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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, 2005
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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: None.
Securities
registered pursuant to Section 12(g) of the Act:
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Title
of each class
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Common
Stock Par Value $0.01 per Share
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Preferred
Stock Purchase Rights
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Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act.
0
Yes
S
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
S
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. S
Yes
0
No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of the registrant’s
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K.
0
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Act. (Check
one):
0
Large
accelerated filer S
Accelerated filer 0
Non-accelerated filer
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). 0
Yes
S
No
The
aggregate market value of common stock held by non-affiliates of the registrant
was approximately $101.3 million on March 1, 2006, and approximately $75.4
million on June 30, 2005.
On
March
1, 2006, there were issued and outstanding 7,236,886 shares of Common Stock
and
on June 30, 2005, there were issued and outstanding 7,201,512
shares.
DOCUMENTS
INCORPORATED BY REFERENCE
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Portions
of our Proxy Statement for our 2006 Annual Meeting to be held on
May 9,
2006 are incorporated by reference into
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Part
III (Items 10, 11, 12 and 14) of this
report.
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STRATUS
PROPERTIES INC.
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All
of our periodic report filings with the Securities and Exchange Commission
(SEC)
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934,
as
amended, are made available, free of charge, through our web site,
www.stratusproperties.com, including our annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and any amendments to those
reports. These reports and amendments are available through our web site as
soon
as reasonably practicable after we electronically file or furnish such material
to the SEC. All subsequent references to “Notes” refer to the Notes to
Consolidated Financial Statements located in Item 8. elsewhere in this Form
10-K.
We
are
engaged in the acquisition, development, management and sale of commercial,
multi-family and residential real estate properties located primarily in the
Austin, Texas area. We conduct real estate operations on properties we
own.
Our
principal real estate holdings are currently in southwest Austin, Texas. Our
most significant holding is the 1,735 acres of residential, multi-family and
commercial property and 86 developed residential estate lots located within
the
Barton Creek community as of December 31, 2005. We also own approximately 384
acres of undeveloped commercial property and approximately 36 acres of
commercial property under development within the Circle C Ranch (Circle C)
community. Our other properties in the Circle C community are currently being
developed and include Meridian, which is an 800-lot residential development,
and
Escarpment Village, which is a retail center. At December 31, 2005, Meridian
consisted of approximately 314 acres and 120 developed residential lots and
Escarpment Village consisted of approximately 62 acres. Our remaining Austin
holdings at December 31, 2005, consisted of 282 acres of commercial property
and
three office buildings in Lantana. One office building is a 75,000-square-foot
office building at 7500 Rialto Boulevard, which is nearly 100 percent leased.
In
the fourth quarter of 2005, we committed to a plan to sell our two
70,000-square-foot office buildings at 7000 West William Cannon Drive (7000
West), known as the Lantana Corporate Center. We have contracted to sell 7000
West for $22.3 million, a portion of which will be paid by the buyer’s
assumption of the related 7000 West project loan. Closing of the sale currently
is scheduled for March 27, 2006 (see “Discontinued Operations - 7000
West”).
In
January 2004, we acquired approximately 68 acres of land in Plano, Texas, which
we refer to as Deerfield. At December 31, 2005, our Deerfield property consisted
of approximately 26 acres of residential land, which is being developed, and
59
developed residential lots. We also own two acres of undeveloped commercial
property in San Antonio, Texas.
In
November 2005, we formed a joint venture partnership with Trammell Crow Central
Texas Development, Inc. (Trammell Crow) to acquire an approximate 74-acre tract
at the intersection of Airport Boulevard and Lamar Boulevard in Austin, Texas
for $7.7 million. We refer to the property as the Crestview Station project,
a
single-family, multi-family, retail and office development. With our joint
venture partner, we have commenced brown field remediation and permitting of
the
property.
From
our
formation in 1992 through 2000, our primary objectives were to reduce our
indebtedness and increase our financial flexibility. In pursuing these
objectives, we had reduced our debt to $8.4 million at December 31, 2000 from
$493.3 million in March 1992. As a result of the settlement of certain
development-related lawsuits and an increasing level of cooperation with the
City of Austin (the City) regarding the development of our properties, we
substantially increased our development activities and expenditures during
the
last five years (see below), which has resulted in our debt from continuing
operations increasing to $50.3 million at December 31, 2005. We have funded
our
development activities primarily through 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 firmly establishing all essential municipal development regulations
applicable to our Circle C properties for thirty years (see “Development and
Other Activities” within Items 7. and 7A. and Note 8). The credit facility and
other sources of financing have increased our financial flexibility and,
together with the Circle C settlement, have allowed us to focus our efforts
on
developing our properties and increasing shareholder value.
1
Our
overall strategy is to enhance the value of our Austin properties by securing
and maintaining development entitlements and developing and building real estate
projects on these properties for sale or investment, thereby increasing the
potential return from our core assets. We also continue to investigate and
pursue opportunities for new projects that would require minimal capital
investment by us yet offer the possibility of acceptable returns and limited
risk. Our progress towards accomplishing these goals includes the
following:
| · |
Over
the past several years we have successfully permitted and developed
significant projects in our Barton Creek and Lantana project
areas.
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During
1999, we completed the development of the 75 residential lots at the Wimberly
Lane subdivision at Barton Creek all of which were sold by the end of 2003.
During 2004, we completed the development of the 47 lots in the second phase
of
Wimberly Lane (Wimberly Lane Phase II), and we also placed 41 of the lots under
contract to a national homebuilder. In 2005, we sold six estate lots and ten
standard homebuilder lots at Wimberly Lane Phase II. We are continuing to
develop several new subdivisions around the new Tom Fazio designed “Fazio
Canyons” golf course at Barton Creek. Through the end of 2005, we had sold 53 of
the 54 lots at Escala Drive in the Barton Creek community.
Since
January 2002, we have secured subdivision plat approval for three new
residential subdivisions within the Barton Creek Community, including: Versant
Place - 54 lots; Wimberly Lane Phase II - 47 lots; and Calera - 155 lots. During
2004, we completed construction of four courtyard homes at Calera Court, two
of
which were sold in October 2005 and one of which was sold in 2004. Calera Court,
the initial phase of the “Calera” subdivision, will include 17 courtyard homes
on 16 acres. The second phase of Calera, Calera Drive, consisting of 53
single-family lots many of which adjoin the Fazio Canyons golf course, received
final plat and construction permit approval in February 2005. In the third
quarter of 2005, we completed development of these lots and sold 19 lots in
the
second half of 2005. Development of the third and last phase of Calera, which
will include approximately 70 single-family lots, will commence in
2006.
We
completed construction of the 34 lots in the Mirador subdivision within the
Barton Creek community during 2001 and marketing efforts are ongoing. Mirador
adjoins the Escala Drive subdivision. At the end of 2005, we owned 12 estate
lots, each averaging approximately 3.5 acres in size, in the Mirador
subdivision.
During
2001, we reached agreement with the City concerning development of a 417-acre
portion of Lantana. This 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 Lantana allowing for approximately 2.9 million square feet of office and
retail development, approximately 400 multi-family units (previously sold to
an
unrelated third party, see below) and approximately 330 residential lots to
which we sold the development rights in 2003. As of December 31, 2005, the
Lantana inventory totaled approximately 2.7 million square feet of potential
office and retail development.
In
2000,
we received final subdivision plat approval from the City to develop
approximately 170 acres of commercial and multi-family real estate within
Lantana. We completed and leased the two 70,000-square-foot office buildings
at
7000 West by the third quarter of 2000. In the fourth quarter of 2005, we
committed to a plan to sell our two office buildings at 7000 West. We have
contracted to sell 7000 West for $22.3 million, a portion of which will be
paid
by the buyer’s assumption of the related 7000 West project loan. Closing of the
sale currently is scheduled for March 27, 2006 (see “Discontinued Operations -
7000 West”). The required infrastructure development at the site known as
“Rialto Boulevard” was completed during 2001. During 2002, we completed the
75,000-square-foot office building at 7500 Rialto Boulevard, which is now nearly
100 percent leased. As demand for office space within Lantana has increased,
we
commenced construction in 2006 of a second 75,000-square-foot office building
at
7500 Rialto Boulevard. Full development of the 170 acres is expected to consist
of over 800,000 square feet of office and retail space and 400 multi-family
units, which were constructed by an apartment developer that purchased our
36.4-acre multi-family tract in 2000.
In
November 2005, we entered into an Agreement of Sale and Purchase with Advanced
Micro Devices, Inc. (NYSE: AMD) under which we have agreed to sell them
approximately 58 acres at our Lantana property for $21.2 million. The proposed
AMD project consists of approximately 825,000 square feet of office and related
uses on a 58-acre site at the southeast corner of West William Cannon Drive
and
Southwest Parkway. Subject to certain conditions, including obtaining certain
permits and approvals from the City, the sale is expected to close during 2006.
In February 2006, the Save Our Springs Alliance, Inc. filed a lawsuit against
the City seeking, among other matters, to prevent the issuance of permits needed
to develop the AMD project (see Item 3. “Legal Proceedings”).
2
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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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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. These
approvals permit development of approximately 1.0 million square feet of
commercial space and 1,730 residential units, including 900 multi-family units
and 830 single family residential lots. In 2004, we amended our Circle C
settlement with the City to increase the amount of permitted commercial space
from 1.0 million square feet to 1.16 million square feet in exchange for a
decrease in allowable multi-family units from 900 units to 504 units. The Circle
C settlement, effective August 15, 2002, firmly establishes all essential
municipal development regulations applicable to our Circle C properties for
30
years. The City also provided us $15 million of cash incentives in connection
with our future development of our Circle C and other Austin-area properties.
These incentives, which are in the form of Credit Bank capacity, can be used
for
City fees and reimbursement for certain infrastructure costs. Annually, we
may
elect to sell up to $1.5 million of the incentives to other developers for
their
use in paying City fees related to their projects. As of December 31, 2005,
we
have permanently used $3.4 million of our City-based incentives including
cumulative sales of $1.6 million to other developers, and we also have $4.5
million in Credit Bank capacity in use as temporary fiscal deposits. At December
31, 2005, unencumbered Credit Bank capacity was $7.1 million.
We
have
commenced development activities at the Circle C community based on the
entitlements secured in our Circle C settlement with the City, as amended in
2004. The preliminary plan has been approved for Meridian, an 800-lot
residential development at the Circle C community. In October 2004, we received
final City plat and construction permit approvals for the first phase of
Meridian, and construction commenced in January 2005. During the first quarter
of 2005, we contracted to sell a total of 494 lots in our Meridian project
to
three national homebuilders in four phases. Sales for each of the four phases
commence upon substantial completion of development for that phase, and continue
every quarter until all of the lots have been sold. The first phase, which
includes 134 lots, was substantially completed at the end of 2005. Development
of the second phase of 134 lots commenced in the third quarter of 2005 and
was
substantially completed in March 2006. In addition, several retail sites at
the
Circle C community received final City approvals and are being developed. Zoning
for Escarpment Village, a 168,000-square-foot retail project anchored by a
grocery store, was approved during the second quarter of 2004, and
construction is progressing with completion expected by
mid-2006.
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We
believe that we have the right to receive approximately $22 million
of
future reimbursements associated with previously incurred Barton
Creek
utility infrastructure development
costs.
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At
December 31, 2005, we had approximately $10.3 million of these expected future
reimbursements of previously incurred costs recorded as a component of “Real
estate, commercial leasing assets and facilities, net” on our balance sheet. The
remaining future reimbursements are not recorded on our balance sheet because
they relate to properties previously sold or represent a component of the $115
million impairment charge we recorded in 1994. Additionally, a significant
portion of the substantial additional costs we will incur in the future as
our
development activities at Barton Creek continue will be eligible for
reimbursement. We received total infrastructure reimbursements of $4.9 million
during 2005, $0.9 million during 2004 and $5.3 million during 2003, including
Barton Creek Municipal Utility District (MUD) reimbursements of $4.9 million
in
2005, $0.9 million in 2004 and $4.6 million in 2003. Our total infrastructure
reimbursements during 2003 also included fiscal deposit refunds.
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We
are currently developing a project in Plano,
Texas.
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In
January 2004, we acquired approximately 68 acres of land in Plano, Texas, for
$7.0 million. The property, which we refer to as Deerfield, is zoned and subject
to a preliminary subdivision plan for 234 residential lots. In February 2004,
we
executed an Option Agreement and a Construction Agreement with a national
homebuilder. Pursuant to the Option Agreement, the homebuilder paid us $1.4
million for an option to purchase all 234 lots over 36 monthly take-downs.
The
net purchase price for each of the 234 lots was $61,500, subject to certain
terms and conditions. The $1.4 million option payment is non-refundable, but
will be applied against subsequent purchases of lots by the homebuilder after
certain thresholds are achieved and will be recognized by us as income as lots
are sold. The Construction Agreement requires the homebuilder to complete
development of the entire project by March 15, 2007. We agreed to pay up to
$5.2
million of the homebuilder’s development costs. The homebuilder must pay all
property taxes and maintenance costs. In February 2004, we entered into a $9.8
million three-year loan agreement with Comerica to finance the acquisition
and
development of Deerfield. Development is proceeding on schedule
3
and
we
had $6.9 million in remaining availability under the loan at December 31, 2005.
The initial lot sale occurred in November 2004 and subsequent lot sales are
on
schedule with 68 lot sales closing in 2005. In October 2005, we executed a
revised agreement with the homebuilder, increasing the lot sizes and average
purchase price to $67,150 based on a new total of 224 lots.
| · |
We
formed a joint venture in November 2005 to purchase and develop a
multi-use property in Austin,
Texas.
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Our
joint
venture with Trammell Crow acquired an approximate 74-acre tract at the
intersection of Airport Boulevard and Lamar Boulevard (Crestview Station).
After
completing remediation work on the property and receiving permits, the joint
venture plans to develop regional infrastructure and then sell entitled
single-family, multi-family, retail and office properties with closings on
the
single-family and multi-family components expected to occur in 2007 upon
completion of the remediation. The Crestview Station property is divided into
three distinct parcels - one containing approximately 46 acres, a second
consisting of approximately 27 acres and a third 0.5-acre tract. Our joint
venture partnership has contracted with a nationally recognized remediation
company to demolish the existing buildings and remediate the 27-acre and
0.5-acre tracts as part of preparing them for residential permitting. Pursuant
to the agreement with the contractor, all environmental and legal liability
was
assigned to and assumed by the contractor.
We
established a banking relationship with Comerica in 1999 that has substantially
enhanced our financial flexibility. In September 2005, we replaced our $30.0
million credit facility with a $45.0 million Comerica revolving credit facility,
which sets limitations on liens and transactions with affiliates and requires
that certain financial ratios be maintained. The $45.0 million facility, of
which $3.0 million is provided for our Calera Court project, matures on May
30,
2007. The facility allows us to purchase up to $6.5 million of our outstanding
common stock after September 30, 2005. Amounts borrowed under the facility
bear
interest at a minimum annual rate of 5.0 percent or, at our option, Comerica’s
prime rate plus 0.5 percent or London Interbank Offered Rate (LIBOR) plus 2.5
percent. Security for obligations outstanding under the facility includes
substantially all of our assets, except for Escarpment Village, 7000 West,
Deerfield and the Meridian project. At December 31, 2005, we had $15.7 million
outstanding under the revolving credit facility.
In
February 2004, we entered into a $9.8 million three-year loan agreement with
Comerica to finance the Deerfield property (see “Development and Other
Activities” in Items 7. and 7A.). We had $2.9 million of net borrowings under
the Deerfield loan at December 31, 2005. At December 31, 2005, we had borrowings
associated with two unsecured $5.0 million term loans and $6.5 million of net
borrowings on a project loan facility for the 7500 Rialto Boulevard office
building (see “Company Strategies and Development Activities,” above). Effective
November 15, 2005, we amended our project loan for 7500 Rialto Boulevard with
Comerica, which extended the maturity from January 2006 to January 2008. In
December 2004, we obtained an $18.5 million project loan from Comerica to fund
the construction of Escarpment Village. As of December 31, 2005, we had $9.9
million of net borrowings under the Escarpment Village project loan, which
will
mature in June 2007. In addition, we have a $22.8 million commitment from the
Teachers Insurance and Annuity Association of America (TIAA) for a 30-year
mortgage available for funding the completed Escarpment Village shopping center
project. The mortgage will be used to refinance the $18.5 million Escarpment
Village project loan discussed above. At December 31, 2005, we had $5.3 million
of net borrowings under the $10.0 million Meridian project loan, which will
mature in November 2007. For a further discussion of the credit facility and
our
other long-term financing arrangements, see “Capital Resources and Liquidity -
Credit Facility and Other Financing Arrangements” within Items 7. and 7A. and
Note 4.
Background.
In 1998,
we formed a strategic alliance with Olympus Real Estate Corporation (Olympus)
to
develop certain of our existing properties and to pursue new real estate
acquisition and development opportunities. In 1999, we formed a joint venture
(7000 West) owned 50.1 percent by Olympus and 49.9 percent by us to construct
a
70,000-square-foot office building at the Lantana Corporate Center. The joint
venture completed construction of a second 70,000-square-foot office building
in
2000. We accounted for our interest in this joint venture under the equity
method of accounting until February 27, 2002, when we purchased Olympus’
ownership interest in the joint venture for $1.5 million and the assumption
of
$12.9 million of debt (the 7000 West project loan). In December 2004, we repaid
the outstanding balance of the 7000 West project loan with proceeds from a
$12.0
million loan from TIAA. The 7000 West project loan with TIAA matures in January
2015, and interest accrues monthly at a fixed annual rate of 5.7 percent. As
of
December 31, 2005, our borrowings outstanding under the 7000 West project loan
were $11.8 million (see Note 7).
4
Sale
of 7000 West.
In the
fourth quarter of 2005, we committed to a plan to sell our two office buildings
at 7000 West. We have contracted to sell 7000 West for $22.3 million, a portion
of which will be paid by the buyer’s assumption of the related 7000 West project
loan. Although closing of the sale is currently scheduled for March 27, 2006,
it
is subject to our satisfaction of certain conditions.
Our
real
estate investments are subject to extensive local, city, county and state rules
and regulations regarding permitting, zoning, subdivision, utilities and water
quality as well as federal rules and regulations regarding air and water quality
and protection of endangered species and their habitats. Such regulation has
delayed and may continue to delay development of our properties and result
in
higher developmental and administrative costs. See “Risk Factors.”
We
have
made, and will continue to make, expenditures for the protection of the
environment with respect to our real estate development activities. Emphasis
on
environmental matters will result in additional costs in the future. Based
on an
analysis of our operations in relation to current and presently anticipated
environmental requirements, we currently do not anticipate that these costs
will
have a material adverse effect on our future operations or financial
condition.
At
December 31, 2005, we had 27 employees. We also use contract personnel to
perform certain management and administrative services, including
administrative, accounting, financial and other services, under a management
services agreement. We may terminate this contract on an annual basis. The
cost
of these services totaled $0.3 million for each of the last three
years.
This
report includes “forward-looking statements” within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of
1934. Forward-looking statements are all statements other than statements of
historical fact included in this report, including, without limitation, the
statements under the headings “Business,” “Properties,” “Market for Registrant’s
Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities,” and “Management’s Discussion and Analysis of Financial Condition
and Results of Operation and Quantitative and Qualitative Disclosures About
Market Risks” regarding our financial position and liquidity, payment of
dividends, share repurchases, strategic plans, future financing plans,
development and capital expenditures, business strategies, and our other plans
and objectives for future operations and activities.
Forward-looking
statements are based on our assumptions and analysis made in light of our
experience and perception of historical trends, current conditions, expected
future developments and other factors that we believe are appropriate under
the
circumstances. These statements are subject to a number of assumptions, risks
and uncertainties, including the risk factors discussed below and in our other
filings with the SEC, general economic and business conditions, the business
opportunities that may be presented to and pursued by us, changes in laws or
regulations and other factors, many of which are beyond our control. Readers
are
cautioned that forward-looking statements are not guarantees of future
performance, and the actual results or developments may differ materially from
those projected, predicted or assumed in the forward-looking statements.
Important factors that could cause actual results to differ materially from
our
expectations include, among others, the following:
We
are vulnerable to concentration risks because our operations are currently
almost exclusive to the Austin, Texas, market.
Our
real estate activities are almost entirely located in Austin, Texas. Because
of
our geographic concentration and limited number of projects, our operations
are
more vulnerable to local economic downturns and adverse project-specific risks
than those of larger, more diversified companies.
The
performance of the Austin economy greatly affects our sales and consequently
the
underlying values of our properties. The Austin economy is heavily influenced
by
conditions in the technology industry. In a weak technology market, which had
been the recent condition, we experienced reduced sales, primarily affecting
our
“high-end” properties, which can significantly affect our financial condition
and results of operations.
Two
of our three office buildings are primarily leased by a single
tenant.
Our two
office buildings at 7000 West are primarily leased to a single tenant. Should
this tenant default on its obligations, we may not be able to find another
tenant to occupy the space under similar terms or at all. Failure to maintain
high occupancy rates for these buildings could hinder our ability to repay
project loans secured by these buildings or limit our ability to refinance
or
extend the maturity of these loans.
5
Aggressive
attempts by certain parties to restrict growth in the area of our holdings
have
in the past had, and may in the future have, a negative effect on our
development and sales activities.
Although
we will defend the development entitlements applicable to our properties, the
efforts of special interest groups have affected and may again negatively impact
our development and sales activities.
If
we are unable to generate sufficient cash from operations, we may find it
necessary to curtail our development activities.
