STRATUS PROPERTIES INC - Annual Report: 2006 (Form 10-K)
|
UNITED
STATES
|
||
|
SECURITIES
AND EXCHANGE COMMISSION
|
||
|
Washington,
D.C. 20549
|
||
|
FORM
10-K
|
||
|
(Mark
One)
|
||
|
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
|
||
|
For
the fiscal year ended December 31, 2006
|
||
|
OR
|
||
|
[
] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
||
|
For
the transition period from
|
to
|
|
|
Commission
File Number: 0-19989
|
||
 |
||
|
Stratus
Properties Inc.
|
||
|
(Exact
name of registrant as specified in its
charter)
|
||
|
Delaware
|
72-1211572
|
|
(State
or other jurisdiction of
incorporation
or organization)
|
(IRS
Employer Identification No.)
|
|
98
San Jacinto Blvd., Suite 220
|
|
|
Austin,
Texas
|
78701
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
|
(512)
478-5788
|
|
|
(Registrant's
telephone number, including area
code)
|
|
Securities
registered pursuant to Section 12(b) of the Act:
|
Title
of each class
|
|
Common
Stock Par Value $0.01 per Share
|
|
Preferred
Stock Purchase Rights
|
Securities
registered pursuant to Section 12(g) of the Act: None.
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. 0
Yes
R
No
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. 0
Yes
R
No
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. R
Yes
0
No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of the registrant’s
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form
10-K. 0
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Act. (Check
one):
0
Large
accelerated filer R
Accelerated filer 0
Non-accelerated filer
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). 0
Yes
R
No
The
aggregate market value of common stock held by non-affiliates of the registrant
was approximately $144.8 million on March 1, 2007, and approximately $113.4
million on June 30, 2006.
On
March
1, 2007, there were issued and outstanding 7,543,763 shares of Common Stock
and
on June 30, 2006, there were issued and outstanding 7,303,057
shares.
DOCUMENTS
INCORPORATED BY REFERENCE
|
Portions
of our Proxy Statement for our 2007 Annual Meeting to be held on
May 8,
2007, are incorporated by reference into
|
|
Part
III (Items 10, 11, 12, 13 and 14) of this
report.
|
|
STRATUS
PROPERTIES INC.
|
|
|
Page
|
|
|
1
|
|
|
1
|
|
|
1
|
|
|
1
|
|
|
5
|
|
|
5
|
|
|
6
|
|
|
6
|
|
|
6
|
|
|
8
|
|
|
9
|
|
|
9
|
|
|
9
|
|
|
10
|
|
|
10
|
|
|
10
|
|
|
13
|
|
|
14
|
|
|
31
|
|
|
55
|
|
|
55
|
|
|
55
|
|
|
56
|
|
|
56
|
|
|
56
|
|
|
56
|
|
|
56
|
|
|
56
|
|
|
56
|
|
|
56
|
|
|
S-1
|
|
|
F-1
|
|
|
E-1
|
|
All
of our periodic report filings with the Securities and Exchange Commission
(SEC)
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934,
as
amended, are made available, free of charge, through our web site,
www.stratusproperties.com, including our annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and any amendments to those
reports. These reports and amendments are available through our web site as
soon
as reasonably practicable after we electronically file or furnish such material
to the SEC. All subsequent references to “Notes” refer to the Notes to
Consolidated Financial Statements located in Item 8. elsewhere in this Form
10-K.
We
are
engaged in the acquisition, development, management and sale of commercial,
multi-family and residential real estate properties located primarily in the
Austin, Texas area. We conduct real estate operations on properties we
own.
Our
principal real estate holdings are currently in southwest Austin, Texas. As
of
December 31, 2006, our most significant holding is the 1,728 acres of
residential, multi-family and commercial property and 37 developed residential
estate lots located within the Barton Creek community. We also own approximately
355 acres of undeveloped commercial property and approximately 36 acres of
commercial property under development within the Circle C Ranch (Circle C)
community. Our other properties in the Circle C community include Meridian,
which is an 800-lot residential development, and Escarpment Village, which
is a
168,000-square-foot retail center anchored by a grocery store. At December
31,
2006, Meridian consisted of approximately 282 acres and 88 developed residential
lots. Our remaining Austin holdings at December 31, 2006, consisted of 223
acres
of commercial property and two 75,000-square-foot office buildings at 7500
Rialto Boulevard, one of which is approximately 96 percent leased and the other
is approximately 50 percent leased, located within Lantana. In the fourth
quarter of 2005, we decided to sell our two 70,000-square-foot office buildings
at 7000 West William Cannon Drive (7000 West), known as the Lantana Corporate
Center. On March 27, 2006, we sold 7000 West for $22.3 million (see
“Discontinued Operations - 7000 West” and Note 7).
In
January 2004, we acquired approximately 68 acres of land in Plano, Texas, which
we refer to as Deerfield. At December 31, 2006, our Deerfield property consisted
of approximately 24 acres of residential land, which is being developed, and
four developed residential lots. We also own two acres of undeveloped commercial
property in San Antonio, Texas.
In
November 2005, we formed a joint venture partnership with Trammell Crow Central
Texas Development, Inc. (Trammell Crow) to acquire an approximate 74-acre tract
at the intersection of Airport Boulevard and Lamar Boulevard in Austin, Texas
for $7.7 million. The property, known as Crestview Station, is a single-family,
multi-family, retail and office development. With our joint venture partner,
we
have commenced brown field remediation and permitting of the property. Trammell
Crow is also managing Escarpment Village for us.
In
December 2006, we acquired a city block in downtown Austin for $15.1 million.
The project, which we refer to as Block 21, is planned for a mixture of retail,
hotel, residential and civic uses on approximately two acres.
From
our
formation in 1992 through 2000, our primary objectives were to reduce our
indebtedness and increase our financial flexibility. In pursuing these
objectives, we had reduced our debt to $8.4 million at December 31, 2000 from
$493.3 million in March 1992. As a result of the settlement of certain
development-related lawsuits and an increasing level of cooperation with the
City of Austin (the City) regarding the development of our properties, we
substantially increased our development activities and expenditures during
the
last five years (see below), which has resulted in our debt increasing to $50.7
million at December 31, 2006. We have funded our development activities
primarily through our expanded
1
credit
facility (see “Credit Facility and Other Financing Arrangements” below and Note
4), which was established as a result of the positive financing relationship
we
have built with Comerica Bank (Comerica) over the past several years. In August
2002, the City granted final approval of a development agreement (Circle C
settlement) and permanent zoning for our real estate located within the Circle
C
community, thereby firmly establishing all essential municipal development
regulations applicable to our Circle C properties for thirty years (see
“Development and Other Activities” within Items 7. and 7A. and Note 8). The
credit facility and other sources of financing have increased our financial
flexibility and, together with the Circle C settlement, have allowed us to
focus
our efforts on developing our properties, acquiring other properties and
increasing shareholder value.
Our
overall strategy is to enhance the value of our Austin properties by securing
and maintaining development entitlements and developing and building real estate
projects on these properties for sale or investment, thereby increasing the
potential return from our core assets. We also continue to investigate and
pursue opportunities for new projects that would require minimal capital
investment by us yet offer the possibility of acceptable returns and limited
risk. Our progress towards accomplishing these goals includes the
following:
| · |
Over
the past several years we have successfully permitted and developed
significant projects in our Barton Creek and Lantana project
areas.
|
During
1999, we completed the development of the 75 residential lots at the Wimberly
Lane subdivision at Barton Creek all of which were sold by the end of 2003.
During 2004, we completed the development of the 47 lots in the second phase
of
Wimberly Lane (Wimberly Lane Phase II), and we also placed 41 of the lots under
contract to a national homebuilder. As of December 31, 2006, over half of the
41
standard homebuilder lots have been sold and the remaining lot sales are on
schedule. We are continuing to develop several new subdivisions around the
new
Tom Fazio designed “Fazio Canyons” golf course at Barton Creek. Through the end
of 2006, we had sold all of the 54 lots at Escala Drive in the Barton Creek
community.
We
commenced construction of a new subdivision within the Barton Creek community
during the fourth quarter of 2000. This subdivision, Mirador, was completed
in
late-2001. Mirador adjoins the Escala Drive subdivision. We developed 34 estate
lots in the Mirador subdivision, with each lot averaging approximately 3.5
acres
in size, and have sold 29 of these lots. At the end of 2006, we owned five
estate lots.
Since
January 2002, we have secured subdivision plat approval for three new
residential subdivisions within the Barton Creek Community, including: Versant
Place - 54 lots; Wimberly Lane Phase II - 47 lots; and Calera - 155 lots. During
2004, we began construction of courtyard homes at Calera Court. Calera Court,
the initial phase of the “Calera” subdivision, will include 16 courtyard homes
on 16 acres. The second phase of Calera, Calera Drive, consisting of 53
single-family lots, many of which adjoin the Fazio Canyons Golf Course, received
final plat and construction permit approval in 2005. In the third quarter of
2005, development of these lots was completed and the initial lots were sold.
As
of December 31, 2006, only 10 lots remained unsold. Development of the third
and
last phase of Calera, which will include approximately 70 single-family
lots, began in the first quarter of 2007 and is expected to be completed in
September 2007.
During
2001, we reached agreement with the City concerning development of a 417-acre
portion of the Lantana community. The agreement reflected a cooperative effort
between the City and us to allow development based on grandfathered
entitlements, while adhering to stringent water quality standards and other
enhancements to protect the environment. With this agreement, we completed
the
core entitlement process for the entire Lantana project allowing for
approximately 2.9 million square feet of office and retail development,
approximately 400 multi-family units (sold to an unrelated third party in 2000,
see below) and a tract for approximately 330 residential lots which we sold
in
2003. In April 2006, we sold a 58-acre tract at Lantana to Advanced Micro
Devices, Inc. (NYSE: AMD) for $21.2 million. Lantana is a partially developed,
mixed-use project with remaining Stratus entitlements for approximately 1.0
million square feet of office and retail use on 223 acres as of December 31,
2
2006.
Regional utility and road infrastructure is in place with capacity to serve
Lantana at full build-out permitted under Stratus’ existing
entitlements.
In
2000,
we received final subdivision plat approval from the City to develop
approximately 170 acres of commercial and multi-family real estate within
Lantana. We completed and leased the two 70,000-square-foot office buildings
at
7000 West by the third quarter of 2000. In the fourth quarter of 2005, we
committed to a plan to sell our two office buildings at 7000 West and on March
27, 2006, we sold 7000 West for $22.3 million (see “Discontinued Operations -
7000 West” and Note 7). The required infrastructure development at the site
known as “Rialto Boulevard” was completed during 2001. During 2002, we completed
the 75,000-square-foot office building at 7500 Rialto Boulevard, which is
approximately 96 percent leased. As demand for office space within Lantana
has
increased, we commenced construction in 2006 of a second 75,000-square-foot
office building at 7500 Rialto Boulevard, which was completed in September
2006.
As of December 31, 2006, Stratus had leased approximately 50 percent of the
space at the second office building. Full development of the 170 acres is
expected to consist of over 800,000 square feet of office and retail space
and
400 multi-family units, which were constructed by an apartment developer that
purchased our 36.4-acre multi-family tract in 2000.
| · |
We
have made significant progress in obtaining the permitting necessary
to
pursue development of additional Austin-area
property.
|
In
August
2002, the City granted final approval of the Circle C settlement and permanent
zoning for our real estate located within the Circle C community. Those
approvals permitted development of approximately 1.0 million square feet of
commercial space and 1,730 residential units, including 900 multi-family units
and 830 single family residential lots. In 2004, we amended our Circle C
settlement with the City to increase the amount of permitted commercial space
from 1.0 million square feet to 1.16 million square feet in exchange for a
decrease in allowable multi-family units from 900 units to 504 units. The Circle
C settlement, effective August 15, 2002, firmly establishes all essential
municipal development regulations applicable to our Circle C properties for
30
years. The City also provided us $15 million of cash incentives in connection
with our future development of our Circle C and other Austin-area properties.
These incentives, which are in the form of Credit Bank capacity, can be used
for
City fees and reimbursement for certain infrastructure costs. Annually, we
may
elect to sell up to $1.5 million of the incentives to other developers for
their
use in paying City fees related to their projects. As of December 31, 2006,
we
have permanently used $5.2 million of our City-based incentives including
cumulative sales of $2.7 million to other developers, and we also have $3.7
million in Credit Bank capacity in use as temporary fiscal deposits. At December
31, 2006, unencumbered Credit Bank capacity was $6.1 million.
We
have
commenced development activities at the Circle C community based on the
entitlements secured in our Circle C settlement with the City, as amended in
2004. The preliminary plan has been approved for Meridian, an 800-lot
residential development at the Circle C community. In October 2004, we received
final City plat and construction permit approvals for the first phase of
Meridian, and construction commenced in January 2005. During the first quarter
of 2005, we contracted to sell a total of 494 lots in our Meridian project
to
three national homebuilders in four phases. Sales for each of the four phases
commence upon substantial completion of development for that phase, and continue
every quarter until all of the lots have been sold. The first phase, which
includes 134 lots, was substantially completed at the end of 2005. Development
of the second phase of 134 lots commenced in the third quarter of 2005 and
was
substantially completed in March 2006. Development of the third phase of 108
lots has commenced and is expected to be completed by September 2007. The fourth
phase of 118 lots will commence by the end of 2007 and completion is expected
in
2008. In 2006, we signed another contract with a national homebuilder for 42
additional lots. Development of those lots will commence in April 2007 and
substantial completion is expected during the third quarter of 2007. The final
phase of the project, which consists of 57 one-acre lots, will commence
development by the end of 2007.
3
In
addition, several retail sites at the Circle C community received final City
approvals and are being developed. Zoning for Escarpment Village, a
168,000-square-foot retail project anchored by a grocery store, was approved
during the second quarter of 2004. The grand opening of Escarpment Village
was
in May 2006. As of December 31, 2006, we had leases for approximately 153,400
square feet or 91 percent of the space at Escarpment Village.
| · |
We
believe that we have the right to receive approximately $21 million
of
future reimbursements associated with previously incurred Barton
Creek
utility infrastructure development
costs.
|
At
December 31, 2006, we had approximately $9.7 million of these expected future
reimbursements of previously incurred costs recorded as a component of “Real
estate, commercial leasing assets and facilities, net” on our balance sheet. The
remaining future reimbursements are not recorded on our balance sheet because
they relate to properties previously sold or represent a component of the $115
million impairment charge we recorded in 1994. Additionally, a significant
portion of the substantial additional costs we will incur in the future as
our
development activities at Barton Creek continue will be eligible for
reimbursement. We received total infrastructure reimbursements, comprised of
Barton Creek Municipal Utility District (MUD) reimbursements, of $1.6 million
during 2006, $4.9 million during 2005 and $0.9 million during 2004.
| · |
We
are currently developing a project in Plano,
Texas.
|
In
January 2004, we acquired the Deerfield property in Plano, Texas, for $7.0
million. The property was zoned and subject to a preliminary subdivision plan
for 234 residential lots. In February 2004, we executed an Option Agreement
and
a Construction Agreement with a national homebuilder. Pursuant to the Option
Agreement, the homebuilder paid us $1.4 million for an option to purchase all
234 lots over 36 monthly take-downs. The net purchase price for each of the
234
lots was $61,500, subject to certain terms and conditions. The $1.4 million
option payment is non-refundable, but will be applied against subsequent
purchases of lots by the homebuilder after certain thresholds are achieved
and
will be recognized by us as income as lots are sold. We agreed to pay up to
$5.2
million of the homebuilder’s development costs. The homebuilder must pay all
property taxes and maintenance costs. The initial lot sale occurred in November
2004 and subsequent lot sales are on schedule. In October 2005, we executed
a
revised agreement with the homebuilder, increasing the lot sizes and average
purchase price to $67,150 based on a new total of 224 lots.
| · |
We
formed a joint venture in November 2005 to purchase and develop a
multi-use property in Austin,
Texas.
|
Our
joint
venture with Trammell Crow acquired an approximate 74-acre tract at the
intersection of Airport Boulevard and Lamar Boulevard (Crestview Station).
After
completing remediation work on the property and receiving permits, the joint
venture plans to develop regional infrastructure and then sell entitled
single-family, multi-family and retail properties with closings on the
single-family and multi-family components and portions of the retail component
expected to occur in 2007, subject to completion of the remediation process.
Our
joint venture partnership has contracted with a nationally recognized
remediation company to demolish the existing buildings and remediate the
property in preparation for permitting. Pursuant to the agreement with the
contractor, all environmental and legal liability was assigned to and assumed
by
the contractor.
| · |
In
December 2006, we purchased land in downtown Austin, Texas, representing
a
city block, to develop as a multi-use
property.
|
In
April
2005, the City selected our proposal to develop a mixed-use project in downtown
Austin immediately north of the new City Hall complex. The project includes
an
entire city block and is planned for a mixture of retail, hotel, residential
and
civic uses. In December 2006, we acquired the property for $15.1 million. We
have executed agreements with Starwood Hotels & Resorts Worldwide, Inc. for
the development of a W Hotel and Residences on the site. In addition, we have
executed agreements for the new studio for KLRU’s “Austin City Limits” program
and for the Austin Children’s
4
Museum.
We have begun the permitting process with the City and expect construction
to
begin in the second quarter of 2007.
Strategic
Alternatives for Enhancing Shareholder Value.
We are
exploring strategic alternatives for enhancing shareholder value, including
a
possible sale of the company. We have retained JPMorgan as our financial advisor
to assist in this process. There can be no assurance that any transaction will
occur or, if one is undertaken, its terms or timing.
We
do not
expect to disclose developments with respect to the exploration of strategic
alternatives unless and until our Board of Directors has approved a definitive
transaction.
We
established a banking relationship with Comerica in 1999 that has substantially
enhanced our financial flexibility. In September 2005, we replaced our $30.0
million credit facility with a $45.0 million Comerica revolving credit facility,
which sets limitations on liens and transactions with affiliates and requires
that certain financial ratios be maintained. The $45.0 million facility, of
which $3.0 million is provided for our Calera Court project, matures on May
30,
2008. The facility allows us to purchase up to $6.5 million of our outstanding
common stock after September 30, 2005. Amounts borrowed under the facility
bear
interest at a minimum annual rate of 5.0 percent or, at our option, Comerica’s
prime rate plus 0.5 percent or London Interbank Offered Rate (LIBOR) plus 2.5
percent. Security for obligations outstanding under the facility includes our
properties within the Barton Creek community and certain of our properties
within Lantana and the Circle C community. In May 2006, we entered into a
modification and extension agreement to extend the maturity and decrease the
interest rate on the Comerica revolving credit facility. Interest on the
facility now accrues, at our option, at Comerica’s rate minus 0.8 percent or
one-month LIBOR plus 1.95 percent,
subject
to a minimum annual rate of 5.0 percent. The available commitment of $45 million
and other conditions and security remained unchanged. At December 31, 2006,
we
had $3.0 million outstanding under the revolving credit facility.
In
December 2006, we amended our two unsecured $5.0 million term loans with First
American Asset Management (FAAM). The amended agreements extend the maturities
of both loans to December 31, 2011, and decrease the annual interest rates
applicable to amounts borrowed under both loans to 6.56 percent. In December
2006, we also entered into two separate new loan agreements with FAAM to borrow
an additional $15.0 million to fund the purchase of the land being used in
connection with our Block 21 project. The new loans mature on December 31,
2011,
and amounts borrowed under both loans bear interest at an annual rate of 6.56
percent. Our obligations under the FAAM loan agreements are
unsecured.
In
December 2004, we obtained an $18.5 million project loan from Comerica to fund
the construction of Escarpment Village. In June 2006, we entered into a 30-year,
$22.8 million mortgage with a 10-year balloon payment from Teachers Insurance
and Annuity Association of America (TIAA). Proceeds from the mortgage were
used
to repay outstanding amounts under our Escarpment Village shopping center $18.5
million project loan and other outstanding debt balances. The annual interest
rate on the mortgage is 5.55 percent. The Escarpment Village shopping center
and
the related lease agreements are security for the loan.
For
a
further discussion of the credit facility and our other long-term financing
arrangements, see “Capital Resources and Liquidity - Credit Facility and Other
Financing Arrangements” within Items 7. and 7A. and Note 4.
Background.
In 1998,
we formed a strategic alliance with Olympus Real Estate Corporation (Olympus)
to
develop certain of our existing properties and to pursue new real estate
acquisition and development opportunities. In 1999, we formed a joint venture
(7000 West) owned 50.1 percent by Olympus and 49.9 percent by us to construct
a
70,000-square-foot office building at the Lantana Corporate Center. The joint
venture completed construction of a second 70,000-square-foot office building
in
2000. We accounted for our interest in this joint venture under the equity
method of accounting until February 27, 2002, when we
5
purchased
Olympus’ ownership interest in the joint venture for $1.5 million and the
assumption of $12.9 million of debt (the 7000 West project loan). In December
2004, we repaid the outstanding balance of the 7000 West project loan with
proceeds from a $12.0 million loan from TIAA.
Sale
of 7000 West.
In the
fourth quarter of 2005, we committed to a plan to sell our office buildings
at
7000 West. On March 27, 2006, our wholly owned subsidiary, Stratus 7000 West
Joint Venture (7000 West JV), sold its two
70,000-square-foot
office buildings at 7000 West William Cannon Drive (7000 West), known as the
Lantana Corporate Center, to
CarrAmerica Lantana, LP (CarrAmerica) for
$22.3
million, resulting in a gain of $9.8 million ($8.3 million net of taxes or
$1.13
per basic share and $1.08 per diluted share) in 2006. CarrAmerica
paid us $10.6 million cash at closing and assumed the $11.7 million principal
balance remaining under our 7000 West project loan from TIAA.
In
connection with CarrAmerica’s assumption of the loan, 7000 West JV entered into
a First Modification Agreement with CarrAmerica and TIAA under which TIAA
released 7000 West JV’s $3.5 million letter of credit issued by Comerica Bank
that secured certain re-tenanting obligations and released 7000 West JV from
all
future obligations under the loan. In addition, TIAA released us from all future
liabilities under our guaranty of 7000 West JV’s environmental representations
and recourse obligations under the loan.
Upon
completion of the sale of 7000 West, Stratus ceased all involvement with the
7000 West office buildings. The operations, assets and liabilities of 7000
West
represented a component of our commercial leasing segment.
Our
real
estate investments are subject to extensive local, city, county and state rules
and regulations regarding permitting, zoning, subdivision, utilities and water
quality as well as federal rules and regulations regarding air and water quality
and protection of endangered species and their habitats. Such regulation has
delayed and may continue to delay development of our properties and result
in
higher developmental and administrative costs. See “Risk Factors.”
We
have
made, and will continue to make, expenditures for the protection of the
environment with respect to our real estate development activities. Emphasis
on
environmental matters will result in additional costs in the future. Based
on an
analysis of our operations in relation to current and presently anticipated
environmental requirements, we currently do not anticipate that these costs
will
have a material adverse effect on our future operations or financial
condition.
At
December 31, 2006, we had 31 employees. We also use contract personnel to
perform certain management and administrative services, including
administrative, accounting, financial and other services, under a management
services agreement. We may terminate this contract on an annual basis. The
cost
of these services totaled $0.4 million in 2006, $0.3 million in 2005 and $0.3
million in 2004.
This
report includes “forward-looking statements” within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of
1934. Forward-looking statements are all statements other than statements of
historical fact included in this report, including, without limitation, the
statements under the headings “Business,” “Properties,” “Market for Registrant’s
Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities,” and “Management’s Discussion and Analysis of Financial Condition
and Results of Operation and Quantitative and Qualitative Disclosures About
Market Risks” regarding our financial position and liquidity, payment of
dividends, share repurchases, strategic plans, future financing plans,
development and capital expenditures, business strategies, and our other plans
and objectives for future operations and activities.
Forward-looking
statements are based on our assumptions and analysis made in light of our
experience and perception of historical trends, current conditions, expected
future developments and other factors that we believe are appropriate under
the
circumstances. These statements are subject to a number of assumptions, risks
and uncertainties, including the risk factors discussed below and in our other
filings with the SEC, general economic and business conditions, the business
opportunities that may be
6
presented
to and pursued by us, changes in laws or regulations and other factors, many
of
which are beyond our control. Readers are cautioned that forward-looking
statements are not guarantees of future performance, and the actual results
or
developments may differ materially from those projected, predicted or assumed
in
the forward-looking statements. Important factors that could cause actual
results to differ materially from our expectations include, among others, the
following:
We
are vulnerable to concentration risks because our operations are currently
almost exclusive to the Austin, Texas, market.
Our real
estate activities are almost entirely located in Austin, Texas. Because of
our
geographic concentration and limited number of projects, our operations are
more
vulnerable to local economic downturns and adverse project-specific risks than
those of larger, more diversified companies.
