What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-14 compared with 2023-05-15 · 217 added, 150 removed, 266 unchanged (58% of the section changed)

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We may also seek to refinance properties in order to benefit from, when available, an increase in the value of the property or from lower interest rates or for other reasons.

We are focused on pure residential and residential-centric mixed-use projects in Austin and other select markets in Texas, which we believe continue to be attractive locations.

We are focused on the development of pure residential and residential-centric mixed-use projects in Austin and other select markets in Texas, which we believe continue to be attractive locations.

From time to time, when deemed appropriate by our Board of Directors (Board) and permitted pursuant to the terms of our debt agreements, we may return cash to shareholders, as we did in 2022 and 2017 with special cash dividends totaling approximately $40 million and $8 million respectively, and as we have been doing during 2022 and 2023 through our $10 million share repurchase program.

Refer to “Business Strategy” in MD&A in our 2022 Form 10-K for a discussion of the evolution of our strategy during 2022.

We do not currently have any material commitments to contribute additional cash to our joint venture projects or wholly owned development projects other than the potential additional $10.0 million of capital that we may be required to contribute to our Holden Hills limited partnership and our share (related to Section N) of the cost of the Tecoma Improvements discussed below under “Recent Development Activities – Current Residential Activities – Barton Creek – Holden Hills.” However, our development plans for future projects require significant additional capital.

(the Holden Hills partnership) and our share (related to Section N) of the cost of the Tecoma Improvements discussed below under “Recent Development Activities – Current Residential Activities – Barton Creek – Holden Hills.” However, in second-quarter 2023, we made operating loans totaling $2.3 million to Stratus Block 150, L.P.

and The Saint June, L.P.

Refer to Note 3 and “Capital Resources and Liquidity – Revolving Credit Facility and Other Financing Arrangements” for further discussion.

In addition, our development plans for future projects require significant additional capital.

Our investment strategy focuses on projects that we believe will provide attractive long-term returns, while limiting our financial risk.

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

Refer to Note 3.

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

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We also generate cash flow from rental income in our leasing operations and from development and asset management fees received from our properties.

Due to the nature of our development-focused business, we do not expect to generate sufficient recurring cash flow to cover our general and administrative expenses each period.

However, we believe that the unique nature and location of our assets, and our team’s ability to execute successfully on development projects, will provide us with positive cash flows and net income over time, as evidenced by our recent sales of The Saint Mary, The Santal and Block 21 in 2021 and 2022 and the distribution from the Holden Hills partnership in 2023.

Further, we believe our investment strategy, current

liquidity and pipeline of projects provide us with many years of opportunities to increase long-term value for our stockholders.

Given challenging market conditions discussed in more detail below, we are currently focused on successfully completing our projects under construction, managing our capital expenditures, advancing other projects through the planning, designing and entitlement process, maximizing cash flow from stabilized assets, controlling costs as much as possible in this inflationary environment, and continuing to source third-party equity capital.

We have undeveloped properties currently undergoing active planning.

Refer to “Recent Development Activities” below and Items 1.

“Business and Properties” in our 2022 Form 10-K for a discussion of these projects.

While uncertainty in the market, primarily due to the increasing costs of construction materials and labor, rising interest rates and recent disruptions in the banking industry due to some highly-publicized bank failures, is currently causing a pause in some sales processes and the start of new development projects, we believe there continues to exist strong demand for residential and residential-centric mixed use projects in Austin and the other markets in Texas where we operate, combined with limited supply.

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

Due to the nature of our development-

focused business, we do not expect to generate sufficient recurring cash flow to cover our general and administrative expenses each period.

However, we believe that the unique nature and location of our assets, and our team’s ability to execute successfully on development projects, will provide us with positive cash flows and net income over time, as evidenced by our recent sales of The Saint Mary, The Santal and Block 21 in 2021 and 2022 and the cash distribution from the Holden Hills partnership in 2023.

Further, we believe our investment strategy, current liquidity and pipeline of projects provide us with many years of opportunities to increase long-term value for our stockholders.

Largely as a result of our recent property sales and the cash distribution from the Holden Hills partnership, as of June 30, 2023 we had cash and cash equivalents of $44.1 million and availability under our revolving credit facility of $42.7 million.

We will re-evaluate our strategy as development progresses on the projects in our pipeline and as market conditions continue to evolve.

OVERVIEW OF FINANCIAL RESULTS

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

Summary Financial Results for the First Quarter of 2023

Our revenues totaled $5.8 million in first-quarter 2023 compared with $3.1 million in first-quarter 2022.

The increase in revenues in first-quarter 2023, compared to first-quarter 2022, is primarily a result of the sale of one Amarra Villas home in first-quarter 2023.

Revenue in our Leasing Operations segment increased $0.2 million to $3.3 million in first-quarter 2023 compared with first-quarter 2022, primarily reflecting revenue from Magnolia Place, which had no rental revenue in first-quarter 2022, and increased revenue at Kingwood Place.

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

Our net loss attributable to common stockholders totaled $5.8 million, or $0.71 per diluted share in first-quarter 2023, compared to net income attributable to common stockholders of $2.3 million, or $0.27 per diluted share, in first-quarter 2022.

Our results for first-quarter 2022 included a $4.8 million pre-tax gain recognized on the reversal of accruals for costs to lease and construct buildings under a master lease arrangement that we entered into in connection with our sale of The Oaks at Lakeway in 2017.

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

Summary Financial Results for the Second-Quarter and First Six Months of 2023

Our revenues totaled $3.5 million in second-quarter 2023 and $9.3 million for the first six months of 2023, compared with $11.1 million in second-quarter 2022 and $14.2 million for the first six months of 2022.

The decrease in revenues in second-quarter 2023 and the first six months of 2023, compared to second-quarter 2022 and the first six months of 2022, is primarily a result of the sales of undeveloped real estate properties in our Real Estate Operations segment in second-quarter 2022 partially offset by an increase in revenue in our Leasing Operations segment primarily reflecting revenue from Magnolia Place, which had no rental revenue in the 2022 periods.

We had no property sales in second-quarter 2023.

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

Our net loss totaled $5.3 million, or $0.64 per diluted share in second-quarter 2023, compared to net income of $96.6 million, or $11.53 per diluted share, in second-quarter 2022.

During the first six months of 2023 our net loss attributable to common stockholders totaled $11.1 million, or $1.35 per diluted share, compared to net income attributable to common stockholders of $98.9 million, or $11.82 per diluted share, during the first six months of 2022.

Our results for second-quarter 2022 and the first six months of 2022 include a $119.7 million pre-tax gain on the sale of Block 21.

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

The results during the first six months of 2022 also include a $4.8 million pre-tax gain recognized on the reversal of accruals for costs to lease and construct buildings under a master lease arrangement that we entered into in connection with our sale of The Oaks at Lakeway in 2017.

