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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-K
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(Mark
One)
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[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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For
the fiscal year ended December 31, 2007
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OR
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[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE 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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(IRS
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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Securities
registered pursuant to Section 12(b) of the Act:
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Title
of each class
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Name
of each exchange on which registered
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Common
Stock, par value $0.01 per share
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NASDAQ
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Preferred
Stock Purchase Rights
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NASDAQ
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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, non-accelerated filer or a smaller reporting
company. See definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act. (Check one): 0 Large
accelerated filer R Accelerated
filer 0
Non-accelerated filer 0 Smaller
reporting company
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 $133.8 million on February 29, 2008, and approximately $152.4
million on June 30, 2007.
Common
stock issued and outstanding was 7,566,181 shares on February 29, 2008, and
7,568,416 shares on June 30, 2007.
DOCUMENTS
INCORPORATED BY REFERENCE
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Portions
of our Proxy Statement for our 2008 Annual Meeting to be held on May 6,
2008, are incorporated by reference into Part III (Items
10, 11, 12, 13 and 14) of this report.
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STRATUS
PROPERTIES INC.
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Except
as otherwise described herein or the context otherwise requires, all references
to “Stratus,” “we,” “us,” and “our” in this Form 10-K refer to Stratus
Properties Inc. and all entities owned or controlled by Stratus Properties Inc.
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 available, free of charge, through our website,
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 website as soon
as reasonably practicable after we electronically file or furnish such material
to the SEC. All subsequent references to “Notes” in this report refer to the
Notes to Consolidated Financial Statements located in Item 8. of 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, 2007, our most significant holding is the 1,678 acres of
residential, multi-family and commercial property and 25 developed residential
estate lots located within the Barton Creek community. We also own approximately
350 acres of undeveloped commercial property and approximately 37 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. At December 31, 2007, Meridian
consisted of approximately 249 acres under development and 58 developed
residential lots. Our remaining Austin holdings at December 31, 2007, consisted
of 223 acres of commercial property and two 75,000-square-foot office buildings,
one of which is 90 percent leased and the other of which is approximately 94
percent leased, at 7500 Rialto Boulevard located within Lantana.
In
January 2004, we acquired approximately 68 acres of land in Plano, Texas, which
we refer to as Deerfield. At December 31, 2007, our Deerfield property consisted
of the final 21 developed residential lots, which were sold in January 2008. 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 Trammell Crow, we have
completed brown field remediation and permitting of the property and are now
proceeding with infrastructure development.
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 hotel, residential,
retail, office and entertainment uses on approximately two acres. We have
executed agreements with Starwood Hotels & Resorts Worldwide, Inc. for the
development of a W Hotel and Residences on the site. On May 8, 2007, we
announced our partnership with Canyon-Johnson Urban Fund II, L.P., 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 of Austin (the City) and the grand opening for the onsite
sales center was held in conjunction with the groundbreaking ceremony in October
2007.
In 2006,
we sold for $22.3 million our two 70,000-square-foot office buildings at 7000
West William Cannon Drive (7000 West), known as the Lantana Corporate Center. On
October 12, 2007, we sold Escarpment Village, which is a 168,000 square-foot
retail center anchored by a grocery store in the Circle C community, for $46.5
million, before closing costs and other adjustments. Accordingly, we have
reported 7000 West’s and Escarpment Village’s assets, liabilities and results of
operations as discontinued operations (see “Discontinued Operations” and Note
7).
1
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 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 regarding the development of our properties, we substantially increased our
development activities and expenditures during the last five years (see
discussion below), which has resulted in our debt increasing to $61.5 million at
December 31, 2007. We also had cash and cash equivalents of $40.9 million at
December 31, 2007. We have funded our development activities primarily through
sales proceeds, $40.0 million of unsecured term loans and our expanded 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 establishing all essential municipal development regulations
applicable to our Circle C properties for 30 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 properties by securing and
maintaining development entitlements and developing and building real estate
projects on these properties for sale or investment. We also continue to
investigate and pursue opportunities for new projects that offer the possibility
of acceptable returns and risk. Our progress towards accomplishing these goals
includes the following:
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Over
the past several years we have successfully permitted and developed
significant projects in our Barton Creek and Lantana project
areas.
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Barton
Creek
Wimberly
Lane. 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 entered into a contract with a national homebuilder to sell 41 of these
Wimberly Lane Phase II lots. The lots are being sold on a scheduled take down
basis. As of December 31, 2007, the final two remaining lots are on schedule for
sale in the first half of 2008.
Mirador and Escala
Drive. We completed construction of Mirador, a subdivision
within the Barton Creek community adjoining the Escala Drive subdivision in
late-2001. We developed 34 estate lots in the Mirador subdivision, with each lot
averaging approximately 3.5 acres in size, and have sold 32 of these lots. As of
December 31, 2007, we owned two Mirador estate lots. By the end of 2006, we had
sold all of the 54 lots at Escala Drive in the Barton Creek
community.
Calera. In 2002,
we secured subdivision plat approval for a new residential subdivision called
Calera, which consists of 155 lots. During 2004, we began construction of
courtyard homes at Calera Court, the initial phase of the Calera subdivision,
which will include 16 homesites on 16 acres. The second phase of Calera, Calera
Drive, consisting of 53 single-family lots, many of which adjoin 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, 2007, only eight 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 began
in the first quarter of 2007 and was completed in early 2008.
Barton Creek
Village. In the second quarter of 2007, we completed the first
phase of Barton Creek Village, which includes a 22,000-square-foot retail
building. In July 2007, we began construction of a 3,300-square-foot bank
building within this retail complex, and it was completed in early 2008.
Construction of the second retail building will begin by the second half of
2008.
2
Lantana
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. 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. The required infrastructure development at the site known as Rialto
Boulevard was completed during 2001. During 2002, we completed the first
75,000-square-foot office building at 7500 Rialto Boulevard.
In 2006,
we sold 7000 West for $22.3 million (see “Discontinued Operations” and Note 7)
and a 58-acre tract at Lantana to Advanced Micro Devices, Inc. (NYSE: AMD) for
$21.2 million. As demand for office space within Lantana increased, we
constructed a second 75,000-square-foot office building at 7500 Rialto
Boulevard, which was completed in September 2006. As of December 31, 2007, we
had leased 90 percent of the first Rialto Boulevard office building and
approximately 94 percent of the second office building.
Lantana
is a partially developed, mixed-use project with our remaining entitlements for
approximately 1.0 million square feet of office and retail use on 223 acres as
of December 31, 2007. Regional utility and road infrastructure is in place with
capacity to serve Lantana at full build-out permitted under our existing
entitlements.
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We
have made significant progress in obtaining the permitting necessary to
pursue development of additional Austin-area
property.
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Circle C
Community
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 2002, firmly established 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, 2007, we have
permanently used $6.5 million of our City-based incentives including cumulative
sales of $3.5 million to other developers, and we also have $3.1 million in
Credit Bank capacity in use as temporary fiscal deposits. At December 31, 2007,
unencumbered Credit Bank capacity was $5.4 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 and second phases
each consisted of 134 lots. The first phase was substantially completed at the
end of 2005. Development of the second phase was substantially completed in
March 2006. Development of the 108-lot third phase of
3
Meridian
was completed in September 2007. The 118-lot fourth phase will commence in 2008
and completion is expected by the end of 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 in early 2008. Development of the final phase of Meridian, which
consists of 57 one-acre lots, is expected to commence by the end of
2008.
In
addition, several retail sites at the Circle C community received final City
approvals and are being developed. Escarpment Village, a 168,000-square-foot
retail project anchored by a grocery store, opened in May 2006. On October 12,
2007, we sold Escarpment Village for $46.5 million, before closing costs and
other adjustments (see “Discontinued Operations” and Note 7).
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We
believe that we have the right to receive approximately $19.1 million of
future reimbursements associated with previously incurred Barton Creek
utility infrastructure development
costs.
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At
December 31, 2007, we had approximately $9.5 million of 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, which 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 $4.8 million
during 2007, $1.6 million during 2006 and $4.9 million during 2005.
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We
completed the development and related sale of lots for a project in Plano,
Texas.
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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
non-refundable option payment was applied against subsequent purchases of lots
by the homebuilder after certain thresholds were achieved and was recognized by
us as income as lots were sold. 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. In January 2008, we sold the remaining
lots.
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We
formed a joint venture in November 2005 to purchase and develop a
multi-use property in Austin,
Texas.
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Crestview
Station
Our joint
venture with Trammell Crow acquired an approximate 74-acre tract at the
intersection of Airport Boulevard and Lamar Boulevard for $7.7 million. The
property, known as Crestview Station, is a single-family, multi-family, retail
and office development, which is located on the commuter rail line approved by
City of Austin voters. With Trammel Crow, we have completed brown field
environmental remediation and permitting of the property and are now proceeding
with infrastructure development. In September 2007, the State of Texas certified
that the remediation was complete.
4
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In
December 2006, we purchased land in downtown Austin, Texas, representing a
city block, to develop as a multi-use
property.
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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, known as
Block 21, includes an entire city block and is planned for a mixture of hotel,
residential, retail, office 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. On May 8, 2007, we announced our partnership with
Canyon-Johnson Urban Fund II, L.P., 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
the grand opening for the onsite sales center was held in conjunction with the
groundbreaking ceremony in October 2007.
Strategic Alternatives for Enhancing
Shareholder Value. As previously announced, we were exploring
strategic alternatives for enhancing shareholder value, including a possible
sale of the company. We retained JPMorgan as our financial advisor to assist in
this process. We have terminated the process of exploring the possible sale of
the company but expect to continue to review various alternatives to enhance
shareholder value.
Credit
Facility. We established a banking relationship with Comerica
in 1999 that has substantially enhanced our financial flexibility. In 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
facility allows us to purchase up to $6.5 million of our outstanding common
stock after September 30, 2005, of which $4.4 million remains available at
December 31, 2007. 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. In May 2007, we entered into another modification and
extension agreement to extend the maturity and further decrease the interest
rate on the revolving credit facility. The $45.0 million facility, of which $3.0
million is provided for our Calera Court project, matures on May 30, 2009.
Interest on the facility now accrues, at our option, at Comerica’s rate minus
1.10 percent or London Interbank Offered Rate (LIBOR) plus 1.65 percent, subject
to a minimum annual rate of 5.0 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. At December
31, 2007, no amounts were outstanding under the revolving credit
facility.
Unsecured Term
Loans. We have $40.0 million of borrowings outstanding under
seven unsecured term loans with First American Asset Management (FAAM),
including two $5.0 million loans, two $8.0 million loans, a $7.0 million loan
and two $3.5 million loans, all of which will mature in December
2011.
In
December 2006, we amended our two unsecured $5.0 million term loans with FAAM.
The amended agreements extend the maturities of both loans and decrease the
annual interest rates on 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 purchase the land being used in
connection with our Block 21 project. Amounts borrowed under both loans bear
interest at an annual rate of 6.56 percent.
In June
2007, we entered into three separate loan agreements with FAAM. Pursuant to the
loan agreements, additional borrowings totaled $15.0 million, $10.6 million of
which was used to pay down the outstanding amounts under our revolving credit
facility with Comerica, and the remainder was used for operations, capital
expenditures and other development costs, including Block 21.
5
The loan
agreements contain customary financial covenants and other restrictions. The
loans may be prepaid subject to certain reinvestment charges as further
described in the related promissory notes. The annual interest rate under
the loan agreements is 6.915 percent. Repayments under the loan agreements can
be accelerated upon the occurrence of certain customary events of
default.
Lantana Promissory
Note. On December 14, 2007, our wholly owned subsidiary,
Lantana Office Properties I, L.P., (“Lantana”), signed a promissory note to The
Lincoln National Life Insurance Company. Under the terms of the note, Lantana
borrowed $21.5 million, which will be used for development costs and general
corporate purposes. The note matures on January 1, 2018. The note contains
customary financial covenants and other restrictions and bears interest at a
rate of 5.99 percent per year.
Prepayment
of the note is prohibited prior to February 1, 2010. Prepayment of the note in
whole, subsequent to February 1, 2010, is subject to a prepayment premium of the
greater of (1) one percent of the outstanding principal balance of the note on
the prepayment date or (2) the result of the sum of the present values of the
remaining payments due from the prepayment date through the maturity date minus
the outstanding principal balance of the note as of the prepayment date.
Prepayment of the note in part is prohibited. Repayments under the note can be
accelerated by the lender upon the occurrence of certain customary events of
default. Lantana’s obligations under the note are secured by a first lien on
real property and improvements and an assignment of rents and present and future
leases related to the office buildings at 7500 Rialto Boulevard.
Escarpment
Village. On October 12, 2007, we sold the Escarpment Village
shopping center, located in Austin, Texas, to Lake Villa, L.L.C. (the Purchaser)
for $46.5 million, before closing costs and other adjustments. The Purchaser
paid $23.0 million in cash at closing and assumed the $22.4 million principal
balance remaining under our loan from Teachers Insurance and Annuity Association
of America (TIAA). We used a portion of the net proceeds from the sale to pay
the outstanding balance on the $45.0 million Comerica revolving credit facility
and will use the remainder of the net proceeds for general corporate purposes.
We recorded a gain of $16.1 million ($11.0 million net of taxes or $1.46 per
basic share and $1.43 per diluted share) on the sale in 2007.
Upon
completion of the sale of Escarpment Village, we ceased all involvement with the
Escarpment Village shopping center. The results of operations, assets and
liabilities of Escarpment Village, which have been classified as discontinued
operations in our consolidated financial statements, previously represented a
component of our commercial leasing segment.
7000 West. In
2006, we sold 7000 West 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). 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, we 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.
6
At
December 31, 2007, we had a total of 29 employees located at our Austin, Texas
headquarters. Additionally, since January 1, 1996, numerous services necessary
for our business and operations, including certain executive, administrative,
accounting, financial, tax and other services, have been performed by FM
Services Company (FM Services) pursuant to a services agreement. FM
Services is a wholly owned subsidiary of Freeport-McMoRan Copper & Gold
Inc. Either party may terminate the services agreement at any time
upon 60 days notice or mutual written agreement.
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, including statements about our plans, strategies, expectations,
assumptions and prospects. "Forward-looking statements" are all statements other
than statements of historical fact, or current facts, that address activities,
events, outcomes and other matters that we plan, expect, intend, assume,
believe, budget, predict, forecast, project, estimate or anticipate (or other
similar expressions) will, should or may occur in the future, such as:
statements regarding our financial plans; our indebtedness; share repurchases;
strategic plans; future financing plans; development and capital expenditures;
business strategies; our ability to obtain necessary permits for new
developments; and 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 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 condition
between 2001 and 2004, we experienced reduced sales, primarily affecting our
“high-end” properties. Although Austin real estate market conditions have
improved since 2005, our geographic concentration may create increased
vulnerability during regional economic downturns, which can significantly affect
our financial condition and results of operations.
