STRATUS PROPERTIES INC Management’s Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)

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, 2021 (2021 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 II, Item 1A. "Risk Factors" herein and Part I,
Item 1A. "Risk Factors" of our 2021 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 real estate
properties and commercial properties in the Austin, Texas area and other select
markets in Texas. We generate revenues and cash flows from the sale of our
developed and undeveloped properties and the lease of our retail, mixed-use and
multi-family properties. Our portfolio consists of approximately 1,700 acres of
undeveloped acreage and acreage under development for commercial and
multi-family and single-family residential projects, as well as several
completed commercial and residential projects. Refer to Note 9 for discussion of
our operating segments and "Business Strategy" below for a discussion of our
business strategy.

                               BUSINESS STRATEGY

Results of Our Strategic Planning Process; Updates


Over the last seven quarters, we have generated pre-tax earnings of $218.9
million and after-tax cash flow of approximately $166 million from the sales of
Block 21 (including $6.9 million of proceeds held in escrow for a year after the
sale), The Santal, a 448-unit luxury garden-style multi-family project located
in Barton Creek in Austin, Texas and The Saint Mary, a 240-unit luxury
garden-style multi-family project in the Circle C community. Our Board of
Directors (Board) and management team engaged in a strategic planning process,
which included consideration of the uses of proceeds from the sale of Block 21
and other recent sales in 2021, and of our long-term business strategy. 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. Our Board also approved a new 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.

After streamlining our business through the sale of Block 21 in May 2022, our
Board has decided to continue our successful development program, with our
proven team focusing 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 believe by methodically developing and enhancing
the value of our properties and then selling them or holding them for lease, we
can create long-term value for our stockholders. As part of re-focusing our
business, during third-quarter 2022, we completed the sale of substantially all
of our non-core assets.

We do not currently have any material commitments to contribute additional cash
to our joint venture projects or wholly owned development projects. However, our
development plans for future projects require significant additional capital. We
plan to continue to develop properties using project-level debt and third-party
equity capital through joint ventures in which we receive development management
fees and asset management fees, with our potential returns increasing above our
relative equity interest in each project as negotiated return hurdles are
achieved. Our investment strategy focuses on projects that we believe will
provide attractive long-term returns, while limiting our financial risk.

                                       19

——————————————————————————–

Table of Contents


As previously disclosed, we recently explored a potential sale or refinancing of
Kingwood Place, Jones Crossing and West Killeen Market. Subsequently, we have
decided to retain these cash-flowing properties given current market conditions.

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 source of revenue and cash flow is expected to come from
sales of our properties to third parties or to joint ventures in which we
participate, 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
rent 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 described above. 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, including our two
large projects Holden Hills and Section N. Refer to "Recent Development
Activities" below for a discussion of these projects. While uncertainty in the
market, primarily due to the increasing costs of construction materials and
labor, and also rising interest rates, 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.

                         OVERVIEW OF FINANCIAL RESULTS

On May 31, 2022, we completed the previously announced sale of Block 21 to Ryman
Hospitality Properties, Inc. (Ryman) for $260.0 million, subject to certain
purchase price adjustments, and including Ryman's assumption of $136.2 million
of existing mortgage debt, with the remainder paid in cash. Our net proceeds of
cash and restricted cash totaled $112.3 million (including $6.9 million of
post-closing escrow amounts to be held for 12 months after the closing, subject
to a longer retention period with respect to any required reserve for pending
claims). We recorded a pre-tax gain on the sale of $119.7 million in
second-quarter 2022. Block 21 was our wholly owned mixed-use real estate
property in downtown Austin, Texas. Block 21 contains the 251-room W Austin
Hotel and is home to Austin City Limits Live at the Moody Theater, a 2,750-seat
entertainment venue that serves as the location for the filming of Austin City
Limits, the longest running music series in American television history. Block
21 also includes Class A office space, retail space and the 3TEN ACL Live
entertainment venue and business. The sale of Block 21 eliminated our Hotel and
Entertainment segments. As a result, our hotel and entertainment operations, as
well as the leasing operations associated with Block 21, are reported as
discontinued operations for all periods presented in the financial statements
included in this Form 10-Q. Refer to Note 4 for further discussion.

As described in this report and in our 2021 Form 10-K, in December 2021, one of
our wholly owned subsidiaries sold The Santal multi-family property for
$152.0 million, which after closing costs and payment of the outstanding project
loan, generated net proceeds of approximately $74 million. In January 2021, one
of our subsidiaries sold The Saint Mary multi-family property for $60.0 million
of which we received $20.9 million after closing costs, payment of the
construction loan, reserves for remaining costs of the partnership and
distributions to noncontrolling interest owners. Net proceeds from the sales
were used to pay down the balance of our $60.0 million Comerica Bank credit
facility and for other corporate purposes.


