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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from   to
Commission file number: 001-37716
strs-20191231_g1.jpg
Stratus Properties Inc.
(Exact name of registrant as specified in its charter)
Delaware72-1211572
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer Identification No.)
  

212 Lavaca St., Suite 300
Austin,Texas78701
(Address of principal executive offices)(Zip Code)
(512) 478-5788
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $0.01 per share STRSThe NASDAQ Stock Market
Securities registered pursuant to Section 12(g) of the Act:  None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. o Yes þ 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. o Yes þ 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. þ Yes o No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). þ Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.  
Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes þ No
The aggregate market value of common stock held by non-affiliates of the registrant was $161.7 million on June 30, 2019.
Common stock issued and outstanding was 8,199,078 shares on February 29, 2020.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of our proxy statement for our 2020 annual meeting of stockholders are incorporated by reference into Part III (Items 10, 11, 12, 13 and 14) of this report.




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STRATUS PROPERTIES INC.
TABLE OF CONTENTS
 Page
  
              Information About our Executive Officers
  
 
 
  
 
  

  



Table of Contents

PART I

Items 1. and 2.  Business and Properties

Except as otherwise described herein or where the context otherwise requires, all references to “Stratus,” “we,” “us” and “our” in this Form 10-K refer to Stratus Properties Inc. and all entities owned or controlled by Stratus Properties Inc. All of our periodic reports filed with or furnished to the United States (U.S.) Securities and Exchange Commission (SEC) pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, 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 are available, free of charge, through our website, "stratusproperties.com," or by submitting a written request via mail to Stratus Investor Relations, 212 Lavaca St., Suite 300, Austin, Texas, 78701. These reports and amendments are available through our website or by request as soon as reasonably practicable after we electronically file or furnish such material with or to the SEC, "Financial Statements and Supplementary Data."

References to “Notes” refer to the Notes to Consolidated Financial Statements included herein (refer to Item 8.),
and references to “MD&A” refer to Management’s Discussion and Analysis of Financial Condition and Results of
Operations and Quantitative and Qualitative Disclosures About Market Risk included herein (refer to Items 7. and
7A.).

Overview

We are a diversified real estate company with headquarters in Austin, Texas. We are engaged primarily in the acquisition, entitlement, development, management, operation and sale of commercial, and multi-family and single-family residential real estate properties located in the Austin, Texas area and other select, fast-growing markets in Texas.

We generate revenues and cash flows from the sale of our developed properties and rental income from our leased properties. Developed property sales can include an individual tract of land that has been developed and permitted for residential use or a developed lot with a residence already built on the lot. We may sell properties under development, undeveloped properties or leased properties if opportunities arise that we believe will maximize overall asset value as part of our business strategy. Our leasing operations primarily involve the lease of space at retail and mixed-use properties that we developed, and the lease of residences in multi-family apartment complexes that we developed. Tenants in our retail and mixed-use projects are diverse and include grocery stores, restaurants, healthcare services, fitness centers, a movie house, other retail products and services, and included a hotel ground lease. In addition to our developed and leased properties, we have a development portfolio that consists of approximately 1,700 acres of commercial and multi-family and single-family residential projects under development or undeveloped land held for future use. See “Business Strategy” in MD&A for further discussion. Our company was incorporated under the laws of the State of Delaware on March 11, 1992.

Pending Sale of Block 21 - Discontinued Operations

Block 21, our wholly owned, mixed-use real estate development and entertainment business, contains the W Austin Hotel and the ACL Live and 3TEN ACL Live entertainment venues, which are located in downtown Austin and are central to the city’s world renowned, vibrant music scene. During December 2019, we entered into an agreement to sell Block 21 for $275 million. As a result, our hotel and entertainment operations, as well as the leasing operations associated with Block 21, are reported as discontinued operations for all periods presented in the financial statements included in this Form 10-K.

The transaction is expected to close in the second quarter of 2020, subject to the satisfaction of closing conditions. We are evaluating options for the use of the net proceeds of the sale and for our future real estate development and leasing operations. Refer to "Discontinued Operations" in MD&A and Note 4 for further discussion.

Continuing Operations

Real Estate Operations. The acreage under development and undeveloped as of December 31, 2019, that comprise our real estate operations is presented in the following table. 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 for which necessary permits have been obtained. The undeveloped acreage shown in the
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table below is presented according to anticipated uses for multi-family units, single-family lots and commercial development based upon our understanding of the properties’ existing entitlements. However, because of the nature and cost of the approval and development process and uncertainty regarding market demand for a particular use, there is no assurance that the undeveloped acreage will ever be developed. Undeveloped acreage (i.e., development work is not currently in progress on such property) includes real estate that can be sold “as is.”
 Acreage Under DevelopmentUndeveloped Acreage 
Single FamilyCommercialTotalSingle
Family
Multi-
family
CommercialTotalTotal
Acreage
Austin:       
Barton Creek13  —  13  512  266  394  1,172  1,185  
Circle C—  —  —  —  21  216  237  237  
Lantana—  —  —  —  —  37  37  37  
Other—  —  —   —  —    
Lakeway—  —  —  34  —  —  34  34  
Magnolia—  —  —  28  26  70  124  124  
Jones Crossing—  —  —  —  21  23  44  44  
Kingwood Place—    —  10  13  23  25  
West Killeen Market—  —  —  —  —     
New Caney—  —  —  —  —  38  38  38  
Camino Real, San Antonio—  —  —  —  —     
Total13   15  581  344  796  1,721  1,736  
Revenue from our real estate operations segment accounted for 46 percent of our total revenue for 2019 and 67 percent for 2018.

The following table summarizes the estimated development potential of our undeveloped acreage as of December 31, 2019:
  
 Single FamilyMulti-familyCommercial
 (lots)(units)(gross square feet)
Barton Creeka
169  1,582  1,588,081  
Lakeway100  —  —  
Circle C—  56  674,942  
Lantana—  —  380,621  
Magnolia96  588  133,605  
New Caney—  —  180,496  
Kingwood Place—  300  —  
Jones Crossing—  300  104,750  
Other  —  
Total366  2,832  3,062,495  
a.See “Properties – Barton Creek- Section KLO and Section N” below for further discussion of ongoing development planning that may result in increased densities for single-family and multi-family and commercial properties.

Leasing Operations. Our principal leasing operations at December 31, 2019, consisted of (1) a 44,493-square-foot retail complex at West Killeen Market, (2) a 154,117-square-foot retail space at Jones Crossing, (3) a 99,379-square-foot mixed-use development representing the first phase of Lantana Place, (4) a 143,855-square-foot mixed-use development project at Kingwood Place, (5) The Santal multi-family project, a garden-style apartment complex consisting of 448 units, and (6) The Saint Mary multi-family project, a luxury garden-style apartment complex consisting of 240 units.

Revenue from our leasing operations segment accounted for 54 percent of our total revenue for 2019 and 33 percent for 2018.

As of December 31, 2019, excluding the assets held for sale at our discontinued operations, our assets at The Santal represented 19 percent of our total assets. No other property exceeded ten percent of our total assets. As of December 31, 2019, 84 percent of our available retail space was leased.
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See the charts below for our leasing revenue by property and our developed square feet of retail space by geographic location as of December 31, 2019.

strs-20191231_g2.jpgstrs-20191231_g3.jpg

Our retail leasing properties had average rentals of $19.77 per square foot as of December 31, 2019. Our scheduled expirations of leased retail square footage as of December 31, 2019, as a percentage of total space leased is less than 1 percent in 2022, 2 percent in 2023, 5 percent in 2024, and 93 percent thereafter.

For further information about our operating segments see “Results of Operations” in MD&A. See Note 10 for a summary of our revenues, operating income and total assets by operating segment.

Properties

Our properties are primarily located in the Austin, Texas area, but include properties in other select markets in Texas. Our Austin-area properties include the following:

Barton Creek
Our Amarra Drive and The Santal properties are located in the Barton Creek community, which is a 4,000-acre upscale community located southwest of downtown Austin. We are also planning future development in residential Section KLO and commercial and multi-family Section N.

Amarra Drive.  Amarra Drive is a subdivision featuring lots ranging from one to over five acres. In 2008, we completed the development of Amarra Drive Phase II, which consists of 35 lots on 51 acres. We sold two lots in 2019 and three lots in 2018. As of December 31, 2019, seven developed Phase II lots remained unsold.

In 2015, we completed the development of Amarra Drive Phase III, which consists of 64 lots on 166 acres. We sold 14 lots in 2019 and 9 lots in 2018. As of December 31, 2019, 17 developed Phase III lots and two homes built on Phase III lots remained unsold.

The Villas at Amarra Drive (Amarra Villas) townhome project is a 20-unit development for which we completed sitework in 2015. The townhomes average approximately 4,400 square feet and are being marketed as “lock and leave” properties, with golf course access and cart garages. Construction of the first seven townhomes was completed during 2017 and 2018. We sold the last two completed townhomes in 2019 and began construction of the next four Amarra Villas townhomes in first-quarter 2020. We sold four townhomes in 2018.

The Santal. The Santal is a garden-style luxury apartment complex located in Section N, which is part of the Barton Creek community. As of December 31, 2019, The Santal multi-family project, consisting of 448 units, was fully leased and stabilized.


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Section KLO and Section N. We are advancing the planning and permitting process for development of future phases of Barton Creek, including residential Section KLO and commercial and multi-family Section N. We redesigned Section KLO using a combination of single family lots and residential condominium lots, which is expected to double our density from 154 to 316 home sites. The City of Austin and Travis County approved initial subdivision permit applications for Section KLO in October 2019. The engineering for roads and utilities for the initial phases of Section KLO is in process. Using a conceptual approach similar to that used for Section KLO, we are also evaluating a redesign of Section N, our approximately 570 acre tract located along Southwest Parkway in the southern portion of the Barton Creek community. If successful, this new project would be designed as a dense, mid-rise, mixed-use project surrounded by an extensive greenspace amenity and result in an increase in potential densities. These potential development projects require extensive additional permitting and development will be dependent on market conditions. Because of the nature and cost of the approval and development process and uncertainty regarding market demand for a particular use, there is uncertainty regarding the nature of the final development plans and whether we will be able to successfully execute the plans. In addition, our development plans for Section KLO and Section N will require significant capital, which we may pursue through debt and/or equity financings, joint ventures, commercial, partner or other arrangements.

Circle C community
The Circle C community is a master-planned community located in Austin, Texas. In 2002, the city of Austin granted final approval of a development agreement (the Circle C settlement), which firmly established all essential municipal development regulations applicable to our Circle C properties until 2032. See Note 9 for a summary of incentives we received in connection with the Circle C settlement.

We are developing the Circle C community based on the entitlements secured in the Circle C settlement. The Circle C settlement, as amended in 2004, permits development of 1.16 million square feet of commercial space, 504 multi-family units and 830 single-family residential lots. As of December 31, 2019, our Circle C community had remaining entitlements for 674,942 square feet of commercial space and 56 multi-family units.
The Saint Mary. In June 2018, we commenced construction of The Saint Mary, a 240-unit luxury garden-style apartment project located in the Circle C community. As of December 31, 2019, construction had been completed and approximately 60 percent of the units were leased.

Lantana
Lantana is a community south of Barton Creek in Austin. As of December 31, 2019, we had remaining entitlements for approximately 381,000 square feet of office and retail use on 37 acres. Regional utility and road infrastructure is in place with capacity to serve Lantana at full build-out as permitted under our existing entitlements. Lantana Place is a partially developed, mixed-use real-estate development project. We completed construction of the 99,379-square-foot first phase of Lantana Place in 2018. We previously entered into a ground lease with a hotel operator in connection with its development of an AC Hotel by Marriott, and construction of that hotel began in May 2019. As of December 31, 2019, we had signed leases for approximately 80 percent of the retail space, including the anchor tenant, Moviehouse & Eatery, which opened in May 2018.

The Oaks at Lakeway
We own approximately 34 acres of undeveloped property in Lakeway, Texas located in the greater Austin area, which is zoned for residential, hotel and civic uses. See Note 9 for discussion of our sale of The Oaks at Lakeway.

Our other Texas properties include:

Magnolia Place
In 2014, we acquired 124 acres in the greater Houston area to develop the Magnolia Place project, which is currently planned for 133,605 square feet of retail space; 7 pad sites; 2 hotel sites; and 96 single-family lots and 588 multi-family units. Magnolia Place will be shadow-anchored by a 95,000-square-foot H-E-B, L.P. (HEB) grocery store to be constructed by HEB on an adjoining 18-acre site owned by HEB. Refer to MD&A for further discussion.

West Killeen Market
In 2015, we acquired approximately 21 acres in Killeen, Texas, to develop the West Killeen Market project, an HEB shadow-anchored retail project with 44,493 square feet of commercial space and three pad sites adjacent to a 90,000 square-foot HEB grocery store. Construction at West Killeen Market was completed in June 2017. The HEB grocery store opened in April 2017. As of December 31, 2019, leases for approximately 70 percent of the space at
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West Killeen Market had been executed, all current tenants have opened for business and leasing activities for the vacant retail space and the three vacant pad sites are ongoing.

