STRATUS PROPERTIES INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations . In Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A), “we,” “us,” “our” and "Stratus" refer to Stratus Properties Inc. and all entities owned or controlled by Stratus Properties Inc. You should read the following discussion in conjunction with our consolidated financial statements and accompanying notes, related MD&A and discussion of our business and properties included in our Annual Report on Form 10-K for the year ended December 31, 2022 (2022 Form 10-K) filed with the United States (U.S.) Securities and Exchange Commission (SEC) and the unaudited consolidated financial statements and accompanying notes included in this Form 10-Q. The results of operations reported and summarized below are not necessarily indicative of future operating results, and future results could differ materially from those anticipated in forward-looking statements (refer to “Cautionary Statement” and Part I, Item 1A. “Risk Factors” of our 2022 Form 10-K for further discussion). All subsequent references to “Notes” refer to Notes to Consolidated Financial Statements (Unaudited) located in Part I, Item 1. “Financial Statements” herein, unless otherwise stated. OVERVIEW We are a diversified real estate company with headquarters in Austin, Texas. We are engaged primarily in the acquisition, entitlement, development, management, leasing and sale of multi-family and single-family residential and commercial real estate properties in the Austin, Texas area and other select markets in Texas. In addition to our developed properties, we have a development portfolio that consists of approximately 1,600 acres of commercial and multi-family and single-family residential projects under development or undeveloped land held for future use. Refer to Note 9 for discussion of our operating segments and “Business Strategy” below for a discussion of our business strategy. BUSINESS STRATEGY Our primary business objective is to create value for stockholders by methodically developing and enhancing the value of our properties and then selling them or holding them for lease. Our successful development program of acquiring properties, securing and maintaining development entitlements, developing and stabilizing properties, and selling them or holding them as part of our leasing operations is a key element of our strategy. We may also seek to refinance properties in order to benefit from, when available, an increase in the value of the property or from lower interest rates or for other reasons. 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 done during 2022 and 2023 through our $10.0 million share repurchase program, that was completed in October 2023. In November 2023, our Board approved a new $5.0 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 Holden Hills, L.P. (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, between April and October 2023, we made operating loans totaling $3.3 million to Stratus Block 150, L.P. and The Saint June, L.P., and we anticipate making future operating loans to Stratus Block 150, L.P. and The Saint George Apartments, L.P. totaling up to $3.4 million over the next 12 months. Refer to Note 3 and “Capital Resources and Liquidity – Revolving Credit Facility and Other Financing Arrangements” and “Capital Resources and Liquidity – Liquidity Outlook” 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. Our main sources of revenue and cash flow are expected to be sales of our properties to third parties or 21 Table of Contents 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 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 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 September 30, 2023 we had cash and cash equivalents of $35.2 million and availability under our revolving credit facility of $40.5 million. 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 working to manage and expand our credit and joint venture partner relationships. 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 Sources of Revenue and Income Our Real Estate Operations encompass our activities associated with our acquisition, entitlement, development, and sale of real estate. The current focus of our real estate operations is multi-family and single-family residential properties and residential-centric mixed-use properties. We may sell or lease the real estate we develop, depending on market conditions. Multi-family and retail rental properties that we develop are reclassified to our Leasing Operations segment when construction is substantially completed and they are ready for occupancy. Revenue in our Real Estate Operations may be generated from the sale of properties that are developed, undeveloped or under development, depending on market conditions. Developed property sales can include an individual tract of land that has been developed and permitted for residential use or a developed lot with a residence built on it. Revenue in our Leasing Operations is generated from the lease of space at retail and mixed-use properties and residences in the multi-family properties that we developed. We may also generate income from the sale of our leased properties, depending on market conditions. Summary Financial Results for the Third-Quarter and First Nine Months of 2023 Our revenues totaled $3.7 million in third-quarter 2023 and $13.0 million for the first nine months of 2023, compared with $10.0 million in third-quarter 