The
performance of the Austin economy greatly affects our sales and consequently
the
underlying values of our properties. The Austin economy is heavily influenced
by
conditions in the technology industry. In a weak technology market, which had
been the recent condition, we experienced reduced sales, primarily affecting
our
“high-end” properties, which can significantly affect our financial condition
and results of operations.
Aggressive
attempts by certain parties to restrict growth in the area of our holdings
have
in the past had, and may in the future have, a negative effect on our
development and sales activities.
Although
we will defend the development entitlements applicable to our properties, the
efforts of special interest groups have affected and may again negatively impact
our development and sales activities.
If
we are unable to generate sufficient cash from operations, we may find it
necessary to curtail our development activities.
Significant capital resources will be required to fund our development
expenditures. Our performance continues to be dependent on future cash flows
from real estate sales and rental income, and there can be no assurance that
we
will generate sufficient cash flow or otherwise obtain sufficient funds to
meet
the expected development plans for our properties.
Our
results of operations and financial condition are greatly affected by the
performance of the real estate industry.
Our real
estate activities are subject to numerous factors beyond our control, including
local real estate market conditions (both where our properties are located
and
in areas where our potential customers reside), substantial existing and
potential competition, general national, regional and local economic conditions,
fluctuations in interest rates and mortgage availability and changes in
demographic conditions. Real estate markets have historically been subject
to
strong periodic cycles driven by numerous factors beyond the control of market
participants.
Real
estate investments often cannot easily be converted into cash and market values
may be adversely affected by these economic circumstances, market fundamentals,
competition and demographic conditions. Because of the effect these factors
have
on real estate values, it is difficult to predict with certainty the level
of
future sales or sales prices that will be realized for individual
assets.
Our
real
estate operations are also dependent upon the availability and cost of mortgage
financing for potential customers, to the extent they finance their purchases,
and for buyers of the potential customers’ existing residences.
Unfavorable
changes in market and economic conditions could hurt occupancy or rental
rates.
Market
and economic conditions may significantly affect rental rates. Occupancy and
rental rates in our market, in turn, may significantly affect our profitability
and our ability to satisfy our financial obligations. The risks that may affect
conditions in our market include the following:
· the
economic climate, which may be adversely impacted by industry slowdowns and
other factors;
· local
conditions, such as oversupply of office space and the demand for office
space;
· the
inability or unwillingness of tenants to pay their current rent or rent
increases; and
7
· competition
from other available office buildings and changes in market rental
rates.
Our
operations are subject to an intensive regulatory approval
process.
Before
we can develop a property, we must obtain a variety of approvals from local
and
state governments with respect to such matters as zoning, density, parking,
subdivision, site planning and environmental issues. Some of these approvals
are
discretionary by nature. Because government agencies and special interest groups
have in the past expressed concerns about our development plans in or near
Austin, our ability to develop these properties and realize future income from
our properties could be delayed, reduced, prevented or made more
expensive.
Several
special interest groups have long opposed our plans in the Austin area and
have
taken various actions to partially or completely restrict development in some
areas, including areas where some of our most valuable properties are located.
We have actively opposed these actions and do not believe unfavorable rulings
would have a significant long-term adverse effect on the overall value of our
property holdings. However, because of the regulatory environment that has
existed in the Austin area and the intensive opposition of several special
interest groups, there can be no assurance that our expectations will prove
correct.
Our
operations are subject to governmental environmental regulation, which can
change at any time and generally would result in an increase to our
costs.
Real
estate development is subject to state and federal regulations and to possible
interruption or termination because of environmental considerations, including,
without limitation, air and water quality and protection of endangered species
and their habitats. Certain of the Barton Creek properties include nesting
territories for the Golden Cheek Warbler, a federally listed endangered species.
In 1995, we received a permit from the U.S. Wildlife Service pursuant to the
Endangered Species Act, which to date has allowed the development of the Barton
Creek and Lantana properties free of restrictions under the Endangered Species
Act related to the maintenance of habitat for the Golden Cheek
Warbler.
Additionally,
in April 1997, the U.S. Department of Interior listed the Barton Springs
Salamander as an endangered species after a federal court overturned a March
1997 decision by the Department of Interior not to list the Barton Springs
Salamander based on a conservation agreement between the State of Texas and
federal agencies. The listing of the Barton Springs Salamander has not affected,
nor do we anticipate it will affect, our Barton Creek and Lantana properties
for
several reasons, including the results of technical studies and our U.S. Fish
and Wildlife Service 10(a) permit obtained in 1995. The development permitted
by
our 2002 Circle C settlement with the City has been reviewed and approved by
the
U.S. Fish and Wildlife Service and, as a result, we do not anticipate that
the
1997 listing of the Barton Springs Salamander will impact our Circle C
properties.
We
are
making, and will continue to make, expenditures with respect to our real estate
development for the protection of the environment. Emphasis on environmental
matters will result in additional costs in the future.
The
real estate business is very competitive and many of our competitors are larger
and financially stronger than we are.
The real
estate business is highly competitive. We compete with a large number of
companies and individuals, and many of them have significantly greater financial
and other resources than we have. Our competitors include local developers
who
are committed primarily to particular markets and also national developers
who
acquire properties throughout the United States (U.S.).
Our
operations are subject to natural risks.
Our
performance may be adversely affected by weather conditions that delay
development or damage property.
Not
applicable.
8
Our
developed lots, developed or under development acreage and undeveloped acreage
as of December 31, 2006, are provided in the following table. The undeveloped
acreage shown in the table is presented according to anticipated uses for
single-family lots, multi-family units and commercial development based upon
our
understanding of the properties’ existing entitlements. However, there is no
assurance that the undeveloped acreage will be so developed because of the
nature of the approval and development process and market demand for a
particular use. Undeveloped acreage includes raw real estate that can be sold
"as is" i.e. no infrastructure or development work has begun on such property.
A
developed lot is an individual tract of land that has been developed and
permitted for residential use. A developed lot may be sold with a home already
built on it. We currently own only five lots with homes built on them (the
Calera Court homes). Developed acreage or acreage under development includes
real estate for which infrastructure work over the entire property has been
completed, is currently being completed or is able to be completed and necessary
permits have been received.
|
Acreage
|
|||||||||||||||||||
|
Developed
or Under Development
|
Undeveloped
|
||||||||||||||||||
|
Developed
|
Single
|
Multi-
|
Single
|
Multi-
|
Total
|
||||||||||||||
|
Lots
|
Family
|
family
|
Commercial
|
Total
|
Family
|
family
|
Commercial
|
Total
|
Acreage
|
||||||||||
|
Austin
|
|||||||||||||||||||
|
Barton
Creek
|
37
|
688
|
249
|
380
|
1,317
|
391
|
-
|
20
|
411
|
1,728
|
|||||||||
|
Lantana
|
-
|
-
|
-
|
223
|
223
|
-
|
-
|
-
|
-
|
223
|
|||||||||
|
Circle
C
|
88
|
282
|
-
|
36
|
318
|
-
|
-
|
355
|
355
|
673
|
|||||||||
|
Block
21
|
-
|
-
|
-
|
2
|
2
|
-
|
-
|
-
|
-
|
2
|
|||||||||
|
Plano
|
|||||||||||||||||||
|
Deerfield
|
4
|
24
|
-
|
-
|
24
|
-
|
-
|
-
|
-
|
24
|
|||||||||
|
San
Antonio
|
|||||||||||||||||||
|
Camino
Real
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
2
|
2
|
2
|
|||||||||
|
Total
|
129
|
994
|
249
|
641
|
1,884
|
391
|
-
|
377
|
768
|
2,652
|
|||||||||
The
following schedule summarizes the estimated development potential of our
Austin-area acreage as of December 31, 2006:
|
Single
|
Commercial
|
|||||||
|
Family
|
Multi-family
|
Office
|
Retail
|
|||||
|
(lots)
|
(units)
|
(gross
square feet)
|
||||||
|
Barton
Creek
|
379
|
1,860
|
1,590,000
|
50,000
|
||||
|
Lantana
|
-
|
-
|
1,220,393
|
470,000
|
||||
|
Circle
C
|
521
|
-
|
787,500
|
372,500
|
||||
|
Total
|
900
|
1,860
|
3,597,893
|
892,500
|
||||
We
may
from time to time be involved in various legal proceedings of a character
normally incident to the ordinary course of our business. We believe that
potential liability from any of these pending or threatened proceedings will
not
have a material adverse effect on our financial condition or results of
operations. We maintain liability insurance to cover some, but not all,
potential liabilities normally incident to the ordinary course of our business
as well as other insurance coverage customary in our business, with such
coverage limits as management deems prudent.
Not
applicable.
9
Certain
information, as of March 1, 2007, regarding our executive officers is set forth
in the following table and accompanying text.
|
Name
|
Age
|
Position
or Office
|
||
|
William
H. Armstrong III
|
42
|
Chairman
of the Board, President and
|
||
|
Chief
Executive Officer
|
||||
|
John
E. Baker
|
60
|
Senior
Vice President and
|
||
|
Chief
Financial Officer
|
||||
|
Kenneth
N. Jones
|
47
|
General
Counsel and Secretary
|
Mr.
Armstrong has been employed by us since our inception in 1992. He has served
as
Chairman of the Board since August 1998, Chief Executive Officer since May
1998
and President since August 1996.
Mr.
Baker
has served as our Senior Vice President and Chief Financial Officer since August
2002. He previously served as Senior Vice President - Accounting from May 2001
until August 2002 and as our Vice President - Accounting from August 1996 until
May 2001.
Mr.
Jones
has served as our General Counsel since August 1998 and Secretary since 2000.
Mr. Jones is a partner with the law firm of Armbrust & Brown, L.L.P. and he
provides legal and business advisory services under a consulting arrangement
with his firm.
Performance
Graph
The
following graph compares the change in the cumulative total stockholder return
on our common stock with the cumulative total return of the Hemscott Real Estate
Development Group and the S&P Stock Index from 2002 through 2006. This
comparison assumes $100 invested on December 31, 2001 in (a) our common stock,
(b) the Hemscott Real Estate Development Group, and (c) the S&P 500 Stock
Index.
10
Comparison
of Cumulative Total Return*
Stratus
Properties Inc., Hemscott Real Estate
Development
Group and S&P 500 Stock Index
|
December
31,
|
||||||
|
2001
|
2002
|
2003
|
2004
|
2005
|
2006
|
|
|
Stratus
Properties Inc.
|
$
100.00
|
$
108.24
|
$
118.24
|
$
188.59
|
$
274.47
|
$
376.47
|
|
Hemscott
Real Estate
|
||||||
|
Development
Group
|
100.00
|
69.50
|
116.01
|
202.14
|
213.06
|
207.15
|
|
S&P
500 Stock Index
|
100.00
|
77.90
|
100.25
|
111.15
|
116.61
|
135.03
|
_______________
*
Total
return assumes reinvestment of dividends.
Our
common stock trades on the National Association of Securities Dealers Automated
Quotation (NASDAQ) stock market under the symbol STRS. The following table
sets
forth, for the periods indicated, the range of high and low sales prices, as
reported by NASDAQ.
|
2006
|
2005
|
||||||||
|
High
|
Low
|
High
|
Low
|
||||||
|
First
Quarter
|
$24.96
|
$22.10
|
$17.25
|
$12.70
|
|||||
|
Second
Quarter
|
26.98
|
24.01
|
18.80
|
15.00
|
|||||
|
Third
Quarter
|
32.94
|
25.65
|
18.75
|
17.01
|
|||||
|
Fourth
Quarter
|
33.00
|
25.72
|
23.33
|
17.30
|
|||||
11
As
of
March 1, 2007, there were 695 holders of record of our common stock. We have
not
in the past paid, and do not anticipate in the future paying, cash dividends
on
our common stock. The decision whether or not to pay dividends and in what
amounts is solely within the discretion of our Board of Directors. However,
our
current ability to pay dividends is also restricted by terms of our credit
agreement, as discussed in Note 4.
The
following table sets forth shares of our common stock we repurchased during
the
three-month period ended December 31, 2006.
|
Current
Programa
|
|||||||||
|
Period
|
Total
Shares Purchased
|
Average
Price Paid Per Share
|
Shares
Purchased
|
Shares
Available for Purchase
|
|||||
|
October
1 to 31, 2006
|
-
|
-
|
-
|
470,565
|
|||||
|
November
1 to 30, 2006
|
-
|
-
|
-
|
470,565
|
|||||
|
December
1 to 31, 2006
|
755
|
$30.01
|
755
|
469,810
|
|||||
|
Total
|
755
|
30.01
|
755
|
||||||
| a. |
In
February 2001, our Board of Directors approved an open market share
purchase program for up to 0.7 million shares of our common stock.
The
program does not have an expiration date. Our loan agreement with
Comerica
provides a limit of $6.5 million for common stock purchases after
September 30, 2005. At December 31, 2006, $5.9 million remains under
the
Comerica agreement for purchases of common
stock.
|
12
The
following table sets forth our selected historical financial data for each
of
the five years in the period ended December 31, 2006. The historical financial
information is derived from our audited financial statements and is not
necessarily indicative of our future results. In addition, the historical
results have been adjusted to reflect the operations of Stratus 7000 West Joint
Venture (7000 West) as discontinued operations (see Note 7). You should read
the
information in the table below together with Items 7. and 7A. “Management’s
Discussion and Analysis of Financial Condition and Results of Operation and
Quantitative and Qualitative Disclosures About Market Risk” and Item 8.
“Financial Statements and Supplementary Data.”
|
2006
|
2005
|
2004
|
2003
|
2002
|
||||||||||||
|
(In
Dollars, Except Average Shares, and In Thousands, Except Per Share
Amounts)
|
||||||||||||||||
|
Years
Ended December 31:
|
||||||||||||||||
|
Revenues
|
$
|
64,007
|
$
|
35,194
|
$
|
17,725
|
$
|
11,001
|
$
|
9,082
|
||||||
|
Operating
income (loss)
|
24,053
|
8,336
|
338
|
(413
|
)
|
(1,545
|
)
|
|||||||||
|
Interest
income
|
416
|
226
|
70
|
728
|
606
|
|||||||||||
|
Equity
in unconsolidated affiliates’
|
||||||||||||||||
|
income
|
-
|
-
|
-
|
29
|
263
|
|||||||||||
|
Income
(loss) from continuing
|
||||||||||||||||
|
operations
|
31,674
|
7,960
|
99
|
17
|
(527
|
)
|
||||||||||
|
Income
from discontinued operationsa
|
8,614
|
514
|
573
|
3
|
6
|
|||||||||||
|
Net
income (loss)
|
40,288
|
8,474
|
672
|
20
|
(521
|
)
|
||||||||||
|
Net
income applicable to common
|
||||||||||||||||
|
stock
|
40,288
|
8,474
|
672
|
20
|
1,846
|
b
|
||||||||||
|
Basic
net income per share:
|
||||||||||||||||
|
Continuing
operations
|
$
|
4.33
|
$
|
1.11
|
$
|
0.01
|
$
|
-
|
$
|
0.26
|
||||||
|
Discontinued
operationsa
|
1.18
|
0.07
|
0.08
|
-
|
-
|
|||||||||||
|
Basic
net income per share
|
$
|
5.51
|
$
|
1.18
|
$
|
0.09
|
$
|
-
|
$
|
0.26
|
||||||
|
Diluted
net income per share:
|
||||||||||||||||
|
Continuing
operations
|
$
|
4.14
|
$
|
1.04
|
$
|
0.01
|
$
|
-
|
$
|
0.25
|
||||||
|
Discontinued
operationsa
|
1.12
|
0.07
|
0.08
|
-
|
-
|
|||||||||||
|
Diluted
net income per share
|
$
|
5.26
|
$
|
1.11
|
$
|
0.09
|
$
|
-
|
$
|
0.25
|
||||||
|
Average
shares outstanding
|
||||||||||||||||
|
Basic
|
7,306
|
7,209
|
7,196
|
7,124
|
7,116
|
|||||||||||
|
Diluted
|
7,658
|
7,636
|
7,570
|
7,315
|
7,392
|
|||||||||||
|
At
December 31:
|
||||||||||||||||
|
Working
capital deficit
|
$
|
(4,856
|
)
|
$
|
(7,198
|
)
|
$
|
(4,111
|
)
|
$
|
(787
|
)
|
$
|
(4,825
|
)
|
|
|
Property
held for sale
|
133,210
|
143,521
|
125,445
|
114,207
|
111,608
|
|||||||||||
|
Property
held for use, net
|
46,702
|
c
|
9,452
|
9,926
|
9,065
|
8,087
|
||||||||||
|
Discontinued
operations
|
||||||||||||||||
|
(7000
West)a
|
-
|
12,230
|
13,239
|
13,936
|
14,705
|
|||||||||||
|
Total
assets
|
203,950
|
173,886
|
152,861
|
142,430
|
139,440
|
|||||||||||
|
Long-term
debt from continuing
|
||||||||||||||||
|
operations,
including current
|
||||||||||||||||
|
portion
|
50,675
|
50,304
|
43,647
|
35,599
|
32,073
|
|||||||||||
|
Long-term
debt, from discontinued
|
||||||||||||||||
|
operations,
including current
|
||||||||||||||||
|
portiona
|
-
|
11,795
|
12,000
|
11,940
|
12,726
|
|||||||||||
|
Stockholders’
equity
|
133,946
|
94,167
|
88,196
|
86,821
|
86,619
|
|||||||||||
13
| a. |
Relates
to the operations, assets and liabilities of 7000 West, which we
sold in
March 2006 (see Note 7).
|
| b. |
In
connection with the conclusion of our relationship with Olympus Real
Estate Corporation in February 2002, we purchased our $10.0 million
of
mandatorily redeemable preferred stock held by Olympus for $7.6 million.
Accounting standards require that the $2.4 million discount amount
be
included in net income applicable to common
stock.
|
| c. |
Includes
the cost associated with the completed Escarpment Village retail
center
which opened in May 2006.
|
Results
of Operation and Quantitative and Qualitative Disclosures About Market
Risk
OVERVIEW
In
management’s discussion and analysis “we,” “us,” and “our” refer to Stratus
Properties Inc. and its consolidated subsidiaries. You should read the following
discussion in conjunction with our consolidated financial statements and the
related discussion of “Business,” “Risk Factors” and “Properties” included
elsewhere in this Form 10-K. The results of operations reported and summarized
below are not necessarily indicative of our future operating results. All
subsequent references to Notes refer to Notes to Consolidated Financial
Statements located in Item 8. “Financial Statements and Supplementary
Data.”
We
are
engaged in the acquisition, development, management and sale of commercial,
multi-family and residential real estate properties located primarily in the
Austin, Texas area. We conduct real estate operations on properties we
own.
Our
principal real estate holdings are currently in southwest Austin, Texas. As
of
December 31, 2006, our most significant holding is the 1,728 acres of
residential, multi-family and commercial property and 37 developed residential
estate lots located within the Barton Creek community. We also own approximately
355 acres of undeveloped commercial property and approximately 36 acres of
commercial property under development within the Circle C Ranch (Circle C)
community. Our other properties in the Circle C community include Meridian,
which is an 800-lot residential development, and Escarpment Village, which
is a
168,000-square-foot retail center anchored by a grocery store. At December
31,
2006, Meridian consisted of approximately 282 acres and 88 developed residential
lots. Our remaining Austin holdings at December 31, 2006, consisted of 223
acres
of commercial property and two 75,000-square-foot office buildings at 7500
Rialto Boulevard, one of which is approximately 96 percent leased and the other
is approximately 50 percent leased, located within Lantana. In the fourth
quarter of 2005, we decided to sell our two 70,000-square-foot office buildings
at 7000 West William Cannon Drive (7000 West), known as the Lantana Corporate
Center. On March 27, 2006, we sold 7000 West for $22.3 million (see
“Discontinued Operations - 7000 West” and Note 7).
In
January 2004, we acquired approximately 68 acres of land in Plano, Texas, which
we refer to as Deerfield. At December 31, 2006, our Deerfield property consisted
of approximately 24 acres of residential land, which is being developed, and
four developed residential lots. We also own two acres of undeveloped commercial
property in San Antonio, Texas.
In
November 2005, we formed a joint venture partnership with Trammell Crow Central
Texas Development, Inc. (Trammell Crow) to acquire an approximate 74-acre tract
at the intersection of Airport Boulevard and Lamar Boulevard in Austin, Texas
for $7.7 million. The property, known as Crestview Station, is a single-family,
multi-family, retail and office development. With our joint venture partner,
we
have commenced brown field remediation and permitting of the property. Trammell
Crow is also managing Escarpment Village for us.
In
December 2006, we acquired a city block in downtown Austin for $15.1 million.
The project, which we refer to as Block 21, is planned for a mixture of retail,
hotel, residential and civic uses on approximately two acres.
14
Real
Estate Market Conditions
Factors
that significantly affect United States (U.S.) real estate market conditions
include interest rate levels and the availability of financing, the supply
of
product (i.e. developed and/or undeveloped land, depending on buyers’ needs) and
current and anticipated future economic conditions. These market conditions
historically move in periodic cycles, and can be volatile in specific regions.
Because of the concentration of our assets primarily in the Austin, Texas area,
market conditions in this region significantly affect our business.
In
addition to the traditional influence of state and federal government employment
levels on the local economy, in recent years the Austin area has experienced
significant growth in the technology sector. The Austin-area population
increased approximately 48 percent between 1989 and 1999, largely due to an
influx of technology companies and related businesses. Average income levels
in
Austin also increased significantly during this period, rising by 62 percent.
The booming economy resulted in rising demands for residential housing,
commercial office space and retail services. Between 1989 and 1999, sales tax
receipts in Austin rose by 126 percent, an indication of the dramatic increase
in business activity during the period. The increases in population, income
levels and sales tax revenues have been less dramatic over the last few
years.
The
following chart compares Austin’s five-county metro area population and median
family income for 1989 and 1999 and the most current information available
for
2005 and 2006, based on U.S. Census Bureau data and City of Austin
data.
Based
on
the City of Austin’s fiscal year of October 1st
through
September 30th,
the
chart below compares Austin’s sales tax revenues for 1989, 1999 and
2005.
15
a.
Source: Comprehensive Annual Financial Report for the City of Austin,
Texas.
Real
estate development in southwest Austin historically has been constrained as
a
result of various restrictions imposed by the City of Austin (the City). Several
special interest groups have also traditionally opposed development in that
area, where most of our property is located. From 2001 through 2004, a downturn
in the technology sector negatively affected the Austin real estate market,
especially the high-end residential and commercial leasing markets; however,
beginning in 2005, market conditions have improved. The December 31, 2005 and
2006 vacancy percentages for various types of developed properties in Austin
are
noted below, and they indicate that with the exception of the continuing
strength of Austin’s retail market, other developed properties are still showing
some negative effects from the economic downturn.
|
December
31,
|
||||
|
2005
|
2006
|
|||
|
Building
Type
|
Vacancy
Factor
|
|||
|
Industrial
Buildings
|
19%a
|
12%b
|
||
|
Office
Buildings (Class A)c
|
17%
|
13%
|
||
|
Multi-Family
Buildings
|
7%d
|
7%b
|
||
|
Retail
Buildings
|
7%e
|
7%f
|
||
| a. |
CB
Richard Ellis: Industrial Availability
Index
|
| b. |
Texas
A&M University Real Estate Center: Texas Market
News
|
| c. |
CB
Richard Ellis: Austin Office
MarketView
|
| d. |
Austin
Investor Interests: The Austin Multi-Family Trend
Report
|
| e. |
CB
Richard Ellis: Austin MSA Retail Market
Overview
|
| f. |
NAI
Global Commercial Real Estate
Services
|
Business
Strategy
Our
financial condition and results of operations are highly dependent upon market
conditions in Austin. Our future operating cash flows and, ultimately, our
ability to develop our properties and expand our business will be largely
dependent on the level of our real estate sales. In turn, these sales will
be
significantly affected by future real estate market conditions in Austin, Texas,
development costs, interest rate levels and regulatory issues including our
land
use and development entitlements. From 2001 through 2004, a downturn in the
technology sector negatively affected the Austin real estate market, especially
the
16
high-end
residential and commercial leasing markets; however, beginning in 2005, market
conditions have improved.
Over
the
past several years, we have successfully worked cooperatively with the City
to
obtain approvals that allow the development of our properties to proceed in
a
timely manner while protecting the environment. We believe the desirable
location and overall quality of our properties, in combination with the land
use
and development entitlements we have obtained, will command a premium over
the
value of other Austin-area properties.
Our
long-term success will depend on our ability to maximize the value of our real
estate through obtaining required approvals that permit us to develop and sell
our properties in a timely manner at a reasonable cost. We must incur
significant development expenditures and secure additional permits prior to
the
development and sale of certain properties. In addition, we continue to pursue
additional development opportunities, and believe we can obtain bank financing
for developing our properties at a reasonable cost. See “Risk Factors” located
elsewhere in this Form 10-K.
