STRATUS PROPERTIES INC 10-Q

Item 1. Financial Statements . STRATUS PROPERTIES INC. CONSOLIDATED BALANCE SHEETS (Unaudited) (In Thousands) March 31, 2023 December 31, 2022 ASSETS Cash and cash equivalents $ 50,895 $ 37,666 Restricted cash 8,889 8,043 Real estate held for sale 1,773 1,773 Real estate under development 246,819 239,278 Land available for development 48,858 39,855 Real estate held for investment, net 92,433 92,377 Lease right-of-use assets 11,981 10,631 Deferred tax assets 38 38 Other assets 18,033 15,479 Total assets $ 479,719 $ 445,140 LIABILITIES AND EQUITY Liabilities: Accounts payable $ 14,684 $ 15,244 Accrued liabilities, including taxes 5,929 7,049 Debt 128,336 122,765 Lease liabilities 16,382 14,848 Deferred gain 3,289 3,519 Other liabilities 5,874 9,642 Total liabilities 174,494 173,067 Commitments and contingencies Equity: Stockholders’ equity: Common stock 94 94 Capital in excess of par value of common stock 196,308 195,773 Retained earnings 35,651 41,452 Common stock held in treasury ( 31,181 ) ( 30,071 ) Total stockholders’ equity 200,872 207,248 Noncontrolling interests in subsidiaries 104,353 64,825 Total equity 305,225 272,073 Total liabilities and equity $ 479,719 $ 445,140 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 March 31, 2023 2022 Revenues: Real estate operations $ 2,493 $ 19 Leasing operations 3,309 3,080 Total revenues 5,802 3,099 Cost of sales: Real estate operations 4,487 1,366 Leasing operations 1,261 984 Depreciation and amortization 928 873 Total cost of sales 6,676 3,223 General and administrative expenses 4,719 3,167 Gain on sale of assets — ( 4,812 ) Total 11,395 1,578 Operating (loss) income ( 5,593 ) 1,521 Interest expense, net — ( 15 ) Other income, net 485 6 (Loss) income before income taxes and equity in unconsolidated affiliates' loss ( 5,108 ) 1,512 (Provision for) benefit from income taxes ( 1,162 ) 302 Equity in unconsolidated affiliates' loss ( 3 ) ( 2 ) Net (loss) income from continuing operations ( 6,273 ) 1,812 Net income from discontinued operations — 375 Net (loss) income and total comprehensive (loss) income ( 6,273 ) 2,187 Total comprehensive loss attributable to noncontrolling interests 472 85 Net (loss) income and total comprehensive (loss) income attributable to common stockholders $ ( 5,801 ) $ 2,272 Basic net (loss) income per share attributable to common stockholders: Continuing operations $ ( 0.71 ) $ 0.23 Discontinued operations — 0.05 $ ( 0.71 ) $ 0.28 Diluted net (loss) income per share attributable to common stockholders: Continuing operations $ ( 0.71 ) $ 0.23 Discontinued operations — 0.04 $ ( 0.71 ) $ 0.27 Weighted-average shares of common stock outstanding: Basic 8,224 8,251 Diluted 8,224 8,355 The accompanying Notes to Consolidated Financial Statements (Unaudited) are an integral part of these consolidated financial statements. 3 Table of Contents STRATUS PROPERTIES INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In Thousands) Three Months Ended March 31, 2023 2022 Cash flow from operating activities: Net (loss) income $ ( 6,273 ) $ 2,187 Adjustments to reconcile net (loss) income to net cash used in operating activities: Depreciation and amortization 928 873 Cost of real estate sold 2,010 — Gain on sale of assets — ( 4,812 ) Debt issuance cost amortization and stock-based compensation 713 515 Equity in unconsolidated affiliate’s loss 3 2 Deferred income taxes — 1,167 Purchases and development of real estate properties ( 9,027 ) ( 4,864 ) Increase in other assets ( 2,945 ) ( 5,559 ) Decrease in accounts payable, accrued liabilities and other ( 3,813 ) ( 7,629 ) Net cash used in operating activities ( 18,404 ) ( 18,120 ) Cash flow from investing activities: Capital expenditures ( 10,006 ) ( 14,724 ) Payments on master lease obligations ( 248 ) ( 182 ) Other 22 — Net cash used in investing activities ( 10,232 ) ( 14,906 ) Cash flow from financing activities: Borrowings from revolving credit facility — 10,000 Borrowings from project loans 11,618 5,111 Payments on project and term loans ( 6,551 ) ( 1,172 ) Payment of dividends ( 184 ) — Finance lease principal payments ( 4 ) — Stock-based awards net payments ( 216 ) ( 452 ) Noncontrolling interest contribution 40,000 — Purchases of treasury stock ( 894 ) — Financing costs ( 1,058 ) ( 17 ) Net cash provided by financing activities 42,711 13,470 Net increase (decrease) in cash, cash equivalents and restricted cash 14,075 ( 19,556 ) Cash, cash equivalents and restricted cash at beginning of year 45,709 70,139 Cash, cash equivalents and restricted cash at end of period $ 59,784 $ 50,583 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) (Continued) (In Thousands) Stockholders’ Equity Common Stock Held in Treasury Total Common Stock Capital in Excess of Par Value Retained Earnings (Accumulated Deficit) Noncontrolling Interests in Subsidiaries Number of Shares At Par Value Number of Shares At Cost Total Equity Balance at December 31, 2022 9,439 $ 94 $ 195,773 $ 41,452 1,448 $ ( 30,071 ) $ 207,248 $ 64,825 $ 272,073 Exercised and vested stock-based awards 40 — — — — — — — — Director fees paid in shares of common stock — — 6 — — — 6 — 6 Stock-based compensation — — 529 — — — 529 — 529 Tender of shares for stock-based awards — — — — 11 ( 216 ) ( 216 ) — ( 216 ) Common stock repurchases — — — — 44 ( 894 ) ( 894 ) — ( 894 ) Contributions from noncontrolling interests — — — — — — — 40,000 40,000 Total comprehensive loss — — — ( 5,801 ) — — ( 5,801 ) ( 472 ) ( 6,273 ) Balance at March 31, 2023 9,479 $ 94 $ 196,308 $ 35,651 1,503 $ ( 31,181 ) $ 200,872 $ 104,353 $ 305,225 Stockholders’ Equity Common Stock Held in Treasury Total Common Stock Capital in Excess of Par Value Retained Earnings (Accumulated Deficit) Noncontrolling Interests in Subsidiaries Number of Shares At Par Value Number of Shares At Cost Total Equity Balance at December 31, 2021 9,388 $ 94 $ 188,759 $ ( 8,963 ) 1,143 $ ( 21,753 ) $ 158,137 $ 50,476 $ 208,613 Exercised and vested stock-based awards 39 — — — — — — — — Stock-based compensation — — 212 — — — 212 — 212 Tender of shares for stock-based awards — — — — 11 ( 452 ) ( 452 ) — ( 452 ) Total comprehensive income (loss) — — — 2,272 — — 2,272 ( 85 ) 2,187 Balance at March 31, 2022 9,427 $ 94 $ 188,971 $ ( 6,691 ) 1,154 $ ( 22,205 ) $ 160,169 $ 50,391 $ 210,560 The accompanying Notes to Consolidated Financial Statements (Unaudited) are an integral part of these consolidated financial statements. 5 Table of Contents STRATUS PROPERTIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. GENERAL The unaudited condensed 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, 2022, included in Stratus Properties Inc.’s (Stratus) Annual Report on Form 10-K for the year ended December 31, 2022 (Stratus 2022 Form 10-K) filed with the U.S. Securities and Exchange Commission on March 31, 2023. 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. Payments to Whitefish Partners for the consultant’s consulting services and expense reimbursements totaled $ 185 thousand for first-quarter 2022, which included $ 20 thousand as an annual incentive award for 2021 and a $ 135 thousand cash payment under Stratus’ Profit Participation Incentive Plan (PPIP). 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 the PPIP and the Long-Term Incentive Plan (LTIP). In first-quarter 2023, he received $ 22 thousand as an annual incentive award for 2022, and his annual salary was increased to $ 120 thousand. As of March 31, 2023, the employee has two outstanding awards under the PPIP. The liability associated with these awards at March 31, 2023 is not significant to the consolidated financial statements. Refer to Note 7 for discussion of the PPIP and LTIP. For additional information regarding Stratus' related parties, including LCHM Holdings, LLC and JBM Trust, refer to Notes 1, 2 and 4 in the Stratus 2022 Form 10-K. 6 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 March 31, 2023 2022 Net (loss) income from continuing operations $ ( 6,273 ) $ 1,812 Net income from discontinued operations — 375 Net (loss) income and total comprehensive (loss) income ( 6,273 ) 2,187 Total comprehensive loss attributable to noncontrolling interests 472 85 Net (loss) income and total comprehensive (loss) income attributable to common stockholders $ ( 5,801 ) $ 2,272 Basic weighted-average shares of common stock outstanding 8,224 8,251 Add shares issuable upon vesting of dilutive restricted stock units (RSUs) a — 104 Diluted weighted-average shares of common stock outstanding 8,224 8,355 Basic net (loss) income per share attributable to common stockholders: Continuing operations $ ( 0.71 ) $ 0.23 Discontinued operations — 0.05 $ ( 0.71 ) $ 0.28 Diluted net (loss) income per share attributable to common stockholders: Continuing operations $ ( 0.71 ) $ 0.23 Discontinued operations — 0.04 $ ( 0.71 ) $ 0.27 a. For the three months ended March 31, 2023, excludes 295 thousand shares of common stock associated with RSUs that were anti-dilutive as a result of the net loss. For the three months ended March 31, 2022, excludes 4 thousand shares of common stock associated with RSUs that were anti-dilutive. 