Jones Crossing
In 2017, we acquired a 72-acre tract of land in College Station, Texas, for Jones Crossing, an HEB-anchored, mixed-use project. Construction of the first phase of the retail component of the Jones Crossing project was completed in third-quarter 2018. The HEB grocery store opened in September 2018, and, as of December 31, 2019, we had signed leases for 95 percent of the completed retail space, including the HEB grocery store. As of December 31, 2019, we had approximately 44 undeveloped acres with estimated development potential of approximately 104,750 square feet of commercial space and five vacant pad sites. We continue to evaluate options for the multi-family component of this project.

Kingwood Place
In August 2018, we purchased a 54-acre tract of land in Kingwood, Texas to be developed as Kingwood Place, an HEB-anchored, mixed-use development project. The Kingwood Place project is expected to total approximately 152,000 square feet of retail lease space, anchored by a 103,000-square-foot HEB grocery store, with 49,000 square feet of retail space, 5 retail pads and an 10-acre parcel planned for approximately 300 multi-family units. Construction of two retail buildings, totaling approximately 41,000 square feet, was completed in August 2019, and the HEB grocery store opened in November 2019. An 8,000-square-foot retail building is under construction and expected to be completed in June 2020, and we have signed ground leases on two other retail pads. Three retail pads remain available for lease. As of December 31, 2019, we had signed leases for approximately 80 percent of the completed retail space, including the HEB grocery store.

New Caney
In October 2018, we purchased a 38-acre tract of land, in partnership with HEB, in New Caney, Texas, for the future development of an HEB-anchored, mixed-use project. Subject to completion of development plans, we currently expect the New Caney project will include restaurants and retail services, totaling approximately 145,000 square feet (inclusive of the HEB grocery store), 5 pad sites and a 10-acre multi-family parcel. We finalized the lease for the HEB grocery store in March 2019, and upon execution of this lease, we acquired HEB’s interests in the partnership for approximately $5 million. We currently plan to commence construction of the New Caney project no earlier than 2021.

Competition
 
We operate in highly competitive industries, namely the real estate development and leasing industries. In the real estate development industry, we compete with numerous public and private developers of varying sizes, ranging from local to national in scope. As a result, we may be competing for investment opportunities, financing and potential buyers with developers that may possess greater financial, marketing or other resources than we have. Our prospective customers generally have a variety of choices of new and existing residences and sites when considering a purchase. We attempt to differentiate our properties primarily on the basis of design, quality, uniqueness, amenities, location and our developer reputation.

The leasing industry is highly fragmented among individuals, partnerships and public and private entities, with no single entity or person dominating the industry. Although we may compete against large sophisticated owners and operators, owners and operators of any size can effectively compete for prospective tenants. We compete for tenants primarily on the basis of property location, rent charged, design and amenities of the property.

In regards to our discontinued operations, competition in the hotel industry is generally based on quality and consistency of rooms, availability of restaurant and meeting facilities and services, attractiveness of location, price and other factors. Management believes that we compete favorably in these areas, however hotel room count in the Austin central business district has increased significantly over the past decade. In the entertainment industry, we compete with other venues in the Austin, Texas area, and venues in other markets for artists likely to perform in the
Austin, Texas region. Touring artists have several alternatives to our venue when scheduling tours.

See Part I, Item 1A. “Risk Factors” for further discussion.

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Credit Facility and Other Financing Arrangements

Obtaining and maintaining adequate financing is a critical component of our business. For information about our credit facility and other financing arrangements, see “Capital Resources and Liquidity - Credit Facility and Other Financing Arrangements” in MD&A and Note 6.

Regulation and Environmental Matters

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 may result in higher development and administrative costs. See Part I, Item 1A. “Risk Factors” for further discussion.

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.
Employees

At December 31, 2019, we had a total of 73 employees, 50 of which were full-time employees, located at our Austin, Texas headquarters. Of these, 43 employees, including 20 full-time employees, were employed by our Block 21 subsidiary and will become employees of the purchaser upon completion of the Block 21 sale transaction. We believe we have a good relationship with our employees, none of whom are represented by a union. During 2019, we contracted with a third party to provide the majority of the part-time staffing at our entertainment venues. Since 1996, certain services necessary for our business and operations, including certain administrative, financial reporting and other services, have been performed by FM Services Company (FM Services) pursuant to a services agreement. FM Services is a wholly owned subsidiary of Freeport-McMoRan Inc. Either party may terminate the services agreement at any time upon 60 days' notice or earlier upon mutual written agreement.


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Item 1A.  Risk Factors

This report contains “forward-looking statements” within the meaning of U.S. federal securities laws. Forward-looking statements are all statements other than statements of historical facts, such as plans, projections or expectations related to whether and when the sale of Block 21 will be completed, the potential impacts of the evolving coronavirus pandemic, the planning, financing, development, construction, completion and stabilization of our development projects, plans to sell, recapitalize or refinance properties, operational and financial performance, expectations regarding future cash flows, municipal utility district reimbursements for infrastructure costs, regulatory matters, leasing activities, estimated costs and timeframes for development and stabilization of properties, liquidity, tax rates, the impact of interest rate changes, capital expenditures, financing plans, possible joint venture, partnership, strategic relationships or other arrangements, our projections with respect to our obligations under the master lease agreements entered into in connection with the 2017 sale of The Oaks at Lakeway, other plans and objectives of management for future operations and development projects, future dividend payments and share repurchases.

We undertake no obligation to update any forward-looking statements. We caution readers that forward-looking statements are not guarantees of future performance and our actual results may differ materially from those anticipated, expected, projected or assumed in the forward-looking statements. Important factors that can cause our actual results to differ materially from those anticipated in the forward-looking statements include the following:

Risks Relating to the Pending Sale of Block 21

The closing of the pending sale of Block 21 is subject to various risks and uncertainties, may not be completed in accordance with expected plans, on the currently contemplated timeline, or at all, and the pending sale may be disruptive to the operations and profitability of our hotel and entertainment businesses.

As previously announced and discussed elsewhere in this report, on December 9, 2019, two of our wholly owned subsidiaries entered into definitive agreements to sell Block 21 to Ryman Hospitality Properties, Inc. (Ryman or Purchaser) for $275 million. Block 21 is our wholly owned mixed-use real estate development and entertainment business in downtown Austin, Texas that contains the 251-room W Austin Hotel and is home to Austin City Limits Live at the Moody Theater. Block 21 also includes Class A office space, retail space and the 3TEN ACL Live entertainment venue and business. The properties and operations of Block 21 constitute all of the properties and operations of our hotel and entertainment businesses and some of the properties and operations of our leasing segment.

The Block 21 transaction is currently expected to close in the second quarter of 2020, subject to the satisfaction or waiver of a number of specified closing conditions, including the consent of the loan servicer to the Purchaser’s assumption of the loan secured by the Block 21 properties, and other customary closing conditions. The Purchaser has deposited $15 million in earnest money to secure its performance under the agreements governing the sales. If the conditions to the closing of the sale of Block 21 are neither satisfied nor, where permissible, waived on a timely basis or at all, we may be unable to complete the sale of Block 21 or such completion may be delayed beyond our expected timeline.

Whether or not the proposed sale of Block 21 is completed, the prior announcement and current pendency of the sale may be disruptive to Block 21’s businesses and may adversely affect current or prospective relationships with current and prospective guests, customers, employees and suppliers. Uncertainties related to the pending sale could divert the attention of management and other employees from the day-to-day operations of Block 21 in preparation for and during the completion of the sale. If we are unable to effectively manage these risks, Block 21’s businesses, results of operations, financial condition and prospects could be adversely affected.

If the proposed sale of Block 21 is delayed or not completed for any reason, we will have expended significant management resources in an effort to complete the sale and will have incurred significant transaction costs. Accordingly, if the proposed sale of Block 21 is not completed on the terms set forth in the definitive agreements governing the sale, or at all, our business, results of operations, financial condition, cash flows and stock price may be adversely affected.


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We cannot assure that the sale of Block 21 will result in additional value being realized by our shareholders.

If completed, the sale of Block 21 is anticipated to provide us with substantial net cash proceeds and increased availability under our revolving credit facility. Our remaining businesses would consist of our traditional real estate operations segment and the majority of our leasing operations segment. We are evaluating options for the use of the net proceeds of the sale and for our future real estate and leasing operations.

Block 21 contributed substantial amounts of our operating income, in many recent periods more than 100%, and contributed a majority of our revenue and operating cash flow in many recent periods. The real estate business is capital intensive. Many of our real estate development projects, by their nature, anticipate that we will make cash expenditures and incur expenses without realizing the projected return until a future period that may be years away. We cannot provide assurances that our business will generate sufficient cash flows from operations in the future or that future borrowings will be available to us in an amount sufficient to enable us to service our remaining indebtedness or to fund other liquidity needs. Accordingly, the sale of Block 21 will impact our future financial performance and liquidity in ways that we cannot predict.

In order to secure our subsidiaries’ responsibilities for the accuracy of certain representations and warranties in the agreements governing the sale of Block 21, $6.875 million will be held in escrow for 13 months after the closing, subject to a longer retention period with respect to any required reserve for pending claims. We cannot assure you that we will eventually receive all or any of the amounts held in escrow.

Accordingly, we cannot assure you that we will be able to redeploy the capital we obtain from the sale of Block 21 in a way that would result in additional value to our shareholders, or that we will engage in any transaction or transactions that will result in our shareholders realizing additional value from the sale.

Risks Relating to our Business and Industries

We need significant amounts of cash to service our debt. If we are unable to generate sufficient cash to service our debt, our liquidity, financial condition and results of operations could be negatively affected.

Our industry is capital-intensive and requires significant up-front expenditures to secure land and pursue development and construction on such land. Our business strategy requires us to rely on cash flow from operations and our debt agreements as our primary sources of funding for our liquidity needs. We have also, from time to time, relied on project-level equity financing of our subsidiaries. As of December 31, 2019, our outstanding debt totaled $224.6 million and our cash and cash equivalents totaled $8.8 million, excluding debt and cash and cash equivalents associated with Block 21 included in discontinued operations. Our level of indebtedness could have significant adverse consequences. For example, it could:

Increase our vulnerability to adverse changes in economic and industry conditions;

Require us to dedicate a substantial portion of our cash flow from operations and proceeds from asset sales to pay or provide for our indebtedness, thus reducing the availability of cash flows to fund working capital, capital expenditures, acquisitions, investments, dividends and other general corporate purposes;

Limit our flexibility to plan for, or react to, changes in our business and the markets in which we operate;

Force us to dispose of one or more of our properties, possibly on unfavorable terms;

Place us at a competitive disadvantage to our competitors that have less debt; and/or

Limit our ability to borrow money to fund our working capital, capital expenditures, debt service requirements and other financing needs.

Our ability to make scheduled debt service payments or to refinance our indebtedness, depends on our future operating and financial performance, which is subject to economic, financial, competitive and other factors beyond our control, including evolving risks relative to the spread of the coronavirus or fear of the further spread of the coronavirus. Our business may not continue to generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. Historically, much of our debt has been renewed or refinanced in the ordinary course of business. The coronavirus pandemic has negatively impacted economic activity worldwide,
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including in our areas of operations. Any further deterioration of current economic conditions in our areas of operations could impact our ability to refinance our debt and obtain renewals on favorable terms or at all. In the future we may not be able to obtain sufficient external sources of liquidity on attractive terms, if at all, or otherwise renew, extend or refinance a significant portion of our outstanding debt scheduled to become due in the near future. There can be no assurance that we will maintain cash reserves and generate sufficient cash flow from operations in an amount sufficient to enable us to service our debt or to fund our other liquidity needs. Any of these occurrences may have a material adverse effect on our liquidity, financial condition and results of operations. For example, our inability to extend, repay or refinance our debt when it becomes due, including upon a default or acceleration event, could force us to sell properties on unfavorable terms or ultimately result in foreclosure on properties pledged as collateral, which could result in a loss of our investment and harm our reputation. In addition, any difficulty in obtaining sufficient capital for planned development expenditures could also cause project delays, which could increase our costs.

Our current financing arrangements contain, and our future financing arrangements likely will contain, certain financial and restrictive covenants relating to our operations and the failure to comply with such covenants could result in a default that accelerates the required payment of such debt.

The terms of the agreements governing our indebtedness include restrictive covenants and require that certain financial ratios be maintained. For example, the minimum stockholders’ equity covenant contained in one of our debt agreements requires us to maintain total stockholders’ equity balance of $110.0 million. At December 31, 2019, our total stockholders’ equity was $121.1 million. Certain loan agreements include a requirement that we maintain liquid assets, as defined in the agreement, above certain thresholds. Several of our debt agreements include a requirement that we maintain a net asset value, as defined in each agreement, of $125 million, and certain of our debt agreements include a requirement that we maintain a promissory note debt-to-gross asset value, as defined in the agreements, of less than 50 percent. In addition, several of our debt agreements include a financial covenant to maintain a debt service coverage ratio as defined in each agreement. As of December 31, 2019, we were in compliance with all financial covenants (see Note 6). Our Comerica Bank credit facility and other debt arrangements contain several significant limitations restricting our ability to, among other things:

Borrow additional money or issue guarantees;

Pay dividends, repurchase shares or make other distributions to shareholders;

Make loans, advances or other investments;

Create liens on assets;

Sell assets;

Enter into sale-leaseback transactions;

Enter into transactions with affiliates; and

Engage in mergers or consolidations.