We
are
exploring strategic alternatives for enhancing shareholder value, including
a
possible sale of the company. We have retained JPMorgan as our financial advisor
to assist in this process. There can be no assurance that any transaction will
occur or, if one is undertaken, its terms or timing.
We
do not
expect to disclose developments with respect to the exploration of strategic
alternatives unless and until our Board of Directors has approved a definitive
transaction.
DEVELOPMENT
AND OTHER ACTIVITIES
Block
21.
In April
2005, the City selected our proposal to develop a mixed-use project in downtown
Austin immediately north of the new City Hall complex. The project includes
an
entire city block and is planned for a mixture of retail, hotel, residential
and
civic uses. In December 2006, we acquired the property for $15.1 million. We
have executed agreements with Starwood Hotels & Resorts Worldwide, Inc. for
the development of a W Hotel and Residences on the site. In addition, we have
executed agreements for the new studio for KLRU’s “Austin City Limits” program
and for the Austin Children’s Museum. We have begun the permitting process with
the City and expect construction to begin in the second quarter of
2007.
Lantana.
In April
2006, we sold a 58-acre tract at Lantana to Advanced Micro Devices, Inc. (NYSE:
AMD) for $21.2 million, recognizing a second-quarter 2006 gain of $15.6 million
to net income or $2.04 per share on the sale. Lantana is a partially developed,
mixed-use project with remaining Stratus entitlements for approximately 1.0
million square feet of office and retail use on 223 acres as of December 31,
2006. Regional utility and road infrastructure is in place with capacity to
serve Lantana at full build-out permitted under Stratus’ existing
entitlements.
In
2001,
we reached agreement with the City concerning development of a 417-acre portion
of the Lantana community. The agreement reflected a cooperative effort between
the City and us to allow development based on grandfathered entitlements, while
adhering to stringent water quality standards and other enhancements to protect
the environment. With this agreement, we completed the core entitlement process
for the entire Lantana project allowing for approximately 2.9 million square
feet of office and retail development, approximately 400 multi-family units
(sold to an unrelated third party in 2000), and a tract for approximately 330
residential lots which we sold in 2003.
In
September 2006, we completed a second 75,000-square-foot office building at
7500
Rialto Boulevard in response to increased demand for office space within
Lantana. As of December 31, 2006, we had leased approximately 50 percent of
the
space at the second office building and approximately 96 percent of the original
office building. In the fourth quarter of 2005, we committed to a plan to sell
our two office buildings at 7000 West. On March 27, 2006, we sold 7000 West
for
$22.3 million (see “Discontinued Operations - 7000 West” and Note
7).
17
Barton
Creek Community.
We
commenced construction of a new subdivision within the Barton Creek community
during the fourth quarter of 2000. This subdivision, Mirador, was completed
in
late-2001. Mirador adjoins the Escala Drive subdivision. We developed 34 estate
lots in the Mirador subdivision, with each lot averaging approximately 3.5
acres
in size.
Since
January 2002, we have secured subdivision plat approval for three new
residential subdivisions within the Barton Creek Community, including: Versant
Place - 54 lots, Wimberly Lane Phase II - 47 lots and Calera - 155 lots. At
December 31, 2006, our remaining unsold developed lots within the Barton Creek
Community included: Calera Drive - 10 lots, Wimberly Lane Phase II - 14 lots,
Calera Court - 8 lots and Mirador - 5 lots. We sold the last of the original
54
lots at Escala Drive subdivision in 2006. Development of the remaining Barton
Creek property is expected to occur over several years.
In
May
2004, we entered into a contract with a national homebuilder to sell 41 lots
within the Wimberly Lane Phase II subdivision in the Barton Creek community.
In
June 2004, the homebuilder paid us a non-refundable $0.6 million deposit for
the
right to purchase the 41 lots. The deposit was used to pay ongoing development
costs of the lots. The deposit will be applied against subsequent purchases
of
lots by the homebuilder after certain thresholds are achieved and will be
recognized as income as lots are sold. The lots are being sold on a scheduled
takedown basis, with the initial six lots sold in December 2004 following
completion of subdivision utilities, and then an average of three lots per
quarter beginning in June 2005. The average purchase price for each of the
41
lots is $150,400, subject to a six percent annual escalator commencing in
December 2004. The Wimberly Lane Phase II subdivision also included six estate
lots, each averaging approximately five acres, which we retained, marketed
and
sold in 2005 for a total of $1.8 million.
During
2004, we began construction of courtyard homes at Calera Court within the Barton
Creek community. Calera Court, the initial phase of the “Calera” subdivision,
will include 16 courtyard homes on 16 acres. The second phase of Calera, Calera
Drive, consisting of 53 single-family lots, many of which adjoin the Fazio
Canyons Golf Course, received final plat and construction permit approval in
2005. In the third quarter of 2005, development of these lots was completed
and
the initial lots were sold. As of December 31, 2006, only 10 lots remained
unsold. Development of the third and last phase of Calera, which will include
approximately 70 single-family lots, began in the first quarter of 2007 and
is
expected to be completed in September 2007.
Circle
C Community. We
have
commenced development activities at the Circle C community based on the
entitlements secured in our Circle C settlement with the City. Our Circle C
settlement, as amended in 2004, permits development of 1.16 million square
feet
of commercial space, 504 multi-family units and 830 single-family residential
lots. The preliminary plan has been approved for Meridian, an 800-lot
residential development at the Circle C community. In October 2004, we received
final City plat and construction permit approvals for the first phase of
Meridian, and construction commenced in January 2005. During the first quarter
of 2005, we contracted to sell a total of 494 lots in our Meridian project
to
three national homebuilders in four phases. Sales for each of the four phases
commence upon substantial completion of development for that phase, and continue
every quarter until all of the lots have been sold. The first phase, which
includes 134 lots, was substantially completed at the end of 2005. Development
of the second phase of 134 lots commenced in the third quarter of 2005 and
was
substantially completed in March 2006. We estimate our sales from the first
two
phases of Meridian will total at least 29 lots for $1.9 million during the
first
quarter of 2007.
Development
of the third phase of Meridian, which includes 108 lots, has commenced and
is
expected to be completed by September 2007. The fourth phase of 118 lots will
commence by the end of 2007 and completion is expected in 2008. In 2006, we
signed another contract with a national homebuilder for 42 additional lots.
Development of those lots will commence in April 2007 and substantial completion
is expected during the third quarter of 2007. The final phase of the project,
which consists of 57 one-acre lots, will commence development by the end of
2007.
18
The
grand
opening of Escarpment Village, a 168,000-square-foot retail project anchored
by
a grocery store at the Circle C community, was in May 2006. As of December
31,
2006, we had leases for 153,400 square feet or 91 percent of the space at
Escarpment Village.
Deerfield.
In
January 2004, we acquired the Deerfield property in Plano, Texas, for $7.0
million. The property was zoned and subject to a preliminary subdivision plan
for 234 residential lots. In February 2004, we executed an Option Agreement
and
a Construction Agreement with a national homebuilder. Pursuant to the Option
Agreement, the homebuilder paid us $1.4 million for an option to purchase all
234 lots over 36 monthly take-downs. The net purchase price for each of the
234
lots was $61,500, subject to certain terms and conditions. The $1.4 million
option payment is non-refundable, but will be applied against subsequent
purchases of lots by the homebuilder after certain thresholds are achieved
and
will be recognized by us as income as lots are sold. We agreed to pay up to
$5.2
million of the homebuilder’s development costs. The homebuilder must pay all
property taxes and maintenance costs. The initial lot sale occurred in November
2004 and subsequent lot sales are on schedule. In October 2005, we executed
a
revised agreement with the homebuilder, increasing the lot sizes and average
purchase price to $67,150 based on a new total of 224 lots. We expect to
complete 15 lot sales for $1.0 million during the first quarter of
2007.
Crestview
Station.
In
November 2005, we formed a joint venture partnership with Trammell Crow to
acquire an approximate 74-acre tract at the intersection of Airport Boulevard
and Lamar Boulevard in Austin, Texas, for $7.7 million. With our joint venture
partner, we have commenced brown field remediation and permitting of the
property, known as Crestview Station, which is located on the commuter rail
line
recently approved by City of Austin voters. Crestview Station is planned for
single-family, multi-family and retail development, with closings on the
single-family and multi-family components and portions of the retail component
expected to occur in 2007, subject to completion of the remediation process.
At
December 31, 2006, our investment in the Crestview Station project totaled
$3.8
million and the joint venture partnership had $7.6 million of outstanding debt,
of which each joint venture partner guarantees $1.9 million.
Our
joint
venture partnership has contracted with a nationally recognized remediation
firm
to demolish the existing buildings and remediate the property in preparation
for
permitting. Under the terms of the remediation contract, the joint venture
partnership will pay the contractor approximately $4.9 million upon completion
of performance benchmarks and certification by the State of Texas that the
remediation is complete. The contractor is required to pay all costs associated
with the remediation and to secure an environmental liability policy with $10.0
million of coverage remaining in place for a 10-year term. Pursuant to the
agreement with the contractor, all environmental and legal liability was
assigned to and assumed by the contractor effective November 30,
2005.
RESULTS
OF OPERATIONS
We
are
continually evaluating the development potential of our properties and will
continue to consider opportunities to enter into significant transactions
involving our properties. As a result, and because of numerous other factors
affecting our business activities as described herein, our past operating
results are not necessarily indicative of our future results.
Summary
operating results follow (in thousands):
|
2006
|
2005
|
2004
|
|||||||
|
Revenues:
|
|||||||||
|
Real
estate operations
|
$
|
60,213
|
$
|
33,841
|
$
|
16,851
|
|||
|
Commercial
leasing
|
3,794
|
1,353
|
874
|
||||||
|
Total
revenues
|
$
|
64,007
|
$
|
35,194
|
$
|
17,725
|
|||
|
Operating
income
|
$
|
24,053
|
$
|
8,336
|
$
|
338
|
|||
|
Benefit
from (provision for) income taxes
|
$
|
8,344
|
$
|
(73
|
)
|
$
|
-
|
||
19
|
2006
|
2005
|
2004
|
|||||||
|
Income
from continuing operations
|
$
|
31,674
|
$
|
7,960
|
$
|
99
|
|||
|
Income
from discontinued operations
|
8,614
|
a
|
514
|
573
|
|||||
|
Net
income
|
$
|
40,288
|
$
|
8,474
|
$
|
672
|
|||
| a. |
Includes
a gain on sale of $8.3 million, net of taxes of $1.5
million.
|
Our
deferred tax assets at December 31, 2005, totaled $19.5 million and we had
provided a 100 percent valuation allowance because realization of the deferred
tax assets was not considered likely. Realization of our deferred tax assets
is
dependent on generating sufficient taxable income within the carryforward period
available under tax law. In the first quarter of 2006, we sold 7000 West (see
Note 7) and in April 2006 we completed the sale of 58 acres at our Lantana
property. These transactions generated pre-tax income of $25.6 million and,
along with our current homebuilder contract arrangements and projected levels
of
future sales, provide sufficient evidence that we concluded it is more likely
than not that we will be able to realize all of our deferred tax assets. As
a
result, 2006 net income from continuing operations included an $8.3 million
tax
benefit resulting from the reversal of a portion of our deferred tax asset
valuation allowance. We recorded a $0.4 million benefit from income taxes to
discontinued operations in 2006 in accordance with income tax accounting
rules.
In
May
2006, the Texas governor signed into law the Texas Revised Franchise Bill (the
Franchise Tax). The Franchise Tax replaces previous taxable capital and earned
surplus components with a tax based on “taxable margin.” Taxable margin is
defined as the entity’s total revenues less either cost of goods sold or
compensation. Our income tax benefit from continuing operations for 2006
includes a deferred tax credit of $0.1 million related to the Franchise
Tax.
We
have
two operating segments, “Real Estate Operations” and “Commercial Leasing” (see
Note 9). The following is a discussion of our operating results by
segment.
Real
Estate Operations
Summary
real estate operating results follow (in thousands):
|
2006
|
2005
|
2004
|
|||||||
|
Revenues:
|
|||||||||
|
Developed
property sales
|
$
|
33,459
|
$
|
25,453
|
$
|
7,238
|
|||
|
Undeveloped
property sales
|
24,929
|
7,550
|
9,192
|
||||||
|
Commissions,
management fees and other
|
1,825
|
838
|
421
|
||||||
|
Total
revenues
|
60,213
|
33,841
|
16,851
|
||||||
|
Cost
of sales
|
(29,223
|
)
|
(19,770
|
)
|
(11,242
|
)
|
|||
|
General
and administrative expenses
|
(6,280
|
)
|
(4,346
|
)
|
(3,788
|
)
|
|||
|
Operating
income
|
$
|
24,710
|
$
|
9,725
|
$
|
1,821
|
|||
Developed
Property Sales. Improving
market conditions in the Austin area have resulted in increased lot sales in
2005 and 2006. Property sales for the last three years follow (revenues in
thousands):
20
|
2006
|
2005
|
2004
|
||||||||||
|
Lots
|
Revenues
|
Lots
|
Revenues
|
Lots
|
Revenues
|
|||||||
|
Residential
Properties:
|
||||||||||||
|
Barton
Creek
|
||||||||||||
|
Calera
Drive
|
24
|
$10,363
|
19
|
$7,101
|
-
|
$
-
|
||||||
|
Calera
Court Courtyard Home
|
5
|
2,922
|
2
|
945
|
1
|
597
|
||||||
|
Mirador
Estate
|
7
|
3,791
|
7
|
3,912
|
8
|
3,262
|
a
|
|||||
|
Wimberly
Lane Phase II
|
||||||||||||
|
Standard
Homebuilder
|
11
|
1,804
|
10
|
1,564
|
6
|
887
|
||||||
|
Estate
|
-
|
-
|
6
|
1,851
|
-
|
-
|
||||||
|
Escala
Drive Estate
|
1
|
695
|
9
|
4,882
|
6
|
2,185
|
||||||
|
Circle
C
|
||||||||||||
|
Meridian
|
166
|
9,881
|
14
|
949
|
-
|
-
|
||||||
|
Deerfield
|
60
|
4,003
|
68
|
4,249
|
5
|
307
|
||||||
|
274
|
$33,459
|
135
|
$25,453
|
26
|
$7,238
|
a
|
||||||
| a. |
Includes
$0.3 million of previously deferred revenues related to a 2003 lot
sale at
the Mirador subdivision that we recognized in
2004.
|
Undeveloped
Property Sales.
During
the first quarter of 2006, we sold a 7.5-acre tract in the Barton Creek
community for $1.5 million. In April 2006, we sold a 58-acre tract at Lantana
to
AMD for $21.2 million of which $0.5 million represented a reimbursement of
certain costs which we recorded as a reduction of cost of sales. In the fourth
quarter of 2006, we sold an approximate 29-acre tract in Circle C for $2.7
million.
During
2005, we sold a 38-acre tract within the Barton Creek Community for $5.0 million
and a 42-acre tract within the Circle C community for $2.6 million.
During
2004, we sold 139 acres of the Meridian development within the Circle C
community for $5.6 million and an 83-acre estate lot within the Barton Creek
community for $1.8 million. Our other 2004 sales within the Circle C community
included two tracts totaling three acres for $1.4 million and an approximate
one-acre commercial tract for $0.5 million.
Commissions,
Management Fees and Other.
Commissions, management fees and other revenues totaled $1.8 million in 2006,
compared to $0.8 million in 2005, and included sales of our development fee
credits to third parties totaling $1.3 million in 2006 and $0.5 million in
2005.
We received these development fee credits as part of the Circle C settlement
(see Note 8).
Commissions,
management fees and other revenues totaled $0.8 million for 2005, compared
to
$0.4 million for 2004. These amounts included sales of our development fee
credits to third parties, totaling $0.5 million in 2005 and $0.1 million in
2004.
Cost
of Sales and General and Administrative Expenses.
Cost of
sales totaled $29.2 million in 2006 and $19.8 million in 2005. The increase
in
cost of sales for 2006 primarily relates to the increase in lot sales and other
land sales in 2006 compared to 2005. General and administrative expenses
increased to $6.3 million in 2006, compared to $4.3 million in 2005 primarily
because of higher compensation costs (see “Other Financial Results” below). Cost
of sales increased to $19.8 million in 2005 from $11.2 million in 2004. The
increase in cost of sales for 2005 compared to 2004 primarily relates to the
increase in developed property sales in 2005.
21
Commercial
Leasing
Our
commercial leasing operating results primarily reflect the activities at
Escarpment Village and two office buildings at 7500 Rialto Boulevard after
removing the results for 7000 West which are now classified as discontinued
operations (see “Discontinued Operations - 7000 West” below and Note 7). Summary
commercial leasing operating results follow (in thousands)
|
2006
|
2005
|
2004
|
|||||||
|
Rental
income
|
$
|
3,794
|
$
|
1,353
|
$
|
874
|
|||
|
Rental
property costs
|
(2,348
|
)
|
(1,456
|
)
|
(1,201
|
)
|
|||
|
Depreciation
|
(1,452
|
)
|
(613
|
)
|
(492
|
)
|
|||
|
General
and administrative expenses
|
(651
|
)
|
(673
|
)
|
(664
|
)
|
|||
|
Operating
loss
|
$
|
(657
|
)
|
$
|
(1,389
|
)
|
$
|
(1,483
|
)
|
In
2006,
we began earning rental income from our Escarpment Village project that was
substantially completed in the second quarter of 2006. Rental income from our
Escarpment Village project totaled $2.1 million in 2006. The balance of our
rental income in 2006 and all of the rental income in 2005 and 2004 is primarily
from one of our 7500 Rialto Boulevard office buildings. As discussed earlier,
in
September 2006, we completed construction of a second 75,000-square-foot office
building at 7500 Rialto Boulevard which is approximately 50 percent
leased.
Our
lease
agreement with the anchor tenant of Escarpment Village and our contract with
Trammell Crow, the firm managing Escarpment Village, contain provisions
requiring that we share the net profits from a sale of the project. The anchor
tenant and Trammell Crow are each entitled to 10 percent of any net profit
from
a sale of Escarpment Village after we receive a 12 percent return on our
investment. We paid the anchor tenant its net profits interest in December
2006
based upon a hypothetical sale at fair market value. We are required to pay
Trammell Crow its net profits interest upon a sale of the project, but no later
than May 2008. If the project is not sold prior to the deadline, then the net
profits calculation will be made based upon a hypothetical sale at fair market
value. As of December 31, 2006, we estimate the net profit payment due Trammell
Crow will total $0.4 million. The amount of the payment to the anchor tenant
($0.7 million) and the estimated payment to Trammell Crow are recorded in other
assets and are being amortized over the anchor tenant’s lease term (20 years) as
a reduction of rental income. The actual payment may vary from this amount
and
will be based on the sale price of Escarpment Village or the estimated fair
value of Escarpment Village, as applicable.
Other
Financial Results
Consolidated
general and administrative expenses increased to $6.9 million in 2006 from
$5.0
million in 2005, primarily because of higher compensation costs, including
stock-based compensation costs. On January 1, 2006, we adopted Statement of
Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” or
“SFAS No. 123R.” Stock-based compensation costs charged to general and
administrative expenses totaled $0.8 million in 2006, $0.3 million in 2005
and
$0.2 million in 2004.
Consolidated
general and administrative expenses totaled $5.0 million in 2005 and $4.5
million in 2004. The increase in 2005 compared to 2004 primarily relates to
higher personnel costs associated with additional projects under way in 2005
and
higher accounting fees related to expanded regulatory requirements.
Non-Operating
Results
Interest
expense, net of capitalized interest, totaled $1.1 million in 2006, $0.5 million
in 2005 and $0.3 million in 2004 (see Note 4). Capitalized interest totaled
$2.0
million in 2006, $3.3 million in 2005 and $2.4 million in 2004. The increase
in
net interest expense in 2006 is related to the financing for the now completed
Escarpment Village project which is no longer eligible for
capitalization.
Interest
income totaled $0.4 million in 2006, $0.2 million in 2005 and $0.1 million
in
2004. Interest income included interest on Barton Creek Municipal Utility
District (MUD) reimbursements totaling $0.1 million in each of 2006 and
2005.
22
DISCONTINUED
OPERATIONS - 7000 WEST
In
the
fourth quarter of 2005, we committed to a plan to sell our office buildings
at
7000 West. On March 27, 2006, our wholly owned subsidiary, Stratus 7000 West
Joint Venture (7000 West JV), sold its two
70,000-square-foot
office buildings at 7000 West William Cannon Drive (7000 West), known as the
Lantana Corporate Center, to
CarrAmerica Lantana, LP (CarrAmerica) for
$22.3
million, resulting in a gain of $9.8 million ($8.3 million net of taxes or
$1.13
per basic share and $1.08 per diluted share) in 2006. CarrAmerica
paid us $10.6 million cash at closing and assumed the $11.7 million principal
balance remaining under our 7000 West project loan from Teachers
Insurance and Annuity Association of America (TIAA).
In
connection with CarrAmerica’s assumption of the loan, 7000 West JV entered into
a First Modification Agreement with CarrAmerica and TIAA under which TIAA
released 7000 West JV’s $3.5 million letter of credit issued by Comerica Bank
that secured certain re-tenanting obligations and released 7000 West JV from
all
future obligations under the loan. In addition, TIAA released us from all future
liabilities under our guaranty of 7000 West JV’s environmental representations
and recourse obligations under the loan.
Upon
completion of the sale of 7000 West, Stratus ceased all involvement with the
7000 West office buildings. The operations, assets and liabilities of 7000
West
represented a component of our commercial leasing segment.
Our
discontinued operations generated net income of $8.6 million, including an
$8.3
million net gain on the sale of 7000 West. Net income from discontinued
operations totaled $0.5 million in 2005 and $0.6 million in 2004. We earned
rental income of $1.1 million in 2006, $3.6 million in 2005 and $3.2 million
in
2004 from the two fully leased office buildings at 7000 West. Rental property
costs in 2004 were reduced by $0.7 million for reimbursement of certain building
repairs received from a settlement with the general contractor responsible
for
construction of the 7000 West office buildings.
CAPITAL
RESOURCES AND LIQUIDITY
Comparison
Of Year-To-Year Cash Flows
Although
at December 31, 2006, we had a $4.9 million working capital deficit, we believe
that we have adequate funds available from our revolving credit facility ($42.0
million at December 31, 2006) and projected operating cash flows to meet our
working capital requirements. Operating activities provided cash of $44.3
million in 2006, $37.4 million in 2005 and $10.0 million in 2004, including
cash
provided by discontinued operations totaling $0.4 million in 2006, $1.3 million
in 2005 and $0.7 million in 2004. Compared to 2005, operating cash flows in
2006
improved primarily because of the increase in sales activities. Compared to
2004, operating cash flows in 2005 improved primarily because of the increase
in
sales activities and working capital changes.
Cash
used
in investing activities before discontinued operations totaled $52.0 million
in
2006. Discontinued operations in 2006 provided $10.0 million from the March
2006
sale of 7000 West (see “Discontinued Operations - 7000 West” and Note 7). Cash
used in investing activities totaled $39.3 million in 2005 and $21.7 million
in
2004, including less than $0.1 million used in discontinued operations in each
of the two years. In December 2006, we acquired approximately two acres
comprising a city block in downtown Austin, Texas, for $15.1 million. Other
real
estate development expenditures for 2006 and 2005 included development costs
for
properties in the Barton Creek, Lantana and Circle C communities. We acquired
our Deerfield property for $7.0 million in 2004 and have continued to develop
the property. Other real estate expenditures for 2004 included improvements
to
certain properties in the Barton Creek and Circle C communities. Commercial
leasing expenditures for 2006 primarily related to the second building at 7500
Rialto Boulevard, which was completed in September 2006. In 2005 and 2004,
development of our commercial leasing properties included the completion of
certain tenant improvements to our 7500 Rialto Boulevard office building.
Expenditures were partly offset by MUD reimbursements of $1.3 million in 2006,
$4.6 million in 2005 and $0.9 million in 2004.
23
During
2006, our financing activities included $22.8 million received from a 30-year
mortgage on Escarpment Village and net repayments of $12.7 million on our
revolving line of credit and $24.6 million on our project construction loans,
including repayments of $6.5 million on the 7500 Rialto Boulevard project loan
and $2.9 million on the Deerfield loan and net repayments of $5.3 million on
the
Meridian project loan and $9.9 million on the Escarpment Village project loan.