2022 and $24.2 million for the first nine months of 2022. The decrease in revenues in the 2023 periods, compared to the 2022 periods, is primarily a result of higher sales of undeveloped real estate properties in our Real Estate Operations segment in both 2022 periods compared to no sales in third-quarter 2023 and lower sales in the first nine months of 2023. The decreases were partially offset in both 2023 periods by an increase in revenue in our Leasing Operations segment primarily reflecting revenue from Magnolia Place and The Saint June, both of which had no rental revenue in the 2022 periods, as well as increased revenue at Kingwood Place and West Killeen Market. Refer to "Results of Operations" below for further discussion of our segments. Our net loss attributable to common stockholders totaled $2.8 million, or $0.35 per diluted share in third-quarter 2023, compared to net loss attributable to common stockholders of $2.4 million, or $0.29 per diluted share, in third-quarter 2022. During the first nine months of 2023 our net loss attributable to common stockholders totaled $13.9 million, or $1.69 per diluted share, compared to net income attributable to common stockholders of $96.5 million, or $11.50 per diluted share, during the first nine months of 2022. Our results for the first nine 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 nine 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. 22 Table of Contents 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 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 cash proceeds totaled approximately $112 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 the 2022 periods presented in the consolidated financial statements included in this Form 10-Q. Refer to Note 4 for further discussion. RECENT DEVELOPMENT ACTIVITIES Current Residential Activities The discussion below focuses on our recent significant residential activity. For a description of our properties containing additional information, refer to Items 1. and 2. “Business and Properties” in our 2022 Form 10-K. Barton Creek 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 September 30, 2023, two developed Amarra Drive Phase III lots remained unsold. Amarra Villas. The Villas at Amarra Drive (Amarra Villas) project is a 20-unit development in Barton Creek. In first-quarter 2023, we completed and sold one home for $2.5 million. Construction on the last ten homes continues to progress with four of the homes expected to be completed in fourth-quarter 2023. As of November 8, 2023, one home was under contract to sell and nine homes remain available for sale. The Saint June. In third-quarter 2021, we began construction on The Saint June, a 182-unit luxury garden-style multi-family project within the Amarra development. The Saint June is 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 were available for occupancy in July 2023, and construction was completed in November 2023. As of September 30, 2023, we had signed leases for approximately 25 percent of the units. Holden Hills. Our final large residential development within the Barton Creek community, Holden Hills, consists of 495 acres and the community is designed to feature 475 unique residences to be developed in two phases with a focus on health and wellness, sustainability and energy conservation. Phases I and II of the Holden Hills development plan encompass the development of the home sites. Phase I is expected to consist of 337 luxury residence sites to be developed in nine distinct communities or “pods,” and 12 single-family platted home sites or “estate lots” and includes related amenities and infrastructure. Phase I also includes the Tecoma Improvements, described below. Phase II is expected to consist of 63 luxury residence sites to be developed in five pods and 63 single-family platted estate lots, and includes related amenities and infrastructure. The luxury residences are expected to range in size from 2,000 square feet to 4,600 square feet. The estate lots are expected to range in size from 0.9 acres to 2.7 acres. 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 partnership the Holden Hills land and related personal property at an agreed 23 Table of Contents 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 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. We and the equity investor have agreed to contribute up to an additional $10.0 million each to the partnership if called upon by the general partner. The initial and potential additional equity contributions are projected to constitute a sufficient amount of equity capital to develop both Phase I and Phase II of the Holden Hills project. The partnership anticipates securing additional debt financing for the development of Phase II. The construction of homes on the pods or estate lots would require additional capital. We expect to complete site work for Phase I, including the construction of road, utility, drainage and other required infrastructure, in late 2024. Accordingly, our current projections anticipate that we could start building homes and/or selling home sites in late 2024 or 2025. We may sell the developed pods and estate lots or may elect to build and sell, or build and lease, homes on some or all of the pods and estate lots, depending on financing and market conditions. 