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 depend 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.
The real
estate industry is highly cyclical and is affected by changes in national,
global and local economic conditions and events, such as employment and income
levels, availability of financing, interest rates, consumer confidence and
overbuilding or decrease in demand. Our real estate activities are subject to
7
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, changes in demographic conditions and changes in
government regulations or requirements. The occurrence of any of the foregoing
could result in a reduction or cancellation of sales and/or lower gross margins
for sales. Lower than expected sales as a result of these occurrences could have
a material adverse effect on the level of our profits and the timing and amounts
of our cash flows.
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.
Mortgage
financing issues, including lack of supply of mortgage loans and tightened
lending requirements, could reduce demand for our products.
Our real
estate operations are 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. Many mortgage
lenders and investors in mortgage loans are currently experiencing severe
financial difficulties arising from losses incurred on sub-prime and other loans
originated before the downturn in the real estate market. These factors have led
to a decrease in the availability of financing and an increase in the cost of
financing. These problems in the mortgage lending industry could adversely
affect potential purchasers of our products, thus having a negative effect on
demand for our products.
Our indebtedness could adversely affect our operating results and financial condition.
As
of December 31, 2007, the outstanding principal amount of our indebtedness
was $61.5 million. Our level of indebtedness could have important
consequences. For example, it could:
|
·
|
increase
our vulnerability to adverse changes in economic and industry
conditions;
|
|
·
|
require
us to dedicate a substantial portion of our cash flow from operations and
proceeds from asset sales to pay or provide for our indebtedness, thus
reducing the availability of cash flows to fund working capital, capital
expenditures, acquisitions, investments and other general corporate
purposes;
|
|
·
|
limit
our flexibility to plan for, or react to, changes in our business and the
market in which we operate;
|
|
·
|
place
us at a competitive disadvantage to our competitors that have less debt;
and
|
|
·
|
limit our
ability to borrow money to fund our working capital, capital expenditures,
debt service requirements and other financing
needs.
|
In
addition, the terms of the agreements governing our indebtedness include
restrictive covenants and require that certain financial ratios be maintained.
We may also need to incur additional indebtedness in the future in the ordinary
course of business to fund our development projects and our operations. If new
debt is added to current debt levels, the risks described above could intensify.
Further, if future debt financing is not available to us when required or is not
available on acceptable terms, we may be unable to grow our business, take
advantage of business opportunities, respond to competitive pressures or
refinance maturing debt, any of which could have a material adverse effect on
our operating results and financial condition. Our future performance is
dependent on future cash flows from real estate sales, and there can be no
assurance that we will generate sufficient cash flow.
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:
8
|
·
|
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
|
|
·
|
competition
from other available office buildings and changes in market rental
rates.
|
We cannot predict with certainty whether any of these factors will occur or whether they will have an adverse affect on our operations.
Our operations are subject to an
intensive regulatory approval process and opposition from environmental groups
that could cause delays and increase the costs of our development efforts or
preclude such developments entirely.
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 United States (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. New environmental
regulations or changes in existing regulations or their enforcement may be
enacted and such new regulations or changes may require significant expenditures
by us. The recent trend toward stricter standards in environmental legislation
and regulations is likely to continue and could have an additional impact on our
operating costs.
9
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 that have significantly greater financial, sales,
marketing 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 U.S.
Our
operations are subject to natural risks.
Our
performance may be adversely affected by weather conditions that delay
development or damage property.
Our
common stock is thinly traded; therefore, our stock price may fluctuate more
than the stock market as a whole.
As a
result of the thin trading market for our stock, its market price may fluctuate
significantly more than the stock market as a whole or the stock prices of
similar companies. Without a larger float, our common stock will be less liquid
than the stock of companies with broader public ownership, and as a result, the
trading prices for our common stock may be more volatile. Among other things,
trading of a relatively small volume of common stock may have a greater impact
on the trading price than would be the case if public float were
larger.
Not
applicable.
Our
developed lots, developed or under development acreage and undeveloped acreage
as of December 31, 2007, 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. As of December 31, 2007, we own only six lots with homes either
built or being 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
|
25
|
642
|
249
|
376
|
1,267
|
391
|
-
|
20
|
411
|
1,678
|
|||||||||
|
Lantana
|
-
|
-
|
-
|
223
|
223
|
-
|
-
|
-
|
-
|
223
|
|||||||||
|
Circle
C
|
58
|
249
|
-
|
37
|
286
|
-
|
-
|
350
|
350
|
636
|
|||||||||
|
Block
21
|
-
|
-
|
-
|
2
|
2
|
-
|
-
|
-
|
-
|
2
|
|||||||||
|
Plano
|
|||||||||||||||||||
|
Deerfield
|
21
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||
|
San
Antonio
|
|||||||||||||||||||
|
Camino
Real
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
2
|
2
|
2
|
|||||||||
|
Total
|
104
|
891
|
249
|
638
|
1,778
|
391
|
-
|
372
|
763
|
2,541
|
|||||||||
10
The
following schedule summarizes the estimated development potential of our
Austin-area acreage as of December 31, 2007:
|
Single
|
Commercial
|
|||||||
|
Family
|
Multi-family
|
Office
|
Retail
|
|||||
|
(lots)
|
(units)
|
(gross
square feet)
|
||||||
|
Barton
Creek
|
367
|
1,860
|
1,590,000
|
35,000
|
||||
|
Lantana
|
-
|
-
|
1,220,393
|
470,000
|
||||
|
Circle
C
|
491
|
-
|
787,500
|
372,500
|
||||
|
Total
|
858
|
1,860
|
3,597,893
|
877,500
|
||||
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.
Certain
information, as of February 29, 2008, regarding our executive officers is set
forth in the following table and accompanying text.
|
Name
|
Age
|
Position
or Office
|
||
|
William
H. Armstrong III
|
43
|
Chairman
of the Board, President and
|
||
|
Chief
Executive Officer
|
||||
|
John
E. Baker
|
61
|
Senior
Vice President and
|
||
|
Chief
Financial Officer
|
||||
|
Kenneth
N. Jones
|
48
|
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 500 Stock
11
Index from 2003 through 2007. This comparison assumes $100 invested
on December 31, 2002 in (a) our common stock, (b) the Hemscott Real Estate
Development Group and (c) the S&P 500 Stock Index.
Comparison
of Cumulative Total Return*
Stratus
Properties Inc., Hemscott Real Estate
Development
Group and S&P 500 Stock Index
|
December
31,
|
||||||
|
2002
|
2003
|
2004
|
2005
|
2006
|
2007
|
|
|
Stratus
Properties Inc.
|
$ 100.00
|
$ 109.24
|
$ 174.24
|
$ 253.59
|
$ 347.83
|
$ 368.91
|
|
Hemscott
Real Estate
|
||||||
|
Development
Group
|
100.00
|
166.91
|
290.84
|
306.54
|
298.04
|
193.65
|
|
S&P
500 Stock Index
|
100.00
|
128.68
|
142.69
|
149.70
|
173.34
|
182.87
|
_______________
* 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.
|
2007
|
2006
|
||||||||
|
High
|
Low
|
High
|
Low
|
||||||
|
First
Quarter
|
$35.00
|
$28.50
|
$24.96
|
$22.10
|
|||||
|
Second
Quarter
|
40.73
|
29.96
|
26.98
|
24.01
|
|||||
|
Third
Quarter
|
35.92
|
25.91
|
32.94
|
25.65
|
|||||
|
Fourth
Quarter
|
36.33
|
27.37
|
33.00
|
25.72
|
|||||
12
As of
February 29, 2008, there were 621 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 that we repurchased during
the three-month period ended December 31, 2007.
|
Current
Programa
|
|||||||||
|
Period
|
Total
Shares Purchased
|
Average
Price Paid Per Share
|
Shares
Purchased
|
Shares
Available for Purchase
|
|||||
|
October
1 to 31, 2007
|
6,236
|
$31.98
|
6,236
|
429,710
|
|||||
|
November
1 to 30, 2007
|
1,349
|
28.70
|
1,349
|
428,361
|
|||||
|
December
1 to 31, 2007
|
4,000
|
31.39
|
4,000
|
424,361
|
|||||
|
Total
|
11,585
|
$31.40
|
11,585
|
||||||
|
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 our common stock repurchases after
September 30, 2005. At December 31, 2007, $4.4 million remains available
under the Comerica agreement for purchases of our common
stock.
|
13
The
following table sets forth our selected historical financial data for each of
the five years in the period ended December 31, 2007. 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 Escarpment Village and
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.”
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||
|
(In
Dollars, Except Average Shares, and In Thousands, Except Per Share
Amounts)
|
||||||||||||||||
|
Years
Ended December 31:
|
||||||||||||||||
|
Revenues
|
$
|
27,164
|
$
|
61,875
|
$
|
35,194
|
$
|
17,725
|
$
|
11,001
|
||||||
|
Operating
income (loss)
|
2
|
23,349
|
8,336
|
338
|
(413
|
)
|
||||||||||
|
Interest
income
|
849
|
370
|
226
|
70
|
728
|
|||||||||||
|
Equity
in unconsolidated affiliates’
|
||||||||||||||||
|
income
|
488
|
-
|
-
|
-
|
29
|
|||||||||||
|
Income
from continuing operations
|
2,589
|
31,793
|
7,960
|
99
|
17
|
|||||||||||
|
Income
from discontinued operations,
|
||||||||||||||||
|
net
of taxes
|
10,766
|
a
|
8,495
|
a,
b
|
514
|
b
|
573
|
b
|
3
|
b
|
||||||
|
Net
income applicable to common
|
||||||||||||||||
|
stock
|
13,355
|
40,288
|
8,474
|
672
|
20
|
|||||||||||
|
Basic
net income per share:
|
||||||||||||||||
|
Continuing
operations
|
$
|
0.34
|
$
|
4.35
|
$
|
1.11
|
$
|
0.01
|
$
|
-
|
||||||
|
Discontinued
operations
|
1.43
|
a
|
1.16
|
a,
b
|
0.07
|
b
|
0.08
|
b
|
-
|
b
|
||||||
|
Basic
net income per share
|
$
|
1.77
|
$
|
5.51
|
$
|
1.18
|
$
|
0.09
|
$
|
-
|
||||||
|
Diluted
net income per share:
|
||||||||||||||||
|
Continuing
operations
|
$
|
0.34
|
$
|
4.15
|
$
|
1.04
|
$
|
0.01
|
$
|
-
|
||||||
|
Discontinued
operations
|
1.40
|
a
|
1.11
|
a,
b
|
0.07
|
b
|
0.08
|
b
|
-
|
b
|
||||||
|
Diluted
net income per share
|
$
|
1.74
|
$
|
5.26
|
$
|
1.11
|
$
|
0.09
|
$
|
-
|
||||||
|
Average
shares outstanding
|
||||||||||||||||
|
Basic
|
7,554
|
7,306
|
7,209
|
7,196
|
7,124
|
|||||||||||
|
Diluted
|
7,677
|
7,658
|
7,636
|
7,570
|
7,315
|
|||||||||||
|
At
December 31:
|
||||||||||||||||
|
Working
capital surplus (deficit)
|
$
|
32,902
|
$
|
3,230
|
$
|
(7,198
|
)
|
$
|
(4,111
|
)
|
$
|
(787
|
)
|
|||
|
Property
held for sale
|
146,282
|
133,210
|
122,468
|
119,067
|
114,207
|
|||||||||||
|
Property
held for use, net
|
24,421
|
18,874
|
9,452
|
9,926
|
9,065
|
|||||||||||
|
Assets
from discontinued operations
|
-
|
34,917
|
a
|
33,956
|
a,
b
|
19,961
|
a,
b
|
13,936
|
b
|
|||||||
|
Total
assets
|
228,357
|
203,950
|
173,886
|
152,861
|
142,430
|
|||||||||||
|
Long-term
debt from continuing
|
||||||||||||||||
|
operations,
including current
|
||||||||||||||||
|
portion
|
61,500
|
28,000
|
40,368
|
43,646
|
35,599
|
|||||||||||
|
Long-term
debt, from discontinued
|
||||||||||||||||
|
operations,
including current portion
|
-
|
22,675
|
a
|
21,731
|
a,
b
|
12,001
|
a,
b
|
11,940
|
b
|
|||||||
|
Stockholders’
equity
|
152,400
|
133,946
|
94,167
|
88,196
|
86,821
|
|||||||||||
|
a.
|
Relates
to the operations, assets and liabilities of Escarpment Village, which we
sold in October 2007 (see Note 7).
|
|
b.
|
Relates
to the operations, assets and liabilities of 7000 West, which we sold in
March 2006 (see Note 7).
|
14
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, 2007, our most significant holding is the 1,678 acres of
residential, multi-family and commercial property and 25 developed residential
estate lots located within the Barton Creek community. We also own approximately
350 acres of undeveloped commercial property and approximately 37 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. At December 31, 2007, Meridian
consisted of approximately 249 acres under development and 58 developed
residential lots. Our remaining Austin holdings at December 31, 2007, consisted
of 223 acres of commercial property and two 75,000-square-foot office buildings,
one of which is 90 percent leased and the other of which is approximately 94
percent leased, at 7500 Rialto Boulevard located within Lantana.
In
January 2004, we acquired approximately 68 acres of land in Plano, Texas, which
we refer to as Deerfield. At December 31, 2007, our Deerfield property consisted
of the final 21 developed residential lots, which were sold in January 2008. 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 Trammell Crow, we have
completed brown field remediation and permitting of the property and are now
proceeding with infrastructure development.
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 hotel, residential,
retail, office and entertainment uses on approximately two acres. We have
executed agreements with Starwood Hotels & Resorts Worldwide, Inc. for the
development of a W Hotel and Residences on the site. On May 8, 2007, we
announced our partnership with Canyon-Johnson Urban Fund II, L.P., 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 of Austin (the City) and the grand opening for the onsite
sales center was held in conjunction with the groundbreaking ceremony in October
2007.
