P.-anchored retail project located in Lakeway, Texas. The parties entered into three master lease agreements at closing: (1) one covering unleased in-line retail space, with a 5 -year term (the In-line Master Lease), (2) one covering the hotel pad with a 99 -year term (the Hotel Master Lease) and (3) one covering four unleased pad sites, three of which have 10 -year terms, and one of which has a 10 Table of Contents 15 -year term (the Pad Site Master Lease). For additional information, refer to Note 9 in the Stratus 2021 Form 10-K under the heading “Deferred Gain on Sale of The Oaks at Lakeway.” The In-Line Master Lease expired in February 2022 and the Hotel Master Lease was terminated in November 2020. As such, Stratus has no further obligations under these two master leases. With respect to the Pad Site Master Lease, Stratus has leased the one pad site with a 15 -year term, reducing the monthly rent payment net of rent collections for this pad site to approximately $ 2,500 . Stratus may assign this lease to the purchaser and terminate the obligation under the Pad Site Master Lease for this pad site with a payment of $ 560 thousand to the purchaser. The lease 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 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 $ 71 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 during the first nine months of 2022. A contract liability of $ 3.7 million is presented as a deferred gain in the consolidated balance sheets at September 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. In January 2021, The Saint Mary, L.P. sold The Saint Mary for $ 60.0 million. After closing costs and payment of the outstanding construction loan, the sale generated net proceeds of approximately $ 34 million. In first-quarter 2021, after establishing a reserve for remaining costs of the partnership, Stratus received $ 20.9 million from the subsidiary in connection with the sale and $ 12.9 million of the net proceeds were distributed to the noncontrolling interest owners. Stratus recognized a pre-tax gain on the sale of $ 22.9 million ($ 16.2 million net of noncontrolling interests) 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 Land. 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 closed in October 2022. Upon entering into the contract, Stratus recorded a $ 625 thousand impairment charge in third-quarter 2021 to reduce the carrying value of the land to its fair value based on the contractual sale price less estimated selling costs. In third-quarter 2022, Stratus recorded a $ 70 thousand impairment charge due to selling costs in excess of the previous estimate. Amarra Villas. In February 2021, Stratus entered into a contract to sell one of the Amarra Villas homes for $ 2.4 million. The sale, if consummated, is set to close in first-quarter 2023. Stratus recorded a $ 650 thousand impairment charge in third-quarter 2022 because the estimated total project costs and costs of sale for the home under construction exceed its contractual sale price. 5. FAIR VALUE MEASUREMENTS Fair value accounting guidance includes a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 inputs) and the lowest priority to unobservable inputs (Level 3 inputs). The carrying value for certain Stratus financial instruments (i.e., cash and cash equivalents, restricted cash, accounts payable and accrued liabilities) approximates fair value because of their short-term nature and generally negligible credit losses. 11 Table of Contents A summary of the carrying amount and fair value of Stratus' debt follows (in thousands): September 30, 2022 December 31, 2021 Carrying Value Fair Value Carrying Value Fair Value Liabilities: Debt $ 124,170 $ 125,855 $ 106,648 $ 108,091 Stratus' debt is recorded at cost and is not actively traded. Fair value is estimated based on discounted future expected cash flows at estimated current market interest rates. Accordingly, Stratus' debt is classified within Level 2 of the fair value hierarchy. The fair value of debt does not represent the amounts that will ultimately be paid upon the maturities of the loans. 6. DEBT AND EQUITY The components of Stratus' debt follow (in thousands): September 30, 2022 December 31, 2021 Comerica Bank credit facility $ — $ — Jones Crossing loan 24,118 24,042 The Annie B land loan 13,939 13,847 New Caney land loan 4,043 4,496 Paycheck Protection Program loan — 156 Construction loans: Kingwood Place 32,657 32,249 Lantana Place 21,776 22,098 The Saint June 9,770 — Magnolia Place 6,314 2,077 West Killeen Market 5,979 6,078 Amarra Villas credit facility 5,574 1,605 Total debt a $ 124,170 $ 106,648 a. Includes net reductions for unamortized debt issuance costs of $ 1.2 million at September 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. Using proceeds from the sale of Block 21, Stratus repaid the outstanding amount under its $ 60.0 million Comerica Bank credit facility in June 2022. As of September 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. In November 2022, Stratus entered into an amendment to extend the maturity date of the credit facility from December 26, 2022, to March 27, 2023. New Caney land loan. 