Failure to obtain necessary bank consents or to comply with any of the restrictions or covenants in our loan documents could result in a default that may, if not cured or waived, accelerate the payment under our debt obligations which would likely have a material adverse effect on our liquidity, financial condition and results of operations. Certain of our debt arrangements have cross-default or cross-acceleration provisions. When present, these provisions could have a wider impact on liquidity than might otherwise arise from a default or acceleration of a single debt instrument. We cannot assure you that we could adequately address any such defaults, cross-defaults or acceleration of our debt payment obligations in a sufficient or timely manner, or at all. Our ability to comply with our covenants will depend upon our future economic performance. These covenants may adversely affect our ability to finance our future operations, satisfy our capital needs or engage in other business activities that may be desirable or advantageous to us. See Note 6 for additional discussion of our restrictive covenants.

In order to maintain compliance with the covenants in our debt agreements and carry out our business plan, we may need to raise additional capital through equity transactions, including project-level equity financing of our subsidiaries or obtain waivers or modifications of covenants from our lenders. Such additional funding may not be
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available on acceptable terms, if at all, when needed. We also may need to incur additional indebtedness in the future in the ordinary course of business to fund our development projects and our operations. There can be no assurance that such additional financing will be available when needed or, if available, offered on acceptable terms. If new debt is added to our current debt levels, the risks described above could intensify.

The success of our business is significantly related to general economic conditions and, accordingly, our business could be harmed by any slowdown or deterioration in the economy.

Periods of economic uncertainty, weakness or recession; significantly rising interest rates; declining employment levels; declining demand for real estate; declining real estate values; pandemic illnesses or fear of the potential spread of illnesses such as coronavirus; or the public perception that any of these events or conditions may occur or be present, may negatively affect our business. These economic conditions can result in a general decline in acquisition, disposition and leasing activity, a general decline in the value of real estate and in rents and increases in tenant defaults on rental payments, which in turn reduce revenue derived from property sales and leases as well as revenues associated with development activities. These conditions can also lead to a decline in property sales prices as well as a decline in funds invested in existing commercial real estate and related assets and properties planned for development. Other factors that could influence demand in our industries include labor costs, access to credit on reasonable terms, geopolitical issues and other macroeconomic factors. With respect to the ongoing and evolving coronavirus (COVID-19) outbreak, which was designated as a pandemic by the World Health Organization on March 11, 2020, the outbreak has caused substantial disruption in international and U.S. economies and markets. The outbreak is having a significant adverse impact on the hotel and entertainment industries and, if repercussions of the outbreak are prolonged, could have a significant adverse impact on our real estate and leasing operations, which could be material.

During an economic downturn, investment capital is usually constrained, and it may take longer for us to dispose of real estate investments. As a result, the value of our real estate investments may be reduced increasing the risk for asset impairments and write-offs and we could realize losses or diminished profitability. If economic and market conditions decline, our business performance and profitability could deteriorate. If this were to occur, we could fail to comply with certain financial covenants in our debt agreements, which would force us to seek waivers or amendments with our lenders. No assurance can be given that we would be able to obtain any necessary waivers or amendments on satisfactory terms, if at all.

Increases in interest rates will increase our interest cost and may adversely affect our cash flow, and changes in how LIBOR, the London interbank offered rate, is determined, or the potential replacement of LIBOR with an alternative reference rate, may adversely affect our interest cost.

We have incurred, and may in the future incur, indebtedness that bears interest at a variable rate. Our consolidated debt at December 31, 2019, was $224.6 million (excluding debt related to Block 21 included in discontinued operations), all of which was variable-rate debt. An increase in interest rates would increase our interest cost and increase the cost of refinancing existing debt and issuing new debt, which would adversely affect our cash flow. In addition, if we need to repay existing debt during periods of rising interest rates, we could be required to liquidate one or more of our investments at times that may not permit realization of the maximum return on such investments. The effect of prolonged interest rate increases could adversely impact our ability to make purchases and develop properties. We may seek to manage our exposure to interest rate volatility by using interest rate hedging arrangements, such as interest rate swap agreements. These agreements involve certain additional risks.

LIBOR is widely used as a reference for setting the interest rate on variable-rate loans globally. We have used LIBOR as a reference rate in our promissory notes, loans, credit facilities, and other debt agreements such that the interest due to our creditors pursuant to these loans is calculated using LIBOR. In July 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, announced that it intends to phase out LIBOR by the end of 2021. If LIBOR is unavailable after 2021, our debt with interest rates that are indexed to LIBOR will be determined using various alternative methods to the extent provided for in our agreements, which could result in increases in interest rates on such debt. Further, before LIBOR ceases to exist, we may need to renegotiate our debt agreements and the loans that utilize LIBOR to replace LIBOR with another standard. It is not possible to predict the effect of these changes, other reforms, or the establishment of alternative reference rates on our borrowing costs or the capital markets generally. While the full consequences of these developments cannot be predicted, they could result in higher interest obligations than under the current form of LIBOR.

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We are vulnerable to concentration risks because our operations are primarily located in the Austin, Texas area.

Our real estate operations are primarily located in the Austin, Texas area. While our real estate operations have expanded to include select markets in Texas outside of the Austin area, including College Station, Kingwood, Magnolia, West Killeen and New Caney, the geographic concentration of the majority of our operations and of the properties we may have under development at any given time means that our business is more vulnerable to local economic, regulatory, and other conditions (such as local periods of economic slowdown or recession, business layoffs or downsizing, industry slowdowns, relocations of businesses, increases in real estate and other taxes and the cost of complying with governmental regulations or increased regulation) and adverse project-specific risks than the businesses of larger, more diversified companies. The performance of the Austin area's economy and our other select markets in Texas greatly affects our revenue and consequently the underlying values of our properties. We cannot assure you that these markets will continue to grow or that underlying real estate fundamentals will continue to be favorable in these markets. Our geographic concentration may create increased vulnerability during regional economic downturns, which can significantly affect our financial condition and results of operations. See “Overview - Real Estate Market Conditions” in Part II, Items 7. and 7A. for more information.

Adverse weather conditions or natural disasters could adversely affect our business, financial condition and results of operations.

Our business, financial condition and results of operations may be adversely affected by weather conditions, including natural disasters, in or near our areas of operations. For our real estate operations, adverse weather may delay development or damage property resulting in substantial repair or replacement costs to the extent not covered by insurance, cause shortages and price increases in labor or raw materials, reduce property values, or cause a loss of revenue, each of which could have a material adverse effect on our business, financial condition and results of operations. Our competitors may be affected differently by such changes in weather conditions or natural disasters depending on the location of their supplies or operations, which could result in such events having a larger impact on us that on our competitors.

Our insurance coverage on our properties may be inadequate to cover any losses we may incur.

We maintain insurance on our properties, including business interruption, property, liability, fire and extended coverage. However, there are certain types of losses, generally of a catastrophic nature, such as floods or acts of war or terrorism that may be uninsurable or not economical to insure. We use our discretion when determining amounts, coverage limits and deductibles, for insurance. These terms are determined based on retaining an acceptable level of risk at a reasonable cost. This may result in insurance coverage that, in the event of a substantial loss, would not be sufficient to pay the full current market value or current replacement cost of our lost investment. Inflation, changes in building codes and ordinances, environmental considerations and other factors also may make it unfeasible to use insurance proceeds to replace a building or other facility after it has been damaged or destroyed. Under such circumstances, the insurance proceeds we receive may be inadequate to restore our economic position in an affected property. In addition, we may become liable for injuries and accidents occurring during the construction process that are underinsured. A significant uninsured loss could materially and adversely affect our business, liquidity, financial condition and results of operations.

The loss of certain key senior management personnel could negatively affect our business.

We depend on the experience and knowledge of our executive officers and other key personnel who guide our strategic direction and execute our business strategy, have extensive market knowledge and relationships and exercise substantial influence over our operational, financing, development and construction activities. Among the reasons that these individuals are important to our success is that each has a regional industry reputation that attracts business and investment opportunities and assists us in negotiations with lenders, existing and potential tenants, community stakeholders and industry personnel. Our Chairman, President and Chief Executive Officer has been employed by the company since its inception in 1992. He has served as President since August 1996, Chief Executive Officer since May 1998 and Chairman of the Board of Directors (Board) since August 1998. Our Senior Vice President and Chief Financial Officer has been employed by the company since 2009. The loss of any of our key senior management personnel could negatively affect our business. Our success may also be dependent in part on our ability to continue to employ and retain other skilled personnel.

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Our business may be adversely affected by information technology disruptions and the failure to maintain the integrity of employee or company data could result in harm to our reputation, and result in a loss of business and/or subject us to costs, fines, investigations, enforcement actions, or lawsuits.

Many of our business and operational processes are dependent on traditional and emerging technology systems to conduct day-to-day operations and lower costs. As our dependence on information systems grows, we become more vulnerable to an increasing threat of continually evolving cybersecurity risks. Cybersecurity incidents are increasing in frequency and magnitude. These incidents may include, but are not limited to, installation of malicious software, phishing, credential attacks, unauthorized access to data and other electronic security breaches that could lead to disruptions in systems, unauthorized release of confidential or otherwise protected information, employee theft or misuse and the corruption of data. Our systems are also vulnerable to damage or interruption from fire, floods, power loss, telecommunications failures, computer viruses, break-ins, and similar events. These or similar occurrences could also lead to interruptions or delays in the operation of our systems resulting in business impact, including loss of business.

We rely on the availability of information technology systems to operate our business. Our reliance on computer, Internet-based and mobile systems and communications and the frequency and sophistication of efforts by hackers to gain unauthorized access or prevent authorized access to such systems have greatly increased in recent years. The integrity and protection of employee and company data, as well as the continuous operation of our systems, are critical to our business. Efforts to hack or breach security measures, disruptions or failures of systems or software to operate as designed or intended, viruses, “ransomware” or other malware, operator error, or inadvertent releases of data may materially impact our information systems and records. A significant theft, loss, loss of access to, or fraudulent use of guest, employee, or company data could adversely impact our reputation and could result in a loss of business, as well as remedial and other expenses, fines, litigation, investigations, enforcement actions, or lawsuits.

We have experienced targeted and non-targeted cybersecurity incidents in the past and may experience them in the future. While these cybersecurity incidents did not result in any material loss to us or interrupt our day-to-day operations, there can be no assurance that we will not experience any such losses in the future. We believe we have implemented appropriate measures to safeguard our systems and data and mitigate potential risks. However, given the unpredictability of the timing, the wide variety of sources from which a cyber-attack can originate, and the evolving nature and scope of information technology disruptions, the various procedures and controls we use to monitor and protect against these threats and to mitigate our potential risks to such threats may not be sufficient in preventing cybersecurity incidents from materializing. Even if we are not targeted directly, cyber-attacks on the U.S. government, financial markets, financial institutions, or other businesses, including third parties with whom we do business, could disrupt our normal business operations and networks. Further, as cybersecurity threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate vulnerabilities to cybersecurity threats.

Failure to succeed in new markets may limit our growth.

We have acquired in the past, and we may acquire in the future if appropriate opportunities arise, properties that are outside of the Austin, Texas area, which is our primary market. For example, we currently have properties in the following Texas cities: College Station, Kingwood, Magnolia, West Killeen and New Caney. Our historical experience in existing markets does not ensure that we will be able to operate successfully in new markets. Entering into new markets exposes us to a variety of risks, including difficulty evaluating local market conditions and local economies, developing new business relationships in the area, competing with other companies that already have an established presence in the area, hiring and retaining key personnel, evaluating quality tenants in the area, and a lack of familiarity with local governmental and permitting procedures. Furthermore, expansion into new markets may divert management's time and other resources away from our current primary market. As a result, we may not be successful in expanding into new markets, which could adversely impact our financial condition, results of operations, cash flow, cash available for distribution, and ability to service our debt obligations.

Part of our business strategy is dependent on maintaining strong relationships with key anchor tenants and our inability to do so could adversely affect our business. In addition, our key anchor tenants may have interests that differ from ours, which could adversely affect us.

We have formed strategic relationships with key anchor tenants as part of our overall strategy for particular development projects and may enter into other similar arrangements in the future. For example, our West Killeen
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Market, Jones Crossing, Kingwood Place, Magnolia and New Caney mixed-use development projects are each anchored by an HEB grocery. Any deterioration in our relationship with HEB or our inability to form and retain strategic relationships with key anchor tenants or enter into other similar arrangements in the future could adversely affect our business.