In December 2006, we entered into two separate new loan agreements with First
American Asset Management (FAAM) to borrow $15.0 million to fund the purchase
of
the land being used in connection with our Block 21 project. Financing
activities provided cash of $3.4 million in 2005 and $8.7 million in 2004,
including net cash provided by (used in) discontinued operations totaling $(0.2)
million in 2005 and $0.1 million in 2004. During 2005, our financing activities
reflected $4.7 million of net payments under our revolving line of credit and
$11.3 million of net borrowings from our project construction loans, including
$5.3 million of net borrowings from the Meridian project loan, $9.9 million
of
borrowings from the Escarpment Village project loan, net payments of $2.6
million on the Deerfield project loan and final payment of $1.2 million on
the
Calera Court project loan. During 2004, our financing activities included $0.5
million of net payments on our revolving line of credit and $8.6 million of
net
borrowings from our project construction loans, including net borrowings of
$5.5
million from the Deerfield loan and $1.2 million from the Calera Court project
loan. See “Credit Facility and Other Financing Arrangements” below for a
discussion of our outstanding debt at December 31, 2006.
In
2001,
our Board of Directors approved an open market share purchase program for up
to
0.7 million shares of our common stock. During 2006, we purchased 22,806 shares
for $0.6 million, a $24.77 per share average. A total of 469,810 shares remain
available under this program. During 2005, we purchased 188,995 shares for
$3.3
million, a $17.68 per share average, including a privately negotiated purchase
of 125,316 shares from a former executive for $2.3 million, an $18.13 per share
average. The transaction was based on market prices of our common stock. During
2004, we purchased 18,389 shares of our common stock for $0.2 million, a $13.47
per share average. Our loan agreement with Comerica provides a limit of $6.5
million for common stock purchases after September 30, 2005 of which $5.9
million is available at December 31, 2006. The timing of future purchases of
our
common stock is dependent on many factors including the price of our common
shares, our cash flows and financial position, and general economic and market
conditions.
The
following table summarizes our contractual cash obligations as of December
31,
2006 (in thousands):
|
2007
|
2008
|
2009
|
2010
|
2011
|
Thereafter
|
Total
|
||||||||||||||
|
Debt
|
$
|
311
|
$
|
3,329
|
$
|
348
|
$
|
368
|
$
|
25,389
|
$
|
20,930
|
$
|
50,675
|
||||||
|
Construction
contracts
|
5,770
|
-
|
-
|
-
|
-
|
-
|
5,770
|
|||||||||||||
|
Operating
lease
|
102
|
32
|
27
|
-
|
-
|
-
|
161
|
|||||||||||||
|
Total
|
$
|
6,183
|
$
|
3,361
|
$
|
375
|
$
|
368
|
$
|
25,389
|
$
|
20,930
|
$
|
56,606
|
||||||
We
had
commitments under non-cancelable open contracts totaling $5.8 million at
December 31, 2006. These commitments include the following contracts that we
entered into in 2006:
| · |
Three
contracts totaling $4.2 million for infrastructure work in connection
with
new residential subdivisions at Barton Creek with a remaining balance
of
$1.5 million at December 31, 2006;
|
| · |
A
$3.4 million contract for the construction of a 20,000-square-foot
retail
and office center at Barton Creek with a remaining balance of $1.0
million
at December 31, 2006;
|
| · |
A
$1.0 million contract for the construction of a recreational center
at
Meridian in Circle C with the entire balance outstanding at December
31,
2006; and
|
| · |
Two
contracts totaling $2.3 million for infrastructure work at Meridian
with a
remaining balance of $2.0 million at December 31,
2006.
|
In
addition to the contracts noted above, we also had $0.3 million of outstanding
commitments at December 31, 2006, on other ongoing Lantana, Meridian and Barton
Creek development contracts.
In
early
2007, we entered into additional contracts for $3.5 million for infrastructure
work associated with new residential subdivisions at Barton
Creek.
24
For
a
further discussion of our debt obligations, see “Credit Facility and Other
Financing Arrangements” below. In addition to our contractual obligations, we
have $3.0 million in other liabilities in the accompanying consolidated balance
sheets representing our indemnification of the purchaser for any future
abandonment costs in excess of net revenues received by the purchaser in
connection with the sale of an oil and gas property in 1993, as further
discussed in Note 8. The timing and final amount of any payment is currently
uncertain.
Credit
Facility and Other Financing Arrangements
A
summary
of our outstanding borrowings (in thousands) and a discussion of our financing
arrangements follow (excludes 7000 West project loan, see “Discontinued
Operations - 7000 West”).
|
December
31,
|
||||||
|
2006
|
2005
|
|||||
|
Comerica
revolving credit facility
|
$
|
3,000
|
$
|
15,677
|
||
|
Unsecured
term loans
|
25,000
|
10,000
|
||||
|
TIAA
mortgage
|
22,675
|
-
|
||||
|
7500
Rialto Boulevard project loan
|
-
|
6,461
|
||||
|
Deerfield
loan
|
-
|
2,943
|
||||
|
Escarpment
Village project loan
|
-
|
9,936
|
||||
|
Meridian
project loan
|
-
|
5,287
|
||||
|
Total
debt
|
$
|
50,675
|
$
|
50,304
|
||
Comerica
Revolving Credit Facility.
In
September 2005, we entered into a loan agreement with Comerica to replace our
existing $30.0 million revolving credit facility with Comerica. The loan
agreement provided for a $45.0 million revolving credit facility, of which
$3.0
million was provided for the Calera Court project. The facility sets limitations
on liens and limitations on transactions with affiliates, and requires that
certain financial ratios be maintained. The facility allows us to purchase
up to
$6.5 million of our outstanding common stock after September 30, 2005. Amounts
borrowed under the facility bear interest at a minimum annual rate of 5.0
percent or, at our option, Comerica’s prime rate plus 0.5 percent or London
Interbank Offered Rate (LIBOR) plus 2.5 percent. Our obligations under the
facility are secured by our properties within the Barton Creek community and
certain of our properties within Lantana and the Circle C
community.
In
May
2006, we entered into a modification and extension agreement to extend the
maturity and decrease the interest rate on our Comerica revolving credit
facility. The maturity date was extended from May 30, 2007 to May 30, 2008
and
interest accrues, at our option, at Comerica’s rate minus 0.8 percent or
one-month LIBOR plus 1.95 percent, subject to a minimum annual rate of 5.0
percent. The available commitment of $45 million and other conditions and
security remain unchanged. At December 31, 2006, we had $3.0 million outstanding
under the revolving credit facility.
Unsecured
Term Loans.
In 2000
and 2001, we obtained two $5.0 million five-year unsecured term loans from
FAAM
(see Note 4). The
proceeds of the loans were used to fund our operations and for other general
corporate purposes. Effective December 15, 2004, we amended the two loans to
extend their respective prior maturities of January 2006 to January 2008 and
July 2006 to July 2008. In accordance with the amendments, interest accrued
on
the loans at a rate of one-month LIBOR plus 4.5 percent and was payable monthly.
The interest rate was 8.8 percent on December 31, 2005. In December 2006, we
amended our two unsecured $5.0 million term loans with FAAM. The amended
agreements extend the maturities of both loans to December 31, 2011, and
decrease the annual interest rates applicable to amounts borrowed under both
loans to 6.56 percent.
In
December 2006, we also entered into two separate new loan agreements with FAAM
to borrow an additional $15.0 million to fund the purchase of the land being
used in connection with our Block 21 project. The new loans mature on December
31, 2011, and amounts borrowed under both loans bear interest at an annual
rate
of 6.56 percent. Our obligations under the FAAM loan agreements are
unsecured.
25
TIAA
Mortgage.
In June
2006, we entered into a 30-year, $22.8 million mortgage with a 10-year balloon
payment from TIAA. Proceeds from the mortgage were used to repay outstanding
amounts under our Escarpment Village shopping center project loan and other
outstanding project loan balances. The annual interest rate on the mortgage
is
5.55 percent. The Escarpment Village shopping center and the related lease
agreements are security for the loan.
Project
Loans.
As
discussed above, in 2006, we used borrowings from the TIAA mortgage to pay
the
outstanding balances of its project loans. Descriptions of these project loans
follow:
· 7500
Rialto Boulevard Project Loan.
In 2001,
we secured an $18.4 million project loan facility with Comerica for the
construction of two office buildings at 7500 Rialto Boulevard. Borrowings under
this project loan funded the construction of the first office building and
related parking garage. This variable-rate project loan facility is secured
by
the land and buildings in the project. We may make additional borrowings under
this facility to fund certain tenant improvements. Effective November 15, 2005,
we restructured our 7500 Rialto Boulevard project loan and extended its maturity
from January 2006 to January 2008. Under the terms of the loan modification
agreement, the commitment under the facility was reduced to $6.8
million.
· Deerfield
Loan.
On
February 27, 2004, we entered into a loan agreement with Comerica for $9.8
million with a maturity date of February 27, 2007. The timing of advances
received and payments made under the loan coincides with the development and
lot
purchase schedules.
· Escarpment
Village Project Loan.
In
December 2004, we executed a Promissory Note and a Construction Loan Agreement
with Comerica for an $18.5 million loan to be used for the construction of
Escarpment Village. The loan has a maturity date of June 2007, with a one-year
extension option subject to certain terms and conditions.
· Meridian
Project Loan.
In May
2005, we executed a development loan agreement with Comerica for a $10.0 million
loan to fund the development of single-family residential lots at Meridian.
The
loan has a maturity date of November 2007.
CRITICAL
ACCOUNTING POLICIES
Management’s
discussion and analysis of our financial condition and results of operations
are
based on our consolidated financial statements, which have been prepared in
conformity with accounting principles generally accepted in the United States
of
America. The preparation of these statements requires that we make estimates
and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. We base these estimates on historical experience and on
assumptions that we consider reasonable under the circumstances; however,
reported results could differ from those based on the current estimates under
different assumptions and/or conditions. The areas requiring the use of
management’s estimates are discussed in Note 1 to our consolidated financial
statements under the heading “Use of Estimates.” We believe that our most
critical accounting policies relate to our valuation of investment real estate
and commercial leasing assets, our allocation of indirect costs, revenue
recognition, valuation allowances for deferred tax assets and our
indemnification of the purchaser of an oil and gas property from us for any
abandonment costs.
Management
has reviewed the following discussion of its development and selection of
critical accounting estimates with the Audit Committee of our Board of
Directors.
· Investment
in Real Estate and Commercial Leasing Assets.
Real
estate held for sale is stated at the lower of cost or fair value less costs
to
sell and includes acreage, development, construction and carrying costs and
other related costs through the development stage. Commercial leasing assets,
which are held for use, are stated at cost. When events or circumstances
indicate than an asset’s carrying amount may not be recoverable, an impairment
test is performed in accordance with the provisions of SFAS No. 144, “Accounting
for the Impairment or Disposal of Long-Lived Assets.” For properties held for
26
sale,
if
estimated fair value less costs to sell is less than the related carrying
amount, then a reduction of the assets carrying value to fair value less costs
to sell is required. For properties held for use, if the projected undiscounted
cash flow from the asset is less than the related carrying amount, then a
reduction of the carrying amount of the asset to fair value is required.
Measurement of the impairment loss is based on the fair value of the asset.
Generally, we determine fair value using valuation techniques such as discounted
expected future cash flows.
Our
expected future cash flows are affected by many factors including:
| a) |
The
economic condition of the Austin, Texas,
market;
|
| b) |
The
performance of the real estate industry in the markets where our
properties are located;
|
| c) |
Our
financial condition, which may influence our ability to develop our
real
estate; and
|
| d) |
Governmental
regulations.
|
Because
any one of these factors could substantially affect our estimate of future
cash
flows, this is a critical accounting policy because these estimates could result
in us either recording or not recording an impairment loss based on different
assumptions. Impairment losses are generally substantial charges. We have not
recorded any such impairment charges since recording a $115 million charge
in
1994. Any impairment charge would more likely than not have a material effect
on
our results of operations.
The
estimate of our future revenues is also important because it is the basis of
our
development plans and also a factor in our ability to obtain the financing
necessary to complete our development plans. If our estimates of future cash
flows from our properties differ from expectations, then our financial and
liquidity position may be compromised, which could result in our default under
certain debt instruments or result in our suspending some or all of our
development activities.
· Allocation
of Overhead Costs.
We
periodically capitalize a portion of our overhead costs and also allocate a
portion of these overhead costs to cost of sales based on the activities of
our
employees that are directly engaged in these activities. In order to accomplish
this procedure, we periodically evaluate our “corporate” personnel activities to
see what, if any, time is associated with activities that would normally be
capitalized or considered part of cost of sales. After determining the
appropriate aggregate allocation rates, we apply these factors to our overhead
costs to determine the appropriate allocations. This is a critical accounting
policy because it affects our net results of operations for that portion which
is capitalized. In accordance with paragraph 7 of SFAS No. 67, “Accounting for
Costs and Initial Rental Operations of Real Estate Projects,” we only capitalize
direct and indirect project costs associated with the acquisition, development
and construction of a real estate project. Indirect costs include allocated
costs associated with certain pooled resources (such as office supplies,
telephone and postage) which are used to support our development projects,
as
well as general and administrative functions. Allocations of pooled resources
are based only on those employees directly responsible for development (i.e.
project manager and subordinates). We charge to expense indirect costs that
do
not clearly relate to a real estate project such as salaries and allocated
expenses related to the Chief Executive Officer and Chief Financial
Officer.
· Revenue
Recognition.
In
accordance with SFAS No. 66, “Accounting for Sales of Real Estate,” we recognize
revenues from property sales when the risks and rewards of ownership are
transferred to the buyer, when the consideration received can be reasonably
determined and when we have completed our obligations to perform certain
supplementary development activities, if any exist, at the time of the sale
(see
Note 1). Consideration is reasonably determined and considered likely of
collection when we have signed sales agreements and have determined that the
buyer has demonstrated a commitment to pay. The buyer’s commitment to pay is
supported by the level of their initial investment, our assessment of the
buyer’s credit standing and our assessment of whether the buyer’s stake in the
property is sufficient to motivate the buyer to honor its obligation to us.
This
is a critical accounting policy because for certain sales, we use our judgment
to determine the buyer’s commitment to pay us and thus determine when it is
proper to recognize revenues.
27
We
recognize our rental income based on the terms of our signed leases with tenants
on a straight-line basis. We recognize sales commissions and management and
development fees when earned, as lots or acreage are sold or when the services
are performed.
· Deferred
Tax Assets.
Our
deferred tax assets at December 31, 2005, totaled $19.5 million primarily from
net operating loss credit carryforwards, and we had provided a 100 percent
valuation allowance because realization of the deferred tax assets was not
considered likely (see Note 5). In the first quarter of 2006, we sold 7000
West
(see Note 7) and in April 2006 we completed the sale of 58 acres at our Lantana
property. These transactions generated pre-tax income of $25.6 million and
along
with our current homebuilder contract arrangements and projected levels of
future sales provide sufficient evidence that we now believe it is more likely
than not that we will be able to realize all of our deferred tax assets. As
a
result, our net deferred tax assets at December 31, 2006, totaled $8.2 million,
net of $0.2 million valuation allowance. Realization of our deferred tax assets
is dependent on generating sufficient taxable income within the carryforward
period available under tax law. Should actual results differ materially from
our
estimates, we may need to reinstate a valuation allowance, which could
materially impact our results of operations and financial position in future
periods.
· Abandonment
Costs Indemnification.
In
connection with the sale of an oil and gas property in 1993, we indemnified
the
purchaser for any abandonment costs in excess of cumulative net revenues
received. Whether or not we ultimately will incur any cost as a result of this
indemnification is uncertain and will depend on a number of factors beyond
our
control, including actual oil and gas produced from the property, oil and gas
prices received and the level of operating and abandonment costs incurred by
the
third-party operator over the life of the property. We periodically assess
the
reasonableness of amounts recorded for this liability through the use of
information obtained from the operator of the property; however, the
availability of such information is limited, and there are numerous
uncertainties involved in estimating the related future revenues, operating
and
abandonment costs. Based
on
our assessment of the available information, we have determined that a loss
is
probable and
we have
recorded a liability of $3.0 million, which is included in “Other Liabilities”
in the accompanying consolidated balance sheets, representing our best estimate
of this potential liability. The carrying value of this liability may be
adjusted in future periods as additional information becomes
available,
but our
current estimate is that this liability will not exceed $9.0 million.
This
is a
critical accounting policy because of the significant judgments we must make
in
assessing the amount of any such liability, in light of the limited amount
of
information available to us and the uncertainty involved in projections of
future product prices and costs of any ultimate liability, which requires us
to
use significant judgment in determining the amount of our
liability.
DISCLOSURES
ABOUT MARKET RISKS
We
derive
our revenues from the management, development and sale of our real estate
holdings and rental of our office properties. Our results of operations can
vary
significantly with fluctuations in the market prices of real estate, which
are
influenced by numerous factors, including interest rate levels. Changes in
interest rates also affect interest expense on our debt. At the present time,
we
do not hedge our exposure to changes in interest rates. At December 31, 2006,
$3.0 million of our total outstanding debt of $50.7 million bears interest
at
variable rates. A change of 100 basis points in annual interest rates for this
variable-rate debt would not have a material impact on annual interest
costs.
ENVIRONMENTAL
Increasing
emphasis on environmental matters is likely to result in additional costs.
Our
future operations may require substantial capital expenditures, which could
adversely affect the development of our properties and results of operations.
Additional costs will be charged against our operations in future periods when
such costs can be reasonably estimated. We cannot at this time accurately
predict the costs associated with future environmental obligations. See “Risk
Factors.”
28
NEW
ACCOUNTING STANDARDS
Accounting
for Stock-Based Compensation.
As of
December 31, 2006, we had three stock-based employee compensation plans and
one
stock-based director compensation plan. Prior to January 1, 2006, we accounted
for options granted under all of our plans under the recognition and measurement
principles of Accounting Principles Board (APB) Opinion No. 25, “Accounting for
Stock Issued to Employees,” and related interpretations, as permitted by SFAS
No. 123, “Accounting for Stock-Based Compensation.” APB Opinion No. 25 required
compensation cost for stock options to be recognized based on the difference
on
the date of grant, if any, between the quoted market price of the stock and
the
amount an employee must pay to acquire the stock (i.e., the intrinsic value).
Because all our plans require that the option exercise price be at least the
market price on the date of grant, we recognized no compensation cost on the
grant or exercise of our employees’ options through December 31, 2005. Other
awards of restricted stock units under the plans did result in compensation
costs being recognized in earnings based on the intrinsic value on the date
of
grant.
Effective
January 1, 2006, we adopted the fair value recognition provisions of SFAS No.
123R, using the modified prospective transition method. Under that transition
method, compensation cost recognized in 2006 includes: (a) compensation costs
for all stock option awards granted to employees prior to, but not yet vested
as
of January 1, 2006, based on the grant-date fair value estimated in accordance
with the original provisions of SFAS No. 123, and (b) compensation costs for
all
stock option awards granted subsequent to January 1, 2006, based on the
grant-date fair value estimated in accordance with the provisions of SFAS No.
123R. Other stock-based awards charged to expense under SFAS No. 123 (i.e.,
restricted stock units) continue to be charged to expense under SFAS No. 123R
(see Note 1). Results for prior periods have not been restated.
As
a
result of adopting SFAS No. 123R on January 1, 2006, our net income for 2006,
was $0.7 million ($0.10 per basic share and $0.09 per diluted share) lower
than
if we had continued to account for share-based compensation under APB Opinion
No. 25.
Compensation
cost charged against earnings for stock-based awards is shown below (in
thousands). We capitalized $0.3 million of stock-based compensation costs to
fixed assets in 2006 and none in 2005 and 2004.
|
2006
|
2005
|
2004
|
|||||||
|
Cost
of sales
|
$
|
326
|
$
|
-
|
$
|
-
|
|||
|
General
and administrative expenses
|
769
|
310
|
226
|
||||||
|
Total
stock-based compensation cost
|
$
|
1,095
|
$
|
310
|
$
|
226
|
|||
Accounting
for Uncertainty in Income Taxes.
In June
2006, the Financial Accounting Standards Board issued Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes,” (FIN 48). FIN 48 clarifies the
accounting for income taxes by prescribing the minimum recognition threshold
a
tax position is required to meet before being recognized in the financial
statements. FIN 48 also provides guidance on derecognition, measurement,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. FIN 48 is effective for the first fiscal year
beginning after December 15, 2006. We are continuing to review the provisions
of
FIN 48, but at this time do not expect adoption to have a material impact on
our
financial statements.
Fair
Value Measurements. In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS
No. 157 establishes a framework for measuring fair value in generally accepted
accounting principles (GAAP), clarifies the definition of fair value within
that
framework, and expands disclosures about the use of fair value measurements.
In
many of its pronouncements, the FASB has previously concluded that fair value
information is relevant to the users of financial statements and has required
(or permitted) fair value as a measurement objective. However, prior to the
issuance of this statement, there was limited guidance for applying the fair
value measurement objective in GAAP. This statement does not require any new
fair value measurements in GAAP. SFAS No. 157 is effective for
29
fiscal
years beginning after November 15, 2007, with early adoption allowed. We are
still reviewing the provisions of SFAS No. 157 and have not determined the
impact of adoption.
CAUTIONARY
STATEMENT
Management’s
Discussion and Analysis of Financial Condition and Results of Operation and
Disclosures about Market Risks contains forward-looking statements regarding
future reimbursements for infrastructure costs, future events related to
financing and regulatory matters, the expected results of our business strategy,
and other plans and objectives of management for future operations and
activities. Important factors that could cause actual results to differ
materially from our expectations include economic and business conditions,
business opportunities that may be presented to and pursued by us, changes
in
laws or regulations and other factors, many of which are beyond our control,
and
other factors that are described in more detail under “Risk Factors” located in
Item 1 of this Form 10-K.
30
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO
THE
BOARD OF DIRECTORS AND STOCKHOLDERS OF STRATUS PROPERTIES INC.:
We
have
completed integrated audits of Stratus Properties Inc.’s 2006 and 2005
consolidated financial statements and of its internal control over financial
reporting as of December 31, 2006, and an audit of its 2004 consolidated
financial statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Our opinions, based on our audits,
are presented below.
Consolidated
financial statements and financial statement schedule
In
our
opinion, the consolidated financial statements listed in the index appearing
under Item 15(a)(1) present fairly, in all material respects, the financial
position of Stratus Properties Inc. and its subsidiaries at December 31, 2006
and 2005, and the results of their operations and their cash flows for each
of
the three years in the period ended December 31, 2006 in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the index
appearing under Item 15(a)(2) presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit of financial statements
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As
discussed in Note 1 to the consolidated financial statements, the Company
changed the manner in which it accounts for share-based compensation in
2006.
Internal
control over financial reporting
Also,
in
our opinion, management’s assessment, included in the accompanying Management's
Report on Internal Control Over Financial Reporting, that the Company maintained
effective internal control over financial reporting as of December 31,
2006 based
on
criteria established in Internal
Control - Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO),
is fairly stated, in all material respects, based on those criteria.
Furthermore, in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2006
based on criteria established in Internal
Control - Integrated Framework
issued
by the COSO. The Company’s management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility
is to express opinions on management’s assessment and on the effectiveness of
the Company’s internal control over financial reporting based on our audit. We
conducted our audit of internal control over financial reporting in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. An audit of internal control
over financial reporting includes obtaining an understanding of internal control
over financial reporting, evaluating management’s assessment, testing and
evaluating the design and operating effectiveness of internal control, and
performing such
31
other
procedures as we consider necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinions.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (i) pertain
to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors
of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
/s/
PricewaterhouseCoopers LLP
Austin,
Texas
March
15,
2007
32
MANAGEMENT’S
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Stratus
Properties Inc.’s (the Company’s) management is responsible for establishing and
maintaining adequate internal control over financial reporting. Internal control
over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) under the
Securities Exchange Act of 1934 as a process designed by, or under the
supervision of, the Company’s principal executive and principal financial
officers and effected by the Company’s Board of Directors, management and other
personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles and
includes those policies and procedures that:
| · |
Pertain
to the maintenance of records that in reasonable detail accurately
and
fairly reflect the transactions and dispositions of the Company’s
assets;
|
| · |
Provide
reasonable assurance that transactions are recorded as necessary
to permit
preparation of financial statements in accordance with generally
accepted
accounting principles, and that receipts and expenditures of the
Company
are being made only in accordance with authorizations of management
and
directors of the Company; and
|
| · |
Provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company’s assets that
could have a material effect on the financial
statements.
|
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Our
management, including our principal executive officer and principal financial
officer, assessed the effectiveness of our internal control over financial
reporting as of the end of the fiscal year covered by this annual report on
Form
10-K. In making this assessment, our management used the criteria set forth
in
Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Based on our management’s
assessment, management concluded that, as of December 31, 2006, our Company’s
internal control over financial reporting is effective based on the COSO
criteria.