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. ( 10.0 percent indirect equity interest), Stratus Block 150, L.P. ( 31.0 percent indirect equity interest), The Saint June, L.P. ( 34.13 percent indirect equity interest), Holden Hills, L.P. ( 50.0 percent indirect equity interest) and Stratus Kingwood Place, L.P. ( 60.0 percent indirect equity interest). For additional information regarding Stratus' partnerships, refer to Notes 2 and 4 in the Stratus 2022 Form 10-K. Holden Hills, L.P. In first-quarter 2023, Holden Hills, L.P. (the Holden Hills partnership), a Texas limited partnership and subsidiary of Stratus, was formed for the development of Holden Hills, Stratus’ final large residential development within the Barton Creek community in Austin, Texas, consisting of 495 acres and designed to feature 475 unique residences (Holden Hills Project). The Holden Hills partnership is governed by a limited partnership agreement between a wholly owned subsidiary of Stratus as Class A limited partner and an unaffiliated equity investor as Class B limited partner, and another wholly owned subsidiary of Stratus which serves as general partner. The partners made the following initial capital contributions to the Holden Hills partnership: (i) Stratus contributed the Holden Hills land and related personal property at an agreed value of $ 70.0 million and (ii) The Class B limited partner contributed $ 40.0 million in cash. Immediately following the Class B limited partner's initial capital contribution, $ 30.0 million of cash was distributed by the Holden Hills partnership to Stratus. Further, the Holden Hills partnership reimbursed Stratus for certain initial project costs and closing costs of approximately $ 5.8 million. As a result of these transactions, Stratus holds, indirectly through its wholly owned subsidiaries, a 50.0 percent equity capital interest in the Holden Hills partnership, and the Class B limited partner holds the remaining 50.0 percent equity capital interest in the Holden Hills partnership. Stratus’ potential returns on its equity investment in 7 Table of Contents the Holden Hills partnership may increase above its relative equity interest as negotiated return hurdles are achieved. Stratus consolidates the Holden Hills limited partnership; therefore, its contribution of the Holden Hills land and related personal property was recorded at historical cost and the contribution from the Class B limited partner was accounted for as a noncontrolling interest. In addition to each partner’s initial capital contribution, upon the call of the general partner from time to time, Stratus is obligated to make capital contributions up to an additional $ 10.0 million, and the Class B limited partner is also obligated to make capital contributions up to an additional $ 10.0 million. Stratus has the authority to manage the day-to-day operations of the Holden Hills partnership, subject to approval rights of the Class B limited partner for specified “major decisions,” including project and operating budgets, the business plan and amendments thereto; sales, leases or transfers of any portion of the Holden Hills project to any partner, affiliate of any partner, or to any unaffiliated third party other than as contemplated in the business plan; incurring any debt, mortgage or guaranty; capital calls in excess of those previously agreed upon; admitting a new partner; and certain transfers of direct or indirect interests in the Holden Hills partnership. The business plan includes rights of first refusal in favor of the Class B limited partner for sale of the luxury residence sites to be developed in