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

Holden Hills Partnership and Cash Distribution in First-Quarter 2023

In first-quarter 2023, we obtained third-party equity and debt financing for and commenced construction on Holden Hills, our final large residential development within the Barton Creek community in Austin, Texas.

We contributed to the partnership the Holden Hills land and related personal property at an agreed value of $70.0 million and our 50.0 percent partner contributed $40.0 million in cash.

The partnership distributed and paid $35.8 million in cash to us in connection with these transactions.

Refer to Note 11 in our 2022 Form 10-K, and “Recent Development Activities – Current Residential Activities – Barton Creek – Holden Hills” and Note 3 in this report for further discussion.

Sale of Block 21 in May 2022

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

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

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

On May 31, 2022, we completed the previously announced sale of Block 21 to Ryman for $260.0 million, subject to certain purchase price adjustments, and including Ryman’s assumption of $136.2 million of existing mortgage debt, with the remainder paid in cash.

Our net proceeds of cash and restricted cash totaled $112.3 million (including $6.9 million escrowed at closing and disbursed in full to Stratus in June 2023).

We recorded a pre-tax gain on the sale of $119.7 million in second-quarter 2022.

Block 21 was our wholly owned mixed-use real estate property in downtown Austin, Texas, containing the 251-room W Austin Hotel, 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.

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

As a result, our hotel and entertainment operations, as well as the leasing operations associated with Block 21, are reported as discontinued operations for first-quarter 2022 presented in the consolidated financial statements included in this Form 10-Q.

As a result, our hotel and entertainment operations, as well as the leasing operations associated with Block 21, are reported as discontinued operations for the 2022 periods presented in the consolidated financial statements included in this Form 10-Q.

Refer to Note 4 for further discussion.

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“Business and Properties” in our 2022 Form 10-K.

Amarra Drive Phase III.

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

As of June 30, 2023, two developed Amarra Drive Phase III lots remained unsold.

Amarra Villas.

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In first-quarter 2023, we completed and sold one home for $2.5 million.

Construction on the last ten units continues to progress, and as of May 10, 2023, one home was under contract to sell and nine homes remain available for sale.

Construction on the last ten units continues to progress, and as of August 9, 2023, one home was under contract to sell and nine homes remain available for sale.

The Saint June.

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

The first units are expected to be ready for occupancy in June 2023, and the project is expected to be completed in third-quarter 2023.

The first units were ready for occupancy in July 2023, and the project is expected to be completed in September 2023.

Holden Hills.

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We entered into a limited partnership agreement with a third-party equity investor for this project in January 2023, and in February 2023 obtained construction financing for Phase I of the project and commenced infrastructure construction.

We contributed to the joint venture the Holden Hills land and related personal property at an agreed value of $70.0 million and our 50.0 percent partner contributed $40.0 million in cash.

Immediately thereafter, the Holden Hills partnership distributed $30 million of cash to us.

We contributed to the partnership the Holden Hills land and related personal property at an agreed value of $70.0 million, and our 50.0 percent partner contributed $40.0 million in cash.

Immediately thereafter, the

Holden Hills partnership distributed $30.0 million of cash to us.

Further, the Holden Hills partnership reimbursed us for certain initial project costs and closing costs of approximately $5.8 million.

We consolidate the Holden Hills limited partnership, and the contribution from our partner was accounted for as a noncontrolling interest.

We consolidate the Holden Hills partnership, and the contribution from our partner was accounted for as a noncontrolling interest in subsidiary.

Refer to Notes 3 and 6 for further discussion.

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Pods and estate lots may also be acquired from the Holden Hills partnership by a limited partner for further development under procedures approved by the partners.

We entered into a development agreement with the Holden Hills partnership (Development Agreement) that provides that, as part of Phase I, 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 us from its current terminus to Southwest Parkway, estimated to cost approximately $14.7 million (the Tecoma

Improvements).

The Tecoma Improvements will enable access and provide utilities necessary for the development of both Holden Hills and Section N.

Pursuant to the Development Agreement, we will reimburse the Holden Hills partnership for 60 percent of the costs of the Tecoma Improvements.

We have posted standby letters of credit with the City of Austin under our revolving credit facility with Comerica Bank totaling approximately $11 million as fiscal security for completion of certain infrastructure improvements benefiting the Holden Hills project and has agreed to leave such fiscal security in place until the improvements are completed.

We have posted standby letters of credit with the City of Austin under our revolving credit facility with Comerica Bank totaling approximately $11 million as fiscal security for completion of certain infrastructure improvements benefiting the Holden Hills project and have agreed to leave such fiscal security in place until the improvements are completed.

As of June 30, 2023, we had $10.6 million remaining to complete the Tecoma Improvements.

The Holden Hills partnership is expected to be eligible to be reimbursed in the future by Travis County Municipal Utility Districts (MUD) for a portion of costs of the Tecoma Improvements and also for a portion of costs related only to the Holden Hills project, with such MUD reimbursements currently estimated to be up to a maximum of $6.4 million for the Tecoma Improvements and $8.0 million for only the Holden Hills project.

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Using an entitlement strategy similar to that used for Holden Hills, we continue to progress the development plans for Section N, our approximately 570-acre tract located along Southwest Parkway in the southern portion of the Barton Creek community adjacent to Holden Hills.

We are designing a dense, mid-rise, mixed-use project, with extensive multi-family and retail components, coupled with limited office, entertainment and hospitality uses, surrounded by an extensive outdoor recreational and greenspace amenities, which are expected to result in a significant increase in development density as compared to our prior plans.

We are designing a dense, mid-rise, mixed-use project, with extensive multi-family and retail components, coupled with limited office, entertainment and hospitality uses, surrounded by extensive outdoor recreational and greenspace amenities, which is expected to result in a significant increase in development density as compared to our prior plans.

The Saint George

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The Saint Julia

We have advanced development plans for The Saint Julia, a 306-unit multi-family project that is part of Lantana Place, a partially developed, mixed-use development project located south of Barton Creek in Austin.

We have advanced development plans for The Saint Julia, an approximately 300-unit multi-family project that is part of Lantana Place, a partially developed, mixed-use development project located south of Barton Creek in Austin.

We currently do not expect to begin construction prior to 2024, and The Saint Julia project remains subject to financing and market conditions.

Lakeway Multi-Family

After extensive negotiation with the City of Lakeway, utility suppliers and neighboring property owners, we secured the right to develop a multi-family project on our remaining land in Lakeway, Texas.

The multi-family project is expected to utilize the road, drainage and utility infrastructure we are required to build, subject to certain conditions, which is secured by the $2.3 million letter of credit under our revolving credit facility.