PricewaterhouseCoopers
LLP, an independent registered public accounting firm, has issued their audit
report on our management’s assessment of the effectiveness of our internal
control over financial reporting as of December 31, 2006, as stated in their
report dated March 15, 2007, which is included herein.
|
/s/
William H. Armstrong III
|
/s/
John E. Baker
|
|
William
H. Armstrong III
|
John
E. Baker
|
|
Chairman
of the Board, President
|
Senior
Vice President
|
|
and
Chief Executive Officer
|
and
Chief Financial Officer
|
33
STRATUS
PROPERTIES INC.
CONSOLIDATED
BALANCE SHEETS
(In
Thousands, Except Par Value)
|
December
31,
|
||||||
|
2006
|
2005
|
|||||
|
ASSETS
|
||||||
|
Current
assets:
|
||||||
|
Cash
and cash equivalents, including restricted cash of
|
||||||
|
$116
and $387, respectively (Note 6)
|
$
|
1,955
|
$
|
1,901
|
||
|
Accounts
receivable
|
934
|
469
|
||||
|
Deposits,
prepaid expenses and other
|
3,700
|
849
|
||||
|
Deferred
tax asset
|
1,144
|
-
|
||||
|
Discontinued
operations (Note 7)
|
-
|
12,230
|
||||
|
Total
current assets
|
7,733
|
15,449
|
||||
|
Real
estate, commercial leasing assets and facilities, net:
|
||||||
|
Property
held for sale - developed or under development
|
116,865
|
127,450
|
||||
|
Property
held for sale - undeveloped
|
16,345
|
16,071
|
||||
|
Property
held for use, net
|
46,702
|
9,452
|
||||
|
Investment
in Crestview
|
3,800
|
3,800
|
||||
|
Deferred
tax asset
|
7,105
|
-
|
||||
|
Other
assets
|
5,400
|
1,664
|
||||
|
Total
assets
|
$
|
203,950
|
$
|
173,886
|
||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||
|
Current
liabilities:
|
||||||
|
Accounts
payable and accrued liabilities
|
$
|
5,988
|
$
|
6,305
|
||
|
Accrued
interest, property taxes and other
|
6,290
|
3,710
|
||||
|
Current
portion of long-term debt
|
311
|
169
|
||||
|
Discontinued
operations (Note 7)
|
-
|
12,036
|
||||
|
Total
current liabilities
|
12,589
|
22,220
|
||||
|
Long-term
debt (Note 4)
|
50,364
|
50,135
|
||||
|
Other
liabilities
|
7,051
|
7,364
|
||||
|
Total
liabilities
|
70,004
|
79,719
|
||||
|
Commitments
and contingencies (Note 8)
|
||||||
|
Stockholders’
equity:
|
||||||
|
Preferred
stock, par value $0.01 per share, 50,000 shares authorized
|
||||||
|
and
unissued
|
-
|
-
|
||||
|
Common
stock, par value $0.01 per share, 150,000 shares
authorized,
|
||||||
|
8,057
and 7,485 shares issued, respectively and
|
||||||
|
7,531
and 7,217 shares outstanding, respectively
|
81
|
74
|
||||
|
Capital
in excess of par value of common stock
|
188,873
|
182,007
|
||||
|
Accumulated
deficit
|
(42,655
|
)
|
(82,943
|
)
|
||
|
Unamortized
value of restricted stock units
|
-
|
(567
|
)
|
|||
|
Common
stock held in treasury, 526 shares and 268 shares,
|
||||||
|
at
cost, respectively
|
(12,353
|
)
|
(4,404
|
)
|
||
|
Total
stockholders’ equity
|
133,946
|
94,167
|
||||
|
Total
liabilities and stockholders' equity
|
$
|
203,950
|
$
|
173,886
|
||
The
accompanying notes are an integral part of these consolidated financial
statements.
34
STRATUS
PROPERTIES INC.
CONSOLIDATED
STATEMENTS OF INCOME
(In
Thousands, Except Per Share Amounts)
|
Years
Ended December 31,
|
|||||||||
|
2006
|
2005
|
2004
|
|||||||
|
Revenues:
|
|||||||||
|
Real
estate
|
$
|
58,388
|
$
|
33,003
|
$
|
16,430
|
|||
|
Rental
income
|
3,794
|
1,353
|
874
|
||||||
|
Commissions,
management fees and other
|
1,825
|
838
|
421
|
||||||
|
Total
revenues
|
64,007
|
35,194
|
17,725
|
||||||
|
Cost
of sales (Note 1):
|
|||||||||
|
Real
estate, net
|
29,096
|
19,625
|
11,119
|
||||||
|
Rental
|
2,348
|
1,456
|
1,201
|
||||||
|
Depreciation
|
1,579
|
758
|
615
|
||||||
|
Total
cost of sales
|
33,023
|
21,839
|
12,935
|
||||||
|
General
and administrative expenses
|
6,931
|
5,019
|
4,452
|
||||||
|
Total
costs and expenses
|
39,954
|
26,858
|
17,387
|
||||||
|
Operating
income
|
24,053
|
8,336
|
338
|
||||||
|
Interest
expense, net
|
(1,139
|
)
|
(529
|
)
|
(309
|
)
|
|||
|
Interest
income
|
416
|
226
|
70
|
||||||
|
Income
from continuing operations before income taxes
|
23,330
|
8,033
|
99
|
||||||
|
Benefit
from (provision for) income taxes
|
8,344
|
(73
|
)
|
-
|
|||||
|
Income
from continuing operations
|
31,674
|
7,960
|
99
|
||||||
|
Income
from discontinued operations (Note 7)
|
|||||||||
|
(including
a gain on sale of $8,261 in 2006,
|
|||||||||
|
net
of taxes of $1,501)
|
8,614
|
514
|
573
|
||||||
|
Net
income applicable to common stock
|
$
|
40,288
|
$
|
8,474
|
$
|
672
|
|||
|
Basic
net income per share of common stock:
|
|||||||||
|
Continuing
operations
|
$
|
4.33
|
$
|
1.11
|
$
|
0.01
|
|||
|
Discontinued
operations
|
1.18
|
0.07
|
0.08
|
||||||
|
Basic
net income per share of common stock
|
$
|
5.51
|
$
|
1.18
|
$
|
0.09
|
|||
|
Diluted
net income per share of common stock:
|
|||||||||
|
Continuing
operations
|
$
|
4.14
|
$
|
1.04
|
$
|
0.01
|
|||
|
Discontinued
operations
|
1.12
|
0.07
|
0.08
|
||||||
|
Diluted
net income per share of common stock
|
$
|
5.26
|
$
|
1.11
|
$
|
0.09
|
|||
|
Average
shares of common stock outstanding:
|
|||||||||
|
Basic
|
7,306
|
7,209
|
7,196
|
||||||
|
Diluted
|
7,658
|
7,636
|
7,570
|
||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
35
STRATUS
PROPERTIES INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
Thousands)
|
Years
Ended December 31,
|
|||||||||
|
2006
|
2005
|
2004
|
|||||||
|
Cash
flow from operating activities:
|
|||||||||
|
Net
income
|
$
|
40,288
|
$
|
8,474
|
$
|
672
|
|||
|
Adjustments
to reconcile net income to net cash provided
|
|||||||||
|
by
operating activities:
|
|||||||||
|
Income
from discontinued operations
|
(8,614
|
)
|
(514
|
)
|
(573
|
)
|
|||
|
Depreciation
|
1,579
|
758
|
615
|
||||||
|
Cost
of real estate sold
|
23,827
|
17,057
|
8,938
|
||||||
|
Deferred
income taxes
|
(6,431
|
)
|
-
|
-
|
|||||
|
Stock-based
compensation
|
1,095
|
310
|
226
|
||||||
|
Loan
deposits and deposits for infrastructure development
|
(3,001
|
)
|
(274
|
)
|
(1,320
|
)
|
|||
|
Long-term
notes receivable
|
-
|
789
|
(615
|
)
|
|||||
|
Other
|
(1,748
|
)
|
1,021
|
(511
|
)
|
||||
|
(Increase)
decrease in working capital:
|
|||||||||
|
Accounts
receivable, prepaid expenses and other
|
(754
|
)
|
(366
|
)
|
503
|
||||
|
Accounts
payable, accrued liabilities and other
|
(2,297
|
)
|
8,859
|
1,394
|
|||||
|
Net
cash provided by continuing operations
|
43,944
|
36,114
|
9,329
|
||||||
|
Net
cash provided by discontinued operations
|
374
|
1,310
|
670
|
||||||
|
Net
cash provided by operating activities
|
44,318
|
37,424
|
9,999
|
||||||
|
Cash
flow from investing activities:
|
|||||||||
|
Purchases
and development of real estate properties
|
(36,278
|
)
|
(39,733
|
)
|
(21,463
|
)
|
|||
|
Development
of commercial leasing properties and other
|
|||||||||
|
expenditures
|
(17,015
|
)
|
(284
|
)
|
(1,099
|
)
|
|||
|
Municipal
utility district reimbursements
|
1,337
|
4,600
|
910
|
||||||
|
Investment
in Crestview
|
-
|
(3,800
|
)
|
-
|
|||||
|
Net
cash used in continuing operations
|
(51,956
|
)
|
(39,217
|
)
|
(21,652
|
)
|
|||
|
Net
cash provided by (used in) discontinued operations
|
10,022
|
(40
|
)
|
(36
|
)
|
||||
|
Net
cash used in investing activities
|
(41,934
|
)
|
(39,257
|
)
|
(21,688
|
)
|
|||
|
Cash
flow from financing activities:
|
|||||||||
|
Borrowings
from revolving credit facility
|
18,000
|
55,005
|
16,414
|
||||||
|
Payments
on revolving credit facility
|
(30,677
|
)
|
(59,684
|
)
|
(16,930
|
)
|
|||
|
Borrowings
from TIAA mortgage
|
22,800
|
-
|
-
|
||||||
|
Payments
on TIAA mortgage
|
(124
|
)
|
-
|
-
|
|||||
|
Borrowings
from unsecured term loans
|
15,000
|
-
|
-
|
||||||
|
Borrowings
from project loans
|
2,236
|
17,583
|
9,176
|
||||||
|
Repayments
on project loans
|
(26,863
|
)
|
(6,248
|
)
|
(610
|
)
|
|||
|
Net
(payments) proceeds from exercised stock options
|
(2,438
|
)
|
639
|
795
|
|||||
|
Excess
tax benefit from exercised stock options
|
1,111
|
-
|
-
|
||||||
|
Purchases
of Stratus common shares
|
(565
|
)
|
(3,342
|
)
|
(248
|
)
|
|||
|
Bank
credit facility fees
|
(810
|
)
|
(388
|
)
|
-
|
||||
|
Net
cash (used in) provided by continuing operations
|
(2,330
|
)
|
3,565
|
8,597
|
|||||
|
Net
cash (used in) provided by discontinued operations
|
-
|
(205
|
)
|
58
|
|||||
|
Net
cash (used in) provided by financing activities
|
(2,330
|
)
|
3,360
|
8,655
|
|||||
36
STRATUS
PROPERTIES INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS (Continued)
(In
Thousands)
|
Years
Ended December 31,
|
|||||||||
|
2006
|
2005
|
2004
|
|||||||
|
Net
increase (decrease) in cash and cash equivalents
|
54
|
1,527
|
(3,034
|
)
|
|||||
|
Cash
and cash equivalents at beginning of year
|
1,901
|
379
|
3,413
|
||||||
|
Cash
and cash equivalents at end of year
|
1,955
|
1,906
|
379
|
||||||
|
Less
cash at discontinued operations
|
-
|
(5
|
)
|
-
|
|||||
|
Less
cash restricted as to use
|
(116
|
)
|
(387
|
)
|
(124
|
)
|
|||
|
Unrestricted
cash and cash equivalents at end of year
|
$
|
1,839
|
$
|
1,514
|
$
|
255
|
|||
|
Supplemental
Information:
|
|||||||||
|
Interest
paid
|
$
|
1,071
|
$
|
1,085
|
$
|
972
|
|||
|
Income
taxes paid
|
$
|
952
|
$
|
-
|
$
|
-
|
|||
The
accompanying notes, which include information regarding noncash transactions,
are an integral part of these consolidated financial statements.
37
STRATUS
PROPERTIES INC.
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In
Thousands)
|
Years
Ended December 31,
|
|||||||||
|
2006
|
2005
|
2004
|
|||||||
|
Preferred
stock:
|
|||||||||
|
Balance
at beginning and end of year
|
$
|
-
|
$
|
-
|
$
|
-
|
|||
|
Common
stock:
|
|||||||||
|
Balance
at beginning of year representing 7,485 shares in 2006,
|
|||||||||
|
7,284
shares in 2005 and 7,179 shares in 2004
|
74
|
72
|
72
|
||||||
|
Exercise
of stock options and restricted stock representing 572
|
|||||||||
|
shares
in 2006, 201 shares in 2005 and 105 shares in 2004
|
7
|
2
|
-
|
||||||
|
Balance
at end of year representing 8,057 shares in 2006, 7,485
|
|||||||||
|
shares
in 2005 and 7,284 shares in 2004
|
81
|
74
|
72
|
||||||
|
Capital
in excess of par value:
|
|||||||||
|
Balance
at beginning of year
|
182,007
|
181,145
|
179,786
|
||||||
|
Stock-based
compensation expense, net of capitalized amounts
|
1,095
|
36
|
91
|
||||||
|
Exercised
stock options and other
|
4,660
|
826
|
744
|
||||||
|
Tax
benefit for stock option exercises
|
1,111
|
-
|
-
|
||||||
|
Restricted
stock units granted, net of forfeitures
|
-
|
-
|
524
|
||||||
|
Balance
at end of year
|
188,873
|
182,007
|
181,145
|
||||||
|
Accumulated
deficit:
|
|||||||||
|
Balance
at beginning of year
|
(82,943
|
)
|
(91,417
|
)
|
(92,089
|
)
|
|||
|
Net
income
|
40,288
|
8,474
|
672
|
||||||
|
Balance
at end of year
|
(42,655
|
)
|
(82,943
|
)
|
(91,417
|
)
|
|||
|
Unamortized
value of restricted stock units:
|
|||||||||
|
Balance
at beginning of year
|
(567
|
)
|
(841
|
)
|
(452
|
)
|
|||
|
Reclass
unamortized value of restricted stock units on adoption
|
|||||||||
|
of
new accounting standard
|
567
|
-
|
-
|
||||||
|
Deferred
compensation associated with restricted stock units, net
|
|||||||||
|
of
forfeitures
|
-
|
-
|
(524
|
)
|
|||||
|
Amortization
of related deferred compensation, net of forfeitures
|
-
|
274
|
135
|
||||||
|
Balance
at end of year
|
-
|
(567
|
)
|
(841
|
)
|
||||
|
Common
stock held in treasury:
|
|||||||||
|
Balance
at beginning of year representing 268 shares in 2006,
|
|||||||||
|
63
shares in 2005 and 44 shares in 2004
|
(4,404
|
)
|
(763
|
)
|
(496
|
)
|
|||
|
Shares
purchased representing 23 shares in 2006,
|
|||||||||
|
189
shares in 2005 and 18 shares in 2004
|
(565
|
)
|
(3,342
|
)
|
(248
|
)
|
|||
|
Tender
of 235 shares in 2006, 16 shares in 2005 and 1 share
|
|||||||||
|
in
2004 for exercised stock options and restricted stock
|
(7,384
|
)
|
(299
|
)
|
(19
|
)
|
|||
|
Balance
at end of year representing 526 shares in 2006,
|
|||||||||
|
268
shares in 2005 and 63 shares in 2004
|
(12,353
|
)
|
(4,404
|
)
|
(763
|
)
|
|||
|
Total
stockholders’ equity
|
$
|
133,946
|
$
|
94,167
|
$
|
88,196
|
|||
The
accompanying notes are an integral part of these consolidated financial
statements.
38
STRATUS
PROPERTIES INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1.
Summary
of Significant Accounting Policies
Operations
and Basis of Accounting.
The real
estate development and marketing operations of Stratus Properties Inc.
(Stratus), a Delaware Corporation, are conducted primarily in Austin, Texas,
through its wholly owned subsidiaries and through certain unconsolidated joint
ventures (see “Investment in Unconsolidated Affiliate” below and Note 3).
Stratus consolidates its wholly owned subsidiaries, which include: Stratus
Properties Operating Co., L.P.; Circle C Land, L.P.; Lantana Office Properties
I, L.P.; Austin 290 Properties, Inc.; Avalon Realty Company, L.L.C.; Stratus
Management L.L.C.; Stratus Realty Inc.; Longhorn Properties Inc.; Stratus
Investments L.L.C., STRS Plano, L.P., Southwest Property Services L.L.C.,
Stratus Block 21 Investments, L.P., Escarpment Village L.P.; Calera Court,
L.P.;
Meridian Development L.P.; Oly Stratus Barton Creek I JV and STRS L.L.C. All
significant intercompany transactions have been eliminated in consolidation.
In
the fourth quarter of 2005, Stratus committed to sell its investment in Stratus
7000 West Joint Venture (7000 West) and on March 27, 2006, Stratus sold 7000
West (see Note 7). As a result, 7000 West is reported as discontinued operations
and the consolidated financial statements for all prior periods have been
adjusted to reflect this presentation.
Investment
in Unconsolidated Affiliate.
Stratus
has a 50 percent interest in the Crestview Station project (see Note 3), which
it accounts for under the equity method in accordance with the provisions of
the
American Institute of Certified Accountants Statement of Position 78-9,
“Accounting for Investments in Real Estate Ventures.” Stratus has determined
that consolidation of the Crestview Station project is not required under the
provisions of Financial Accounting Standards Board Interpretation No. 46,
“Consolidation of Variable Interest Entities.”
Use
of Estimates.
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the amounts reported in these financial
statements and accompanying notes. The more significant estimates include
estimates of future cash flow from development and sale of real estate
properties, allocation of certain indirect costs, valuation allowances for
deferred tax assets, useful lives for depreciation and amortization and
abandonment costs for a previously owned oil and gas property. Actual results
could differ from those estimates.
Cash
Equivalents and Restricted Cash.
Highly
liquid investments purchased with maturities of three months or less are
considered cash equivalents. Restricted cash includes approximately $0.1 million
held at December 31, 2006 and December 31, 2005, representing funds held for
payment of fractional shares resulting from the May 2001 stock split (see Note
6). Restricted cash at December 31, 2005, also included $0.3 million from
Deerfield lot sales used for payment on the Deerfield loan during
2006.
Financial
Instruments.
The
carrying amounts of receivables, accounts payable and long-term debt reported
in
the accompanying consolidated balance sheets approximate fair value. Stratus
periodically evaluates its ability to collect its receivables. Stratus provides
an allowance for estimated uncollectible amounts if its evaluation provides
sufficient evidence of such amounts. Stratus believes all of its receivables
are
collectible and no allowances for doubtful accounts are included in the
accompanying consolidated balance sheets.
Investment
in Real Estate and Commercial Leasing Assets.
Real
estate held for sale is stated at the lower of cost or fair value less costs
to
sell, and includes acreage, development, construction and carrying costs, and
other related costs through the development stage. Commercial leasing assets,
which are held for use, are stated at cost. Capitalized costs are assigned
to
individual components of a project, as practicable, whereas interest and other
common costs are allocated based on the relative fair value of individual land
parcels. Certain carrying costs are capitalized on properties currently under
active development. Stratus recorded capitalized interest of $2.0 million in
2006, $3.3 million in 2005 and $2.4 million in 2004.
39
In
accordance with Statement of Financial Accounting Standards (SFAS) No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets,” when events or
circumstances indicate that an asset’s carrying amount may not be recoverable,
an impairment test is performed. Events
or
circumstances that Stratus considers indicators of impairment include
significant decreases in market values, adverse changes in regulatory
requirements (including environmental laws) and current period or projected
operating cash flow losses from rental properties. Impairment tests for
properties to be held and used, including rental properties, involve the use
of
estimated future net undiscounted cash flows expected to be generated from
the
use of the property and its eventual disposition. If
projected undiscounted cash flow from properties
to be held and used
is less
than the related carrying amount, then a reduction of the carrying amount of
the
long-lived asset to fair value is required. Measurement of the impairment loss
is based on the fair value of the asset. Generally, Stratus determines fair
value using valuation techniques such as discounted expected future cash flows.
Impairment
tests for properties held for sale, including undeveloped and developed
properties, involve management estimates of fair value based on estimated market
values for similar properties in similar locations and management estimates
of
costs to sell. If estimated fair value less costs to sell is less than the
related carrying amount, then a reduction of the long-lived asset to fair value
less costs to sell is required. No
impairment losses are reflected in the accompanying consolidated statements
of
income.
Accrued
Property Taxes.
Stratus
estimates its property tax accrual based on prior year property tax payments
and
other current events that may impact the payment. Upon receipt of the property
tax bill, Stratus adjusts its accrued property tax balance at year-end to the
actual amount of taxes due in January. Accrued property taxes totaled $2.0
million at December 31, 2006 and $1.5 million at December 31, 2005.
Depreciation.
Office
buildings are depreciated on a straight-line basis over their estimated 40-year
life. The retail buildings at Escarpment Village are depreciated on a
straight-line basis over their estimated 30-year life. Furniture, fixtures
and
equipment are depreciated on a straight-line basis over a five-year
period.
Revenue
Recognition.
Revenues
from property sales are recognized in accordance with SFAS No. 66, “Accounting
for Sales of Real Estate,” when the risks and rewards of ownership are
transferred to the buyer, when the consideration received can be reasonably
determined and when Stratus has completed its obligations to perform certain
supplementary development activities, if any exist, at the time of the sale.
Consideration is reasonably determined and considered likely of collection
when
Stratus has signed sales agreements and has determined that the buyer has
demonstrated a commitment to pay. The buyer’s commitment to pay is supported by
the level of their initial investment, Stratus’ assessment of the buyer’s credit
standing and Stratus’ assessment of whether the buyer’s stake in the property is
sufficient to motivate the buyer to honor their obligation to it.
Stratus
recognizes its rental income based on the terms of its signed leases with
tenants on a straight-line basis. Stratus recognizes sales commissions and
management and development fees when earned, as lots or acreage are sold or
when
the services are performed. A summary of Stratus’ revenues follows:
|
Years
Ended December 31,
|
|||||||||
|
2006
|
2005
|
2004
|
|||||||
|
(In
Thousands)
|
|||||||||
|
Revenues:
|
|||||||||
|
Developed
property sales
|
$
|
33,459
|
$
|
25,453
|
$
|
7,238
|
|||
|
Undeveloped
property sales
|
24,929
|
7,550
|
9,192
|
||||||
|
Rental
income
|
3,794
|
1,353
|
874
|
||||||
|
Commissions,
management fees and other
|
1,825
|
838
|
421
|
||||||
|
Total
revenues
|
$
|
64,007
|
$
|
35,194
|
$
|
17,725
|
|||
Cost
of Sales.
Cost of
sales includes the cost of real estate sold as well as costs directly
attributable to the properties sold such as marketing and depreciation. A
summary of Stratus’ cost of sales follows:
40
|
Years
Ended December 31,
|
|||||||||
|
2006
|
2005
|
2004
|
|||||||
|
(In
Thousands)
|
|||||||||
|
Cost
of developed property sales
|
$
|
19,627
|
$
|
13,023
|
$
|
3,504
|
|||
|
Cost
of undeveloped property sales
|
7,473
|
4,564
|
5,678
|
||||||
|
Rental
property costs
|
2,348
|
1,456
|
1,201
|
||||||
|
Allocation
of overhead costs (see below)
|
2,811
|
2,277
|
2,130
|
||||||
|
Municipal
utility district reimbursements
|
(92
|
)
|
(126
|
)
|
-
|
||||
|
Depreciation
|
1,579
|
758
|
615
|
||||||
|
Other,
net
|
(723
|
)
|
(113
|
)
|
(193
|
)
|
|||
|
Total
cost of sales
|
$
|
33,023
|
$
|
21,839
|
$
|
12,935
|
|||
Municipal
Utility District Reimbursements.
Stratus
receives Barton Creek Municipal Utility District (MUD) reimbursements from
the
City of Austin (the City) for certain infrastructure costs incurred. Prior
to
1996, Stratus expensed infrastructure costs as incurred. In 1996, Stratus began
capitalizing the infrastructure costs to the related properties. MUD
reimbursements received for infrastructure costs incurred prior to 1996 are
reflected as a reduction of cost of sales, while other MUD reimbursements
represent a reimbursement of basis in real estate properties and are recorded
as
a reduction of the related asset’s balance. Stratus has agreements with seven
independent MUDs in Barton Creek to build the MUDs’ utility systems and to be
eligible for future reimbursements for the related costs. The amount and timing
of MUD reimbursements depends upon the respective MUD having a sufficient tax
base within its district to issue bonds and being able to obtain the necessary
state approval for the sale of the bonds. Because the timing of the issuance
and
approval of the bonds is subject to considerable uncertainty, coupled with
the
fact that interest rates on such bonds cannot be fixed until they are approved,
the amounts associated with MUD reimbursements are not known until approximately
one month before the MUD reimbursements are received. MUD reimbursements
represent the actual amounts received.
