STRATUS PROPERTIES INC - Quarter Report: 2007 March (Form 10-Q)
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UNITED
STATES
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SECURITIES
AND EXCHANGE COMMISSION
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Washington,
D.C. 20549
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FORM
10-Q
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(Mark
One)
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[X]
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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SECURITIES
EXCHANGE ACT OF 1934
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For
the quarterly period ended March 31, 2007
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or
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[
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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SECURITIES
EXCHANGE ACT OF 1934
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For
the transition period from
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to
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Commission
File Number: 0-19989
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Stratus
Properties Inc.
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(Exact
name of registrant as specified in its
charter)
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Delaware
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72-1211572
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(State
or other jurisdiction of
incorporation
or organization)
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(I.R.S.
Employer Identification No.)
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98
San Jacinto Blvd., Suite 220
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Austin,
Texas
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78701
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(Address
of principal executive offices)
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(Zip
Code)
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(512)
478-5788
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(Registrant's
telephone number, including area code)
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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
ÿo
No
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 Exchange Act (Check
one):
Large
accelerated filer o
Accelerated
filer R
Non-accelerated
filer oÿ
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). ÿo
Yes
R
No
On
March
31, 2007, there were issued and outstanding 7,568,116 shares of the registrant’s
Common Stock, par value $0.01 per share.
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STRATUS
PROPERTIES INC.
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Page
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3
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Condensed
Consolidated Balance Sheets
(Unaudited)
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3
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Consolidated
Statements of Income
(Unaudited)
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4
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Consolidated
Statements of Cash Flows
(Unaudited)
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5
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Notes
to Consolidated Financial Statements
(Unaudited)
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6
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10
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11
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17
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Item
4. Controls and Procedures
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17
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18
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Item
1. Legal Proceedings
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18
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Item
1A. Risk Factors
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18
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18
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18
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Item
6. Exhibits
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19
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20
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E-1
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STRATUS
PROPERTIES INC.
STRATUS
PROPERTIES INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS (Unaudited)
(In
Thousands)
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March
31,
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December
31,
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2007
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2006
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ASSETS
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Current
assets:
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Cash
and cash equivalents, including restricted cash of
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$115
and $116, respectively
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$
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1,304
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$
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1,955
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Accounts
receivable
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1,194
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934
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Deposits,
prepaid expenses and other
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3,558
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3,700
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Deferred
tax asset
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1,161
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1,144
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Total
current assets
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7,217
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7,733
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Real
estate, commercial leasing assets and facilities, net:
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Property
held for sale - developed or under development
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121,604
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116,865
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Property
held for sale - undeveloped
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16,270
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16,345
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Property
held for use, net
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46,284
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46,702
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Investment
in Crestview
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3,800
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3,800
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Deferred
tax asset
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6,997
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7,105
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Other
assets
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5,445
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5,400
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Total
assets
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$
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207,617
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$
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203,950
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LIABILITIES
AND STOCKHOLDERS’ EQUITY
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Current
liabilities:
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Accounts
payable and accrued liabilities
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$
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5,353
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$
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5,988
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Accrued
interest, property taxes and other
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4,245
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6,290
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Current
portion of long-term debt
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316
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311
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Total
current liabilities
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9,914
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12,589
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Long-term
debt
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55,608
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50,364
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Other
liabilities
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6,655
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7,051
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Total
liabilities
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72,177
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70,004
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Stockholders’
equity:
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Preferred
stock
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-
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-
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Common
stock
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81
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81
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Capital
in excess of par value of common stock
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190,130
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188,873
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Accumulated
deficit
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(41,918
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)
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(42,655
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)
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Common
stock held in treasury
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(12,853
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)
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(12,353
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)
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Total
stockholders’ equity
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135,440
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133,946
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Total
liabilities and stockholders' equity
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$
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207,617
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$
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203,950
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The
accompanying notes are an integral part of these consolidated financial
statements.
3
STRATUS
PROPERTIES INC.
CONSOLIDATED
STATEMENTS OF INCOME (Unaudited)
(In
Thousands, Except Per Share Amounts)
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Three
Months Ended
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March
31,
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2007
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2006
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Revenues:
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Real
estate
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$
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4,426
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$
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11,038
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Rental
income
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1,559
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387
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Commissions,
management fees and other
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221
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265
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Total
revenues
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6,206
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11,690
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Cost
of sales:
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Real
estate, net
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1,593
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7,547
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Rental
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1,102
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324
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Depreciation
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539
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186
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Total
cost of sales
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3,234
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8,057
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General
and administrative expenses
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2,001
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1,739
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Total
costs and expenses
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5,235
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9,796
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Operating
income
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971
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1,894
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Interest
expense, net
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(333
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)
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(179
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)
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Interest
income
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529
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14
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Income
from continuing operations before income taxes
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1,167
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1,729
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(Provision
for) benefit from income taxes
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(429
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)
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8,260
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Income
from continuing operations
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738
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9,989
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Income
from discontinued operations (including a gain on sale of
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$7,834,
net of taxes of $1,928, in 2006)
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-
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8,187
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Net
income
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$
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738
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$
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18,176
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Basic
net income per share of common stock:
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Continuing
operations
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$
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0.10
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$
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1.38
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Discontinued
operations
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-
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1.13
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Basic
net income per share of common stock
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$
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0.10
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$
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2.51
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Diluted
net income per share of common stock:
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Continuing
operations
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$
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0.10
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$
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1.30
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Discontinued
operations
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-
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1.06
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Diluted
net income per share of common stock
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$
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0.10
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$
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2.36
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Weighted
average shares of common stock outstanding:
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Basic
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7,549
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7,242
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Diluted
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7,670
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7,697
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The
accompanying notes are an integral part of these consolidated financial
statements.