In 2006,
we sold our two 70,000-square-foot office buildings at 7000 West William Cannon
Drive (7000 West), known as the Lantana Corporate Center for $22.3 million. On
October 12, 2007, we sold Escarpment Village, which is a 168,000 square-foot
retail center anchored by a grocery store in the Circle C community, for $46.5
million, before closing costs and other adjustments. Accordingly, we have
reported 7000 West’s and Escarpment Village’s assets, liabilities and results of
operations as discontinued operations (see “Discontinued Operations” and Note
7).
15
Real
Estate Market Conditions
Factors
that significantly affect United States 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
2006 and 2007, based on U.S. Census Bureau data and City of Austin
data.
16
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
2006.
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, 2006 and
2007 vacancy percentages for various types of developed properties in Austin are
noted below.
|
December
31,
|
||||
|
2006
|
2007
|
|||
|
Building
Type
|
Vacancy
Factor
|
|||
|
Industrial
Buildings
|
12%
a
|
6%
a
|
||
|
Office
Buildings (Class A)
|
13%
b
|
14%
a
|
||
|
Multi-Family
Buildings
|
7%
a
|
6%
a
|
||
|
Retail
Buildings
|
7%
c
|
7%
a
|
||
|
a.
|
Texas
A&M University Real Estate Center: Texas Market
News
|
|
b.
|
CB
Richard Ellis: Austin Office
MarketView
|
|
c.
|
NAI
Global Commercial Real Estate
Services
|
17
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. In the fourth quarter of 2007, the real
estate market in the United States began to show signs of weakness, as credit
markets became unpredictable and mixed views developed regarding the economy.
Our future performance may in part be dependent upon the credit markets settling
and the underlying strength of the U.S. economy.
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
in Item 1A.
As
previously announced, we were exploring strategic alternatives for enhancing
shareholder value, including a possible sale of the company. We retained
JPMorgan as our financial advisor to assist in this process. We have terminated
the process of exploring the possible sale of the company but expect to continue
to review various alternatives to enhance shareholder value.
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 hotel, residential, retail,
office 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. On
May 8, 2007, we announced our partnership with Canyon-Johnson Urban Fund II,
L.P., 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 the grand opening for the onsite
sales center was held in conjunction with the groundbreaking ceremony in October
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 December 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 December 31, 2007, we had leased approximately 94 percent of the
space at the second office building and the original office building is 90
percent leased.
Barton Creek
Community. In 2002, we secured subdivision plat approval for a
new residential subdivision called Calera, which consists of 155 lots. At
December 31, 2007, our remaining unsold developed lots within the Barton Creek
Community included: Calera Drive – 8 lots, Amarra – 7 lots, Calera
Court – 6 lots, Wimberly Lane Phase II – 2 lots and Mirador – 2
lots.
18
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. The average purchase price for each of the 41 lots is
$150,400, subject to a six percent annual escalator commencing in December 2004.
As of December 31, 2007, the final two remaining lots are on schedule for sale
in the first half of 2008.
During
2004, we began construction of courtyard homes at Calera Court, the initial
phase of the Calera subdivision, which will include 16 homesites on 16 acres.
The second phase of Calera, Calera Drive, consisting of 53 single-family lots,
many of which adjoin 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,
2007, only eight 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 began in the first quarter of 2007 and was
completed in early 2008.
In the
second quarter of 2007, we completed the first phase of the Barton Creek
Village. The first phase includes a 22,000-square-foot retail building. In July
2007, we began construction of a 3,300-square-foot bank building within this
retail complex, and it was completed in early 2008. Construction of the second
retail building will begin by the second half of 2008.
Circle C Community. We are
developing 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. 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 was substantially completed in March 2006.
Development of the 108-lot third phase of Meridian was completed in September
2007. The 118-lot fourth phase will commence in 2008 and completion is expected
by the end of 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 in the first quarter of 2008. Development of the final phase of
Meridian, which consists of 57 one-acre lots, is expected to commence in
2008.
We
estimate our sales from the first three phases of Meridian will total at least
30 lots for $2.0 million during the first quarter of 2008.
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
non-refundable option payment was applied against subsequent purchases of lots
by the homebuilder after certain thresholds were achieved and was recognized by
us as income as lots were sold. 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. In January 2008, we sold the final 21
lots for $1.4 million.
19
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. The
property, known as Crestview Station, is a single-family, multi-family, retail
and office development, which is located on the commuter rail line approved by
City of Austin voters. With Trammell Crow, we have completed brown field
environmental remediation and permitting of the property and are now proceeding
with infrastructure development. In September 2007, the State of Texas certified
that the remediation was complete. At December 31, 2007, our investment in the
Crestview Station project totaled $4.2 million and the joint venture partnership
had $2.6 million of outstanding debt, of which each joint venture partner
guarantees $1.3 million.
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):
|
2007
|
2006
|
2005
|
|||||||
|
Revenues:
|
|||||||||
|
Real
estate operations
|
$
|
24,083
|
$
|
60,213
|
$
|
33,841
|
|||
|
Commercial
leasing
|
3,081
|
1,662
|
1,353
|
||||||
|
Total
revenues
|
$
|
27,164
|
$
|
61,875
|
$
|
35,194
|
|||
|
Operating
income
|
$
|
2
|
$
|
23,349
|
$
|
8,336
|
|||
|
(Provision
for) benefit from income taxes
|
$
|
(1,670
|
)
|
$
|
8,344
|
$
|
(73
|
)
|
|
|
Income
from continuing operations
|
$
|
2,589
|
$
|
31,793
|
$
|
7,960
|
|||
|
Income
from discontinued operations
|
10,766
|
a
|
8,495
|
b
|
514
|
||||
|
Net
income
|
$
|
13,355
|
$
|
40,288
|
$
|
8,474
|
|||
|
a.
|
Includes
a gain on sale of Escarpment Village $11.0 million, net of taxes of $5.1
million.
|
|
b.
|
Includes
a gain on sale of 7000 West 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 2006, we sold 7000 West (see Note 7) and 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 the majority of our
deferred tax assets. As a result, income from continuing operations for 2006
included an $8.3 million tax benefit, $1.14 per basic share and $1.09 per
diluted share, 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 9). The following is a discussion of our operating results by
segment.
20
Real
Estate Operations
Summary
real estate operating results follow (in thousands):
|
2007
|
2006
|
2005
|
|||||||
|
Revenues:
|
|||||||||
|
Developed
property sales
|
$
|
21,388
|
$
|
33,459
|
$
|
25,453
|
|||
|
Undeveloped
property sales
|
1,082
|
24,929
|
7,550
|
||||||
|
Commissions,
management fees and other
|
1,613
|
1,825
|
838
|
||||||
|
Total
revenues
|
24,083
|
60,213
|
33,841
|
||||||
|
Cost
of sales, including depreciation
|
(15,754
|
)
|
(29,223
|
)
|
(19,770
|
)
|
|||
|
General
and administrative expenses
|
(6,119
|
)
|
(6,280
|
)
|
(4,346
|
)
|
|||
|
Operating
income
|
$
|
2,210
|
$
|
24,710
|
$
|
9,725
|
|||
Developed Property Sales. Property sales for the last three years follow (revenues in thousands):
|
2007
|
2006
|
2005
|
||||||||||
|
Lots
|
Revenues
|
Lots
|
Revenues
|
Lots
|
Revenues
|
|||||||
|
Residential
Properties:
|
||||||||||||
|
Barton
Creek
|
||||||||||||
|
Calera
Drive
|
2
|
$ 809
|
24
|
$10,363
|
19
|
$7,101
|
||||||
|
Calera
Court Courtyard Homes
|
2
|
1,307
|
5
|
2,922
|
2
|
945
|
||||||
|
Mirador
Estate
|
3
|
2,334
|
7
|
3,791
|
7
|
3,912
|
||||||
|
Wimberly
Lane Phase II
|
||||||||||||
|
Standard
Homebuilder
|
12
|
2,114
|
11
|
1,804
|
10
|
1,564
|
||||||
|
Estate
|
-
|
-
|
-
|
-
|
6
|
1,851
|
||||||
|
Escala
Drive Estate
|
-
|
-
|
1
|
695
|
9
|
4,882
|
||||||
|
Amarra
Drive Phase I
|
1
|
1,250
|
-
|
-
|
-
|
-
|
||||||
|
Circle
C
|
||||||||||||
|
Meridian
|
138
|
8,898
|
166
|
9,881
|
14
|
949
|
||||||
|
Deerfield
|
70
|
4,676
|
60
|
4,003
|
68
|
4,249
|
||||||
|
Total
Residential
|
228
|
$21,388
|
274
|
$33,459
|
135
|
$25,453
|
||||||
Undeveloped Property Sales.
During 2007, we sold a five-acre tract at Circle C for $1.1
million.
During
2006, we sold a 7.5-acre tract in the Barton Creek community for $1.5 million, 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 and 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.
Commissions, Management Fees and
Other. Commissions, management fees and other revenues totaled
$1.6 million in 2007, compared to $1.8 million in 2006, and included sales of
our development fee credits to third parties totaling $0.8 million in 2007 and
$1.3 million in 2006. We received these development fee credits as part of the
Circle C settlement (see Note 8).
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.
21
Cost
of Sales. Cost of sales totaled $15.8 million in 2007 and
$29.2 million in 2006. Cost of sales for 2007 included reductions totaling $1.7
million for Barton Creek Municipal Utility District (MUD) reimbursements. Cost
of sales for 2007 also decreased compared to 2006 primarily because of a
decrease in developed property sales in 2007. Cost of sales increased to $29.2
million in 2006 from $19.8 million in 2005, primarily because of increases in
lot sales and other land sales in
2006.
Commercial
Leasing
Our
commercial leasing operating results primarily reflect the activities at 7500
Rialto Boulevard. As of December 31, 2007, the original office building was 90
percent leased and the second building, which was completed in September 2006,
was approximately 94 percent leased. Rental income increased in 2007 compared to
2006 primarily because of the increase in occupancy of the second office
building during 2007; whereas, the second building was only 50 percent leased as
of December 31, 2006. Rental income increased in 2006 compared to 2005 because
of the completion and partial occupancy of the second office building during the
second half of 2006. Summary commercial leasing operating results follow (in
thousands):
|
2007
|
2006
|
2005
|
|||||||
|
Rental
income
|
$
|
3,081
|
$
|
1,662
|
$
|
1,353
|
|||
|
Rental
property costs
|
(3,264
|
)
|
(1,718
|
)
|
(1,456
|
)
|
|||
|
Depreciation
|
(1,115
|
)
|
(725
|
)
|
(613
|
)
|
|||
|
General
and administrative expenses
|
(910
|
)
|
(580
|
)
|
(673
|
)
|
|||
|
Operating
loss
|
$
|
(2,208
|
)
|
$
|
(1,361
|
)
|
$
|
(1,389
|
)
|
Other Financial
Results
General
and administrative expenses increased to $7.0 million in 2007 from $6.9 million
in 2006, primarily because of higher 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 $0.9 million in 2007, $0.8
million in 2006 and $0.3 million in 2005.
General
and administrative expenses totaled $6.9 million in 2006 and $5.0 million in
2005. The increase in 2006 compared to 2005 primarily relates to higher
compensation costs, including stock-based compensation costs.
Non-Operating
Results
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. The property was subsequently sold to other parties, most recently in
2007. After assessing available information concerning the terms of the 2007
sale and the new purchaser’s future plans for the property, we concluded that
our obligation to the seller still exists and did not transfer to the new
purchaser. Additionally, we concluded that the new purchaser’s assumption of all
abandonment obligations, along with its significant financial investment and
expanded development plans for the property, make the likelihood of our being
required to satisfy this contingent abandonment obligation remote. As a result,
we reversed our $3.0 million reserve and recorded the same amount as other
income in 2007.
Interest
expense, net of capitalized interest, totaled $0.1 million in 2007, $0.3 million
in 2006 and $0.5 million in 2005 (see Note 4). Capitalized interest totaled $2.8
million in 2007, $2.0 million in 2006 and $3.3 million in 2005. The decrease in
net interest expense in 2007 is related to the financing for Escarpment Village
project which is included in discontinued operations.
Interest
income totaled $0.8 million in 2007, $0.4 million in 2006 and $0.2 million in
2005. Interest income included interest on Barton Creek Municipal Utility
District (MUD) reimbursements totaling $0.5 million in 2007 and $0.1 million in
each of 2006 and 2005.
22
DISCONTINUED
OPERATIONS
On
October 12, 2007, we sold the Escarpment Village shopping center, located in
Austin, Texas, to Lake Villa, L.L.C. (the Purchaser) for $46.5 million, before
closing costs and other adjustments. The Purchaser paid $23.0 million in cash at
closing and assumed the $22.4 million principal balance remaining under our loan
from Teachers Insurance and Annuity Association of America (TIAA). We used a
portion of the net proceeds from the sale to pay the outstanding balance on the
$45.0 million Comerica revolving credit facility and will use the remainder of
the net proceeds for general corporate purposes. We recorded a gain of $16.1
million ($11.0 million net of taxes or $1.46 per basic share and $1.43 per
diluted share) on the sale.
Upon
completion of the sale of Escarpment Village, we ceased all involvement with the
Escarpment Village shopping center. The results of operations, assets and
liabilities of Escarpment Village, which have been classified as discontinued
operations in our consolidated financial statements, previously represented a
component of our commercial leasing segment. We earned rental income from
Escarpment Village totaling $2.8 million in 2007 and $2.1 million in
2006.
On March
27, 2006, we sold our two 70,000-square-foot office buildings at 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). 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, we 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. We earned rental
income of $1.1 million in 2006 and $3.6 million in 2005 from the two fully
leased office buildings at 7000 West.
Income
from discontinued operations totaled $10.8 million, including an $11.0 million
gain net of taxes on the Escarpment Village sale, in 2007, and $8.5 million,
including a $7.3 million gain net of taxes on the 7000 West sale in
2006.
CAPITAL
RESOURCES AND LIQUIDITY
Comparison Of Year-To-Year
Cash Flows
Operating
activities provided cash of $25.7 million in 2007, $44.3 million in 2006 and
$37.4 million in 2005, including cash provided by (used in) discontinued
operations totaling $10.3 million in 2007, $(5.3) million in 2006 and $3.2
million in 2005. Compared to 2006, operating cash flows in 2007 improved
primarily because of the sale of Escarpment Village. Compared to 2005, operating
cash flows in 2006 improved primarily because of the increase in sales
activities.
Cash used
in investing activities totaled $22.9 million in 2007, including $10.9 million
provided by discontinued operations (see “Discontinued Operations” and Note 7).