Refer to Note 6 and “Capital Resources and Liquidity – Revolving Credit Facility and Other Financing Arrangements” below for additional discussion.

Other Residential

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We continue to evaluate options for the 21-acre multi-family component of Jones Crossing, an H-E-B grocery anchored, mixed-use development located in College Station, Texas.

We are also evaluating options for a multi-family project on our remaining land in Lakeway, Texas.

Current Commercial Activities

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The retail component of Magnolia Place, our H-E-B shadow-anchored retail project in Magnolia, Texas, is currently planned to consist of up to four retail buildings totaling approximately 34,000 square feet and up to nine retail pad sites to be sold or ground leased.

The first phase of development consists of two retail buildings totaling 18,582

square feet, all pad sites, and the road, utility and drainage infrastructure necessary to support the entire development.

The first phase of development consists of two retail buildings totaling 18,582 square feet, all pad sites, and the road, utility and drainage infrastructure necessary to support the entire development.

Except for a storm water drainage pond and certain City of Magnolia water supply upgrades, which are expected to be completed by the end of 2023, the first phase of development was completed in third-quarter 2022, and the two retail buildings were turned over to our retail tenants to begin their finish-out process.

As of March 31, 2023, we had signed leases for all the retail space in the first phase of development.

As of June 30, 2023, we had signed leases for all the retail space in the first phase of development, and tenants representing 89 percent of the space were open for business.

We sold two retail pad sites in 2022 for a total of $3.4 million, leaving up to seven additional pad sites available for lease or sale.

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• West Killeen Market is our H-E-B shadow-anchored retail project in West Killeen, Texas, near Fort Hood.

As of March 31, 2023, we had signed leases for approximately 74 percent of the 44,493-square-foot retail space.

• At Jones Crossing , as of March 31, 2023, we had signed leases for substantially all of the completed retail space, including the H-E-B grocery store, totaling 154,117 square feet, and a ground lease on one retail pad site.

As of June 30, 2023, we had signed leases for approximately 74 percent of the 44,493-square-foot retail space.

• At Jones Crossing , as of June 30, 2023, we had signed leases for substantially all of the completed retail space, including the H-E-B grocery store, totaling 154,117 square feet, and a ground lease on one retail pad site.

Four retail pad sites remain available for lease.

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

As of March 31, 2023, we had signed leases for approximately 90 percent of the 99,379-square-foot retail space, including the anchor tenant, Moviehouse & Eatery, and a ground lease for an AC Hotel by Marriott that opened in November 2021.

As of June 30, 2023, we had signed leases for approximately 92 percent of the 99,379-square-foot retail space, including the anchor tenant, Moviehouse & Eatery, and a ground lease for an AC Hotel by Marriott that opened in November 2021.

• Kingwood Place is our H-E-B-anchored, mixed-use development project in Kingwood, Texas (in the greater Houston area).

We have constructed 151,855 square feet of retail space at Kingwood Place, including an H-E-B grocery store, and as of March 31, 2023, we had signed leases for approximately 96 percent of the retail space, including the H-E-B grocery store.

We have constructed 151,855 square feet of retail space at Kingwood Place, including an H-E-B grocery store, and as of June 30, 2023, we had signed leases for approximately 96 percent of the retail space, including the H-E-B grocery store.

We have also signed ground leases on four of the retail pad sites.

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Market Conditions

During 2022, the U.S.

economy experienced steep rises in inflation and interest rates.

Refer to “Debt Maturities and Other Contractual Obligations” below for further discussion about the increase in interest rates.

Our industry has been experiencing construction and labor cost increases, supply chain constraints, labor shortages, higher borrowing costs and tightening bank credit.

These factors are having an adverse impact on the projected profitability of our new projects, have delayed projects under construction and the commencement of construction on new projects, have adversely impacted our ability to raise equity capital on attractive terms in our desired time frame, and have adversely impacted our ability to sell some properties at attractive prices in our desired time frame.

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

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

projects under construction is limited;

Inflation reached a near 40-year high in late 2021, driven in large part by economic recovery from the ongoing COVID-19 pandemic, and continued rising through June 2022.

Since then, the rate of inflation has generally decelerated;

however, it has remained at historically high levels.

In response, the Federal Reserve has raised the federal funds target interest rate by an aggregate of 525 basis points during 2022 and through July 2023, to a target range between 5.25 percent and 5.50 percent, the highest level in over 20 years, and it may increase rates again during the remainder of 2023.

Because all of our debt is variable rate, these increases in market interest rates have substantially increased our borrowing costs.

Refer to “Capital Resources and Liquidity – Debt Maturities and Other Contractual Obligations” below for further discussion.

In addition, we, along with our industry, have been experiencing tightening bank credit, higher costs and more limited availability of equity capital, and a weak market for real estate sales.

Higher construction and labor costs, supply chain disruptions and constraints and labor shortages have persisted.

These factors are having an adverse impact on the cash flows of our existing projects and the projected profitability of our new projects, and on our asset values.

These factors have also caused delays in projects under construction and a pause in sales processes and the start of new development projects.

To manage the risks of rising construction and labor costs, we go through extensive pricing exercises culminating with competitive bids from reputable contractors based on final plans and specifications.

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

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

In addition, because all of our debt is subject to variable interest rates, we are experiencing increased borrowing costs, and our developed properties are experiencing increased operating costs due to inflation.

Refer to Part I, Item 1A.

“Risk Factors” of our 2022 Form 10-K.

“Risk Factors” of our 2022 Form 10-K for more information regarding our risk factors.

Although current market conditions are challenging, we believe our liquidity position, experienced team and development opportunities in Austin and other Texas markets will enable us to capture value for our stockholders when market conditions improve.

RESULTS OF OPERATIONS

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

Three Months Ended

Three Months Ended Six Months Ended

June 30, June 30,

2023 2022 2023 2022

Operating (loss) income:

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Leasing Operations b

1,404 1,465 2,546 7,521

Corporate, eliminations and other c

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Net (loss) income from continuing operations (5,309) 532 (11,582) 2,344

Net income from discontinued operations $ — $ 375

Net income from discontinued operations d

— 95,925 — 96,300

Total comprehensive loss attributable to noncontrolling interests 8 164 480 249

Net (loss) income attributable to common stockholders

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Includes sales commissions and other revenues together with related expenses.

First-quarter 2022 includes a $4.8 million pre-tax gain recognized on the reversal of accruals for costs to lease and construct buildings under a master lease arrangement that we entered into in connection with our sale of The Oaks at Lakeway in 2017.

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

The first six months of 2022 includes a $4.8 million pre-tax gain recognized on the reversal of accruals for costs to lease and construct buildings under a master lease arrangement that we entered into in connection with our sale of The Oaks at Lakeway in 2017.