4
STRATUS
PROPERTIES INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS (Unaudited)
(In
Thousands)
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Three
Months Ended
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March
31,
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2007
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2006
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Cash
flow from operating activities:
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Net
income
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$
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738
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$
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18,176
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Adjustments
to reconcile net income to net cash provided
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by
operating activities:
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Income
from discontinued operations
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-
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(8,187
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)
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Depreciation
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539
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186
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Cost
of real estate sold
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2,610
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6,559
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Deferred
income taxes
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91
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(8,260
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)
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Stock-based
compensation
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527
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447
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Deposits
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(327
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)
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18
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Other
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(10
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(534
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)
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(Increase)
decrease in working capital:
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Accounts
receivable and prepaid expenses
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(239
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)
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(289
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)
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Accounts
payable, accrued liabilities and other
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(2,663
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)
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(2,813
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)
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Net
cash provided by continuing operations
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1,266
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5,303
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Net
cash provided by discontinued operations
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-
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374
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Net
cash provided by operating activities
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1,266
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5,677
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Cash
flow from investing activities:
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Purchases
and development of real estate properties
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(9,176
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)
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(6,039
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)
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Development
of commercial leasing properties and other
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expenditures
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(122
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)
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(96
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)
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Municipal
utility district reimbursements
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2,000
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-
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Net
cash used in continuing operations
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(7,298
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)
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(6,135
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)
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Net
cash provided by discontinued operations
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-
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10,022
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Net
cash (used in) provided by investing activities
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(7,298
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)
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3,887
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Cash
flow from financing activities:
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Borrowings
from revolving credit facility
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10,950
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7,500
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Payments
on revolving credit facility
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(5,625
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)
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(9,507
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)
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Payments
on TIAA mortgage
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(76
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)
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-
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Borrowings
from project loans
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-
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2,236
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Repayments
on project loans
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-
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(3,101
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)
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Net
(payments for) proceeds from exercised stock options
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(38
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)
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725
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Excess
tax benefit from exercised stock options
|
323
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-
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Purchases
of Stratus common shares
|
(153
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)
|
(254
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)
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Net
cash provided by (used in) financing activities
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5,381
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(2,401
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)
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Net
(decrease) increase in cash and cash equivalents
|
(651
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)
|
7,163
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Cash
and cash equivalents at beginning of year
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1,955
|
1,901
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Cash
and cash equivalents at end of period
|
1,304
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9,064
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Less
cash restricted as to use
|
(115
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)
|
(301
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)
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Unrestricted
cash and cash equivalents at end of period
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$
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1,189
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$
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8,763
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The
accompanying notes are an integral part of these consolidated financial
statements.
5
STRATUS
PROPERTIES INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| 1. |
GENERAL
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The
accompanying unaudited consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto for
the
year ended December 31, 2006, included in Stratus Properties Inc.’s (Stratus)
Annual Report on Form 10-K (Stratus 2006 Form 10-K) filed with the Securities
and Exchange Commission. In the opinion of management, the accompanying
consolidated financial statements reflect all adjustments (consisting only
of
normal recurring items) considered necessary for a fair statement of the
financial position of Stratus at March 31, 2007, and the results of operations
and cash flows for the three-month periods ended March 31, 2007 and 2006.
Operating results for the three months ended March 31, 2007 are not necessarily
indicative of the results that may be expected for the year ending December
31,
2007. Certain prior year amounts have been reclassified to conform to the
current year presentation.
| 2. |
EARNINGS
PER SHARE
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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 period. 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):
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Three
Months Ended
|
||||||
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March
31,
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||||||
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2007
|
2006
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|||||
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Income
from continuing operations
|
$
|
738
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$
|
9,989
|
||
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Income
from discontinued operations
|
-
|
8,187
|
||||
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Net
income
|
$
|
738
|
$
|
18,176
|
||
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Weighted
average common shares outstanding
|
7,549
|
7,242
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Add:
Dilutive stock options
|
103
|
406
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||||
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Restricted
stock
|
18
|
49
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||||
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Weighted
average common shares outstanding for
|
||||||
|
purposes
of calculating diluted net income per share
|
7,670
|
7,697
|
||||
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Diluted
net income per share of common stock:
|
||||||
|
Continuing
operations
|
$
|
0.10
|
$
|
1.30
|
||
|
Discontinued
operations
|
-
|
1.06
|
||||
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Diluted
net income per share of common stock
|
$
|
0.10
|
$
|
2.36
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| 3. |
DEBT
OUTSTANDING
|
At
March
31, 2007, Stratus had total debt of $55.9 million, including $0.3 million of
current debt, compared to total debt of $50.7 million, including $0.3 million
of
current debt, at December 31, 2006. Stratus’ debt outstanding at March 31, 2007
consisted of the following:
| · |
$8.3
million of net borrowings under the $45.0 million Comerica revolving
credit facility. The $45.0 million facility, of which $3.0 million
is
provided for Stratus’ Calera Court project, matures on May 30,
2008.
|
| · |
$25.0
million of borrowings outstanding under four unsecured term loans,
including two $5.0 million loans, an $8.0 million loan and a $7.0
million
loan, all of which will mature in December
2011.
|
| · |
$22.6
million related to the mortgage from the Teachers Insurance and Annuity
Association of America (TIAA) associated with the Escarpment Village
shopping center, which matures in July
2016.
|
For
a
further discussion of Stratus’ debt see Note 4 of the Stratus 2006 Form
10-K.