Significant capital resources will be required to fund our development
expenditures. Our performance continues to be dependent on future cash flows
from real estate sales and rental income, and there can be no assurance that
we
will generate sufficient cash flow or otherwise obtain sufficient funds to
meet
the expected development plans for our properties.
Our
results of operations and financial condition are greatly affected by the
performance of the real estate industry.
Our real
estate activities are subject to numerous factors beyond our control, including
local real estate market conditions (both where our properties are located
and
in areas where our potential customers reside), substantial existing and
potential competition, general national, regional and local economic conditions,
fluctuations in interest rates and mortgage availability and changes in
demographic conditions. Real estate markets have historically been subject
to
strong periodic cycles driven by numerous factors beyond the control of market
participants.
Real
estate investments often cannot easily be converted into cash and market values
may be adversely affected by these economic circumstances, market fundamentals,
competition and demographic conditions. Because of the effect these factors
have
on real estate values, it is difficult to predict with certainty the level
of
future sales or sales prices that will be realized for individual
assets.
Our
real
estate operations are also dependent upon the availability and cost of mortgage
financing for potential customers, to the extent they finance their purchases,
and for buyers of the potential customers’ existing residences.
Unfavorable
changes in market and economic conditions could hurt occupancy or rental
rates.
Market
and economic conditions may significantly affect rental rates. Occupancy and
rental rates in our market, in turn, may significantly affect our profitability
and our ability to satisfy our financial obligations. The risks that may affect
conditions in our market include the following:
· the
economic climate, which may be adversely impacted by industry slowdowns and
other factors;
· local
conditions, such as oversupply of office space and the demand for office
space;
· the
inability or unwillingness of tenants to pay their current rent or rent
increases; and
· competition
from other available office buildings and changes in market rental
rates.
Our
operations are subject to an intensive regulatory approval
process.
Before
we can develop a property, we must obtain a variety of approvals from local
and
state governments with respect to such matters as zoning, density, parking,
subdivision, site planning and environmental issues. Some of these approvals
are
discretionary by nature. Because government agencies and special interest groups
have in the past expressed concerns about our development plans in or near
Austin, our ability to develop these properties and realize future income from
our properties could be delayed, reduced, prevented or made more
expensive.
Several
special interest groups have long opposed our plans in the Austin area and
have
taken various actions to partially or completely restrict development in some
areas, including areas where some of our most valuable properties are located.
We have actively opposed these actions and do not believe unfavorable rulings
would have a significant long-term adverse effect on the overall value of our
property holdings. However, because of the regulatory environment that has
existed in the Austin area and the intensive opposition of several special
interest groups, there can be no assurance that our expectations will prove
correct.
Our
operations are subject to governmental environmental regulation, which can
change at any time and generally would result in an increase to our
costs.
Real
estate development is subject to state and federal regulations and to possible
interruption or termination because of environmental considerations, including,
without limitation, air and water quality and protection of endangered species
and their habitats. Certain of the Barton Creek properties include nesting
territories for the Golden Cheek Warbler, a federally listed
6
endangered
species. In 1995, we received a permit from the U.S. Wildlife Service pursuant
to the Endangered Species Act, which to date has allowed the development of
the
Barton Creek and Lantana properties free of restrictions under the Endangered
Species Act related to the maintenance of habitat for the Golden Cheek
Warbler.
Additionally,
in April 1997, the U.S. Department of Interior listed the Barton Springs
Salamander as an endangered species after a federal court overturned a March
1997 decision by the Department of Interior not to list the Barton Springs
Salamander based on a conservation agreement between the State of Texas and
federal agencies. The listing of the Barton Springs Salamander has not affected,
nor do we anticipate it will affect, our Barton Creek and Lantana properties
for
several reasons, including the results of technical studies and our U.S. Fish
and Wildlife Service 10(a) permit obtained in 1995. The development permitted
by
our 2002 Circle C settlement with the City has been reviewed and approved by
the
U.S. Fish and Wildlife Service and, as a result, we do not anticipate that
the
1997 listing of the Barton Springs Salamander will impact our Circle C
properties.
We
are
making, and will continue to make, expenditures with respect to our real estate
development for the protection of the environment. Emphasis on environmental
matters will result in additional costs in the future.
The
real estate business is very competitive and many of our competitors are larger
and financially stronger than we are.
The real
estate business is highly competitive. We compete with a large number of
companies and individuals, and many of them have significantly greater financial
and other resources than we have. Our competitors include local developers
who
are committed primarily to particular markets and also national developers
who
acquire properties throughout the United States (U.S.).
Our
operations are subject to natural risks.
Our
performance may be adversely affected by weather conditions that delay
development or damage property.
The
U.S. military intervention in Iraq, the terrorist attacks in the U.S. on
September 11, 2001 and the potential for additional future terrorist acts
have created economic, political and social uncertainties that could materially
and adversely affect our business.
It is
possible that further acts of terrorism may be directed against the U.S.
domestically or abroad, and such acts of terrorism could be directed against
properties and personnel of companies such as ours. Moreover, while our property
and business interruption insurance covers damages to insured property directly
caused by terrorism, this insurance does not cover damages and losses caused
by
war. Terrorism
and war developments may materially and adversely affect our business and
profitability and the prices of our common stock in ways that we cannot predict
at this time.
Not
applicable.
Our
developed lots, developed or under development acreage and undeveloped acreage
as of December 31, 2005, 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; however, we currently own only three lots with homes built on
them
(the Calera Court homes). Developed acreage or acreage under development
includes real estate for which infrastructure work over the entire property
has
been completed, is currently being completed or is able to be completed and
necessary permits have been received.
7
|
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
|
86
|
695
|
249
|
380
|
1,324
|
391
|
-
|
20
|
411
|
1,735
|
|||||||||
|
Lantana
|
-
|
-
|
-
|
282
|
282
|
-
|
-
|
-
|
-
|
282
|
|||||||||
|
Circle
C
|
120
|
314
|
-
|
98
|
412
|
-
|
114
|
270
|
384
|
796
|
|||||||||
|
Plano
|
|||||||||||||||||||
|
Deerfield
|
59
|
26
|
-
|
-
|
26
|
-
|
-
|
-
|
-
|
26
|
|||||||||
|
San
Antonio
|
|||||||||||||||||||
|
Camino
Real
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
2
|
2
|
2
|
|||||||||
|
Total
|
265
|
1,035
|
249
|
760
|
2,044
|
391
|
114
|
292
|
797
|
2,841
|
|||||||||
The
following schedule summarizes the estimated development potential of our
Austin-area acreage as of December 31, 2005:
|
Single
|
Commercial
|
|||||||
|
Family
|
Multi-family
|
Office
|
Retail
|
|||||
|
(lots)
|
(units)
|
(gross
square feet)
|
||||||
|
Barton
Creek
|
430
|
1,860
|
1,590,000
|
50,000
|
||||
|
Lantana
|
-
|
-
|
1,220,393
|
1,462,185
|
||||
|
Circle
C
|
489
|
300
|
787,500
|
372,500
|
||||
|
Total
|
919
|
2,160
|
3,597,893
|
1,884,685
|
||||
On
February 21, 2006, the Save Our Springs Alliance, Inc. (“SOS Alliance”) filed
suit against the City of Austin (the City) in the 200th
Judicial
District Court of Travis County, Texas under Cause No. GN-06-000627. SOS
Alliance, among other claims, asserts that (i) the AMD project is not exempt
under Chapter 245 of the Texas Local Government Code (the grandfathering
statute) from current code compliance; and (ii) our Lantana settlement
agreements with the City are invalid. The SOS Alliance requests that the court
enjoin the City from issuing permits for development of the AMD project. On
February 24, 2006, we intervened in the litigation and will vigorously defend
our Lantana entitlements. A hearing on the SOS Alliance’s request for injunction
against the City is scheduled for March 22, 2006.
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 March 1, 2006, regarding our executive officers is set forth
in the following table and accompanying text.
8
|
Name
|
Age
|
Position
or Office
|
||
|
William
H. Armstrong III
|
41
|
Chairman
of the Board, President and
|
||
|
Chief
Executive Officer
|
||||
|
John
E. Baker
|
59
|
Senior
Vice President and
|
||
|
Chief
Financial Officer
|
||||
|
Kenneth
N. Jones
|
46
|
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.
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.
|
2005
|
2004
|
||||||||
|
High
|
Low
|
High
|
Low
|
||||||
|
First
Quarter
|
$17.25
|
$12.70
|
$13.55
|
$9.90
|
|||||
|
Second
Quarter
|
18.80
|
15.00
|
13.21
|
11.85
|
|||||
|
Third
Quarter
|
18.75
|
17.01
|
14.35
|
11.95
|
|||||
|
Fourth
Quarter
|
23.33
|
17.30
|
16.03
|
13.04
|
|||||
As
of
March 1, 2006, there were 762 holders of record of our common stock. We have
not
in the past paid, and do not anticipate in the future paying, cash dividends
on
our common stock. The decision whether or not to pay dividends and in what
amounts is solely within the discretion of our Board of Directors. However,
our
current ability to pay dividends is also restricted by terms of our credit
agreement, as discussed in Note 4.
The
following table sets forth shares of our common stock we repurchased during
the
three-month period ended December 31, 2005.
|
Current
Programa
|
|||||||||
|
Period
|
Total
Shares Purchased
|
Average
Price Paid Per Share
|
Shares
Purchased
|
Shares
Available for Purchase
|
|||||
|
October
1 to 31, 2005
|
798
|
$19.81
|
798
|
493,542
|
|||||
|
November
1 to 30, 2005
|
716
|
19.65
|
716
|
492,826
|
|||||
|
December
1 to 31, 2005
|
210
|
21.31
|
210
|
492,616
|
|||||
|
Total
|
1,724
|
19.92
|
1,724
|
||||||
| a. |
In
February 2001, our Board of Directors approved an open market share
purchase program for up to 0.7 million shares of our common stock.
The
program does not have an expiration date. Our loan agreement with
Comerica
provides a limit of $6.5 million for common stock purchases after
September 30, 2005.
|
9
The
following table sets forth our selected historical financial data for each
of
the five years in the period ended December 31, 2005. The historical financial
information is derived from our audited financial statements and is not
necessarily indicative of our future results. In addition, the historical
results have been adjusted to reflect the operations of Stratus 7000 West Joint
Venture (7000 West) as discontinued operations (see Note 7). You should read
the
information in the table below together with Items 7. and 7A. “Management’s
Discussion and Analysis of Financial Condition and Results of Operation and
Quantitative and Qualitative Disclosures About Market Risk” and Item 8.
“Financial Statements and Supplementary Data.”
|
2005
|
2004
|
2003
|
2002
|
2001
|
||||||||||||
|
(In
Dollars, Except Average Shares, and In Thousands, Except Per Share
Amounts)
|
||||||||||||||||
|
Years
Ended December 31:
|
||||||||||||||||
|
Revenues
|
$
|
35,194
|
$
|
17,725
|
$
|
11,001
|
$
|
9,082
|
$
|
14,829
|
||||||
|
Operating
income (loss)
|
8,336
|
338
|
(413
|
)
|
(1,545
|
)
|
2,794
|
|||||||||
|
Interest
income
|
226
|
70
|
728
|
606
|
1,157
|
|||||||||||
|
Equity
in unconsolidated affiliates’
|
||||||||||||||||
|
income
|
-
|
-
|
29
|
263
|
244
|
|||||||||||
|
Net
income (loss) from continuing
|
||||||||||||||||
|
operations
|
7,960
|
99
|
17
|
(527
|
)
|
3,977
|
||||||||||
|
Income
(loss) from discontinued
|
||||||||||||||||
|
operationsa
|
514
|
573
|
3
|
6
|
(37
|
)
|
||||||||||
|
Net
income (loss)
|
8,474
|
672
|
20
|
(521
|
)
|
3,940
|
||||||||||
|
Net
income applicable to common
|
||||||||||||||||
|
stock
|
8,474
|
672
|
20
|
1,846
|
b
|
3,940
|
||||||||||
|
Basic
net income (loss) per share:
|
||||||||||||||||
|
Continuing
operations
|
1.11
|
0.01
|
-
|
0.26
|
0.56
|
|||||||||||
|
Discontinued
operationsa
|
0.07
|
0.08
|
-
|
-
|
(0.01
|
)
|
||||||||||
|
Basic
net income per sharec
|
1.18
|
0.09
|
-
|
0.26
|
0.55
|
|||||||||||
|
Diluted
net income per share:
|
||||||||||||||||
|
Continuing
operations
|
1.04
|
0.01
|
-
|
0.25
|
0.48
|
|||||||||||
|
Discontinued
operationsa
|
0.07
|
0.08
|
-
|
-
|
-
|
|||||||||||
|
Diluted
net income per sharec
|
1.11
|
0.09
|
-
|
0.25
|
0.48
|
|||||||||||
|
Average
shares outstandingc
|
||||||||||||||||
|
Basic
|
7,209
|
7,196
|
7,124
|
7,116
|
7,142
|
|||||||||||
|
Diluted
|
7,636
|
7,570
|
7,315
|
7,392
|
d
|
8,204
|
d
|
|||||||||
|
At
December 31:
|
||||||||||||||||
|
Working
capital (deficit)
|
(7,198
|
)
|
(4,111
|
)
|
(787
|
)
|
(4,825
|
)
|
141
|
|||||||
|
Property
held for sale
|
143,521
|
125,445
|
114,207
|
111,608
|
109,704
|
|||||||||||
|
Property
held for use, net
|
9,452
|
9,926
|
9,065
|
8,087
|
e
|
338
|
||||||||||
|
Discontinued
operations (7000 West)a
|
12,230
|
13,239
|
13,936
|
14,705
|
1,475
|
|||||||||||
|
Total
assets
|
173,886
|
152,861
|
142,430
|
139,440
|
129,478
|
|||||||||||
|
Long-term
debt from continuing
|
||||||||||||||||
|
operations,
including current
|
||||||||||||||||
|
portion
|
50,304
|
43,647
|
35,599
|
32,073
|
25,576
|
|||||||||||
|
Long-term
debt, from discontinued
|
||||||||||||||||
|
operations,
including current
|
||||||||||||||||
|
portiona
|
11,795
|
12,000
|
11,940
|
12,726
|
-
|
|||||||||||
|
Mandatorily
Redeemable Preferred
|
||||||||||||||||
|
Stockb
|
-
|
-
|
-
|
-
|
10,000
|
|||||||||||
|
Stockholders’
equity
|
94,167
|
88,196
|
86,821
|
86,619
|
84,659
|
|||||||||||
10
| a. |
Relates
to the operations, assets and liabilities of 7000 West, which we
have
contracted to sell (see Note 7).
|
| b. |
In
connection with the conclusion of our relationship with Olympus Real
Estate Corporation in February 2002, we purchased our $10.0 million
of
mandatorily redeemable preferred stock held by Olympus for $7.6 million.
Accounting standards require that the $2.4 million discount amount
be
included in net income applicable to common
stock.
|
| c. |
Reflects
the effects of the stock split transactions completed in 2001 (see
Note
6).
|
| d. |
Includes
effect of assumed redemption of 1.7 million outstanding shares of
our
mandatorily redeemable preferred stock for 851,000 shares of our
common
stock. Amount for 2002 is pro-rated for the period the preferred
stock was
outstanding prior to its redemption in February 2002, totaling 142,000
equivalent shares.
|
| e. |
Reflects
the cost associated with the completed 7500 Rialto Boulevard office
building.
|
Items
7. and 7A. Management’s Discussion and Analysis of Financial
Condition and
Results
of Operation and Quantitative and Qualitative Disclosures About Market
Risk
OVERVIEW
In
management’s discussion and analysis “we,” “us,” and “our” refer to Stratus
Properties Inc. and its consolidated subsidiaries. You should read the following
discussion in conjunction with our 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. Our
most significant holding is the 1,735 acres of residential, multi-family and
commercial property and 86 developed residential estate lots located within
the
Barton Creek community as of December 31, 2005. We also own approximately 384
acres of undeveloped residential, commercial and multi-family property and
36
acres of commercial property under development within the Circle C Ranch (Circle
C) community. Our other properties in the Circle C community are currently
being
developed and include Meridian, which is an 800-lot residential development,
and
Escarpment Village, which is a retail center. At December 31, 2005, Meridian
consisted of approximately 314 acres and 120 developed residential lots and
Escarpment Village consisted of approximately 62 acres. Our remaining Austin
holdings at December 31, 2005, consisted of 282 acres of commercial property
and
three office buildings in Lantana. One office building is a 75,000-square-foot
office building at 7500 Rialto Boulevard, which is nearly 100 percent leased.
In
the fourth quarter of 2005, we committed to a plan to sell our two
70,000-square-foot office buildings at 7000 West William Cannon Drive (7000
West), known as the Lantana Corporate Center. We have contracted to sell 7000
West for $22.3 million, a portion of which will be paid by the buyer’s
assumption of the related 7000 West project loan. Closing of the sale currently
is scheduled for March 27, 2006 (see “Discontinued Operations - 7000
West”).
In
January 2004, we acquired approximately 68 acres of land in Plano, Texas, which
we refer to as Deerfield. At December 31, 2005, our Deerfield property consists
of approximately 26 acres of residential land, which is being developed, and
59
developed residential lots. We also own two acres of undeveloped commercial
property in San Antonio, Texas.
In
November 2005, we formed a joint venture partnership with Trammell Crow Central
Texas Development, Inc. (Trammell Crow) to acquire an approximate 74-acre tract
at the intersection of Airport Boulevard and Lamar Boulevard in Austin, Texas
for $7.7 million. We refer to the property as the Crestview Station project,
a
single-family, multi-family, retail and office development. With our joint
venture partner, we have commenced brown field remediation and permitting of
the
property.
Real
Estate Market Conditions
Factors
that significantly affect United States (U.S.) real estate market conditions
include interest rate levels and the availability of financing, the supply
of
product (i.e. developed and/or undeveloped land, depending on buyers’ needs) and
current and anticipated future economic conditions. These market conditions
historically move in periodic cycles, and can be volatile in specific regions.
Because of the concentration of our assets primarily in the Austin, Texas area,
market conditions in this region significantly affect our business.
11
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
2004 and 2005, based on U.S. Census Bureau data and City of Austin
data.
Based
on
the City of Austin’s fiscal year of October 1st
through
September 30th,
the
chart below compares Austin’s sales tax revenues for 1989, 1999 and
2004.
a.
Source: Comprehensive Annual Financial Report for the City of Austin,
Texas.
12
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, 2004 and
2005 vacancy percentages for various types of developed properties in Austin
are
noted below, and they indicate that with the exception of the continuing
strength of Austin’s retail market, other developed properties are still showing
some negative effects from the economic downturn.
|
December
31,
|
||||
|
2004
|
2005
|
|||
|
Building
Type
|
Vacancy
Factor
|
|||
|
Industrial
Buildings
|
20%a
|
19%b
|
||
|
Office
Buildings (Class A)
|
20%c
|
17%d
|
||
|
Multi-Family
Buildingse
|
9%
|
7%
|
||
|
Retail
Buildingsf
|
7%
|
7%
|
||
| a. |
CB
Richard Ellis: Austin Industrial Market
Summary
|
| b. |
CB
Richard Ellis: Industrial Availability
Index
|
| c. |
CB
Richard Ellis: Austin Office Market
Summary
|
| d. |
CB
Richard Ellis: Austin Office
MarketView
|
| e. |
Austin
Investor Interests: The Austin Multi-Family Trend
Report
|
| f. |
CB
Richard Ellis: Austin MSA Retail Market
Overview
|
Business
Strategy
Over
the
past several years, we have successfully worked cooperatively with the City
to
obtain approvals that allow the development of our properties to proceed in
a
timely manner while protecting the environment. We believe the desirable
location and overall quality of our properties, in combination with the land
use
and development entitlements we have obtained, will command a premium over
the
value of other Austin-area properties.
Our
long-term success will depend on our ability to maximize the value of our real
estate through obtaining required approvals that permit us to develop and sell
our properties in a timely manner at a reasonable cost. We must incur
significant development expenditures and secure additional permits prior to
the
development and sale of certain properties. In addition, we continue to pursue
additional development opportunities, and believe we can obtain bank financing
for developing our properties at a reasonable cost. See “Risk Factors” located
elsewhere in this Form 10-K.
DEVELOPMENT
AND OTHER ACTIVITIES
Lantana.
In
November 2005, we entered into an Agreement of Sale and Purchase with Advanced
Micro Devices, Inc. (NYSE: AMD) under which we have agreed to sell them
approximately 58 acres at our Lantana property for $21.2 million. The proposed
AMD project consists of approximately 825,000 square feet of office and related
uses on a 58-acre site at the southeast corner of West William Cannon Drive
and
Southwest Parkway. Subject to certain conditions, including obtaining certain
permits and approvals from the City, the sale is expected to close during 2006.
In February 2006, the Save Our Springs Alliance, Inc. filed a lawsuit against
the City seeking, among other matters, to prevent the issuance of permits needed
to develop the AMD project. Lantana is a partially developed, mixed-use project
with remaining entitlements for approximately 2.7 million square feet of office
and retail use on 282 acres. Regional utility and road infrastructure is in
place with capacity to serve Lantana at full build-out permitted under existing
entitlements.
In
2001,
we reached agreement with the City concerning development of a 417-acre portion
of the Lantana project area. The agreement reflected a cooperative effort
between the City and us to allow development based on grandfathered
entitlements, while adhering to stringent water quality standards and other
enhancements to protect the environment. With this agreement, we completed
the
core entitlement process for the entire Lantana project allowing for
approximately 2.9 million square feet of office and retail development,
approximately 400 multi-family units (previously sold to an unrelated third
party, see below), and approximately 330 residential lots to which we sold
the
development rights in 2003. As of December 31, 2005, the Lantana project
inventory totaled approximately 2.7 million square feet of office and retail
estimated development potential as discussed above.