While key anchor tenants provide local credibility, enhance our ability to attract other tenants or customers to the area or offer other competitive attributes, they may have the ability to exert influence over our development projects through restrictive lease covenants (such as exclusive use covenants or prohibited use covenants) that restrict our rights or have economic or business interests or goals that are inconsistent with ours or that are influenced by factors unrelated to our business. We may also be subject to reputational harm or the value of our properties may be adversely affected if the reputation or financial position of any of our key anchor tenants deteriorates.

Risks Relating to Real Estate Operations

There can be no assurance that all of the properties in our active development pipeline will be completed in their entirety in accordance with the anticipated timing or cost, or that we will achieve the results we expect from the development of such properties, which could materially and adversely affect our financial condition, results of operations.

We currently have several active development projects, including Kingwood Place, Magnolia Place and Amarra Villas. The development of the projects in our active development pipeline is subject to numerous risks, many of which are outside of our control. The cost necessary to complete the development of our active development pipeline could be materially higher than we anticipate. In addition, we could decide not to undertake construction on one or more of the projects in our development pipeline if our pre-leasing or financing efforts are unsuccessful, among other reasons. Furthermore, if we are delayed in the completion of any development project, tenants may have the right to terminate pre-development leases, which could materially and adversely affect the financial viability of the project. In addition, even if we decide to commence construction on a project, we can provide no assurances that we will complete any of the projects in our active development pipeline on the anticipated schedule or within the budget, or that, once completed, the properties in our development pipeline will achieve the results that we expect. If the development of the projects in our development pipeline is not completed in accordance with our anticipated timing or at the anticipated cost, or the properties fail to achieve the financial results we expect, it could have a material adverse effect on our business, financial condition, results of operations and cash flows.

The real estate business is highly competitive and many of our competitors are larger and financially stronger than we are or have lower cost structures than we do.

The real estate business is highly competitive. We compete with a large number of companies and individuals that have significantly greater financial, sales, marketing and other resources than we have in addition to competitors that have lower cost structures than we do. Our competitors include local developers who are committed primarily to particular markets and also national developers who acquire and develop properties throughout the U.S. Competition may increase the demand for the types of properties in which we typically invest and, therefore, reduce the number of suitable investment opportunities available to us and increase the purchase prices for such properties. In addition, a downturn in the real estate industry could significantly increase competition among developers. Increased competition could cause us to increase our selling incentives, lose existing or potential tenants, offer more substantial rent abatements, tenant improvement allowances, early termination rights, below-market renewal options, or other incentives in order to retain tenants when our tenants' leases expire, and reduce our prices. An oversupply of real estate properties available for sale or lease, as well as the potential significant discounting of prices by some of our competitors, may adversely affect our results of operations.

Our business, results of operations, cash flows and financial condition are greatly affected by the performance of the real estate industry.

Revenue from our real estate operations segment accounted for 46 percent of our total revenue for the fiscal year ended December 31, 2019. The U.S. real estate industry is highly cyclical and is affected by changes in global, national and local economic conditions and events such as general employment and income levels, availability of financing, interest rates, consumer confidence and spending, and overbuilding of or decrease in demand for residential and commercial real estate. 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,
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political and social conditions, fluctuations in interest rates and mortgage availability, over-building in our markets, a decline in brick-and-mortar retail industry, changes in demographic conditions, changes in tenant preferences and changes in government regulations or requirements, including tax law changes. Any of the foregoing factors could result in a reduction or cancellation of sales and/or lower gross margins for sales. Lower than expected sales could have a material adverse effect on the level of our profits and the timing and amounts of our cash flows.

Real estate investments often cannot easily be converted into cash, and market values may be adversely affected by these economic circumstances, market fundamentals, and competitive and demographic conditions. Because of the effect these factors have on real estate values, it is difficult to predict the level of future sales or sales prices that will be realized for individual assets. In addition, validating third party pricing for illiquid assets may be more subjective than more liquid assets. We cannot predict whether we will be able to sell any property for the price or on the terms set by us or whether any price or other terms offered by a prospective purchaser would be acceptable to us. We also cannot predict the length of time needed to find a willing purchaser and to close the sale of a property. To the extent we are unable to sell any properties for our book value, we may be required to take a non-cash impairment charge or loss on the sale, either of which would reduce our net income or increase our net loss. See "Critical Accounting Policies" in Part II, Items 7. and 7A. for more information.

Our operations are subject to an intensive regulatory approval process and opposition from environmental and special interest groups, either or both of which could cause delays and increase the costs of our development efforts or preclude such developments entirely.

Real estate projects must generally comply with local land development regulations and may need to comply with state and federal regulations. 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 and other land use entitlements and issues, and subdivision, site planning and environmental issues under applicable regulations. Some of these approvals are discretionary. Obtaining all of the necessary permits and entitlements to develop a parcel of land is often difficult, costly and may take several years, or more, to complete. In some situations, we may be unable to obtain the necessary permits and/or entitlements to proceed with a real estate development or may be required to alter our plans for the development. Because government agencies and special interest groups have, in the past, expressed concerns about our development plans in or near Austin, and in the future may express similar concerns in or near the Austin area and in our other select markets in Texas, our ability to develop these properties and realize future income from our properties could be delayed, reduced, prevented or made more expensive. In addition, any failure to comply with these laws or regulations could result in capital or operating expenditures or the imposition of significant financial penalties or restrictions on our operations that could adversely affect present and future operations or our ability to sell, and thereby, our financial condition, results of operations and cash flows.

Several special interest groups have, in the past, 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. However, because of the regulatory environment that has existed in the Austin area and the opposition of these special interest groups, there can be no assurance that an unfavorable ruling would not have a significant long-term adverse effect on the overall value of our property holdings.

Our operations are subject to environmental regulation, which can change at any time and could increase our costs.

Real estate development is subject to state and federal environmental 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. In addition, in those cases where an endangered or threatened species is involved and agency rulemaking and litigation are ongoing, the outcome of such rulemaking and litigation can be unpredictable, and at any time can result in unplanned or unforeseeable restrictions on or even the prohibition of development in identified environmentally sensitive areas.

Certain of the Barton Creek and Lantana properties include nesting territories for the golden-cheeked warbler, a federally listed endangered species. In 1995, we received a permit from the U.S. Wildlife Service pursuant to the Endangered Species Act, which to date has allowed the development of the Barton Creek and Lantana properties free of restrictions under the Endangered Species Act related to the maintenance of habitat for the golden-cheeked warbler.

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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 the U.S. Fish and Wildlife Service 10(a) permit obtained by us in 1995. The development permitted by the 2002 Circle C settlement with the city of Austin has been reviewed and approved by the U.S. Fish and Wildlife Service and, as a result, we also do not anticipate that the 1997 listing of the Barton Springs salamander will affect our Circle C properties.

In January 2013, the U.S. Department of the Interior announced that it had conducted an economic assessment of the potential designation of critical habitat for four species of Central Texas salamanders. Although this potential designation of habitat has not affected, nor do we anticipate that it will affect, our Barton Creek, Lantana or Circle C properties for several reasons, including prior studies and approvals and our existing U.S. Fish and Wildlife Service 10(a) permit obtained in 1995, future endangered species listings or habitat designations could impact development of our properties.

Under various federal, state and local laws and regulations relating to the environment, as a current or former owner or operator of real property, we may be liable for costs and damages resulting from the presence or discharge of hazardous or toxic substances, waste or petroleum products at, on, in, under or migrating through, whether generated from our property or other property, including costs to investigate and clean up such contamination and liability for harm to natural resources. The costs of removal or remediation, and the impact on the development potential and development timeline could be substantial. These laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of any hazardous or toxic substances. Environmental laws also may impose restrictions on the manner in which a property may be used or businesses may be operated, and these restrictions may require substantial expenditures. Environmental laws provide for sanctions in the event of noncompliance and may be enforced by governmental agencies or, in certain circumstances, by private parties. Certain environmental laws and common law principles could be used to impose liability for release of and exposure to hazardous substances, including asbestos and other airborne contaminants. In addition, third parties may seek recovery from owners or operators of real properties for personal injury or property damage associated with exposure to released hazardous substances. The cost of defending against claims of liability, of compliance with environmental regulatory requirements, of remediating any contaminated property, or of paying personal injury claims could materially adversely affect our business, assets or results of operations and, consequently, amounts available for distributions to our shareholders.

From time to time, the Environmental Protection Agency and similar federal, state or local agencies review land developers’ compliance with environmental laws and may levy fines and penalties for failure to strictly comply with applicable environmental laws or impose additional requirements for future compliance as a result of past failures. Any such actions taken with respect to us may increase our costs and result in project delays. We are making, and will continue to make, expenditures with respect to our real estate development for the protection of the environment. Emphasis on environmental matters will result in additional costs in the future. New environmental regulations or changes in existing regulations or their enforcement may be enacted and such new regulations or changes may require significant expenditures by us. The recent trend toward stricter standards in environmental legislation and regulations is likely to continue and could have a material adverse effect on our operating costs.

Risks Relating to Leasing Operations

Unfavorable changes in market and economic conditions could negatively affect occupancy or rental rates, which could negatively affect our financial condition and results of operations and ability to service our debt.

Revenue from our leasing operations segment accounted for 54 percent of our total revenue from continuing operations for the fiscal year ended December 31, 2019. In 2019, our leasing operations primarily involved the lease of retail space at retail and mixed-use properties that we developed, and the lease of residences in multi-family apartment complexes that we developed. Tenants in our retail and mixed-use projects are diverse and include grocery stores, restaurants, healthcare services, fitness centers, a movie house, other retail products and services, and include a hotel ground lease. We have also leased commercial office space in the past.

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The average occupancy rates and rents at properties we develop and lease, particularly those that are newly constructed or have not stabilized, may fail to meet our original expectations for a number of reasons, including changes in market and economic conditions, the development by competitors of competing retail, office or housing alternatives, or our inability to achieve stabilization of a property on schedule, any of which may result in increased construction and financing costs and a decrease in expected rental revenues.

A decline in real estate market and economic conditions could adversely affect occupancy or rental rates, which could adversely affect our profitability and our ability to satisfy our financial obligations. The risks that could affect conditions in our markets include the following:

Local conditions in the market, such as an oversupply of, or decrease in demand for, retail space, residential rental properties, or office space, or increased competition from other available retail buildings, apartment complexes or office buildings;

The inability or unwillingness of tenants to pay their current rent or rent increases; and

Declines in market rental rates.

Our rental revenues may be lower as a result of lower average occupancy rates, increased turnover, reduced rental rates, increased concessions and potential increases in uncollectible rent. In addition, we continue to incur expenses such as maintenance costs, insurance costs and property taxes, whether or not a property is occupied. We cannot predict with certainty whether any of these conditions will occur or whether, and to what extent, they will have an adverse effect on our operations.

We may be unable to achieve and sustain satisfactory occupancy and rental rates at our retail and mixed use projects.

We face competition in attracting tenants to choose our retail and mixed-use projects over those of other developers and owners of similar properties. Once entered into, our retail leases typically range from five to ten years or longer. Adverse market or economic conditions that negatively impact our tenants’ businesses such as the ongoing and evolving coronavirus outbreak and its repercussions, particularly if prolonged, could adversely impact their ability to meet their obligations under the leases or to renew the leases. These tenants face continual competition in attracting customers, often including from on-line competitors. Further, as new technologies emerge, the relationships among customers, retailers, and shopping centers are evolving on a rapid basis. If we are unable to adapt to such new technologies and relationships on a timely basis, our financial performance may be adversely impacted.

We may be unable to achieve and sustain satisfactory occupancy and rental rates at our apartment properties.

We also face competition in attracting tenants to our apartment complexes, including from other apartment properties as well as from condominiums and single-family homes available for rent or purchase. Once entered into, our apartment leases are typically for a term of 12 months. As these leases typically permit the residents to leave at the end of the lease term without penalty, our rental revenues are impacted by declines in market rents more quickly than if our leases were for longer terms. Adverse economic conditions that negatively impact our tenants' employment, such as the ongoing and evolving coronavirus outbreak and its repercussions, particularly if prolonged, could adversely impact our tenants' ability to pay rent. Our ability to rent residences at our apartment properties at attractive rates may be adversely impacted by economic conditions that could cause tenants and potential tenants to prefer housing alternatives with lower rents. In addition, economic developments that favor home ownership over renting, such as low or declining interest rates, favorable or improving mortgage terms or a strong or strengthening job market, could also have an adverse impact on our apartment properties.


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Risks Relating to our Discontinued Operations - W Austin Hotel

An adverse change in external perceptions of the W Austin Hotel could negatively affect the hotel’s results of operations.

Our W Austin Hotel is managed by W Hotel Management, Inc. a subsidiary of Starwood Hotels & Resorts Worldwide, Inc., which is a subsidiary of Marriott International, Inc. The hotel’s ability to attract and retain guests depends, in part, upon the external perceptions and market recognition of the W hotel brand, of Starwood and Marriott as hotel operators and of the quality of the W Austin Hotel and its services. The reputation of the W Austin Hotel may be negatively affected if Marriott’s or Starwood’s reputations are damaged for any reason. In addition, we are required to spend money periodically to keep the property well maintained, modernized and refurbished in accordance with brand standards, which may be more costly than we anticipate.