6
| 4. |
RESTRICTED
CASH,
INTEREST COST AND STOCK-BASED
COMPENSATION
|
Restricted
Cash.
Restricted cash totaled $0.1 million at March 31, 2007 and December 31, 2006,
primarily representing funds held for payment of fractional shares resulting
from the May 2001 stock split (see Note 6 of the Stratus 2006 Form
10-K).
Interest
Cost.
Interest
expense excludes capitalized interest of $0.6 million in the first quarter
of
2007 and $0.8 million in the first quarter of 2006.
Stock-Based
Compensation.
Stock-based compensation costs are capitalized as appropriate. Compensation
cost
charged against earnings for stock-based awards is shown below (in
thousands).
|
Three
Months Ended
|
|||||||
|
March
31,
|
|||||||
|
2007
|
2006
|
||||||
|
Stock
options awarded to employees (including directors)
|
$
|
117
|
$
|
145
|
|||
|
Restricted
stock units
|
508
|
421
|
|||||
|
Less
capitalized amounts
|
(98
|
)
|
(119
|
)
|
|||
|
Impact
on net income
|
$
|
527
|
$
|
447
|
|||
Stock
options representing 40,325 shares at a weighted average option price of $7.65
per share were exercised in the first quarter of 2007. The tax benefit realized
for the tax deductions from stock option exercises totaled $0.3 million for
the
three months ended March 31, 2007 and $0.6 million for the three months ended
March 31, 2006. 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. Shares tendered to Stratus for these purposes
totaled approximately 32,500 shares for the three months ended March 31, 2007.
Stratus paid $0.1 million of employee taxes for stock options in the first
quarter of 2007. Stratus granted 38,000 restricted stock units in the three
months ended March 31, 2007, at a grant date fair value of $1.3 million. For
more information regarding Stratus’ stock-based awards see Notes 1 and 6 of the
Stratus 2006 Form 10-K.
| 5. |
DISCONTINUED
OPERATIONS
|
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 Lantana, LP (CarrAmerica) for
$22.3
million, resulting in a $9.8 million ($7.8 million net of taxes) gain in the
first quarter of 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.
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 for the three
months ended March 31, 2006 (in thousands):
|
Rental
income
|
$
|
1,057
|
||
|
Rental
property costs
|
(403
|
)
|
||
|
General
and administrative expenses
|
(48
|
)
|
||
|
Interest
expensea
|
(168
|
)
|
||
|
Interest
income
|
2
|
|||
|
Gain
on sale
|
9,762
|
|||
|
Provision
for income taxes
|
(2,015
|
)
|
||
|
Income
from discontinued operations
|
$
|
8,187
|
||
| a. |
Relates
to interest expense from 7000 West project loan and does not include
any
additional allocations of interest.
|
For
a
further discussion of Stratus’ discontinued operations see Note 7 of the Stratus
2006 Form 10-K.
7
| 6. |
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. The Deerfield property in Plano, Texas is also included
in the Real Estate Operations segment.
The
Commercial Leasing segment includes two office buildings at 7500 Rialto
Boulevard and the Escarpment Village project. As of March 31, 2007, the first
75,000-square-foot building at 7500 Rialto Boulevard was approximately 96
percent leased and the second 75,000-square-foot building, which opened in
September 2006, was approximately 50 percent leased. Southwest Property Services
L.L.C., a wholly owned subsidiary of Stratus, manages these office buildings.
Rental income from Escarpment Village totaled $0.9 million in the first quarter
of 2007 and less than $0.1 million in the first quarter of 2006. Stratus sold
the two 70,000-square-foot office buildings at 7000 West in March 2006 (see
Note
5). The 7000 West operating results are reported as discontinued operations
for
the three months ended March 31, 2006.
As
of
March 31, 2007, Stratus’ minimum rental income which includes scheduled rent
increases, under noncancelable long-term leases which extend to 2026, totaled
$48.9 million, including $3.6 million in the last three quarters of 2007, $4.8
million in 2008, $4.4 million in 2009, $3.8 million in 2010, $3.3 million in
2011 and $29.0 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 March 31, 2007,
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.