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 $11.0 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 September 30, 2023, we had $9.2 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. The Holden Hills partnership has agreed to deliver to us 60 percent of any MUD reimbursements for Tecoma Improvement costs paid directly by us, when such reimbursements are received by the partnership. The amount and timing of MUD reimbursements depends upon, among other factors, the amount and timing of actual costs incurred, the MUD having a sufficient tax base within its district to issue bonds and obtaining the necessary state approval for the sale of the bonds. Accordingly, the amount and timing of the receipt of MUD reimbursements is uncertain. Section N. 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 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 In fourth-quarter 2021, we purchased the land for The Saint George, a 316-unit luxury wrap-style, multi-family project in north-central Austin. We entered into a construction loan for this project and began construction in third-quarter 2022. We currently expect to achieve substantial completion by mid-2024. The Annie B In third-quarter 2021, we purchased the land and announced plans for The Annie B, a proposed luxury high-rise project in downtown Austin to be developed as a 400-foot tower, consisting of approximately 420,000 square feet with 316 luxury residential units. We continue to work to finalize our development plans and to evaluate whether the project is most profitable as a for rent or for sale product. Our goal is to commence construction as soon as financing and other market conditions warrant. 24 Table of Contents The Saint Julia 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. Our goal is to commence construction as soon as financing and other market conditions warrant. 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 a $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 In October 2022, we entered into a contract to sell approximately 11 acres planned for 275 multi-family units in Magnolia Place for $4.3 million. The buyer terminated the contract in September 2023. In August 2023, we entered into a contract to sell approximately 47 acres planned for up to 600 multi-family units, a second phase of retail development and up to seven remaining pad sites in Magnolia Place for $14.5 million, which is currently not expected to close before first-quarter 2024. 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. Current Commercial Activities The discussion below focuses on our recent significant commercial activity. For a description of our properties containing additional information, refer to Items 1. and 2. “Business and Properties” in our 2022 Form 10-K. Magnolia Place 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. 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 2024, 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 September 30, 2023, we had signed leases for all the retail space in the first phase of development, and all tenants were open for business. As discussed above, in August 2023, we entered into a contract to sell approximately 47 acres planned for a second phase of retail development, up to seven remaining pad sites and up to 600 multi-family units, for $14.5 million. We sold two retail pad sites in 2022 for a total of $3.4 million. Jones Crossing Jones Crossing, our H-E-B shadow-anchored mixed-use project in College Station, Texas, the location of Texas A&M University, has additional commercial development potential of approximately 104,750 square feet of commercial space. Other Commercial We also own and operate the following stabilized retail projects that we developed: • West Killeen Market is our H-E-B shadow-anchored retail project in West Killeen, Texas, near Fort Cavazos. As of September 30, 2023, we had signed leases for approximately 74 percent of the 44,493-square-foot retail space. • At Jones Crossing , as of September 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 September 30, 2023, we had signed leases for approximately 92 percent of the 25 Table of Contents 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 September 30, 2023, we had signed leases for substantially all of the retail space, including the H-E-B grocery store. We have also signed ground leases on four of the retail pad sites. One retail pad site remains available for lease. Potential Development Projects and Pipeline Our development plans for The Annie B, Section N and The Saint Julia will require significant additional capital, which we currently intend to pursue through project-level debt and third-party equity capital arrangements through joint ventures in which we receive development management fees and asset management fees and with our potential returns increasing above our relative equity interest in each project as negotiated return hurdles are achieved. We anticipate seeking additional debt to finance the development of Phase II of Holden Hills. We are also pursuing other development projects. These potential development projects and projects in our pipeline could require extensive additional permitting and will be dependent on market conditions and financing. Because of the nature and cost of the approval and development process and uncertainty regarding market demand for a particular use, there is uncertainty regarding the nature of the final development plans and whether we will be able to successfully execute the plans. Market Conditions 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 September 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 and thereafter. 