13
During
the first quarter of 2004, we executed leases that brought our
75,000-square-foot office building at 7500 Rialto Boulevard to 90 percent
occupancy in July 2004, and at December 31, 2005, the office building was
approximately 96 percent leased. As demand for office space within Lantana
has
increased, we commenced construction in 2006 of a second 75,000-square-foot
office building at 7500 Rialto Boulevard. Our two 70,000-square-foot office
buildings at 7000 West were fully leased in 2003, 2004 and 2005. In March 2004,
we formed Southwest Property Services L.L.C. to manage our office buildings.
Effective June 30, 2004, we terminated our agreement with the third-party
property management firm previously providing this function. Although there
were
higher costs during the initial transition, this change in management
responsibility provides future cost savings for our commercial leasing
operations and better control of building operations. In the fourth quarter
of
2005, we committed to a plan to sell our two office buildings at 7000 West.
We
have contracted to sell 7000 West for $22.3 million, a portion of which will
be
paid by the buyer’s assumption of the related 7000 West project loan. Closing of
the sale currently is scheduled for March 27, 2006 (see “Discontinued Operations
- 7000 West”).
Downtown
Austin Project.
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 suitable for a mixture of retail, office, hotel,
residential and civic uses. We have entered into a negotiation period with
the
City to reach agreement on the project’s design and transaction terms and
structure.
Barton
Creek Community.
We
commenced construction of a new subdivision within the Barton Creek community
during the fourth quarter of 2000. This subdivision, Mirador, was completed
in
late-2001. Mirador adjoins the Escala Drive subdivision. We developed 34 estate
lots in the Mirador subdivision, with each lot averaging approximately 3.5
acres
in size. We sold the initial four Mirador lots during 2002, three lots in 2003
for $1.1 million, eight lots in 2004 for $3.0 million and seven lots in 2005
for
$3.9 million.
Since
January 2002, we have secured subdivision plat approval for three new
residential subdivisions within the Barton Creek Community, including: Versant
Place - 54 lots, Wimberly Lane Phase II - 47 lots and Calera - 155 lots. At
December 31, 2005, the developed lots within the Barton Creek Community
included: Calera Drive - 34 lots, Wimberly Lane Phase II - 25 lots, Calera
Court
- 14 lots, Mirador - 12 lots and Escala - 1 lot. Development of the remaining
Barton Creek property is being deferred until market conditions
improve.
In
May
2004, we entered into a contract with a national homebuilder to sell 41 lots
within the Wimberly Lane Phase II subdivision in the Barton Creek community.
In
June 2004, the homebuilder paid us a non-refundable $0.6 million deposit for
the
right to purchase the 41 lots. The deposit was used to pay ongoing development
costs of the lots. The deposit will be applied against subsequent purchases
of
lots by the homebuilder after certain thresholds are achieved and will be
recognized as income as lots are sold. The lots are being sold on a scheduled
takedown basis, with the initial six lots sold in December 2004 following
completion of subdivision utilities, and then an average of three lots per
quarter beginning in June 2005. The average purchase price for each of the
41
lots is $150,400, subject to a six percent annual escalator commencing in
December 2004. Wimberly Lane Phase II also included six estate lots, each
averaging approximately five acres, which we retained, marketed and sold in
2005
for a total of $1.8 million.
During
2004, we completed construction of four courtyard homes at Calera Court within
the Barton Creek community, two of which were sold in October 2005 and one
of
which was sold in the first quarter of 2004. Calera Court, the initial phase
of
the “Calera” subdivision, will include 17 courtyard homes on 16 acres. The
second phase of Calera, Calera Drive, consisting of 53 single-family lots,
many
of which adjoin the Fazio Canyons Golf Course, received final plat and
construction permit approval in 2005. In the third quarter of 2005, development
of these lots was completed and the initial five lots were sold for $2.1
million. During the fourth quarter of 2005, we sold an additional 14 lots for
$5.0 million. Development of the third and last phase of Calera, which will
include approximately 70 single-family lots, is scheduled to commence in
2006.
Deerfield.
In
January 2004, we acquired the Deerfield property in Plano, Texas, for $7.0
million. The property is zoned and subject to a preliminary subdivision plan
for
234 residential lots. In February 2004, we executed an Option Agreement and
a
Construction Agreement with a national homebuilder. Pursuant to the Option
Agreement, the homebuilder paid us $1.4 million for an option to purchase all
234 lots over 36 monthly take-downs. The net purchase price for each of the
234
lots was $61,500, subject to certain terms and conditions. The $1.4 million
option payment is non-refundable, but will be applied against subsequent
purchases of lots by the homebuilder after certain thresholds are achieved
and
will be recognized by us as income as lots are sold. The Construction Agreement
requires the homebuilder to complete development of the entire project by March
15, 2007. We agreed to pay up to $5.2 million of the homebuilder’s development
costs. The homebuilder must pay all property taxes and maintenance costs. In
February 2004, we entered into a $9.8 million three-year loan
14
agreement
with Comerica Bank (Comerica) to finance the acquisition and development of
Deerfield. Development is proceeding on schedule and we had $6.9 million in
remaining availability under the loan at December 31, 2005. The initial lot
sale
occurred in November 2004 and subsequent lot sales are on schedule with 68
lot
sales in 2005. In October 2005, we executed a revised agreement with the
homebuilder, increasing the lot sizes and average purchase price to $67,150
based on a new total of 224 lots. We expect to complete 15 lot sales for $1.0
million during the first quarter of 2006.
Circle
C Community. We
have
commenced development activities at the Circle C community based on the
entitlements secured in our Circle C settlement with the City. Our Circle C
settlement permits development of 1.0 million square feet of commercial space,
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 preliminary plan has been approved for Meridian, an 800-lot
residential development at the Circle C community. In October 2004, we received
final City plat and construction permit approvals for the first phase of
Meridian, and construction commenced in January 2005. During the first quarter
of 2005, we contracted to sell a total of 494 lots in our Meridian project
to
three national homebuilders in four phases. Sales for each of the four phases
commence upon substantial completion of development for that phase, and continue
every quarter until all of the lots have been sold. The first phase, which
includes 134 lots, was substantially completed at the end of 2005. Development
of the second phase of 134 lots commenced in the third quarter of 2005 and
was
substantially completed in March 2006. We estimate our sales from the first
two
phases of Meridian will total at least 30 lots for $1.8 million during the
first
quarter of 2006.
In
addition, several retail sites at the Circle C community have received final
City approvals and are being developed. Zoning for Escarpment Village, a
168,000-square-foot retail project anchored by a grocery store, was approved
during the second quarter of 2004, and construction is
progressing with completion expected by mid-2006. In December 2004, we
obtained an $18.5 million project loan from Comerica to fund the construction
of
Escarpment Village, as well as a $22.8 million commitment from the Teachers
Insurance and Annuity Association of America (TIAA) for a long-term mortgage
for
the completed project.
Crestview
Station.
In
November 2005, we formed a joint venture partnership with Trammell Crow to
acquire an approximate 74-acre tract at the intersection of Airport Boulevard
and Lamar Boulevard in Austin, Texas, for $7.7 million. With our joint venture
partner, we have commenced brown field remediation and permitting of the
property, known as the Crestview Station project, for single-family,
multi-family, retail and office development, with closings on the single-family
and multi-family components expected to occur in 2007 upon completion of the
remediation. At December 31, 2005, our investment in the Crestview Station
project totaled $4.2 million and the joint venture partnership had $7.6 million
of outstanding debt, of which each of the joint venture partners guarantees
$1.9
million.
The
Crestview Station property is divided into three distinct parcels - one
containing approximately 46 acres, a second consisting of approximately 27
acres, and a third 0.5-acre tract. Our joint venture partnership has contracted
with a nationally recognized remediation firm to demolish the existing buildings
and remediate the 27-acre and 0.5-acre tracts as part of preparing them for
residential permitting. Under the terms of the remediation contract, the joint
venture partnership will pay the contractor approximately $4.9 million upon
completion of performance benchmarks and certification by the State of Texas
that the remediation is complete. The contractor is required to pay all costs
associated with the remediation and to secure an environmental liability policy
with $10.0 million of coverage remaining in place for a 10-year term. Pursuant
to the agreement with the contractor, all environmental and legal liability
was
assigned to and assumed by the contractor effective November 30,
2005.
Lakeway
Project.
In
January 2001, we invested $2.0 million in the Lakeway project near Austin,
Texas. Since that time, we had been the manager and developer of the 552-acre
Schramm Ranch tract, receiving both management fees and sales commissions for
our services. In the second quarter of 2001, we negotiated the sale of
substantially all of the Schramm Ranch property to a single purchaser. In return
for our securing the required entitlements, the sale was to be completed in
four
planned installments. We secured all the remaining necessary entitlements for
the Schramm Ranch property in the fourth quarter of 2001 and received a $1.2
million distribution associated with the first two sale
installments.
In
the
first half of 2002, the purchaser closed the final two planned sale
installments. We received a total cash distribution of $1.5 million, which
represents a $1.2 million return of our $2.0 million investment and $0.3 million
of income. During the second quarter of 2003, we sold the remaining 5-acre
commercial site for $0.7 million, ending the project, and received $0.3 million
representing our 40 percent share of the related net sales proceeds. On a
cumulative basis, we have received a total of $2.9 million of cash
distributions, not including
15
sales
commissions and management fees, from our involvement in the Lakeway Project,
which represents the full return of our $2.0 million investment and $0.9 million
of income. See Note 3 for more information regarding our involvement in the
Lakeway project.
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):
|
2005
|
2004
|
2003
|
|||||||
|
Revenues:
|
|||||||||
|
Real
estate operations
|
$
|
33,841
|
$
|
16,851
|
$
|
10,667
|
|||
|
Commercial
leasing
|
1,353
|
874
|
334
|
||||||
|
Total
revenues
|
$
|
35,194
|
$
|
17,725
|
$
|
11,001
|
|||
|
Operating
income (loss)a
|
$
|
8,336
|
$
|
338
|
$
|
(413
|
)
|
||
|
Net
income from continuing operations
|
$
|
7,960
|
$
|
99
|
$
|
17
|
|||
|
Income
from discontinued operations
|
514
|
573
|
3
|
||||||
|
Net
income
|
$
|
8,474
|
$
|
672
|
$
|
20
|
|||
| a. |
Includes
Municipal Utility District (MUD) reimbursements of infrastructure
costs
charged to expense in prior years totaling $0.1 million in 2005 and
$1.2
million in 2003 (see Note 1).
|
We
have
two operating segments, “Real Estate Operations” and “Commercial Leasing” (see
Note 9). The following is a discussion of our operating results by
segment.
Real
Estate Operations
Summary
real estate operating results follow (in thousands):
|
2005
|
2004
|
2003
|
|||||||
|
Revenues:
|
|||||||||
|
Developed
property sales
|
$
|
25,453
|
$
|
7,238
|
$
|
1,217
|
|||
|
Undeveloped
property sales
|
7,550
|
9,192
|
7,721
|
||||||
|
Commissions,
management fees and other
|
838
|
421
|
1,729
|
||||||
|
Total
revenues
|
33,841
|
16,851
|
10,667
|
||||||
|
Cost
of sales
|
(19,770
|
)
|
(11,242
|
)
|
(6,512
|
)
|
|||
|
General
and administrative expenses
|
(4,346
|
)
|
(3,788
|
)
|
(3,555
|
)
|
|||
|
Operating
income
|
$
|
9,725
|
$
|
1,821
|
$
|
600
|
|||
16
Developed
Property Sales. Improving
market conditions in the Austin area and our Deerfield project have resulted
in
increased lot sales in 2005. Property sales for 2005, 2004 and 2003 included
the
following (revenues in millions):
|
2005
|
2004
|
2003
|
||||||||||
|
Lots
|
Revenues
|
Lots
|
Revenues
|
Lots
|
Revenues
|
|||||||
|
Residential
Properties:
|
||||||||||||
|
Deerfield
|
68
|
$4.2
|
5
|
$0.3
|
-
|
$
-
|
||||||
|
Barton
Creek
|
||||||||||||
|
Calera
Drive
|
19
|
7.1
|
-
|
-
|
-
|
-
|
||||||
|
Escala
Drive Estate
|
9
|
4.9
|
6
|
2.2
|
1
|
0.1
|
||||||
|
Mirador
Estate
|
7
|
3.9
|
8
|
3.2
|
a
|
3
|
1.0
|
b
|
||||
|
Calera
Court Courtyard Home
|
2
|
1.0
|
1
|
0.6
|
-
|
-
|
||||||
|
Wimberly
Lane Phase I
|
-
|
-
|
-
|
-
|
1
|
0.1
|
||||||
|
Wimberly
Lane Phase II
|
||||||||||||
|
Standard
Homebuilder
|
10
|
1.6
|
6
|
0.9
|
-
|
-
|
||||||
|
Estate
|
6
|
1.8
|
-
|
-
|
-
|
-
|
||||||
|
Circle
C
|
||||||||||||
|
Meridian
|
14
|
1.0
|
-
|
-
|
-
|
-
|
||||||
|
135
|
$25.5
|
26
|
$7.2
|
a
|
5
|
$1.2
|
b
|
|||||
| a. |
Includes
$0.3 million of previously deferred revenues related to a 2003
lot sale at
the Mirador subdivision that we recognized in
2004.
|
| b. |
Amount
is net of $0.3 million of deferred profits which we recognize
as we
receive payments.
|
Undeveloped
Property Sales.
During
2005, we sold a 38-acre tract within the Barton Creek Community for $5.0 million
and a 42-acre tract within the Circle C community for $2.6 million.
During
2004, we sold 139 acres of the Meridian development within the Circle C
community for $5.6 million and an 83-acre estate lot within the Barton Creek
community for $1.8 million. Our other 2004 sales within the Circle C community
included two tracts totaling three acres for $1.4 million and an approximate
one-acre commercial tract for $0.5 million.
During
2003, we sold to a single purchaser our entire 142 acres of undeveloped
residential real estate within the Lantana development in southwest Austin
for
$4.6 million. We also sold a 23-acre tract within the Circle C community for
$1.25 million, a 1.5-acre undeveloped retail tract in our Circle C community
for
$1.2 million and six acres of property located in southwest Austin for $0.65
million.
Commissions,
Management Fees and Other.
Commissions, management fees and other revenues totaled $0.8 million in 2005,
compared to $0.4 million in 2004, and included sales of our development fee
credits to third parties totaling $0.5 million in 2005 and $0.1 million in
2004.
We received these development fee credits as part of the Circle C settlement
(see Note 8).
Commissions,
management fees and other revenues totaled $0.4 million for 2004, compared
to
$1.7 million for 2003. These amounts included sales of our development fee
credits to third parties, totaling $0.1 million in 2004 and $0.9 million in
2003. During 2003, commissions and management fees also included $0.5 million
in
fees paid to us for our involvement in the Lakeway Project near Austin. During
the second quarter of 2003, we sold the remaining five-acre commercial tract
at
the Schramm Ranch property for $0.7 million, of which we received 40 percent
of
the net sales proceeds (see “Development and Other Activities”
above).
Cost
of Sales.
Cost of
sales totaled $19.8 million in 2005 and $11.2 million in 2004. The increase
in
cost of sales for 2005 compared to 2004 primarily relates to the increase in
developed property sales in 2005. The cost of sales during 2005 were reduced
by
$0.1 million of MUD reimbursements covering infrastructure costs charged to
expense in prior years.
Cost
of
sales increased to $11.2 million in 2004 from $6.5 million in 2003. The increase
in 2004 cost of sales compared to 2003 primarily related to the increase in
undeveloped and developed property sales in 2004. In addition, cost of sales
during 2003 were reduced by $1.2 million of MUD reimbursements covering
infrastructure costs charged to expense in prior years.
17
Commercial
Leasing
Our
commercial leasing operating results primarily reflect the activities at our
7500 Rialto Boulevard office building after removing the results for 7000 West
which are now classified as discontinued operations (see below). Summary
commercial leasing operating results follow (in thousands):
|
2005
|
2004
|
2003
|
|||||||
|
Rental
income
|
$
|
1,353
|
$
|
874
|
$
|
334
|
|||
|
Rental
property costs
|
(1,456
|
)
|
(1,201
|
)
|
(564
|
)
|
|||
|
Depreciation
|
(613
|
)
|
(492
|
)
|
(325
|
)
|
|||
|
General
and administrative expenses
|
(673
|
)
|
(664
|
)
|
(458
|
)
|
|||
|
Operating
loss
|
$
|
(1,389
|
)
|
$
|
(1,483
|
)
|
$
|
(1,013
|
)
|
Rental
Income.
In 2005,
we earned $1.4 million in rental income, compared to $0.9 million for 2004,
as
occupancy rates were increasing at our 7500 Rialto Boulevard office building.
In
2004, we received rental income of $0.9 million, compared to $0.3 million for
2003, as the occupancy rate increased from approximately 37 percent in December
2003 to 97 percent in December 2004.
Rental
Property Costs.
Rental
property costs increased to $1.5 million in 2005 from $1.2 million in 2004,
coinciding with the increase in the occupancy rate.
Rental
property costs increased in 2004 compared to 2003, partially because of the
additional costs of Southwest Property Services L.L.C., which we formed in
March
2004 to manage our office buildings. Previously, we had outsourced our property
management functions to a property management firm. Effective June 30, 2004,
we
terminated our agreement with this firm and Southwest Property Services L.L.C.
now performs all property management responsibilities.
Other
Financial Results
General
and administrative expenses totaled $5.0 million in 2005, $4.5 million in 2004
and $4.0 million in 2003. The increase in 2005 compared to 2004 primarily
relates to higher personnel costs associated with additional projects under
way
in 2005 and higher accounting fees related to expanded regulatory
requirements.
The
increase in 2004 compared to 2003 reflects higher legal fees related to a
lawsuit that was dismissed by the courts in 2004. General and administrative
expenses also were higher because of a reduction in the allocation of certain
general and administrative expenses to capital projects (see Note
1).
Non-Operating
Results
Interest
expense, net of capitalized interest, totaled $0.5 million in 2005, $0.3 million
in 2004 and $0.3 million in 2003 (see Note 4). Capitalized interest totaled
$3.3
million in 2005, $2.4 million in 2004 and $2.1 million in 2003. The increase
in
capitalized interest in each year over the three-year period from 2003 to 2005
reflects the higher average balance of our borrowings outstanding related to
additional development projects.
Interest
income totaled $0.2 million in 2005, $0.1 million in 2004 and $0.7 million
in
2003. Interest income included interest on MUD reimbursements totaling $0.1
million in 2005 and $0.6 million in 2003.
DISCONTINUED
OPERATIONS - 7000 WEST
In
the
fourth quarter of 2005, we committed to a plan to sell our two
70,000-square-foot office buildings at 7000 West, which had been a component
of
our commercial leasing segment. We have contracted to sell 7000 West for $22.3
million, a portion of which will be paid by the buyer’s assumption of the
related 7000 West project loan. Although closing of the sale currently is
scheduled for March 27, 2006, it is subject to our satisfaction of certain
conditions.
Our
discontinued operations generated net income of $0.5 million in 2005, $0.6
million in 2004 and $3,000 in 2003. We earned rental income of $3.6 million
in
2005, $3.2 million in 2004 and $3.4 million in 2003 from our two fully leased
office buildings at 7000 West. Rental property costs in 2004 were reduced by
$0.7 million for reimbursement of certain building repairs received from a
settlement with the general contractor responsible for construction of the
7000
West office buildings.
18
7000
West Project Loan.
We have
a project loan associated with the construction of the buildings at 7000 West.
The variable rate, nonrecourse loan was secured by the approximately 11 acres
of
real estate at 7000 West and the two office buildings. In December 2004, we
repaid the outstanding balance of the 7000 West project loan with proceeds
from
a $12.0 million loan from TIAA. The 7000 West project loan with TIAA matures
in
January 2015, and interest accrues monthly at a fixed annual rate of 5.7
percent. As of December 31, 2005, our borrowings outstanding under the 7000
West
project loan were $11.8 million.
CAPITAL
RESOURCES AND LIQUIDITY
Comparison
Of Year-To-Year Cash Flows
Although
at December 31, 2005, we had a $7.2 million working capital deficit, we believe
that we have adequate funds available from our revolving credit facility ($29.3
million at December 31, 2005) and projected operating cash flows to meet our
working capital requirements. Operating activities provided cash of $37.8
million in 2005, $10.0 million in 2004 and $8.1 million in 2003, including
cash
provided by discontinued operations totaling $1.3 million in 2005, $0.7 million
in 2004 and $1.0 million in 2003. Compared to 2004, operating cash flows in
2005
improved primarily because of the increase in sales activities and working
capital changes. Compared to 2003, operating cash flows in 2004 increased
primarily because of the increase in sales activities. In July 2003, Barton
Creek MUD No. 4 issued $5.0 million in revenue bonds, of which we received
approximately $3.8 million in 2003 as reimbursement for a portion of our
previous infrastructure costs within the Barton Creek community. In addition,
we
received $0.8 million of other Barton Creek MUD reimbursements during 2003.
Reimbursements totaling $1.8 million represented (1) a $1.2 million
reimbursement of infrastructure costs charged to expense in prior years and
were
recorded as a reduction of cost of sales and (2) $0.6 million for interest
on
the reimbursements. The remaining reimbursement of $2.8 million and a fiscal
deposit refund of $0.7 million represented a reimbursement of our cost of real
estate properties and were recorded as a reduction of capital
expenditures.