distinct communities or “pods” to a third party. A “deadlock” may be declared by any partner if any limited partner does not approve any two major decisions proposed by the general partner within any 12-month period. Prior to the third anniversary of the effective date of the limited partnership agreement, a buy-sell provision can be triggered only if there is a deadlock. On or after the third anniversary, any partner can initiate a buy-sell at any time by written notice to the other partner, specifying the buyout price. Stratus has entered into a development agreement with the Holden Hills partnership pursuant to which the Holden Hills partnership will construct certain street, drainage, water, sidewalk, electric and gas improvements in order to extend the Tecoma Circle roadway on Section N land owned by Stratus from its current terminus to Southwest Parkway, estimated to cost approximately $ 14.7 million (the Tecoma Improvements), and Stratus will reimburse the partnership for 60 percent of the costs. The Tecoma Improvements will enable access and provide utilities necessary for the development of both Holden Hills and Section N. The Holden Hills partnership has agreed to pay Stratus a development management fee of 4.00 percent of certain construction costs for Phase I of the project, and an asset management fee of $ 150 thousand per year starting 15 months after construction starts on the project payable from available cash flow after debt service. Also in first-quarter 2023, the Holden Hills partnership entered into a loan agreement with Comerica Bank to finance the development of Phase I of the project. Refer to Note 6 for discussion of the loan agreement. 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 Holden Hills, 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 re-evaluate which entity is the primary beneficiary of these partnerships in accordance with applicable accounting guidance. The cash and cash equivalents held at these limited partnerships are subject to restrictions on distribution to the parent company pursuant to the individual partnership loan agreements. 8 Table of Contents Stratus’ consolidated balance sheets include the following assets and liabilities of the partnerships, net of intercompany balances, which are eliminated (in thousands): March 31, 2023 a December 31, 2022 Assets: b Cash and cash equivalents $ 5,897 $ 7,744 Real estate under development 140,252 107,968 Land available for development 3,927 3,927 Real estate held for investment 31,494 31,415 Other assets 5,885 4,503 Total assets 187,455 155,557 Liabilities: c Accounts payable and accrued liabilities 10,987 12,247 Debt 62,702 55,305 Total liabilities 73,689 67,552 Net assets $ 113,766 $ 88,005 a. Includes the assets and liabilities of the Holden Hills partnership, which was formed in January 2023. b. Substantially all of the assets are available to settle obligations only of the partnerships. c. All of the debt is guaranteed by Stratus until certain conditions are met in the individual partnership loan agreements. The creditors for the remaining liabilities do not have recourse to the general credit of Stratus. 4. ASSET SALES Block 21 - Discontinued Operations. Block 21 was Stratus’ wholly owned mixed-use real estate property in downtown Austin, Texas containing the 251 -room W Austin Hotel and Austin City Limits Live at the Moody Theater, a 2,750 -seat entertainment venue, Class A office space, retail space and the 3TEN ACL Live entertainment venue. 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. In accordance with accounting guidance, Stratus reported the results of operations of Block 21 as discontinued operations in the consolidated statement of comprehensive income for first-quarter 2022 because the disposal represents a strategic shift that had a major effect on operations. 