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. Refer to Part I, Item 1A. “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 We are continually evaluating the development and sale potential of our properties and will continue to consider opportunities to enter into transactions involving our properties, including possible sales, joint ventures or other arrangements. As a result, and because of numerous factors affecting our business activities as described herein and in our 2022 Form 10-K, our past operating results are not necessarily indicative of our future results. We use operating income or loss to measure the performance of our operating segments. Corporate, eliminations and other 26 Table of Contents include consolidated general and administrative expenses, which primarily consist of employee compensation and other costs described herein. The following table summarizes our operating results (in thousands): Three Months Ended Nine Months Ended September 30, September 30, 2023 2022 2023 2022 Operating (loss) income: Real Estate Operations a $ (1,505) $ (89) $ (6,215) $ 1,014 Leasing Operations b 1,354 853 3,900 8,374 Corporate, eliminations and other c (3,178) (3,594) (11,959) (10,202) Operating loss (3,329) (2,830) (14,274) (814) Interest expense, net — — — (15) Net loss from continuing operations (3,217) (2,574) (14,799) (230) Net income from discontinued operations d — — — 96,300 Total comprehensive loss attributable to noncontrolling interests 373 214 853 463 Net (loss) income attributable to common stockholders $ (2,844) $ (2,360) $ (13,946) $ 96,533 a. Includes sales commissions and other revenues together with related expenses. For both 2022 periods, includes a $650 thousand impairment charge related to one of the Amarra Villas homes that was sold for $2.5 million in first-quarter 2023 and $70 thousand for the multi-family tract of land at Kingwood Place sold for $5.5 million in fourth-quarter 2022. Refer to Note 4. b. The first nine 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. c. Includes consolidated general and administrative expenses and eliminations of intersegment amounts. d. The first nine months of 2022 includes 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: Real Estate Operations and Leasing Operations (refer to Note 9). The following is a discussion of our operating results by segment. Real Estate Operations The following table summarizes our Real Estate Operations results (in thousands): Three Months Ended Nine Months Ended September 30, September 30, 2023 2022 2023 2022 Revenues: Developed property sales $ — $ — $ 2,493 $ 2,382 Undeveloped property sales — 6,887 — 12,331 Commissions and other — — 58 124 Total revenues — 6,887 2,551 14,837 Cost of sales, including depreciation (1,505) (6,256) (8,766) (13,103) Impairment of real estate — (720) — (720) Operating (loss) income $ (1,505) $ (89) $ (6,215) $ 1,014 27 Table of Contents Developed Property Sales. The following table summarizes our developed property sales (dollars in thousands): Nine Months Ended September 30, 2023 2022 Homes Revenues Average Cost Per Home Lots/Units Revenues Average Cost Per Lot/Unit Barton Creek Amarra Drive: Amarra Villas homes 1 $ 2,493 $ 2,243 1 $ 2,382 $ 2,382 Total Residential 1 $ 2,493 1 $ 2,382 We had no developed property sales in third-quarter 2023 or 2022. 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 third-quarter 2022, we closed $6.9 million of undeveloped property sales consisting of (i) 28 acres of residential land for $3.2 million at Magnolia Place, (ii) a 0.3 acre tract of land in Austin for $1.6 million, (iii) a pad site at Magnolia Place for $1.1 million and (iv) a pad site at West Killeen Market for $1.0 million. During the first nine months of 2022, we also 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. We had no undeveloped property sales in third-quarter 2023 or for the first nine months of 2023. Cost of Sales. Cost of sales includes costs of property sold, project operating and marketing expenses and allocated overhead costs. Cost of sales decreased to $1.5 million in third-quarter 2023, compared to $6.3 million in third-quarter 2022, primarily due to the undeveloped property sales in third-quarter 2022 while there were no property sales in third-quarter 2023. Cost of sales decreased to $8.8 million for the first nine months of 2023, compared to $13.1 million for the first nine months of 2022, primarily due to higher real estate revenues in the first nine months of 2022 partially offset by 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 and $1.0 million of expenses related to the formation of the Holden Hills partnership in the first nine months of 2023. Impairment of Real Estate. In third-quarter 2022, we recorded impairment charges totaling $720 thousand. These included a $650 thousand impairment charge related to one of the Amarra Villas homes that sold for $2.5 million in first-quarter 2023 and a $70 thousand impairment charge for the multi-family tract of land at Kingwood Place that sold for $5.5 million in fourth-quarter 2022. Refer to Note 4 for further discussion. Leasing Operations The following table summarizes our Leasing Operations results (in thousands): Three Months Ended Nine Months Ended September 30, September 30, 2023 2022 2023 2022 Rental revenue $ 3,669 $ 3,090 $ 10,450 $ 9,370 Rental cost of sales, excluding depreciation and amortization (1,381) (1,350) (3,786) (3,204) Depreciation and amortization (934) (887) (2,764) (2,604) Gain on sale of assets — — — 4,812 Operating income $ 1,354 $ 853 $ 3,900 $ 8,374 Rental Revenue. In the 2023 periods, rental revenue primarily included revenue from Lantana Place, Kingwood Place, Jones Crossing, West Killeen Market, Magnolia Place and The Saint June. 