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

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

The 2022 periods include a $119.7 million pre-tax gain on the May 2022 sale of Block 21.

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

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

Three Months Ended

Three Months Ended Six Months Ended

June 30, June 30,

2023 2022 2023 2022

Developed property sales $ — $ 2,382 $ 2,493 $ 2,382

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Cost of sales, including depreciation (2,747) (5,456) (7,261) (6,847)

Operating loss $ (2,021) $ (1,368)

Operating (loss) income $ (2,689) $ 2,471 $ (4,710) $ 1,103

Developed Property Sales.

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

Three Months Ended March 31,

Homes Revenues Average Cost Per Home Homes Revenues Average Cost Per Home

Three Months Ended June 30,

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

Amarra Drive:

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Total Residential — $ — 1 $ 2,382

The increase in revenues from developed property sales for first-quarter 2023, compared to first-quarter 2022, reflects the sale of one Amarra Villas home compared to no sales in first-quarter 2022.

Real Estate Cost of Sales and Depreciation.

Six Months Ended June 30,

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

Amarra Drive:

Amarra Villas homes 1 $ 2,493 $ 2,249 1 $ 2,382 $ 2,382

Total Residential 1 $ 2,493 1 $ 2,382

We had no sales of developed properties in second-quarter 2023.

During the periods presented, we sold one Amarra Villas home in the second quarter of 2022 and one in the first quarter of 2023.

Undeveloped Property Sales.

In second-quarter 2022 and the first six months of 2022, we closed $5.4 million of undeveloped property sales consisting of (i) a six-acre multi-family tract of land in Amarra Drive for $2.5 million, (ii) a completed pad site at Magnolia Place for $2.3 million and (iii) a tract of land in Austin for $0.6 million.

Cost of Sales.

Cost of sales includes costs of property sold, project operating and marketing expenses and allocated overhead costs.

Cost of sales increased to $4.5 million in first-quarter 2023 compared to $1.4 million in first-quarter 2022, primarily reflecting the sale of one Amarra Villas home in first-quarter 2023 while the absence of sales in first-quarter 2022 resulted in no cost of property sold.

Cost of sales decreased to $2.7 million in second-quarter 2023, compared to $5.5 million in second-quarter 2022, primarily due to the sale of an Amarra Villas home and the undeveloped property sold in second-quarter 2022 while there were no property sales in second-quarter 2023.

In addition, second-quarter 2023 cost of sales includes a $1.2 million charge to write off a forfeited earnest money deposit and other pursuit costs associated with terminating a contract to purchase land.

Cost of sales increased to $7.3 million for the first six months of 2023, compared to $6.8 million for the first six months of 2022, primarily due to the $1.2 million charge discussed above and $1.0 million of expenses related to the formation of the Holden Hills partnership in first-quarter 2023.

Leasing Operations

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

Three Months Ended

Three Months Ended Six Months Ended

June 30, June 30,

2023 2022 2023 2022

Rental revenue $ 3,472 $ 3,200 $ 6,781 $ 6,280

Rental cost of sales, excluding depreciation (1,261)

Depreciation (906) (852)

Rental cost of sales, excluding depreciation and amortization (1,144)

(870) (2,405) (1,854)

Depreciation and amortization (924) (865) (1,830) (1,717)

Gain on sale of assets — — — 4,812

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Rental Revenue.

In first-quarter 2023, rental revenue primarily included revenue from Lantana Place, Kingwood Place, Jones Crossing, West Killeen Market and Magnolia Place.

In first-quarter 2022, rental revenue primarily included revenue from Lantana Place, Jones Crossing, Kingwood Place and West Killeen Market.

The increase in rental revenue in first-quarter 2023, compared with first-quarter 2022, primarily reflects revenue from Magnolia Place, which had no rental revenue in first-quarter 2022, and increased revenue at Kingwood Place.

In the 2023 periods, rental revenue primarily included revenue from Lantana Place, Kingwood Place, Jones Crossing, West Killeen Market and Magnolia Place.

In the 2022 periods, rental revenue primarily included revenue from Lantana Place, Jones Crossing, Kingwood Place and West Killeen Market.

The increase in rental revenue in the 2023 periods, compared with the 2022 periods, primarily reflects revenue from Magnolia Place, which had no rental revenue in either period for 2022, and increased revenue at Kingwood Place.

Rental Cost of Sales and Depreciation.

Rental cost of sales and depreciation expense increased in first-quarter 2023 compared with first-quarter 2022, primarily as a result of The Saint June and Magnolia Place, both of which had no operating expenses in first-quarter 2022, and costs of landscaping repairs and replacements at retail properties following the Texas winter storm in February 2023.

Rental cost of sales and depreciation expense increased in the 2023 periods compared with the 2022 periods, primarily as a result of The Saint June and Magnolia Place, both of which had no operating expenses in the 2022 periods, and costs of landscaping repairs and replacements at retail properties following the Texas winter storm in February 2023.

Gain on Sale of Assets.

In first-quarter 2022, we recognized a gain on the reversal of accruals for costs to lease and construct buildings under a master lease arrangement that we entered into in connection with our sale of The Oaks at Lakeway in 2017.

For the first six months of 2022, we recognized a $4.8 million pre-tax gain on the reversal of accruals for costs to lease and construct buildings under a master lease arrangement that we entered into in connection with our sale of The Oaks at Lakeway in 2017.

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

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Corporate, eliminations and other (refer to Note 9) includes consolidated general and administrative expenses, which primarily consist of employee compensation and other costs.

Consolidated general and administrative expenses increased to $4.7 million in first-quarter 2023 compared to $3.2 million in first-quarter 2022 primarily as a result of higher compensation costs for salary increases, estimated cash incentive awards for 2023, as well as restricted stock units (RSUs) granted in second-quarter 2022 in connection with the Profit Participation Incentive Plan (PPIP) payouts for Lantana Place and The Santal.

Fees related to a new consulting arrangement in 2023 to help raise third-party equity capital and office rent, which was eliminated in consolidation prior to the sale of Block 21, also contributed to the increase.

Consolidated general and administrative expenses increased to $4.1 million in second-quarter 2023 and $8.8 million for the first six months of 2023, compared to $3.4 million in second-quarter 2022 and $6.6 million for the first six months of 2022 primarily as a result of higher compensation costs for salary increases and estimated cash incentive awards for 2023, as well as charges for restricted stock units (RSUs) granted in second-quarter 2022 in connection with the Profit Participation Incentive Plan (PPIP) payouts for Lantana Place and The Santal.

Non-Operating Results

Interest Expense, Net.

Interest costs (before capitalized interest) totaled $2.4 million in first-quarter 2023 compared with $1.1 million in first-quarter 2022.