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 Block 21’s results of operations in the consolidated statements of comprehensive (loss) income consist of the following (in thousands): Three Months Ended March 31, 2022 Revenues: a Hotel $ 5,871 Entertainment 5,340 Leasing operations and other 726 Total revenue 11,937 Cost of sales: Hotel 4,743 Entertainment 4,139 Leasing operations and other 471 Depreciation b — Total cost of sales 9,353 General and administrative expenses 100 Operating income 2,484 Interest expense, net ( 1,945 ) Provision for income taxes ( 164 ) Net income from discontinued operations $ 375 a. In accordance with accounting guidance, amounts are net of eliminations of intercompany revenue totaling $ 321 thousand in first-quarter 2022. b. In accordance with accounting guidance, depreciation is not recognized subsequent to classification as assets held for sale, which occurred in the fourth quarter of 2021. Capital expenditures associated with discontinued operations totaled $ 182 thousand in first-quarter 2022. The Oaks at Lakeway. In 2017, Stratus sold The Oaks at Lakeway to FHF I Oaks at Lakeway, LLC for $ 114.0 million in cash. The Oaks at Lakeway is an H-E-B, L.P.-anchored retail project located in Lakeway, Texas. The parties entered into three master lease agreements at closing: (1) one covering unleased in-line retail space, with a 5 -year term (the In-line Master Lease), (2) one covering the hotel pad with a 99 -year term (the Hotel Master Lease) and (3) one covering four unleased pad sites, three of which have 10 -year terms, and one of which has a 15 -year term (the Pad Site Master Lease). 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 $ 74 thousand per month) pursuant to the Pad Site Master Lease until the lease expires in February 2027. In connection with this determination, Stratus reversed an accrual of costs to lease and construct these buildings, resulting in recognition of an additional $ 4.8 million of gain in first-quarter 2022. A contract liability is presented as a deferred gain in the consolidated balance sheets in the amount of $ 3.3 million at March 31, 2023 and $ 3.5 million at December 31, 2022. 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. 10 Table of Contents 5. FAIR VALUE MEASUREMENTS Fair value accounting guidance includes a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 inputs) and the lowest priority to unobservable inputs (Level 3 inputs). The carrying value for certain Stratus financial instruments (i.e., cash and cash equivalents, restricted cash, accounts payable and accrued liabilities) approximates fair value because of their short-term nature and generally negligible credit losses. A summary of the carrying amount and fair value of Stratus' debt follows (in thousands): March 31, 2023 December 31, 2022 Carrying Value Fair Value Carrying Value Fair Value Liabilities: Debt $ 128,336 $ 130,075 $ 122,765 $ 124,575 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): March 31, 2023 December 31, 2022 Comerica Bank revolving credit facility $ — $ — Jones Crossing loan 23,938 24,143 The Annie B land loan 13,933 13,969 New Caney land loan — 4,047 Construction loans: Kingwood Place 27,768 27,507 Lantana Place 21,787 21,782 The Saint June 21,001 13,829 Magnolia Place 7,174 6,816 West Killeen Market 5,289 5,306 Amarra Villas revolving credit facility 7,446 5,366 Total debt a b $ 128,336 $ 122,765 a. Includes net reductions for unamortized debt issuance costs of $ 1.0 million at March 31, 2023, and $ 1.1 million at December 31, 2022. b. The Saint George and Holden Hills construction loans did not have outstanding balances at March 31, 2023 or December 31, 2022 (for The Saint George construction loan). Comerica Bank revolving credit facility. As of March 31, 2023, Status had $ 42.7 million available under the Comerica Bank revolving credit facility. Letters of credit, totaling $ 11.0 million, have been issued under the revolving credit facility, and secure the company’s obligation to build certain roads and utilities facilities benefiting Holden Hills and Section N. In March 2023, Stratus entered into a modification of the revolving credit facility, which extended the maturity date of the revolving credit facility to March 27, 2025, and increased the floor of the facility’s benchmark rate, the Bloomberg Short-Term Bank Yield Index (BSBY) Rate. As amended, advances under the revolving credit facility bear interest at the one-month BSBY Rate (with a floor of 0.50 percent) plus 4.00 percent. Jones Crossing loan. The Jones Crossing loan requires a debt service coverage ratio (DSCR) of 1.15 to 1.00 measured quarterly beginning with the quarter ending