Our Real Estate Operations encompass our activities associated with our
acquisition, entitlement, development and sale of real estate. The current focus
of our real estate operations is multi-family and single-family residential
properties and residential-centric mixed-use properties. We may sell or lease
the real estate we develop, depending on market conditions. Real estate that we
develop and then lease becomes part of our Leasing Operations. Revenue in our
Real Estate Operations may be generated from the sale of properties that are
developed,
                                       20

——————————————————————————–

Table of Contents


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 already
built on it. In addition to our developed properties, we have a development
portfolio that consists of approximately 1,700 acres of commercial and
multi-family and single-family residential projects under development or
undeveloped land held for future use.

Revenue in our Leasing Operations is generated from the lease of space at retail
and mixed-use properties that we developed and the lease of residences in the
multi-family projects that we developed. We also generate income from the sale
of our leased properties, depending on market conditions.

Our total stockholders' equity increased to $219.8 million at September 30,
2022, from $158.1 million at December 31, 2021, and $98.9 million at
December 31, 2020, primarily as a result of gains realized on the sale of Block
21 in May 2022 and our sales of The Santal and The Saint Mary in December 2021
and January 2021, respectively.

Our revenues totaled $10.0 million in third-quarter 2022 and $24.2 million for
the first nine months of 2022, compared with $6.3 million in third-quarter 2021
and $23.3 million for the first nine months of 2021. The increase in revenues in
third-quarter 2022, compared to third-quarter 2021, is primarily a result of the
sales of undeveloped real estate properties in our Real Estate Operations
segment in third-quarter 2022, partially offset by a decrease in leasing revenue
as a result of the sale of The Santal multi-family project in late 2021. The
increase in revenues for the first nine months of 2022, compared to the first
nine months of 2021, is primarily a result of the sales of undeveloped real
estate properties as well as a completed Amarra Villas home in our Real Estate
Operations segment partially offset by a decrease in leasing revenue following
the sales of The Saint Mary and The Santal multi-family projects in 2021. Refer
to "Results of Operations" below for further discussion of our segments.

Our net loss attributable to common stockholders totaled $2.4 million, or $0.29
per diluted share in third-quarter 2022, compared to a net loss of $3.8 million,
or $0.46 per diluted share, in third-quarter 2021. During the first nine months
of 2022 our net income attributable to common stockholders totaled $96.5
million, or $11.50 per diluted share, compared to a net loss attributable to
common stockholders of $5.0 million, or $0.61 per diluted share, during the
first nine months of 2021. 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 Stratus entered into in
connection with its sale of The Oaks at Lakeway in 2017. Refer to Note 4 under
the heading "The Oaks at Lakeway" for additional discussion. Our net losses
attributable to common stockholders in the 2021 periods include net losses from
discontinued operations of $1.5 million and $9.9 million for third-quarter 2021
and the first nine months of 2021, respectively, as our former hotel and
entertainment operations included in Block 21 were impacted by the COVID-19
pandemic. Our results for the first nine months of 2021 were positively impacted
by the $22.9 million pre-tax gain ($16.2 million net of noncontrolling
interests) on the January 2021 sale of The Saint Mary. Our net losses
attributable to common stockholders in the 2021 periods also include (i)
increases in charges to general and administrative expenses for incentive
compensation costs associated with our Profit Participation Incentive Plan
(PPIP) resulting primarily from an increased valuation for the Santal
(third-quarter and nine-month periods), and for consulting, legal and public
relation costs incurred in connection with our successful proxy contest and our
real estate investment trust (REIT) exploration process (nine-month period),
partially offset by (ii) a $3.7 million gain related to forgiveness of
substantially all of our Paycheck Protection Program (PPP) loan (third-quarter
and nine-month periods).

Market Conditions

Our industry has continued to experience cost increases primarily in
construction materials and labor, along with supply chain constraints. In
addition, interest rates have been rising and bank credit has been tightening in
our industry. These factors are having an adverse impact on the projected
profitability of our new projects, 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. In addition, on completed projects, we are
experiencing increased borrowing costs on our variable rate debt and increased
operating costs due to inflation. To manage these risks, we go through extensive
pricing exercises culminating with competitive bids from reputable contractors
based on final plans and specifications. Because we 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
                                       21

——————————————————————————–

Table of Contents

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

                         RECENT DEVELOPMENT ACTIVITIES

Current Residential Activities


Barton Creek
In second-quarter 2022, we sold a six-acre undeveloped multi-family tract of
land in Barton Creek for $2.5 million. As of September 30, 2022, two developed
Amarra Drive Phase III lots remained unsold.

The Villas at Amarra Drive (Amarra Villas) project is a 20-unit development in
the Barton Creek community for which we completed construction and sale of the
first seven homes between 2017 and 2019. We began construction on the next two
Amarra Villas homes during first-quarter 2020, one of which was completed and
sold for $2.4 million in second-quarter 2022. In 2021, we began construction of
one additional home and in March 2022, we began construction on another two
homes. We began construction on the remaining eight homes in second-quarter
2022. Construction on the last 12 units continue to progress, and as of
November 4, 2022, 3 homes were under contract to sell and 9 Amarra Villas homes
remain available for sale of the 20-unit project.