Allocation
of Overhead Costs.
Stratus
has historically allocated a portion of its overhead costs to both capital
accounts (real estate, commercial leasing assets and facilities) and cost of
sales based on the percentage of time certain of its employees, comprising
its
indirect overhead pool, worked in the related areas (i.e. construction and
development for capital and sales and marketing for cost of sales). In
accordance with paragraph 7 of SFAS No. 67, “Accounting for Costs and Initial
Rental Operations of Real Estate Projects,” Stratus only capitalizes direct and
indirect project costs associated with the acquisition, development, and
construction of a real estate project. Indirect costs include allocated costs
associated with certain pooled resources (such as office supplies, telephone
and
postage) which are used to support Stratus’ development projects, as well as
general and administrative functions. Allocations of pooled resources are based
only on those employees directly responsible for development (i.e. project
manager and subordinates). Stratus charges to expense indirect costs that do
not
clearly relate to a real estate project, such as salaries and allocated expenses
related to the Chief Executive Officer and Chief Financial Officer.
Advertising
Costs.
Advertising costs are expensed as incurred and are included as a component
of
cost of sales. Advertising costs totaled $0.2 million in 2006, $0.2 million
in
2005 and $0.1 million in 2004.
Income
Taxes.
Stratus
follows the liability method of accounting for income taxes in accordance with
SFAS No. 109, “Accounting for Income Taxes.” Under this method, deferred tax
assets and liabilities are recorded for future tax consequences of temporary
differences between the financial reporting and tax basis of assets and
liabilities (see Note 5).
Earnings
Per Share.
Stratus’
basic net income per share of common stock was calculated by dividing the income
applicable to continuing operations, income from discontinued operations and
net
income applicable to common stock by the weighted average number of common
shares outstanding during the year. The following is a reconciliation of net
income and weighted average common shares outstanding for purposes of
calculating diluted net income per share (in thousands, except per share
amounts):
41
|
Years
Ended December 31,
|
|||||||||
|
2006
|
2005
|
2004
|
|||||||
|
Income
from continuing operations
|
$
|
31,674
|
$
|
7,960
|
$
|
99
|
|||
|
Income
from discontinued operations
|
8,614
|
514
|
573
|
||||||
|
Net
income applicable to common stock
|
$
|
40,288
|
$
|
8,474
|
$
|
672
|
|||
|
Weighted
average common shares outstanding
|
7,306
|
7,209
|
7,196
|
||||||
|
Add:
Dilutive stock options
|
314
|
418
|
340
|
||||||
|
Restricted stock
|
38
|
9
|
34
|
||||||
|
Weighted
average common shares outstanding for
|
|||||||||
|
purposes
of calculating diluted net income per share
|
7,658
|
7,636
|
7,570
|
||||||
|
Diluted
net income per share of common stock:
|
|||||||||
|
Continuing
operations
|
$
|
4.14
|
$
|
1.04
|
$
|
0.01
|
|||
|
Discontinued
operations
|
1.12
|
0.07
|
0.08
|
||||||
|
Diluted
net income per share of common stock
|
$
|
5.26
|
$
|
1.11
|
$
|
0.09
|
|||
Outstanding
stock options with exercise prices greater than the average market price of
the
common stock during the year are excluded from the computation of diluted net
income per share of common stock and are shown below.
|
Years
Ending December 31,
|
|||||
|
2006
|
2005
|
2004
|
|||
|
Outstanding
options (in thousands)
|
-
|
-
|
63
|
||
|
Average
exercise price
|
-
|
-
|
$13.97
|
||
Stock-Based
Compensation Plans.
As of
December 31, 2006, Stratus has three stock-based employee compensation plans
and
one stock-based director compensation plan, which are more fully described
in
Note 6. Prior to January 1, 2006, Stratus accounted for options granted under
all of its plans under the recognition and measurement principles of Accounting
Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to
Employees,” and related interpretations, as permitted by SFAS No. 123,
“Accounting for Stock-Based Compensation.” APB Opinion No. 25 required
compensation cost for stock options to be recognized based on the difference
on
the date of grant, if any, between the quoted market price of the stock and
the
amount an employee must pay to acquire the stock (i.e., the intrinsic value).
Because all the plans require that the option exercise price be at least the
market price on the date of grant, Stratus recognized no compensation cost
on
the grant or exercise of its employees’ options through December 31, 2005. Prior
to 2007, Stratus defined the market price as the average of the high and low
price of Stratus common stock on the date of grant. Effective March 2007, in
response to new Securities and Exchange Commission disclosure rules, Stratus
now
defines the market price for future grants as the closing price of Stratus
common stock on the date of grant. Other
awards of restricted stock units under the plans did result in compensation
costs being recognized in earnings based on the intrinsic value on the date
of
grant.
Effective
January 1, 2006, Stratus adopted the fair value recognition provisions of SFAS
No. 123 (revised 2004), “Share-Based Payment” or “SFAS No. 123R,” using the
modified prospective transition method. Under that transition method,
compensation cost recognized in 2006 includes: (a) compensation costs for all
stock option awards granted to employees prior to but not yet vested as of
January 1, 2006, based on the grant-date fair value estimated in accordance
with
the original provisions of SFAS No. 123, and (b) compensation costs for all
stock option awards granted subsequent to January 1, 2006, based on the
grant-date fair value estimated in accordance with the provisions of SFAS No.
123R. In addition, other stock-based awards charged to expense under SFAS No.
123 (i.e., restricted stock units) continue to be charged to expense under
SFAS
No. 123R. Results for prior periods have not been restated. Stratus has elected
to recognize compensation costs for awards that vest over several years on
a
straight-line basis over the vesting period. Stratus’ stock option awards
provide for employees to receive the next year’s vesting after an employee
retires. For stock option awards granted after January 1, 2006, to
retirement-
42
eligible
employees, Stratus records one year of amortization of the awards’ value on the
date of grant. In addition, prior to adoption of SFAS No. 123R, Stratus
recognized forfeitures as they occurred in its SFAS No. 123 pro forma
disclosures. Beginning January 1, 2006, Stratus includes estimated forfeitures
in its compensation cost and updates the estimated forfeiture rate through
the
final vesting date of the awards.
As
a
result of adopting SFAS No. 123R on January 1, 2006, Stratus’ net income for the
year ended December 31, 2006, was $0.7 million ($0.10 per basic share and $0.09
per diluted share) lower than if it had continued to account for share-based
compensation under APB Opinion No. 25.
The
following table illustrates the effect on net income and earnings per share
for
the years ended December 31, 2005 and 2004, if Stratus had applied the fair
value recognition provisions of SFAS No. 123 to stock-based awards granted
under
Stratus’ stock-based compensation plans (in thousands, except per share
amounts):
|
2005
|
2004
|
|||||
|
Net
income applicable to common stock, as reported
|
$
|
8,474
|
$
|
672
|
||
|
Add:
Stock-based employee compensation expense
|
||||||
|
included
in reported net income applicable to common
|
||||||
|
stock
for restricted stock units
|
274
|
148
|
||||
|
Deduct:
Total stock-based employee compensation
|
||||||
|
expense
determined under fair value-based method
|
||||||
|
for
all awards
|
(937
|
)
|
(667
|
)
|
||
|
Pro
forma net income applicable to common stock
|
$
|
7,811
|
$
|
153
|
||
|
Earnings
per share:
|
||||||
|
Basic
- as reported
|
$
|
1.18
|
$
|
0.09
|
||
|
Basic
- pro forma
|
$
|
1.08
|
$
|
0.02
|
||
|
Diluted
- as reported
|
$
|
1.11
|
$
|
0.09
|
||
|
Diluted
- pro forma
|
$
|
1.03
|
$
|
0.02
|
||
For
the
pro forma computations, the values of option grants were calculated on the
dates
of grant using the Black-Scholes option-pricing model and amortized to expense
on a straight-line basis over the options’ vesting periods. No other discounts
or restrictions related to vesting or the likelihood of vesting of stock options
were applied. The following table summarizes the calculated average fair values
and weighted-average assumptions used to determine the fair value of Stratus’
stock option grants under SFAS No. 123 during the years ended December 31,
2005
and 2004.
|
2005
|
2004
|
|||
|
Options
granted
|
7,750
|
117,500
|
||
|
Fair
value per stock option
|
$11.48
|
$10.29
|
||
|
Risk-free
interest rate
|
4.33
|
%
|
4.39
|
%
|
|
Expected
volatility rate
|
46.2
|
%
|
48.7
|
%
|
|
Expected
life of options (in years)
|
10
|
10
|
New
Accounting Standards.
Accounting
for Uncertainty in Income Taxes.
In June
2006, the Financial Accounting Standards Board (FASB) issued Interpretation
No.
48, “Accounting for Uncertainty in Income Taxes,” (FIN 48). FIN 48 clarifies the
accounting for income taxes by prescribing the minimum recognition threshold
a
tax position is required to meet before being recognized in the financial
statements. FIN 48 also provides guidance on derecognition, measurement,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. FIN 48 is effective for the first fiscal year
beginning after December 15, 2006. Stratus is continuing to review the
provisions of FIN 48, but at this time does not expect adoption to have a
material impact on its financial statements.
Fair
Value Measurements. In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS
No. 157 establishes a framework for measuring fair value in generally accepted
43
accounting
principles (GAAP), clarifies the definition of fair value within that framework,
and expands disclosures about the use of fair value measurements. In many of
its
pronouncements, the FASB has previously concluded that fair value information
is
relevant to the users of financial statements and has required (or permitted)
fair value as a measurement objective. However, prior to the issuance of this
statement, there was limited guidance for applying the fair value measurement
objective in GAAP. This statement does not require any new fair value
measurements in GAAP. SFAS No. 157 is effective for fiscal years beginning
after
November 15, 2007, with early adoption allowed. Stratus is still reviewing
the
provisions of SFAS No. 157 and has not determined the impact of
adoption.
2.
Real
Estate, Commercial Leasing Assets and Facilities, net
Undeveloped
acreage includes raw real estate that can be sold "as is" i.e. no infrastructure
or development work has begun on such property. A developed lot is an individual
tract of land that has been developed and permitted for residential use. A
developed lot may be sold with a home already built on it. Stratus currently
owns only five lots with homes built on them (the Calera Court homes). Developed
acreage or acreage under development includes real estate for which
infrastructure work over the entire property has been completed, is currently
being completed or is able to be completed and necessary permits have been
received.
|
December
31,
|
||||||
|
2006
|
2005
|
|||||
|
(In
Thousands)
|
||||||
|
Property
held for sale - developed or under development:
|
||||||
|
Austin,
Texas area
|
$
|
111,496
|
$
|
120,256
|
||
|
Other
areas of Texas
|
5,369
|
7,194
|
||||
|
116,865
|
127,450
|
|||||
|
Property
held for sale - undeveloped:
|
||||||
|
Austin,
Texas area
|
16,311
|
16,037
|
||||
|
Other
areas of Texas
|
34
|
34
|
||||
|
16,345
|
16,071
|
|||||
|
Property
held for use:
|
||||||
|
Commercial
leasing assets, net of accumulated depreciation
|
||||||
|
of
$2,883 in 2006 and $1,454 in 2005
|
46,273
|
8,989
|
||||
|
Furniture,
fixtures and equipment, net of accumulated
|
||||||
|
depreciation
of $428 in 2006 and $562 in 2005
|
429
|
463
|
||||
|
Total
property held for use
|
46,702
|
9,452
|
||||
|
$
|
179,912
|
$
|
152,973
|
|||
At
December 31, 2006, Stratus’ investment in real estate includes approximately
2,652 acres of land located in Austin, Plano and San Antonio, Texas. The
principal holdings of Stratus are located in the Austin area and consisted
of
1,728 acres of residential, multi-family and commercial property and 37
developed residential estate lots within the Barton Creek community at December
31, 2006. Stratus also holds approximately 355 acres of undeveloped residential,
commercial and multi-family property and 36 acres of commercial property under
development within the Circle C Ranch (Circle C) community. Stratus’ other
properties in the Circle C community include Meridian, which is an 800-lot
residential development, and Escarpment Village, which is a 168,000-square-foot
retail center anchored by a grocery store. At December 31, 2006, Meridian
consisted of approximately 282 acres and 88 developed residential lots. Stratus’
remaining Austin holdings at December 31, 2006, consisted of 223 acres of
commercial property and two 75,000-square-foot buildings at 7500 Rialto
Boulevard, one of which is approximately 96 percent leased and the other is
approximately 50 percent leased, located within Lantana. In the fourth quarter
of 2005, Stratus committed to a plan to sell its two office buildings at 7000
West. On March 27, 2006, Stratus sold 7000 West (see Note 7). Stratus’ Deerfield
project in Plano, Texas, consists of approximately 24 acres of residential
land,
which is being developed, and four developed residential lots.
Stratus
also owns two acres of undeveloped commercial property in San Antonio,
Texas.
44
3.
Investment
in Unconsolidated Affiliate
In
November 2005, Stratus formed a joint venture partnership with Trammell Crow
Central Texas Development, Inc. (Trammell Crow) to acquire an approximate
74-acre tract at the intersection of Airport Boulevard and Lamar Boulevard
in
Austin, Texas, for $7.7 million. With its joint venture partner, Stratus has
commenced brown field remediation and permitting of the property, known as
Crestview Station, which is located on the commuter rail line recently approved
by City of Austin voters. Crestview Station is planned for single-family,
multi-family and retail development, with closings on the single-family and
multi-family components and portions of the retail component expected to occur
in 2007, subject to completion of the remediation process. At December 31,
2006,
Stratus’ investment in the Crestview Station project totaled $3.8 million and
the joint venture partnership had $7.6 million of outstanding debt, of which
each joint venture partner guarantees $1.9 million.
The
joint
venture partnership has contracted with a nationally recognized remediation
firm
to demolish the existing buildings and remediate the property in preparation
for
permitting. Under the terms of the remediation contract, the joint venture
partnership will pay the contractor approximately $4.9 million upon completion
of performance benchmarks and certification by the State of Texas that the
remediation is complete. The contractor is required to pay all costs associated
with the remediation and to secure an environmental liability policy with $10.0
million of coverage remaining in place for a 10-year term. Pursuant to the
agreement with the contractor, all environmental and legal liability was
assigned to and assumed by the contractor effective November 30,
2005.
4.
Long-Term
Debt
|
December
31,
|
||||||
|
2006
|
2005
|
|||||
|
(In
Thousands)
|
||||||
|
Comerica
revolving credit facility, average rate 7.2% in 2006
|
||||||
|
and
6.0% in 2005
|
$
|
3,000
|
$
|
15,677
|
||
|
Unsecured
term loans, average rate 9.1% in 2006
|
||||||
|
and
7.7% in 2005
|
25,000
|
10,000
|
||||
|
TIAA
mortgage, average rate 5.55% in 2006
|
22,675
|
-
|
||||
|
7500
Rialto Boulevard project loan, average rate 7.1% in 2006
|
||||||
|
and
6.1% in 2005
|
-
|
6,461
|
||||
|
Deerfield
loan, average rate 7.6% in 2006 and 6.0% in 2005
|
-
|
2,943
|
||||
|
Escarpment
Village project loan, average rate 7.2% in 2006
|
||||||
|
and
6.1% in 2005
|
-
|
9,936
|
||||
|
Meridian
project loan, average rate 7.3% in 2006 and 6.6% in 2005
|
-
|
5,287
|
||||
|
Total
|
50,675
|
50,304
|
||||
|
Less:
Current portion
|
(311
|
)
|
(169
|
)
|
||
|
Long-term
debt
|
$
|
50,364
|
$
|
50,135
|
||
Comerica
Revolving Credit Facility.
In
September 2005, Stratus entered into a loan agreement with Comerica to replace
its existing $30.0 million revolving credit facility with Comerica. The loan
agreement provided for a $45.0 million revolving credit facility, of which
$3.0
million was provided for the Calera Court project. The facility sets limitations
on liens and limitations on transactions with affiliates, and requires that
certain financial ratios be maintained. The facility allows Stratus to purchase
up to $6.5 million of its outstanding common stock after September 30, 2005
of
which $5.9 million remains available at December 31, 2006. Amounts borrowed
under the facility bear interest at a minimum annual rate of 5.0 percent or,
at
Stratus’ option, Comerica’s prime rate plus 0.5 percent or London Interbank
Offered Rate (LIBOR) plus 2.5 percent. Stratus’ obligations under the facility
are secured by its properties within the Barton Creek community and certain
of
its properties within Lantana and the Circle C community.
In
May
2006, Stratus entered into a modification and extension agreement to extend
the
maturity and decrease the interest rate on its Comerica revolving credit
facility. The maturity date was extended from May 30, 2007 to May 30, 2008
and
interest now accrues, at Stratus’ option, at Comerica’s rate minus 0.8 percent
or one-month LIBOR plus 1.95 percent, subject to a minimum annual rate of 5.0
percent. The available commitment of $45 million and other conditions and
security remained unchanged.
45
Unsecured
Term Loans.
In 2000
and 2001, Stratus obtained two $5.0 million five-year unsecured term loans
from
First American Asset Management (FAAM). The
proceeds of the loans were used to fund Stratus’ operations and for other
general corporate purposes. Effective December 15, 2004, Stratus amended the
two
loans to extend their respective maturities from January 2006 to January 2008
and July 2006 to July 2008. In accordance with the amendments, interest accrued
on the loans at a rate of one-month LIBOR plus 4.5 percent and is payable
monthly. Prior to the 2004 amendments, the interest rate was fixed at 9.25
percent. In December 2006, Stratus amended its two unsecured $5.0 million term
loans with FAAM. The amended agreements extend the maturities of both loans
to
December 31, 2011, and decrease the annual interest rates applicable to amounts
borrowed under both loans to 6.56 percent.
In
December 2006, Stratus also entered into two separate new loan agreements with
FAAM to borrow an additional $15.0 million to fund the purchase of the land
being used in connection with its Block 21 project. The new loans mature on
December 31, 2011, and amounts borrowed under both loans bear interest at an
annual rate of 6.56 percent. Stratus’ obligations under the FAAM loan agreements
are unsecured.
TIAA
Mortgage.
In June
2006, Stratus entered into a 30-year, $22.8 million mortgage with a 10-year
balloon payment from Teachers Insurance and Annuity Association of America
(TIAA). Proceeds from the mortgage were used to repay outstanding amounts under
Stratus’ Escarpment Village shopping center project loan and other outstanding
project loan balances. The annual interest rate on the mortgage is 5.55 percent.
The Escarpment Village shopping center and the related lease agreements are
security for the loan.
Project
Loans.
As
discussed above, in 2006, Stratus used borrowings from the TIAA mortgage to
pay
the outstanding balances of its project loans. Descriptions of these project
loans follow:
7500
Rialto Boulevard Project Loan.
In 2001,
Stratus secured an $18.4 million project loan with Comerica for the construction
of two office buildings at 7500 Rialto Boulevard. This variable-rate project
loan facility is secured by the land and first office building at 7500 Rialto
Boulevard. Under the terms of the original agreement and loan modification
agreements since 2001, Stratus has extended the facility’s maturity and reduced
the commitment under the facility. Effective November 15, 2005, Stratus
restructured its 7500 Rialto Boulevard project loan and extended its maturity
from January 2006 to January 2008. Under the terms of the loan modification
agreement, the commitment under the facility was reduced to $6.8 million.
Stratus may make additional borrowings under this facility to fund certain
tenant improvements.
Deerfield
Loan.
In
February 2004, Stratus entered into a $9.8 million three-year loan agreement
with Comerica to finance the acquisition and development of Deerfield. The
timing of advances received and payments made under the loan coincides with
the
development and lot purchase schedules.
Escarpment
Village Project Loan.
In
December 2004, Stratus executed a Promissory Note and a Construction Loan
Agreement with Comerica for an $18.5 million loan to be used for the
construction of a 168,000-square-foot retail project, which Stratus referred
to
as Escarpment Village. The loan had a maturity date of June 2007, with a
one-year extension option subject to certain terms and conditions.
Meridian
Project Loan.
In May
2005, Stratus executed a development loan agreement with Comerica for a $10.0
million loan to fund the development of single-family residential lots at
Meridian. The loan has a maturity date of November 2007.
Maturities.
Maturities of long-term debt instruments based on the amounts and terms
outstanding at December 31, 2006, totaled $0.3 million in 2007, $3.3 million
in
2008, $0.3 in 2009, $0.4 in 2010, $25.4 million in 2011 and $20.9 million
thereafter.
46
5.
Income
Taxes
The
components of deferred income taxes follow:
|
December
31,
|
||||||
|
2006
|
2005
|
|||||
|
(In
Thousands)
|
||||||
|
Deferred
tax assets and liabilities:
|
||||||
|
Net
operating loss credit carryfowards
|
$
|
218
|
$
|
10,847
|
||
|
Real
estate and facilities, net
|
4,922
|
6,605
|
||||
|
Employee
benefit accruals
|
593
|
107
|
||||
|
Accrued
liabilities
|
1,646
|
1,050
|
||||
|
Alternative
minimum tax credits and depletion allowance
|
||||||
|
(no
expiration)
|
1,360
|
967
|
||||
|
Other
assets
|
339
|
208
|
||||
|
Other
liabilities
|
(611
|
)
|
(284
|
)
|
||
|
Valuation
allowance
|
(218
|
)
|
(19,500
|
)
|
||
|
8,249
|
-
|
|||||
|
Current
deferred tax asset
|
(1,144
|
)
|
-
|
|||
|
Long-term
deferred tax asset
|
$
|
7,105
|
$
|
-
|
||
The
income tax benefit (provision) attributable to income from continuing operations
consists of the following:
|
Years
Ended December 31,
|
||||||
|
2006
|
2005
|
|||||
|
(In
Thousands)
|
||||||
|
Current
|
$
|
95
|
$
|
(154
|
)
|
|
|
Deferred
|
8,249
|
81
|
||||
|
Benefit
from (provision for) income taxes
|
$
|
8,344
|
$
|
(73
|
)
|
|
Stratus’
deferred tax assets at December 31, 2005 totaled $19.5 million and Stratus
had
provided a 100 percent valuation allowance because realization of the deferred
tax assets was not considered likely. Realization of Stratus’ deferred tax
assets is dependent on generating sufficient taxable income within the
carryforward period available under tax law. In the first quarter of 2006,
Stratus sold 7000 West (see Note 7) and in April 2006 Stratus completed the
sale
of 58 acres at its Lantana property. These transactions generated pre-tax income
of $25.6 million and along with Stratus’ current homebuilder contract
arrangements and projected levels of future sales provide sufficient evidence
that Stratus now believes it is more likely than not that it will be able to
realize all of its deferred tax assets. As a result, 2006 net income from
continuing operations included an $8.3 million tax benefit resulting from the
reversal of a portion of Stratus’ deferred tax asset valuation allowance.
Stratus recorded a $0.4 million benefit from income taxes to discontinued
operations in 2006 in accordance with income tax accounting rules.
In
May
2006, the Texas governor signed into law the Texas Revised Franchise Bill (the
Franchise Tax). The Franchise Tax replaces current taxable capital and earned
surplus components with a tax based on “taxable margin.” Taxable margin is
defined as the entity’s total revenues less either cost of goods sold or
compensation. Stratus’ income tax benefit from continuing operations for 2006
includes a deferred tax credit of $0.1 million related to the Franchise
Tax.
Stratus’
2005 provision for income taxes of $73,000 is for alternative minimum taxes.
Reconciliations of the differences between the income tax provision computed
at
the federal statutory tax rate and the recorded income tax (benefit) provision
follow:
47
|
Years
Ended December 31,
|
||||||||||||||||||
|
2006
|
2005
|
2004
|
||||||||||||||||
|
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
|
|||||||||||||
|
(Dollars
in Thousands)
|
||||||||||||||||||
|
Income
tax provision computed at the
|
||||||||||||||||||
|
federal
statutory income tax rate
|
$
|
8,166
|
35
|
%
|
$
|
2,991
|
35
|
%
|
$
|
235
|
35
|
%
|
||||||
|
Adjustments
attributable to:
|
||||||||||||||||||
|
Change
in valuation allowance
|
(16,489
|
)
|
(71
|
)
|
(2,175
|
)
|
(25
|
)
|
(1,981
|
)
|
(295
|
)
|
||||||
|
State
taxes and other
|
(21
|
)
|
-
|
(743
|
)
|
(9
|
)
|
1,746
|
260
|
|||||||||
|
Income
tax provision
|
$
|
(8,344
|
)
|
(36
|
)%
|
$
|
73
|
1
|
%
|
$
|
-
|
-
|
%
|
|||||
6.