Cash used in investing activities totaled $41.9 million in 2006 including $2.5
million of cash provided by discontinued operations. Cash used in investing
activities totaled $39.3 million in 2005, including $14.7 million used in
discontinued operations. 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 2007 and 2006 included development costs for
properties in the Barton Creek, Lantana and Circle C communities. Expenditures
for commercial leasing properties for 2007 primarily related to the first retail
building at Barton Creek Village. Commercial leasing expenditures for 2006
primarily related to the second building at 7500 Rialto Boulevard, which was
completed in September 2006. In 2005, 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 $2.6 million in 2007, $1.3 million in 2006 and $4.6 million in
2005.
23
Our
financing activities in 2007 include $15.0 million of borrowings under our
unsecured term loans, $21.5 million of borrowings under the new Lantana
promissory note and $3.0 million of net repayments on our revolving line of
credit. In 2007, we also used $1.5 million to repurchase shares of our common
stock on the open market. During 2006, our financing activities included net
repayments of $12.7 million on our revolving line of credit and net repayments
of $14.4 million on our project construction loans. 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, including net cash provided by discontinued operations totaling
$9.7 million. During 2005, our financing activities reflected $4.7 million of
net payments under our revolving line of credit and $1.4 million of net
borrowings from our project construction loans. See “Credit Facility and Other
Financing Arrangements” below for a discussion of our outstanding debt at
December 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 2007, we purchased 45,449 shares
for $1.5 million, a $31.97 per share average. During the first quarter of 2008
through March 10, 2008, we purchased 8,575 shares for $0.3 million, a $29.37 per
share average. As of March 10, 2008, a total of 415,786 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 $4.2
million is currently available. 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,
2007 (in thousands):
|
2008
|
2009
|
2010
|
2011
|
2012
|
Thereafter
|
Total
|
||||||||||||||
|
Debt
|
$
|
242
|
$
|
279
|
$
|
297
|
$
|
40,315
|
$
|
334
|
$
|
20,033
|
$
|
61,500
|
||||||
|
Construction
contracts
|
11,674
|
-
|
-
|
-
|
-
|
-
|
11,674
|
|||||||||||||
|
Operating
lease
|
154
|
38
|
5
|
-
|
-
|
-
|
197
|
|||||||||||||
|
Total
|
$
|
12,070
|
$
|
317
|
$
|
302
|
$
|
40,315
|
$
|
334
|
$
|
20,033
|
$
|
73,371
|
||||||
We had
commitments under noncancelable open contracts totaling $11.7 million at
December 31, 2007. These commitments include the following contracts that we
entered into in 2007:
|
●
|
Thirteen
contracts totaling $3.9 million for infrastructure work in connection with
new residential subdivisions at Barton Creek with a remaining balance of
$0.3 million at December 31, 2007;
|
|
●
|
A
$2.5 million contract for the construction of a 20,000 square-foot retail
center at Circle C with a remaining balance of $1.1 million at December
31, 2007;
|
|
●
|
Three
contracts totaling $1.3 million for the final three condominium units at
Calera Court in Barton Creek with the entire balance remaining at December
31, 2007;
|
|
●
|
A
$3.8 million contract for infrastructure work in connection with new
residential subdivisions at Meridian in Circle C with a remaining balance
of $1.2 million at December 31, 2007;
and
|
|
●
|
$14.3
million in contracts in connection with architectural, design and
engineering work for Block 21 with a remaining balance of $7.6 million at
December 31, 2007.
|
In
addition to the contracts noted above, we also had $0.1 million of outstanding
commitments at December 31, 2007, on other ongoing Lantana, Meridian and Barton
Creek development contracts.
In early
2008, we entered into additional contracts for $2.7 million for infrastructure
work associated with new residential subdivisions at Barton Creek and an
additional $0.7 million in contracts related to Block 21.
For a
further discussion of our debt obligations, see “Credit Facility and Other
Financing Arrangements” below.
Credit Facility and Other
Financing Arrangements
A summary
of our outstanding borrowings (in thousands) and a discussion of our financing
arrangements follow.
|
December
31,
|
||||||
|
2007
|
2006
|
|||||
|
Unsecured
term loans
|
$
|
40,000
|
$
|
25,000
|
||
|
Lantana
Promissory Note
|
21,500
|
-
|
||||
|
TIAA
mortage
|
-
|
22,675
|
a
|
|||
|
Comerica
revolving credit facility
|
-
|
3,000
|
||||
|
Total
debt
|
$
|
61,500
|
$
|
50,675
|
||
|
a.
|
Assumed
by purchaser of Escarpment Village.
|
Credit
Facility. 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 facility allows us to purchase up to $6.5 million of our
outstanding common stock after September 30, 2005. 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. In May 2007, we entered
into another modification and extension agreement to extend the maturity and
further decrease the interest rate on the revolving credit facility. The $45.0
million facility, of which $3.0 million is provided for our Calera Court
project, matures on May 30, 2009. Interest on the facility now accrues, at our
option, at Comerica’s rate minus 1.10 percent or London Interbank Offered Rate
(LIBOR) plus 1.65 percent, subject to a minimum annual rate of 5.0 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. At December 31, 2007, no amounts were outstanding
under the revolving credit facility.
Unsecured Term
Loans. We have $40.0 million of borrowings outstanding under
seven unsecured term loans with First American Asset Management (FAAM),
including two $5.0 million loans, two $8.0 million loans, a $7.0 million loan
and two $3.5 million loans, all of which will mature in December
2011.
In
December 2006, we amended our two unsecured $5.0 million term loans with FAAM.
The amended agreements extend the maturities of both loans and decrease the
annual interest rates on 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 purchase the land being used in
connection with our Block 21 project. Amounts borrowed under both loans bear
interest at an annual rate of 6.56 percent.
In June
2007, we entered into three separate loan agreements with FAAM. Pursuant to the
loan agreements, additional borrowings totaled $15.0 million, $10.6 million of
which was used to pay down the outstanding amounts under our revolving credit
facility with Comerica, and the remainder was used for operations, capital
expenditures and other development costs, including Block 21.
The loan
agreements contain customary financial covenants and other restrictions. The
loans may be prepaid subject to certain reinvestment charges as further
described in the related promissory notes. The annual interest rate under the
loan agreements is 6.915 percent. Repayments under the loan agreements can be
accelerated upon the occurrence of certain customary events of
default.
Lantana Promissory
Note. On December 14, 2007, our wholly owned subsidiary,
Lantana Office Properties I, L.P., (“Lantana”), signed a promissory note to The
Lincoln National Life Insurance Company. Under the terms of the note, Lantana
borrowed $21.5 million, which will be used for development costs and general
corporate purposes. The note matures on January 1, 2018. The note contains
customary financial covenants and other restrictions. The note bears interest at
a rate of 5.99 percent per year.
Prepayment
of the note is prohibited prior to February 1, 2010. Prepayment of the note in
whole, subsequent to February 1, 2010, is subject to a prepayment premium of the
greater of (1) one percent of the outstanding principal balance of the note on
the prepayment date or (2) the result of the sum of the present values of the
remaining payments due from the prepayment date through the maturity date minus
the outstanding principal balance of the note as of the prepayment date.
Prepayment of the note in part is
25
prohibited.
Repayments under the note can be accelerated by the lender upon the occurrence
of certain customary events of default. Lantana’s obligations under
the note are secured by a first lien on real property and improvements and an
assignment of rents and present and future leases related to the office
buildings at 7500 Rialto Boulevard.
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 and valuation allowances for deferred tax assets.
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 Statement of Financial Accounting Standards (SFAS) No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets.” For properties
held for 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:
|
·
|
The economic
condition of the Austin, Texas,
market;
|
|
·
|
The performance of the real estate industry in the markets where our
properties are located;
|
|
·
|
Our financial condition, which may influence our ability to develop our
real estate; and
|
|
·
|
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
26
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.
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 2006, we sold 7000 West
(see Note 7) and 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
the majority of our deferred tax assets. At December 31, 2007, our net deferred
tax assets totaled $6.9 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.
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, 2007,
$40.0 million of our total outstanding debt of $61.5 million bears interest at
variable rates. A change of 100 basis points in annual interest rates for this
variable-rate debt would have an approximate $0.4 million 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.”
NEW
ACCOUNTING STANDARDS
Accounting for Uncertainty in Income
Taxes. On January 1, 2007, we adopted Financial Accounting
Standards Board (FASB) Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes,” (FIN 48), which prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. FIN 48 also
provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. We did not recognize a
change to our unrecognized tax benefits as a result of the implementation of FIN
48. The adoption of FIN 48 had no impact on our financial statements. We had no
unrecognized tax benefits as of January 1, 2007 or December 31,
2007.
27
Fair Value
Measurements. In September 2006, the FASB issued SFAS No. 157,
“Fair Value Measurements,” which provides enhanced guidance for using fair value
to measure assets and liabilities. SFAS No. 157 does not require any new fair
value measurements under U.S. generally accepted accounting principles (GAAP);
rather this statement establishes a common definition of fair value, provides a
framework for measuring fair value under U.S. GAAP and expands disclosure
requirements about fair value measurements. On February 12, 2008, the FASB
issued FSP FAS 157-2, which delays the effective date of SFAS No. 157 for
nonfinancial assets or liabilities that are not required or permitted to be
measured at fair value on a recurring basis to fiscal years beginning after
November 15, 2008, and interim periods within those years. We are currently
evaluating the impact, if any, the adoption of SFAS No. 157 will have on our
financial reporting and disclosures.
Fair
Value Option for Financial Assets and Liabilities. 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,” which permits
entities to choose to measure many financial instruments and certain other items
at fair value that are not currently required to be measured at fair value. SFAS
No. 159 is effective for fiscal years beginning after November 15, 2007. We do
not believe that the adoption of SFAS No. 159 will have a material impact on our
financial reporting and disclosures.
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.
28
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE
BOARD OF DIRECTORS AND STOCKHOLDERS OF STRATUS PROPERTIES INC.:
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, 2007
and 2006, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2007 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. Also in our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2007 based on criteria
established in Internal
Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Company's management is
responsible for these financial statements and financial statement schedule, for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management's Report on Internal Control over
Financial Reporting. Our responsibility is to express opinions on these
financial statements, on the financial statement schedule, and on the Company's
internal control over financial reporting based on our integrated audits. We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects. Our audits of the financial statements included 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.
Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures as we considered necessary
in the circumstances. We believe that our audits provide a reasonable basis for
our opinions.
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.
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 14,
2008
29
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, 2007, 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, 2007, as stated in their
report dated March 14, 2008, 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
|
30
STRATUS
PROPERTIES INC.
CONSOLIDATED
BALANCE SHEETS
(In
Thousands, Except Par Value)
|
December
31,
|
||||||
|
2007
|
2006
|
|||||
|
ASSETS
|
||||||
|
Current
assets:
|
||||||
|
Cash
and cash equivalents, including restricted cash of
|
||||||
|
$112
and $116, respectively
|
$
|
40,985
|
$
|
1,736
|
||
|
Accounts
receivable
|
2,315
|
839
|
||||
|
Notes
receivable from property sales
|
311
|
26
|
||||
|
Deposits,
prepaid expenses and other
|
79
|
56
|
||||
|
Deferred
tax asset
|
1,401
|
1,144
|
||||
|
Discontinued
operations (Note 7)
|
-
|
34,917
|
||||
|
Total
current assets
|
45,091
|
38,718
|
||||
|
Real
estate, commercial leasing assets and facilities, net:
|
||||||
|
Property
held for sale – developed or under development
|
129,759
|
116,865
|
||||
|
Property
held for sale – undeveloped
|
16,523
|
16,345
|
||||
|
Property
held for use, net
|
24,421
|
18,874
|
||||
|
Investment
in unconsolidated affiliate
|
4,226
|
3,800
|
||||
|
Deferred
tax asset
|
5,534
|
7,105
|
||||
|
Other
assets
|
2,803
|
2,243
|
||||
|
Total
assets
|
$
|
228,357
|
$
|
203,950
|
||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||
|
Current
liabilities:
|
||||||
|
Accounts
payable and accrued liabilities
|
$
|
6,324
|
$
|
5,676
|
||
|
Accrued
interest, property taxes and other
|
5,623
|
5,134
|
||||
|
Current
portion of long-term debt
|
242
|
-
|
||||
|
Discontinued
operations (Note 7)
|
-
|
24,678
|
||||
|
Total
current liabilities
|
12,189
|
35,488
|
||||
|
Long-term
debt (Note 4)
|
61,258
|
28,000
|
||||
|
Other
liabilities
|
2,510
|
6,516
|
||||
|
Total
liabilities
|
75,957
|
70,004
|
||||
|
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,
|
||||||
|
8,128
and 8,057 shares issued, respectively and
|
||||||
|
7,542
and 7,531 shares outstanding, respectively
|
81
|
81
|
||||
|
Capital
in excess of par value of common stock
|
195,898
|
188,873
|
||||
|
Accumulated
deficit
|
(29,300
|
)
|
(42,655
|
)
|
||
|
Common
stock held in treasury, 586 shares and 526 shares,
|
||||||
|
at
cost, respectively
|
(14,279
|
)
|
(12,353
|
)
|
||
|
Total
stockholders’ equity
|
152,400
|
133,946
|
||||
|
Total
liabilities and stockholders' equity
|
$
|
228,357
|
$
|
203,950
|
||
The
accompanying Notes to Consolidated Financial Statements are an integral part of
these consolidated financial statements.
31
STRATUS
PROPERTIES INC.