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 in March 2022 and 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. PPP loan. In April 2020, Stratus received a $ 4.0 million loan under the Paycheck Protection Program (PPP loan) of the Coronavirus Aid, Relief, and Economic Security Act, which was signed into law on March 27, 2020. The PPP loan matured and the remaining balance was repaid by Stratus in April 2022. Of the original loan amount, $ 3.7 million was forgiven in August 2021. 12 Table of Contents Lantana Place construction loan. In August 2022, Stratus and Southside Bank amended the Lantana Place construction loan. Pursuant to the agreement, the date through which Stratus can request advances under the loan was extended through December 31, 2023, the interest rate for the loan was changed to Term SOFR plus 2.40 percent, subject to a 3.0 percent floor, and the maturity date of the loan was extended to July 1, 2027. In addition, the land planned for The Saint Julia, a proposed multi-family project at Lantana Place, was released from the collateral for the loan. Payments of interest only on the construction loan are due monthly through July 1, 2023. Beginning August 1, 2023, monthly payments of principal and interest based on a 30-year amortization are due, with the outstanding principal due at maturity. The debt service coverage ratio was also changed to 1.25 to 1.00, and Stratus was released as guarantor under the related guaranty. 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 based on a 30-year amortization are due monthly and the remaining balance is payable at maturity. Amarra Villas credit 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. No amounts were outstanding on this loan as of September 30, 2022. 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 $ 1.8 million in third-quarter 2022, $ 2.2 million in third-quarter 2021, $ 4.4 million for the first nine months of 2022 and $ 6.6 million for the first nine months of 2021. Stratus' capitalized interest totaled $ 1.8 million in third-quarter 2022, $ 1.3 million in third-quarter 2021, $ 4.3 million for the first nine months of 2022 and $ 3.9 million for the first nine 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. 13 Table of Contents Equity. 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. On September 1, 2022, after receiving written consent from Comerica Bank, Stratus’ Board of Directors (Board) declared a special cash dividend of $ 4.67 per share (totaling $ 40.0 million) on Stratus’ common stock, which was paid on September 29, 2022, to shareholders of record as of September 19, 2022. Accrued liabilities as of September 30, 2022, included $ 1.3 million representing dividends accrued for unvested RSUs in accordance with the terms of the awards. The accrued dividends will be paid to the holders of the RSUs, if and when they vest. Stratus’ Board also approved a new share repurchase program, which authorizes repurchases of up to $ 10.0 million of Stratus’ common stock. The repurchase program authorizes Stratus, in management’s discretion, to repurchase shares from time to time, subject to market conditions and other factors. In third-quarter 2022, Stratus acquired 33,958 shares of its common stock under the share repurchase program for a total cost of $ 0.8 million at an average price of $ 23.49 per share. Through November 4, 2022, Stratus has acquired 105,415 shares of its common stock for a total cost of $ 2.6 million at an average price of $ 25.02 per share, and $ 7.4 million remains available for repurchases under the program. 7. PROFIT PARTICIPATION INCENTIVE PLAN In July 2018, the Compensation Committee unanimously adopted the PPIP, which provides participants with economic incentives tied to the success of the development projects designated by the Compensation Committee as approved projects under the PPIP. Estimates related to the awards may change over time as a result of differences between projected and actual development progress and costs, market conditions and the timing of capital transactions or valuation events. Refer to Note 8 of the Stratus 2021 Form 10-K for further discussion. The sale of The Saint Mary in January 2021 was a capital transaction under the PPIP. During February 2022, $ 2.1 million was paid in cash to eligible participants. In September 2021, Lantana Place reached a valuation event under the PPIP. The profit pool was $ 3.9 million, of which $ 0.2 million was paid in cash during February 2022 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. 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. During first-quarter 2022, the Compensation Committee designated The Saint June as an approved project under the PPIP, and the awards were granted in August 2022. 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. 14 Table of Contents A summary of PPIP costs follows (in thousands): Three Months Ended Nine Months Ended September 30, September 30, 2022 2021 2022 2021 Charged to general and administrative expense $ 135 $ 2,751 $ 269 $ 3,495 Capitalized to project development costs 107 ( 60 ) 209 367 Total PPIP costs $ 242 $ 2,691 $ 478 $ 3,862 The accrued liability for the PPIP totaled $ 2.9 million at September 30, 2022, and $ 15.2 million at December 31, 2021 (included in other liabilities). 