In third-quarter 2021, we began construction on The Saint June, a 182-unit
luxury garden-style multi-family project within the Amarra development. The
Saint June is 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 project is expected to be
completed in first-quarter 2023.

We continue to progress the development plans for Holden Hills, our final large
residential development within the Barton Creek community consisting of 495
acres and designed to feature approximately 475 unique residences to be
developed in multiple phases with a focus on health and wellness, sustainability
and energy conservation. We have obtained construction permits for Phase I, and
subject to obtaining financing and other market conditions, we currently expect
to start infrastructure construction in late 2022 and to complete site work for
Phase I, including the construction of road, utility, drainage and other
required infrastructure, approximately 20 to 22 months from the start of
construction. Accordingly, our current projections anticipate that we could
start building homes and/or selling home sites in late 2024 or 2025. We may sell
the developed home sites, or may elect to build and sell, or build and lease,
homes on some or all of the home sites, depending on financing and market
conditions.

Using a conceptual approach 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 surrounded by an extensive greenspace amenity, resulting in a
significant potential increase in development density, as compared to our prior
plans.

The Annie B
In September 2021, we purchased the land and announced plans for The Annie B, a
proposed luxury high-rise rental project in downtown Austin to be developed as a
400-foot tower, consisting of approximately 420,000 square feet with 316 luxury
multi-family units for lease. We continue to work to finalize our development
plans with a goal of beginning construction in late 2023 or 2024, subject to
obtaining financing and other market conditions.

The Saint George
In December 2021, we purchased the land for The Saint George, a 316-unit luxury
wrap-style, multi-family project to be constructed in north-central Austin. We
entered into a construction loan for this project in July 2022 and began
construction in third-quarter 2022. We currently expect to achieve substantial
completion by mid-2024.

Lantana Multi-Family, Magnolia Place, Jones Crossing, Kingwood Place and Other
Residential
We have advanced development plans for the multi-family component of Lantana
Place, a partially developed, mixed-use development project located south of
Barton Creek in Austin. The multi-family component is now known as The Saint
Julia and is expected to consist of 306 units. We currently do not expect to
begin construction prior to 2024, and the project remains subject to financing
and market conditions.


                                       22

——————————————————————————–

Table of Contents


In second-quarter 2022, we sold an undeveloped tract of land in Austin for
$0.6 million. In third-quarter 2022, we sold a 0.3 acre undeveloped tract of
land in Austin for $1.6 million and 28 acres of undeveloped residential land for
$3.2 million at Magnolia Place, an H-E-B, L.P (H-E-B) grocery shadow-anchored,
mixed-use project in Magnolia, Texas. We also continue to evaluate options for
the multi-family component of Jones Crossing, an H-E-B grocery anchored,
mixed-use development located in College Station, Texas.

In September 2021, we entered into a contract to sell a multi-family tract of
land currently planned for approximately 275 multi-family units for $5.5 million
at Kingwood Place, an H-E-B grocery anchored, mixed-use project in Kingwood,
Texas. We closed on the sale on October 20, 2022. In connection with the sale,
we made a $5.0 million principal payment on the Kingwood Place construction
loan.

For further discussion of our multi-family and single-family residential
properties, refer to MD&A and the related sections in Items 1. and 2. “Business
and Properties” in our 2021 Form 10-K.

Current Commercial Activities


Magnolia Place
In August 2021, we began construction on the first phase of development of
Magnolia Place, our H-E-B grocery shadow-anchored, mixed-use project in
Magnolia, Texas. Magnolia Place is currently planned to consist of 4 retail
buildings totaling approximately 35,000 square feet, 5 retail pad sites to be
sold or ground leased, 194 single-family lots and approximately 500 multi-family
units. The first phase of development consists of 2 retail buildings totaling
18,987 square feet, all 5 pad sites and the road, utility and drainage
infrastructure necessary to support the entire development. Infrastructure
construction was completed in second-quarter 2022. In third-quarter 2022, we
substantially completed construction on the first phase of development and the
two retail buildings were turned over to our retail tenants to begin their
finish-out process. In mid-2021, H-E-B began construction on its
95,000-square-foot grocery store on an adjoining 18-acre site owned by H-E-B,
which opened on November 2, 2022. During second-quarter 2022, we sold one
completed pad site for $2.3 million and sold another completed pad site in
third-quarter 2022 for $1.1 million.

Lantana Place
As of September 30, 2022, we had signed leases for approximately 90 percent of
the retail space at Lantana Place, including the anchor tenant, Moviehouse &
Eatery, and a ground lease for an AC Hotel by Marriott. Lantana Place is our
partially developed, mixed-use development project within the Lantana community
south of Barton Creek in Austin, Texas.