Cash
used
in investing activities totaled $39.6 million in 2005, $21.7 million in 2004
and
$8.8 million in 2003, including less than $0.1 million used in discontinued
operations in each of the three years. We acquired our Deerfield property for
$7.0 million in the first quarter of 2004 and continued to develop the property
in 2005. Other real estate expenditures for 2005 and 2004 included improvements
to certain properties in the Barton Creek and Circle C communities. Development
of our commercial leasing properties included the completion of certain tenant
improvements to our 7500 Rialto Boulevard office building. The expenditures
were
partly offset by MUD reimbursements of $4.6 million in 2005, $0.9 million in
2004 and $3.5 million in 2003. During 2003, we received $0.3 million of
distributions from the Lakeway project, including $0.2 million representing
the
final return of our original investment in the project (see “Development and
Other Activities” above).
Financing
activities provided cash of $3.4 million in 2005, $8.7 million in 2004 and
$2.8
million in 2003, including net cash provided by (used in) discontinued
operations totaling $(0.2) million in 2005, $0.1 million in 2004 and $(0.8)
million in 2003. During 2005, our financing activities reflected $4.7 million
of
net payments under our revolving line of credit and $11.3 million of net
borrowings from our project construction loans, including $5.3 million of net
borrowings from the Meridian project loan, $9.9 million of borrowings from
the
Escarpment Village project loan, net payments of $2.6 million on the Deerfield
project loan and final payment of $1.2 million on the Calera Court project
loan.
During 2004, our financing activities included $0.5 million of net payments
on
our revolving line of credit and $8.6 million of net borrowings from our project
construction loans, including net borrowings of $5.5 million from the Deerfield
loan and $1.2 million from the Calera Court project loan. During 2003, our
financing activities included $4.3 million of net borrowings from our revolving
line of credit and net payments totaling $0.7 million under our 7500 Rialto
Boulevard project loan. See “Credit Facility and Other Financing Arrangements”
below for a discussion of our outstanding debt at December 31,
2005.
In
2001,
our Board of Directors approved an open market share purchase program for up
to
0.7 million shares of our common stock. Under this program, we purchased 188,995
shares for $3.3 million, a $17.68 per share average, in 2005, including a
privately negotiated purchase of 125,316 shares from a former executive for
$2.3
million, an $18.13 per share average. The transaction was based on market prices
of our common stock. During the first quarter of 2006 through March 10, 2006,
we
purchased 10,668 shares for $0.3 million, a $23.78 per share average. A total
of
481,948 shares remain available under this program. During 2004, we purchased
18,389 shares of our common stock for $0.2 million, a $13.47 per share average.
Our loan agreement with Comerica provides a limit of $6.5 million for common
stock purchases after September 30, 2005. 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.
19
The
following table summarizes our contractual cash obligations as of December
31,
2005 (in thousands):
|
2006
|
2007
|
2008
|
2009
|
2010
|
Thereafter
|
Total
|
||||||||||||||
|
Debt
|
$
|
169
|
$
|
33,843
|
$
|
16,292
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
50,304
|
||||||
|
Construction
contracts
|
4,831
|
-
|
-
|
-
|
-
|
-
|
4,831
|
|||||||||||||
|
Operating
lease
|
77
|
77
|
7
|
-
|
-
|
-
|
161
|
|||||||||||||
|
Total
|
$
|
5,077
|
$
|
33,920
|
$
|
16,299
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
55,296
|
||||||
We
had
commitments under non-cancelable open contracts totaling $4.0 million at
December 31, 2005. In January 2005, we entered into an $8.5 million contract
with a term of one year for the construction of the Escarpment Village shopping
center at the Circle C community. During 2005, that contract increased to a
total of $10.1 million as additional facilities were added to the center. The
contract only had an outstanding commitment of $0.2 million at December 31,
2005; however, in addition to this balance, there was also $0.6 million in
outstanding Escarpment Village leasing commissions at December 31, 2005, as
well
as $0.9 million in landscaping costs contracted for the completion of the
center.
In
January 2005, we also executed four construction contracts with one-year terms
totaling $3.9 million for paving and utilities work at the Circle C community
in
connection with the development of the first 134 lots of the Meridian project
and the construction of the first phase of the main boulevard in Meridian.
In
June 2005, we executed two construction contracts with nine-month terms,
totaling $3.1 million, for paving and utilities for the second 134-lot phase
of
the Meridian project. Additionally, in September 2005, we executed two
construction contracts with 75-day terms, totaling $0.3 million, for gas and
electric improvements for the second 134-lot phase of the Meridian project.
The
total outstanding balance remaining on all the Meridian contracts at December
31, 2005 was $1.2 million.
In
addition to the contracts noted above, we also had an outstanding total of
$0.9
million at December 31, 2005 in various ongoing Lantana and Barton Creek
development contracts.
In
early
2006, we entered into an additional $0.8 million of contracts for various
development projects to be completed during 2006. The two major items were
a
$0.4 million contract for construction materials to be used in future Barton
Creek retail facilities and a $0.2 million engineering contract for the next
phase of residential lots at the Meridian project.
For
a
further discussion of our debt obligations, see “Credit Facility and Other
Financing Arrangements” below. In addition to our contractual obligations, we
have $3.0 million in other liabilities in the accompanying consolidated balance
sheets representing our indemnification of the purchaser for any future
abandonment costs in excess of net revenues received by the purchaser in
connection with the sale of an oil and gas property in 1993, as further
discussed in Note 8. The timing and final amount of any payment is currently
uncertain.
Credit
Facility and Other Financing Arrangements
A
summary
of our outstanding borrowings (in thousands) and a discussion of our financing
arrangements follow (excludes 7000 West project loan, see “Discontinued
Operations - 7000 West”).
|
December
31,
|
||||||
|
2005
|
2004
|
|||||
|
Comerica
revolving credit facility
|
$
|
15,677
|
$
|
20,355
|
||
|
Unsecured
term loans
|
10,000
|
10,000
|
||||
|
7500
Rialto Boulevard project loan
|
6,461
|
6,630
|
||||
|
Deerfield
loan
|
2,943
|
5,503
|
||||
|
Escarpment
Village project loan
|
9,936
|
1
|
||||
|
Meridian
project loan
|
5,287
|
-
|
||||
|
Calera
Court project loan
|
-
|
1,158
|
||||
|
Total
debt
|
$
|
50,304
|
$
|
43,647
|
||
Comerica
Revolving Credit Facility.
On
September 30, 2005, we entered into a loan agreement with Comerica to replace
our existing $30.0 million revolving credit facility with them. The loan
agreement provides for a $45.0 million revolving credit facility, of which
$3.0
million is provided for our Calera Court project. The facility matures on May
30, 2007.
The
facility sets limitations on liens and limitations on transactions with
affiliates, and requires that certain financial ratios be maintained. The
facility allows us to purchase up to $6.5 million of our outstanding
common
20
stock
after September 30, 2005. Amounts borrowed under the facility bear interest
at a
minimum annual rate of 5.0 percent or, at our option, Comerica’s prime rate plus
0.5 percent or London Interbank Offered Rate (LIBOR) plus 2.5 percent. Our
obligations under the facility are secured by substantially all of our assets,
except for Escarpment Village, 7000 West, Deerfield and the Meridian
project.
Unsecured
Term Loans.
In 2000
and 2001, we obtained two $5.0 million five-year unsecured term loans from
First
American Asset Management (see Note 4). The
proceeds of the loans were used to fund our operations and for other general
corporate purposes. Effective December 15, 2004, we amended the two loans to
extend their prior maturities of January 2006 to January 2008 and July 2006
to
July 2008. In accordance with the amendments, interest now accrues on the loans
at a rate of one-month LIBOR plus 4.5 percent and is payable monthly. The
interest rate was 8.8 percent on December 31, 2005 and 6.9 percent on December
31, 2004. Prior to the 2004 amendments, the interest rate was fixed at 9.25
percent.
7500
Rialto Boulevard Project Loan.
In 2001,
we secured an $18.4 million project loan facility with Comerica for the
construction of two office buildings at 7500 Rialto Boulevard. Borrowings under
this project loan have funded the construction of the first 75,000-square-foot
building and related parking garage. This variable-rate project loan facility
is
secured by the land and buildings in the project. We may make additional
borrowings under this facility to fund certain tenant improvements. Effective
November 15, 2005, we restructured our 7500 Rialto Boulevard project loan and
extended its maturity from January 2006 to January 2008. Under the terms of
the
loan modification agreement, we paid an extension fee of $25,600 and the
commitment under the facility was reduced to $6.8 million. As of December 31,
2005, we had $6.5 million outstanding under the project loan.
Deerfield
Loan.
On
February 27, 2004, we entered into a loan agreement with Comerica for $9.8
million with a maturity date of February 27, 2007, including an option to extend
the maturity date by six months to August 27, 2007, subject to certain
conditions. The timing of advances received and payments made under the loan
coincides with the development and lot purchase schedules. As of December 31,
2005, borrowings outstanding under the loan totaled $2.9 million, which proceeds
financed a portion of the acquisition and the development costs of the Deerfield
property.
Escarpment
Village Project Loan.
In
December 2004, we executed a Promissory Note and a Construction Loan Agreement
with Comerica for an $18.5 million loan to be used for the construction of
Escarpment Village. The loan has a maturity date of June 2007, with a one-year
extension option subject to certain terms and conditions. As of December 31,
2005, our borrowings outstanding under the loan were $9.9 million. We also
have
a $22.8 million commitment from TIAA for a 30-year mortgage available for
funding the completed Escarpment Village shopping center project. The mortgage
will be used to refinance the $18.5 million Escarpment Village project loan
discussed above.
Meridian
Project Loan.
In May
2005, we executed a development loan agreement with Comerica for a $10.0 million
loan to fund the development of single-family residential lots at Meridian.
The
loan has a maturity date of November 2007. As of December 31, 2005, we had
$5.3
million of outstanding under the Meridian project loan.
Calera
Court Project Loan.
In
September 2003, we finalized a $3.0 million project loan with Comerica to fund
the construction of courtyard homes at Calera Court. We paid the $1.2 million
outstanding balance of the loan at its maturity in September 2005. As discussed
above, $3.0 million of the $45.0 million revolving credit facility is provided
for our Calera Court project.
CRITICAL
ACCOUNTING POLICIES
Management’s
discussion and analysis of our financial condition and results of operations
are
based on our consolidated financial statements, which have been prepared in
conformity with accounting principles generally accepted in the United States
of
America. The preparation of these statements requires that we make estimates
and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. We base these estimates on historical experience and on
assumptions that we consider reasonable under the circumstances; however,
reported results could differ from those based on the current estimates under
different assumptions and/or conditions. The areas requiring the use of
management’s estimates are discussed in Note 1 to our consolidated financial
statements under the heading “Use of Estimates.” We believe that our most
critical accounting policies relate to our valuation of investment real estate
and commercial leasing assets, our allocation of indirect costs, revenue
recognition, valuation allowances for deferred tax assets and our
indemnification of the purchaser of an oil and gas property from us for any
abandonment costs.
Management
has reviewed the following discussion of its development and selection of
critical accounting estimates with the Audit Committee of our Board of
Directors.
21
· 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:
| a) |
The
economic condition of the Austin, Texas,
market;
|
| b) |
The
performance of the real estate industry in the markets where our
properties are located;
|
| c) |
Our
financial condition, which may influence our ability to develop our
real
estate; and
|
| d) |
Governmental
regulations.
|
Because
any one of these factors could substantially affect our estimate of future
cash
flows, this is a critical accounting policy because these estimates could result
in us either recording or not recording an impairment loss based on different
assumptions. Impairment losses are generally substantial charges. We have not
recorded any such impairment charges since recording a $115 million charge
in
1994. Any impairment charge would more likely than not have a material effect
on
our results of operations.
The
estimate of our future revenues is also important because it is the basis of
our
development plans and also a factor in our ability to obtain the financing
necessary to complete our development plans. If our estimates of future cash
flows from our properties differ from expectations, then our financial and
liquidity position may be compromised, which could result in our default under
certain debt instruments or result in our suspending some or all of our
development activities.
· Allocation
of Overhead Costs.
We
periodically capitalize a portion of our overhead costs and also allocate a
portion of these overhead costs to cost of sales based on the activities of
our
employees that are directly engaged in these activities. In order to accomplish
this procedure, we periodically evaluate our “corporate” personnel activities to
see what, if any, time is associated with activities that would normally be
capitalized or considered part of cost of sales. After determining the
appropriate aggregate allocation rates, we apply these factors to our overhead
costs to determine the appropriate allocations. This is a critical accounting
policy because it affects our net results of operations for that portion which
is capitalized. In accordance with paragraph 7 of SFAS No. 67, “Accounting for
Costs and Initial Rental Operations of Real Estate Projects,” we only capitalize
direct and indirect project costs associated with the acquisition, development
and construction of a real estate project. Indirect costs include allocated
costs associated with certain pooled resources (such as office supplies,
telephone and postage) which are used to support our development projects,
as
well as general and administrative functions. Allocations of pooled resources
are based only on those employees directly responsible for development (i.e.
project manager and subordinates). We charge to expense indirect costs that
do
not clearly relate to a real estate project such as salaries and allocated
expenses related to the Chief Executive Officer and Chief Financial Officer.
· Revenue
Recognition.
In
accordance with SFAS No. 66, “Accounting for Sales of Real Estate,” we recognize
revenues from property sales when the risks and rewards of ownership are
transferred to the buyer, when the consideration received can be reasonably
determined and when we have completed our obligations to perform certain
supplementary development activities, if any exist, at the time of the sale
(see
Note 1). Consideration is reasonably determined and considered likely of
collection when we have signed sales agreements and have determined that the
buyer has demonstrated a commitment to pay. The buyer’s commitment to pay is
supported by the level of their initial investment, our assessment of the
buyer’s credit standing and our assessment of whether the buyer’s stake in the
property is sufficient to motivate the buyer to honor its obligation to us.
This
is a critical accounting policy because for certain sales, we use our judgment
to determine the buyer’s commitment to pay us and thus determine when it is
proper to recognize revenues.
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.
22
· Deferred
Tax Assets.
We have
significant net operating loss credit carryforwards that are scheduled to expire
from 2007 through 2024 (see Note 5). Realization of these deferred tax assets
is
dependent on generating sufficient taxable income within the carryforward period
available under tax law. In addition, under the provisions of the Internal
Revenue Code, certain substantial changes in Stratus’ ownership may result in a
limitation on the amount of net operating loss carryforwards which can be used
in future years. In accordance with SFAS No. 109, “Accounting for Income Taxes,”
we have recorded a valuation allowance to reduce our deferred tax assets to
an
amount that is more likely than not to be realized. At December 31, 2005 and
2004, the valuation allowance was equal to 100 percent of our deferred tax
assets. In determining the need for this valuation allowance, we considered
the
historical and projected financial performance of our operations along with
any
changes in Stratus’ ownership. Should actual results differ materially from our
estimates or a significant change in Stratus’ ownership occur, we may need to
adjust our valuation allowance and begin providing a current tax provision,
which could materially impact our results of operations and financial position
in future periods.
· Abandonment
Costs Indemnification.
In
connection with the sale of an oil and gas property in 1993, we indemnified
the
purchaser for any abandonment costs in excess of cumulative net revenues
received. Whether or not we ultimately will incur any cost as a result of this
indemnification is uncertain and will depend on a number of factors beyond
our
control, including actual oil and gas produced from the property, oil and gas
prices received and the level of operating and abandonment costs incurred by
the
third-party operator over the life of the property. We periodically assess
the
reasonableness of amounts recorded for this liability through the use of
information obtained from the operator of the property; however, the
availability of such information is limited, and there are numerous
uncertainties involved in estimating the related future revenues, operating
and
abandonment costs. Based
on
our assessment of the available information, we have determined that a loss
is
probable and
we have
recorded a liability of $3.0 million, which is included in “Other Liabilities”
in the accompanying consolidated balance sheets, representing our best estimate
of this potential liability. The carrying value of this liability may be
adjusted in future periods as additional information becomes
available,
but our
current estimate is that this liability will not exceed $9.0 million.
This
is a
critical accounting policy because of the significant judgments we must make
in
assessing the amount of any such liability, in light of the limited amount
of
information available to us and the uncertainty involved in projections of
future product prices and costs of any ultimate liability, which requires us
to
use significant judgment in determining the amount of our
liability.
DISCLOSURES
ABOUT MARKET RISKS
We
derive
our revenues from the management, development and sale of our real estate
holdings and rental of our office properties. Our results of operations can
vary
significantly with fluctuations in the market prices of real estate, which
are
influenced by numerous factors, including interest rate levels. Changes in
interest rates also affect interest expense on our debt. At the present time,
we
do not hedge our exposure to changes in interest rates. Based on our bank debt
outstanding from continuing operations at December 31, 2005, a change of 100
basis points in applicable annual interest rates would have an approximate
$0.5
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 STANDARD
Through
December 31, 2005, we have accounted for grants of employee stock options under
the recognition principles of Accounting Principles Board (APB) Opinion No.
25,
“Accounting for Stock Issued to Employees,” and related interpretations, which
require compensation costs for stock-based employee compensation plans 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. If we had applied the fair value recognition provisions of SFAS
No.
123, “Accounting for Stock-Based Compensation,” which requires stock-based
compensation to be recognized based on the use of a fair value method, our
net
income would have been reduced by $0.7 million, $0.10 per basic share and $0.08
per diluted share, in 2005, $0.5 million, $0.07 per share, in 2004 and $0.7
million, $0.09 per share, in 2003 (see Note 1). These amounts are not
necessarily
23
indicative
of what charges may be in future periods. In December 2004, the FASB issued
SFAS
No. 123 (revised 2004), “Share-Based Payment” (SFAS No. 123R). SFAS No. 123R
requires all share-based payments to employees, including grants of employee
stock options, to be recognized in the financial statements based on their
fair
values. SFAS No. 123R’s effective date is fiscal periods beginning after June
15, 2005. We adopted SFAS No. 123R on January 1, 2006.
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.
24
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO
THE
BOARD OF DIRECTORS AND STOCKHOLDERS OF STRATUS PROPERTIES INC.:
We
have
completed an integrated audit of Stratus Properties Inc.’s 2005 consolidated
financial statements and of its internal control over financial reporting as
of
December 31, 2005 and audits of its 2004 and 2003 consolidated financial
statements in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Our opinions, based on our audits, are
presented below.
Consolidated
financial statements and financial statement schedule
In
our
opinion, the consolidated financial statements listed in the index appearing
under Item 15(a)(1) present fairly, in all material respects, the financial
position of Stratus Properties Inc. and its subsidiaries at December 31, 2005
and 2004, and the results of their operations and their cash flows for each
of
the three years in the period ended December 31, 2005 in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the index
appearing under Item 15(a)(2) presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit of financial statements
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
Internal
control over financial reporting
Also,
in
our opinion, management’s assessment, included in the accompanying Management's
Report on Internal Control Over Financial Reporting, that the Company maintained
effective internal control over financial reporting as of December 31,
2005 based
on
criteria established in Internal
Control - Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO),
is fairly stated, in all material respects, based on those criteria.
Furthermore, in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2005,
based on criteria established in Internal
Control - Integrated Framework
issued
by the COSO. The Company’s management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility
is to express opinions on management’s assessment and on the effectiveness of
the Company’s internal control over financial reporting based on our audit. We
conducted our audit of internal control over financial reporting in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. An audit of internal control
over financial reporting includes obtaining an understanding of internal control
over financial reporting, evaluating management’s assessment, testing and
evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we consider necessary in the circumstances.
We believe that our audit provides a reasonable basis for our
opinions.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (i) pertain
to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company
25
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
16,
2006
26
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, 2005, 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, 2005, as stated in their
report dated March 16, 2006, 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
|
27
STRATUS
PROPERTIES INC.
(In
Thousands, Except Par Value)
|
December
31,
|
||||||
|
2005
|
2004
|
|||||
|
ASSETS
|
||||||
|
Current
assets:
|
||||||
|
Cash
and cash equivalents, including restricted cash of
|
||||||
|
$387
and $124, respectively (Note 6)
|
$
|
1,901
|
$
|
379
|
||
|
Notes
receivable from property sales
|
-
|
27
|
||||
|
Accounts
receivable
|
42
|
189
|
||||
|
Deposits,
prepaid expenses and other
|
849
|
393
|
||||
|
Discontinued
operations (Note 7)
|
12,230
|
345
|
||||
|
Total
current assets
|
15,022
|
1,333
|
||||
|
Real
estate, commercial leasing assets and facilities, net:
|
||||||
|
Property
held for sale - developed or under development
|
127,450
|
104,526
|
||||
|
Property
held for sale - undeveloped
|
16,071
|
20,919
|
||||
|
Property
held for use, net
|
9,452
|
9,926
|
||||
|
Investment
in Crestview
|
4,157
|
-
|
||||
|
Other
assets
|
1,734
|
2,474
|
||||
|
Discontinued
operations (Note 7)
|
-
|
12,894
|
||||
|
Notes
receivable from property sales (Note 1)
|
-
|
789
|
||||
|
Total
assets
|
$
|
173,886
|
$
|
152,861
|
||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||
|
Current
liabilities:
|
||||||
|
Accounts
payable and accrued liabilities
|
$
|
6,305
|
$
|
1,091
|
||
|
Accrued
interest, property taxes and other
|
3,710
|
2,263
|
||||
|
Current
portion of long-term debt
|
169
|
1,327
|
||||
|
Discontinued
operations (Note 7)
|
12,036
|
583
|
||||
|
Total
current liabilities
|
22,220
|
5,264
|
||||
|
Long-term
debt (Note 4)
|
50,135
|
42,320
|
||||
|
Other
liabilities
|
7,364
|
5,164
|
||||
|
Discontinued
operations (Note 7)
|
-
|
11,917
|
||||
|
Total
liabilities
|
79,719
|
64,665
|
||||
|
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,
|
||||||
|
7,485
and 7,284 shares issued, respectively and
|
||||||
|
7,217
and 7,221 shares outstanding, respectively
|
74
|
72
|
||||
|
Capital
in excess of par value of common stock
|
182,007
|
181,145
|
||||
|
Accumulated
deficit
|
(82,943
|
)
|
(91,417
|
)
|
||
|
Unamortized
value of restricted stock units
|
(567
|
)
|
(841
|
)
|
||
|
Common
stock held in treasury, 268 shares and 63 shares,
|
||||||
|
at
cost, respectively
|
(4,404
|
)
|
(763
|
)
|
||
|
Total
stockholders’ equity
|
94,167
|
88,196
|
||||
|
Total
liabilities and stockholders' equity
|
$
|
173,886
|
$
|
152,861
|
||
The
accompanying notes are an integral part of these financial
statements.