The W Austin Hotel’s revenues, profits or market share could be harmed if the W Austin Hotel is unable to compete effectively in the hotel industry in Austin.

The hotel industry in Austin is highly competitive. The W Austin Hotel competes for customers with other hotel and resort properties in Austin, ranging from national and international hotel brands to independent, local and regional hotel operators. We compete based on a number of factors, including quality and consistency of rooms, restaurant, bar and meeting facilities and services, attractiveness of location and price, and other amenities. Historically, the Austin market has had a limited number of high-end hotel accommodations. However, hotel capacity is being expanded by other hotel operators in Austin, including several properties in close proximity to the W Austin Hotel in downtown Austin. Furthermore, travelers can book stays on websites that facilitate the short-term rental of homes and apartments from owners, thereby providing an alternative to hotel rooms. Increased internet bookings of alternatives to hotel rooms could have an adverse effect on our hotel's occupancy, average daily rate and revenue per available room.

The W Austin Hotel is subject to the business, financial and operating risks common to the hotel industry, any of which could reduce its revenues and profitability.

Business, financial and operating risks common to the hotel industry include:

Changes in desirability of the hotel’s location (i.e. Austin) as a travel destination;

Decreases in the demand for hotel rooms and related lodging services in general, including a reduction in business travel as a result of alternatives to in-person meetings (including virtual meetings hosted online or over private teleconferencing networks), because of the fear of the spread of illnesses such as the Coronavirus, or because of general economic conditions;

Increases in fixed costs, including increases in commercial property taxes;

Decreased corporate, governmental or convention travel-related spending;

The costs and administrative burdens associated with complying with applicable laws and regulations, including employment, health, safety and environmental laws; and

Increases in operating costs including, but not limited to, energy, water, labor (including the effect of labor shortages, unionization and minimum wage increases), food, workers’ compensation and health-care, insurance and unanticipated costs related to force majeure events and their consequences.

The ongoing and evolving coronavirus (COVID-19) outbreak is having a significant adverse impact on the hotel industry, and we have recently received a significant number of cancellations at the W Austin Hotel. Prolonged repercussions from the outbreak could have a material adverse impact on the W Austin Hotel.
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Risks Relating to our Discontinued Operations - Entertainment Businesses

Our entertainment businesses face intense competition in the live music industry, and they may not be able to maintain or increase their revenue or profits.

Our entertainment businesses compete in a highly competitive industry, and may not be able to maintain or increase their revenue as a result of such competition. The live music industry competes with other forms of entertainment for consumers’ discretionary spending, and our venues compete with other venues to book artists. Our entertainment businesses’ competitors compete for key personnel who have relationships with popular music artists and that have a history of being able to book such artists for concerts and tours. These competitors may engage in more extensive development efforts, undertake more far-reaching marketing campaigns, adopt more aggressive pricing policies and make more attractive offers to existing and potential artists. Our competitors may develop services, advertising options or music venues that are equal or superior to those our entertainment businesses provide or that achieve greater market acceptance and brand recognition than our entertainment businesses achieve.

Other variables related to our entertainment businesses that could adversely affect their financial performance include:

Changes in consumer preferences and decreased success in offering events that appeal to customers;

Technological changes and innovations that may lead to a reduction in attendance at live events, a loss of ticket sales or lower ticket fees;

General economic conditions which could cause our consumers to reduce discretionary spending;

Unfavorable fluctuations in operating costs, which we may be unwilling or unable to pass through to our customers via ticket prices;

Event, tour and artist cancellations;

Interruptions in our computer, communications, information and ticketing systems and infrastructures and data loss or other breaches of our network security;

Occurrence and threat of extraordinary events, such as terrorist attacks, intentional or unintentional mass-casualty incidents such as active shooter incidents, public health concerns such as contagious disease outbreaks such as the coronavirus, weather conditions, natural disasters or similar events that may require us to cancel or reschedule an event; and

Occurrence of personal injuries or accidents in connection with our live music events.

The ongoing and evolving coronavirus (COVID-19) outbreak is having a significant adverse impact on the entertainment industry. Prolonged repercussions from the outbreak could have a material adverse impact on our entertainment venues. Any one or more of these or similar occurrences or worsening of such occurrences could adversely affect the financial performance of our entertainment businesses by, among other things, leading to decreases in the number of events hosted; event attendance; ticket sales; revenue from private events, sponsorships, personal seat license sales and suite sales; and revenue from sales of concessions and merchandise.

Risks Relating to Ownership of Shares of Our Common Stock

Our common stock is thinly traded; therefore, our stock price may fluctuate more than the stock market as a whole.

As a result of the thin trading market for shares of our common stock, our stock price may fluctuate significantly more than the stock market as a whole or the stock prices of similar companies. Without a larger public float, shares of our common stock will be less liquid than the shares of common stock of companies with broader public ownership, and as a result, the trading prices for shares of our common stock may be more volatile. Among other things, trading of a relatively small volume of shares of our common stock may have a greater effect on the trading price than would be the case if our public float were larger.

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Anti-takeover provisions in our charter documents and Delaware law may make an acquisition of us more difficult.

Anti-takeover provisions in our charter documents and Delaware law may make an acquisition of us more difficult. These provisions:

Provide for a classified Board serving staggered three-year terms;

Authorize the Board to issue preferred stock without stockholder approval and to designate the rights, preferences and privileges of each class; if issued, such preferred stock would increase the number of outstanding shares of our capital stock and could include terms that may deter an acquisition of us;

Establish advance notice requirements for nominations to the Board or for proposals that can be presented at stockholder meetings;

Limit who may call stockholder meetings or act by written consent; and

Require a supermajority stockholder vote for certain transactions with a 20% stockholder, subject to certain exceptions.

These provisions may discourage potential takeover attempts, discourage bids for our common stock at a premium over market price or adversely affect the market price of, and the voting and other rights of the holders of, our common stock. These provisions could also discourage proxy contests and make it more difficult for stockholders to elect directors other than the candidates nominated by our Board.

In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which may prohibit large stockholders from consummating a merger with, or acquisition of, us. These provisions may deter an acquisition of us that might otherwise be attractive to our stockholders.

We may not pay dividends on our common stock or repurchase shares of our common stock.

Holders of our common stock are entitled to receive dividends only when and if they are declared by our Board. Further, our Comerica Bank loan agreements prohibit us from paying a dividend on our common stock without the bank’s prior written consent. Although we declared a special cash dividend on our common stock in March 2017 after receiving written consent from Comerica Bank, we are not required to again do so and we may not pay special cash dividends in the future. Comerica Bank’s consent to the payment of a dividend in March 2017 is not indicative of the bank’s willingness to consent to the payment of future dividends. Additionally, our Comerica Bank loan agreements contain a restrictive covenant limiting common stock repurchases to $1.0 million in the aggregate during the term of the facilities. Any repurchases of our common stock in excess of $1.0 million would require a waiver from Comerica Bank. The declaration of future dividends and share repurchases, which is subject to our Board's discretion and the restrictions under our Comerica Bank loan agreements, will depend on our financial results, cash requirements, projected compliance with covenants in our debt agreements, outlook and other factors deemed relevant by our Board.

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Item 1B. Unresolved Staff Comments

None.

Item 3.  Legal Proceedings

We are from time to time involved in legal proceedings that arise in the ordinary course of our business. We do not believe, based on currently available information, that the outcome of any legal proceeding will have a material adverse effect on our financial condition or results of operations. We maintain liability insurance to cover some, but not all, potential liabilities normally incident to the ordinary course of our business as well as other insurance coverage customary in our business, with such coverage limits as management deems prudent.


Item 4. Mine Safety Disclosures

Not applicable.

Information About our Executive Officers
Certain information as of February 29, 2020, regarding our executive officers is set forth in the following table and accompanying text. Each of our executive officers serves at the discretion of our Board of Directors.
NameAgePosition or Office
William H. Armstrong III55  Chairman of the Board, President and Chief Executive Officer
Erin D. Pickens58  Senior Vice President and Chief Financial Officer

Mr. Armstrong has been employed by us since our inception in 1992. Mr. Armstrong has served as President since August 1996, Chief Executive Officer since May 1998 and Chairman of the Board since August 1998.

Ms. Pickens has served as our Senior Vice President since May 2009 and as our Chief Financial Officer since June 2009. Ms. Pickens previously served as Executive Vice President and Chief Financial Officer of Tarragon Corporation from November 1998 until April 2009, and as Vice President and Chief Accounting Officer from September 1996 until November 1998 and Accounting Manager from June 1995 until August 1996 for Tarragon and its predecessors.

PART II

Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Common Stock

Our common stock trades on The Nasdaq Stock Market (NASDAQ) under the symbol “STRS.” As of February 29, 2020, there were 307 holders of record of our common stock. 

Common Stock Dividends

The declaration of dividends is at the discretion of our Board of Directors (the Board); however, our ability to pay dividends is restricted by the terms of our loan agreements with Comerica Bank (which include the Comerica Bank credit facility, Amarra Villas credit facility, and Kingwood Place construction loan), which prohibits us from paying a dividend on our common stock. The declaration of future dividends, which is subject to our Board’s discretion and the restrictions under our Comerica Bank loan agreements, will depend on our financial results, cash requirements, projected compliance with covenants in our debt agreements, outlook and other factors deemed relevant by our Board. Additionally, our Comerica Bank loan agreements contain a restrictive covenant limiting common stock repurchases to $1.0 million in the aggregate during the term of the facilities. Any repurchases of our common stock in excess of $1.0 million would require a waiver from Comerica Bank. See Part I, Item 1A. "Risk Factors" for further discussion.


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Unregistered Sales of Equity Securities

None.

Issuer Purchases of Equity Securities

The following table sets forth information with respect to shares of our common stock that we repurchased under the Board-approved open market share purchase program during the three months ended December 31, 2019.
PeriodTotal Number of Shares PurchasedAverage Price Paid Per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programsa
Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programsa
October 1 to 31, 2019—  $—  —  991,695  
November 1 to 30, 2019—  —  —  991,695  
December 1 to 31, 2019—  —  —  991,695  
Total—  $—  —  991,695  
a.In November 2013, the Board approved an increase in our open-market share purchase program, initially authorized in 2001, for up to 1.7 million shares of our common stock. The program does not have an expiration date.
As stated above, our Comerica Bank loan agreements require lender approval of any common stock repurchases in excess of $1.0 million.
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Items 7. and 7A. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Quantitative and Qualitative Disclosures About Market Risk

OVERVIEW

In Management’s Discussion and Analysis of Financial Condition and Results of Operations, “we,” “us,” “our” and “Stratus” refer to Stratus Properties Inc. and all entities owned or controlled by Stratus Properties Inc. You should read the following discussion in conjunction with our consolidated financial statements and the related discussion of “Business and Properties” and “Risk Factors” included elsewhere in this Form 10-K. The results of operations reported and summarized below are not necessarily indicative of future operating results, and future results could differ materially from those anticipated in forward-looking statements (refer to “Cautionary Statement” for further discussion). All subsequent references to “Notes” refer to Notes to Consolidated Financial Statements located in Part II, Item 8. “Financial Statements and Supplementary Data.”

We are a diversified real estate company with headquarters in Austin, Texas. We are engaged primarily in the acquisition, entitlement, development, management, operation and sale of commercial, and multi-family and single-family residential real estate properties located in the Austin, Texas area and other select, fast-growing markets in Texas. We generate revenues and cash flows from the sale of our developed properties and rental income from our leased properties. See "Operations" in Part I, Items 1. and 2. "Business and Properties," and Note 10 for further discussion of our operating segments and “Business Strategy” for a discussion of our business strategy.

BUSINESS STRATEGY

Our portfolio consists of approximately 1,700 acres of undeveloped acreage and acreage under development for commercial, multi-family and single-family residential projects, plus several completed retail and residential projects.

Our primary business objective is to create value for stockholders by methodically developing and enhancing the value of our properties and then selling them profitably. Our full cycle development program of acquiring properties, securing and maintaining development entitlements, developing and stabilizing, and then preparing them for sale or refinancing is a key element of our strategy. We currently have projects in certain of these stages as described below in “Development Activities - Residential” and “Development Activities - Commercial.”

We believe that Austin and other select, fast-growing markets in Texas continue to be desirable locations. Many of our developments are in locations where development approvals have historically been subject to regulatory constraints, which has made it difficult to obtain entitlements. Our Austin properties, which are located in desirable areas with significant regulatory constraints, are entitled and have utility capacity for full buildout. As a result, we believe that through strategic planning, development and marketing, we can maximize and fully realize their value.