|
Real
Estate Operationsa
|
Commercial
Leasing
|
Other
|
Total
|
|||||||||
|
(In
Thousands)
|
||||||||||||
|
Three
Months Ended March 31, 2007
|
||||||||||||
|
Revenues
|
$
|
4,647
|
$
|
1,559
|
$
|
-
|
$
|
6,206
|
||||
|
Cost
of sales, excluding depreciation
|
(1,593
|
)
|
(1,102
|
)
|
-
|
(2,695
|
)
|
|||||
|
Depreciation
|
(32
|
)
|
(507
|
)
|
-
|
(539
|
)
|
|||||
|
General
and administrative expenses
|
(1,721
|
)
|
(280
|
)
|
-
|
(2,001
|
)
|
|||||
|
Operating
income (loss)
|
$
|
1,301
|
$
|
(330
|
)
|
$
|
-
|
$
|
971
|
|||
|
Provision
for income taxes
|
$
|
-
|
$
|
-
|
$
|
(429
|
)
|
$
|
(429
|
)
|
||
|
Capital
expenditures
|
$
|
9,176
|
$
|
122
|
$
|
-
|
$
|
9,298
|
||||
|
Total
assets
|
$
|
142,836
|
$
|
56,224
|
$
|
8,557
|
b
|
$
|
207,617
|
|||
|
Three
Months Ended March 31, 2006
|
||||||||||||
|
Revenues
|
$
|
11,303
|
$
|
387
|
$
|
-
|
$
|
11,690
|
||||
|
Cost
of sales, excluding depreciation
|
(7,547
|
)
|
(324
|
)
|
-
|
(7,871
|
)
|
|||||
|
Depreciation
|
(33
|
)
|
(153
|
)
|
-
|
(186
|
)
|
|||||
|
General
and administrative expense
|
(1,609
|
)
|
(130
|
)
|
-
|
(1,739
|
)
|
|||||
|
Operating
income (loss)
|
$
|
2,114
|
$
|
(220
|
)
|
$
|
-
|
$
|
1,894
|
|||
|
Income
from discontinued operations
|
$
|
-
|
$
|
8,187
|
c
|
$
|
-
|
$
|
8,187
|
|||
|
Benefit
from income taxes
|
$
|
-
|
$
|
-
|
$
|
8,260
|
$
|
8,260
|
||||
|
Capital
expenditures
|
$
|
6,039
|
$
|
96
|
$
|
-
|
$
|
6,135
|
||||
|
Total
assets
|
$
|
154,537
|
$
|
14,612
|
$
|
8,305
|
b
|
$
|
177,454
|
|||
8
| a. |
Includes
sales commissions, management fees and other revenues together with
related expenses.
|
| b. |
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 7).
|
| c. |
Includes
a $7.8 million gain, net of taxes of $1.9 million, on the sale of
7000
West.
|
| 7. |
INCOME
TAXES
|
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 our deferred tax assets
is
dependent on generating sufficient taxable income within the carryforward period
available under tax law. In March 2006, Stratus sold 7000 West (see Note 5)
and
in April 2006, Stratus completed the sale of 58 acres at Lantana. These
transactions generated pre-tax income of approximately $26 million and, along
with Stratus’ current homebuilder contract arrangements and projected levels of
future sales, provide sufficient evidence that Stratus will more likely than
not
be able to realize all of its deferred tax assets. As a result, first-quarter
2006 income from continuing operations included an $8.3 million, $1.14 per
basic
share and $1.07 per diluted share, tax benefit resulting from the reversal
of a
portion of our deferred tax asset valuation allowance. Stratus’ first-quarter
2007 provision for income taxes totaled $0.4 million, $0.06 per
share.
Effective
January 1, 2007, Stratus adopted Financial Accounting Standards Board (FASB)
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 issues. The adoption of FIN 48 had no
material effect on Stratus’ financial statements.
Stratus
files income tax returns in the U.S. federal jurisdiction and various state
and
local jurisdictions. With few exceptions, Stratus is no longer subject to U.S.
federal or state and local income tax examinations by tax authorities for the
years prior to 2003. Recently, the Texas Comptroller of Public Accounts (the
Comptroller) notified Stratus of their plan to conduct a routine audit of
Stratus’ Texas Franchise Tax account. Stratus anticipates that the Comptroller
will complete this examination by the end of 2007. Stratus does not anticipate
that adjustments resulting from this examination, if any, would result in a
material change to its financial position or results of operations.
Stratus
will recognize interest accrued related to unrecognized tax benefits in interest
expense and penalties in non-operating expenses.
| 8. |
NEW
ACCOUNTING STANDARDS
|
In
September 2006, the FASB issued Statement of Financial Accounting Standards
(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 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.
In
February 2007, the FASB issued SFAS No. 159 “The Fair Value Option for Financial
Assets and Liabilities - Including an amendment of FASB No. 115.” SFAS No. 159
permits entities to choose to measure many financial instruments and certain
other items at fair value. This statement is effective for fiscal years
beginning after November 15, 2007, with early adoption allowed. Stratus has
not
yet determined the impact, if any, that adopting this standard might have on
its
financial statements.
9
The
financial information as of March 31, 2007, and for the three-month periods
ended March 31, 2007 and 2006, included in Part I of this Form 10-Q pursuant
to
Rule 10-01 of Regulation S-X has been reviewed by PricewaterhouseCoopers LLP
(PricewaterhouseCoopers), Stratus’ independent registered public accounting
firm, in accordance with the standards of the Public Company Accounting
Oversight Board (United States). PricewaterhouseCoopers’ report is included in
this quarterly report.
PricewaterhouseCoopers
does not carry out significant or additional procedures beyond those that would
have been necessary if its report had not been included in this quarterly
report. Accordingly, such report is not a “report” or “part of a registration
statement” within the meaning of Sections 7 and 11 of the Securities Act of 1933
and the liability provisions of Section 11 of such Act do not
apply.
REPORT
OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and Stockholders
of
Stratus Properties Inc.:
We
have
reviewed the accompanying condensed consolidated balance sheet of Stratus
Properties Inc. and its subsidiaries as of March 31, 2007, and the related
consolidated statements of income and of cash flows for each of the three-month
periods ended March 31, 2007 and 2006. These interim financial statements are
the responsibility of the Company’s management.
We
conducted our review in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board (United States),
the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an
opinion.
Based
on
our review, we are not aware of any material modifications that should be made
to the accompanying condensed consolidated interim financial statements for
them to
be in
conformity with accounting principles generally accepted in the United States
of
America.