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 and The Saint June, both of which had no rental revenue in the 2022 periods, as well as increased revenue at Kingwood Place and West Killeen Market. 28 Table of Contents Rental Cost of Sales and Depreciation and Amortization. Rental cost of sales and depreciation and amortization expense increased in the 2023 periods compared with the 2022 periods, primarily as a result of The Saint June, which had no operating expenses in the 2022 periods, and Magnolia Place, which began operations in third-quarter 2022, and costs of landscaping repairs and replacements at retail properties following the Texas winter storm in February 2023. Gain on Sale of Assets. For the first nine 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. Corporate, Eliminations and Other Corporate, eliminations and other (refer to Note 9) includes consolidated general and administrative expenses, which primarily consist of employee compensation and other costs. Consolidated general and administrative expenses were $3.2 million in third-quarter 2023 and $12.0 million for the first nine months of 2023, compared to $3.6 million in third-quarter 2022 and $10.2 million for the first nine months of 2022. The decrease in the third-quarter 2023 compared to the third-quarter 2022 was primarily a result from a reduction in the employee incentive compensation costs associated with the Profit Participation Incentive Plan (PPIP) resulting from a decreased valuation for Kingwood Place. The increase in the first nine months of 2023 compared to the first nine months of 2022 was primarily 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 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 in the first nine months of 2023. Non-Operating Results Interest Expense, Net. Interest costs (before capitalized interest) totaled $3.4 million in third-quarter 2023 and $8.7 million for the first nine months of 2023, compared with $1.8 million in third-quarter 2022 and $4.4 million for the first nine 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 September 30, 2023, all of our debt was variable-rate debt, and for all of such debt, the interest rates have increased during 2022 and the first nine 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 all 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 Income Taxes. We recorded a provision for income taxes of $(0.4) million in third-quarter 2023 and $(2.0) million for the first nine months of 2023, compared to $(0.4) million in third-quarter 2022 and $(0.2) million for the first nine months of 2022. The provision for income taxes in 2023 is primarily a result from the taxable income generated from cash received in the Holden Hills transaction discussed in Note 3. 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 the 2023 periods. Net income from discontinued operations totaled $96.3 million for the first nine 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 $0.4 million in third-quarter 2023 and $0.9 million for the first nine months of 2023, compared to $0.2 million in third-quarter 2022 and $0.5 million for the first nine months of 2022. CAPITAL RESOURCES AND LIQUIDITY Volatility in the real estate market, including the markets in which we operate, can impact the timing of and proceeds received from sales of our properties, which may cause uneven cash flows from period to period. However, we believe that the unique nature and location of our assets will provide us positive cash flows over time. 29 Table of Contents Comparison of Cash Flows for the Nine Months Ended September 30, 2023 and 2022 Operating Activities. Cash used in operating activities totaled $39.3 million for the first nine months of 2023, compared with $49.3 million for the first nine months of 2022. Expenditures for purchases and development of real estate properties totaled $34.7 million for the first nine months of 2023 and $18.3 million for the first nine 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 nine 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) provided by investing activities totaled $(36.9) million for the first nine months of 2023 and $66.2 million for the first nine months of 2022. During the first nine 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 $36.2 million for the first nine months of 2023, primarily for The Saint George and The Saint June, and $38.9 million for the first nine months of 2022, primarily for The Saint June, The Saint George and Magnolia Place projects. Financing Activities. Cash provided by (used in) financing activities totaled $66.9 million for the first nine months of 2023 and $(9.7) million for the first nine months of 2022. During both the first nine months of 2023 and 2022, we had no net borrowings on the Comerica Bank revolving credit facility. During the first nine months of 2023, net borrowings on other project and term loans totaled $33.2 million, primarily reflecting borrowings on The Saint George construction loan, 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 nine months of 2022, net repayments on other project and term loans