28
STRATUS
PROPERTIES INC.
(In
Thousands, Except Per Share Amounts)
|
Years
Ended December 31,
|
|||||||||
|
2005
|
2004
|
2003
|
|||||||
|
Revenues:
|
|||||||||
|
Real
estate
|
$
|
33,003
|
$
|
16,430
|
$
|
8,938
|
|||
|
Rental
income
|
1,353
|
874
|
334
|
||||||
|
Commissions,
management fees and other
|
838
|
421
|
1,729
|
||||||
|
Total
revenues
|
35,194
|
17,725
|
11,001
|
||||||
|
Cost
of sales (Note 1):
|
|||||||||
|
Real
estate, net
|
19,625
|
11,119
|
6,414
|
||||||
|
Rental,
net
|
1,456
|
1,201
|
564
|
||||||
|
Depreciation
|
758
|
615
|
423
|
||||||
|
Total
cost of sales
|
21,839
|
12,935
|
7,401
|
||||||
|
General
and administrative expenses
|
5,019
|
4,452
|
4,013
|
||||||
|
Total
costs and expenses
|
26,858
|
17,387
|
11,414
|
||||||
|
Operating
income (loss)
|
8,336
|
338
|
(413
|
)
|
|||||
|
Interest
expense, net
|
(529
|
)
|
(309
|
)
|
(327
|
)
|
|||
|
Interest
income
|
226
|
70
|
728
|
||||||
|
Equity
in unconsolidated affiliates’ income (Note 3)
|
-
|
-
|
29
|
||||||
|
Income
from continuing operations before income taxes
|
8,033
|
99
|
17
|
||||||
|
Provision
for income taxes
|
(73
|
)
|
-
|
-
|
|||||
|
Net
income from continuing operations
|
7,960
|
99
|
17
|
||||||
|
Income
from discontinued operations (Note 7)
|
514
|
573
|
3
|
||||||
|
Net
income applicable to common stock
|
$
|
8,474
|
$
|
672
|
$
|
20
|
|||
|
Basic
net income per share of common stock:
|
|||||||||
|
Continuing
operations
|
$
|
1.11
|
$
|
0.01
|
$
|
-
|
|||
|
Discontinued
operations
|
0.07
|
0.08
|
-
|
||||||
|
Basic
net income per share of common stock
|
$
|
1.18
|
$
|
0.09
|
$
|
-
|
|||
|
Diluted
net income per share of common stock:
|
|||||||||
|
Continuing
operations
|
$
|
1.04
|
$
|
0.01
|
$
|
-
|
|||
|
Discontinued
operations
|
0.07
|
0.08
|
-
|
||||||
|
Diluted
net income per share of common stock
|
$
|
1.11
|
$
|
0.09
|
$
|
-
|
|||
|
Average
shares of common stock outstanding:
|
|||||||||
|
Basic
|
7,209
|
7,196
|
7,124
|
||||||
|
Diluted
|
7,636
|
7,570
|
7,315
|
||||||
The
accompanying notes are an integral part of these financial
statements.
29
STRATUS
PROPERTIES INC.
(In
Thousands)
|
Years
Ended December 31,
|
|||||||||
|
2005
|
2004
|
2003
|
|||||||
|
Cash
flow from operating activities:
|
|||||||||
|
Net
income
|
$
|
8,474
|
$
|
672
|
$
|
20
|
|||
|
Adjustments
to reconcile net income to net cash provided
|
|||||||||
|
by
operating activities:
|
|||||||||
|
Income
from discontinued operations
|
(514
|
)
|
(573
|
)
|
(3
|
)
|
|||
|
Depreciation
|
758
|
615
|
423
|
||||||
|
Cost
of real estate sold
|
17,057
|
8,938
|
4,973
|
||||||
|
Stock-based
compensation
|
282
|
156
|
119
|
||||||
|
Long-term
notes receivable
|
789
|
(615
|
)
|
1,929
|
|||||
|
Equity
in unconsolidated affiliates’ income
|
-
|
-
|
(29
|
)
|
|||||
|
Distribution
of unconsolidated affiliates’ income
|
-
|
-
|
29
|
||||||
|
Loan
deposits and deposits for infrastructure development
|
(274
|
)
|
(1,320
|
)
|
-
|
||||
|
Other
|
1,049
|
(441
|
)
|
(325
|
)
|
||||
|
(Increase)
decrease in working capital:
|
|||||||||
|
Accounts
receivable, prepaid expenses and other
|
(9
|
)
|
503
|
54
|
|||||
|
Accounts
payable, accrued liabilities and other
|
8,859
|
1,394
|
(99
|
)
|
|||||
|
Net
cash provided by continuing operations
|
36,471
|
9,329
|
7,091
|
||||||
|
Net
cash provided by discontinued operations
|
1,310
|
670
|
961
|
||||||
|
Net
cash provided by operating activities
|
37,781
|
9,999
|
8,052
|
||||||
|
Cash
flow from investing activities:
|
|||||||||
|
Purchases
and development of real estate properties
|
(39,733
|
)
|
(21,463
|
)
|
(11,566
|
)
|
|||
|
Municipal
utility district reimbursements
|
4,600
|
910
|
3,504
|
||||||
|
Investment
in Crestview
|
(4,157
|
)
|
-
|
-
|
|||||
|
Development
of commercial leasing properties and other
|
|||||||||
|
expenditures
|
(284
|
)
|
(1,099
|
)
|
(911
|
)
|
|||
|
Distribution
from Lakeway Project
|
-
|
-
|
191
|
||||||
|
Net
cash used in continuing operations
|
(39,574
|
)
|
(21,652
|
)
|
(8,782
|
)
|
|||
|
Net
cash used in discontinued operations
|
(40
|
)
|
(36
|
)
|
(22
|
)
|
|||
|
Net
cash used in investing activities
|
(39,614
|
)
|
(21,688
|
)
|
(8,804
|
)
|
|||
|
Cash
flow from financing activities:
|
|||||||||
|
Borrowings
from revolving credit facility
|
55,005
|
16,414
|
20,963
|
||||||
|
Payments
on revolving credit facility
|
(59,684
|
)
|
(16,930
|
)
|
(16,703
|
)
|
|||
|
Borrowings
from project loans
|
17,583
|
9,176
|
781
|
||||||
|
Repayments
on project loans
|
(6,248
|
)
|
(610
|
)
|
(1,516
|
)
|
|||
|
Net
proceeds from exercise of stock options
|
639
|
795
|
64
|
||||||
|
Purchases
of Stratus common shares
|
(3,342
|
)
|
(248
|
)
|
-
|
||||
|
Bank
credit facility fees
|
(388
|
)
|
-
|
-
|
|||||
|
Net
cash provided by continuing operations
|
3,565
|
8,597
|
3,589
|
||||||
|
Net
cash provided by (used in) discontinued operations
|
(205
|
)
|
58
|
(785
|
)
|
||||
|
Net
cash provided by financing activities
|
3,360
|
8,655
|
2,804
|
||||||
30
STRATUS
PROPERTIES INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS (Continued)
(In
Thousands)
|
Years
Ended December 31,
|
|||||||||
|
2005
|
2004
|
2003
|
|||||||
|
Net
increase (decrease) in cash and cash equivalents
|
1,527
|
(3,034
|
)
|
2,052
|
|||||
|
Cash
and cash equivalents at beginning of year
|
379
|
3,413
|
1,361
|
||||||
|
Cash
and cash equivalents at end of year
|
1,906
|
379
|
3,413
|
||||||
|
Less
cash at discontinued operations
|
(5
|
)
|
-
|
(189
|
)
|
||||
|
Less
cash restricted as to use
|
(387
|
)
|
(124
|
)
|
(207
|
)
|
|||
|
Unrestricted
cash and cash equivalents at end of year
|
$
|
1,514
|
$
|
255
|
$
|
3,017
|
|||
|
Supplemental
Information:
|
|||||||||
|
Interest
paid
|
$
|
1,085
|
$
|
972
|
$
|
703
|
|||
The
accompanying notes, which include information regarding noncash transactions,
are an integral part of these financial statements.
31
STRATUS
PROPERTIES INC.
(In
Thousands)
|
Years
Ended December 31,
|
|||||||||
|
2005
|
2004
|
2003
|
|||||||
|
Preferred
stock:
|
|||||||||
|
Balance
at beginning and end of year
|
$
|
-
|
$
|
-
|
$
|
-
|
|||
|
Common
stock:
|
|||||||||
|
Balance
at beginning of year representing 7,284 shares in 2005,
|
|||||||||
|
7,179
shares in 2004 and 7,159 shares in 2003
|
72
|
72
|
72
|
||||||
|
Exercise
of stock options and restricted stock representing 201
|
|||||||||
|
shares
in 2005, 105 shares in 2004 and 19 shares in 2003
|
2
|
-
|
-
|
||||||
|
Balance
at end of year representing 7,485 shares in 2005, 7,284
|
|||||||||
|
shares
in 2004 and 7,179 shares in 2003
|
74
|
72
|
72
|
||||||
|
Capital
in excess of par value:
|
|||||||||
|
Balance
at beginning of year
|
181,145
|
179,786
|
179,472
|
||||||
|
Exercised
stock options and other
|
862
|
835
|
99
|
||||||
|
Restricted
stock units granted, net of forfeitures (Note 6)
|
-
|
524
|
215
|
||||||
|
Balance
at end of year
|
182,007
|
181,145
|
179,786
|
||||||
|
Accumulated
deficit:
|
|||||||||
|
Balance
at beginning of year
|
(91,417
|
)
|
(92,089
|
)
|
(92,109
|
)
|
|||
|
Net
income
|
8,474
|
672
|
20
|
||||||
|
Balance
at end of year
|
(82,943
|
)
|
(91,417
|
)
|
(92,089
|
)
|
|||
|
Unamortized
value of restricted stock units:
|
|||||||||
|
Balance
at beginning of year
|
(841
|
)
|
(452
|
)
|
(333
|
)
|
|||
|
Deferred
compensation associated with restricted stock units, net
|
|||||||||
|
of
forfeitures (Note 6)
|
-
|
(524
|
)
|
(215
|
)
|
||||
|
Amortization
of related deferred compensation, net of forfeitures
|
274
|
135
|
96
|
||||||
|
Balance
at end of year
|
(567
|
)
|
(841
|
)
|
(452
|
)
|
|||
|
Common
stock held in treasury:
|
|||||||||
|
Balance
at beginning of year representing 63 shares in 2005,
|
|||||||||
|
44
shares in 2004 and 42 shares in 2003
|
(763
|
)
|
(496
|
)
|
(483
|
)
|
|||
|
Shares
purchased representing 189 shares in 2005 and
|
|||||||||
|
18
shares in 2004
|
(3,342
|
)
|
(248
|
)
|
-
|
||||
|
Tender
of 16 shares in 2005 and 1 share in 2004 and 2003
|
|||||||||
|
for
exercised stock options and restricted stock
|
(299
|
)
|
(19
|
)
|
(13
|
)
|
|||
|
Balance
at end of year representing 268 shares in 2005,
|
|||||||||
|
63
shares in 2004 and 44 shares in 2003
|
(4,404
|
)
|
(763
|
)
|
(496
|
)
|
|||
|
Total
stockholders’ equity
|
$
|
94,167
|
$
|
88,196
|
$
|
86,821
|
|||
The
accompanying notes are an integral part of these financial
statements.
32
STRATUS
PROPERTIES INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1.
Summary
of Significant Accounting Policies
Operations
and Basis of Accounting.
The real
estate development and marketing operations of Stratus Properties Inc.
(Stratus), a Delaware Corporation, are conducted primarily in Austin, Texas,
through its wholly owned subsidiaries and through certain unconsolidated joint
ventures (see “Investments in Unconsolidated Affiliates” below and Note 3).
Stratus consolidates its wholly owned subsidiaries, which include: Stratus
Properties Operating Co., L.P.; Circle C Land, L.P.; Stratus 7000 West Joint
Venture; 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., Escarpment Village L.P.; Calera Court, L.P.; Meridian
Development L.P.; Oly Stratus Barton Creek I JV and STRS L.L.C. All significant
intercompany transactions have been eliminated in consolidation. Certain prior
year amounts have been reclassified to conform to the 2005 presentation. In
the
fourth quarter of 2005, Stratus committed to sell its investment in Stratus
7000
West Joint Venture (see Note 7). As a result, the Stratus 7000 West Joint
Venture (7000 West) is reported as discontinued operations and the consolidated
financial statements for all prior periods have been adjusted to reflect this
presentation.
Investments
in Unconsolidated Affiliates.
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.” Stratus had a net profits
interest in the Lakeway project, as further described in Note 3, in which its
share of the project’s earnings or loss was calculated using the hypothetical
liquidation at book value approach. This approach compares the value of the
investment at the beginning of the year to that at the end of the year, assuming
that the project’s assets were liquidated or sold at book value. The difference
represents Stratus’ share of the project’s earnings or losses.
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 totaled $0.4 million at December
31, 2005, including $0.3 million from Deerfield lot sales to be used for payment
on the Deerfield loan (see Note 4), and $0.1 million at December 31, 2004.
Approximately $0.1 million held at year-end 2005 and 2004 represents funds
held
for payment of fractional shares resulting from the May 2001 stock split (see
Note 6).
Financial
Instruments.
The
carrying amounts of receivables, notes receivable, accounts payable and
long-term borrowings 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.
Notes
Receivable from Property Sales.
Stratus’
developed property sales in 2004 included the sale of two residential estate
lots at the Mirador subdivision for $0.7 million, for which Stratus received
cash of $0.1 million and a promissory note of $0.6 million. Stratus also
received a promissory note of $0.2 million for the $0.3 million sale of one
residential estate lot at Mirador. The $0.6 million note, which had an annual
interest rate of eight percent, required three annual principal and interest
payments with the final payment due in September 2007. The $0.2 million note,
which had an annual interest rate of 10 percent, required monthly principal
and
interest payments with the final payment due in July 2007. Stratus received
full
payment on these notes in 2005.
33
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 $3.3 million in
2005, $2.4 million in 2004 and $2.1 million in 2003.
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 $1.5
million at December 31, 2005 and $1.6 million at December 31, 2004.
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. Notes received
in connection with land sales have not been discounted, as the purchase price
was not significantly different from similar cash transactions.
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,
|
|||||||||
|
2005
|
2004
|
2003
|
|||||||
|
(In
Thousands)
|
|||||||||
|
Revenues:
|
|||||||||
|
Developed
property sales
|
$
|
25,453
|
$
|
7,238
|
$
|
1,217
|
|||
|
Undeveloped
property sales
|
7,550
|
9,192
|
7,721
|
||||||
|
Rental
income
|
1,353
|
874
|
334
|
||||||
|
Commissions,
management fees and other
|
838
|
421
|
1,729
|
||||||
|
Total
revenues
|
$
|
35,194
|
$
|
17,725
|
$
|
11,001
|
|||
34
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,
|
|||||||||
|
2005
|
2004
|
2003
|
|||||||
|
(In
Thousands)
|
|||||||||
|
Cost
of developed property sales
|
$
|
13,023
|
$
|
3,504
|
$
|
683
|
|||
|
Cost
of undeveloped property sales
|
4,564
|
5,678
|
4,681
|
||||||
|
Rental
property costs
|
1,456
|
1,201
|
564
|
||||||
|
Allocation
of overhead costs (see below)
|
2,277
|
2,130
|
2,446
|
||||||
|
Municipal
utility district reimbursements
|
(126
|
)
|
-
|
(1,180
|
)
|
||||
|
Depreciation
|
758
|
615
|
423
|
||||||
|
Other,
net
|
(113
|
)
|
(193
|
)
|
(216
|
)
|
|||
|
Total
cost of sales
|
$
|
21,839
|
$
|
12,935
|
$
|
7,401
|
|||
Municipal
Utility District Reimbursements.
Stratus
receives 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 and in 1996, Stratus began
capitalizing the infrastructure costs to the related properties. MUD
reimbursements received for infrastructure costs incurred prior to 1996 are
reflected as a reduction of cost of sales, while other MUD reimbursements
represent a reimbursement of basis in real estate properties and are recorded
as
a reduction of the related asset’s balance. Stratus has agreements with seven
independent MUDs in Barton Creek to build the MUDs’ utility systems and to be
eligible for future reimbursements for the related costs. The amount and timing
of MUD reimbursements depends upon the respective MUD having a sufficient tax
base within its district to issue bonds and being able to obtain the necessary
state approval for the sale of the bonds. Because the timing of the issuance
and
approval of the bonds is subject to considerable uncertainty, coupled with
the
fact that interest rates on such bonds cannot be fixed until they are approved,
the amounts associated with MUD reimbursements are not known until approximately
one month before the MUD reimbursements are received. MUD reimbursements
represent the actual amounts received.
Allocation
of Overhead Costs.
Stratus
has historically allocated a portion of its overhead costs to both capital
accounts (real estate, commercial leasing assets and facilities) and cost of
sales based on the percentage of time certain of its employees, comprising
its
indirect overhead pool, worked in the related areas (i.e. construction and
development for capital and sales and marketing for cost of sales). In
accordance with paragraph 7 of SFAS No. 67, “Accounting for Costs and Initial
Rental Operations of Real Estate Projects,” Stratus only capitalizes direct and
indirect project costs associated with the acquisition, development, and
construction of a real estate project. Indirect costs include allocated costs
associated with certain pooled resources (such as office supplies, telephone
and
postage) which are used to support Stratus’ development projects, as well as
general and administrative functions. Allocations of pooled resources are based
only on those employees directly responsible for development (i.e. project
manager and subordinates). Stratus charges to expense indirect costs that do
not
clearly relate to a real estate project, such as salaries and allocated expenses
related to the Chief Executive Officer and Chief Financial Officer.
Advertising
Costs.
Advertising costs are expensed as incurred and are included as a component
of
cost of sales. Advertising costs totaled $0.2 million in 2005, $0.1 million
in
2004 and $0.1 million in 2003.
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):
35
|
Years
Ended December 31,
|
|||||||||
|
2005
|
2004
|
2003
|
|||||||
|
Net
income from continuing operations
|
$
|
7,960
|
$
|
99
|
$
|
17
|
|||
|
Income
from discontinued operations
|
514
|
573
|
3
|
||||||
|
Net
income applicable to common stock
|
$
|
8,474
|
$
|
672
|
$
|
20
|
|||
|
Weighted
average common shares outstanding
|
7,209
|
7,196
|
7,124
|
||||||
|
Add:
Dilutive stock options
|
418
|
340
|
180
|
||||||
|
Restricted
stock
|
9
|
34
|
11
|
||||||
|
Weighted
average common shares outstanding for
|
|||||||||
|
purposes
of calculating diluted net income per share
|
7,636
|
7,570
|
7,315
|
||||||
|
Diluted
net income per share of common stock:
|
|||||||||
|
Continuing
operations
|
$
|
1.04
|
$
|
0.01
|
$
|
-
|
|||
|
Discontinued
operations
|
0.07
|
0.08
|
-
|
||||||
|
Diluted
net income per share of common stock
|
$
|
1.11
|
$
|
0.09
|
$
|
-
|
|||
Outstanding
stock options with exercise prices greater than the average market price of
the
common stock during the year are excluded from the computation of diluted net
income per share of common stock and are shown below.
|
Years
Ending December 31,
|
|||||
|
2005
|
2004
|
2003
|
|||
|
Outstanding
options (in thousands)
|
-
|
63
|
229
|
||
|
Average
exercise price
|
-
|
$13.97
|
$11.64
|
||
Stock-Based
Compensation Plans.