Interest costs in first-quarter 2023 were higher, compared to first-quarter 2022, primarily reflecting rising interest rates as well as an increase in average debt balances.

As of March 31, 2023, all of our debt was variable-rate debt, and for all of such debt, the interest rates have increased over the past year, including for first-quarter 2023, and may continue to rise in the future if prevailing market interest rates continue to climb.

Capitalized interest totaled $2.4 million in first-quarter 2023 compared to $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.

Interest costs (before capitalized interest) totaled $2.9 million in second-quarter 2023 and $5.3 million for the first six months of 2023, compared with $1.5 million in second-quarter 2022 and $2.6 million for the first six months of 2022.

Interest costs in the 2023 periods were higher, compared to the 2022 periods, primarily reflecting rising interest rates as well as an increase in average debt balances.

As of June 30, 2023, all of our debt was variable-rate debt, and for all of such debt, the interest rates have increased over the past year, including the first six months of 2023, and may continue to rise in the future if prevailing market interest rates continue to climb.

Substantially all of the interest costs were capitalized for the periods presented.

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 all periods presented.

(Provision for) Benefit from Income Taxes.

We recorded a provision for income taxes of $1.2 million in first-quarter 2023 compared to a benefit from income taxes of $0.3 million in first-quarter 2022.

We recorded a (provision for) benefit from income taxes of $(0.5) million in second-quarter 2023 and $(1.7) million for the first six months of 2023, compared to less than $(0.1) million in second-quarter 2022 and $0.3 million for the first six months of 2022.

Refer to Note 8 for further discussion of income taxes.

Net Income from Discontinued Operations.

As a result of the sale of Block 21 in May 2022, we did not have any net income from discontinued operations in first-quarter 2023 compared to $0.4 million in first-quarter 2022.

As a result of the sale of Block 21 in May 2022, we did not have any net income from discontinued operations in second-quarter 2023 or the first six months of 2023.

Net income from discontinued operations totaled $95.9 million in second-quarter 2022 and $96.3 million for the first six months of 2022.

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

Total Comprehensive Loss Attributable to Noncontrolling Interests in Subsidiaries .

Our partners' share of losses totaled $0.5 million in first-quarter 2023 compared to $0.1 million in first-quarter 2022.

Our partners' share of losses totaled less than $0.1 million in second-quarter 2023 and $0.5 million for the first six months of 2023, compared to $0.2 million in both second-quarter 2022 and for the first six months of 2022.

CAPITAL RESOURCES AND LIQUIDITY

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

Comparison of Cash Flows for the Three Months Ended March 31, 2023 and 2022

Comparison of Cash Flows for the Six Months Ended June 30, 2023 and 2022

Operating Activities.

Cash used in operating activities totaled $18.4 million in first-quarter 2023, compared with $18.1 million in first-quarter 2022.

Expenditures for purchases and development of real estate properties totaled $9.0 million in first-quarter 2023 and $4.9 million in first-quarter 2022, both primarily related to development of our Barton Creek properties, particularly Amarra Villas and, to a lesser extent, Holden Hills.

The cash outflow resulting from the decrease in accounts payable, accrued liabilities and other in first-quarter 2023 and first-quarter 2022 are primarily related to the timing of property tax payments.

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

Cash used in operating activities totaled $26.8 million for the first six months of 2023, compared with $43.6 million for the first six months of 2022.

Expenditures for purchases and development of real estate properties totaled $21.1 million for the first six months of 2023 and $12.1 million for the first six months of 2022, both primarily related to development of our Barton Creek properties, particularly Amarra Villas and Holden Hills.

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

Investing Activities.

Cash used in investing activities totaled $10.2 million in first-quarter 2023 and $14.9 million in first-quarter 2022.

Capital expenditures totaled $10.0 million in first-quarter 2023, primarily for The Saint June and The Saint George, and $14.7 million in first-quarter 2022, primarily for The Saint June and Magnolia Place.

Cash (used in) provided by investing activities totaled $(24.0) million for the first six months of 2023 and $77.8 million for the first six months of 2022.

During the first six months of 2022, we received net proceeds from the sale of Block 21 of $105.8 million (excluding the release of reserves previously presented as restricted cash but including $6.9 million escrowed at closing).

As no claims were made against the escrowed amounts, the $6.9 million was disbursed in full to us in June 2023.

Capital expenditures totaled $23.5 million for the first six months of 2023, primarily for The Saint George and The Saint June, and $27.6 million for the first six months of 2022, primarily for The Saint June and Magnolia Place projects.

Financing Activities.

Cash provided by financing activities totaled $42.7 million in first-quarter 2023 and $13.5 million in first-quarter 2022.

In first-quarter 2023, we had no net borrowings on the Comerica Bank revolving credit facility, compared with net borrowings of $10.0 million in first-quarter 2022.

In first-quarter 2023, net borrowings on project and term loans totaled $5.1 million, primarily reflecting borrowings on The Saint June construction loan and the Amarra Villas revolving credit facility, partially offset by the payoff of the New Caney land loan.

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

Refer to “Revolving Credit Facility and Other Financing Arrangements” and “Debt Maturities and Other Contractual Obligations” below for a discussion of our outstanding debt at March 31, 2023.

In first-quarter 2023, we received a contribution from a noncontrolling interest owner of $40.0 million, related to the Holden Hills partnership.

Cash provided by financing activities totaled $50.1 million for the first six months of 2023 and $6.2 million for the first six months of 2022.

During both the first six months of 2023 and 2022, we had no net borrowings on the Comerica Bank revolving credit facility.

During the first six months of 2023, net borrowings on other project and term loans totaled $14.5 million, primarily reflecting borrowings on The Saint June construction loan and the Amarra Villas revolving credit facility, partially offset by the payoff of the New Caney land loan.

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

Refer to “Revolving Credit Facility and Other Financing Arrangements” below for a discussion of our outstanding debt at June 30, 2023.

During the first six months of 2023, we received a contribution from a noncontrolling interest owner of $40.0 million, related to the Holden Hills partnership.

On September 1, 2022, after receiving written consent from Comerica Bank, our Board declared a special cash dividend of $4.67 per share (totaling $40.0 million) on our common stock, which was paid on September 29, 2022 to shareholders of record as of September 19, 2022.

During first-quarter 2023, $0.2 million of accrued dividends for unvested RSUs were paid to the holders upon the vesting of the RSUs, leaving $1.1 million of dividends accrued for unvested RSUs presented in accrued liabilities as of March 31, 2023.

The remaining accrued dividends will be paid

to the holders of the RSUs as the RSUs vest.

In 2022, with written consent from Comerica Bank, our Board also approved a share repurchase program, which authorizes repurchases of up to $10.0 million of our common stock, which replaced our prior share repurchase program.