CONSOLIDATED
STATEMENTS OF INCOME
(In
Thousands, Except Per Share Amounts)
|
Years
Ended December 31,
|
|||||||||
|
2007
|
2006
|
2005
|
|||||||
|
Revenues:
|
|||||||||
|
Real
estate
|
$
|
22,470
|
$
|
58,388
|
$
|
33,003
|
|||
|
Rental
income
|
3,081
|
1,662
|
1,353
|
||||||
|
Commissions,
management fees and other
|
1,613
|
1,825
|
838
|
||||||
|
Total
revenues
|
27,164
|
61,875
|
35,194
|
||||||
|
Cost
of sales (Note 1):
|
|||||||||
|
Real
estate, net
|
15,597
|
29,096
|
19,625
|
||||||
|
Rental
|
3,264
|
1,718
|
1,456
|
||||||
|
Depreciation
|
1,272
|
852
|
758
|
||||||
|
Total
cost of sales
|
20,133
|
31,666
|
21,839
|
||||||
|
General
and administrative expenses
|
7,029
|
6,860
|
5,019
|
||||||
|
Total
costs and expenses
|
27,162
|
38,526
|
26,858
|
||||||
|
Operating
income
|
2
|
23,349
|
8,336
|
||||||
|
Other
income
|
3,000
|
-
|
-
|
||||||
|
Interest
expense, net
|
(80
|
)
|
(270
|
)
|
(529
|
)
|
|||
|
Interest
income
|
849
|
370
|
226
|
||||||
|
Equity
in unconsolidated affiliate’s income
|
488
|
-
|
-
|
||||||
|
Income
from continuing operations before income taxes
|
4,259
|
23,449
|
8,033
|
||||||
|
(Provision
for) benefit from income taxes
|
(1,670
|
)
|
8,344
|
(73
|
)
|
||||
|
Income
from continuing operations
|
2,589
|
31,793
|
7,960
|
||||||
|
Income
from discontinued operations,
|
|||||||||
|
net
of taxes (Note 7)
|
10,766
|
8,495
|
514
|
||||||
|
Net
income applicable to common stock
|
$
|
13,355
|
$
|
40,288
|
$
|
8,474
|
|||
|
Basic
net income per share of common stock:
|
|||||||||
|
Continuing
operations
|
$
|
0.34
|
$
|
4.35
|
$
|
1.11
|
|||
|
Discontinued
operations
|
1.43
|
1.16
|
0.07
|
||||||
|
Basic
net income per share of common stock
|
$
|
1.77
|
$
|
5.51
|
$
|
1.18
|
|||
|
Diluted
net income per share of common stock:
|
|||||||||
|
Continuing
operations
|
$
|
0.34
|
$
|
4.15
|
$
|
1.04
|
|||
|
Discontinued
operations
|
1.40
|
1.11
|
0.07
|
||||||
|
Diluted
net income per share of common stock
|
$
|
1.74
|
$
|
5.26
|
$
|
1.11
|
|||
|
Average
shares of common stock outstanding:
|
|||||||||
|
Basic
|
7,554
|
7,306
|
7,209
|
||||||
|
Diluted
|
7,677
|
7,658
|
7,636
|
||||||
The
accompanying Notes to Consolidated Financial Statements are an integral part of
these consolidated financial statements.
32
STRATUS
PROPERTIES INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
Thousands)
|
Years
Ended December 31,
|
|||||||||
|
2007
|
2006
|
2005
|
|||||||
|
Cash
flow from operating activities:
|
|||||||||
|
Net
income
|
$
|
13,355
|
$
|
40,288
|
$
|
8,474
|
|||
|
Adjustments
to reconcile net income to net cash provided
|
|||||||||
|
by
operating activities:
|
|||||||||
|
Income
from discontinued operations
|
(10,766
|
)
|
(8,495
|
)
|
(514
|
)
|
|||
|
Depreciation
|
1,272
|
852
|
758
|
||||||
|
Cost
of real estate sold
|
14,262
|
23,827
|
17,057
|
||||||
|
Deferred
income taxes
|
1,314
|
(6,431
|
)
|
-
|
|||||
|
Stock-based
compensation
|
1,534
|
1,095
|
310
|
||||||
|
Equity
in unconsolidated affiliate’s income
|
(488
|
)
|
-
|
-
|
|||||
|
Deposits
|
(1,372
|
)
|
272
|
(274
|
)
|
||||
|
Long-term
notes receivable
|
-
|
-
|
789
|
||||||
|
Other
long-term liabilities
|
(3,000
|
)
|
-
|
-
|
|||||
|
Other
|
(759
|
)
|
986
|
1,021
|
|||||
|
(Increase)
decrease in working capital:
|
|||||||||
|
Accounts
receivable, prepaid expenses and other
|
(1,788
|
)
|
(656
|
)
|
(366
|
)
|
|||
|
Accounts
payable, accrued liabilities and other
|
1,767
|
(2,131
|
)
|
6,991
|
|||||
|
Net
cash provided by continuing operations
|
15,331
|
49,607
|
34,246
|
||||||
|
Net
cash provided by (used in) discontinued operations
|
10,333
|
(5,289
|
)
|
3,178
|
|||||
|
Net
cash provided by operating activities
|
25,664
|
44,318
|
37,424
|
||||||
|
Cash
flow from investing activities:
|
|||||||||
|
Purchases
and development of real estate properties
|
(34,528
|
)
|
(36,278
|
)
|
(25,058
|
)
|
|||
|
Development
of commercial leasing properties and other
|
|||||||||
|
expenditures
|
(1,896
|
)
|
(9,513
|
)
|
(284
|
)
|
|||
|
Municipal
utility district reimbursements
|
2,557
|
1,337
|
4,600
|
||||||
|
Investment
in unconsolidated affiliate
|
-
|
-
|
(3,800
|
)
|
|||||
|
Net
cash used in continuing operations
|
(33,867
|
)
|
(44,454
|
)
|
(24,542
|
)
|
|||
|
Net
cash provided by (used in) discontinued operations
|
10,930
|
2,520
|
(14,715
|
)
|
|||||
|
Net
cash used in investing activities
|
(22,937
|
)
|
(41,934
|
)
|
(39,257
|
)
|
|||
|
Cash
flow from financing activities:
|
|||||||||
|
Borrowings
from revolving credit facility
|
17,450
|
18,000
|
55,005
|
||||||
|
Payments
on revolving credit facility
|
(20,450
|
)
|
(30,677
|
)
|
(59,684
|
)
|
|||
|
Borrowings
from unsecured term loans
|
15,000
|
15,000
|
-
|
||||||
|
Borrowings
from Lantana promissory note
|
21,500
|
-
|
-
|
||||||
|
Borrowings
from project loans
|
-
|
1,214
|
7,647
|
||||||
|
Repayments
on project loans
|
-
|
(15,593
|
)
|
(6,248
|
)
|
||||
|
Net
(payments for) proceeds from exercised stock options
|
(112
|
)
|
(2,438
|
)
|
639
|
||||
|
Excess
tax benefit from exercised stock options
|
4,845
|
1,111
|
-
|
||||||
|
Purchases
of Stratus common shares
|
(1,453
|
)
|
(565
|
)
|
(3,342
|
)
|
|||
|
Bank
credit facility fees
|
-
|
(810
|
)
|
(388
|
)
|
||||
|
Net
cash provided by (used in) continuing operations
|
36,780
|
(14,758
|
)
|
(6,371
|
)
|
||||
|
Net
cash (used in) provided by discontinued operations
|
(258
|
)
|
12,428
|
9,731
|
|||||
|
Net
cash provided by (used in) financing activities
|
36,522
|
(2,330
|
)
|
3,360
|
|||||
33
STRATUS
PROPERTIES INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS (Continued)
(In
Thousands)
|
Years
Ended December 31,
|
|||||||||
|
2007
|
2006
|
2005
|
|||||||
|
Net
increase in cash and cash equivalents
|
39,249
|
54
|
1,527
|
||||||
|
Cash
and cash equivalents at beginning of year
|
1,736
|
1,901
|
379
|
||||||
|
Cash
and cash equivalents at end of year
|
40,985
|
1,955
|
1,906
|
||||||
|
Less
cash restricted as to use
|
(112
|
)
|
(116
|
)
|
(387
|
)
|
|||
|
Less
cash at discontinued operations
|
-
|
(219
|
)
|
(336
|
)
|
||||
|
Unrestricted
cash and cash equivalents at end of year
|
$
|
40,873
|
$
|
1,620
|
$
|
1,183
|
|||
|
Supplemental
Information:
|
|||||||||
|
Interest
paid
|
$
|
1,146
|
$
|
1,071
|
$
|
1,085
|
|||
|
Income
taxes paid
|
$
|
-
|
$
|
952
|
$
|
-
|
|||
The
accompanying Notes to Consolidated Financial Statements, which include
information regarding noncash transactions, are an integral part of these
consolidated financial statements.
34
STRATUS
PROPERTIES INC.
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In
Thousands)
|
Years
Ended December 31,
|
|||||||||
|
2007
|
2006
|
2005
|
|||||||
|
Preferred
stock:
|
|||||||||
|
Balance
at beginning and end of year
|
$
|
-
|
$
|
-
|
$
|
-
|
|||
|
Common
stock:
|
|||||||||
|
Balance
at beginning of year representing 8,057 shares in 2007,
|
|||||||||
|
7,485
shares in 2006 and 7,284 shares in 2005
|
81
|
74
|
72
|
||||||
|
Exercise
of stock options and restricted stock representing 71
|
|||||||||
|
shares
in 2007, 572 shares in 2006 and 201 shares in 2005
|
-
|
7
|
2
|
||||||
|
Balance
at end of year representing 8,128 shares in 2007, 8,057
|
|||||||||
|
shares
in 2006 and 7,485 shares in 2005
|
81
|
81
|
74
|
||||||
|
Capital
in excess of par value:
|
|||||||||
|
Balance
at beginning of year
|
188,873
|
182,007
|
181,145
|
||||||
|
Stock-based
compensation expense, net of capitalized amounts
|
1,534
|
1,095
|
36
|
||||||
|
Exercised
stock options and other
|
646
|
4,660
|
826
|
||||||
|
Tax
benefit for stock option exercises
|
4,845
|
1,111
|
-
|
||||||
|
Balance
at end of year
|
195,898
|
188,873
|
182,007
|
||||||
|
Accumulated
deficit:
|
|||||||||
|
Balance
at beginning of year
|
(42,655
|
)
|
(82,943
|
)
|
(91,417
|
)
|
|||
|
Net
income
|
13,355
|
40,288
|
8,474
|
||||||
|
Balance
at end of year
|
(29,300
|
)
|
(42,655
|
)
|
(82,943
|
)
|
|||
|
Unamortized
value of restricted stock units:
|
|||||||||
|
Balance
at beginning of year
|
-
|
(567
|
)
|
(841
|
)
|
||||
|
Reclass
unamortized value of restricted stock units on adoption
|
|||||||||
|
of
new accounting standard
|
-
|
567
|
-
|
||||||
|
Amortization
of related deferred compensation, net of forfeitures
|
-
|
-
|
274
|
||||||
|
Balance
at end of year
|
-
|
-
|
(567
|
)
|
|||||
|
Common
stock held in treasury:
|
|||||||||
|
Balance
at beginning of year representing 526 shares in 2007,
|
|||||||||
|
268
shares in 2006 and 63 shares in 2005
|
(12,353
|
)
|
(4,404
|
)
|
(763
|
)
|
|||
|
Shares
purchased representing 45 shares in 2007,
|
|||||||||
|
23
shares in 2006 and 189 shares in 2005
|
(1,453
|
)
|
(565
|
)
|
(3,342
|
)
|
|||
|
Tender
of 15 shares in 2007, 235 shares in 2006 and 16 shares
|
|||||||||
|
in
2005 for exercised stock options and restricted stock
|
(473
|
)
|
(7,384
|
)
|
(299
|
)
|
|||
|
Balance
at end of year representing 586 shares in 2007,
|
|||||||||
|
526
shares in 2006 and 268 shares in 2005
|
(14,279
|
)
|
(12,353
|
)
|
(4,404
|
)
|
|||
|
Total
stockholders’ equity
|
$
|
152,400
|
$
|
133,946
|
$
|
94,167
|
|||
The
accompanying Notes to Consolidated Financial Statements are an integral part of
these consolidated financial statements.
35
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 an unconsolidated joint venture (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., 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. On March 27, 2006, Stratus sold Stratus 7000 West Joint Venture
(7000 West) and on October 12, 2007, Stratus sold the Escarpment Village
shopping center. As a result, 7000 West and Escarpment Village are reported as
discontinued operations and the consolidated financial statements for all
periods have been adjusted to reflect this presentation (see Note
7).
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
$0.1 million held at December 31, 2007 and 2006, for payment of fractional
shares resulting from the May 2001 stock split (see Note 6).
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 $2.8 million in 2007, $2.0 million in 2006 and
$3.3 million in 2005.
36
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 $1.6 million at December 31, 2007 and $2.0
million at December 31, 2006.
Depreciation. Office
buildings are depreciated on a straight-line basis over their estimated 40-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,
|
|||||||||
|
2007
|
2006
|
2005
|
|||||||
|
(In
Thousands)
|
|||||||||
|
Revenues:
|
|||||||||
|
Developed
property sales
|
$
|
21,388
|
$
|
33,459
|
$
|
25,453
|
|||
|
Undeveloped
property sales
|
1,082
|
24,929
|
7,550
|
||||||
|
Rental
income
|
3,081
|
1,662
|
1,353
|
||||||
|
Commissions,
management fees and other
|
1,613
|
1,825
|
838
|
||||||
|
Total
revenues
|
$
|
27,164
|
$
|
61,875
|
$
|
35,194
|
|||
37
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:
|
Years
Ended December 31,
|
|||||||||
|
2007
|
2006
|
2005
|
|||||||
|
(In
Thousands)
|
|||||||||
|
Cost
of developed property sales
|
$
|
14,106
|
$
|
19,627
|
$
|
13,023
|
|||
|
Cost
of undeveloped property sales
|
326
|
7,473
|
4,564
|
||||||
|
Rental
property costs
|
3,264
|
1,718
|
1,456
|
||||||
|
Allocation
of overhead costs (see below)
|
3,235
|
2,811
|
2,277
|
||||||
|
Municipal
utility district reimbursements (see below)
|
(1,724
|
)
|
(92
|
)
|
(126
|
)
|
|||
|
Depreciation
|
1,272
|
852
|
758
|
||||||
|
Other,
net
|
(346
|
)
|
(723
|
)
|
(113
|
)
|
|||
|
Total
cost of sales
|
$
|
20,133
|
$
|
31,666
|
$
|
21,839
|
|||
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 $0.3 million
in 2007, $0.2 million in 2006 and $0.2 million in 2005.
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):
38
|
Years
Ended December 31,
|
|||||||||
|
2007
|
2006
|
2005
|
|||||||
|
Income
from continuing operations
|
$
|
2,589
|
$
|
31,793
|
$
|
7,960
|
|||
|
Income
from discontinued operations
|
10,766
|
8,495
|
514
|
||||||
|
Net
income applicable to common stock
|
$
|
13,355
|
$
|
40,288
|
$
|
8,474
|
|||
|
Weighted
average common shares outstanding
|
7,554
|
7,306
|
7,209
|
||||||
|
Add: Dilutive
stock options
|
97
|
314
|
418
|
||||||
|
Restricted
stock
|
26
|
38
|
9
|
||||||
|
Weighted
average common shares outstanding for
|
|||||||||
|
purposes
of calculating diluted net income per share
|
7,677
|
7,658
|
7,636
|
||||||
|
Diluted
net income per share of common stock:
|
|||||||||
|
Continuing
operations
|
$
|
0.34
|
$
|
4.15
|
$
|
1.04
|
|||
|
Discontinued
operations
|
1.40
|
1.11
|
0.07
|
||||||
|
Diluted
net income per share of common stock
|
$
|
1.74
|
$
|
5.26
|
$
|
1.11
|
|||
Stock-Based Compensation
Plans. As of December 31, 2007, Stratus has two 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 2007 and 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-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.