Our development plans require significant additional capital, which we may pursue through joint ventures or other arrangements. Our business strategy requires us to rely on cash flow from operations and debt financing as our primary sources of funding for our liquidity needs. We have also, from time to time, relied on project-level equity financing of our subsidiaries. We have formed strategic relationships as part of our overall strategy for particular development projects and may enter into other similar arrangements in the future.

During 2019, we made significant progress in advancing our primary business objectives as we:
(1) entered into an agreement to sell Block 21, which contains the W Austin Hotel and the ACL Live and 3TEN ACL Live entertainment venues, for $275 million;
(2) completed construction of The Saint Mary, a 240-unit multi-family development in the Circle C community;
(3) completed construction of the H-E-B, L.P. (HEB) grocery store and two retail buildings with a total of 143,855 square feet at Kingwood Place, an HEB-anchored, mixed-use development project in Kingwood, Texas;
(4) completed construction of the second phase and refinanced The Santal, a 448-unit garden style, multi-family project in the Barton Creek community;
(5) finalized the New Caney HEB grocery store lease and acquired HEB’s interests in the New Caney partnership for approximately $5 million; and
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(6) completed the sales of Barton Creek Village for $7.7 million and a retail pad subject to a ground lease located in the Circle C community for $3.2 million.
We are evaluating our options for the use of the net proceeds from the sale of Block 21.
GENERAL

Developed property sales can include an individual tract of land that has been developed and permitted for residential use, or a developed lot with a residence already built on it. We may sell properties under development, undeveloped properties or leased properties, if opportunities arise that we believe will maximize overall asset values as part of our business strategy.

Our acreage under development and undeveloped as of December 31, 2019, is presented in the following table.
 Acreage Under DevelopmentUndeveloped Acreage 
Single FamilyCommercialTotalSingle
Family
Multi-
family
CommercialTotalTotal
Acreage
Austin:       
Barton Creek13  —     13  512  266  394  1,172  1,185  
Circle C—  —     —  —  21  216  237  237  
Lantana—  —     —  —  —  37  37  37  
Other—  —  —   —  —    
Lakeway—  —  —  34  —  —  34  34  
Magnolia—  —  —  28  26  70  124  124  
Jones Crossing—  —  —  —  21  23  44  44  
Kingwood Place—    —  10  13  23  25  
West Killeen Market—  —  —  —  —     
New Caney—  —  —  —  —  38  38  38  
Camino Real, San Antonio—  —     —  —  —     
Total13      15  581  344  796  1,721  1,736  

Our single-family residential holdings at December 31, 2019, are principally in southwest Austin, Texas, and include developed lots, townhomes under development in Amarra Drive in Barton Creek and a condominium unit at the W Austin Residences in downtown Austin. Our multi-family and commercial holdings at December 31, 2019, consist of The Santal, Lantana Place, Jones Crossing, West Killeen Market, Kingwood Place, The Saint Mary and New Caney. See “Development Activities - Residential” and “Development Activities - Commercial” below for further discussion.

Our leasing operations primarily involve the lease of space at retail and mixed-use properties that we developed, and the lease of residences in multi-family apartment complexes that we developed. Tenants in our retail and mixed-use projects are diverse and include grocery stores, restaurants, healthcare services, fitness centers, a movie house, other retail products and services, and include a hotel ground lease.

In 2019, our revenues totaled $30.0 million and our net loss attributable to common stockholders totaled $2.5 million, compared with revenues of $25.0 million and a net loss attributable to common stockholders of $4.0 million for 2018. Revenues increased in 2019, compared with 2018, primarily as a result of the commencement of leases at our recently completed properties, partly offset by a decrease in sales of higher-priced residential units.

We received $4.8 million of proceeds in 2019 related to Travis County municipal utility district (MUD) reimbursements of infrastructure costs incurred for development of Barton Creek. Of the total amount, we recorded $1.1 million as a reduction of real estate under development on the consolidated balance sheet, and $3.4 million as a reduction in real estate cost of sales and $0.3 million in other income, net in the consolidated statement of comprehensive loss for 2019. The year ended December 31, 2019, also included a pre-tax gain on the sale of assets totaling $5.7 million, primarily related to the sales of Barton Creek Village and a retail pad subject to a ground lease located in the Circle C community.
Our results for 2018 include equity in unconsolidated affiliates income of $1.15 million ($0.9 million to net loss attributable to common stockholders), primarily related to Crestview Station, and a net tax charge of $0.2 million associated with U.S. tax reform.

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At December 31, 2019, we had total debt of $224.6 million (see “Debt Maturities and Other Contractual Obligations” below for further discussion) and consolidated cash of $8.8 million, excluding debt and cash related to Block 21, which is reported in discontinued operations. We have significant recurring costs, including property taxes, maintenance and marketing, and we believe we will have sufficient sources of debt financing and cash from operations to meet our cash requirements. For discussion of operating cash flows and debt transactions see “Capital Resources and Liquidity” below.

Since January 2020, the coronavirus (COVID-19) outbreak has caused substantial disruption in international and U.S. economies and markets, which intensified in recent weeks. The coronavirus and fear of further spread of the coronavirus has caused quarantines, cancellation of events and travel, business and school shutdowns, and overall reduction in business and economic activity. On March 6, 2020, the annual South by Southwest music festival in Austin, Texas was cancelled. On March 11, 2020, the World Health Organization designated the coronavirus outbreak a pandemic. The outbreak is having a significant adverse impact on the hotel and entertainment industries. Due to the cancellation of South by Southwest and Austin’s recent ban on large gatherings, we recently received a significant number of cancellations at the W Austin Hotel. We continue to closely monitor the coronavirus situation and are evaluating its impact and potential impact on our business. We are taking recommended preventative measures at our properties to protect tenants, customers and employees. The situation is evolving rapidly, and we cannot at this time reliably estimate the financial impact on our company. See “Risk Factors” for additional discussion.

Real Estate Market Conditions. Because of the concentration of our assets primarily in the Austin, Texas area, and in other select, fast-growing markets in Texas, market conditions in these regions significantly affect our business. Our future operating cash flows and our ability to develop and sell our properties will be dependent on the level and profitability of our real estate sales. In turn, these sales will be significantly affected by future real estate market conditions in and around Austin and the other markets in which we operate, including development costs, interest rates, the availability of credit to finance real estate transactions, demand for residential and commercial real estate, and regulatory factors including our use and development entitlements. These market conditions historically have moved in periodic cycles, and can be volatile. Real estate development in southwest Austin, where most of our real estate under development and undeveloped real estate is located, has historically been constrained as a result of various restrictions imposed by the city of Austin. Additionally, several special interest groups have traditionally opposed development in southwest Austin.

In addition to the traditional influence of state and federal government employment levels on the local economy, the Austin-Round Rock, Texas area (Austin-Round Rock) has been influenced by growth in the technology sector. Large, high-profile technology companies have expanded their profile in Austin-Round Rock recently as the technology sector has clustered in this market. The Austin-Round Rock-area population increased by 33 percent from 2009 through 2018, largely because of growing interest in Austin’s local job market. Median family income levels in the Austin-Round Rock area increased by 30 percent during the same period. The expanding economy resulted in rising demands for residential housing, commercial office space and retail services. From 2009 through 2018, sales tax receipts in the city of Austin rose by 66 percent, an indication of the increase in business activity during the period.


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The following chart compares Austin-Round Rock’s five-county median family income and metro area population for 1999, 2009 and the most current information available for 2018 (actual) and 2019 (estimate), based on United States (U.S.) Census Bureau data and Austin-Round Rock’s data.

strs-20191231_g4.jpg
Based on the city of Austin's fiscal year of October 1 through September 30, the chart below compares the city of Austin's sales tax revenues for 1999, 2009 and 2018 (the latest period for which data is available).
strs-20191231_g5.jpg
Source: Comprehensive Annual Financial Report for the City of Austin, Texas


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Vacancy rates in the city of Austin, Texas as of December 31, 2019 and 2018, are noted below.
 Vacancy Rates
Building Type20192018
Office Buildings (Class A)10.5 %
a
9.4 %
a
Multi-Family Buildings5.5 %
b
5.5 %
b
Retail Buildings4.1 %
b
4.4 %
b
a.CB Richard Ellis: Austin MarketView
b.Marcus & Millichap Research Services, CoStar Group, Inc.
CRITICAL ACCOUNTING ESTIMATES

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 U.S. The preparation of these financial 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 under the heading “Use of Estimates.” We believe that our most critical accounting estimates relate to our real estate, deferred tax assets, income taxes, profit recognition on sales of real estate and the profit participation incentive plan.

Management has reviewed the following discussion of its development and selection of critical accounting estimates with the audit committee of our Board of Directors (Board).

Real Estate.  Real estate is classified as held for sale, under development, held for investment or land available for development (see Note 1). When events or circumstances indicate that an asset’s carrying amount may not be recoverable, an impairment test is performed. For real estate held for sale, if estimated fair value less costs to sell is less than the related carrying amount, a reduction of the asset’s carrying value to fair value less costs to sell is required. For real estate under development, land available for development and real estate held for investment, if the projected undiscounted cash flow from the asset is less than the related carrying amount, a reduction of the carrying amount of the asset to fair value is required. Measurement of an impairment loss is based on the fair value of the long-lived asset. Generally, we determine fair value using valuation techniques such as discounted expected future cash flows.

In developing estimated future cash flows for impairment testing for our real estate assets, we have incorporated our own market assumptions including those regarding real estate prices, sales pace, sales and marketing costs, and infrastructure costs. Our assumptions are based, in part, on general economic conditions, the current state of the real estate industry, expectations about the short- and long-term outlook for the real estate market, and competition from other developers or operators in the area in which we develop or operate our properties. These assumptions can significantly affect our estimates of future cash flows. For those properties held for sale and deemed to be impaired, we determine fair value based on appraised values, adjusted for estimated costs to sell, as we believe this is the value for which the property could be sold. We recorded no impairment losses during the two years ended December 31, 2019.

Deferred Tax Assets. The carrying amounts of deferred tax assets are required to be reduced by a valuation allowance if, based on the available evidence, it is more likely than not that such assets will not be realized. Accordingly, we assess the need to establish valuation allowances for deferred tax assets periodically based on the more-likely-than-not realization threshold criterion. In the assessment of the need for a valuation allowance, appropriate consideration is given to all positive and negative evidence related to the realization of the deferred tax assets. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the duration of statutory carryforward periods, our experience with operating loss and tax credit carryforwards not expiring unused, and tax planning alternatives. This process involves significant management judgment about assumptions that are subject to change based on variances between projected and actual operating performance and changes in our business environment or operating or financing plans.

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We regularly evaluate the recoverability of our deferred tax assets, considering available positive and negative evidence, including earnings history and the forecast of future taxable income. We had deferred tax assets (net of deferred tax liabilities) totaling $12.3 million at December 31, 2019.

Income Taxes. In preparing our annual consolidated financial statements, we estimate the actual amount of income taxes currently payable or receivable as well as deferred income tax assets and liabilities attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which these temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates or laws is recognized in income in the period in which such changes are enacted. See Note 7 for further discussion.

Profit Recognition on Sales of Real Estate. Revenue or gains on sales of real estate are recognized when control of the asset has been transferred to the buyer if collection of substantially all of the consideration to which Stratus will be entitled is probable and Stratus has satisfied all other performance obligations under the contract. Consideration is allocated among multiple performance obligations or distinct nonfinancial assets to be transferred to the buyer based on relative fair value. Consideration is reasonably determined and deemed likely of collection when Stratus has signed sales agreements and has determined that the buyer has demonstrated a commitment to pay.

Profit Participation Incentive Plan. In July 2018, the Compensation Committee of our Board adopted the Stratus Profit Participation Incentive Plan (the Plan), which provides participants with economic incentives tied to the success of the development projects designated by the Compensation Committee as approved projects under the Plan. Under the Plan, 25 percent of the profit for each approved project following a capital transaction (each as defined in the Plan) will be set aside in a pool. The Committee will allocate participation interests in each pool to certain officers, employees and consultants determined to be instrumental in the success of the project. We estimate the profit pool of each approved project by projecting the cash flow from operations, the net sales price, the timing of a capital transaction or valuation event and Stratus' equity and preferred return including costs to complete for projects under development, all of which involve significant judgment and estimates. Estimates related to the awards may change over time due to differences between projected and actual development progress and costs, market conditions and the timing of capital transactions or valuation events. During 2019, we accrued $0.7 million to project development costs and $1.0 million in general and administrative expense related to the Plan. The accrued liability for the Plan totaled $2.5 million at December 31, 2019 (included in other liabilities). See Note 1 and Note 8 for additional discussion.