During the first six months of 2023, $0.6 million of accrued dividends for unvested RSUs were paid to the holders upon the vesting of the RSUs, leaving $0.7 million of dividends accrued for unvested RSUs presented in accrued liabilities as of June 30, 2023.

The remaining accrued dividends will be paid to the holders of the RSUs as the RSUs vest.

In 2022, with written consent from Comerica Bank, our Board also approved a share repurchase program, which authorizes repurchases of up to $10.0 million of our common stock.

The repurchase program authorizes us, in management’s discretion, to repurchase shares from time to time, subject to market conditions and other factors.

As of March 31, 2023, we had repurchased 338,324 shares of our common stock for a total of $8.8 million at an average price of $25.88.

Through May 10, 2023, we have acquired 359,553 shares of our 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.

As of June 30, 2023, we repurchased 369,006 shares of our common stock for a total of $9.5 million at an average price of $25.61.

Through August 9, 2023, we have acquired 381,889 shares of our common stock for a total cost of $9.8 million at an average price of $25.65 per share, and $0.2 million remains available for repurchases under the program.

The timing, price and number of shares that may be repurchased under the program will be based on market conditions, applicable securities laws and other factors considered by management.

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Revolving Credit Facility and Other Financing Arrangements

As of March 31, 2023, we had $50.9 million in cash and cash equivalents and restricted cash of $8.9 million, and no amount was borrowed under our revolving credit facility.

Of the $50.9 million in consolidated cash and cash equivalents at March 31, 2023, $5.9 million held at certain consolidated subsidiaries is subject to restrictions on distribution to the parent company pursuant to project loan agreements.

As of June 30, 2023, we had $44.1 million in cash and cash equivalents and restricted cash of $1.0 million, and no amount was borrowed under our revolving credit facility.

Of the $44.1 million in consolidated cash and cash equivalents at June 30, 2023, $4.7 million held at certain consolidated subsidiaries is subject to restrictions on distribution to the parent company pursuant to project loan agreements.

We have taken steps to obtain Federal Deposit Insurance Corporation (FDIC) protection for much of our deposits;

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Any loss of uninsured deposits could have a material adverse effect on our future financial condition, liquidity and operations.

As of March 31, 2023, $46.9 million was invested in a FDIC insured cash sweep platform.

As of March 31, 2023, we had total debt of $129.4 million based on the principal amounts outstanding compared with $123.9 million at December 31, 2022.

As of March 31, 2023, the maximum amount that could be borrowed under the Comerica Bank revolving credit facility was $53.7 million, resulting in availability of $42.7 million, net of letters of credit totaling $11.0 million issued under the revolving credit facility to secure our obligation to build certain roads and utilities facilities benefiting Holden Hills and Section N.

Refer to “Debt Maturities and Other Contractual Obligations” below for a table illustrating the timing of principal payments due on our outstanding debt as of March 31, 2023.

As of June 30, 2023, $31.4 million was invested in an FDIC insured cash sweep platform.

As of June 30, 2023, we had total debt of $139.4 million based on the principal amounts outstanding compared with $123.9 million at December 31, 2022.

As of June 30, 2023, the maximum amount that could be borrowed under the Comerica Bank revolving credit facility was $53.7 million, resulting in availability of $42.7 million, net of letters of credit totaling $11.0 million issued under the revolving credit facility to secure our obligation to build certain roads and utilities facilities benefiting Holden Hills and Section N.

In March 2023, we entered into a modification of the revolving credit facility, which extended the maturity date to March 27, 2025 and increased the floor of the facility’s benchmark 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.

As amended, advances under the revolving credit facility bear interest at the one-month Bloomberg Short-Term Bank Yield Index (BSBY) Rate (with a floor of 0.50 percent) plus 4.00 percent.

In May 2023, we entered into another modification of the revolving credit facility to increase the maximum amount of letters of credit that may be issued under the revolving credit facility from $11.5 million to $13.3 million.

In July 2023, we entered into a $2.3 million letter of credit to secure our obligations to construct and pay for certain utility infrastructure in Lakeway,

Texas, estimated to cost approximately $2.3 million.

The amount available under the revolving credit facility, net of letters of credit issued, was $40.4 million as of August 9, 2023.

Refer to Note 6 for additional discussion.

In January 2023, The Saint June construction loan interest terms were modified.

In February 2023, The Annie B land loan’s maturity was extended to March 1, 2024 and the interest terms were modified.

Refer to “Debt Maturities and Other Contractual Obligations” below for a table illustrating the timing of principal payments due on our outstanding debt as of June 30, 2023.

In April 2023, we made an operating loan of $1.5 million to Stratus Block 150, L.P.

to facilitate the partnership’s ability to pay ongoing costs of The Annie B project during the pre-construction period.

The loan bears interest at the one-month BSBY Rate plus 5.00 percent, is subordinate to The Annie B land loan and must be repaid before distributions may be made to the partners.

In June 2023, we made an operating loan of $750 thousand to The Saint June, L.P.

to support the partnership’s ability to pay its construction loan interest, which has risen above the amount originally budgeted due to rising interest rates.

The loan bears interest at the Term Secured Overnight Financing Rate (SOFR) plus 5.00 percent, is subordinate to The Saint June construction loan and must be repaid before distributions may be made to the partners.

In February 2023, The Annie B land loan’s maturity was extended to March 1, 2024.

Also in February 2023, our subsidiary Holden Hills, L.P.

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In March 2023, we repaid the $4.1 million New Caney land loan.

In May 2023, the Magnolia Place construction loan interest terms were modified.

In response to the phase-out of London Interbank Offered Rate (LIBOR) as a benchmark interest rate, in the first six months of 2023, interest terms were modified for The Saint June construction loan, The Annie B land loan, and the Magnolia Place construction loan to replace the LIBOR benchmark rate with either Term SOFR or the one-month BSBY Rate.

Refer to Note 6 for further discussion.

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Refer to Note 6 and MD&A in our 2022 Form 10-K for a discussion of the financial covenants in our debt agreements.

As of March 31, 2023, we were in compliance with all of our financial covenants;

however, our Jones Crossing project did not pass the debt service coverage ratio (DSCR) test under the Jones Crossing loan.

The DSCR under the Jones Crossing loan is not a financial covenant;

however, to avoid a “Cash Sweep Period,” as defined in the loan agreement, we made a $1.7 million principal payment on the Jones Crossing loan in May 2023 to restore the DSCR to the required threshold.

Based on our current estimates of Jones Crossing operating income and interest rates, we believe additional principal payments in the aggregate of up to approximately $2.3 million over the next 12 months are likely to be required to maintain the DSCR and avoid a Cash Sweep Period.

As of June 30, 2023, we were in compliance with all of our financial covenants.