We
previously audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheet
as of
December 31, 2006, and the related consolidated statements of income, of changes
in stockholders’ equity and of cash flows for the year then ended (not presented
herein), and in our report dated March 15, 2007, we expressed an unqualified
opinion on those consolidated financial statements with an explanatory paragraph
for the Company’s change in accounting for stock-based compensation. In our
opinion, the information set forth in the accompanying condensed consolidated
balance sheet as of December 31, 2006, is fairly stated in all material respects
in relation to the consolidated balance sheet from which it has been
derived.
/s/
PricewaterhouseCoopers LLP
Austin,
Texas
May
10,
2007
10
OVERVIEW
Management’s
discussion and analysis presented below should be read in conjunction with
our
discussion and analysis of financial results contained in our 2006 Annual Report
on Form 10-K (2006 Form 10-K). The operating results summarized in this report
are not necessarily indicative of our future operating results. All subsequent
references to Notes refer to Notes to Consolidated Financial Statements, unless
otherwise stated.
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
March 31, 2007, our most significant holding is the 1,728 acres of residential,
multi-family and commercial property and 34 developed residential estate lots
located within the Barton Creek community. We also own approximately 350 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 currently 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 March 31,
2007, Meridian consisted of approximately 282 acres and 60 developed residential
lots. Our remaining Austin holdings at March 31, 2007, consisted of 223 acres
of
commercial property and two 75,000-square-foot office buildings at 7500 Rialto
Boulevard (one of which was approximately 96 percent leased and the other was
approximately 50 percent leased) located in Lantana.
At
March
31, 2007, our Deerfield property, which is located in Plano, Texas, consists
of
approximately eight acres of residential land, which is being developed, and
49
developed residential lots. We also own two acres of undeveloped commercial
property in San Antonio, Texas.
In
November 2005, we formed a joint venture 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 Trammell Crow, we have
commenced brown field remediation and permitting of the property.
In
December 2006, we acquired a city block in downtown Austin for $15.1 million.
The project, known as Block 21, is planned for a mixture of retail, hotel,
residential, and entertainment uses on approximately two acres as more fully
discussed in “Development and Other Activities.”
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 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
of
Austin (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
11
opportunities,
and believe we can obtain bank financing for developing our properties at a
reasonable cost. See “Risk Factors” located in Item 1A. of our 2006 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
entertainment 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 agreements for the new studio for KLRU’s “Austin City Limits”
program and for the Austin Children’s Museum. On May 8, 2007, Stratus announced
its partnership with Canyon-Johnson, a joint venture between the Los
Angeles-based Canyon Capital Realty Advisors and Earvin "Magic" Johnson, for
the
development of Block 21. We have begun the permitting process with the City
and
expect construction to begin in the third quarter of 2007.
Lantana.
Lantana
is a partially developed, mixed-use project with remaining entitlements for
approximately 1.0 million square feet of office and retail use on 223 acres
as
of March 31, 2007. Regional utility and road infrastructure is in place with
capacity to serve Lantana at full build-out permitted under our existing
entitlements.
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 March 31, 2007, we had leased approximately 50 percent of the
space at the second office building and approximately 96 percent of the original
office building. We sold our two 7000 West office buildings in March 2006 (see
Note 5).
Barton
Creek Community.
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
March 31, 2007, our remaining unsold developed lots within the Barton Creek
Community included: Calera Drive - 10 lots, Wimberly Lane Phase II - 11 lots,
Calera Court - 8 lots and Mirador - 5 lots. Development of the remaining Barton
Creek property is expected to occur over several years.
In
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. 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.
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 homesites 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 March 31, 2007, only 10 lots remained unsold at Calera
Drive. Development of the final phase, known as Verano Drive, will include
71
single-family lots. Construction of the final phase of Calera was initiated
in
the first quarter of 2007 and is scheduled for completion 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
12
830
single-family residential lots. Meridian is an 800-lot residential development
at the Circle C community. In January 2005, the first phase of construction
commenced. 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 and second phases each consisted of 134 lots. The
first phase was substantially completed at the end of 2005. Development of
the
second phase commenced in the third quarter of 2005 and was substantially
completed in March 2006. Development of the 108-lot third phase of Meridian
has
commenced and is expected to be completed by September 2007. The 118-lot fourth
phase 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 commenced in April 2007 and substantial completion
is
expected during the third quarter of 2007. Development of the final phase of
Meridian, which consists of 57 one-acre lots, is expected to commence by the
end
of 2007.
We
estimate our sales from the first two phases of Meridian will total at least
26
lots for $1.8 million during the second quarter of 2007.
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 March 31,
2007, we had leases for approximately 156,100 square feet or 93 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. We executed agreements with a national homebuilder,
whereby 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 15 lot sales for
$1.0 million to be completed during the second quarter of 2007.
Crestview
Station.
In
November 2005, we formed a joint venture 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 Trammell Crow, we have
commenced brown field remediation and permitting of the property, known as
Crestview Station, which is located on the commuter rail line 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 March 31, 2007, 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 maintain 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.