As of
December 31, 2005, Stratus has three stock-based employee compensation plans
and
one stock-based director compensation plan, which are more fully described
in
Note 6. Stratus accounts 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, which require compensation cost for stock-based employee
compensation plans 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. Because all the plans require that
the
option exercise price be at least the market price on the date of grant, Stratus
recognizes no compensation expense on the grant or exercise of its employees’
options. See “New Accounting Standard” below for a discussion of SFAS No. 123
(revised 2004), “Share-Based Payment” (SFAS No. 123R), which Stratus adopted on
January 1, 2006. The following table illustrates the effect on net income and
earnings per share if Stratus had applied the fair value recognition provisions
of SFAS No. 123, “Accounting for Stock-Based Compensation,” which requires
compensation cost for all stock-based employee compensation plans to be
recognized based on a fair value method (in thousands, except per share
amounts):
|
Years
Ended December 31,
|
|||||||||
|
2005
|
2004
|
2003
|
|||||||
|
Net
income applicable to common stock, as reported
|
$
|
8,474
|
$
|
672
|
$
|
20
|
|||
|
Add:
Stock-based employee compensation expense
|
|||||||||
|
included
in reported net income applicable to
|
|||||||||
|
common
stock for restricted stock units
|
274
|
148
|
96
|
||||||
|
Deduct:
Total stock-based employee compensation
|
|||||||||
|
expense
determined under fair value-based method
|
|||||||||
|
for
all awards
|
(937
|
)
|
(667
|
)
|
(750
|
)
|
|||
|
Pro
forma net income (loss) applicable to common stock
|
$
|
7,811
|
$
|
153
|
$
|
(634
|
)
|
||
|
Earnings
per share:
|
|||||||||
|
Basic
- as reported
|
$
|
1.18
|
$
|
0.09
|
$
|
-
|
|||
|
Basic
- pro forma
|
$
|
1.08
|
$
|
0.02
|
$
|
(0.09
|
)
|
||
|
Diluted
- as reported
|
$
|
1.11
|
$
|
0.09
|
$
|
-
|
|||
|
Diluted
- pro forma
|
$
|
1.03
|
$
|
0.02
|
$
|
(0.09
|
)
|
||
36
For
the
pro forma computations, the values of option grants were calculated on the
dates
of grant using the Black-Scholes option-pricing model. The following table
summarizes the calculated average fair values and weighted-average assumptions
used to determine the fair value of Stratus’ stock option grants under SFAS No.
123 during the years presented.
|
2005
|
2004
|
2003
|
||||
|
Options
granted
|
7,750
|
117,500
|
77,500
|
|||
|
Fair
value per stock option
|
$11.48
|
$10.29
|
$6.99
|
|||
|
Risk-free
interest rate
|
4.33
|
%
|
4.39
|
%
|
4.52
|
%
|
|
Expected
volatility rate
|
46.2
|
%
|
48.7
|
%
|
50.8
|
%
|
Stratus
assumes an expected life of 10 years for all of its options and no annual
dividends. The pro forma effects on net income are not representative of future
years because of the potential changes in the factors used in calculating the
Black-Scholes valuation and the number and timing of option grants. No other
discounts or restrictions related to vesting or the likelihood of vesting of
stock options were applied.
New
Accounting Standard.
Through
December 31, 2005, Stratus has accounted for grants of employee stock options
under the recognition principles of APB Opinion No. 25 and related
interpretations, which require compensation costs for stock-based employee
compensation plans 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. If Stratus had applied the fair value
recognition provisions of SFAS No. 123, which requires stock-based compensation
to be recognized based on the use of a fair value method, Stratus’ net income
would have been reduced by $0.7 million, $0.10 per basic share and $0.08 per
diluted share, in 2005, $0.5 million, $0.07 per share, in 2004 and $0.7 million,
$0.09 per share, in 2003. These pro forma amounts are not necessarily indicative
of what charges may be for future periods. In December 2004, the Financial
Accounting Standards Board issued SFAS No. 123R. SFAS No. 123R requires all
share-based payments to employees, including grants of employee stock options,
to be recognized in the financial statements based on their fair values. SFAS
No. 123R’s effective date is fiscal periods beginning after June 15, 2005.
Stratus adopted SFAS No. 123R on January 1, 2006.
2.
Real
Estate, Commercial Leasing Assets and Facilities, net
|
December
31,
|
||||||
|
2005
|
2004
|
|||||
|
(In
Thousands)
|
||||||
|
Property
held for sale - developed or under development:
|
||||||
|
Austin,
Texas area
|
$
|
120,256
|
$
|
95,460
|
||
|
Other
areas of Texas
|
7,194
|
9,066
|
||||
|
127,450
|
104,526
|
|||||
|
Property
held for sale - undeveloped:
|
||||||
|
Austin,
Texas area
|
16,037
|
20,885
|
||||
|
Other
areas of Texas
|
34
|
34
|
||||
|
16,071
|
20,919
|
|||||
|
Property
held for use:
|
||||||
|
Commercial
leasing assets, net of accumulated depreciation
|
||||||
|
of
$1,454 in 2005 and $862 in 2004
|
8,989
|
9,445
|
||||
|
Furniture,
fixtures and equipment, net of accumulated
|
||||||
|
depreciation
of $562 in 2005 and $422 in 2004
|
463
|
481
|
||||
|
Total
property held for use
|
9,452
|
9,926
|
||||
|
$
|
152,973
|
$
|
135,371
|
|||
At
December 31, 2005, Stratus’ investment in real estate includes approximately
2,841 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
1,735 acres of residential, multi-family and commercial property and 86
developed residential estate lots within the Barton Creek community at December
31, 2005. Stratus also holds approximately 384 acres of undeveloped residential,
commercial and multi-family property and 36 acres of commercial property under
development within the Circle C Ranch (Circle C) community. Stratus’ other
properties in the Circle C community are currently being developed and include
Meridian, which is
37
an
800-lot residential development, and Escarpment Village, which is a retail
center. At December 31, 2005, Meridian consisted of approximately 314 acres
and
120 developed residential lots and Escarpment Village consisted of approximately
62 acres. Stratus’ remaining Austin holdings at December 31, 2005, consisted of
282 acres of commercial property and three office buildings in Lantana. One
office building is the 75,000-square-foot building at 7500 Rialto Boulevard,
which is nearly 100 percent leased. In the fourth quarter of 2005, Stratus
committed to a plan to sell its two office buildings at 7000 West. Stratus
has
contracted to sell 7000 West for $22.3 million, a portion of which will be
paid
by the buyer’s assumption of the related 7000 West project loan. Closing of the
sale currently is scheduled for March 27, 2006 (see Note 7). Stratus’ Deerfield
project in Plano, Texas, consists of approximately 26 acres of residential
land,
which is being developed, and 59 developed residential lots of residential
property.
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; however, Stratus
currently owns only three lots with homes built on them (the Calera Court
homes). Developed acreage or acreage under development includes real estate
for
which infrastructure work over the entire property has been completed, is
currently being completed or is able to be completed and necessary permits
have
been received.
Stratus’
office building costs include both the construction and land costs associated
with its 75,000-square-foot office building at 7500 Rialto
Boulevard.
Stratus
also owns two acres of undeveloped commercial property in San Antonio,
Texas.
3.
Investments
in Unconsolidated Affiliates
Crestview
Station Project
In
November 2005, Stratus formed a joint venture partnership with Trammell Crow
Central Texas Development, Inc. to acquire an approximate 74-acre tract at
the
intersection of Airport Boulevard and Lamar Boulevard in Austin, Texas, for
$7.7
million. Stratus refers to the property as the Crestview Station project, a
single-family, multi-family, retail and office development. With its joint
venture partner, Stratus has commenced brown field remediation and permitting
of
the property. At December 31, 2005, Stratus’ investment in the Crestview Station
project totaled $4.2 million and the joint venture partnership had $7.6 million
of outstanding debt, of which each of the joint venture partners guarantees
$1.9
million.
The
Crestview Station property is divided into three distinct parcels - one
containing approximately 46 acres, a second consisting of approximately 27
acres, and a third 0.5-acre tract. The joint venture partnership has contracted
with a nationally recognized remediation firm to demolish the existing buildings
and remediate the 27-acre and 0.5-acre tracts as part of preparing them for
residential permitting. Under the terms of the remediation contract, the joint
venture partnership will pay the contractor approximately $4.9 million upon
completion of performance benchmarks and certification by the State of Texas
that the remediation is complete. The contractor is required to pay all costs
associated with the remediation and to secure an environmental liability policy
with $10.0 million of coverage remaining in place for a 10-year term. Pursuant
to the agreement with the contractor, all environmental and legal liability
was
assigned to and assumed by the contractor effective November 30,
2005.
Lakeway
Project
From
mid-1998 through early 2003, Stratus has provided development, management,
operating and marketing services for the Lakeway development near Austin, Texas,
which is owned by Commercial Lakeway Limited Partnership, an affiliate of Credit
Suisse First Boston, for a fixed monthly fee. In 2001, Stratus entered into
an
expanded development management agreement with Commercial Lakeway Limited
Partnership covering a 552-acre portion of the Lakeway development known as
Schramm Ranch, and Stratus contributed $2.0 million as an investment in this
project (Lakeway Project). In 2003, Stratus sold the last remaining 5-acre
tract
at the project ending the project. Under the agreement, Stratus received
management and development fees and sales commissions, as well as a net profits
interest in the Lakeway project. Lakeway Project distributions were made to
Stratus as sales installments closed. Under terms of the agreement, Stratus
received a 28 percent share in any Lakeway Project distributions until such
distributions exceeded its initial investment in the project ($2.0 million)
plus
a stated annual rate of return and 40 percent thereafter.
Stratus
received a total of $2.9 million of cash distributions, not including sales
commissions and management fees, from its involvement with the Lakeway Project,
which represents the full return of Stratus’ $2.0 million investment and $0.9
million of income.
38
4.
Long-Term
Debt
|
December
31,
|
||||||
|
2005
|
2004
|
|||||
|
(In
Thousands)
|
||||||
|
Comerica
revolving credit facility, average rate 6.0% in 2005
|
||||||
|
and
5.0% in 2004
|
$
|
15,677
|
$
|
20,355
|
||
|
Unsecured
term loans, average rate 7.7% in 2005
|
||||||
|
and
9.1% in 2004
|
10,000
|
10,000
|
||||
|
7500
Rialto Boulevard project loan, average rate 6.1% in 2005
|
||||||
|
and
5.0% in 2004
|
6,461
|
6,630
|
||||
|
Deerfield
loan, average rate 6.0% in 2005 and 5.0% in 2004
|
2,943
|
5,503
|
||||
|
Escarpment
Village project loan, average rate 6.1% in 2005
|
||||||
|
and
4.8% in 2004
|
9,936
|
1
|
||||
|
Meridian
project loan, average rate 6.6% in 2005
|
5,287
|
-
|
||||
|
Calera
Court project loan, average rate 5.0% in 2004
|
-
|
1,158
|
||||
|
Total
|
50,304
|
43,647
|
||||
|
Less:
Current portion
|
(169
|
)
|
(1,327
|
)
|
||
|
Long-term
debt
|
$
|
50,135
|
$
|
42,320
|
||
Comerica
Revolving Credit Facility.
On
September 30, 2005, Stratus entered into a loan agreement with Comerica to
replace its existing $30.0 million revolving credit facility with Comerica.
The
loan agreement provides for a $45.0 million revolving credit facility, of which
$3.0 million is provided for the Calera Court project. The facility matures
on
May 30, 2007.
The
facility sets limitations on liens and limitations on transactions with
affiliates, and requires that certain financial ratios be maintained. The
facility allows Stratus to purchase up to $6.5 million of its outstanding common
stock after September 30, 2005. Amounts borrowed under the facility bear
interest at a minimum annual rate of 5.0 percent or, at Stratus’ option,
Comerica’s prime rate plus 0.5 percent or London Interbank Offered Rate (LIBOR)
plus 2.5 percent. Stratus’ obligations under the facility are secured by
substantially all of its assets, except for Escarpment Village, 7000 West,
Deerfield and the Meridian project.
Unsecured
Term Loans.
In 2000
and 2001, Stratus obtained two $5.0 million five-year unsecured term loans
from
First American Asset Management. The
proceeds of the loans were used to fund Stratus’ operations and for other
general corporate purposes. Effective December 15, 2004, Stratus amended the
two
loans to extend their prior maturities of January 2006 to January 2008 and
July
2006 to July 2008. In accordance with the amendments, interest now accrues
on
the loans at a rate of one-month LIBOR plus 4.5 percent and is payable monthly.
Prior to the 2004 amendments, the interest rate was fixed at 9.25
percent.
7500
Rialto Boulevard Project Loan.
In 2001,
Stratus secured an $18.4 million project loan with Comerica for the construction
of two office buildings at 7500 Rialto Boulevard located within the Lantana
project in Austin, Texas. This variable-rate project loan facility, secured
by
the land and one office building was amended in January 2004 to extend the
maturity to January 31, 2005, with the option to extend the loan for an
additional one-year period, subject to certain conditions. Negotiation of an
earlier amendment also included a reduction of Comerica’s commitment from $18.4
million to $9.2 million, reflecting the elimination of the borrowings necessary
to fund the construction of a second building at 7500 Rialto Boulevard. Upon
finalizing an earlier amendment to this project loan in January 2003, Stratus
repaid $1.4 million of its borrowings outstanding on the project facility,
which
reduced the commitment under the facility to $7.8 million. The January 2004
amendment required Stratus to repay $69,900 of borrowings outstanding and
reduced the commitment under the project loan by $0.2 million to $7.6 million.
Effective January 31, 2005, Stratus extended the loan for one year in accordance
with the remaining option. Under the terms of the maturity extension, Stratus
paid an extension fee of $18,500 and the commitment under the facility was
reduced by $0.2 million to $7.4 million. Stratus may make additional borrowings
under this facility to fund certain tenant improvements. Effective November
15,
2005, Stratus restructured its 7500 Rialto Boulevard project loan and extended
its maturity from January 2006 to January 2008. Under the terms of the loan
modification agreement, Stratus paid an extension fee of $25,600 and the
commitment under the facility was reduced to $6.8 million. As of December 31,
2005, Stratus had $6.5 million outstanding under the project loan.
39
Deerfield
Loan.
On
February 27, 2004, Stratus entered into a loan agreement with Comerica for
$9.8
million with a maturity date of February 27, 2007, including an option to extend
the maturity date by six months to August 27, 2007, subject to certain
conditions. The timing of advances received and payments made under the loan
coincides with the development and lot purchase schedules. As of December 31,
2005, borrowings outstanding under the loan totaled $2.9 million, which proceeds
financed a portion of the acquisition and the development costs of the Deerfield
property.
Escarpment
Village Project Loan.
In
December 2004, Stratus executed a Promissory Note and a Construction Loan
Agreement with Comerica for an $18.5 million loan to be used for the
construction of a 168,000-square-foot retail project, which Stratus refers
to as
Escarpment Village. The loan has a maturity date of June 2007, with a one-year
extension option subject to certain terms and conditions. As of December 31,
2005, borrowings outstanding under the loan were $9.9 million.
In
addition, Stratus has a $22.8 million commitment from Teachers Insurance and
Annuity Association of America (TIAA) for a 30-year mortgage available for
funding the completed Escarpment Village shopping center project. The mortgage
will be used to refinance the $18.5 million Escarpment Village project loan
discussed above.
Meridian
Project Loan.
In May
2005, Stratus executed a development loan agreement with Comerica for a $10.0
million loan to fund the development of single-family residential lots at
Meridian. The loan has a maturity date of November 2007. As of December 31,
2005, Stratus had $5.3 million of net borrowings under the Meridian project
loan.
Calera
Court Project Loan.
In
September 2003, Stratus finalized a $3.0 million project loan with Comerica
to
fund the construction of courtyard homes at Calera Court. Stratus paid the
$1.2
million outstanding balance of the loan at its maturity in September 2005.
As
discussed above, $3.0 million of the $45.0 million revolving credit facility
is
provided for the Calera Court project.
Maturities.
Maturities of long-term debt instruments based on the amounts and terms
outstanding at December 31, 2005, totaled $0.2 million in 2006, $33.8 million
in
2007, $16.3 million in 2008 and none thereafter.
5.
Income
Taxes
Income
taxes are recorded pursuant to SFAS No. 109. The components of deferred taxes
follow:
|
December
31,
|
||||||
|
2005
|
2004
|
|||||
|
(In
Thousands)
|
||||||
|
Deferred
tax assets:
|
||||||
|
Net
operating loss credit carryfowards (expire 2007-2024)
|
$
|
10,847
|
$
|
12,561
|
||
|
Real
estate and facilities, net
|
5,622
|
6,060
|
||||
|
Alternative
minimum tax credits and depletion allowance
|
||||||
|
(no
expiration)
|
967
|
813
|
||||
|
Other
future deduction carryforwards (expire 2007-2009)
|
191
|
368
|
||||
|
Valuation
allowance
|
(17,627
|
)
|
(19,802
|
)
|
||
|
$
|
-
|
$
|
-
|
|||
Realization
of deferred tax assets is dependent on generating sufficient taxable income
within the carryforward period available under tax law. In addition, under
the
provisions of the Internal Revenue Code, certain substantial changes in Stratus’
ownership may result in a limitation on the amount of net operating loss
carryforwards which can be used in future years. Stratus believes that it is
more likely than not that the loss carryforwards may expire unused and,
accordingly, has established a valuation allowance of $17.6 million and $19.8
million at December 31, 2005 and 2004, respectively.
Stratus’
2005 provision for income taxes of $73,000 is for alternative minimum taxes.
Reconciliations of the differences between the income tax provision computed
at
the federal statutory tax rate and the recorded income tax provision
follow:
40
|
Years
Ended December 31,
|
||||||||||||||||||
|
2005
|
2004
|
2003
|
||||||||||||||||
|
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
|
|||||||||||||
|
(Dollars
in Thousands)
|
||||||||||||||||||
|
Income
tax provision computed at the
|
||||||||||||||||||
|
federal
statutory income tax rate
|
$
|
2,991
|
35
|
%
|
$
|
235
|
35
|
%
|
$
|
7
|
35
|
%
|
||||||
|
Adjustments
attributable to:
|
||||||||||||||||||
|
Change
in valuation allowance
|
(2,175
|
)
|
(25
|
)
|
(1,981
|
)
|
(295
|
)
|
(450
|
)
|
(2,250
|
)
|
||||||
|
State
taxes and other
|
(743
|
)
|
(9
|
)
|
1,746
|
260
|
443
|
2,215
|
||||||||||
|
Income
tax provision
|
$
|
73
|
1
|
%
|
$
|
-
|
-
|
%
|
$
|
-
|
-
|
%
|
||||||
6.
Stock
Options, Equity Transactions and Employee Benefits
Stock
Options.
Stratus’
Stock Option Plan, 1998 Stock Option Plan and Stock Option Plan for Non-Employee
Directors (the Plans) provide for the issuance of stock options, restricted
stock units (RSUs) (see below) and stock appreciations rights (collectively
stock-based compensation awards), adjusted for the effects of the effective
reverse stock split transactions (see below), representing 975,000 shares of
Stratus common stock at no less than market value at time of grant. In May
2002,
Stratus’ shareholders approved the 2002 Stock Incentive Plan (the 2002 Stock
Option Plan), which provides for the issuance of stock-based compensation awards
representing 355,000 shares of Stratus common stock. Generally, stock-based
compensation awards, excluding RSUs, are exercisable in 25 percent annual
increments beginning one year from the date of grant and expire 10 years after
the date of grant. At December 31, 2005, 98,763 options were available for
new
grants under the four plans. A summary of stock options outstanding
follows:
|
2005
|
2004
|
2003
|
|||||||||||||
|
Weighted
|
Weighted
|
Weighted
|
|||||||||||||
|
Number
|
Average
|
Number
|
Average
|
Number
|
Average
|
||||||||||
|
Of
|
Option
|
Of
|
Option
|
of
|
Option
|
||||||||||
|
Options
|
Price
|
Options
|
Price
|
Options
|
Price
|
||||||||||
|
Balance
at January 1
|
1,008,434
|
$
|
9.19
|
1,004,774
|
$
|
8.34
|
935,962
|
$
|
8.14
|
||||||
|
Granted
|
7,750
|
18.22
|
117,500
|
15.83
|
77,500
|
10.54
|
|||||||||
|
Exercised
|
(177,848
|
)
|
5.27
|
(90,639
|
)
|
8.22
|
(8,688
|
)
|
7.30
|
||||||
|
Expired/Forfeited
|
-
|
-
|
(23,201
|
)
|
9.43
|
-
|
-
|
||||||||
|
Balance
at December 31
|
838,336
|
10.11
|
1,008,434
|
9.19
|
1,004,774
|
8.34
|
|||||||||
Summary
information of stock options outstanding at December 31, 2005
follows:
|
Options
Outstanding
|
Options
Exercisable
|
||||||||||||
|
Weighted
|
Weighted
|
Weighted
|
|||||||||||
|
Average
|
Average
|
Average
|
|||||||||||
|
Range
of Exercise
|
Number
|
Remaining
|
Option
|
Number
|
Option
|
||||||||
|
Prices
|
of
Options
|
Life
|
Price
|
Of
Options
|
Price
|
||||||||
|
$3.00
|
25,000
|
0.1
year
|
$3.00
|
25,000
|
$3.00
|
||||||||
|
$5.25
to $7.81
|
154,625
|
2.5
years
|
6.94
|
154,625
|
6.94
|
||||||||
|
$8.06
to $10.56
|
409,809
|
6.2
years
|
9.26
|
339,497
|
9.17
|
||||||||
|
$12.38
to $18.22
|
248,902
|
8.2
years
|
14.18
|
153,277
|
13.04
|
||||||||
|
838,336
|
672,399
|
||||||||||||
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 Board of Directors authorized the
issuance of 22,726 RSUs, on January 17, 2002, 20,000 RSUs on both December
17,
2003 and 2002, and 35,000 RSUs on December 30, 2004. The RSUs will be converted
into shares of Stratus common stock ratably on the anniversary date of each
award over the following four years. Upon issuance of the RSUs, unearned
compensation equivalent to the market value at the date of grant (calculated
using the average of the high and low quoted market prices for Stratus’ common
stock on that date) of approximately $0.6 million in 2004, $0.2 million in
2003
and $0.4 million ($0.2 million for each grant) in 2002 was recorded as deferred
compensation in stockholders’ equity and will be amortized to expense over the
four-year vesting periods.
41
Stratus
recorded approximately $273,700 in 2005, $134,300 in 2004, and $96,000 in 2003
of this deferred compensation as general and administrative
expense.