However, our Jones Crossing project did not pass the debt service coverage ratio (DSCR) test under the Jones Crossing loan in each of fourth-quarter 2022 and first-quarter 2023.

The DSCR test under the Jones Crossing loan is not a financial covenant and not meeting the DSCR test is not an event of default;

however, to avoid a “Cash Sweep Period,” as defined in the loan agreement, we made principal payments of $231 thousand and $1.7 million in February 2023 and May 2023, respectively, to restore the DSCR to the required threshold.

The DSCR fell below 1.15 to 1.00 in second-quarter 2023 and we must make an additional principal payment of approximately $1.2 million in August 2023 or allow a Cash Sweep Period to commence.

If the $1.2 million principal payment is made in August 2023, based on our current estimates of the Jones Crossing project’s operating income and interest rates, we project that we will meet the DSCR test over the next 12 months.

A Cash Sweep Period limits our ability to receive cash from our Jones Crossing subsidiary, and is projected not to be material to our overall liquidity position over the next 12 months.

Once a Cash Sweep Period has commenced, it is terminated when the DSCR is at least 1.20 to 1.00 at the end of any two consecutive fiscal quarters (or by making additional principal payments to achieve that level).

As permitted under the loan agreement, in August 2023 the Jones Crossing subsidiary separated the ground lease for the multi-family parcel from the primary ground lease, and the multi-family parcel has been released from the loan collateral .

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

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make loans, advances or other investments;

create liens on

create liens on assets;

enter into sale-leaseback transactions;

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Debt Maturities and Other Contractual Obligations

The following table summarizes our debt maturities based on the principal amounts outstanding as of March 31, 2023 (in thousands):

The following table summarizes our debt maturities based on the principal amounts outstanding as of June 30, 2023 (in thousands):

2023 2024 2025 2026 2027 Thereafter Total

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$ — $ — $ — $ — $ — $ — $ —

Jones Crossing loan b

Jones Crossing loan

— — — 22,594 — 22,594

The Annie B land loan c

The Annie B land loan b

— 14,000 — — — — 14,000

Construction loans:

Kingwood Place d

Kingwood Place c

28,099 — — — — — 28,099

Lantana Place 101 260 284 304 20,931 — 21,880

The Saint June — 24,851 — — — — 24,851

Lantana Place 94 244 268 289 20,985 — 21,880

Amarra Villas revolving credit facility — 10,951 — — — — 10,951

Magnolia Place — 8,143 — — — — 8,143

West Killeen Market

28 61 5,195 — — — 5,284

Magnolia Place — 7,341 — — — — 7,341

Amarra Villas revolving credit facility — 7,446 — — — — 7,446

The Saint George — — — 3,597 — — 3,597

$ 28,221 $ 58,250 $ 5,463 $ 26,480 $ 20,985 $ — $ 139,399

In first-quarter 2023, we entered into a modification of the revolving credit facility, which extended the maturity date of the revolving credit facility to March 27, 2025.

In March 2023, we entered into a modification of the revolving credit facility, which extended the maturity date of the revolving credit facility to March 27, 2025.

Refer to Note 6 for further information.

In May 2023, we made a $1.7 million principal payment to bring the DSCR back above 1.15 to 1.00 to avoid a Cash Sweep Period.

In first-quarter 2023, we extended the maturity date of this loan to March 1, 2024.

In February 2023, we extended the maturity date of this loan to March 1, 2024.

The maturity date is December 6, 2023.

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we project that we will meet the conditions and expect to exercise the option to extend the maturity.

The Saint George and Holden Hills construction loans did not have outstanding balances at March 31, 2023.

The Holden Hills construction loan did not have an outstanding balance at June 30, 2023.

The following table summarizes the weighted-average interest rate of each loan, all of which have variable rates, for the periods presented:

Three Months Ended

Three Months Ended Six Months Ended

June 30, June 30,

2023 2022 2023 2022 a

Comerica Bank revolving credit facility b

— % 4.94 % — % 4.97 %

Jones Crossing loan

7.19 2.91 6.97 2.65

The Annie B land loan 7.90 3.71 7.65 3.60

New Caney land loan c

— 3.41 — 3.21

Construction loans:

Kingwood Place 7.67 3.22 7.41 2.95

Lantana Place 6.93 3.00

The Saint June d

West Killeen Market

Magnolia Place 7.79 3.50

7.82 3.87 7.54 3.87

Lantana Place 7.40 3.54 7.17 3.27

Amarra Villas revolving credit facility 7.98 3.79 7.74 3.56

Magnolia Place 8.27 4.13 8.04 3.89

West Killeen Market

7.71 3.54 7.47 3.27

The Saint George e

7.41 — 7.41 —

At March 31, 2022, we had an outstanding balance of $38 thousand for the loan under the Paycheck Protection Program (PPP loan).

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The PPP loan matured and the remaining balance was repaid on April 15, 2022.

We did not have an outstanding balance during first-quarter 2023.

At March 31, 2023, the interest rate for the revolving credit facility was 8.67 percent.

We did not have an outstanding balance during second-quarter 2023 or the first six months of 2023.

At June 30, 2023, the interest rate for the revolving credit facility was 9.20 percent.

In March 2023, we repaid this loan.

We did not have an outstanding balance during first-quarter 2022.

Other than as discussed above and in our financial statements for the quarter ended March 31, 2023, there have been no material changes in our contractual obligations related to Amarra Villas, Magnolia Place, The Saint June, The Saint George and the first phase of Holden Hills since December 31, 2022.

Refer to MD&A in our 2022 Form 10-K for further information regarding our contractual obligations.

We did not have an outstanding balance during either period in 2022 or during first-quarter 2023.

Liquidity Outlook

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

For our development projects with firm commitments, we have construction loans, as well as remaining equity capital allocated to the projects to fund the projected cash outlays for these projects over the next 12 months except for 60 percent of the costs of the Tecoma Improvements for which we have agreed to reimburse the Holden Hills limited partnership.

We had firm commitments totaling approximately $75 million at June 30, 2023 primarily related to construction of The Saint George, Holden Hills and Amarra Villas.

We have construction loans, as well as remaining equity capital contributed to The Saint George and Holden Hills partnerships, to fund the projected cash outlays for these projects over the next 12 months except for 60 percent of the costs of the Tecoma Improvements for which we have agreed to reimburse the Holden Hills partnership.

As of June 30, 2023, we had $10.6 million remaining to complete the Tecoma Improvements.

Refer to "Recent Development Activities – Current Residential Activities – Barton Creek – Holden Hills” above for further discussion of the Tecoma Improvements.

As of March 31, 2023, our expected cash requirements to fund our firm commitments have not changed significantly from the amounts reported in our 2022 Form 10-K.

Our stabilized commercial properties (West Killeen Market, Jones Crossing, Lantana Place and Kingwood Place) are projected to generate positive cash flow after debt service over the next 12 months.