Kingwood Place
Kingwood Place is our H-E-B-anchored, mixed-use development project in Kingwood,
Texas (in the greater Houston area). We have constructed approximately 152,000
square feet of retail space at Kingwood Place, including an H-E-B grocery store,
and we have signed ground leases on four of the retail pads. One pad site
remains available for lease. As of September 30, 2022, we had signed leases for
approximately 95 percent of the retail space, including the H-E-B grocery store.
We recently explored a potential sale or refinancing of Kingwood Place, but have
decided to retain this cash-flowing property given current market conditions.

Jones Crossing
As of September 30, 2022, we had signed leases for substantially all of the
retail space at the first phase of Jones Crossing. Jones Crossing is our
H-E-B-anchored, mixed-use project in College Station, Texas. We recently
explored a potential sale or refinancing of Jones Crossing, but have decided to
retain this cash-flowing property given current market conditions.

West Killeen Market
As of September 30, 2022, we had signed leases for approximately 75 percent of
the retail space at West Killeen Market, our retail project located in Killeen,
Texas, shadow-anchored by an adjacent H-E-B grocery store. During third-quarter
2022, we sold the last remaining pad site for $1.0 million. We recently explored
a potential sale or refinancing of West Killeen Market, but have decided to
retain this cash-flowing property given current market conditions.

For further discussion of our commercial properties, refer to MD&A and the
related sections in Items 1. and 2. “Business and Properties” in our 2021 Form
10-K.

                                       23

——————————————————————————–

Table of Contents

Potential Development Projects and Pipeline


Our development plans for The Annie B, Holden Hills, Section N and The Saint
Julia will require significant additional capital, which we currently intend to
pursue through project-level debt and third-party equity capital arrangements
through joint ventures in which we receive development management fees and asset
management fees, and with our potential returns increasing above our relative
equity interest in each project as negotiated return hurdles are achieved. We
are also pursuing other development projects. These potential development
projects and projects in our pipeline require extensive additional permitting
and will be dependent on market conditions and financing. Because of the nature
and cost of the approval and development process and uncertainty regarding
market demand for a particular use, there is uncertainty regarding the nature of
the final development plans and whether we will be able to successfully execute
the plans.

                             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 2021 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 includes 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,
                                                      2022                2021               2022                2021
Operating (loss) income:
Real Estate Operations a                          $      (89)         $  (1,904)         $    1,014          $    (575)
Leasing Operations b                                     853              1,689               8,374             26,981
Corporate, eliminations and other c                   (3,594)            (5,213)            (10,202)           (15,731)
Operating (loss) income                           $   (2,830)         $  (5,428)         $     (814)         $  10,675
Interest expense, net                             $        -          $    (855)         $      (15)         $  (2,690)
Net (loss) income from continuing operations      $   (2,574)         $  (2,656)         $     (230)         $  11,212
Net (loss) income from discontinued operations d  $        -      e   $  (1,541)         $   96,300          $  (9,947)

Total comprehensive loss (income) attributable to
noncontrolling interests                          $      214          $     433          $      463          $  (6,248)
Net (loss) income attributable to common          $   (2,360)         $  (3,764)         $   96,533          $  (4,983)
stockholders


a.Includes sales commissions and other revenues together with related expenses.
For both periods of 2022, includes a $650 thousand impairment charge for one of
the Amarra Villas homes that is under contract to sell for $2.4 million and a
$70 thousand impairment charge for the multi-family tract of land at Kingwood
Place that sold for $5.5 million in October 2022. For both periods of 2021,
includes a $625 thousand impairment charge for the multi-family tract of land at
Kingwood Place.

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 Stratus entered into in connection with its sale
of The Oaks at Lakeway in 2017. Refer to Note 4 under the heading "The Oaks at
Lakeway" for additional discussion. The first nine months of 2021 includes a
$22.9 million pre-tax gain on the January 2021 sale of The Saint Mary.

c.Includes consolidated general and administrative expenses and eliminations of
intersegment amounts. The decreases in 2022 from the comparable prior year
periods are primarily the result of $3.8 million incurred for the first nine
months of 2021 for consulting, legal and public relation costs for our
successful proxy contest and the REIT exploration process in addition to $2.8
million incurred in third-quarter 2021 and $3.5 million incurred during the
first nine months of 2021 for employee incentive compensation costs associated
with the PPIP resulting primarily from an increased valuation for The Santal.

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 May 2022 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.