totaled $16.0 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 September 30, 2023. During the first nine months of 2023, we received a contribution from a noncontrolling interest owner of $40.0 million, related to the Holden Hills partnership. During the first nine months of 2022, we received contributions from a noncontrolling interest owner of $15.0 million, related to The Saint George 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 the first nine months of 2023, $0.7 million of accrued dividends for unvested RSUs were paid to the holders upon the vesting of the RSUs, leaving $0.6 million of dividends accrued for unvested RSUs presented in accrued liabilities as of September 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 authorized repurchases of up to $10.0 million of our common stock. As of September 30, 2023, we repurchased 386,619 shares of our common stock for a total of $9.9 million at an average price of $25.67. In October 2023, we completed the share repurchase program. In total, under the completed share repurchase program, we acquired 389,378 shares of our common stock for a cost of $10.0 million at an average price of $25.68 per share. In November 2023, with written consent from Comerica Bank, our Board approved a new share repurchase program, which authorizes repurchases of up to $5.0 million of our common stock. The repurchase program authorizes us, in management’s and the Capital Committee of the Board’s discretion, to repurchase shares from time to time, subject to market conditions and other factors. 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 and the Capital Committee of the Board. Share repurchases under the program may be made from time to time through solicited or unsolicited transactions in the open market, in privately negotiated transactions or by other means in accordance with securities laws. The share repurchase program does not obligate us to repurchase any specific amount of shares, does not have an expiration date, and may be suspended, modified or discontinued at any time without prior notice. 30 Table of Contents Revolving Credit Facility and Other Financing Arrangements As of September 30, 2023, we had $35.2 million in cash and cash equivalents and restricted cash of $1.2 million, and no amount was borrowed under our revolving credit facility. Of the $35.2 million in consolidated cash and cash equivalents at September 30, 2023, $2.9 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; however, we typically have some cash balances on deposit with banks in excess of FDIC insured limits. Any loss of uninsured deposits could have a material adverse effect on our future financial condition, liquidity and operations. As of September 30, 2023, $30.1 million was invested in an FDIC insured cash sweep platform. As of September 30, 2023, we had total debt of $158.5 million based on the principal amounts outstanding compared with $123.9 million at December 31, 2022. As of September 30, 2023, the maximum amount that could be borrowed under the Comerica Bank revolving credit facility was $53.8 million, resulting in availability of $40.5 million, net of letters of credit totaling $13.3 million issued under the revolving credit facility, $11.0 million of which 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 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. Refer to Note 6 for additional discussion. 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 September 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. In August 2023, we made an additional advance of $800 thousand under the operating loan to Stratus Block 150, L.P. 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. In October 2023, we made an additional advance of $250 thousand under the operating loan to The Saint June, L.P., and the Class B Limited Partner made an operating loan of $250 thousand to The Saint June, L.P. The loans bear 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. entered into a $26.1 million construction loan with Comerica Bank due February 8, 2026 to finance the development of Phase I of the Holden Hills project. In March 2023, we repaid the $4.1 million New Caney land loan. In response to the phase-out of London Interbank Offered Rate (LIBOR) as a benchmark interest rate, in the first nine 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. Our debt agreements require compliance with specified financial covenants. 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 September 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. As permitted under the Jones Crossing loan agreement, in August 2023 the Jones Crossing subsidiary separated the ground lease for the multi-family parcel (the Multi-Family Phase) from the primary ground lease, and the Multi-Family Phase was released from the loan collateral . In October 2023, the Jones Crossing loan was modified effective August 1, 2023 to remove the Multi-Family Phase from certain defined terms and to revise the DSCR calculation to exclude the Multi-Family Phase from expenses on a retroactive basis beginning in second- 31 Table of Contents quarter 2023. Accordingly, the DSCR met the threshold in second-quarter and third-quarter 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. Stratus’ and its subsidiaries’ debt arrangements contain significant limitations that may restrict Stratus’ and its subsidiaries’ ability to, among other things: borrow additional money or issue guarantees; pay