For other projected pre-development costs, much of which are discretionary, and for our costs of the Tecoma Improvements and projected general and administrative expenses, we have cash on hand and availability under our revolving credit facility (which was recently extended to March 27, 2025, as stated above) in amounts expected to be sufficient to fund these cash requirements for the next 12 months.

Also, we anticipate making additional operating loans to Stratus Block 150, L.P.

of up to $3 million over the next 12 months to enable the partnership to pay debt service and project costs during the pre-construction period.

The operating loans would bear interest at the one-month BSBY Rate plus 5.00 percent and would be repaid before distributions may be made to the partners.

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

Our stabilized commercial properties (West Killeen Market, Jones Crossing, Lantana Place and Kingwood Place) are projected to generate sufficient cash flow to cover debt service over the next 12 months.

As discussed above, we may be required to make additional principal payments on the Jones Crossing loan over the next 12 months or allow a Cash Sweep Period to commence.

For other projected pre-development costs, much of which are discretionary, and for our costs of the Tecoma Improvements and projected operating loans to partnerships and general and administrative expenses, we had cash on hand of $44.1 million at June 30, 2023 and availability under our revolving credit facility (which matures on March 27, 2025) of approximately $40.4 million as of August 9, 2023 in amounts expected to be sufficient to fund these cash requirements for the next 12 months.

We expect to successfully extend the maturities or refinance our debt that matures in the next 12 months.

For future potential significant development projects, we would not plan to enter into commitments to incur material costs for the projects until we obtain what we project to be adequate financing to cover anticipated cash outlays.

As discussed under “Business Strategy” above, our main source of revenue and cash flow is expected to come from sales of our properties to third parties or distributions from joint ventures, the timing of and proceeds from which are difficult to predict and depend on market conditions and other factors.

We also generate cash flow from rental

revenue in our leasing operations and from development and asset management fees received from our properties.

difficult to predict and depend on market conditions and other factors.

We also generate cash flow from rental revenue in our leasing operations and from development and asset management fees received from our properties.

Due to the nature of our development-focused business, we do not expect to generate sufficient recurring cash flow to cover our general and administrative expenses each period.

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In the ordinary course of business, we engage in certain activities that are not reflected on our consolidated balance sheets, generally referred to as off-balance sheet arrangements.

For additional information regarding these types of activities, refer to the discussion about our firm commitments in “Liquidity Outlook” above and Note 9 to our consolidated financial statements in our 2022 Form 10-K.

For additional information regarding these types of activities, refer to the discussion about our firm commitments in “Capital Resources and Liquidity – Liquidity Outlook” above and Note 9 to our consolidated financial statements in our 2022 Form 10-K.

CAUTIONARY STATEMENT

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We caution readers that forward-looking statements are not guarantees of future performance, and our actual results may differ materially from those anticipated, expected, projected or assumed in the forward-looking statements.

Important factors that can cause our actual results to differ materially from those anticipated in the forward-looking statements include, but are not limited to, our ability to implement our business strategy successfully, including our ability to develop, construct and sell or lease properties on terms our Board considers

acceptable, increases in operating and construction costs, including real estate taxes and the cost of building materials and labor, increases in inflation and interest rates, supply chain constraints, tightening bank credit, defaults by contractors and subcontractors, declines in the market value of our assets, market conditions or corporate developments that could preclude, impair or delay any opportunities with respect to plans to sell, recapitalize or refinance properties, a decrease in the demand for real estate in select markets in Texas where we operate, particularly in Austin, changes in economic, market, tax and business conditions, including as a result of the war in Ukraine, potential U.S.

or local economic downturn or recession or failure of the U.S.

Congress to raise the statutory debt limit, the availability and terms of financing for development projects and other corporate purposes, the failure of any bank in which we deposit our funds, any major public health crisis, our ability to collect anticipated rental payments and close projected asset sales, loss of key personnel, our ability to enter into and maintain joint ventures, partnerships, or other strategic relationships, including risks associated with such joint ventures, our ability to pay or refinance our debt, extend maturity dates of our loans or comply with or obtain waivers of financial and other covenants in debt agreements and to meet other cash obligations, eligibility for and potential receipt and timing of receipt of MUD reimbursements, industry risks, changes in buyer preferences, potential additional impairment charges, competition from other real estate developers, our ability to obtain various entitlements and permits, changes in laws, regulations or the regulatory environment affecting the development of real estate, opposition from special interest groups or local governments with respect to development projects, weather- and climate-related risks, environmental and litigation risks, the failure to attract buyers or tenants for our developments or such buyers’ or tenants’ failure to satisfy their purchase commitments or leasing obligations, cybersecurity incidents and other factors described in more detail under the heading “Risk Factors” in Part I, Item 1A.

Important factors that can cause our actual results to differ materially from those anticipated in the

forward-looking statements include, but are not limited to, our ability to implement our business strategy successfully, including our ability to develop, construct and sell or lease properties on terms our Board considers acceptable, increases in operating and construction costs, including real estate taxes and the cost of building materials and labor, increases in inflation and interest rates, supply chain constraints, tightening bank credit, defaults by contractors and subcontractors, declines in the market value of our assets, market conditions or corporate developments that could preclude, impair or delay any opportunities with respect to plans to sell, recapitalize or refinance properties, a decrease in the demand for real estate in select markets in Texas where we operate, particularly in Austin, changes in economic, market, tax and business conditions, including as a result of the war in Ukraine, potential U.S.

or local economic downturn or recession, the availability and terms of financing for development projects and other corporate purposes, the failure of any bank in which we deposit our funds, any major public health crisis, our ability to collect anticipated rental payments and close projected asset sales, loss of key personnel, our ability to enter into and maintain joint ventures, partnerships, or other strategic relationships, including risks associated with such joint ventures, our ability to pay or refinance our debt, extend maturity dates of our loans or comply with or obtain waivers of financial and other covenants in debt agreements and to meet other cash obligations, eligibility for and potential receipt and timing of receipt of MUD reimbursements, industry risks, changes in buyer preferences, potential additional impairment charges, competition from other real estate developers, our ability to obtain various entitlements and permits, changes in laws, regulations or the regulatory environment affecting the development of real estate, opposition from special interest groups or local governments with respect to development projects, weather- and climate-related risks, environmental and litigation risks, the failure to attract buyers or tenants for our developments or such buyers’ or tenants’ failure to satisfy their purchase commitments or leasing obligations, cybersecurity incidents and other factors described in more detail under the heading “Risk Factors” in Part I, Item 1A.

of our 2022 Form 10-K, filed with the SEC.

5 unchanged sentences

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What changed 10-Q

Item 2. Management’s Discussion and Analysis