                                       24

——————————————————————————–

Table of Contents


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

                                             Three Months Ended              Nine Months Ended
                                                September 30,                  September 30,
                                             2022             2021           2022          2021
Revenues:
Developed property sales                $      -           $      -      $    2,382      $ 4,615
Undeveloped property sales                 6,887                750          12,331        3,250
Commissions and other                          -                142             124          360
Total revenues                             6,887                892          14,837        8,225
Cost of sales, including depreciation      6,256              2,171          13,103        8,175
Impairment of real estate                    720                625             720          625
Operating (loss) income                 $    (89)          $ (1,904)     $    1,014      $  (575)


Developed Property Sales. The following table summarizes our developed property
sales (dollars in thousands):


                                                                                Nine Months Ended September 30,
                                                                2022                                                        2021
                                                                                 Average Cost                                               Average Cost
                                             Homes              Revenues           Per Home           Lots/Units           Revenues         Per Lot/Unit
Barton Creek
Amarra Drive:
Amarra Villas homes                                1           $  2,382          $   2,382                  -             $      -          $       -
Phase III lots                                     -                  -                  -                  3                2,215                299

W Austin Hotel & Residences Project
Condominium Unit                                   -                  -                  -                  1                2,400              1,721
Total Residential                                  1           $  2,382                                     4             $  4,615


There were no developed property sales in third-quarter 2022 or 2021. The
decrease in revenues from developed property sales for the first nine months of
2022, compared to the first nine months of 2021, reflects no lot sales in the
2022 period, as inventory of developed properties in our Real Estate Operations
segment is limited. In addition, the first nine months of 2021 included revenue
from the sale of our last condominium unit at the W Austin Hotel & Residences.

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. In third-quarter 2021, we sold a pad site at
West Killeen Market for $750 thousand. During the first nine months of 2021, we
also sold a five-acre multi-family tract of land in Amarra Drive for $2.5
million.

Real Estate Cost of Sales and Depreciation. Cost of sales includes costs of
property sold, project operating and marketing expenses and allocated overhead
costs, partly offset by reductions for certain municipal utility district (MUD)
reimbursements. Cost of sales increased to $6.3 million in third-quarter 2022
and $13.1 million for the first nine months of 2022, compared to $2.2 million in
third-quarter 2021 and $8.2 million for the first nine months of 2021, primarily
reflecting higher real estate revenues in the 2022 periods.

Impairment of Real Estate. In September 2021, we entered into a contract to sell
the multi-family tract of land at Kingwood Place, which was planned for
approximately 275 multi-family units, for $5.5 million. The sale closed in
October 2022. Upon entering into the contract, we recorded a $625 thousand
impairment charge in third-quarter

                                       25

——————————————————————————–

Table of Contents


2021 to reduce the carrying value of the land to its fair value based on the
contractual sale price less estimated selling costs. In third-quarter 2022, we
recorded an additional $70 thousand impairment charge as a result of the selling
costs exceeding the previous estimate.

In February 2021, we entered into a contract to sell one of the Amarra Villas
homes for $2.4 million. The sale, if consummated, is set to close in
first-quarter 2023. We recorded a $650 thousand impairment charge in
third-quarter 2022 because the currently estimated total project costs and costs
of sale for the home under construction exceed its contractual sale price.

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

                                                        Three Months Ended                       Nine Months Ended
                                                           September 30,                           September 30,
                                                      2022                 2021               2022                2021
Rental revenue                                  $    3,090             $   5,376          $    9,370          $  15,057
Rental cost of sales, excluding depreciation         1,350                 2,238               3,204              6,482
Depreciation                                           887                 1,449               2,604              4,525

Gain on sale of assets                                   -                     -              (4,812)           (22,931)
Operating income                                $      853             $   1,689          $    8,374          $  26,981



Rental Revenue.  Rental revenue primarily includes revenue from Lantana Place,
Jones Crossing, Kingwood Place and West Killeen Market, and until their sales in
December 2021 and January 2021, respectively, our multi-family projects The
Santal and The Saint Mary. The decrease in rental revenue in the 2022 periods,
compared with the 2021 periods, primarily reflects the sale of The Santal in
December 2021, partly offset by increased revenue at Lantana Place and Kingwood
Place. The Santal had rental revenue of $2.3 million in third-quarter 2021 and
$6.8 million during the first nine months of 2021.

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


Gain on Sale of Assets. For the first nine months of 2022, we recognized a gain
on the reversal of accruals for costs to lease and construct buildings under a
master lease arrangement that 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.

In January 2021, one of our subsidiaries sold The Saint Mary for $60.0 million.
After closing costs and payment of the outstanding construction loan, the sale
generated net proceeds of approximately $34 million. In first-quarter 2021,
after establishing a reserve for remaining costs of the partnership, we received
$20.9 million from the subsidiary in connection with the sale and $12.9 million
of the net proceeds were distributed to the noncontrolling interest owners. We
recognized a pre-tax gain on the sale of $22.9 million ($16.2 million net of
noncontrolling interests) for the first nine months of 2021.