13
Summary
operating results follow (in thousands):
|
First
Quarter
|
||||||
|
2007
|
2006
|
|||||
|
Revenues:
|
||||||
|
Real
estate operations
|
$
|
4,647
|
$
|
11,303
|
||
|
Commercial
leasing
|
1,559
|
387
|
||||
|
Total
revenues
|
$
|
6,206
|
$
|
11,690
|
||
|
Operating
income
|
$
|
971
|
$
|
1,894
|
||
|
(Provision
for) benefit from income taxes
|
$
|
(429
|
)
|
$
|
8,260
|
|
|
Income
from continuing operations
|
$
|
738
|
$
|
9,989
|
||
|
Income
from discontinued operations
|
-
|
8,187
|
||||
|
Net
income
|
$
|
738
|
$
|
18,176
|
||
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 March 2006, we sold 7000 West (see Note 5) and
in
April 2006, we completed the sale of 58 acres at our Lantana property. These
transactions generated pre-tax income of approximately $26 million and, along
with our current homebuilder contract arrangements and projected levels of
future sales, provide sufficient evidence that we will more likely than not
be
able to realize all of our deferred tax assets. As a result, first-quarter
2006
income from continuing operations included an $8.3 million, $1.14 per basic
share and $1.07 per diluted share, tax benefit resulting from the reversal
of a
portion of our deferred tax asset valuation allowance.
We
have
two operating segments, “Real Estate Operations” and “Commercial Leasing” (see
Note 6). The following is a discussion of our operating results by
segment.
Real
Estate Operations
Summary
real estate operating results follow (in thousands):
|
First
Quarter
|
||||||
|
2007
|
2006
|
|||||
|
Revenues:
|
||||||
|
Developed
property sales
|
$
|
3,343
|
$
|
9,538
|
||
|
Undeveloped
property sales
|
1,083
|
1,500
|
||||
|
Commissions,
management fees and other
|
221
|
265
|
||||
|
Total
revenues
|
4,647
|
11,303
|
||||
|
Cost
of sales, including depreciation
|
(1,625
|
)
|
(7,580
|
)
|
||
|
General
and administrative expenses
|
(1,721
|
)
|
(1,609
|
)
|
||
|
Operating
income
|
$
|
1,301
|
$
|
2,114
|
||
Developed
Property Sales. Property
sales for the first quarters of 2007 and 2006 included the following (revenues
in thousands):
14
|
First
Quarter
|
||||||||
|
2007
|
2006
|
|||||||
|
Lots
|
Revenues
|
Lots
|
Revenues
|
|||||
|
Residential
Properties:
|
||||||||
|
Barton
Creek
|
||||||||
|
Calera
Drive
|
-
|
$
-
|
6
|
$2,902
|
||||
|
Calera
Court Courtyard Homes
|
-
|
-
|
4
|
2,312
|
||||
|
Mirador
Estate
|
-
|
-
|
2
|
1,065
|
||||
|
Wimberly
Lane Phase II
|
||||||||
|
Standard
Homebuilder Estate
|
3
|
523
|
2
|
301
|
||||
|
Circle
C
|
||||||||
|
Meridian
|
28
|
1,816
|
39
|
2,287
|
||||
|
Deerfield
|
15
|
1,004
|
10
|
671
|
||||
|
Total
Residential
|
46
|
$3,343
|
63
|
$9,538
|
||||
Undeveloped
Property Sales.
We sold
a five-acre tract at Circle C for $1.1 million during the first quarter of
2007
and a 7.5-acre tract in the Barton Creek community for $1.5 million during
the
first quarter of 2006.
Commissions,
Management Fees and Other.
Commissions, management fees and other revenues totaled $0.2 million in the
first quarter of 2007, compared to $0.3 million in the first quarter of 2006,
and included sales of our development fee credits to third parties totaling
$0.1
million in the 2007 quarter and $0.2 million in the 2006 quarter. We received
these development fee credits as part of the Circle C settlement (see Note
8 of
our 2006 Form 10-K).
Cost
of Sales and General and Administrative Expenses.
Cost of
sales totaled $1.6 million, including a reduction of $1.6 million for Barton
Creek Municipal Utility District (MUD) reimbursements, in the first quarter
of
2007 and $7.6 million in the first quarter of 2006. Cost of sales for the 2007
quarter also decreased compared to the 2006 quarter because of a decrease in
developed property sales in the 2007 quarter. General and administrative
expenses increased to $1.7 million in the first quarter of 2007 from $1.6
million in the first quarter of 2006 primarily because of higher compensation
costs.
Commercial
Leasing
Our
commercial leasing operating results primarily reflect the activities at
Escarpment Village and the two office buildings at 7500 Rialto Boulevard. The
results for 7000 West which was sold in March 2006 are classified as
discontinued operations for the 2006 quarter (see below). Summary commercial
leasing operating results follow (in thousands):
|
First
Quarter
|
||||||
|
2007
|
2006
|
|||||
|
Rental
income
|
$
|
1,559
|
$
|
387
|
||
|
Rental
property costs
|
(1,102
|
)
|
(324
|
)
|
||
|
Depreciation
|
(507
|
)
|
(153
|
)
|
||
|
General
and administrative expenses
|
(280
|
)
|
(130
|
)
|
||
|
Operating
loss
|
$
|
(330
|
)
|
$
|
(220
|
)
|
In
January 2006, we began earning rental income (less than $0.1 million for the
first quarter of 2006) from Escarpment Village. The grand opening of the
Escarpment Village shopping center occurred on May 12, 2006. Rental income
for
Escarpment totaled $0.9 million for the first quarter of 2007. Rental income
for
7500 Rialto Boulevard increased to $0.6 million in the first quarter of 2007
reflecting the opening of the second office building in September 2006, compared
with $0.3 million in the 2006 quarter.
Other
Financial Results
General
and administrative expenses increased to $2.0 million in the first quarter
of
2007 from $1.7 million in the first quarter of 2006, primarily because of higher
compensation costs.