September 30, 2022. If the DSCR falls below 1.15 to 1.00, a “Cash Sweep Period” (as defined in the Jones Crossing loan) results, which limits Stratus’ ability to receive cash from its Jones Crossing subsidiary. The DSCR fell below 1.15 to 1.00 in each of fourth-quarter 2022 and first-quarter 2023, and the Jones Crossing subsidiary made principal payments of $ 231 thousand and $ 1.7 million in February 11 Table of Contents 2023 and May 2023, respectively, to bring the DSCR back above 1.15 to 1.00 and a Cash Sweep Period did not occur. The Annie B land loan. In February 2023, Stratus Block 150, L.P. entered into a modification agreement that extended the maturity date of The Annie B land loan to March 1, 2024, and changed the interest rate to the BSBY Rate (with a floor of 0.50 percent) plus 3.00 percent. In connection with the modification agreement, Stratus Block 150, LP, escrowed an interest reserve of $ 0.6 million with the lender. New Caney land loan. In March 2023, the New Caney land loan was repaid. The Saint June construction loan. In January 2023, The Saint June construction loan was amended to change the interest rate for the loan to Term Secured Overnight Financing Rate (SOFR) with a floor of 0.75 percent plus 2.85 percent, subject to a 3.50 percent floor. Magnolia Place construction loan. In May 2023, the Magnolia Place construction loan was amended to change the interest rate for the loan to Term SOFR with a floor of 0.00 percent plus 3.36 percent, subject to a 3.50 percent floor. Amarra Villas revolving credit facility. In March 2023, Stratus made a $ 2.2 million principal payment on the Amarra Villas revolving credit facility upon the closing of a sale of one of the Amarra Villas homes. Holden Hills construction loan. In first-quarter 2023, the Holden Hills partnership entered into a loan agreement with Comerica Bank to finance the development of Phase I of the Holden Hills project. The loan agreement provides for a senior secured construction loan in the aggregate principal amount of the least of (i) $ 26.1 million, (ii) 23 percent of the total development costs for Phase I or (iii) the amount that would result in a maximum loan-to-value ratio of 28 percent. The loan has a maturity date of February 8, 2026. Advances under the loan bear interest at the one-month BSBY Rate (with a floor of 0.50 percent), plus 3.00 percent. Payments of interest only on the loan are due monthly until the maturity date with the outstanding principal due at maturity. The Holden Hills partnership may prepay all or any portion of the loan without premium or penalty. Amounts repaid under the loan may not be reborrowed. The loan is secured by the Holden Hills project, including the land related to both Phase I and Phase II, and the Phase I improvements. After completion of construction of Phase I, the Holden Hills partnership may sell and obtain releases of the liens on single-family platted home sites, individual pods or the Phase II land, subject to specified conditions, and upon payment to the lender of specified amounts related to the parcel to be released. The Holden Hills partnership is not permitted to make distributions to its partners, including Stratus, while the loan is outstanding. The Holden Hills partnership must apply all Municipal Utility District (MUD) reimbursements it receives and is entitled to retain as payments of principal on the loan. Stratus has entered into a guaranty for the benefit of the lender pursuant to which Stratus has guaranteed the payment of the loan and the completion of Phase I, including the Tecoma Improvements (which benefit both the Holden Hills Project and Section N). Stratus is also liable for customary carve-out obligations and an environmental indemnity. Stratus must maintain, on a consolidated basis, a net asset value not less than $ 125.0 million, and a debt-to-gross-asset value not more than 50 percent (in each case as defined in the guaranty). For additional information regarding Stratus' debt, refer to Note 6 in the Stratus 2022 Form 10-K. Interest Expense and Capitalization. Interest costs (before capitalized interest) totaled $ 2.4 million in first-quarter 2023 and $ 1.1 million in first-quarter 2022. Stratus' capitalized interest totaled $ 2.4 million in