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. Under this program, Stratus purchased 207,384 shares of
its
common stock through 2005 for $3.6 million (a $17.31 per share average),
including purchases of 188,995 shares for $3.3 million (a $17.68 per share
average) in 2005 and purchases of 18,389 shares for $0.2 million (a $13.47
per
share average) in 2004. The 2005 purchases include a privately negotiated
purchase of 125,316 shares from a former executive for $2.3 million (an $18.13
per share average) in the third quarter. In 2006, through March 10, Stratus
purchased 10,668 shares for $0.3 million (a $23.78 per share average) and
481,948 shares remain available under this program.
Stock
Split Transactions.
In May
2001, the shareholders of Stratus approved an amendment to Stratus’ certificate
of incorporation to permit a reverse 1-for-50 common stock split followed
immediately by a forward 25-for-1 common stock split. This transaction resulted
in Stratus’ shareholders owning fewer than 50 shares of common stock having
their shares converted into less than one share in the reverse 1-for-50 split,
for which they received cash payments equal to the fair value of those
fractional interests. Stratus shareholders owning more than 50 shares of
Stratus’ common stock had their number of shares of common stock reduced by
one-half immediately after this transaction. Shareholders owning an odd number
of shares were entitled to a cash payment equal to the fair value of the
resulting fractional share. Stratus funded $0.5 million into a restricted cash
account to purchase 42,000 post-stock split shares of its common stock. At
December 31, 2005, $0.1 million of restricted cash remained to pay for
fractional shares.
Employee
Benefits.
Stratus
maintains a 401(k) defined contribution plan and a money purchase plan that
are
subject to the provisions of the Employee Retirement Income Security Act of
1974
(ERISA). The plans were amended, effective September 1, 2003, to merge the
money
purchase plan into the 401(k) plan. The amended 401(k) plan provides for an
employer matching contribution equal to 100 percent of the participant’s
contribution, subject to a limit of 5 percent of participant’s annual salary.
The 401(k) plan also provides for the money purchase contribution to be
discretionary. Matching and money purchase contributions were $0.2 million
in
each of 2005, 2004 and 2003.
7.
Discontinued
Operations
In
1998,
Stratus formed a strategic alliance with Olympus Real Estate Corporation
(Olympus) to develop certain of its existing properties and to pursue new real
estate acquisition and development opportunities. In 1999, Stratus formed a
joint venture (7000 West) owned 50.1 percent by Olympus and 49.9 percent by
Stratus to construct two 70,000-square-foot office buildings at 7000 West.
Stratus accounted for its interest in this joint venture under the equity method
of accounting until February 27, 2002, when Stratus purchased Olympus’ ownership
interest in the joint venture for $1.5 million and assumed $12.9 million of
debt
(the 7000 West project loan). In December 2004, Stratus repaid the outstanding
balance of the 7000 West project loan with proceeds from a $12.0 million loan
from TIAA.
In
the
fourth quarter of 2005, Stratus committed to a plan to sell its office buildings
at 7000 West. Stratus has contracted to sell 7000 West for $22.3 million, a
portion of which will be paid by the buyer’s assumption of the related 7000 West
project loan. Although closing of the sale currently is scheduled for March
27,
2006, it is subject to Stratus’ satisfaction of certain conditions. Upon
completion of the sale of 7000 West, Stratus will cease all involvement with
the
7000 West office buildings. The operations, assets and liabilities of 7000
West
represented a component of Stratus’ commercial leasing segment.
The
table
below provides a summary of 7000 West’s results of operations (in
thousands):
42
|
Years
Ended December 31,
|
||||||||||
|
2005
|
2004
|
2003
|
||||||||
|
Rental
income
|
$
|
3,554
|
$
|
3,165
|
$
|
3,421
|
||||
|
Rental
property costs
|
(1,320
|
)
|
(852
|
)a
|
(1,938
|
)
|
||||
|
Depreciation
|
(701
|
)
|
(906
|
)
|
(890
|
)
|
||||
|
General
and administrative expenses
|
(302
|
)
|
(185
|
)
|
-
|
|||||
|
Interest
expenseb
|
(717
|
)
|
(649
|
)
|
(590
|
)
|
||||
|
Income
from discontinued operations
|
$
|
514
|
$
|
573
|
$
|
3
|
||||
| a. |
Includes
$0.7 million for reimbursement of certain building repairs received
from a
settlement with the general contractor responsible for construction
of the
7000 West office buildings.
|
| b. |
Relates
to interest expense from 7000 West project loan (see below) and does
not
include any additional allocations of
interest.
|
The
following summarizes 7000 West’s net assets (in thousands):
|
December
31,
|
|||||||
|
2005
|
2004
|
||||||
|
Assets:
|
|||||||
|
Cash
and cash equivalents
|
$
|
5
|
$
|
-
|
|||
|
Other
current assets
|
1,136
|
345
|
|||||
|
Property
held for sale, net of accumulated depreciation
|
|||||||
|
of
$4,577 in 2005 and $3,877 in 2004
|
11,089
|
11,750
|
|||||
|
Other
assets
|
-
|
1,144
|
|||||
|
Liabilities:
|
|||||||
|
Current
portion of long-term debt
|
(11,795
|
)
|
(204
|
)
|
|||
|
Other
current liabilities
|
(241
|
)
|
(379
|
)
|
|||
|
Long-term
debt
|
-
|
(11,796
|
)
|
||||
|
Other
long-term liabilities
|
-
|
(121
|
)
|
||||
|
Net
assets
|
$
|
194
|
$
|
739
|
|||
7000
West Project Loan.
Stratus
had a project loan associated with the construction of the two
70,000-square-foot office buildings at 7000 West. This variable rate,
nonrecourse loan was secured by the approximate 11 acres of real estate and
the
two fully-leased office buildings at 7000 West. In December 2004, Stratus paid
the remaining outstanding balance of the project loan with the proceeds from
a
$12.0 million loan from TIAA. The 7000 West project loan with TIAA matures
in
January 2015, and interest accrues monthly at a fixed annual rate of 5.7
percent. As of December 31, 2005, Stratus’ borrowings outstanding under the 7000
West project loan were $11.8 million.
8.
Commitments
and Contingencies
Construction
Contracts.
Stratus
had commitments under non-cancelable open contracts totaling $4.0 million at
December 31, 2005. In January 2005, Stratus entered into an $8.5 million
contract with a term of one year for the construction of the Escarpment Village
shopping center at the Circle C community. During 2005, that contract increased
to a total of $10.1 million as additional facilities were added to the center.
The contract only had an outstanding commitment of $0.2 million at December
31,
2005; however, in addition to this balance, there was also $0.6 million in
outstanding Escarpment Village leasing commissions at December 31, 2005, as
well
as $0.9 million in landscaping costs contracted for the completion of the
center.
In
January 2005, Stratus also executed four construction contracts with one-year
terms totaling $3.9 million for paving and utilities work at the Circle C
community in connection with the development of the first 134 lots of the
Meridian project and the construction of the first phase of the main boulevard
in Meridian. In June 2005, Stratus executed two construction contracts with
nine-month terms, totaling $3.1 million, for paving and utilities for the second
134-lot phase of the Meridian project. Additionally, in September 2005, Stratus
executed two construction contracts with 75-day terms, totaling $0.3 million,
for gas and electric improvements for the second 134-lot phase of the Meridian
project. The total outstanding balance remaining on all the Meridian contracts
at December 31, 2005 was $1.2 million.
In
addition to the contracts noted above, Stratus also had an outstanding total
of
$0.9 million at December 31, 2005 in various ongoing Lantana and Barton Creek
development contracts.
43
In
early
2006, Stratus entered into an additional $0.8 million of contracts for various
development projects to be completed during 2006. The two major items were
a
$0.4 million contract for construction materials to be used in future Barton
Creek retail facilities and a $0.2 million engineering contract for the next
phase of residential lots at the Meridian project.
Operating
Lease.
As of
December 31, 2005, Stratus’ minimum annual contractual payments under its
non-cancelable long-term operating lease for its office space which extends
to
2008 totaled $77,000 in 2006 and 2007 and $7,000 in 2008. Total rental expense
under Stratus’ operating lease amounted to $77,100 in each of 2005, 2004 and
2003.
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 establishes all essential municipal development regulations applicable
to
Stratus’ Circle C properties for thirty years. These approvals permit
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, 2005, Stratus
has
permanently used $3.4 million of its City-based development fee credits,
including cumulative amounts sold to third parties totaling $1.6 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 $4.5 million in Credit Bank capacity in use as temporary fiscal
deposits as of December 31, 2005. Unencumbered Credit Bank capacity was $7.1
million at December 31, 2005.
Environment.
Stratus
has made, and will continue to make, expenditures at its operations for
protection of the environment. Increasing emphasis on environmental matters
can
be expected to result in additional costs, which will be charged against
Stratus’ operations in future periods. Present and future environmental laws and
regulations applicable to Stratus’ operations may require substantial capital
expenditures that could adversely affect the development of its real estate
interests or may affect its operations in other ways that cannot be accurately
predicted at this time.
Stratus
sold its remaining oil and gas properties in 1993. In connection with the sale
of an oil and gas property, Stratus indemnified the purchaser for any
abandonment costs in excess of cumulative net revenues received. Whether or
not
Stratus ultimately will incur any cost as a result of this indemnification
is
uncertain and will depend on a number of factors beyond its control, including
actual oil and gas produced, oil and gas prices received and the level of
operating and abandonment costs incurred by the third-party operator over the
life of the property. Stratus periodically assesses the reasonableness of
amounts recorded for this liability through the use of information obtained
from
the operator of the property; however, the availability of such information
is
limited, and there are numerous uncertainties involved in estimating the related
future revenues, operating and abandonment costs. Based
on
its assessment of the available information, Stratus has determined that a
loss
is probable and
Stratus
has recorded a liability of $3.0 million, which is included in “Other
Liabilities” in the accompanying consolidated balance sheets, representing its
best estimate of this potential liability. The carrying value of this liability
may be adjusted in future periods as additional information becomes
available,
but
Stratus’ current estimate is that this liability will not exceed $9.0
million.
9.
Business
Segments
Stratus
has two operating segments, “Real Estate Operations” and “Commercial Leasing.”
The Real Estate Operations segment is comprised of all Stratus’ developed
properties, properties under development and undeveloped properties in Austin,
Texas, which consist of its properties in the Barton Creek community, the Circle
C community and Lantana. In addition, the Deerfield property in Plano, Texas
is
included in the Real Estate Operations segment.
The
Commercial Leasing segment includes the Lantana Corporate Center office complex
at 7000 West, which consists of two fully leased 70,000-square-foot office
buildings, as well as Stratus’ nearly 100 percent leased 75,000-square-foot
office building at 7500 Rialto Boulevard. In March 2004, Stratus
formed
44
Southwest
Property Services L.L.C. to manage these office buildings. Previously, Stratus
had outsourced its property management functions to a property management firm.
Effective June 30, 2004, Stratus terminated its agreement with this firm and
Southwest Property Services L.L.C. is performing all property management
responsibilities. In the fourth quarter of 2005, Stratus committed to sell
the
two 70,000-square-foot office buildings at 7000 West and their operating results
are reported as discontinued operations for all years shown in the table
below.
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, 2005
|
||||||||||||
|
Revenues
|
$
|
33,841
|
$
|
1,353
|
$
|
-
|
$
|
35,194
|
||||
|
Cost
of sales, excluding depreciation
|
(19,625
|
)
|
(1,456
|
)
|
-
|
(21,081
|
)
|
|||||
|
Depreciation
|
(145
|
)
|
(613
|
)
|
-
|
(758
|
)
|
|||||
|
General
and administrative expenses
|
(4,346
|
)
|
(673
|
)
|
-
|
(5,019
|
)
|
|||||
|
Operating
income (loss)
|
$
|
9,725
|
$
|
(1,389
|
)
|
$
|
-
|
$
|
8,336
|
|||
|
Income
from discontinued operations
|
$
|
-
|
$
|
514
|
$
|
-
|
$
|
514
|
||||
|
Provision
for income taxes
|
$
|
-
|
$
|
-
|
$
|
73
|
$
|
73
|
||||
|
Capital
expenditures
|
$
|
39,733
|
$
|
324
|
$
|
-
|
$
|
40,057
|
||||
|
Total
assets
|
$
|
143,521
|
$
|
21,682
|
b
|
$
|
8,683
|
c
|
$
|
173,886
|
||
|
Year
Ended December 31, 2004
|
||||||||||||
|
Revenues
|
$
|
16,851
|
$
|
874
|
$
|
-
|
$
|
17,725
|
||||
|
Cost
of sales, excluding depreciation
|
(11,119
|
)
|
(1,201
|
)
|
-
|
(12,320
|
)
|
|||||
|
Depreciation
|
(123
|
)
|
(492
|
)
|
-
|
(615
|
)
|
|||||
|
General
and administrative expense
|
(3,788
|
)
|
(664
|
)
|
-
|
(4,452
|
)
|
|||||
|
Operating
income (loss)
|
$
|
1,821
|
$
|
(1,483
|
)
|
$
|
-
|
$
|
338
|
|||
|
Income
from discontinued operations
|
$
|
-
|
$
|
573
|
$
|
-
|
$
|
573
|
||||
|
Capital
expenditures
|
$
|
21,463
|
$
|
1,135
|
$
|
-
|
$
|
22,598
|
||||
|
Total
assets
|
$
|
125,445
|
$
|
23,165
|
b
|
$
|
4,251
|
c
|
$
|
152,861
|
||
|
Year
Ended December 31, 2003
|
||||||||||||
|
Revenues
|
$
|
10,667
|
$
|
334
|
$
|
-
|
$
|
11,001
|
||||
|
Cost
of sales, excluding depreciation
|
(6,414
|
)
|
(564
|
)
|
-
|
(6,978
|
)
|
|||||
|
Depreciation
|
(98
|
)
|
(325
|
)
|
-
|
(423
|
)
|
|||||
|
General
and administrative expense
|
(3,555
|
)
|
(458
|
)
|
-
|
(4,013
|
)
|
|||||
|
Operating
income (loss)
|
$
|
600
|
$
|
(1,013
|
)
|
$
|
-
|
$
|
(413
|
)
|
||
|
Income
from discontinued operations
|
$
|
-
|
$
|
3
|
$
|
-
|
$
|
3
|
||||
|
Capital
expenditures
|
$
|
11,566
|
$
|
933
|
$
|
-
|
$
|
12,499
|
||||
|
Total
assets
|
$
|
114,207
|
$
|
23,001
|
b
|
$
|
5,222
|
c
|
$
|
142,430
|
||
| a. |
Includes
sales commissions, management fees and other revenues together with
related expenses.
|
| b. |
Includes
assets from the discontinued operations of 7000 West, which Stratus
currently has contracted to sell on March 27, 2006, totaling $12.2
million, net of accumulated depreciation of $4.6 million, at December
31,
2005; $13.2 million, net of accumulated depreciation of $3.9 million,
at
December 31, 2004; and $13.9 million, net of accumulated depreciation
of
$3.0 million, at December 31, 2003. These buildings represented two
of
Stratus’ three commercial leasing
properties.
|
| c. |
Represents
all other assets except for property held for sale and property held
for
use comprising the Real Estate Operations and Commercial Leasing
segments.
|
Stratus
receives revenues under operating leases for its remaining office building
at
7500 Rialto Boulevard. As of December 31, 2005, Stratus’ minimum annual rental
income which includes scheduled rent increases, under noncancelable long-term
leases which extend to 2010, totaled $1.3 million in 2006, $1.4 million in
2007,
$1.4 million in 2008, $0.9 million in 2009 and $0.9 million in
2010.
45
10.
Quarterly
Financial Information (Unaudited)
|
Operating
Income
|
Net
Income
|
Net
Income
(Loss)
Per Share
|
|||||||||||||
|
Revenues
|
(Loss)
|
(Loss)
|
Basic
|
Diluted
|
|||||||||||
|
(In
Thousands, Except Per Share Amounts)
|
|||||||||||||||
|
2005
|
|||||||||||||||
|
1st
Quarter
|
$
|
2,717
|
$
|
(976
|
)
|
$
|
(912
|
)
|
$
|
(0.13
|
)
|
$
|
(0.13
|
)
|
|
|
2nd
Quarter
|
7,189
|
1,406
|
1,320
|
0.18
|
0.17
|
||||||||||
|
3rd
Quarter
|
12,146
|
3,389
|
3,319
|
0.46
|
0.44
|
||||||||||
|
4th
Quarter
|
13,142
|
4,517
|
4,747
|
0.66
|
0.62
|
||||||||||
|
$
|
35,194
|
$
|
8,336
|
$
|
8,474
|
1.18
|
1.11
|
||||||||
|
Operating
Income
|
Net
Income
|
Net
Income
(Loss)
Per Share
|
|||||||||||||
|
Revenues
|
(Loss)
|
(Loss)
|
Basic
|
Diluted
|
|||||||||||
|
(In
Thousands, Except Per Share Amounts)
|
|||||||||||||||
|
2004
|
|||||||||||||||
|
1st
Quarter
|
$
|
1,221
|
$
|
(1,657
|
)
|
$
|
(1,805
|
)
|
$
|
(0.25
|
)
|
$
|
(0.25
|
)
|
|
|
2nd
Quarter
|
3,434
|
(330
|
)
|
(489
|
)
|
(0.07
|
)
|
(0.07
|
)
|
||||||
|
3rd
Quarter
|
4,040
|
(25
|
)
|
557
|
0.08
|
0.07
|
|||||||||
|
4th
Quarter
|
9,030
|
2,350
|
2,409
|
0.33
|
0.32
|
||||||||||
|
$
|
17,725
|
$
|
338
|
$
|
672
|
0.09
|
0.09
|
||||||||
Not
applicable.
(a) Evaluation
of disclosure controls and procedures.
Our
chief executive officer and chief financial officer, with the participation
of
management, have evaluated the effectiveness of our “disclosure controls and
procedures” (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934) as of the end of the period covered by this annual report
on Form 10-K. Based on their evaluation, they have concluded that our disclosure
controls and procedures are effective in timely alerting them to material
information relating to Stratus (including our consolidated subsidiaries)
required to be disclosed in our periodic Securities and Exchange Commission
(SEC) filings.
(b) Changes
in internal controls.
There
has been no change in our internal control over financial reporting that
occurred during the fourth quarter that has materially affected, or is
reasonably likely to materially affect our internal control over financial
reporting.
(c) Management’s
annual
report on internal control over financial reporting and the report thereon
of
PricewaterhouseCoopers LLP are incorporated herein by reference to our 2005
Annual Report.
Not
applicable.
The
information set forth under the captions “Information About Nominees and
Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” of our
definitive Proxy Statement to be filed with the SEC, relating to our 2006 Annual
Meeting to be held on May 9, 2006, 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.
46
The
information set forth under the captions “Director Compensation” and “Executive
Officer Compensation” of our definitive Proxy Statement to be filed with the
SEC, relating to our 2006 Annual Meeting to be held on May 9, 2006, is
incorporated herein by reference.
The
information set forth under the captions “Stock Ownership of Directors and
Executive Officers,” “Stock Ownership of Certain Beneficial Owners” and
“Proposal to Adopt the 2006 Stock Incentive Plan” of our definitive Proxy
Statement to be filed with the SEC, relating to our 2006 Annual Meeting to
be
held on May 9, 2006, is incorporated herein by reference.
None.
The
information set forth under the caption “Independent Auditors” of our definitive
Proxy Statement to be filed with the SEC, relating to our 2006 Annual Meeting
to
be held on May 9, 2006, is incorporated herein by reference.
(a)(1). Financial
Statements.
(a)(2). Financial
Statement Schedule.
(a)(3). Exhibits.
Reference
is made to the Exhibit Index beginning on page E-1 hereof. Instruments with
respect to other long-term debt of Stratus and its consolidated subsidiaries
are
omitted pursuant to Item 601(b)(4)(iii) of Regulation S-K since the total amount
authorized under each such omitted instrument does not exceed 10 percent of
the
total assets of Stratus and its subsidiaries on a consolidated basis. Stratus
hereby agrees to furnish a copy of any such instrument to the SEC upon
request.
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf
by
the undersigned, thereunto duly authorized.
STRATUS
PROPERTIES INC.
By: /s/
William H. Armstrong III
William
H. Armstrong III
Chairman
of the Board, President
and
Chief
Executive Officer
Date:
March 16, 2006
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
/s/
William H. Armstrong III
|
Chairman
of the Board, President
|
|
|
William
H. Armstrong III
|
and
Chief Executive Officer
(Principal
Executive Officer)
|
|
|
*
|
Senior
Vice President
|
|
|
John
E. Baker
|
and
Chief Financial Officer
(Principal
Financial Officer)
|
|
|
*
|
Vice
President and Controller
|
|
|
C.
Donald Whitmire, Jr.
|
(Principal
Accounting Officer)
|
|
|
*
|
Director
|
|
|
James
C. Leslie
|
||
|
*
|
Director
|
|
|
Michael
D. Madden
|
||
|
*
|
Director
|
|
|
Bruce
G. Garrison
|
*By: /s/
William H. Armstrong III
William
H. Armstrong III
Attorney-in-Fact
Date:
March 16, 2006
S-1
STRATUS
PROPERTIES INC.
The
financial statements in the schedule listed below should be read in conjunction
with the financial statements of Stratus contained elsewhere in this Annual
Report on Form 10-K.
|
Page
|
|
|
Schedule
III-Real Estate, Commercial Leasing Assets
|
|
|
and
Facilities and Accumulated Depreciation
|
F-2
|
Schedules
other than the one listed above have been omitted since they are either not
required, not applicable or the required information is included in the
financial statements or notes thereto.
F-1
Stratus
Properties Inc.