15
Non-Operating Results
Interest
income totaled $0.5 million in the first quarter of 2007, compared with less
than $0.1 million in the first quarter of 2006, primarily reflecting interest
on
MUD reimbursements totaling approximately $0.5 million in the 2007
quarter.
DISCONTINUED
OPERATIONS - 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 $9.8 million ($7.8 million net of taxes or $1.08 per
basic share and $1.02 per diluted share) gain in the first quarter of 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.
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 $8.2 million, including a $7.8
million gain net of taxes on the sale, in the first quarter of 2006. We earned
rental income of $1.1 million in the first quarter of 2006 from the two fully
leased office buildings at 7000 West.
CAPITAL
RESOURCES AND LIQUIDITY
Comparison
of First-Quarter 2007 and 2006 Cash Flows
Operating
activities provided cash of $1.3 million during the first quarter of 2007 and
$5.7 million during the first quarter of 2006, including cash provided by
discontinued operations totaling $0.4 million during the first quarter of 2006.
Compared to the 2006 quarter, operating cash flows in the first quarter of
2007
were reduced primarily because of the decrease in sales activities.
Cash
used
in investing activities totaled $7.3 million during the first quarter of 2007
and cash provided by investing activities totaled $3.9 million during the first
quarter of 2006. We received $2.0 million of Barton Creek municipal utility
district reimbursements in the first quarter of 2007. First-quarter 2006
included $10.0 million received from the sale of 7000 West (see “Discontinued
Operations - 7000 West”). Other real estate expenditures for the first quarters
of 2007 and 2006 included development costs for properties in the Barton Creek,
Lantana and Circle C communities (see “Development and Other
Activities”).
Financing
activities provided cash of $5.4 million during the first quarter of 2007,
compared to $2.4 million of cash used in financing activities during the first
quarter of 2006. Our financing activities in the first quarter of 2007 include
$5.3 million of net borrowings on our revolving line of credit and $0.1 million
of mortgage payments on our TIAA loan. In the first quarter of 2007, we also
used $0.2 million to repurchase shares of our common stock on the open market
(see below). During the first quarter of 2006, our financing activities included
$2.0 million of net repayments on our revolving line of credit and $0.9 million
of net repayments on our project construction loans, including net repayments
of
$0.9 million from the Deerfield loan and $0.9 million from the Meridian project
loan partly offset by $1.0 million of borrowings on the Escarpment Village
loan.
See “Credit Facility and Other Financing Arrangements” below for a discussion of
our outstanding debt at March 31, 2007.
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 the first quarter of 2007, we
purchased 4,400 shares for $0.2 million, a $34.85 per share average. A total
of
465,410 shares remain available under this program. Our loan agreement with
Comerica provides a limit of $6.5 million for common stock purchases after
September 30, 2005 of which $5.7 million is available at March 31, 2007. 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.
Credit
Facility and Other Financing Arrangements
At
March
31, 2007, we had total debt of $55.9 million, including $0.3 million of current
debt, compared to total debt of $50.7 million, including $0.3 million of current
debt, at December 31, 2006. Our debt outstanding at March 31, 2007 consisted
of
the following:
16
| · |
$8.3
million of net borrowings under the $45.0 million Comerica revolving
credit facility. The $45.0 million facility, of which $3.0 million
is
provided for our Calera Court project, matures on May 30,
2008.
|
| · |
$25.0
million of borrowings outstanding under four unsecured term loans,
including two $5.0 million loans, an $8.0 million loan and a $7.0
million
loan, all of which will mature in December
2011.
|
| · |
$22.6
million related to the mortgage from the Teachers Insurance and Annuity
Association of America (TIAA) associated with the Escarpment Village
shopping center, which matures in July
2016.
|
For
a
further discussion of our debt see Note 4 of our 2006 Form 10-K.
STOCK
BASED COMPENSATION
Effective
January 1, 2006, we adopted the fair value recognition provisions of Statement
of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment”
or (SFAS No. 123R), using the modified prospective transition method. For more
information regarding our accounting for stock-based awards see Note 1 of our
2006 Form 10-K.
Compensation
cost charged against earnings for stock-based awards is shown below (in
thousands). We capitalized $0.1 million of stock-based compensation costs to
fixed assets in the first quarter of 2007 and 2006.
|
Three
Months Ended
March
31,
|
|||||||
|
2007
|
2006
|
||||||
|
Cost
of sales
|
$
|
203
|
$
|
133
|
|||
|
General
and administrative expenses
|
324
|
314
|
|||||
|
Total
stock-based compensation cost
|
$
|
527
|
$
|
447
|
|||
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
our 2006 Form 10-K.
There
have been no significant changes in our market risks since the year ended
December 31, 2006. For more information, please read the consolidated financial
statements and notes thereto included in our Annual Report on Form 10-K for
the
year ended December 31, 2006.
Item
4.
Controls
and Procedures.
(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 quarterly
report on Form 10-Q. 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 filings.
17
(b) Changes in internal controls. There has been no change in our internal control over financial reporting that occurred during the first quarter that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.
Item
1.
Legal
Proceedings.
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.
Item
1A.
Risk
Factors.
There
have been no material changes to our risk factors since the year ended December
31, 2006. For more information, please read Item 1A included in our Form 10-K
for the year ended December 31, 2006.