8. INCOME TAXES Stratus’ accounting policy for and other information regarding its income taxes are further described in Notes 1 and 7 in the Stratus 2021 Form 10-K. Stratus had deferred tax assets (net of deferred tax liabilities) totaling $ 6.3 million at September 30, 2022, and $ 12.4 million at December 31, 2021. Stratus' deferred tax assets had valuation allowances totaling $ 6.3 million at September 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. Stratus plans to make a federal income tax payment of approximately $ 10 million in December 2022 to satisfy estimated taxes due associated with current year taxable income, including the gain on the sale of Block 21. In evaluating the recoverability of the remaining deferred tax assets, management considered available positive and negative evidence, giving greater weight to the uncertainty regarding projected future financial results. Upon a change in facts and circumstances, management may conclude that sufficient positive evidence exists to support a reversal of, or decrease in, the valuation allowance in the future, which would favorably impact Stratus' results of operations. Stratus’ future results of operations may be negatively impacted by an inability to realize a tax benefit for future tax losses or for items that will generate additional deferred tax assets that are not more likely than not to be realized. The difference between Stratus' consolidated effective income tax rate for the first nine months of 2022 and the U.S. Federal statutory income tax rate of 21 percent was primarily attributable to state income taxes, noncontrolling interests in subsidiaries, the presence of a valuation allowance against certain U.S. Federal deferred tax assets as of September 30, 2022, and the release of a reserve on uncertain tax positions related to the 2015 through 2017 U.S. Federal tax audit, which was closed in first-quarter 2022. The difference between Stratus' consolidated effective income tax rate of 3 percent for the first nine 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 September 30, 2021, and the Texas state margin tax. On August 16, 2022, the Inflation Reduction Act of 2022 (the IR Act) was enacted in the United States. Among other provisions, the IR Act imposes a new 1 percent excise tax on the fair market value of net corporate stock repurchases made by covered corporations, effective for tax years beginning after December 31, 2022. Stratus is assessing the potential impacts of the IR Act, but does not expect the IR Act to have a material impact on its consolidated financial statements. 9. BUSINESS 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 through its sale in May 2022. 15 Table of Contents 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; 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); and in Magnolia, Texas (Magnolia Place), Kingwood, Texas (land for future multi-family development, for which a sale closed in October 2022, and a vacant pad site) and New Caney, Texas (New Caney), located in the greater Houston area. The Leasing Operations segment is comprised of Stratus’ real estate assets, both residential and commercial, that are leased or available for lease and includes West Killeen Market, Lantana Place, Kingwood Place and the completed portion of Jones Crossing. The segment also included The Saint Mary until its sale in January 2021 and The Santal until its sale in December 2021. Stratus uses operating income or loss to measure the performance of each segment. General and administrative expenses, which primarily consist of employee salaries, wages and other costs, are managed on a consolidated basis and are not allocated to Stratus’ operating segments. The following segment information reflects management determinations that may not be indicative of what the actual financial performance of each segment would be if it were an independent entity. Revenues from Contracts with Customers. Stratus' revenues from contracts with customers follow (in thousands): Three Months Ended Nine Months Ended September 30, September 30, 2022 2021 2022 2021 Real Estate Operations: Developed property sales $ — $ — $ 2,382 $ 4,615 Undeveloped property sales 6,887 750 12,331 3,250 Commissions and other — 142 118 351 6,887 892 14,831 8,216 Leasing Operations: Rental revenue 3,090 5,376 9,370 15,057 3,090 5,376 9,370 15,057 Total revenues from contracts with customers $ 9,977 $ 6,268 $ 24,201 $ 23,273 Financial Information by Business Segment. Summarized financial information by segment for the three months ended September 30, 2022, based on Stratus’ internal financial reporting system utilized by its chief operating decision maker, follows (in thousands): Real Estate Operations a Leasing Operations Corporate, Eliminations and Other b Total Revenues: Unaffiliated customers $ 6,887 $ 3,090 $ — $ 9,977 Cost of sales, excluding depreciation 6,232 1,350 ( 4 ) 7,578 Depreciation 24 887 ( 4 ) 907 General and administrative expenses — — 3,602 3,602 Impairment of real estate c 720 — — 720 Operating (loss) income $ ( 89 ) $ 853 $ ( 3,594 ) $ ( 2,830 ) Capital expenditures and purchases and development of real estate properties $ 6,203 $ 11,314 $ — $ 17,517 Total assets at September 30, 2022 274,397 111,938 76,502 462,837 a. Includes sales commissions and other revenues together with related expenses. 