December
31, 2005
(In
Thousands)
SCHEDULE
III
|
|
|
|||||||||||||||||||||||||
|
Initial
Cost
|
Costs
Capitalized
|
Gross
Amounts at December 31, 2005
|
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,
b
|
||||||||||||||||||||||||||
|
Barton
Creek, Austin, TX
|
$
|
16,277
|
$
|
-
|
$
|
47,948
|
$
|
64,225
|
$
|
-
|
$
|
64,225
|
86
|
1,324
|
$
|
-
|
-
|
|||||||||
|
Deerfield,
Plano, TX
|
4,813
|
-
|
2,381
|
7,194
|
-
|
7,194
|
59
|
26
|
-
|
2004
|
||||||||||||||||
|
Circle
C, Austin, TX
|
6,536
|
-
|
34,468
|
41,004
|
-
|
41,004
|
120
|
412
|
-
|
1992
|
||||||||||||||||
|
Lantana,
Austin, TX
|
2,110
|
-
|
12,917
|
c
|
15,027
|
-
|
15,027
|
-
|
282
|
-
|
1994
|
|||||||||||||||
|
Undevelopedd
|
||||||||||||||||||||||||||
|
Camino
Real, San Antonio, TX
|
16
|
-
|
18
|
34
|
-
|
34
|
-
|
2
|
-
|
1990
|
||||||||||||||||
|
Barton
Creek, Austin, TX
|
6,371
|
-
|
1,258
|
7,629
|
-
|
7,629
|
-
|
411
|
-
|
1988
|
||||||||||||||||
|
Circle
C, Austin, TX
|
5,278
|
-
|
3,130
|
8,408
|
-
|
8,408
|
-
|
384
|
-
|
1992
|
||||||||||||||||
|
Held
for Use
|
||||||||||||||||||||||||||
|
7500
Rialto Boulevard, Austin, TX
|
104
|
10,339
|
-
|
104
|
10,339
|
10,443
|
-
|
-
|
1,454
|
2002
|
||||||||||||||||
|
Corporate
offices, Austin ,TX
|
-
|
1,025
|
-
|
-
|
1,025
|
1,025
|
-
|
-
|
562
|
-
|
||||||||||||||||
|
$
|
41,505
|
$
|
11,364
|
$
|
102,120
|
$
|
143,625
|
$
|
11,364
|
$
|
154,989
|
265
|
2,841
|
$
|
2,016
|
|||||||||||
| a. |
Includes
48 developed lots in the Calera subdivision, 25 developed lots in
the
Wimberly Lane Phase II subdivision, 12 developed lots in the Mirador
subdivision, and 1 developed lot in the Escala
subdivision.
|
| b. |
Real
estate that is currently being developed, has been developed, or
has
received the necessary permits to be
developed.
|
| c. |
Includes
the Circle C community real estate.
|
| d. |
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, 2005, 2004 and 2003 are as follows (in
thousands):
|
2005
|
2004
|
2003
|
|||||||
|
(In
Thousands)
|
|||||||||
|
Balance,
beginning of year
|
$
|
136,654
|
$
|
124,005
|
$
|
120,171
|
|||
|
Acquisitions
|
-
|
7,026
|
-
|
||||||
|
Improvements
and other
|
35,392
|
14,561
|
8,807
|
||||||
|
Cost
of real estate sold
|
(17,057
|
)
|
(8,938
|
)
|
(4,973
|
)
|
|||
|
Balance,
end of year
|
$
|
154,989
|
$
|
136,654
|
$
|
124,005
|
|||
The
aggregate net book value for federal income tax purposes as of December 31,
2005
was $174.5 million.
(2)
Reconciliation of Accumulated Depreciation:
The
changes in accumulated depreciation for the years ended December 31, 2005,
2004
and 2003 are as follows (in thousands):
|
2005
|
2004
|
2003
|
|||||||
|
Balance,
beginning of year
|
$
|
1,284
|
$
|
732
|
$
|
475
|
|||
|
Retirement
of assets
|
(26
|
)
|
(63
|
)
|
(166
|
)
|
|||
|
Depreciation
expense
|
758
|
615
|
423
|
||||||
|
Balance,
end of year
|
$
|
2,016
|
$
|
1,284
|
$
|
732
|
|||
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
|
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.
|
|
10.2
|
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.
|
|
10.3
|
Loan
Agreement dated December 28, 2000, by and between Stratus Properties
Inc.
and Holliday Fenoliglio 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.
|
|
10.4
|
Loan
Agreement dated June 14, 2001, by and between Stratus Properties
Inc. and
Holliday Fenoliglio 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.
|
|
10.5
|
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.
|
|
10.6
|
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 Form 10-Q of Stratus
for the
quarter ended March 31, 2003.
|
|
10.7
|
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).
|
E-1
|
10.8
|
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.
|
|
10.9
|
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 Form 10-Q of Stratus for the quarter ended September
30,
2003.
|
|
10.10
|
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.
|
|
Executive
Compensation Plans and Arrangements (Exhibits 10.11 through
10.20)
|
|
|
10.11
|
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.
|
|
10.12
|
Stratus
Stock Option Plan. Incorporated by reference to Exhibit 10.25 to
Stratus’
2003 Form 10-K.
|
|
10.13
|
Stratus
1996 Stock Option Plan for Non-Employee Directors. Incorporated by
reference to Exhibit 10.22 to the Quarterly Report on Form 10-Q of
Stratus
for the quarter ended June 30, 2005 (Stratus’ 2005 Second Quarter Form
10-Q).
|
|
10.14
|
Stratus
Properties Inc. 1998 Stock Option Plan. Incorporated by reference
to
Exhibit 10.23 to Stratus’ 2005 Second Quarter Form
10-Q.
|
|
10.15
|
Form
of Notice of Grant of Nonqualified Stock Options and Limited Rights
under
the 1998 Stock Option Plan. Incorporated by reference to Exhibit
10.24 to
Stratus’ 2005 Second Quarter Form 10-Q.
|
|
10.16
|
Form
of Restricted Stock Unit Agreement under the 1998 Stock Option Plan.
Incorporated by reference to Exhibit 10.25 to Stratus’ 2005 Second Quarter
Form 10-Q.
|
|
10.17
|
Stratus
Properties Inc. 2002 Stock Incentive Plan. Incorporated by reference
to
Exhibit 10.26 to Stratus’ 2005 Second Quarter Form
10-Q.
|
|
10.18
|
Form
of Notice of Grant of Nonqualified Stock Options and Limited Rights
under
the 2002 Stock Incentive Plan. Incorporated by reference to Exhibit
10.27
to Stratus’ 2005 Second Quarter Form 10-Q.
|
|
10.19
|
Form
of Restricted Stock Unit Agreement under the 2002 Stock Incentive
Plan.
Incorporated by reference to Exhibit 10.28 to Stratus’ 2005 Second Quarter
Form 10-Q.
|
|
Stratus
Director Compensation.
|
|
|
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).
|
E-2
|
Certification
of Principal Executive Officer pursuant to 18 U.S.C. Section
1350.
|
|
|
Certification
of Principal Financial Officer pursuant to 18 U.S.C. Section
1350.
|
E-3
Exhibit
10.20
STRATUS
PROPERTIES INC.
DIRECTOR
COMPENSATION
EFFECTIVE
APRIL 1, 2006
Cash
Compensation
Each
non-employee director receives $1,000 for attendance at each board committee
meeting and $500 for participation in each board committee meeting by telephone
conference as well as an annual fee consisting of (a) $12,500 for serving on
the
board, (b) $1,000 for serving on each committee, (c) $4,000 for serving as
chairman of the audit committee, and (d) $2,000 for serving as chairman of
any
other committee. Each director receives a fee of $1,000 for attendance at each
board meeting and $500 for participation in each board meeting by telephone
conference and is also reimbursed for reasonable out-of-pocket expenses incurred
in attending each board and committee meeting.
Stock
Option Plan for Non-Employee Directors
The
company provides equity compensation to the non-employee directors through
the
1996 Stock Option Plan for Non-Employee Directors, which was approved by our
stockholders. Pursuant to the plan, on September 1st
of each
year, each non-employee director receives a grant of options to acquire 2,500
shares of our common stock. The options are granted at fair market value on
the
grant date, vest ratably over the first four anniversaries of the grant date
and
expire on the tenth anniversary of the grant date.
Exhibit
21.1
List
of
Subsidiaries of
Stratus
Properties Inc.
|
Name
Under Which
|
||
|
Entity
|
Organized
|
It
Does Business
|
|
Stratus
Properties Operating Co., L.P.
|
Delaware
|
Same
|
|
Oly
Stratus Barton Creek I Joint Venture
|
Texas
|
Same
|
|
STRS
Plano, L.P.
|
Texas
|
Same
|
Exhibit
23.1
CONSENT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We
hereby
consent to the incorporation by reference in the Registration Statement on
Form
S-8 (No. 33-78798, 333-31059, 333-52995, 333-104288) of Stratus Properties
Inc.
of our report dated March 16, 2006 relating to the financial statements,
financial statement schedule, management’s assessment of the effectiveness of
internal control over financial reporting and the effectiveness of internal
control over financial reporting, which appears in this Form 10-K.
/s/
PricewaterhouseCoopers LLP
Austin,
Texas
March
16,
2006
Exhibit
24.1
Stratus
Properties Inc.
Secretary’s
Certificate
I,
Douglas N. Currault II, Assistant Secretary of Stratus Properties Inc. (the
“Corporation”), a corporation organized and existing under the laws of the State
of Delaware, do hereby certify that the following resolution was duly adopted
by
the Board of Directors of the Corporation at a meeting held on February 10,
1993, and that such resolution has not been amended, modified or rescinded
and
is in full force and effect:
RESOLVED,
That any report, registration statement or other form filed on behalf of this
corporation pursuant to the Securities Exchange Act of 1934, or any amendment
to
any such report, registration statement or other form, may be signed on behalf
of any director or officer of this corporation pursuant to a power of attorney
executed by such director or officer.
IN
WITNESS WHEREOF, I have hereunto signed my name and affixed the seal of the
Corporation on March 14, 2006.
/s/
Douglas N. Currault II
Douglas
N. Currault II
Assistant
Secretary
(Seal)
Exhibit
24.2
POWER
OF ATTORNEY
BE
IT
KNOWN: That the undersigned, in his capacity or capacities as an officer and/or
a member of the Board of Directors of Stratus Properties Inc., a Delaware
corporation (the “Company”), does hereby make, constitute and appoint KENNETH N.
JONES, his true and lawful attorney-in-fact with full power of substitution,
to
execute, deliver and file, for and on behalf of him, in his name and in his
capacity or capacities as aforesaid, an Annual Report of the Company on Form
10-K for the year ended December 31, 2005, and any amendment or amendments
thereto and any other document in support thereof or supplemental thereto,
and
the undersigned hereby grants to said attorney, full power and authority to
do
and perform each and every act and thing whatsoever that said attorney may
deem
necessary or advisable to carry out fully the intent of the foregoing as the
undersigned might or could do personally or in the capacity or capacities as
aforesaid, hereby ratifying and confirming all acts and things which said
attorney may do or cause to be done by virtue of this Power of
Attorney.
EXECUTED
this 9th
day of
March, 2006.
|
/s/
William H. Armstrong III
|
William
H. Armstrong
III
POWER
OF ATTORNEY
BE
IT
KNOWN: That the undersigned, in his capacity or capacities as an officer and/or
a member of the Board of Directors of Stratus Properties Inc., a Delaware
corporation (the “Company”), does hereby make, constitute and appoint WILLIAM H.
ARMSTRONG III and KENNETH N. JONES, and each of them acting individually, his
true and lawful attorney-in-fact with power to act without the others and with
full power of substitution, to execute, deliver and file, for and on behalf
of
him, in his name and in his capacity or capacities as aforesaid, an Annual
Report of the Company on Form 10-K for the year ended December 31, 2005, and
any
amendment or amendments thereto and any other document in support thereof or
supplemental thereto, and the undersigned hereby grants to said attorneys,
and
each of them, full power and authority to do and perform each and every act
and
thing whatsoever that said attorney or attorneys may deem necessary or advisable
to carry out fully the intent of the foregoing as the undersigned might or
could
do personally or in the capacity or capacities as aforesaid, hereby ratifying
and confirming all acts and things which said attorney or attorneys may do
or
cause to be done by virtue of this Power of Attorney.
EXECUTED
this 9th
day of
March, 2006.
|
/s/
Bruce G. Garrison
|
Bruce
G.
Garrison
POWER
OF ATTORNEY
BE
IT
KNOWN: That the undersigned, in his capacity or capacities as an officer and/or
a member of the Board of Directors of Stratus Properties Inc., a Delaware
corporation (the “Company”), does hereby make, constitute and appoint WILLIAM H.
ARMSTRONG III and KENNETH N. JONES, and each of them acting individually, his
true and lawful attorney-in-fact with power to act without the others and with
full power of substitution, to execute, deliver and file, for and on behalf
of
him, in his name and in his capacity or capacities as aforesaid, an Annual
Report of the Company on Form 10-K for the year ended December 31, 2005, and
any
amendment or amendments thereto and any other document in support thereof or
supplemental thereto, and the undersigned hereby grants to said attorneys,
and
each of them, full power and authority to do and perform each and every act
and
thing whatsoever that said attorney or attorneys may deem necessary or advisable
to carry out fully the intent of the foregoing as the undersigned might or
could
do personally or in the capacity or capacities as aforesaid, hereby ratifying
and confirming all acts and things which said attorney or attorneys may do
or
cause to be done by virtue of this Power of Attorney.
EXECUTED
this 9th
day of
March, 2006.
|
/s/
James C.
Leslie
|
James
C.
Leslie
POWER
OF ATTORNEY
BE
IT
KNOWN: That the undersigned, in his capacity or capacities as an officer and/or
a member of the Board of Directors of Stratus Properties Inc., a Delaware
corporation (the “Company”), does hereby make, constitute and appoint WILLIAM H.
ARMSTRONG III and KENNETH N. JONES, and each of them acting individually, his
true and lawful attorney-in-fact with power to act without the others and with
full power of substitution, to execute, deliver and file, for and on behalf
of
him, in his name and in his capacity or capacities as aforesaid, an Annual
Report of the Company on Form 10-K for the year ended December 31, 2005, and
any
amendment or amendments thereto and any other document in support thereof or
supplemental thereto, and the undersigned hereby grants to said attorneys,
and
each of them, full power and authority to do and perform each and every act
and
thing whatsoever that said attorney or attorneys may deem necessary or advisable
to carry out fully the intent of the foregoing as the undersigned might or
could
do personally or in the capacity or capacities as aforesaid, hereby ratifying
and confirming all acts and things which said attorney or attorneys may do
or
cause to be done by virtue of this Power of Attorney.
EXECUTED
this 9th
day of
March, 2006.
|
/s/
Michael D. Madden
|
Michael
D.
Madden
POWER
OF ATTORNEY
BE
IT
KNOWN: That the undersigned, in his capacity or capacities as an officer and/or
a member of the Board of Directors of Stratus Properties Inc., a Delaware
corporation (the “Company”), does hereby make, constitute and appoint WILLIAM H.
ARMSTRONG III and KENNETH N. JONES, and each of them acting individually, his
true and lawful attorney-in-fact with power to act without the others and with
full power of substitution, to execute, deliver and file, for and on behalf
of
him, in his name and in his capacity or capacities as aforesaid, an Annual
Report of the Company on Form 10-K for the year ended December 31, 2005, and
any
amendment or amendments thereto and any other document in support thereof or
supplemental thereto, and the undersigned hereby grants to said attorneys,
and
each of them, full power and authority to do and perform each and every act
and
thing whatsoever that said attorney or attorneys may deem necessary or advisable
to carry out fully the intent of the foregoing as the undersigned might or
could
do personally or in the capacity or capacities as aforesaid, hereby ratifying
and confirming all acts and things which said attorney or attorneys may do
or
cause to be done by virtue of this Power of Attorney.
EXECUTED
this 9th
day of
March, 2006.
|
/s/
C. Donald Whitmire, Jr.
|
C.
Donald Whitmires,
Jr.
POWER
OF ATTORNEY
BE
IT
KNOWN: That the undersigned, in his capacity or capacities as an officer and/or
a member of the Board of Directors of Stratus Properties Inc., a Delaware
corporation (the “Company”), does hereby make, constitute and appoint WILLIAM H.
ARMSTRONG III and KENNETH N. JONES, and each of them acting individually, his
true and lawful attorney-in-fact with power to act without the others and with
full power of substitution, to execute, deliver and file, for and on behalf
of
him, in his name and in his capacity or capacities as aforesaid, an Annual
Report of the Company on Form 10-K for the year ended December 31, 2005, and
any
amendment or amendments thereto and any other document in support thereof or
supplemental thereto, and the undersigned hereby grants to said attorneys,
and
each of them, full power and authority to do and perform each and every act
and
thing whatsoever that said attorney or attorneys may deem necessary or advisable
to carry out fully the intent of the foregoing as the undersigned might or
could
do personally or in the capacity or capacities as aforesaid, hereby ratifying
and confirming all acts and things which said attorney or attorneys may do
or
cause to be done by virtue of this Power of Attorney.
EXECUTED
this 9th
day of
March, 2006.
|
/s/
John E. Baker
|
John
E.
Baker
Exhibit
31.1
CERTIFICATION
I,
William H. Armstrong III, certify that:
1. I
have
reviewed this annual report on Form 10-K of Stratus Properties
Inc.;
|
2.
|
Based
on my knowledge, this report does not contain any untrue statement
of a
material fact or omit to state a material fact necessary to make
the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
|
|
3.
|
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects
the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
|
|
4.
|
The
registrant’s other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and
have:
|
|
(a)
|
Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to
ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is
being
prepared;
|
|
(b)
|
Designed
such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision,
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;
|
|
(c)
|
Evaluated
the effectiveness of the registrant’s disclosure controls and procedures
and presented in this report our conclusions about the effectiveness
of
the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation;
and
|
|
(d)
|
Disclosed
in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely
to
materially affect, the registrant’s internal control over financial
reporting; and
|
|
5.
|
The
registrant’s other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting,
to
the registrant’s auditors and the audit committee of the registrant’s
board of directors (or persons performing the equivalent
functions):
|
|
(a)
|
All
significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information;
and
|
|
(b)
|
Any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s internal control
over financial reporting.
|
Date:
March 16, 2006
/s/
William H. Armstrong III
William
H. Armstrong III
Chairman
of the Board, President
and
Chief
Executive Officer
Exhibit
31.2
CERTIFICATION
I,
John
E. Baker, certify that:
1. I
have
reviewed this annual report on Form 10-K of Stratus Properties
Inc.;
|
2.
|
Based
on my knowledge, this report does not contain any untrue statement
of a
material fact or omit to state a material fact necessary to make
the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
|
|
3.
|
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects
the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
|
|
4.
|
The
registrant’s other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and
have:
|
|
(a)
|
Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to
ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is
being
prepared;
|
|
(b)
|
Designed
such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision,
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;
|
|
(c)
|
Evaluated
the effectiveness of the registrant’s disclosure controls and procedures
and presented in this report our conclusions about the effectiveness
of
the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation;
and
|
|
(d)
|
Disclosed
in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely
to
materially affect, the registrant’s internal control over financial
reporting; and
|
|
5.
|
The
registrant’s other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting,
to
the registrant’s auditors and the audit committee of the registrant’s
board of directors (or persons performing the equivalent
functions):
|
|
(a)
|
All
significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information;
and
|
|
(b)
|
Any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s internal control
over financial reporting.
|
Date:
March 16, 2006
/s/
John E. Baker
John
E.
Baker
Senior
Vice President &
Chief
Financial Officer
Exhibit
32.1
Certification
Pursuant to 18 U.S.C. Section 1350
(Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002)
In
connection with the Annual Report on Form 10-K of Stratus Properties Inc. (the
“Company”) for the year ending December 31, 2005, as filed with the Securities
and Exchange Commission on the date hereof (the “Report”), William H. Armstrong
III, as Chairman of the Board, President and Chief Executive Officer of the
Company, hereby certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to
§ 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge:
(1)
The
Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
(2)
The
information contained in the Report fairly presents, in all material respects,
the financial condition and results of operations of the Company.
Dated:
March 16, 2006
/s/
William H. Armstrong III
William
H. Armstrong III
Chairman
of the Board, President and
Chief
Executive Officer
A
signed
original of this written statement required by Section 906 has been provided
to
the Company and will be retained by the Company and furnished to the Securities
and Exchange Commission or its staff upon request.
This
certification shall not be deemed filed by the Company for purposes of § 18 of
the Securities Exchange Act of 1934, as amended.
Exhibit
32.2
Certification
Pursuant to 18 U.S.C. Section 1350
(Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002)
In
connection with the Annual Report on Form 10-K of Stratus Properties Inc. (the
“Company”) for the year ending December 31, 2005, as filed with the Securities
and Exchange Commission on the date hereof (the “Report”), John E. Baker, as
Senior Vice President & Chief Financial Officer of the Company, hereby
certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the
Sarbanes-Oxley Act of 2002, that, to the best of his knowledge:
(1)
The
Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
(2)
The
information contained in the Report fairly presents, in all material respects,
the financial condition and results of operations of the Company.
Dated:
March 16, 2006
/s/
John E. Baker
John
E.
Baker
Senior
Vice President &
Chief
Financial Officer
A
signed
original of this written statement required by Section 906 has been provided
to
the Company and will be retained by the Company and furnished to the Securities
and Exchange Commission or its staff upon request.
This
certification shall not be deemed filed by the Company for purposes of § 18 of
the Securities Exchange Act of 1934, as amended.