first-quarter 2023 and $ 1.1 million in first-quarter 2022. Capitalized interest is primarily related to development activities at Barton Creek (primarily Holden Hills, Section N and The Saint June), The Saint George and The Annie B for both periods presented. Equity. The Comerica Bank revolving credit facility, Amarra Villas revolving credit facility, The Annie B land loan, The Saint George construction loan, Kingwood Place construction loan and Holden Hills 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, 12 Table of Contents which was paid on September 29, 2022 to shareholders of record as of September 19, 2022. Accrued liabilities included $ 1.1 million as of March 31, 2023, and $ 1.3 million as of December 31, 2022, representing dividends accrued for unvested RSUs in accordance with the terms of the awards. The accrued dividends are paid to the holders of the RSUs as the RSUs vest. In 2022, with written consent from Comerica Bank, Stratus’ Board also approved a 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 first-quarter 2023, Stratus acquired 43,624 shares of its common stock under the share repurchase program for a total cost of $ 0.9 million at an average price of $ 20.49 per share. Through May 10, 2023, Stratus has acquired 359,553 shares of its common stock for a total cost of $ 9.2 million at an average price of $ 25.64 per share, and $ 0.8 million remains available for repurchases under the program. 7. PROFIT PARTICIPATION INCENTIVE PLAN AND LONG-TERM INCENTIVE PLAN In July 2018, the Compensation Committee adopted the PPIP. In February 2023, the Committee approved the LTIP, which amends and restates the PPIP, and is effective for participation interests awarded under development projects on or after its effective date. As of March 31, 2023, there were not yet any participation interests awarded under the LTIP. Outstanding participation interests granted under the PPIP will continue to be governed by the terms of the prior PPIP. The PPIP and LTIP provide participants with economic incentives tied to the success of the development projects designated by the Committee as approved projects under the PPIP and LTIP. 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 Notes 1 and 8 of the Stratus 2022 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 $ 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. Of the remaining amount, $ 1.6 million 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 and LTIP, 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 excess of the grant-date value over the accrued liability 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. 13 Table of Contents A summary of PPIP costs follows (in thousands): Three Months Ended March 31, 2023 2022 Charged to general and administrative expense $ 148 $ 15 Capitalized to project development costs 110 51 Total PPIP costs $ 258 $ 66 The accrued liability for the PPIP totaled $ 3.2 million at March 31, 2023, and $ 3.0 million at December 31, 2022 (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 2022 Form 10-K. Stratus has a full valuation allowance against its U.S. Federal net deferred tax assets as of both March 31, 2023 and December 31, 2022. Stratus has recorded a deferred tax asset totaling $ 38 thousand at both March 31, 2023 and December 31, 2022 related to state income taxes. 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. During 2023, Stratus expects to incur current state income taxes in addition to U.S. Federal current income taxes primarily associated with taxable income generated from cash received in the Holden Hills transaction. The difference between Stratus' consolidated effective income tax rate of ( 23 ) percent for first-quarter 2023 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 its U.S. Federal net deferred tax assets as of March 31, 2023, and the executive compensation limitation. The difference between Stratus' consolidated effective income tax rate of ( 20 ) percent for first-quarter 2022 and the U.S. Federal statutory income tax rate of 21 percent was primarily attributable to the release of a reserve on uncertain tax positions related to the 2015 through 2017 U.S. Federal tax audit, which was closed in first-quarter 2022. 