Stock-Based
Compensation, Equity Transactions and Employee Benefits
Stock-Based
Compensation Plans.
Stratus’
Stock Option Plan, 1998 Stock Option Plan and Stock Option Plan for Non-Employee
Directors (the Plans) provide for the issuance of stock options, restricted
stock units (see below) and stock appreciations rights (collectively stock-based
compensation awards), adjusted for the effects of the effective reverse stock
split transactions (see below), representing 975,000 shares of Stratus common
stock at no less than market value at time of grant. In May 2002, Stratus’
shareholders approved the 2002 Stock Incentive Plan (the 2002 Stock Option
Plan), which provides for the issuance of stock-based compensation awards
representing 355,000 shares of Stratus common stock.
Generally,
stock-based compensation awards are exercisable in 25 percent annual increments
beginning one year from the date of grant and expire 10 years after the date
of
grant. Awards for approximately 3,100 shares under the 1998 Stock Option Plan,
32,500 shares under the Stock Option Plan for Non-Employee Directors and 9,800
shares under the 2002 Stock Option Plan were available for new grants as of
December 31, 2006.
Stock-Based
Compensation Costs.
Compensation cost charged against earnings for stock-based awards is shown
below
(in thousands). Stock-based compensation costs are capitalized as appropriate,
but such capitalization was not previously reflected in our pro-forma
disclosures shown below as amounts were not considered material.
|
Years
Ended December 31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
Stock
options awarded to employees (including directors)
|
$
|
593
|
$
|
-
|
$
|
-
|
||||
|
Stock
options awarded to nonemployees
|
2
|
36
|
91
|
|||||||
|
Restricted
stock units
|
792
|
274
|
135
|
|||||||
|
Less
capitalized amounts
|
(292
|
)
|
-
|
-
|
||||||
|
Impact
on net income
|
$
|
1,095
|
$
|
310
|
$
|
226
|
||||
Options.
A
summary of options outstanding as of December 31, 2006, and changes during
the
year ended December 31, 2006, follow:
|
Weighted
|
||||||||||
|
Average
|
Aggregate
|
|||||||||
|
Weighted
|
Remaining
|
Intrinsic
|
||||||||
|
Number
of
|
Average
|
Contractual
|
Value
|
|||||||
|
Options
|
Option
Price
|
Term
(years)
|
($000)
|
|||||||
|
Balance
at January 1
|
838,336
|
$
|
10.11
|
|||||||
|
Granted
|
7,500
|
26.44
|
||||||||
|
Exercised
|
(548,649
|
)
|
9.01
|
|||||||
|
Balance
at December 31
|
297,187
|
12.55
|
4.70
|
$
|
5,782
|
|||||
|
Vested
and exercisable at December 31
|
208,062
|
11.14
|
3.29
|
$
|
4,341
|
|||||
48
Summaries
of options outstanding and changes during the years ended December 31, 2005,
and
December 31, 2004, follow:
|
2005
|
2004
|
|||||||||
|
Weighted
|
Weighted
|
|||||||||
|
Number
|
Average
|
Number
|
Average
|
|||||||
|
Of
|
Option
|
of
|
Option
|
|||||||
|
Options
|
Price
|
Options
|
Price
|
|||||||
|
Balance
at January 1
|
1,008,434
|
$
|
9.19
|
1,004,774
|
$
|
8.34
|
||||
|
Granted
|
7,750
|
18.22
|
117,500
|
15.83
|
||||||
|
Exercised
|
(177,848
|
)
|
5.27
|
(90,639
|
)
|
8.22
|
||||
|
Expired/Forfeited
|
-
|
-
|
(23,201
|
)
|
9.43
|
|||||
|
Balance
at December 31
|
838,336
|
10.11
|
1,008,434
|
9.19
|
||||||
The
fair
value of each option award is estimated on the date of grant using a
Black-Scholes option valuation model. Expected volatility is based on the
historical volatility of Stratus’ stock. Stratus uses historical data to
estimate option exercise, forfeitures and expected life of the options. When
appropriate, employees who have similar historical exercise behavior are grouped
for valuation purposes. The risk-free interest rate is based on Federal Reserve
rates in effect for bonds with maturity dates equal to the expected term of
the
option at the date of grant. Stratus has not paid, and has no current plan
to
pay, cash dividends on its common stock. The following table summarizes the
calculated fair value and assumptions used to determine the fair value of
Stratus’ stock option awards during 2006.
|
Options
granted
|
7,500
|
|||
|
Grant-date
fair value per stock option
|
$
|
14.57
|
||
|
Expected
and weighted average volatility
|
48.6
|
%
|
||
|
Expected
life of options (in years)
|
6.7
|
|||
|
Risk-free
interest rate
|
4.7
|
%
|
The
total
intrinsic value of options exercised during the year ended December 31, 2006,
was $11.4 million. During 2006, approximately 83,700 stock options with a
weighted-average grant-date fair market value of $7.86 vested. As of December
31, 2006, there were approximately 89,100 stock options unvested with a
weighted-average grant-date fair market value of $10.07. As of December 31,
2006, Stratus had $0.8 million of total unrecognized compensation cost related
to unvested stock options expected to be recognized over a weighted average
period of one year.
The
following table includes amounts related to exercises of stock options and
vesting of restricted stock units for the year ended December 31, 2006 (in
thousands, except Stratus shares tendered):
|
Stratus
shares tendered to pay the exercise price
|
|||
|
and/or
the minimum required taxesa
|
111,097
|
||
|
Cash
received from stock option exercises
|
$
|
1,055
|
|
|
Actual
tax benefit realized for the tax deductions
|
|||
|
from
stock option exercises
|
$
|
1,111
|
|
|
Amounts
Stratus paid for employee taxes related
|
|||
|
to
stock option exercises
|
$
|
3,495
|
|
| a. |
Under
terms of the related plans, upon exercise of stock options and vesting
of
restricted stock units, employees may tender Stratus shares to Stratus
to
pay the exercise price and/or the minimum required
taxes.
|
Restricted
Stock Units.
Under
Stratus’ restricted stock program, shares of its common stock may be granted to
certain officers of Stratus at no cost. The restricted stock units are converted
into shares of Stratus common stock ratably on the anniversary of each award
over the vesting period, generally four years. The awards fully vest upon
retirement. Prior to 2007, Stratus defined the market value for restricted
stock
units as the average of the high and low price of Stratus common stock on the
date of grant. Effective March 2007, in response to new Securities and Exchange
Commission disclosure rules, Stratus
49
now
defines the market price for future grants as the closing price of Stratus
common stock on the date of grant.
Stratus
granted 49,000 restricted stock units in 2006. A summary of outstanding unvested
restricted stock units as of December 31, 2006, and activity during the year
ended December 31, 2006 is presented below:
|
Weighted
|
|||||||
|
Average
|
Aggregate
|
||||||
|
Number
of
|
Remaining
|
Intrinsic
|
|||||
|
Restricted
|
Contractual
|
Value
|
|||||
|
Stock
Units
|
Term
(years)
|
($000)
|
|||||
|
Balance
at January 1
|
45,045
|
||||||
|
Granted
|
49,000
|
||||||
|
Vested
|
(22,795
|
)
|
|||||
|
Balance
at December 31
|
71,250
|
1.3
|
$
|
2,280
|
|||
The
grant-date fair value of restricted stock units granted during the year ended
December 31, 2006 was $1.2 million. The total intrinsic value of restricted
stock units vesting during the year ended December 31, 2006, was $0.7 million.
As of December 31, 2006, Stratus had $0.9 million of total unrecognized
compensation cost related to unvested restricted stock units expected to be
recognized over a weighted-average period of 1.3 years.
Share
Purchase Program.
In
February 2001, Stratus’ Board of Directors authorized an open market stock
purchase program for up to 0.7 million stock-split adjusted shares of Stratus’
common stock (see below). The purchases may occur over time depending on many
factors, including the market price of Stratus stock; Stratus’ operating
results, cash flow and financial position; and general economic and market
conditions. In addition, Stratus’ $45.0 million revolving credit facility allows
Stratus to purchase up to $6.5 million of its outstanding common stock after
September 30, 2005. Since 2004, Stratus has purchased 230,190 shares of its
common stock for $4.2 million (an $18.05 per share average) under this program.
Purchases include 22,806 shares for $0.6 million (a $24.77 per share average)
in
2006, 188,995 shares for $3.3 million (a $17.68 per share average) in 2005
and
18,389 shares for $0.2 million (a $13.47 per share average) in 2004. The 2005
purchases include a privately negotiated purchase of 125,316 shares from a
former executive for $2.3 million (an $18.13 per share average). As of March 10,
2007, 469,810 shares remain available under this program.
Stock
Split Transactions.
In May
2001, the shareholders of Stratus approved an amendment to Stratus’ certificate
of incorporation to permit a reverse 1-for-50 common stock split followed
immediately by a forward 25-for-1 common stock split. This transaction resulted
in Stratus’ shareholders owning fewer than 50 shares of common stock having
their shares converted into less than one share in the reverse 1-for-50 split,
for which they received cash payments equal to the fair value of those
fractional interests. Stratus shareholders owning more than 50 shares of
Stratus’ common stock had their number of shares of common stock reduced by
one-half immediately after this transaction. Shareholders owning an odd number
of shares were entitled to a cash payment equal to the fair value of the
resulting fractional share. Stratus funded $0.5 million into a restricted cash
account to purchase 42,000 post-stock split shares of its common stock. At
December 31, 2006, $0.1 million of restricted cash remained to pay for
fractional shares.
Employee
Benefits.
Stratus
maintains a 401(k) defined contribution plan and a money purchase plan that
are
subject to the provisions of the Employee Retirement Income Security Act of
1974
(ERISA). The plans were amended, effective September 1, 2003, to merge the
money
purchase plan into the 401(k) plan. The amended 401(k) plan provides for an
employer matching contribution equal to 100 percent of the participant’s
contribution, subject to a limit of 5 percent of participant’s annual salary.
The 401(k) plan also provides for the money purchase contribution to be
discretionary. Matching and money purchase contributions were $0.3 million
in
2006 and $0.2 million in each of 2005 and 2004.
50
7.
Discontinued
Operations
In
the
fourth quarter of 2005, Stratus committed to a plan to sell its office buildings
at 7000 West. On March 27, 2006, Stratus’ wholly owned subsidiary, Stratus 7000
West Joint Venture (7000 West JV), sold its two
70,000-square-foot
office buildings at 7000 West William Cannon Drive (7000 West), known as the
Lantana Corporate Center, to
CarrAmerica for
$22.3
million, resulting in a gain of $9.8 million ($8.3 million net of taxes or
$1.13
per basic share and $1.08 per diluted share) in 2006. CarrAmerica
paid $10.6 million cash to Stratus at closing and assumed the $11.7 million
principal balance remaining under Stratus’ 7000 West project loan from TIAA. In
connection with CarrAmerica’s assumption of the loan, 7000 West JV entered into
a First Modification Agreement with CarrAmerica and TIAA under which TIAA
released 7000 West JV’s $3.5 million letter of credit issued by Comerica Bank
that secured certain re-tenanting obligations and released 7000 West JV from
all
future obligations under the loan. In addition, TIAA released Stratus from
all
future liabilities under its guaranty of 7000 West JV’s environmental
representations and recourse obligations under the loan.
Upon
completion of the sale of 7000 West, Stratus ceased all involvement with the
7000 West office buildings. The operations, assets and liabilities of 7000
West
represented a component of Stratus’ commercial leasing segment.
The
table
below provides a summary of 7000 West’s results of operations (in
thousands):
|
Years
Ended December 31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
Rental
income
|
$
|
1,057
|
$
|
3,554
|
$
|
3,165
|
||||
|
Rental
property costs
|
(403
|
)
|
(1,320
|
)
|
(852
|
)a
|
||||
|
Depreciation
|
-
|
(701
|
)
|
(906
|
)
|
|||||
|
General
and administrative expenses
|
(48
|
)
|
(302
|
)
|
(185
|
)
|
||||
|
Interest
expenseb
|
(168
|
)
|
(717
|
)
|
(649
|
)
|
||||
|
Interest
income
|
2
|
-
|
-
|
|||||||
|
Gain
on sale
|
9,762
|
-
|
-
|
|||||||
|
Provision
for income taxes
|
(1,588
|
)
|
-
|
-
|
||||||
|
Income
from discontinued operations
|
$
|
8,614
|
$
|
514
|
$
|
573
|
||||
| a. |
Includes
$0.7 million for reimbursement of certain building repairs received
from a
settlement with the general contractor responsible for construction
of the
7000 West office buildings.
|
| b. |
Relates
to interest expense from 7000 West project loan and does not include
any
additional allocations of interest.
|
The
following summarizes 7000 West’s net assets (in thousands) at December 31,
2005:
|
Assets:
|
||||
|
Cash
and cash equivalents
|
$
|
5
|
||
|
Other
current assets
|
1,136
|
|||
|
Property
held for sale, net of accumulated depreciation
|
||||
|
of
$4,577
|
11,089
|
|||
|
Liabilities:
|
||||
|
Current
portion of long-term debt
|
(11,795
|
)
|
||
|
Other
current liabilities
|
(241
|
)
|
||
|
Net
assets
|
$
|
194
|
||
51
8.
Commitments
and Contingencies
Construction
Contracts.
Stratus
had commitments under non-cancelable open contracts totaling $5.8 million at
December 31, 2006. These commitments include the following contracts that
Stratus entered into in 2006:
| · |
Three
contracts totaling $4.2 million for infrastructure work in connection
with
new residential subdivisions at Barton Creek with a remaining balance
of
$1.5 million at December 31, 2006;
|
| · |
A
$3.4 million contract for the construction of a 20,000-square-foot
retail
and office center at Barton Creek with a remaining balance of $1.0
million
at December 31, 2006;
|
| · |
A
$1.0 million contract for the construction of a recreational center
at
Meridian in Circle C with the entire balance outstanding at December
31,
2006; and
|
| · |
Two
contracts totaling $2.3 million for infrastructure work at Meridian
with a
remaining balance of $2.0 million at December 31,
2006.
|
In
addition to the contracts noted above, Stratus also had $0.3 million of
outstanding commitments at December 31, 2006, on other ongoing Lantana, Meridian
and Barton Creek development contracts.
In
early
2007, Stratus entered into additional contracts for $3.5 million for
infrastructure work associated with new residential subdivisions at Barton
Creek.
Operating
Lease.
As of
December 31, 2006, Stratus’ minimum annual contractual payments under its
non-cancelable long-term operating lease for its office space which extends
to
2009 totaled $101,500 in 2007, $32,300 in 2008 and $27,300 in 2009. Total rental
expense under Stratus’ operating lease amounted to $77,100 in each of 2006, 2005
and 2004.
Circle
C Settlement.
On
August 1, 2002, the City granted final approval of a development agreement
(the
Circle C settlement) and permanent zoning for Stratus’ real estate located
within the Circle C community in southwest Austin. The Circle C settlement
firmly established all essential municipal development regulations applicable
to
Stratus’ Circle C properties for thirty years. Those approvals permitted
development of 1.0 million square feet of commercial space, 900 multi-family
units and 830 single-family residential lots. In 2004, Stratus amended its
Circle C settlement with the City to increase the amount of permitted commercial
space from 1.0 million square feet to 1.16 million square feet in exchange
for a
decrease in allowable multi-family units from 900 units to 504 units. The City
also provided Stratus $15 million of development fee credits, which are in
the
form of Credit Bank capacity, in connection with its future development of
its
Circle C and other Austin-area properties for waivers of fees and reimbursement
for certain infrastructure costs. In addition, Stratus can elect to sell up
to
$1.5 million of the incentives per year to other developers for their use in
paying City fees related to their projects. As of December 31, 2006, Stratus
has
permanently used $5.2 million of its City-based development fee credits,
including cumulative amounts sold to third parties totaling $2.7 million. Fee
credits used for the development of Stratus’ properties effectively reduce the
eventual basis of the related properties and defer recognition of any gain
associated with the use of the fees until the affected properties are sold.
Stratus also has $3.7 million in Credit Bank capacity in use as temporary fiscal
deposits as of December 31, 2006. Unencumbered Credit Bank capacity was $6.1
million at December 31, 2006.
Environment.
Stratus
has made, and will continue to make, expenditures at its operations for
protection of the environment. Increasing emphasis on environmental matters
can
be expected to result in additional costs, which will be charged against
Stratus’ operations in future periods. Present and future environmental laws and
regulations applicable to Stratus’ operations may require substantial capital
expenditures that could adversely affect the development of its real estate
interests or may affect its operations in other ways that cannot be accurately
predicted at this time.
Stratus
sold its remaining oil and gas properties in 1993. In connection with the sale
of an oil and gas property, Stratus indemnified the purchaser for any
abandonment costs in excess of cumulative net revenues received. Whether or
not
Stratus ultimately will incur any cost as a result of this indemnification
is
uncertain and will depend on a number of factors beyond its control, including
actual oil and gas produced, oil and gas prices received and the level of
operating and abandonment costs incurred by the third-party operator over the
life of the property. Stratus periodically assesses the reasonableness of
amounts recorded for this liability through the use of information obtained
from
the operator of the
52
property;
however, the availability of such information is limited, and there are numerous
uncertainties involved in estimating the related future revenues, operating
and
abandonment costs. Based
on
its assessment of the available information, Stratus has determined that a
loss
is probable and
Stratus
has recorded a liability of $3.0 million, which is included in “Other
Liabilities” in the accompanying consolidated balance sheets, representing its
best estimate of this potential liability. The carrying value of this liability
may be adjusted in future periods as additional information becomes
available,
but
Stratus’ current estimate is that this liability will not exceed $9.0
million.
9.
Business
Segments
Stratus
has two operating segments, “Real Estate Operations” and “Commercial Leasing.”
The Real Estate Operations segment is comprised of all Stratus’ developed
properties, properties under development and undeveloped properties in Austin,
Texas, which consist of its properties in the Barton Creek community, the Circle
C community and Lantana. In addition, the Deerfield property in Plano, Texas
is
included in the Real Estate Operations segment.
The
Commercial Leasing segment includes two office buildings at 7500 Rialto
Boulevard and the Escarpment Village project. The first 75,000-square-foot
building at 7500 Rialto Boulevard is approximately 96 percent leased. The second
75,000-square-foot building opened in September 2006 and is approximately 50
percent leased. Southwest Property Services L.L.C., which Stratus formed in
2004, manages these office buildings. For 2006, the Commercial Leasing segment
also includes Escarpment Village, a 168,000-square-foot retail project anchored
by a grocery store. Rental income from Escarpment Village totaled $2.1 million
in 2006 (including less than $0.1 million in the first quarter). In the fourth
quarter of 2005, Stratus committed to sell the two 70,000-square-foot office
buildings at 7000 West and completed the sale on March 27, 2006. The 7000 West
operating results are reported as discontinued operations in the table
below.
As
of
December 31, 2006, Stratus’ minimum rental income which includes scheduled rent
increases, under noncancelable long-term leases which extend to 2026, totaled
$4.3 million in 2007, $4.4 million in 2008, $4.3 million in 2009, $3.8 million
in 2010, $3.2 million in 2011 and $28.9 million thereafter.
Stratus’
lease agreement with the anchor tenant of Escarpment Village and its contract
with Trammell Crow Central Texas, Ltd. (Trammell Crow), the firm managing
Escarpment Village, contain provisions requiring Stratus to share the net
profits from a sale of the project. The anchor tenant and Trammell Crow are
each
entitled to 10 percent of any net profit from a sale of Escarpment Village
after
Stratus receives a 12 percent return on its investment. Stratus paid the anchor
tenant its net profits interest in December 2006 based upon a hypothetical
sale
at fair market value. Stratus is required to pay Trammell Crow its net profits
interest upon a sale of the project, but no later than May 2008. If the project
is not sold prior to the deadline, then the net profits calculation will be
made
based upon a hypothetical sale at fair market value. As of December 31, 2006,
Stratus estimates the net profit payment due Trammell Crow will total $0.4
million. The amount of the payment to the anchor tenant ($0.7 million) and
the
estimated payment to Trammell Crow are recorded in other assets and are being
amortized over the anchor tenant’s lease term (20 years) as a reduction of
rental income. The actual payment may vary from this amount and will be based
on
the actual sale price of Escarpment Village or the estimated fair value of
Escarpment Village, as applicable.
The
segment data presented below were prepared on the same basis as Stratus’
consolidated financial statements.
53
|
Real
Estate Operationsa
|
Commercial
Leasing
|
Other
|
Total
|
|||||||||
|
(In
Thousands)
|
||||||||||||
|
Year
Ended December 31, 2006
|
||||||||||||
|
Revenues
|
$
|
60,213
|
$
|
3,794
|
$
|
-
|
$
|
64,007
|
||||
|
Cost
of sales, excluding depreciation
|
(29,096
|
)
|
(2,348
|
)
|
-
|
(31,444
|
)
|
|||||
|
Depreciation
|
(127
|
)
|
(1,452
|
)
|
-
|
(1,579
|
)
|
|||||
|
General
and administrative expenses
|
(6,280
|
)
|
(651
|
)
|
-
|
(6,931
|
)
|
|||||
|
Operating
income (loss)
|
$
|
24,710
|
$
|
(657
|
)
|
$
|
-
|
$
|
24,053
|
|||
|
Income
from discontinued operations
|
$
|
-
|
$
|
8,614
|
b
|
$
|
-
|
$
|
8,614
|
|||
|
Benefit
from income taxes
|
$
|
-
|
$
|
-
|
$
|
8,344
|
c
|
$
|
8,344
|
|||
|
Capital
expenditures
|
$
|
36,278
|
$
|
17,015
|
$
|
-
|
$
|
53,293
|
||||
|
Total
assets
|
$
|
139,266
|
$
|
56,021
|
$
|
8,663
|
c
|
$
|
203,950
|
|||
|
Year
Ended December 31, 2005
|
||||||||||||
|
Revenues
|
$
|
33,841
|
$
|
1,353
|
$
|
-
|
$
|
35,194
|
||||
|
Cost
of sales, excluding depreciation
|
(19,625
|
)
|
(1,456
|
)
|
-
|
(21,081
|
)
|
|||||
|
Depreciation
|
(145
|
)
|
(613
|
)
|
-
|
(758
|
)
|
|||||
|
General
and administrative expenses
|
(4,346
|
)
|
(673
|
)
|
-
|
(5,019
|
)
|
|||||
|
Operating
income (loss)
|
$
|
9,725
|
$
|
(1,389
|
)
|
$
|
-
|
$
|
8,336
|
|||
|
Income
from discontinued operations
|
$
|
-
|
$
|
514
|
$
|
-
|
$
|
514
|
||||
|
Provision
for income taxes
|
$
|
-
|
$
|
-
|
$
|
73
|
$
|
73
|
||||
|
Capital
expenditures
|
$
|
39,733
|
$
|
324
|
$
|
-
|
$
|
40,057
|
||||
|
Total
assets
|
$
|
143,521
|
$
|
21,682
|
d
|
$
|
8,683
|
$
|
173,886
|
|||
|
Year
Ended December 31, 2004
|
||||||||||||
|
Revenues
|
$
|
16,851
|
$
|
874
|
$
|
-
|
$
|
17,725
|
||||
|
Cost
of sales, excluding depreciation
|
(11,119
|
)
|
(1,201
|
)
|
-
|
(12,320
|
)
|
|||||
|
Depreciation
|
(123
|
)
|
(492
|
)
|
-
|
(615
|
)
|
|||||
|
General
and administrative expense
|
(3,788
|
)
|
(664
|
)
|
-
|
(4,452
|
)
|
|||||
|
Operating
income (loss)
|
$
|
1,821
|
$
|
(1,483
|
)
|
$
|
-
|
$
|
338
|
|||
|
Income
from discontinued operations
|
$
|
-
|
$
|
573
|
$
|
-
|
$
|
573
|
||||
|
Capital
expenditures
|
$
|
21,463
|
$
|
1,135
|
$
|
-
|
$
|
22,598
|
||||
|
Total
assets
|
$
|
125,445
|
$
|
23,165
|
d
|
$
|
4,251
|
$
|
152,861
|
|||
| a. |
Includes
sales commissions, management fees and other revenues together with
related expenses.
|
| b. |
Includes
an $8.3 million gain, net of taxes of $1.5 million, on the sale of
7000
West.
|
| c. |
Includes
deferred tax assets resulting from the reversal of a portion of Stratus’
deferred tax asset valuation allowance which was recorded as a benefit
from income taxes (see Note 5).
|
| d. |
Includes
assets from the discontinued operations of 7000 West, which Stratus
sold
on March 27, 2006, totaling $12.2 million, net of accumulated depreciation
of $4.6 million, at December 31, 2005, and $13.2 million, net of
accumulated depreciation of $3.9 million, at December 31, 2004. These
buildings represented two of Stratus’ three commercial leasing properties
as of December 31, 2005, and December 31,
2004.
|
54
10.