Corporate, Eliminations and Other
Corporate, eliminations and other (refer to Note 9) includes consolidated
general and administrative expenses, which primarily consist of employee
compensation and other costs. Consolidated general and administrative expenses
decreased to $3.6 million in third-quarter 2022 and $10.2 million for the first
nine months of 2022, compared to $5.3 million in third-quarter 2021 and $15.8
million for the first nine months of 2021 primarily as a result of $2.8 million
incurred in third-quarter 2021 and $3.5 million incurred during the first nine
months of 2021 for employee incentive compensation costs associated with the
PPIP resulting primarily from an increased valuation for The Santal and $3.8
million incurred for the first nine months of 2021 for consulting, legal and
public relation costs for our successful proxy contest and the REIT exploration
process.

Non-Operating Results
Interest Expense, Net. Interest costs (before capitalized interest) totaled $1.8
million in third-quarter 2022 and $4.4 million for the first nine months of
2022, compared with $2.2 million in third-quarter 2021 and $6.6 million for the
first nine months of 2021. Interest costs in the 2022 periods were lower,
compared to the 2021 periods, primarily

                                       26

——————————————————————————–

Table of Contents


reflecting reductions in average debt balances, including the repayment of the
outstanding balance on the Comerica Bank credit facility and the repayment of
The Santal loan partially offset by rising interest rates. As of September 30,
2022, all of our debt was variable-rate debt, and for all of such debt, the
interest rates have increased for the first nine months of 2022 and may continue
to rise in the future if prevailing market interest rates continue to climb.

Capitalized interest totaled $1.8 million in third-quarter 2022 and $4.3 million
for the first nine months of 2022, compared to $1.3 million in third-quarter
2021 and $3.9 million for the first nine months of 2021. Capitalized interest is
primarily related to development activities at Barton Creek (primarily Section
N), The Annie B, The Saint George and Magnolia Place.

Net Gain on Extinguishment of Debt. We recorded a net gain on extinguishment of
debt totaling $3.7 million in third-quarter 2021 and $3.5 million for the first
nine months of 2021 primarily associated with the forgiveness of substantially
all of our PPP loan in third quarter 2021. This gain was partly offset by losses
on the extinguishment of debt associated with the repayment of The Saint Mary
construction loan upon the sale of the property in first-quarter 2021 and the
refinancing of the Jones Crossing construction loan in second-quarter 2021,
which resulted in the write-off of unamortized deferred financing costs.

Provision for Income Taxes. We recorded a provision for income taxes of $0.4
million in third-quarter 2022 and $0.2 million for the first nine months of
2022, compared to $0.1 million in third-quarter 2021 and $0.3 million for the
first nine months of 2021. Refer to Note 8 for further discussion of income
taxes.

Net Income (Loss) from Discontinued Operations. Net income (loss) from
discontinued operations totaled $96.3 million for the first nine months of 2022,
compared to $(9.9) million for the first nine months of 2021. As a result of the
sale of Block 21 in May 2022, we did not have any net income from discontinued
operations in third-quarter 2022 compared to $(1.5) million in third-quarter
2021. The net income for the first nine months of 2022 primarily reflects a
$119.7 million pre-tax gain on the sale of Block 21. The net losses in the 2021
periods reflect the negative impacts that the COVID-19 pandemic had on the hotel
and entertainment operations within our discontinued operations.

Total Comprehensive Loss (Income) Attributable to Noncontrolling Interests in
Subsidiaries. Our partners' share of losses (income) totaled $0.2 million in
third-quarter 2022 and $0.5 million for the first nine months of 2022, compared
to $0.4 million in third-quarter 2021 and $(6.2) million for the first nine
months of 2021. For the first nine months of 2021, our partners were allocated
$6.7 million of the gain from the sale of The Saint Mary.

                        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.

Comparison of Cash Flows for the Nine Months Ended September 30, 2022 and 2021
Operating Activities. Cash used in operating activities totaled $49.3 million
for the first nine months of 2022, compared with $36.4 million for the first
nine months of 2021. Expenditures for purchases and development of real estate
properties totaled $18.3 million for the first nine months of 2022 and $30.8
million for the first nine months of 2021, both primarily related to development
of our Barton Creek properties, particularly Amarra Villas and, to a lesser
extent, Holden Hills. The cash outflow resulting from the decrease in accounts
payable, accrued liabilities and other during the first nine months of 2022 is
primarily related to the payment of awards under the PPIP and the timing of tax
payments, including property taxes.

Investing Activities. Cash provided by investing activities totaled $66.2
million for the first nine months of 2022 and $51.8 million for the first nine
months of 2021. 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 of
post-closing escrow amounts to be held for 12 months after the closing, subject
to a longer retention period with respect to any required reserves for pending
claims). During the first nine months of 2021, we received proceeds, net of
closing costs, from the sale of The Saint Mary of $59.5 million.

Capital expenditures totaled $38.9 million for the first nine months of 2022,
primarily for The Saint June, The Saint George and Magnolia Place projects, and
$6.7 million for the first nine months of 2021, primarily for The Saint June,
Lantana Place and Magnolia Place projects.