39
The
following table illustrates the effect on net income and earnings per share for
the year ended December 31, 2005, 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):
|
Net
income applicable to common stock, as reported
|
$
|
8,474
|
|
|
Add: Stock-based
employee compensation expense
|
|||
|
included
in reported net income applicable to common
|
|||
|
stock
for restricted stock units
|
274
|
||
|
Deduct: Total
stock-based employee compensation
|
|||
|
expense
determined under fair value-based method
|
|||
|
for
all awards
|
(937
|
)
|
|
|
Pro
forma net income applicable to common stock
|
$
|
7,811
|
|
|
Earnings
per share:
|
|||
|
Basic
– as reported
|
$
|
1.18
|
|
|
Basic
– pro forma
|
$
|
1.08
|
|
|
Diluted
– as reported
|
$
|
1.11
|
|
|
Diluted
– pro forma
|
$
|
1.03
|
|
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 year ended December 31,
2005.
|
Options
granted
|
7,750
|
|
|
Fair
value per stock option
|
$11.48
|
|
|
Risk-free
interest rate
|
4.33
|
%
|
|
Expected
volatility rate
|
46.2
|
%
|
|
Expected
life of options (in years)
|
10
|
New
Accounting Standards.
Fair Value
Measurements. In September 2006, the Financial Accounting
Standards Board (FASB) issued SFAS No. 157, “Fair Value Measurements,” which
provides enhanced guidance for using fair value to measure assets and
liabilities. SFAS No. 157 does not require any new fair value measurements under
U.S. generally accepted accounting principles (GAAP); rather this statement
establishes a common definition of fair value, provides a framework for
measuring fair value under U.S. GAAP and expands disclosure requirements about
fair value measurements. On February 12, 2008, the FASB issued FSP FAS 157-2,
which delays the effective date of SFAS No. 157 for nonfinancial assets or
liabilities that are not required or permitted to be measured at fair value on a
recurring basis to fiscal years beginning after November 15, 2008, and interim
periods within those years. Stratus is currently evaluating the impact, if any,
the adoption of SFAS No. 157 will have on its financial reporting and
disclosures.
Fair
Value Option for Financial Assets and Liabilities. 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,” which permits
entities to choose to measure many financial instruments and certain other items
at fair value that are not currently required to be measured at fair value. SFAS
No. 159 is effective for fiscal years beginning after November 15, 2007. Stratus
does not believe that the adoption of SFAS No. 159 will have a material impact
on its financial reporting and disclosures.
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.
40
As of
December 31, 2007, Stratus owns only six lots with homes either built or being
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,
|
||||||
|
2007
|
2006
|
|||||
|
(In
Thousands)
|
||||||
|
Property
held for sale – developed or under development:
|
||||||
|
Austin,
Texas area
|
$
|
128,586
|
$
|
111,496
|
||
|
Other
areas of Texas
|
1,173
|
5,369
|
||||
|
129,759
|
116,865
|
|||||
|
Property
held for sale – undeveloped:
|
||||||
|
Austin,
Texas area
|
16,489
|
16,311
|
||||
|
Other
areas of Texas
|
34
|
34
|
||||
|
16,523
|
16,345
|
|||||
|
Property
held for use:
|
||||||
|
Commercial
leasing assets, net of accumulated depreciation
|
||||||
|
of
$3,202 in 2007 and $2,156 in 2006
|
23,800
|
18,445
|
||||
|
Furniture,
fixtures and equipment, net of accumulated
|
||||||
|
depreciation
of $415 in 2007 and $428 in 2006
|
621
|
429
|
||||
|
Total
property held for use
|
24,421
|
18,874
|
||||
|
$
|
170,703
|
$
|
152,084
|
|||
At
December 31, 2007, Stratus’ investment in real estate includes approximately
2,541 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
1,678 acres of residential, multi-family and commercial property and 25
developed residential estate lots within the Barton Creek community at December
31, 2007. Stratus also holds approximately 37 acres of commercial property under
development and 350 acres of undeveloped commercial property 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. At December 31,
2007, Meridian consisted of approximately 249 acres and 58 developed residential
lots. Stratus’ remaining Austin holdings at December 31, 2007, consisted of 223
acres of commercial property and two 75,000-square-foot buildings, one of which
is 90 percent leased and the other of which is approximately 94 percent leased,
at 7500 Rialto Boulevard located within Lantana. In 2006, Stratus sold 7000 West
(see Note 7) and on October 12, 2007, Stratus sold the Escarpment Village
shopping center (see Note 7). At December 31, 2007, Stratus’ Deerfield project
in Plano, Texas, consisted of the final 21 developed residential lots, which
were sold in January 2008.
Stratus
also owns two acres of undeveloped commercial property in San Antonio,
Texas.
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. The property, known as Crestview Station, is a
single-family, multi-family, retail and office development, which is located on
the commuter rail line approved by City of Austin voters. With Trammell Crow,
Stratus has completed brown field environmental remediation and permitting of
the property and is now proceeding with infrastructure development. In September
2007, the State of Texas certified that the remediation was
complete.
At
December 31, 2007, Stratus’ investment in the Crestview Station project totaled
$4.2 million and the joint venture partnership had $2.6 million of outstanding
debt, of which each joint venture partner guarantees $1.3 million.
41
4. Long-Term
Debt
|
December
31,
|
||||||
|
2007
|
2006
|
|||||
|
(In
Thousands)
|
||||||
|
Comerica
revolving credit facility, average rate 7.4% in 2007
|
||||||
|
and
7.2% in 2006
|
$
|
-
|
$
|
3,000
|
||
|
Unsecured
term loans, average rate 6.7% in 2007
|
||||||
|
and
9.1% in 2006
|
40,000
|
25,000
|
||||
|
Lantana
promissory note, average rate 6.0% in 2007
|
21,500
|
-
|
||||
|
Total
|
61,500
|
28,000
|
||||
|
Less: Current
portion
|
(242
|
)
|
-
|
|||
|
Long-term
debt
|
$
|
61,258
|
$
|
28,000
|
||
Comerica Revolving Credit
Facility. In 2005, Stratus replaced its $30.0 million credit
facility with a $45.0 million Comerica revolving credit facility, which 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 $4.4 million remains available at December 31,
2007. In May 2006, Stratus entered into a modification and extension agreement
to extend the maturity and decrease the interest rate on the Comerica revolving
credit facility. In May 2007, Stratus entered into another modification and
extension agreement to extend the maturity and further decrease the interest
rate on the revolving credit facility. The $45.0 million facility, of which $3.0
million is provided for the Calera Court project, matures on May 30, 2009.
Interest on the facility now accrues, at Stratus’ option, at Comerica’s rate
minus 1.10 percent or London Interbank Offered Rate (LIBOR) plus 1.65 percent,
subject to a minimum annual rate of 5.0 percent. Security for obligations
outstanding under the facility includes Stratus’ properties within the Barton
Creek community and certain of Stratus’ properties within Lantana and the Circle
C community. At December 31, 2007, no amounts were outstanding under the
revolving credit facility.
Unsecured Term
Loans. Stratus has $40.0 million of borrowings outstanding
under seven unsecured term loans with First American Asset Management (FAAM),
including two $5.0 million loans, two $8.0 million loans, a $7.0 million loan
and two $3.5 million loans, all of which will mature in December
2011.
In
December 2006, Stratus amended its two unsecured $5.0 million term loans with
FAAM. The amended agreements extend the maturities of both loans and decrease
the annual interest rates on 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 purchase the land being used in
connection with the Block 21 project. Amounts borrowed under both loans bear
interest at an annual rate of 6.56 percent.
In June
2007, Stratus entered into three separate loan agreements with FAAM. Pursuant to
the loan agreements, additional borrowings totaled $15.0 million, $10.6 million
of which was used to pay down the outstanding amounts under our revolving credit
facility with Comerica, and the remainder was used for operations, capital
expenditures and other development costs, including the Block 21
project.
The loan
agreements contain customary financial covenants and other restrictions. The
loans may be prepaid subject to certain reinvestment charges as further
described in the related promissory notes. The annual interest rate under the
loan agreements is 6.915 percent. Repayments under the loan agreements can be
accelerated upon the occurrence of certain customary events of
default.
Lantana Promissory
Note. On December 14, 2007, Stratus’ wholly owned subsidiary,
Lantana Office Properties I, L.P., (“Lantana”), signed a promissory note to The
Lincoln National Life Insurance Company. Under the terms of the note, Lantana
borrowed $21.5 million, which will be used for development costs and general
corporate purposes. The note matures on January 1, 2018. The note contains
customary financial covenants and other restrictions and bears interest at a
rate of 5.99 percent per year.
42
Prepayment
of the note is prohibited prior to February 1, 2010. Prepayment of the note in
whole, subsequent to February 1, 2010, is subject to a prepayment premium of the
greater of (1) one percent of the outstanding principal balance of the note on
the prepayment date or (2) the result of the sum of the present values of the
remaining payments due from the prepayment date through the maturity date minus
the outstanding principal balance of the note as of the prepayment date.
Prepayment of the note in part is prohibited. Repayments under the note can be
accelerated by the lender upon the occurrence of certain customary events of
default. Lantana’s obligations under the note are secured by a first lien on
real property and improvements and an assignment of rents and present and future
leases related to the office buildings at 7500 Rialto Boulevard.
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 mortgage was assumed by the purchaser of Escarpment
Village on October 12, 2007.
Maturities. Maturities
of long-term debt instruments based on the amounts and terms outstanding at
December 31, 2007, totaled $0.2 million in 2008, $0.3 million in 2009, $0.3
million in 2010, $40.3 million in 2011, $0.3 million in 2012 and $20.0 million
thereafter.
5. Income
Taxes
The
components of deferred income taxes follow:
|
December
31,
|
||||||
|
2007
|
2006
|
|||||
|
(In
Thousands)
|
||||||
|
Deferred
tax assets and liabilities:
|
||||||
|
Real
estate and facilities, net
|
$
|
4,096
|
$
|
4,922
|
||
|
Alternative
minimum tax credits and depletion allowance
|
||||||
|
(no
expiration)
|
1,225
|
1,360
|
||||
|
Employee
benefit accruals
|
1,092
|
593
|
||||
|
Accrued
liabilities
|
496
|
1,646
|
||||
|
Other
assets
|
377
|
339
|
||||
|
Net
operating loss credit carryfowards
|
178
|
218
|
||||
|
Other
liabilities
|
(351
|
)
|
(611
|
)
|
||
|
Valuation
allowance
|
(178
|
)
|
(218
|
)
|
||
|
6,935
|
8,249
|
|||||
|
Current
deferred tax asset
|
(1,401
|
)
|
(1,144
|
)
|
||
|
Long-term
deferred tax asset
|
$
|
5,534
|
$
|
7,105
|
||
The
income tax benefit (provision) attributable to income from continuing operations
consists of the following:
|
Years
Ended December 31,
|
|||||||||
|
2007
|
2006
|
2005
|
|||||||
|
(In
Thousands)
|
|||||||||
|
Current
|
$
|
29
|
$
|
95
|
$
|
(154
|
)
|
||
|
Deferred
|
(1,699
|
)
|
8,249
|
81
|
|||||
|
(Provision
for) benefit from income taxes
|
$
|
(1,670
|
)
|
$
|
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 2006, Stratus sold 7000 West
(see Note 7) and 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
43
evidence
that Stratus now believes it is more likely than not that it will be able to
realize the majority 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 (provision for) benefit from income taxes to discontinued
operations totaling $(4.9) million in 2007 and $0.4 million in
2006.
On
January 1, 2007, Stratus adopted FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes,” (FIN 48), which prescribes a recognition threshold
and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. FIN
48 also provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure and transition. Stratus did
not recognize a change to its unrecognized tax benefits as a result of the
implementation of FIN 48. The adoption of FIN 48 had no impact on Stratus’
financial statements. Stratus had no unrecognized tax benefits as of January 1,
2007 or December 31, 2007.
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 income tax examinations by tax authorities for the years prior to 2004,
and state and local income tax examinations for the years prior to 2003. In
completing its routine audit of Stratus’ Texas Franchise Tax account in
September 2007, the Texas Comptroller of Public Accounts noted that no
additional taxes were due from Stratus.
Reconciliations
of the differences between the income tax provision computed at the federal
statutory tax rate and the recorded income tax provision (benefit)
follow:
|
Years
Ended December 31,
|
|||||||||||||||||||
|
2007
|
2006
|
2005
|
|||||||||||||||||
|
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
|
||||||||||||||
|
(Dollars
in Thousands)
|
|||||||||||||||||||
|
Income
tax provision computed at the
|
|||||||||||||||||||
|
federal
statutory income tax rate
|
$
|
1,491
|
35
|
%
|
$
|
8,166
|
35
|
%
|
$
|
2,991
|
35
|
%
|
|||||||
|
Adjustments
attributable to:
|
|||||||||||||||||||
|
Change
in valuation allowance
|
-
|
-
|
(16,489
|
)
|
(71
|
)
|
(2,175
|
)
|
(25
|
)
|
|||||||||
|
State
taxes and other
|
179
|
4
|
(21
|
)
|
-
|
(743
|
)
|
(9
|
)
|
||||||||||
|
Income
tax provision
|
$
|
1,670
|
39
|
%
|
$
|
(8,344
|
)
|
(36
|
)%
|
$
|
73
|
1
|
%
|
||||||
6. Stock-Based
Compensation, Equity Transactions and Employee Benefits
Stock-Based Compensation
Plans. Stratus’ 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
reverse stock split transactions (see below), representing 550,000 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 30,176 shares under the 1998 Stock Option Plan,
25,000 shares under the Stock Option Plan for Non-Employee Directors and 44,059
shares under the 2002 Stock Option Plan were available for new grants as of
December 31, 2007.