dividends, repurchase equity or make other distributions to equityholders; make loans, advances or other investments; create liens on assets; sell assets; enter into sale-leaseback transactions; enter into transactions with affiliates; permit a change of control or change in management; sell all or substantially all of its assets; and engage in mergers, consolidations or other business combinations. Our 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, which was obtained in 2022 in connection with the special cash dividend and completed $10.0 million share repurchase program, and in November 2023 in connection with the new $5.0 million share repurchase program. Any future declaration of dividends or decision to repurchase our common stock is at the discretion of our Board, subject to restrictions under our Comerica Bank debt agreements, and will depend on our financial results, cash requirements, projected compliance with covenants in our debt agreements, outlook and other factors deemed relevant by our Board. Our future debt agreements, future refinancings of or amendments to existing debt agreements or other future agreements may restrict our ability to declare dividends or repurchase shares. Our project loans are generally secured by all or substantially all of the assets of the projects, and our Comerica Bank revolving credit facility is secured by substantially all of our assets other than those encumbered by separate project financing. In addition, we are typically required to guarantee all or part of the payment of our project loans, in some cases until certain development milestones and/or financial conditions are met, except for the Jones Crossing loan guaranty, which is generally limited to non-recourse carve-out obligations. We were released as guarantor under the Lantana Place construction loan guaranty in 2022. Refer to Note 6 to our consolidated financial statements in our 2022 Form 10-K for additional discussion. Our construction loans typically permit advances only in accordance with budgeted allocations and subject to specified conditions, and require lender consent for changes to plans and specifications exceeding specified amounts. If the lender deems undisbursed proceeds insufficient to meet costs of completing the project, the lender may decline to make additional advances until the borrower deposits with the lender sufficient additional funds to cover the deficiency the lender deems to exist. The inability to satisfy a condition to receive advances for a specified time period after lender’s refusal, or the failure to complete a project by a specified completion date, may be an event of default, subject to exceptions for force majeure. 32 Table of Contents Debt Maturities and Other Contractual Obligations The following table summarizes our debt maturities based on the principal amounts outstanding as of September 30, 2023 (in thousands): 2023 2024 2025 2026 2027 Thereafter Total Comerica Bank revolving credit facility a $ — $ — $ — $ — $ — $ — $ — Jones Crossing loan — — — 22,594 — 22,594 The Annie B land loan b — 14,000 — — — — 14,000 Construction loans: Kingwood Place c 28,011 — — — — — 28,011 The Saint June — 25,997 — — — — 25,997 Lantana Place 73 298 327 354 20,784 — 21,836 The Saint George — — — 16,097 — — 16,097 Amarra Villas revolving credit facility — 14,242 — — — — 14,242 Magnolia Place — 8,713 — — — — 8,713 West Killeen Market 15 58 5,198 — — — 5,271 Holden Hills — — — 1,711 — — 1,711 Total $ 28,099 $ 63,308 $ 5,525 $ 40,756 $ 20,784 $ — $ 158,472 a. 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. b. In February 2023, we extended the maturity date of this loan to March 1, 2024. c. The maturity date is December 6, 2023. We exercised our option to extend the maturity date for one additional 12-month period, which the lender has approved. We are working with the lender to document the extension and modification of the loan agreement. 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 Nine Months Ended September 30, September 30, 2023 2022 2023 2022 a Comerica Bank revolving credit facility b — % — % — % 4.97 % Jones Crossing loan 7.57 4.23 7.16 3.20 The Annie B land loan 8.25 5.22 7.83 4.04 New Caney land loan c — 4.76 — 3.53 Construction loans: Kingwood Place 7.87 4.59 7.56 3.34 The Saint June d 8.13 5.01 7.76 4.96 Lantana Place 7.66 4.74 7.33 3.67 The Saint George e 7.66 — 7.63 — Amarra Villas revolving credit facility 8.27 5.07 7.95 4.19 Magnolia Place 8.63 5.28 7.89 4.59 West Killeen Market 7.98 4.95 7.64 3.72 Holden Hills f 8.36 — 8.36 — a. At March 31, 2022, we had an outstanding balance of $38 thousand for the loan under the Paycheck Protection Program (PPP loan). The PPP loan bore interest at 1.00 percent. The PPP loan matured and the remaining balance was repaid on April 15, 2022. b. We did not have an outstanding balance during third-quarter 2023, third-quarter 2022 or the first nine months of 2023. At September 30, 2023, the interest rate for the revolving credit facility was 9.40 percent. c. In March 2023, we repaid this loan. 33 Table of Contents d. We did not have an outstanding balance during first-quarter 2022. e. We did not have an outstanding balance during either period in 2022 or during first-quarter 2023. f. We did not have an outstanding balance during either period in 2022 or during first-quarter and second-quarter 2023. Liquidity Outlook We had firm commitments totaling approximately $54 million at September 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 Holden Hills partnership, to fund these projected cash outlays for the projects over the next 12 months except for anticipated operating loans to The Saint George Apartments, L.P. described below and 60 percent of the costs of the Tecoma Improvements for which we have agreed to reimburse the Holden Hills partnership. As of September 30, 2023, we had $9.2 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. Also, we anticipate making future operating loans to Stratus Block 150, L.P. and The Saint George Apartments, L.P. totaling up to $3.4 million over the next 12 months to enable the partnerships to pay debt service and project costs. 