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DEVELOPMENT ACTIVITIES

Residential.  As of December 31, 2019, the number of our residential developed lots/units, lots/units under development and lot/units for potential development by area are shown below:
 Residential Lots/Units
 DevelopedUnder
Development
Potential Developmenta
Total
Barton Creek:   
Amarra Drive:
      
Phase II lots
 —  —   
Phase III lots
17  —  —  17  
Phase III homes —  —   
Amarra Villas
—  13  —  13  
 Other townhomes
—  —  170  170  
Section N multi-family:
The Santal
448  —  —  448  
Other Section N
—  —  1,412  1,412  
Other Barton Creek sections
—  —  156  156  
Circle C multi-family:      
The Saint Mary
240  —  —  240  
Tract 102
—  —  56  56  
Lakeway—  —  100  100  
Jones Crossing—  —  300  300  
Kingwood Place—  —  300  300  
Magnolia—  —  684  684  
Other—  —    
W Austin Residences —  —   
Total Residential Lots/Units715  13  3,185  3,913  
a.Our development of the properties identified under the heading “Potential Development” is dependent upon the approval of our development plans and permits by governmental agencies, including the city of Austin and other cities in our Texas markets. Those governmental agencies may not approve one or more development plans and permit applications related to such properties or may require us to modify our development plans. Accordingly, our development strategy with respect to those properties may change in the future. While we may be proceeding with approved infrastructure projects or planning activities for some of these properties, they are not considered to be “under development” for disclosure in this table until construction activities have begun.
Barton Creek
Amarra Drive. In 2008, we completed the development of Amarra Drive Phase II, which consists of 35 lots on 51 acres. We sold two lots for $1.2 million in 2019 and three lots for $2.0 million in 2018, two of which were included in the contract discussed below. As of December 31, 2019, seven developed Phase II lots remained unsold.
In 2015, we completed the development of Amarra Drive Phase III, which consists of 64 lots on 166 acres. We sold 14 lots in 2019 for $8.9 million, 8 of which were included in the contract discussed below, and 9 lots in 2018 for $5.9 million, 2 of which were included in the contract discussed below. As of December 31, 2019, 17 developed Phase III lots and 2 homes built on Phase III lots remained unsold.

In September 2019, we amended a contract previously entered into in March 2018, pursuant to which we agreed to sell 2 Amarra Drive Phase II lots and 15 Amarra Drive Phase III lots to a homebuilder for a total of $11.6 million (the original homebuilder contract). In January 2020, the original homebuilder contract was terminated and replaced with a similar contract with the same homebuilder in which we agreed to sell the three remaining Amarra Drive Phase III lots under the original contract as well as three new Amarra Drive Phase II lots and two new Amarra Drive Phase III lots for $5.2 million (the new homebuilder contract). In accordance with the new homebuilder contract the parties are required to close on the sale of these lots ratably before March 31, 2021. If the purchaser fails to close on the sale of the minimum number of lots by any of the specified closing dates, we may elect to terminate the contract but would retain the related $45 thousand earnest money.

Subsequent to December 31, 2019, and through March 12, 2020, we sold one Amarra Drive Phase II lot, six Amarra Drive Phase III lots, including one which was subject to the new homebuilder contract, and two homes built on Amarra Drive Phase III lots for a total of $11.7 million. As of March 12, 2020, one Amarra Drive Phase II lot and one
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Amarra Drive Phase III lot were under contract, in addition to the remaining three Amarra Drive Phase II lots and four Amarra Drive Phase III lots subject to the new homebuilder contract discussed above.

The Villas at Amarra Drive (Amarra Villas) townhome project is a 20-unit development for which we completed site work in late 2015. Construction of the first five townhomes was completed during 2017 and an additional two townhomes were completed in 2018. We sold the last two completed townhomes for $3.5 million in 2019. We sold four townhomes for $7.5 million in 2018. We began construction on the next four Amarra Villas townhomes in the first quarter of 2020.

The Santal. The Santal multi-family project is a garden-style apartment complex in the Barton Creek community. As of December 31, 2019, The Santal multi-family project, consisting of 448 units, was fully leased and stabilized. We completed construction of the second phase of The Santal, located directly adjacent to the first phase, during first-quarter 2019.

Section KLO and Section N. We are advancing the planning and permitting process for development of future phases of Barton Creek, including residential Section KLO and commercial and multi-family Section N. We redesigned Section KLO using a combination of single family lots and residential condominium lots, which is expected to double our density from 154 to 316 home sites. The city of Austin and Travis County approved initial subdivision permit applications for Section KLO in October 2019. The engineering for roads and utilities for the initial phases of Section KLO is in process. Using a conceptual approach similar to that used for Section KLO, we are also evaluating a redesign of Section N, our approximately 570 acre tract located along Southwest Parkway in the southern portion of the Barton Creek community. If successful, this new project would be designed as a dense, mid-rise, mixed-use project surrounded by an extensive greenspace amenity and result in an increase in potential densities. These potential development projects require extensive additional permitting and will be dependent on market conditions. Because of the nature and cost of the approval and development process and uncertainty regarding market demand for a particular use, there is uncertainty regarding the nature of the final development plans and whether we will be able to successfully execute the plans. In addition, our development plans for Section KLO and Section N will require significant capital, which we may pursue through debt and/or equity financings, joint ventures, commercial, partner or other arrangements.

Circle C
We are developing our properties located in the Circle C community based on the entitlements secured in our Circle C settlement with the city of Austin. Our Circle C settlement, as amended in 2004, permits development of 1.16 million square feet of commercial space, 504 multi-family units and 830 single-family residential lots. As of December 31, 2019, our Circle C community had remaining entitlements for 674,942 square feet of commercial space and 56 multi-family units. See Note 9 for a summary of incentives we received in connection with the Circle C settlement.

The Saint Mary. During 2019, we completed construction of The Saint Mary, a 240-unit luxury garden-style apartment project located in the Circle C community. As of December 31, 2019, approximately 60 percent of the units were leased. We expect to explore opportunities to sell The Saint Mary upon stabilization, subject to market conditions. See Note 2 for further discussion.

W Austin Residences
As of December 31, 2019, one condominium unit remained unsold. The condominium unit is not included in the sale of Block 21.


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Commercial.  As of December 31, 2019, the number of square feet of our commercial property developed, under development and our remaining entitlements for potential development of commercial property (excluding our discontinued operations associated with Block 21, which include the W Austin Hotel, the ACL Live entertainment venue and the related office and retail space) are shown below:
 Commercial Property
 DevelopedUnder Development
Potential Development a
Total
Barton Creek:    
Entry corner
—  —  5,000  5,000  
Amarra retail/office
—  —  83,081  83,081  
Section N
—  —  1,500,000  1,500,000  
Circle C—  —  674,942  674,942  
Lantana:
Lantana Place
99,379  —  220,621  320,000  
Tract G07
—  —  160,000  160,000  
Magnolia —  —  133,605  133,605  
West Killeen Market44,493  —  —  44,493  
Jones Crossing154,117  —  104,750  258,867  
Kingwood Place143,855  8,000  —  151,855  
New Caney—  —  180,496  180,496  
Total Square Feet441,844  8,000  3,062,495  3,512,339  
a.Our development of the properties identified under the heading “Potential Development” is dependent upon the approval of our development plans and permits by governmental agencies, including the city of Austin and other cities in our Texas markets. Those governmental agencies may not approve one or more development plans and permit applications related to such properties or may require us to modify our development plans. Accordingly, our development strategy with respect to those properties may change in the future. While we may be proceeding with approved infrastructure projects or planning activities for some of these properties, they are not considered to be “under development” for disclosure in this table until construction activities have begun.

Barton Creek and Circle C Commercial
As indicated in the table and discussion above, we have substantial commercial property development potential in Barton Creek and Circle C.

Lantana, including Lantana Place
Lantana is a community south of Barton Creek in Austin. As of December 31, 2019, we had remaining entitlements for approximately 381,000 square feet of office and retail use on 37 acres. Regional utility and road infrastructure is in place with capacity to serve Lantana at full build-out as permitted under our existing entitlements. Lantana Place is a partially developed, mixed-use real-estate development project. We completed construction of the 99,379-square-foot first phase of Lantana Place in 2018. We previously entered into a ground lease with a hotel operator in connection with its development of an AC Hotel by Marriott, and construction of that hotel began in May 2019. As of December 31, 2019, we had signed leases for approximately 80 percent of the retail space, including the anchor tenant, Moviehouse & Eatery, which opened in May 2018.

Magnolia Place
We are planning to proceed, subject to financing, with the first phase of development of Magnolia Place, a mixed-use project in Magnolia, Texas, currently planned for 133,605 square feet of commercial space; 7 pad sites; 2 hotel sites; and 96 single-family lots and 588 multi-family units. Magnolia Place will be shadow-anchored by a 95,000-square-foot HEB grocery store to be constructed by HEB on an adjoining 18-acre site owned by HEB. The first phase of development is expected to consist of approximately 33,000 square feet of retail space, 4 pads for lease and 3 pads to be held for sale, and we are currently evaluating the initial phase of multi-family development. We are currently in the process of securing a construction loan to finance the first phase of development. We began site clearing, which will be followed by site work and joint use road and utility infrastructure that will support the entire project. We expect substantially all of the infrastructure costs to be eligible for future reimbursement by the Magnolia East MUD. Refer to Note 1 for further discussion of this MUD and our accounting policy for MUD reimbursements. The HEB grocery store is currently expected to open in mid-2021.

West Killeen Market
In 2015, we acquired approximately 21 acres in Killeen, Texas, to develop the West Killeen Market project with 44,493 square feet of commercial space and three pad sites. The project is shadow-anchored by an adjacent
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90,000 square-foot HEB grocery store. Construction of the commercial space and pad sites was completed in 2017. As of December 31, 2019, we had executed leases for approximately 70 percent of the retail space at West Killeen Market and leasing activities for the vacant retail space and the three vacant pad sites are ongoing.

Jones Crossing
Construction of the first phase of the retail component of Jones Crossing, an HEB-anchored, mixed-use development in College Station, Texas, is complete. As of December 31, 2019, we had signed leases for approximately 95 percent of the completed retail space, including the HEB grocery store. As of December 31, 2019, we had approximately 44 undeveloped acres with estimated development potential of approximately 104,750 square feet of commercial space and five vacant pad sites. We continue to evaluate options for the multi-family component of this project.

Kingwood Place
In August 2018, we purchased a 54-acre tract of land in Kingwood, Texas to be developed as Kingwood Place, a mixed-use development project. The Kingwood project is expected to total approximately 152,000 square feet of retail lease space, anchored by a 103,000-square-foot HEB grocery store, with 49,000 square feet of retail space, 5 retail pads and a 10-acre parcel planned for approximately 300 multi-family units. Construction of two retail buildings, totaling approximately 41,000 square feet, was completed in August 2019, and the HEB grocery store was completed and opened in November 2019. An 8,000-square-foot retail building is under construction and expected to be completed in June 2020, and we have signed ground leases on two other retail pads. Three retail pads remain available for lease. As of December 31, 2019, we had signed leases for approximately 80 percent of the retail space, including the HEB grocery store. See Note 2 for further discussion.

New Caney
In October 2018, we purchased a 38-acre tract of land, in partnership with HEB, for approximately $9.5 million in New Caney, Texas, for the future development of an HEB-anchored, mixed-use project. Subject to completion of development plans, we currently expect the New Caney project will include restaurants and retail services, totaling approximately 145,000 square feet (inclusive of the HEB grocery store), 5 pad sites, and a 10-acre multi-family parcel. We finalized the lease for the HEB grocery store in March 2019, and upon execution of this lease, we acquired HEB’s interests in the partnership for approximately $5 million. We currently plan to commence construction on the New Caney project no earlier than 2021.

RESULTS OF OPERATIONS

We are continually evaluating the development and sale potential of our properties and will continue to consider opportunities to enter into transactions involving our properties, including possible joint ventures or other arrangements. 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. We use operating income or loss to measure the performance of each operating segment. Corporate, eliminations and other includes consolidated general and administrative expenses, which primarily consist of employee salaries and other costs.

The following table summarizes our operating results for the years ended December 31 (in thousands):
 20192018
Operating income (loss):  
Real estate operations$4,112  
a
$1,144  
b
Leasing operations8,296  
c
1,932  
Corporate, eliminations and other(11,192) (10,313) 
Operating income (loss)$1,216  $(7,237) 
Interest expense, net$(4,248) $(198) 
Loss from continuing operations$(2,787) $(5,347) 
Income from discontinued operationsd
$320  $1,361  
Net loss attributable to common stockholders$(2,464) $(3,982) 
e
a.We received $4.8 million of proceeds in 2019 related to Travis County MUD reimbursements of infrastructure costs incurred for development of Barton Creek. Of the total amount, $3.4 million was recorded as a reduction in real estate cost of sales.
b.Includes $0.4 million of reductions to cost of sales associated with collection of prior-years’ assessments of properties in Barton Creek.
c.Includes a gain on the sale of assets totaling $5.7 million, primarily related to the sales of Barton Creek Village and a retail pad subject to a ground lease located in the Circle C community.
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d.See Note 4 and the discussion below under heading “Discontinued Operations” for further information regarding discontinued operations.
e.Includes $1.15 million from equity in unconsolidated affiliates’ income reflecting Stratus’ interest in Crestview Station. During 2018, Crestview Station sold its last tract of land and its multi-family entitlements.