44
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 in Note 1 as amounts were not
considered material.
|
Years
Ended December 31,
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Stock
options awarded to employees (including directors)
|
$
|
508
|
$
|
593
|
$
|
-
|
||||
|
Stock
options awarded to nonemployees
|
-
|
2
|
36
|
|||||||
|
Restricted
stock units
|
1,312
|
792
|
274
|
|||||||
|
Less
capitalized amounts
|
(286
|
)
|
(292
|
)
|
-
|
|||||
|
Impact
on income from continuing operations
|
||||||||||
|
before
income taxes
|
$
|
1,534
|
$
|
1,095
|
$
|
310
|
||||
Options. A summary
of options outstanding as of December 31, 2007, and changes during the year
ended December 31, 2007, follow:
|
Weighted
|
||||||||||
|
Average
|
Aggregate
|
|||||||||
|
Weighted
|
Remaining
|
Intrinsic
|
||||||||
|
Number
of
|
Average
|
Contractual
|
Value
|
|||||||
|
Options
|
Option
Price
|
Term
(years)
|
($000)
|
|||||||
|
Balance
at January 1
|
297,187
|
$
|
12.55
|
|||||||
|
Granted
|
7,500
|
32.85
|
||||||||
|
Exercised
|
(92,125
|
)
|
11.30
|
|||||||
|
Balance
at December 31
|
212,562
|
13.80
|
4.1
|
$
|
4,281
|
|||||
|
Vested
and exercisable at December 31
|
166,312
|
12.06
|
3.1
|
$
|
3,639
|
|||||
Summaries
of options outstanding and changes during the years ended December 31, 2006, and
December 31, 2005, follow:
|
2006
|
2005
|
|||||||||
|
Weighted
|
Weighted
|
|||||||||
|
Number
|
Average
|
Number
|
Average
|
|||||||
|
Of
|
Option
|
of
|
Option
|
|||||||
|
Options
|
Price
|
Options
|
Price
|
|||||||
|
Balance
at January 1
|
838,336
|
$
|
10.11
|
1,008,434
|
$
|
9.19
|
||||
|
Granted
|
7,500
|
26.44
|
7,750
|
18.22
|
||||||
|
Exercised
|
(548,649
|
)
|
9.01
|
(177,848
|
)
|
5.27
|
||||
|
Balance
at December 31
|
297,187
|
12.55
|
838,336
|
10.11
|
||||||
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 2007 and 2006.
|
2007
|
2006
|
||||||
|
Options
granted
|
7,500
|
7,500
|
|||||
|
Grant-date
fair value per stock option
|
$
|
16.30
|
$
|
14.57
|
|||
|
Expected
and weighted average volatility
|
41.8
|
%
|
48.6
|
%
|
|||
|
Expected
life of options (in years)
|
6.7
|
6.7
|
|||||
|
Risk-free
interest rate
|
4.4
|
%
|
4.7
|
%
|
|||
45
The total
intrinsic value of options exercised during the year ended December 31, 2007,
was $2.0 million. During 2007, 51,000 stock options with a weighted-average
grant-date fair market value of $9.33 vested. As of December 31, 2007, there
were 46,250 stock options unvested with a weighted-average grant-date fair
market value of $11.88. As of December 31, 2007, Stratus had $0.5 million of
total unrecognized compensation cost related to unvested stock options expected
to be recognized over a weighted average period of nine months.
The
following table includes amounts related to exercises of stock options and
vesting of restricted stock units for the years ended December 31, 2007 and 2006
(in thousands, except Stratus shares tendered):
|
2007
|
2006
|
|||||
|
Stratus
shares tendered to pay the exercise price
|
||||||
|
and/or
the minimum required taxesa
|
7,431
|
111,097
|
||||
|
Cash
received from stock option exercises
|
$
|
132
|
$
|
1,055
|
||
|
Actual
tax benefit realized for the tax deductions
|
||||||
|
from
stock option exercises
|
$
|
4,845
|
$
|
1,111
|
||
|
Amounts
Stratus paid for employee taxes
|
$
|
244
|
$
|
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.
Stratus
granted 76,000 restricted stock units in 2007. A summary of outstanding unvested
restricted stock units as of December 31, 2007, and activity during the year
ended December 31, 2007 is presented below:
|
Weighted
|
|||||||
|
Average
|
Aggregate
|
||||||
|
Number
of
|
Remaining
|
Intrinsic
|
|||||
|
Restricted
|
Contractual
|
Value
|
|||||
|
Stock
Units
|
Term
(years)
|
($000)
|
|||||
|
Balance
at January 1
|
71,250
|
||||||
|
Granted
|
76,000
|
||||||
|
Vested
|
(25,750
|
)
|
|||||
|
Balance
at December 31
|
121,500
|
8.9
|
$
|
4,124
|
|||
The
grant-date fair value of restricted stock units granted during the year ended
December 31, 2007, was $2.4 million. The total intrinsic value of restricted
stock units vesting during the year ended December 31, 2007, was $0.8 million.
As of December 31, 2007, Stratus had $2.0 million of total unrecognized
compensation cost related to unvested restricted stock units expected to be
recognized over a weighted-average period of 1.6 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 275,639 shares of its common stock for $5.6 million (a $20.34 per
share average) under this program. Purchases include 45,449 shares for $1.5
million (a $31.97 per share average) in 2007, 22,806 shares for $0.6 million (a
$24.77 per share average) in 2006 and 188,995 shares for $3.3 million (a $17.68
per share average) in 2005. 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, 2008, 415,786 shares remain available under
this program.
46
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, 2007, $0.1 million of
restricted cash remained to pay for fractional shares.
Employee
Benefits. Stratus maintains a 401(k) defined contribution plan
subject to the provisions of the Employee Retirement Income Security Act of 1974
(ERISA). Effective September 1, 2003, Stratus merged its money purchase plan
into the 401(k) plan. The 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 discretionary contributions. Stratus’ contributions to the 401(k)
plan totaled $0.5 million in 2007, $0.3 million in 2006 and $0.2 million in
2005.
7. Discontinued
Operations
Income
from discontinued operations reported in the consolidated statements of income
included the following (in thousands):
|
Years
Ended December 31,
|
|||||||||
|
2007
|
2006
|
2005
|
|||||||
|
Escarpment
Village
|
$
|
15,712
|
$
|
(119
|
)
|
$
|
-
|
||
|
7000
West
|
-
|
8,187
|
514
|
||||||
|
Income
before income taxes from
|
|||||||||
|
discontinued
operations
|
15,712
|
8,068
|
514
|
||||||
|
(Provision
for) benefit from income taxes
|
(4,946
|
)
|
427
|
-
|
|||||
|
Income
from discontinued operations
|
$
|
10,766
|
$
|
8,495
|
$
|
514
|
|||
Escarpment
Village. On October 12, 2007, Stratus sold the Escarpment
Village shopping center, located in Austin, Texas, to Lake Villa, L.L.C. (the
Purchaser) for $46.5 million, before closing costs and other adjustments. The
Purchaser paid $23.0 million in cash at closing and assumed the $22.4 million
principal balance remaining under Stratus’ loan from TIAA. Stratus recorded a
gain of $16.1 million ($11.0 million net of taxes or $1.46 per basic share and
$1.43 per diluted share) on the sale.
Upon
completion of the sale of Escarpment Village, Stratus ceased all involvement
with the Escarpment Village shopping center. The results of operations, assets
and liabilities of Escarpment Village, which have been classified as
discontinued operations in the accompanying consolidated financial statements,
previously represented a component of Stratus’ commercial leasing
segment.
The table
below provides a summary of Escarpment Village’s results of operations for the
years ended December 31, 2007 and 2006 (in thousands):
|
2007
|
2006
|
|||||
|
Rental
income
|
$
|
2,841
|
$
|
2,132
|
||
|
Rental
property costs
|
(1,547
|
)
|
(630
|
)
|
||
|
Depreciation
|
(680
|
)
|
(727
|
)
|
||
|
General
and administrative expenses
|
(86
|
)
|
(71
|
)
|
||
|
Interest
expensea
|
(1,024
|
)
|
(869
|
)
|
||
|
Interest
income
|
70
|
46
|
||||
|
Gain
on sale
|
16,138
|
-
|
||||
|
Provision
for income taxes
|
(4,946
|
)
|
-
|
|||
|
Income
(loss) from discontinued operations
|
$
|
10,766
|
$
|
(119
|
)
|
|
|
a.
|
Relates
to interest expense from the Escarpment Village project loan and the
Escarpment Village loan from TIAA and does not include any additional
allocations of interest.
|
47
The
following summarizes Escarpment Village’s net assets at December 31, 2006 (in
thousands):
|
Assets:
|
|||
|
Cash
and cash equivalents
|
$
|
219
|
|
|
Current
assets
|
3,713
|
||
|
Property
held for use, net of accumulated
|
|||
|
depreciation
of $727
|
27,828
|
||
|
Long-term
assets
|
3,157
|
||
|
Total
assets
|
$
|
34,917
|
|
|
Liabilities:
|
|||
|
Current
portion of long-term debt
|
$
|
(311
|
)
|
|
Other
current liabilities
|
(1,468
|
)
|
|
|
Long-term
debt
|
(22,364
|
)
|
|
|
Other
long-term liabilities
|
(535
|
)
|
|
|
Total
liabilities
|
$
|
(24,678
|
)
|
7000
West. On March 27, 2006, Stratus sold 7000 West 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 $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 results of operations, assets and liabilities of
7000 West previously were reflected as a component of Stratus’ commercial
leasing segment.
The table
below provides a summary of 7000 West’s results of operations for years ended
December 31, 2006 and December 31, 2005 (in thousands):
|
2006
|
2005
|
|||||
|
Rental
income
|
$
|
1,057
|
$
|
3,554
|
||
|
Rental
property costs
|
(403
|
)
|
(1,320
|
)
|
||
|
Depreciation
|
-
|
(701
|
)
|
|||
|
General
and administrative expenses
|
(48
|
)
|
(302
|
)
|
||
|
Interest
expensea
|
(168
|
)
|
(717
|
)
|
||
|
Interest
income
|
2
|
-
|
||||
|
Gain
on sale
|
9,762
|
-
|
||||
|
Provision
for income taxes
|
(1,588
|
)
|
-
|
|||
|
Income
from discontinued operations
|
$
|
8,614
|
$
|
514
|
||
|
a.
|
Relates
to interest expense from 7000 West project loan and does not include any
additional allocations of interest.
|
8. Commitments
and Contingencies
Construction
Contracts. Stratus had commitments under noncancelable open
contracts totaling $11.7 million at December 31, 2007. These commitments include
the following contracts that Stratus entered into in 2007:
|
●
|
Thirteen
contracts totaling $3.9 million for infrastructure work in connection with
new residential subdivisions at Barton Creek with a remaining balance of
$0.3 million at December 31, 2007;
|
|
●
|
A
$2.5 million contract for the construction of a 20,000 square-foot retail
center at Circle C with a remaining balance of $1.1 million at December
31, 2007;
|
|
●
|
Three
contracts totaling $1.3 million for the final three condominium units at
Calera Court in Barton Creek with the entire balance remaining at December
31, 2007;
|
|
●
|
A
$3.8 million contract for infrastructure work in connection with new
residential subdivisions at Meridian in Circle C with a remaining balance
of $1.2 million at December 31, 2007;
and
|
|
●
|
$14.3
million in contracts in connection with architectural, design and
engineering work for Block 21 with a remaining balance of $7.6 million at
December 31, 2007.
|
48
In
addition to the contracts noted above, Stratus also had $0.1 million of
outstanding commitments at December 31, 2007, on other ongoing Lantana, Meridian
and Barton Creek development contracts.
In early
2008, Stratus entered into additional contracts for $2.7 million for
infrastructure work associated with new residential subdivisions at Barton Creek
and an additional $0.7 million in contracts related to Block 21.
Operating Lease. As
of December 31, 2007, Stratus’ minimum annual contractual payments under its
noncancelable long-term operating lease for its office space which extends to
2010 totaled $0.2 million in 2008 and less than $50,000 in total for both 2009
and 2010. Total rental expense under Stratus’ operating lease amounted to $0.2
million in 2007 and $0.1 million in each of 2006 and 2005.
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, 2007, Stratus has permanently used $6.5 million of its City-based
development fee credits, including cumulative amounts sold to third parties
totaling $3.5 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 $3.1 million in Credit Bank
capacity in use as temporary fiscal deposits as of December 31, 2007.
Unencumbered Credit Bank capacity was $5.4 million at December 31,
2007.
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. The property
was subsequently sold to other parties, most recently in 2007. After assessing
available information concerning the terms of the 2007 sale and the new
purchaser’s future plans for the property, Stratus concluded that its obligation
to the seller still exists and did not transfer to the new purchaser.
Additionally, Stratus concluded that the new purchaser’s assumption of all
abandonment obligations, along with its significant financial investment and
expanded development plans for the property, make the likelihood of Stratus
being required to satisfy this contingent abandonment obligation remote. As a
result, Stratus reversed its $3.0 million reserve and recorded the same amount
as other income in 2007.
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 primarily includes the two office buildings at 7500
Rialto Boulevard. The first 75,000-square-foot building at 7500 Rialto Boulevard
is 90 percent leased. The second 75,000-
49
square-foot
building opened in September 2006 and is approximately 94 percent leased.
Southwest Property Services L.L.C., which Stratus formed in 2004, manages these
office buildings. The 7000 West and Escarpment Village operating results are
reported as discontinued operations in the table below.
As of
December 31, 2007, Stratus’ minimum rental income which includes scheduled rent
increases, under noncancelable long-term leases which extend through 2025,
totaled $2.7 million in 2008, $2.7 million in 2009, $2.2 million in 2010, $1.8
million in 2011, $1.8 million in 2012 and $6.6 million thereafter.