16 Table of Contents b. Includes consolidated general and administrative expenses and eliminations of intersegment amounts. c. Includes a $ 650 thousand impairment charge for one of the Amarra Villas homes that is under contract to sell for $ 2.4 million and a $ 70 thousand impairment charge for the multi-family tract of land at Kingwood Place that sold for $ 5.5 million in October 2022. Summarized financial information by segment for the three months ended September 30, 2021, based on Stratus’ internal financial reporting system utilized by its chief operating decision maker, follows (in thousands): Real Estate Operations a Leasing Operations Corporate, Eliminations and Other b Total Revenues: Unaffiliated customers $ 892 $ 5,376 $ — $ 6,268 Cost of sales, excluding depreciation 2,134 2,238 ( 25 ) 4,347 Depreciation 37 1,449 ( 14 ) 1,472 General and administrative expenses c — — 5,252 5,252 Impairment of real estate d 625 — — 625 Operating (loss) income $ ( 1,904 ) $ 1,689 $ ( 5,213 ) $ ( 5,428 ) Capital expenditures and purchases and development of real estate properties $ 25,962 $ 4,120 $ 210 $ 30,292 Total assets at September 30, 2021 e 211,423 180,057 167,620 559,100 a. Includes sales commissions and other revenues together with related expenses. b. Includes consolidated general and administrative expenses and eliminations of intersegment amounts. c. Includes $ 2.8 million in employee incentive compensation costs associated with the PPIP resulting primarily from an increased valuation for The Santal. d. Includes a $ 625 thousand impairment charge for the multi-family tract of land at Kingwood Place. e. Leasing operations includes $ 67.3 million of assets held for sale related to the December 2021 sale of The Santal. Corporate, eliminations and other includes $ 147.8 million of assets held for sale associated with discontinued operations at Block 21. Summarized financial information by segment for the nine months ended September 30, 2022, based on Stratus’ internal financial reporting system utilized by its chief operating decision maker, follows (in thousands): Real Estate Operations a Leasing Operations Corporate, Eliminations and Other b Total Revenues: Unaffiliated customers $ 14,831 $ 9,370 $ — $ 24,201 Intersegment 6 — ( 6 ) — Cost of sales, excluding depreciation 13,030 3,204 ( 4 ) 16,230 Depreciation 73 2,604 ( 13 ) 2,664 General and administrative expenses — — 10,213 10,213 Gain on sale of assets c — ( 4,812 ) — ( 4,812 ) Impairment of real estate d 720 — — 720 Operating income (loss) $ 1,014 $ 8,374 $ ( 10,202 ) $ ( 814 ) Capital expenditures and purchases and development of real estate properties $ 18,294 $ 38,676 $ 213 $ 57,183 a. Includes sales commissions and other revenues together with related expenses. b. Includes consolidated general and administrative expenses and eliminations of intersegment amounts. c. 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. d. Includes a $ 650 thousand impairment charge for one of the Amarra Villas homes that is under contract to sell for $ 2.4 million and a $ 70 thousand impairment charge for the multi-family tract of land at Kingwood Place that sold for $ 5.5 million in October 2022. 17 Table of Contents Summarized financial information by segment for the nine months ended September 30, 2021, based on Stratus’ internal financial reporting system utilized by its chief operating decision maker, follows (in thousands): Real Estate Operations a Leasing Operations Corporate, Eliminations and Other b Total Revenues: Unaffiliated customers $ 8,216 $ 15,057 $ — $ 23,273 Intersegment 9 — ( 9 ) — Cost of sales, excluding depreciation 8,026 6,482 ( 25 ) 14,483 Depreciation 149 4,525 ( 50 ) 4,624 General and administrative expenses c — — 15,797 15,797 Gain on sale of assets d — ( 22,931 ) — ( 22,931 ) Impairment of real estate e 625 — — 625 Operating (loss) income $ ( 575 ) $ 26,981 $ ( 15,731 ) $ 10,675 Capital expenditures and purchases and development of real estate properties $ 30,841 $ 6,233 $ 475 $ 37,549 a. Includes sales commissions and other revenues together with related expenses. b. Includes consolidated general and administrative expenses and eliminations of intersegment amounts. c. Includes $ 3.8 million incurred for consulting, legal and public relation costs for Stratus' successful proxy contest and the real estate investment trust exploration process as well as $ 3.5 million in employee incentive compensation costs associated with the PPIP resulting primarily from an increased valuation for The Santal. d. Represents the pre-tax gain on the January 2021 sale of The Saint Mary. e. Includes a $ 625 thousand impairment charge for the multi-family tract of land at Kingwood Place. 10. SUBSEQUENT EVENTS On October 20, 2022, Stratus closed on the sale of a multi-family tract of land at Kingwood Place, an H-E-B grocery anchored, mixed-use project in Kingwood, Texas for $ 5.5 million. In connection with the sale, Stratus made a $ 5.0 million principal payment on the Kingwood Place construction loan. Stratus evaluated events after September 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. 18 Table of Contents