                                       27

——————————————————————————–

Table of Contents


Financing Activities. Cash used in financing activities totaled $9.7 million for
the first nine months of 2022 and cash provided by financing activities totaled
$10.0 million for the first nine months of 2021. During the first nine months of
2022, we had no net borrowings on the Comerica Bank credit facility, compared
with net borrowings of $10.9 million for the first nine months of 2021. During
the first nine months of 2022, net borrowings on other project and term loans
totaled $16.0 million, primarily reflecting borrowings on the Magnolia Place and
The Saint June construction loans. During the first nine months of 2021, net
repayments on other project and term loans totaled $13.9 million, primarily
reflecting the repayment of The Saint Mary construction loan upon the sale of
the project. Refer to "Liquidity Outlook, Credit Facility and Other Financing
Arrangements" below for a discussion of our outstanding debt at September 30,
2022.

During the first nine months of 2022, we received contributions from
noncontrolling interest owners of $15.0 million, related to The Saint George
partnership. No distributions to noncontrolling interest owners were paid during
the first nine months of 2022. During the first nine months of 2021, we paid
distributions to noncontrolling interest owners of $13.2 million, primarily
related to the sale of The Saint Mary, and received contributions from
noncontrolling interest owners of $28.0 million, related to The Saint June and
Block 150 limited partnerships.

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. Our Board also approved a new
share repurchase program, which authorizes repurchases of up to $10.0 million of
our common stock, which replaced our prior share repurchase program. 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
September 30, 2022, we repurchased 33,958 shares of our common stock for a total
of $0.8 million at an average price of $23.49. Through November 4, 2022, we have
acquired 105,415 shares of our common stock for a total cost of $2.6 million at
an average price of $25.02 per share, and $7.4 million remains available for
repurchases under the program.

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. 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.

Liquidity Outlook, Credit Facility and Other Financing Arrangements
We had $63.5 million in cash and cash equivalents at September 30, 2022. We
believe that our current cash and cash equivalents, financing arrangements and
cash generated from operations will provide us with sufficient liquidity to
satisfy our anticipated working capital needs, debt service requirements,
expected capital expenditures, project funding commitments, income taxes and the
share repurchase program for at least the next 12 months. We expect to be able
to extend or refinance all of our loans prior to their maturity dates. No
assurances can be given that the results anticipated by our projections will
occur. Refer to "Risk Factors" included in Part I, Item 1A. and Note 6 in our
2021 Form 10-K.

At September 30, 2022, we had total debt of $125.4 million based on the
principal amounts outstanding, compared with $107.9 million at December 31,
2021. Consolidated debt at December 31, 2021, excluded the Block 21 loan of
approximately $137 million, which was presented in liabilities held for sale -
discontinued operations. Using proceeds from the sale of Block 21, we repaid the
outstanding amount under our $60.0 million Comerica Bank credit facility prior
to June 30, 2022. At September 30, 2022, we had $49.0 million available under
the credit facility. Letters of credit, totaling $11.0 million, have been issued
under the credit facility, and secure our obligation to build certain roads and
utilities facilities benefiting Holden Hills and Section N. Refer to "Debt
Maturities and Other Contractual Obligations" below for a table illustrating the
timing of principal payments due on our outstanding debt as of September 30,
2022. We plan to make a federal income tax payment of approximately $10 million
in December 2022 to satisfy estimated taxes due associated with current year
taxable income, including the gain on the sale of Block 21.

Our debt agreements require compliance with specified financial covenants. Refer
to MD&A in our 2021 Form 10-K and Note 6 for a discussion of the financial
covenants in our debt agreements. As of September 30, 2022, we were in
compliance with all of our financial covenants.

                                       28

——————————————————————————–

Table of Contents


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; sell all or substantially all of its assets; and engage in mergers,
consolidations or other business combinations. Our Comerica Bank credit
facility, Amarra Villas credit facility, The Annie B land loan, The Saint George
construction loan and Kingwood Place construction loan require Comerica Bank's
prior written consent for any common stock repurchases in excess of $1.0 million
or any dividend payments, which was obtained in connection with the special cash
dividend and 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.

In May 2022, we entered into an amendment with Comerica Bank to extend the
maturity date of the Comerica Bank credit facility from September 27, 2022, to
December 26, 2022, and in November 2022, Comerica Bank extended the maturity
date from December 26, 2022, to March 27, 2023. We are in discussions with the
lender to remove Holden Hills from the collateral pool for the facility, finance
the Holden Hills project under a separate loan agreement and enter into a
revised revolving credit facility with a lower borrowing limit secured by the
remaining collateral under the facility.