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)
|
||||||||||||
|
Year
Ended December 31, 2007
|
||||||||||||
|
Revenues
|
$
|
24,083
|
$
|
3,081
|
$
|
-
|
$
|
27,164
|
||||
|
Cost
of sales, excluding depreciation
|
(15,597
|
)
|
(3,264
|
)
|
-
|
(18,861
|
)
|
|||||
|
Depreciation
|
(157
|
)
|
(1,115
|
)
|
-
|
(1,272
|
)
|
|||||
|
General
and administrative expenses
|
(6,119
|
)
|
(910
|
)
|
-
|
(7,029
|
)
|
|||||
|
Operating
income (loss)
|
$
|
2,210
|
$
|
(2,208
|
)
|
$
|
-
|
$
|
2
|
|||
|
Income
from discontinued operations
|
$
|
-
|
$
|
10,766
|
b
|
$
|
-
|
$
|
10,766
|
|||
|
Provision
for income taxes
|
$
|
1,670
|
$
|
-
|
$
|
-
|
$
|
1,670
|
||||
|
Capital
expenditures
|
$
|
34,528
|
$
|
2,009
|
$
|
-
|
$
|
36,537
|
||||
|
Total
assets
|
$
|
185,611
|
$
|
35,773
|
$
|
6,973
|
c
|
$
|
228,357
|
|||
|
Year
Ended December 31, 2006
|
||||||||||||
|
Revenues
|
$
|
60,213
|
$
|
1,662
|
$
|
-
|
$
|
61,875
|
||||
|
Cost
of sales, excluding depreciation
|
(29,096
|
)
|
(1,718
|
)
|
-
|
(30,814
|
)
|
|||||
|
Depreciation
|
(127
|
)
|
(725
|
)
|
-
|
(852
|
)
|
|||||
|
General
and administrative expenses
|
(6,280
|
)
|
(580
|
)
|
-
|
(6,860
|
)
|
|||||
|
Operating
income (loss)
|
$
|
24,710
|
$
|
(1,361
|
)
|
$
|
-
|
$
|
23,349
|
|||
|
Income
from discontinued operations
|
$
|
-
|
$
|
8,495
|
d
|
$
|
-
|
$
|
8,495
|
|||
|
Benefit
from income taxes
|
$
|
8,344
|
$
|
-
|
$
|
-
|
$
|
8,344
|
||||
|
Capital
expenditures
|
$
|
36,278
|
$
|
17,015
|
$
|
-
|
$
|
53,293
|
||||
|
Total
assets
|
$
|
139,266
|
$
|
56,021
|
e
|
$
|
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 expense
|
(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
|
e,
f
|
$
|
8,683
|
$
|
173,886
|
|||
|
a.
|
Includes
sales commissions, management fees and other revenues together with
related expenses.
|
|
b.
|
Includes
an $11.0 million gain, net of taxes of $5.1 million, on the sale of
Escarpment Village.
|
|
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
an $8.3 million gain, net of taxes of $1.5 million, on the sale of 7000
West.
|
|
e.
|
Includes
assets from the discontinued operations of Escarpment Village, which
Stratus sold on October 12, 2007, totaling $34.9 million, net of
accumulated depreciation of $0.7 million, at December 31, 2006 and $21.7
million at December 31, 2005. Escarpment Village previously represented a
component of Stratus’ commercial leasing
segment.
|
50
| f. | 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. 7000 West previously represented a component of Stratus' commercial leasing segment. |
10. Quarterly
Financial Information (Unaudited)
The
quarterly financial information for the applicable 2007 and 2006 periods have
been restated to reflect Escarpment Village and 7000 West as discontinued
operations (see Note 7).
|
Operating
Income
|
Net
Income
|
Net
Income (Loss)
Per
Share
|
|||||||||||||
|
Revenues
|
(Loss)
|
(Loss)
|
Basic
|
Diluted
|
|||||||||||
|
(In
Thousands, Except Per Share Amounts)
|
|||||||||||||||
|
2007
|
|||||||||||||||
|
1st
Quarter
|
$
|
5,316
|
$
|
702
|
$
|
738
|
$
|
0.10
|
$
|
0.10
|
|||||
|
2nd
Quarter
|
6,788
|
585
|
241
|
0.03
|
0.03
|
||||||||||
|
3rd
Quarter
|
8,036
|
(423
|
)
|
(345
|
)
|
(0.05
|
)
|
(0.05
|
)
|
||||||
|
4th
Quarter
|
7,024
|
(862
|
)
|
12,721
|
1.69
|
1.66
|
|||||||||
|
$
|
27,164
|
$
|
2
|
$
|
13,355
|
1.77
|
1.74
|
||||||||
|
Operating
|
Net
Income
Per
Share
|
||||||||||||||
|
Revenues
|
Income
|
Net
Income
|
Basic
|
Diluted
|
|||||||||||
|
(In
Thousands, Except Per Share Amounts)
|
|||||||||||||||
|
2006
|
|||||||||||||||
|
1st
Quarter
|
$
|
11,662
|
$
|
1,867
|
$
|
18,176
|
$
|
2.51
|
$
|
2.36
|
|||||
|
2nd
Quarter
|
32,368
|
18,222
|
17,775
|
2.43
|
2.32
|
||||||||||
|
3rd
Quarter
|
9,069
|
1,231
|
1,181
|
0.16
|
0.16
|
||||||||||
|
4th
Quarter
|
8,776
|
2,029
|
3,156
|
0.43
|
0.41
|
||||||||||
|
$
|
61,875
|
$
|
23,349
|
$
|
40,288
|
5.51
|
5.26
|
||||||||
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 included in Item 8. Financial
Statements and Supplementary Data.
Not
applicable.
51
Information
required by this item will be contained in our definitive proxy statement to be
filed pursuant to Regulation 14A and 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 on Form 10-K.
Other information required by this item will be contained in our definitive
proxy statement to be filed pursuant to Regulation 14A and is incorporated
herein by reference.
Information
required by this item will be contained in our definitive proxy statement to be
filed pursuant to Regulation 14A and is incorporated herein by
reference.
Information
required by this item will be contained in our definitive proxy statement to be
filed pursuant to Regulation 14A and is incorporated herein by
reference.
Information
required by this item will be contained in our definitive proxy statement to be
filed pursuant to Regulation 14A and is incorporated herein by
reference.
Information
required by this item will be contained in our definitive proxy statement to be
filed pursuant to Regulation 14A and is incorporated herein by
reference.
(a)(1). Financial
Statements.
Consolidated
Balance Sheets, page 31.
Consolidated
Statements of Income, page 32.
Consolidated
Statements of Cash Flows, page 33.
Consolidated
Statements of Changes in Stockholders’ Equity, page 35.
(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.
52
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
14, 2008
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
14, 2008
S-1
STRATUS
PROPERTIES INC.
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.
F-1
STRATUS
PROPERTIES INC.
REAL
ESTATE, COMMERCIAL LEASING ASSETS AND FACILITIES AND ACCUMULATED
DEPRECIATION
December
31, 2007
(In
Thousands)
SCHEDULE
III
|
Cost
|
Gross
Amounts at
|
|||||||||||||||||||||||||
|
Initial
Cost
|
Capitalized
|
December
31, 2007
|
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
|
$
|
13,736
|
$
|
-
|
$
|
53,055
|
$
|
66,791
|
$
|
-
|
$
|
66,791
|
25
|
1,267
|
$
|
-
|
1988
|
|||||||||
|
Deerfield,
Plano, TX
|
543
|
-
|
630
|
1,173
|
-
|
1,173
|
21
|
-
|
-
|
2004
|
||||||||||||||||
|
Circle
C, Austin, TX
|
4,671
|
-
|
14,034
|
18,705
|
-
|
18,705
|
58
|
286
|
-
|
1992
|
||||||||||||||||
|
Lantana,
Austin, TX
|
567
|
-
|
13,457
|
14,024
|
-
|
14,024
|
-
|
223
|
-
|
1994
|
||||||||||||||||
|
Block
21, Austin, TX
|
15,108
|
-
|
13,958
|
29,066
|
-
|
29,066
|
-
|
2
|
-
|
2006
|
||||||||||||||||
|
Undevelopedc
|
||||||||||||||||||||||||||
|
Camino
Real, San Antonio, TX
|
16
|
-
|
18
|
34
|
-
|
34
|
-
|
2
|
-
|
1990
|
||||||||||||||||
|
Barton
Creek, Austin, TX
|
6,372
|
-
|
1,385
|
7,757
|
-
|
7,757
|
-
|
411
|
-
|
1988
|
||||||||||||||||
|
Circle
C, Austin, TX
|
5,172
|
-
|
3,560
|
8,732
|
-
|
8,732
|
-
|
350
|
-
|
1992
|
||||||||||||||||
|
Held
for Use
|
||||||||||||||||||||||||||
|
Barton
Creek Village, Austin, TX
|
47
|
5,110
|
-
|
47
|
5,110
|
5,157
|
-
|
-
|
84
|
2007
|
||||||||||||||||
|
7500
Rialto Boulevard, Austin, TX
|
208
|
21,637
|
-
|
208
|
21,637
|
21,845
|
-
|
-
|
3,118
|
2002
|
||||||||||||||||
|
Corporate
offices, Austin ,TX
|
-
|
1,036
|
-
|
-
|
1,036
|
1,036
|
-
|
-
|
415
|
-
|
||||||||||||||||
|
$
|
46,440
|
$
|
27,783
|
$
|
100,097
|
$
|
146,537
|
$
|
27,783
|
$
|
174,320
|
104
|
2,541
|
$
|
3,617
|
|||||||||||
|
a.
|
Real
estate that is currently being developed, has been developed, or has
received the necessary permits to be
developed.
|
|
b.
|
Includes
14 developed lots in the Calera subdivision, 7 developed lots in the
Amarra Drive Phase I subdivision, 2 developed lots in the Wimberly Lane
Phase II subdivision and 2 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, 2007, 2006 and 2005 are as follows (in
thousands):
|
2007
|
2006
|
2005
|
|||||||
|
Balance,
beginning of year
|
$
|
154,668
|
$
|
133,936
|
$
|
130,276
|
|||
|
Acquisitions
|
-
|
15,108
|
-
|
||||||
|
Improvements
and other
|
33,914
|
29,451
|
20,717
|
||||||
|
Cost
of real estate sold
|
(14,262
|
)
|
(23,827
|
)
|
(17,057
|
)
|
|||
|
Balance,
end of year
|
$
|
174,320
|
$
|
154,668
|
$
|
133,936
|
|||
The
aggregate net book value for federal income tax purposes as of December 31, 2007
was $182.4 million.
(2) Reconciliation
of Accumulated Depreciation:
The
changes in accumulated depreciation for the years ended December 31, 2007, 2006
and 2005 are as follows (in thousands):
|
2007
|
2006
|
2005
|
|||||||
|
Balance,
beginning of year
|
$
|
2,584
|
$
|
2,016
|
$
|
1,284
|
|||
|
Retirement
of assets
|
(239
|
)
|
(284
|
)
|
(26
|
)
|
|||
|
Depreciation
expense
|
1,272
|
852
|
758
|
||||||
|
Balance,
end of year
|
$
|
3,617
|
$
|
2,584
|
$
|
2,016
|
|||
Depreciation
of buildings and improvements reflected in the statements of income is
calculated over estimated lives of 40 years.
F-3
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 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
|
Second
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 May
30, 2007. Incorporated by reference to Exhibit 10.1 to the Current Report
on Form 8-K of Stratus dated June 27, 2007.
|
|
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.
|
|
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.
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.
|
|
10.21
|
Letter
Agreement between Stratus Properties Inc. and Canyon-Johnson Urban Fund
II, L.P., dated as of May 4, 2007. Incorporated by reference to Exhibit
10.21 to the Quarterly Report on Form 10-Q of Stratus for the quarter
ended June 30, 2007 (Stratus’ 2007 Second Quarter Form
10-Q).
|
|
10.22
|
Loan
Agreement between Stratus Properties Inc. and Holliday Fenoglio Fowler,
L.P. dated as of June 1, 2007, subsequently assigned to American Select
Portfolio Inc., an affiliate of First American Asset Management.
Incorporated by reference to Exhibit 10.22 to Stratus’ 2007 Second Quarter
Form 10-Q.
|
|
10.23
|
Loan
Agreement between Stratus Properties Inc. and Holliday Fenoglio Fowler,
L.P. dated as of June 1, 2007, subsequently assigned to American Strategic
Income Portfolio Inc., an affiliate of First American Asset Management.
Incorporated by reference to Exhibit 10.23 to Stratus’ 2007 Second Quarter
Form 10-Q.
|
|
10.24
|
Loan
Agreement between Stratus Properties Inc. and Holliday Fenoglio Fowler,
L.P. dated as of June 1, 2007, subsequently assigned to American Strategic
Income Portfolio Inc.-III, an affiliate of First American Asset
Management. Incorporated by reference to Exhibit 10.24 to Stratus’ 2007
Second Quarter Form 10-Q.
|
|
10.25
|
Purchase
and Sale Agreement dated as of July 9, 2007, between Escarpment Village,
L.P. as Seller and Christopher Investment Company, Inc. as Purchaser.
Incorporated by reference to Exhibit 10.1 to the Current Report on Form
8-K of Stratus dated October 12, 2007.
|
|
10.26
|
Promissory
Note dated as of December 14, 2007, between Lantana Office Properties I,
L.P., as borrower, and The Lincoln National Life Insurance Company, as
lender. Incorporated by reference to Exhibit 10.1 to the Current Report on
Form 8-K of Stratus dated December 14, 2007.
|
|
Executive
Compensation Plans and Arrangements (Exhibits 10.27 through
10.38)
|
|
|
10.27
|
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.
|
|
10.28
|
Stratus
Properties Inc. Stock Option Plan, as amended and restated. Incorporated
by reference to Exhibit 10.22 to the Quarterly Report on Form 10-Q of
Stratus for the quarter ended March 31, 2007 (Stratus’ 2007 First Quarter
Form 10-Q).
|
|
10.29
|
Stratus
Properties Inc. 1996 Stock Option Plan for Non-Employee Directors, as
amended and restated. Incorporated by reference to Exhibit 10.23 to
Stratus’ 2007 First Quarter Form 10-Q.
|
|
10.30
|
Stratus
Properties Inc. 1998 Stock Option Plan, as amended and restated.
Incorporated by reference to Exhibit 10.24 to Stratus’ 2007 First Quarter
Form 10-Q.
|
|
10.31
|
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).
|
|
10.32
|
Form
of Restricted Stock Unit Agreement under the 1998 Stock Option Plan.
Incorporated by reference to Exhibit 10.26 to Stratus’ 2007 First Quarter
Form 10-Q.
|
|
10.33
|
Stratus
Properties Inc. 2002 Stock Incentive Plan, as amended and restated.
Incorporated by reference to Exhibit 10.27 to Stratus’ 2007 First Quarter
Form 10-Q.
|
|
10.34
|
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.
|
|
10.35
|
Form
of Restricted Stock Unit Agreement under the 2002 Stock Incentive Plan.
Incorporated by reference to Exhibit 10.29 to Stratus’ 2007 First Quarter
Form 10-Q.
|
|
10.36
|
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.
|
|
10.37
|
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.
|
|
10.38
|
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.
|
|
List
of subsidiaries.
|
|
|
Consent
of PricewaterhouseCoopers LLP.
|
|
|
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.
|
|
|
Power
of attorney pursuant to which a report has been signed on behalf of
certain officers and directors of Stratus.
|
|
|
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-4