Quarterly
Financial Information (Unaudited)
|
Operating
|
Net
Income
Per
Share
|
||||||||||||||
|
Revenues
|
Income
|
Net
Income
|
Basic
|
Diluted
|
|||||||||||
|
(In
Thousands, Except Per Share Amounts)
|
|||||||||||||||
|
2006
|
|||||||||||||||
|
1st
Quarter
|
$
|
11,690
|
$
|
1,894
|
$
|
18,176
|
a
|
$
|
2.51
|
a
|
$
|
2.36
|
a
|
||
|
2nd
Quarter
|
32,875
|
18,331
|
17,775
|
2.43
|
2.32
|
||||||||||
|
3rd
Quarter
|
9,850
|
1,466
|
1,181
|
0.16
|
0.16
|
||||||||||
|
4th
Quarter
|
9,592
|
2,362
|
3,156
|
0.43
|
0.41
|
||||||||||
|
$
|
64,007
|
$
|
24,053
|
$
|
40,288
|
5.51
|
5.26
|
||||||||
|
Operating
Income
|
Net
Income
|
Net
Income
(Loss)
Per Share
|
|||||||||||||
|
Revenues
|
(Loss)
|
(Loss)
|
Basic
|
Diluted
|
|||||||||||
|
(In
Thousands, Except Per Share Amounts)
|
|||||||||||||||
|
2005
|
|||||||||||||||
|
1st
Quarter
|
$
|
2,717
|
$
|
(976
|
)
|
$
|
(912
|
)
|
$
|
(0.13
|
)
|
$
|
(0.13
|
)
|
|
|
2nd
Quarter
|
7,189
|
1,406
|
1,320
|
0.18
|
0.17
|
||||||||||
|
3rd
Quarter
|
12,146
|
3,389
|
3,319
|
0.46
|
0.44
|
||||||||||
|
4th
Quarter
|
13,142
|
4,517
|
4,747
|
0.66
|
0.62
|
||||||||||
|
$
|
35,194
|
$
|
8,336
|
$
|
8,474
|
1.18
|
1.11
|
||||||||
| a. |
Includes
a $1.9 million ($0.26 per basic share and $0.25 per diluted share)
adjustment to the previously reported benefit from income taxes for
additional deferred tax credits that were not identified until the
fourth
quarter of 2006.
|
Not
applicable.
(a) Evaluation
of disclosure controls and procedures.
Our
chief executive officer and chief financial officer, with the participation
of
management, have evaluated the effectiveness of our “disclosure controls and
procedures” (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934) as of the end of the period covered by this annual report
on Form 10-K. Based on their evaluation, they have concluded that our disclosure
controls and procedures are effective in timely alerting them to material
information relating to Stratus (including our consolidated subsidiaries)
required to be disclosed in our periodic Securities and Exchange Commission
(SEC) filings.
(b) Changes
in internal controls.
There
has been no change in our internal control over financial reporting that
occurred during the fourth quarter that has materially affected, or is
reasonably likely to materially affect our internal control over financial
reporting.
(c) Management’s
annual
report on internal control over financial reporting and the report thereon
of
PricewaterhouseCoopers LLP are incorporated herein by reference to our 2006
Annual Report.
Not
applicable.
55
The
information set forth under the captions “Corporate Governance,“ “Information
About Nominees and Directors” and “Section 16(a) Beneficial Ownership Reporting
Compliance” of our definitive Proxy Statement to be filed with the SEC, relating
to our 2007 Annual Meeting to be held on May 8, 2007, is incorporated herein
by
reference. The information required by Item 10 regarding our executive officers
appears in a separately captioned heading after Item 4 in Part I of this
report.
The
information set forth under the captions “Director Compensation” and “Executive
Officer Compensation” of our definitive Proxy Statement to be filed with the
SEC, relating to our 2007 Annual Meeting to be held on May 8, 2007, is
incorporated herein by reference.
The
information set forth under the captions “Stock Ownership of Directors and
Executive Officers,” “Stock Ownership of Certain Beneficial Owners” and
“Proposal to Adopt the 2007 Stock Incentive Plan” of our definitive Proxy
Statement to be filed with the SEC, relating to our 2007 Annual Meeting to
be
held on May 8, 2007, is incorporated herein by reference.
The
information set forth under the caption “Corporate Governance” of our definitive
Proxy Statement to be filed with the SEC, relating to our 2007 Annual Meeting
to
be held on May 8, 2007, is incorporated herein by reference.
The
information set forth under the caption “Independent Auditors” of our definitive
Proxy Statement to be filed with the SEC, relating to our 2007 Annual Meeting
to
be held on May 8, 2007, is incorporated herein by reference.
(a)(1). Financial
Statements.
Consolidated
Balance Sheets, page 34.
Consolidated
Statements of Income, page 35.
Consolidated
Statements of Cash Flows, page 36.
Consolidated
Statements of Changes in Stockholders’ Equity, page 38.
(a)(2). Financial
Statement Schedule.
Schedule
III-Real Estate, Commercial Leasing Assets and Facilities and Accumulated
Depreciation, page F-2.
(a)(3). Exhibits.
Reference
is made to the Exhibit Index beginning on page E-1 hereof. Instruments with
respect to other long-term debt of Stratus and its consolidated subsidiaries
are
omitted pursuant to Item 601(b)(4)(iii) of Regulation S-K since the total amount
authorized under each such omitted instrument does not exceed 10 percent of
the
total assets of Stratus and its subsidiaries on a consolidated basis. Stratus
hereby agrees to furnish a copy of any such instrument to the SEC upon
request.
56
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf
by
the undersigned, thereunto duly authorized.
STRATUS
PROPERTIES INC.
By: /s/
William H. Armstrong III
William
H. Armstrong III
Chairman
of the Board, President
and
Chief
Executive Officer
Date:
March 16, 2007
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
/s/ William H. Armstrong III
|
Chairman
of the Board, President
|
|
|
William
H. Armstrong III
|
and
Chief Executive Officer
(Principal
Executive Officer)
|
|
|
*
|
Senior
Vice President
|
|
|
John
E. Baker
|
and
Chief Financial Officer
(Principal
Financial Officer)
|
|
|
*
|
Vice
President and Controller
|
|
|
C.
Donald Whitmire, Jr.
|
(Principal
Accounting Officer)
|
|
|
*
|
Director
|
|
|
James
C. Leslie
|
||
|
*
|
Director
|
|
|
Michael
D. Madden
|
||
|
*
|
Director
|
|
|
Bruce
G. Garrison
|
*By: /s/
William H. Armstrong III
William
H. Armstrong III
Attorney-in-Fact
Date:
March 16, 2007
S-1
STRATUS
PROPERTIES INC.
The
financial statements in the schedule listed below should be read in conjunction
with the financial statements of Stratus contained elsewhere in this Annual
Report on Form 10-K.
|
Page
|
|
|
Schedule
III-Real Estate, Commercial Leasing Assets
|
|
|
and
Facilities and Accumulated Depreciation
|
F-2
|
Schedules
other than the one listed above have been omitted since they are either not
required, not applicable or the required information is included in the
financial statements or notes thereto.
Stratus
Properties Inc.
REAL
ESTATE, COMMERCIAL LEASING ASSETS AND FACILITIES AND ACCUMULATED
DEPRECIATION
December
31, 2006
(In
Thousands)
SCHEDULE
III
|
Cost
|
Gross
Amounts at
|
|||||||||||||||||||||||||
|
Initial
Cost
|
Capitalized
|
December
31, 2006
|
Number
of Lots
|
|||||||||||||||||||||||
|
Bldg.
and
|
Subsequent
to
|
Bldg.
and
|
and
Acres
|
Accumulated
|
Year
|
|||||||||||||||||||||
|
Land
|
Improvements
|
Acquisitions
|
Land
|
Improvements
|
Total
|
Lots
|
Acres
|
Depreciation
|
Acquired
|
|||||||||||||||||
|
Developed
or Under Developmenta
|
||||||||||||||||||||||||||
|
Barton
Creek,
Austin, TXb
|
$
|
14,789
|
$
|
-
|
$
|
50,871
|
$
|
65,660
|
$
|
-
|
$
|
65,660
|
37
|
1,317
|
$
|
-
|
1988
|
|||||||||
|
Deerfield,
Plano, TX
|
2,904
|
-
|
2,465
|
5,369
|
-
|
5,369
|
4
|
24
|
-
|
2004
|
||||||||||||||||
|
Circle
C, Austin, TX
|
5,387
|
-
|
10,151
|
15,538
|
-
|
15,538
|
88
|
318
|
-
|
1992
|
||||||||||||||||
|
Lantana,
Austin, TX
|
567
|
-
|
11,815
|
12,382
|
-
|
12,382
|
-
|
223
|
-
|
1994
|
||||||||||||||||
|
Block
21, Austin, TX
|
15,108
|
-
|
2,808
|
17,916
|
-
|
17,916
|
-
|
2
|
-
|
2006
|
||||||||||||||||
|
Undevelopedc
|
||||||||||||||||||||||||||
|
Camino
Real,
San Antonio, TX
|
16
|
-
|
18
|
34
|
-
|
34
|
-
|
2
|
-
|
1990
|
||||||||||||||||
|
Barton
Creek, Austin, TX
|
6,371
|
-
|
1,319
|
7,690
|
-
|
7,690
|
-
|
411
|
-
|
1988
|
||||||||||||||||
|
Circle
C, Austin, TX
|
5,278
|
-
|
3,343
|
8,621
|
-
|
8,621
|
-
|
355
|
-
|
1992
|
||||||||||||||||
|
Held
for Use
|
||||||||||||||||||||||||||
|
Escarpment
Village,
Austin, TX
|
3,044
|
25,511
|
-
|
3,044
|
25,511
|
28,555
|
-
|
-
|
727
|
2006
|
||||||||||||||||
|
7500
Rialto Boulevard,
Austin, TX
|
208
|
20,393
|
-
|
208
|
20,393
|
20,601
|
-
|
-
|
2,156
|
2002
|
||||||||||||||||
|
Corporate
offices,
Austin ,TX
|
-
|
857
|
-
|
-
|
857
|
857
|
-
|
-
|
428
|
-
|
||||||||||||||||
|
$
|
53,672
|
$
|
46,761
|
$
|
82,790
|
$
|
136,462
|
$
|
46,761
|
$
|
183,223
|
129
|
2,652
|
$
|
3,311
|
|||||||||||
| a. |
Real
estate that is currently being developed, has been developed, or
has
received the necessary permits to be
developed.
|
| b. |
Includes
18 developed lots in the Calera subdivision, 14 developed lots in
the
Wimberly Lane Phase II subdivision and 5 developed lots in the Mirador
subdivision.
|
| c. |
Undeveloped
real estate that can be sold “as is” or will be developed in the future as
additional permitting is obtained.
|
F-2
Stratus
Properties Inc.
Notes
to Schedule III
(1)
Reconciliation of Real Estate, Commercial Leasing Assets and
Facilities:
The
changes in real estate, commercial leasing assets and facilities for the years
ended December 31, 2006, 2005 and 2004 are as follows (in
thousands):
|
2006
|
2005
|
2004
|
|||||||
|
(In
Thousands)
|
|||||||||
|
Balance,
beginning of year
|
$
|
154,989
|
$
|
136,654
|
$
|
124,005
|
|||
|
Acquisitions
|
15,108
|
-
|
7,026
|
||||||
|
Improvements
and other
|
36,953
|
35,392
|
14,561
|
||||||
|
Cost
of real estate sold
|
(23,827
|
)
|
(17,057
|
)
|
(8,938
|
)
|
|||
|
Balance,
end of year
|
$
|
183,223
|
$
|
154,989
|
$
|
136,654
|
|||
The
aggregate net book value for federal income tax purposes as of December 31,
2006
was $193.9 million.
(2)
Reconciliation of Accumulated Depreciation:
The
changes in accumulated depreciation for the years ended December 31, 2006,
2005
and 2004 are as follows (in thousands):
|
2006
|
2005
|
2004
|
|||||||
|
Balance,
beginning of year
|
$
|
2,016
|
$
|
1,284
|
$
|
732
|
|||
|
Retirement
of assets
|
(284
|
)
|
(26
|
)
|
(63
|
)
|
|||
|
Depreciation
expense
|
1,579
|
758
|
615
|
||||||
|
Balance,
end of year
|
$
|
3,311
|
$
|
2,016
|
$
|
1,284
|
|||
Depreciation
of buildings and improvements reflected in the statements of income is
calculated over estimated lives of 40 years, except for the retail buildings
at
Escarpment Village which are depreciated over their estimated lives of 30
years.
F-3
Exhibit
Number
|
3.1
|
Amended
and Restated Certificate of Incorporation of Stratus. Incorporated
by
reference to Exhibit 3.1 to the Quarterly Report on Form 10-Q of
Stratus
for the quarter ended March 31, 2004 (Stratus’ 2004 First Quarter Form
10-Q).
|
|
3.2
|
Certificate
of Amendment to the Amended and Restated Certificate of Incorporation
of
Stratus, dated May 14, 1998. Incorporated by reference to Exhibit
3.2 to
Stratus’ 2004 First Quarter Form 10-Q.
|
|
3.3
|
Certificate
of Amendment to the Amended and Restated Certificate of Incorporation
of
Stratus, dated May 25, 2001. Incorporated by reference to Exhibit
3.2 to
the Annual Report on Form 10-K of Stratus for the fiscal year ended
December 31, 2001 (Stratus’ 2001 Form 10-K).
|
|
3.4
|
By-laws
of Stratus, as amended as of February 11, 1999. Incorporated by reference
to Exhibit 3.4 to Stratus’ 2004 First Quarter Form
10-Q.
|
|
4.1
|
Rights
Agreement dated as of May 16, 2002, between Stratus and Mellon Investor
Services LLP, as Rights Agent, which includes the Certificates of
Designation of Series C Participating Preferred Stock; the Forms
of Rights
Certificate Assignment, and Election to Purchase; and the Summary
of
Rights to Purchase Preferred Shares. Incorporated by reference to
Exhibit
4.1 to Stratus’ Registration Statement on Form 8-A dated May 22,
2002.
|
|
4.2
|
Amendment
No. 1 to Rights Agreement between Stratus Properties Inc. and Mellon
Investor Services LLC, as Rights Agent, dated as of November 7, 2003.
Incorporated by reference to Exhibit 4.1 to the Current Report on
Form 8-K
of Stratus dated November 7, 2003.
|
|
10.1
|
Modification
and Extension Agreement by and between Stratus Properties Inc., Stratus
Properties Operating Co., L.P., Circle C Land, L.P., Austin 290
Properties, Inc., Calera Court, L.P., and Comerica Bank effective
July 19,
2006. Incorporated by reference to Exhibit 10.1 to the Current Report
on
Form 8-K of Stratus dated July 19, 2006.
|
|
10.2
|
Loan
Agreement by and between Stratus Properties Inc., Stratus Properties
Operating Co., L.P., Circle C Land, L.P., Austin 290 Properties,
Inc.,
Calera Court, L.P., and Comerica Bank dated as of September 30, 2005.
Incorporated by reference to Exhibit 10.1 to the Current Report on
Form
8-K of Stratus dated September 30, 2005.
|
|
10.3
|
Revolving
Promissory Note by and between Stratus Properties Inc., Stratus Properties
Operating Co., L.P., Circle C Land, L.P., Austin 290 Properties,
Inc.,
Calera Court, L.P., and Comerica Bank dated as of September 30, 2005.
Incorporated by reference to Exhibit 10.2 to the Current Report on
Form
8-K of Stratus dated September 30, 2005.
|
|
10.4
|
Loan
Agreement dated December 28, 2000, by and between Stratus Properties
Inc.
and Holliday Fenoglio Fowler, L.P., subsequently assigned to an affiliate
of First American Asset Management. Incorporated by reference to
Exhibit
10.20 to the Annual Report on Form 10-K of Stratus for the fiscal
year
ended December 31, 2000.
|
|
10.5
|
Loan
Agreement dated June 14, 2001, by and between Stratus Properties
Inc. and
Holliday Fenoglio Fowler, L.P., subsequently assigned to an affiliate
of
First American Asset Management. Incorporated by reference to Exhibit
10.20 to the Quarterly Report on Form 10-Q of Stratus for the quarter
ended September 30, 2001.
|
|
10.6
|
Construction
Loan Agreement dated June 11, 2001, between 7500 Rialto Boulevard,
L.P.
and Comerica Bank-Texas. Incorporated by Reference to Exhibit 10.26
to
Stratus’ 2001 Form 10-K.
|
|
10.7
|
Modification
Agreement dated January 31, 2003, by and between Lantana Office Properties
I, L.P., formerly 7500 Rialto Boulevard, L.P., and Comerica Bank-Texas.
Incorporated by reference to Exhibit 10.19 to the Quarterly Report
on Form
10-Q of Stratus for the quarter ended March 31,
2003.
|
E-1
|
10.8
|
Second
Modification Agreement dated as of December 29, 2003, to be effective
as
of January 31, 2004, by and between Lantana Office Properties I,
L.P., a
Texas limited partnership (formerly known as 7500 Rialto Boulevard,
L.P.),
as borrower, and Comerica Bank, as lender. Incorporated by reference
to
Exhibit 10.20 to the Annual Report on Form 10-K of Stratus for the
fiscal
year ended December 31, 2003 (Stratus’ 2003 Form 10-K).
|
|
10.9
|
Guaranty
Agreement dated June 11, 2001, by Stratus Properties Inc. in favor
of
Comerica Bank-Texas. Incorporated by Reference to Exhibit 10.27 to
Stratus’ 2001 Form 10-K.
|
|
10.10
|
Loan
Agreement dated September 22, 2003, by and between Calera Court,
L.P., as
borrower, and Comerica Bank, as lender. Incorporated by reference
to
Exhibit 10.26 to the Quarterly Report on Form 10-Q of Stratus for
the
quarter ended September 30, 2003.
|
|
10.11
|
Development
Agreement dated August 15, 2002, between Circle C Land Corp. and
City of
Austin. Incorporated by reference to Exhibit 10.18 to the Quarterly
Report
on Form 10-Q of Stratus for the quarter ended September 30,
2002.
|
|
10.12
|
First
Modification Agreement dated March 27, 2006, by and between Stratus
7000
West Joint Venture, as Old Borrower, and CarrAmerica Lantana, LP,
as New
Borrower, and Teachers Insurance and Annuity Association of America,
as
Lender. Incorporated by reference to Exhibit 10.1 to the Current
Report on
Form 8-K of Stratus dated March 27, 2006.
|
|
10.13
|
Agreement
of Sale and Purchase dated November 23, 2005, by and between Stratus
Properties Operating Co., L.P., as Seller, and Advanced Micro Devices,
Inc., as Purchaser. Incorporated by reference to Exhibit 10.12 to
the
Quarterly Report on Form 10-Q of Stratus for the quarter ended March
31,
2006 (Stratus’ 2006 First Quarter Form 10-Q).
|
|
10.14
|
First
Amendment to Agreement of Sale and Purchase dated April 26, 2006,
by and
between Stratus Properties Operating Co., L.P., as Seller, and Advanced
Micro Devices, Inc., as Purchaser. Incorporated by reference to Exhibit
10.13 to Stratus’ 2006 First Quarter Form 10-Q.
|
|
10.15
|
Deed
of Trust, Assignment of Leases and Rents, Security Agreement and
Fixture
Filing dated as of June 30, 2006, by and among Escarpment Village,
L.P.
and Teachers Insurance and Annuity Association of America. Incorporated
by
reference to Exhibit 10.15 to the Quarterly Report on Form 10-Q of
Stratus
for the quarter ended June 30, 2006 (Stratus’ 2006 Second Quarter Form
10-Q).
|
|
10.16
|
Promissory
Note dated as of June 30, 2006, by and between Escarpment Village,
L.P.
and Teachers Insurance and Annuity Association of America. Incorporated
by
reference to Exhibit 10.16 to Stratus’ 2006 Second Quarter Form
10-Q.
|
|
10.17
|
Amended
and Restated Loan Agreement between Stratus Properties Inc. and American
Strategic Income Portfolio Inc.-II dated as of December 12,
2006.
|
|
10.18
|
Amended
and Restated Loan Agreement between Stratus Properties Inc. and American
Select Portfolio Inc. dated as of December 12, 2006.
|
|
10.19
|
Loan
Agreement between Stratus Properties Inc. and Holliday Fenoglio Fowler,
L.P. dated as of December 12, 2006.
|
|
10.20
|
Loan
Agreement between Stratus Properties Inc. and Holliday Fenoglio Fowler,
L.P. dated as of December 12, 2006.
|
|
Executive
Compensation Plans and Arrangements (Exhibits 10.21 through
10.32)
|
|
|
10.21
|
Stratus’
Performance Incentive Awards Program, as amended, effective February
11,
1999. Incorporated by reference to Exhibit 10.24 to Stratus’ 2004 First
Quarter Form 10-Q.
|
|
10.22
|
Stratus
Stock Option Plan. Incorporated by reference to Exhibit 10.25 to
Stratus’
2003 Form 10-K.
|
E-2
|
10.23
|
Stratus
1996 Stock Option Plan for Non-Employee Directors. Incorporated by
reference to Exhibit 10.22 to the Quarterly Report on Form 10-Q of
Stratus
for the quarter ended June 30, 2005 (Stratus’ 2005 Second Quarter Form
10-Q).
|
|
10.24
|
Stratus
Properties Inc. 1998 Stock Option Plan. Incorporated by reference
to
Exhibit 10.23 to Stratus’ 2005 Second Quarter Form
10-Q.
|
|
10.25
|
Form
of Notice of Grant of Nonqualified Stock Options and Limited Rights
under
the 1998 Stock Option Plan. Incorporated by reference to Exhibit
10.24 to
Stratus’ 2005 Second Quarter Form 10-Q.
|
|
10.26
|
Form
of Restricted Stock Unit Agreement under the 1998 Stock Option Plan.
Incorporated by reference to Exhibit 10.25 to Stratus’ 2005 Second Quarter
Form 10-Q.
|
|
10.27
|
Stratus
Properties Inc. 2002 Stock Incentive Plan. Incorporated by reference
to
Exhibit 10.26 to Stratus’ 2005 Second Quarter Form
10-Q.
|
|
10.28
|
Form
of Notice of Grant of Nonqualified Stock Options and Limited Rights
under
the 2002 Stock Incentive Plan. Incorporated by reference to Exhibit
10.27
to Stratus’ 2005 Second Quarter Form 10-Q.
|
|
10.29
|
Form
of Restricted Stock Unit Agreement under the 2002 Stock Incentive
Plan.
Incorporated by reference to Exhibit 10.28 to Stratus’ 2005 Second Quarter
Form 10-Q.
|
|
10.30
|
Stratus
Director Compensation. Incorporated by reference to Exhibit 10.20
to the
Annual Report on Form 10-K of Stratus for the fiscal year ended December
31, 2005.
|
|
10.31
|
Change
of Control Agreement between Stratus Properties Inc. and William
H.
Armstrong III, effective as of January 26, 2007. Incorporated by
reference
to Exhibit 10.1 to the Current Report on Form 8-K of Stratus dated
January
24, 2007.
|
|
10.32
|
Change
of Control Agreement between Stratus Properties Inc. and John E.
Baker,
effective as of January 26, 2007. Incorporated by reference to Exhibit
10.2 to the Current Report on Form 8-K of Stratus dated January 24,
2007.
|
|
14.1
|
Ethics
and Business Conduct Policy. Incorporated by reference to Exhibit
14.1 to
Stratus’ 2003 Form 10-K.
|
|
21.1
|
List
of subsidiaries.
|
|
23.1
|
Consent
of PricewaterhouseCoopers LLP.
|
|
24.1
|
Certified
resolution of the Board of Directors of Stratus authorizing this
report to
be signed on behalf of any officer or director pursuant to a Power
of
Attorney.
|
|
24.2
|
Power
of attorney pursuant to which a report has been signed on behalf
of
certain officers and directors of Stratus.
|
|
31.1
|
Certification
of Principal Executive Officer pursuant to Rule
13a-14(a)/15d-14(a).
|
|
31.2
|
Certification
of Principal Financial Officer pursuant to Rule
13a-14(a)/15d-14(a).
|
|
32.1
|
Certification
of Principal Executive Officer pursuant to 18 U.S.C. Section
1350.
|
|
32.2
|
Certification
of Principal Financial Officer pursuant to 18 U.S.C. Section
1350.
|
E-3