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 presented as discontinued operations. The Real Estate Operations segment is comprised of Stratus’ real estate assets (developed for sale, under development and available for development), which consists of its properties in Austin, Texas (including the Barton Creek Community, which includes Section N, Holden Hills, Amarra multi-family and commercial land, Amarra Villas, The Saint June, Amarra Drive lots and other vacant land; the Circle C community; the Lantana community, which includes 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 (land for future phases of retail and multi-family development and retail pad sites at Jones Crossing); and in Magnolia, Texas (land for a future phase of retail development and for future multi-family use and retail pad 14 Table of Contents sites at Magnolia Place), Kingwood, Texas (a retail pad site) and New Caney, Texas (New Caney), each located in the greater Houston area. The Leasing Operations segment is comprised of Stratus’ real estate assets held for investment that are leased or available for lease and includes retail space at West Killeen Market, Lantana Place, Kingwood Place and the completed portions of Jones Crossing and Magnolia Place and retail pad sites subject to ground leases at Lantana Place, Kingwood Place and Jones Crossing. Stratus uses operating income or loss to measure the performance of each segment. General and administrative expenses, which primarily consist of employee salaries, wages and other costs, are managed on a consolidated basis and are not allocated to Stratus’ operating segments. The following segment information reflects management determinations that may not be indicative of what the actual financial performance of each segment would be if it were an independent entity. Revenues from Contracts with Customers. Stratus' revenues from contracts with customers follow (in thousands): Three Months Ended March 31, 2023 2022 Real Estate Operations: Developed property sales $ 2,493 $ — Undeveloped property sales — — Commissions and other — 19 2,493 19 Leasing Operations: Rental revenue 3,309 3,080 3,309 3,080 Total revenues from contracts with customers $ 5,802 $ 3,099 Financial Information by Business Segment. Summarized financial information by segment for the three months ended March 31, 2023, 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 $ 2,493 $ 3,309 $ — $ 5,802 Cost of sales, excluding depreciation ( 4,487 ) ( 1,261 ) — ( 5,748 ) Depreciation and amortization ( 27 ) ( 906 ) 5 ( 928 ) General and administrative expenses — — ( 4,719 ) ( 4,719 ) Operating (loss) income $ ( 2,021 ) $ 1,142 $ ( 4,714 ) $ ( 5,593 ) Capital expenditures and purchases and development of real estate properties $ 9,027 $ 10,006 $ — $ 19,033 Total assets at March 31, 2023 c 307,571 109,136 63,012 479,719 a. Includes sales commissions and other revenues together with related expenses. b. Includes consolidated general and administrative expenses and eliminations of intersegment amounts. c. Corporate, eliminations and other includes cash, cash equivalents and restricted cash of $ 57.0 million. 15 Table of Contents Summarized financial information by segment for the three months ended March 31, 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 $ 19 $ 3,080 $ — $ 3,099 Intersegment 4 — ( 4 ) — Cost of sales, excluding depreciation ( 1,366 ) ( 984 ) — ( 2,350 ) Depreciation and amortization ( 25 ) ( 852 ) 4 ( 873 ) General and administrative expenses — — ( 3,167 ) ( 3,167 ) Gain on sale of assets c — 4,812 — 4,812 Operating (loss) income $ ( 1,368 ) $ 6,056 $ ( 3,167 ) $ 1,521 Capital expenditures and purchases and development of real estate properties $ 4,864 $ 14,542 $ 182 $ 19,588 Total assets at March 31, 2022 d 254,212 106,652 183,904 544,768 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. Refer to Note 4 under the heading “The Oaks at Lakeway” for further discussion. d. Corporate, eliminations and other includes $ 151.2 million of assets held for sale associated with discontinued operations at Block 21 and cash, cash equivalents and restricted cash of $ 15.8 million. 10. SUBSEQUENT EVENTS Stratus evaluated events after March 31, 2023, 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. 16 Table of Contents