               DEBT MATURITIES AND OTHER CONTRACTUAL OBLIGATIONS

The following table summarizes our debt maturities based on the principal
amounts outstanding as of September 30, 2022 (in thousands):


                                2022              2023              2024              2025             2026             Thereafter            Total

Comerica Bank credit $ – $ – $ –

$ – $ – $ – $ –
facility a
Jones Crossing loan

                 -                 -                 -                -            24,500                    -             24,500
The Annie B land loan               -            14,000                 -                -                 -                    -             14,000
New Caney land loan                 -             4,050                 -                -                 -                    -              4,050
Construction loans:
Kingwood Place b               32,689                 -                 -                -                 -                    -             32,689
Lantana Place                       -               103               259              276               290               20,951             21,879
The Saint June                      -                 -            10,135                -                 -                    -             10,135
West Killeen Market                 8                32                33            5,917                 -                    -              5,990
Magnolia Place                      -                 -             6,540                -                 -                    -              6,540
Amarra Villas credit                -                 -             5,574                -                 -                    -              5,574
facility
Total                        $ 32,697          $ 18,185          $ 22,541  
       $ 6,193          $ 24,790          $    20,951          $ 125,357


a.In May 2022, we entered into an amendment to extend the maturity date of the
$60.0 million Comerica Bank credit facility from September 27, 2022, to December
26, 2022, and have entered into another extension of the maturity date from
December 26, 2022, to March 27, 2023, pending completion of our discussions with
the lender to amend the facility in connection with the financing of Holden
Hills as discussed elsewhere in this report.

b.Matures December 6, 2022. We expect to extend the maturity date for an
additional 12-month period. Following the extension, we have the option to
extend the maturity date for a second additional 12-month period, subject to
certain conditions. The sale of the multi-family tract closed in October 2022
and resulted in a principal paydown of $5.0 million.


                                       29

——————————————————————————–

Table of Contents

The following table summarizes the interest rate of each loan, all of which have
variable rates, as of September 30, 2022, and December 31, 2021:

                                                Interest Rate at
                                    September 30, 2022      December 31, 2021
Comerica Bank credit facility                   6.40  %                5.00  %
Jones Crossing loan                             4.91                   2.40
The Annie B land loan                           5.56                   3.50
New Caney land loan                             5.28                   3.10
Construction loans:
Kingwood Place                                  5.06                   2.60
Lantana Place                                   5.00                   3.00
The Saint June                                  5.31                      -
West Killeen Market                             5.35                   3.00
Magnolia Place                                  5.88                   3.50
Amarra Villas credit facility                   5.40                   3.10



Other than the debt transactions discussed in Note 6, there have been no
material changes in our contractual obligations since December 31, 2021. Refer
to MD&A in our 2021 Form 10-K for further information regarding our contractual
obligations.

                         CRITICAL ACCOUNTING ESTIMATES

There have been no changes in our critical accounting estimates from those
discussed in our 2021 Form 10-K.

                            NEW ACCOUNTING STANDARDS

No new accounting standards in 2022 have had a material impact on us.

                         OFF-BALANCE SHEET ARRANGEMENTS

There have been no material changes in our off-balance sheet arrangements since
December 31, 2021. Refer to Note 9 in our 2021 Form 10-K for further
information.

                              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 impacts of the COVID-19
pandemic, 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, 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 special cash dividend and 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
                                       30

——————————————————————————–

Table of Contents

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, the ongoing COVID-19 pandemic and any future major public health crisis,
increases in inflation and interest rates, supply chain constraints, declines in
the market value of our assets, increases in operating and construction costs,
including real estate taxes and the cost of building materials and labor,
defaults by contractors and subcontractors, 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, our ability to collect anticipated rental payments and close
projected asset sales, the availability and terms of financing for development
projects and other corporate purposes, our ability to enter into and maintain
joint ventures, partnerships, or other strategic relationships, including risks
associated with such joint ventures, our ability to implement our business
strategy successfully, including our ability to develop, construct and sell or
lease properties on terms our Board considers acceptable, market conditions or
corporate developments that could preclude, impair or delay any opportunities
with respect to plans to sell, recapitalize or refinance properties, our ability
to obtain various entitlements and permits, a decrease in the demand for real
estate in select markets in Texas where we operate, changes in economic, market,
tax and business conditions, including as a result of the war in Ukraine,
reductions in discretionary spending by consumers and businesses, competition
from other real estate developers, the termination of sales contracts or letters
of intent because of, among other factors, the failure of one or more closing
conditions or market changes, the failure to attract customers or tenants for
our developments or such customers' or tenants' failure to satisfy their
purchase commitments or leasing obligations, changes in consumer preferences,
potential additional impairment charges, industry risks, changes in laws,
regulations or the regulatory environment affecting the development of real
estate, opposition from special interest groups or local governments with
respect to development projects, weather- and climate-related risks, loss of key
personnel, environmental and litigation risks, cybersecurity incidents and other
factors described in more detail under the heading "Risk Factors" in Part I,
Item 1A. of our 2021 Form 10-K, filed with the SEC, and "Risk Factors" included
in Part II, Item 1A. herein.

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 forward-looking statements, which speak
only as of the date made, notwithstanding any changes in our assumptions,
business plans, actual experience, or other changes.

© Edgar Online, source Glimpses

Source link