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. For other projected pre-development costs, much of which are discretionary, and for our costs of the Tecoma Improvements, the projected operating loans to partnerships and general and administrative expenses, we had cash on hand of $35.2 million at September 30, 2023 and availability under our revolving credit facility (which matures on March 27, 2025) of approximately $40.5 million as of September 30, 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. 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. No assurances can be given that the results anticipated by our projections will occur. Refer to Note 6 in this report and in our 2022 Form 10-K and “Risk Factors” included in Part I, Item 1A. of our 2022 Form 10-K for further discussion. Our ability to meet our cash obligations over the longer term will depend on our future operating and financial performance and cash flows, including our ability to sell or lease properties profitably and extend or refinance debt as it becomes due, which is subject to economic, financial, competitive and other factors beyond our control. CRITICAL ACCOUNTING ESTIMATES There have been no changes in our critical accounting estimates from those discussed in our 2022 Form 10-K. NEW ACCOUNTING STANDARDS No new accounting pronouncements adopted or issued by the Financial Accounting Standards Board had or may have a material impact on our consolidated financial statements. OFF-BALANCE SHEET ARRANGEMENTS 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 34 Table of Contents 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 This Quarterly Report on Form 10-Q contains forward-looking statements in which we discuss factors we believe may affect our future performance. Forward-looking statements are all statements other than statements of historical fact, such as plans, projections or expectations related to the impact of inflation and interest rate changes, supply chain constraints and tightening bank credit, our ability to meet our future debt service and other cash obligations, future cash flows and liquidity, our expectations about the Austin and Texas real estate markets, the planning, financing, development, construction, completion and stabilization of our development projects, plans to sell, recapitalize, or refinance properties, future operational and financial performance, MUD reimbursements for infrastructure costs, regulatory matters, leasing activities, tax rates, future capital expenditures and financing plans, possible joint ventures, partnerships, or other strategic relationships, other plans and objectives of management for future operations and development projects, the impacts of any major public health crisis, and future cash returns to stockholders, including the timing and amount of repurchases under our share repurchase program. The words “anticipate,” “may,” “can,” “plan,” “believe,” “potential,” “estimate,” “expect,” “project,” "target," “intend,” “likely,” “will,” “should,” “to be” and any similar expressions and/or statements are intended to identify those assertions as forward-looking statements. Under our Comerica Bank debt agreements, we are not permitted to repurchase our common stock in excess of $1.0 million or pay dividends on our common stock without Comerica Bank's prior written consent, which was obtained in connection with the share repurchase program. Any future declaration of dividends or decision to repurchase our common stock is at the discretion of our Board, subject to restrictions under our Comerica Bank debt agreements, and will depend on our financial results, cash requirements, projected compliance with covenants in our debt agreements, outlook and other factors deemed relevant by our Board. Our future debt agreements, future refinancings of or amendments to existing debt agreements or other future agreements may restrict our ability to declare dividends or repurchase shares. 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, business and geopolitical conditions, including as a result of the conflicts in Ukraine and Israel, 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. Investors are cautioned that many of the assumptions upon which our forward-looking statements are based are likely to change after the date the forward-looking statements are made. Further, we may make changes to our business plans that could affect our results. We caution investors that we undertake no obligation to update our 35 Table of Contents forward-looking statements, which speak only as of the date made, notwithstanding any changes in our assumptions, business plans, actual experience or other changes. Item 3. Quantitative and Qualitative Disclosures About Market Risk . Not applicable.