The
following table sets forth shares of our common stock we repurchased during
the
three-month period ended March 31, 2007.
|
Current
Programa
|
|||||||||
|
Period
|
Total
Shares Purchased
|
Average
Price Paid Per Share
|
Shares
Purchased
|
Shares
Available for Purchase
|
|||||
|
January
1 to 31, 2007
|
-
|
$
|
-
|
-
|
469,810
|
||||
|
February
1 to 28, 2007
|
-
|
-
|
-
|
469,810
|
|||||
|
March
1 to 31, 2007
|
11,347
|
b
|
33.56
|
b
|
4,400
|
465,410
|
|||
|
Total
|
11,347
|
$
|
33.56
|
4,400
|
|||||
| 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 March 31, 2007, $5.7 million remains under
the
Comerica agreement for purchases of common
stock.
|
| b. |
Includes
6,947 shares repurchased (at $32.75 per share) under Stratus’
applicable stock incentive plans (Plans). Stratus repurchased previously
issued shares to satisfy exercise prices on option awards under the
Plans.
|
Our
annual meeting of stockholders was held on May 8, 2007 (the “Annual Meeting”).
Proxies were solicited pursuant to Regulation 14A under the Securities Exchange
Act of 1934, as amended. The following matters were submitted to a vote of
security holders during our Annual Meeting:
|
Votes
Cast For
|
Authority
Withheld
|
||
|
1.
Election of Director:
|
|||
|
William
H. Armstrong III
|
6,615,207
|
774,792
|
There
were no abstentions with respect to the election of directors. In addition
to
the directors elected at the Annual Meeting, the terms of the following
directors continued after the Annual Meeting: Bruce G. Garrison, James C. Leslie
and Michael D. Madden.
18
|
Broker
|
||||||||
|
For
|
Against
|
Abstentions
|
Non-Votes
|
|||||
|
2.
Ratification of
|
||||||||
|
PricewaterhouseCoopers
|
||||||||
|
LLP
as independent
|
||||||||
|
auditor
|
7,362,992
|
23,961
|
3,026
|
-
|
||||
|
3.
Stockholder proposal
|
||||||||
|
regarding
declassification
|
||||||||
|
of
the board of directors
|
1,668,656
|
980,921
|
59,822
|
4,680,600
|
Item
6.
Exhibits.
The
exhibits to this report are listed in 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
Securities and Exchange Commission upon request.
19
Pursuant
to the requirements 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/
John E. Baker
-----------------------------------
John
E.
Baker
Senior
Vice President and
Chief
Financial Officer
(authorized
signatory and
Principal
Financial Officer)
Date: May
10,
2007
20
STRATUS
PROPERTIES INC.
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 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 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
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.
Incorporated by reference to Exhibit 10.17 to the Annual Report on
Form
10-K of Stratus for the year ended December 31, 2006 (Stratus’ 2006 Form
10-K).
|
|
10.18
|
Amended
and Restated Loan Agreement between Stratus Properties Inc. and American
Select Portfolio Inc. dated as of December 12, 2006. Incorporated
by
reference to Exhibit 10.18 to Stratus’ 2006 Form 10-K.
|
|
10.19
|
Loan
Agreement between Stratus Properties Inc. and Holliday Fenoglio Fowler,
L.P. dated as of December 12, 2006. Incorporated by reference to
Exhibit
10.19 to Stratus’ 2006 Form 10-K.
|
|
10.20
|
Loan
Agreement between Stratus Properties Inc. and Holliday Fenoglio Fowler,
L.P. dated as of December 12, 2006. Incorporated by reference to
Exhibit
10.20 to Stratus’ 2006 Form 10-K.
|
|
Executive
Compensation Plans and Arrangements (Exhibits 10.21 through
10.32)
|
E-2
|
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.
|
|
Stratus
Properties Inc. Stock Option Plan, as amended and
restated.
|
|
|
Stratus
Properties Inc. 1996 Stock Option Plan for Non-Employee Directors,
as
amended and restated.
|
|
|
Stratus
Properties Inc. 1998 Stock Option Plan, as amended and
restated.
|
|
|
10.25
|
Form
of Notice of Grant of Nonqualified Stock Options under the 1998 Stock
Option Plan. Incorporated by reference to Exhibit 10.24 to the Quarterly
Report on Form 10-Q of Stratus for the quarter ended June 30, 2005
(Stratus’ 2005 Second Quarter Form 10-Q).
|
|
Form
of Restricted Stock Unit Agreement under the 1998 Stock Option
Plan.
|
|
|
Stratus
Properties Inc. 2002 Stock Incentive Plan, as amended and
restated.
|
|
|
10.28
|
Form
of Notice of Grant of Nonqualified Stock Options under the 2002 Stock
Incentive Plan. Incorporated by reference to Exhibit 10.27 to Stratus’
2005 Second Quarter Form 10-Q.
|
|
Form
of Restricted Stock Unit Agreement under the 2002 Stock Incentive
Plan.
|
|
|
10.30
|
Stratus
Director Compensation. Incorporated by reference to Exhibit 10.20
to the
Annual Report on Form 10-K of Stratus for the 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.
|
|
Letter
from PricewaterhouseCoopers LLP regarding the unaudited interim financial
statements.
|
|
|
Certification
of Principal Executive Officer pursuant to Rule
13a-14(a)/15d-14(a).
|
|
|
Certification
of Principal Financial Officer pursuant to Rule
13a-14(a)/15d-14(a).
|
|
|
Certification
of Principal Executive Officer pursuant to 18 U.S.C. Section
1350.
|
|
|
Certification
of Principal Financial Officer pursuant to 18 U.S.C. Section
1350.
|
E-3