As a result of the pending sale of Block 21, Stratus currently has two operating segments: Real Estate Operations and Leasing Operations (see Notes 4 and 10). The following is a discussion of our operating results by segment.

Real Estate Operations
The following table summarizes our Real Estate Operations results for the years ended December 31 (in thousands):
 20192018
Revenues:  
Developed property sales$13,549  $16,509  
Commissions and other254  300  
Total revenues13,803  16,809  
Cost of sales, including depreciation9,691  15,665  
Operating income$4,112  $1,144  

Developed Property Sales.  The following table summarizes our developed property sales for the years ended December 31 (in thousands):
 20192018
 Lots/UnitsRevenuesAverage Cost per Lot/UnitLots/UnitsRevenuesAverage Cost per Lot/Unit
Barton Creek      
Amarra Drive:
Phase II lots $1,235  $229   $1,970  $213  
Phase III lots14  8,864  286   5,938  277  
Amarra Villas townhomes 3,450  1,607   7,461  1,704  
W Austin Residences:
    
Condominium unit—  —  —   1,140  726  
Total Residential18  $13,549  17  $16,509  

Real Estate Revenue. The decrease in revenue from the Real Estate Operations segment in 2019, compared with 2018, primarily reflects lower revenues from the sales of higher-priced residential units, including Amarra Villas townhomes and the W Austin Residences condominium sold in 2018.

Cost of Sales. Cost of sales includes cost of property sold, project operating and marketing expenses and allocated overhead costs, partly offset by reductions for certain MUD reimbursements. Cost of sales totaled $9.7 million in 2019 and $15.7 million in 2018. The decrease in cost of sales in 2019, compared with 2018, primarily reflects (i) $3.4 million in MUD reimbursements received in 2019 recorded as a reduction in real estate cost of sales as the reimbursed property had previously been sold and (ii) fewer residential unit sales. Costs of sales for 2018 includes $0.4 million of reductions to cost of sales associated with collection of prior-years' assessments of properties in Barton Creek.

Cost of sales for our real estate operations also includes significant recurring costs (including property taxes, maintenance and marketing), which totaled $5.3 million in 2019 and $5.2 million in 2018.


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Leasing Operations
The following table summarizes our Leasing Operations results for the years ended December 31 (in thousands):
 20192018
Rental revenue$16,218  $8,211  
Rental cost of sales, excluding depreciation8,069  3,644  
Depreciation5,536  2,635  
Gain on sales of assets(5,683) —  
Operating income $8,296  $1,932  

Rental Revenue.  Rental revenue primarily includes revenue from The Santal, Lantana Place, Jones Crossing and West Killeen Market. The increase in rental revenue in 2019, compared with 2018, primarily reflects the commencement of leases at our recently completed properties.

Rental Cost of Sales and Depreciation.  Rental costs of sales and depreciation expense increased in 2019, compared with 2018, primarily reflecting the completion of the projects and increased activity at The Santal and Lantana Place.

Gain on Sales of Assets. During 2019, we recorded a pre-tax gain of $5.7 million, primarily related to the sales of Barton Creek Village and a retail pad subject to a ground lease located in the Circle C community.

Corporate, Eliminations and Other
Corporate, eliminations and other (see Note 10) includes consolidated general and administrative expenses, which primarily consist of employee salaries and other costs. Consolidated general and administrative expenses totaled $11.3 million in 2019 and $10.3 million in 2018. The increase in general and administrative expenses in 2019, compared to 2018, primarily reflects charges associated with our Profit Participation Incentive Plan, which was approved in late 2018 and therefore did not have a full year of expense in 2018. See Note 8 for further discussion of our Profit Participation Incentive Plan. Corporate, eliminations and other also includes eliminations of intersegment amounts incurred by our operating segments.

Non-Operating Results
Interest Expense, Net.  Interest costs (before capitalized interest) totaled $11.9 million in 2019 and $7.7 million in 2018. The increase in interest costs in 2019, compared with 2018, primarily reflects higher average debt balances.

Capitalized interest totaled $7.7 million in 2019 and $7.5 million in 2018, and is primarily related to development activities at Barton Creek. The 2019 period also included capitalized interest costs associated with the development activities at Kingwood Place and The Saint Mary. In 2018, an additional $0.7 million of interest from discontinued operations was capitalized to real estate under development.

Other Income, Net. We recorded $0.4 million of interest income in 2019, primarily associated with reimbursements received from MUDs.

Equity in Unconsolidated Affiliates’ (Loss) Income.  We account for our interests in our unconsolidated affiliates, primarily Crestview Station, using the equity method. Our equity in the net (loss) income of these entities totaled less than $(0.1) million in 2019 and $1.15 million in 2018. The results in 2018 reflect profit from the sale of Crestview’s last tract of land and its multi-family entitlements.

Benefit from Income Taxes.  We recorded a benefit from income taxes of $0.3 million in 2019 and $0.7 million in 2018. Both 2019 and 2018 include the Texas state margin tax. The difference between Stratus’ consolidated effective income tax rate and the U.S. federal statutory income tax rate of 21 percent for 2019 and 2018 is primarily attributable to the Texas state margin tax. We had deferred tax assets (net of deferred tax liabilities) totaling $12.3 million at December 31, 2019, and $11.8 million at December 31, 2018.

Discontinued Operations
Block 21 is located on a two-acre city block in downtown Austin and contains the W Austin Hotel, consisting of a 251-room luxury hotel, and office, retail and entertainment space. The hotel is managed by W Hotel Management, Inc. a subsidiary of Starwood Hotels & Resorts Worldwide, Inc., which is a subsidiary of Marriott International, Inc. The entertainment space, occupied by Austin City Limits Live at the Moody Theater (ACL Live) and 3TEN ACL Live, includes a live music and entertainment venue and production studio. The 3TEN ACL Live venue, which opened in
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March 2016, has a capacity of approximately 350 people and is designed to be more intimate than ACL Live, which is a 2,750-seat entertainment venue.

As a result of our December 2019 announcement of an agreement to sell Block 21 for $275 million, our hotel and entertainment operations, as well as the leasing operations associated with the Block 21 property, are reported as discontinued operations for all periods presented in the accompanying financial statements. Refer to Note 4 for further discussion.

The transaction is expected to close in the second quarter of 2020, subject to the satisfaction of closing conditions, and we expect to record an approximate $130 million pre-tax gain based on December 31, 2019, balances. The purchase price is payable by the assumption of the Goldman Sachs loan with the balance to be paid in cash. We expect the net sale proceeds before taxes to be approximately $120 million and the after-tax proceeds to be approximately $100 million.

Income from discontinued operations totaled $0.3 million in 2019 and $1.4 million in 2018. The decrease in income from discontinued operations in 2019, compared with 2018, was primarily a result of lower hotel revenue as discussed below.

The following is a discussion of our key operating results within discontinued operations.

Hotel Revenue. Hotel revenue primarily includes revenue from W Austin Hotel room reservations and food and beverage sales. Hotel revenues were $35.2 million in 2019 and $37.9 million in 2018. The decrease in hotel revenue in 2019, compared with 2018, was primarily a result of reduced group business and transient weekend business and lower food and beverage sales. Revenue per available room (RevPAR), which is calculated by dividing total room revenue by the average total rooms available during the year, was $235 in 2019, compared with $245 in 2018.

Entertainment Revenue. Entertainment revenue primarily reflects the results of operations for ACL Live, including ticket sales, revenue from private events, sponsorships, personal seat license sales and suite sales, and sales of concessions and merchandise. Entertainment revenue also reflects revenues associated with events hosted at venues other than ACL Live, including 3TEN ACL Live. Revenues from the Entertainment segment varies from period to period as a result of factors such as the price of tickets and number of tickets sold, as well as the number and type of events hosted at ACL Live and 3TEN ACL Live. Entertainment revenues were $24.6 million in 2019 and $22.5 million in 2018. Entertainment revenue increased in 2019, compared with 2018, primarily as a result of an increase in the number of events hosted and higher event attendance at ACL Live.

Certain key operating statistics specific to the concert and event hosting industry are included below to provide additional information regarding our ACL Live and 3TEN ACL Live operating performance, for the years ended December 31.
 20192018
ACL Live
Events:
Events hosted264  240  
Estimated attendance316,650  285,900  
Ancillary net revenue per attendee$46.05  $41.53  
Ticketing:
Number of tickets sold260,320  214,130  
Gross value of tickets sold (in thousands)$14,411  $12,717  
3TEN ACL Live
Events:
Events hosted201  216  
Estimated attendance36,475  38,100  
Ancillary net revenue per attendee$52.10  $42.05  
Ticketing:
Number of tickets sold23,160  22,190  
Gross value of tickets sold (in thousands)$550  $514  

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CAPITAL RESOURCES AND LIQUIDITY

Volatility in the real estate market, including the markets in which we operate, can impact sales of our properties from period to period. However, we believe that the unique nature and location of our assets will provide us positive cash flows over time. See “Business Strategy” for further discussion of our liquidity.

Comparison of Year-to-Year Cash Flows
Operating Activities. Cash used in operating activities totaled $2.4 million in 2019 and $31.9 million in 2018. The decrease in cash used in operating activities for 2019, compared to 2018, primarily reflects a decrease in expenditures for purchases and development of real estate properties (which totaled $11.3 million in 2019 and $43.7 million in 2018) and changes in working capital accounts. Discontinued operations provided cash flows from operating activities of $2.8 million in 2019 and $6.4 million in 2018.

During 2019, our operating cash flows included MUD reimbursements totaling $4.8 million related to infrastructure costs incurred in Barton Creek (of which $3.7 million reduced the net loss before taxes for the year and $1.1 million was applied to real estate under development).

Investing Activities. Cash used in investing activities totaled $63.9 million in 2019 and $64.0 million in 2018. Capital expenditures totaled $62.6 million for 2019, primarily related to the development of the Kingwood Place and The Saint Mary projects, and $61.9 million for 2018, primarily related to the development of The Santal, Lantana Place, Jones Crossing and The Saint Mary projects. The year 2019 included $10.8 million in proceeds from the sales Barton Creek Village and a retail pad subject to a ground lease located in the Circle C community. Discontinued operations used cash in investing activities totaling $1.3 million in 2019 and $1.2 million in 2018, primarily related to capital expenditures at the hotel and entertainment venues.

We also made payments totaling $1.8 million in 2019 and $2.1 million in 2018 under our master lease obligations associated with the 2017 sale of The Oaks at Lakeway. In 2019, we used $10.3 million to acquire (i) HEB’s noncontrolling interest in the New Caney project and (ii) a limited partner's 33.33 percent interest in the Kingwood Place project.

Financing Activities. Cash provided by financing activities totaled $65.9 million in 2019 and $95.4 million in 2018. Net repayments on the Comerica Bank credit facility totaled $7.7 million in 2019, compared with net borrowings of $24.5 million in 2018. Net borrowings for 2018 were used primarily to fund development projects and capital expenditures. Net borrowings on other project and term loans totaled $75.4 million in 2019, primarily related to The Santal refinancing and The Saint Mary, Kingwood Place, Jones Crossing and New Caney projects, compared with net borrowings of $50.3 million in 2018, primarily for The Santal, Lantana Place, Kingwood Place and Jones Crossing projects. Included in net borrowings, were repayments of the Block 21 loan included in liabilities held for sale totaling $2.2 million in 2019 and $2.1 million in 2018. See Note 6 and “Credit Facility and Other Financing Arrangements” below for a discussion of our outstanding debt at December 31, 2019.

The year 2018 also included $18.0 million of capital contributions from the Class B limited partners in the Kingwood Place and Saint Mary limited partnerships (see Note 2). An additional $4.6 million was received from HEB for its contribution to the purchase of the land for the future New Caney project.

In 2013, our Board approved an increase in the open market share purchase program from 0.7 million shares to 1.7 million shares of our common stock. There were no purchases under this program during 2019 or 2018. As of December 31, 2019, a total of 991,695 shares of our common stock remained available under this program. Our ability to repurchase shares of our common stock is restricted by the terms of our loan agreements with Comerica Bank, which prohibit us from repurchasing shares of our common stock in excess of $1.0 million without the bank’s prior written consent.

Credit Facility and Other Financing Arrangements
At December 31, 2019, we had total debt of $227.2 million based on the principal amounts outstanding, compared with $154.1 million at December 31, 2018, excluding debt related to Block 21 included in discontinued operations. Our Comerica Bank credit facility, which is comprised of a $60.0 million revolving line of credit, had $15.6 million available at December 31, 2019, net of $1.9 million of letters of credit committed against the credit facility. Our Comerica Bank credit facility matures in June 2020, and we are in discussions with the lender about renewing the facility.

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Several of our financing instruments contain customary financial covenants. The West Killeen Market construction loan includes a requirement that we maintain a minimum total stockholders’ equity balance of $110.0 million. The Santal loan includes a requirement that we maintain liquid assets, as defined in the agreement, of not less than $7.5 million. The Comerica Bank credit facility, the Lantana Place construction loan, the Jones Crossing construction loan, The Saint Mary construction loan, the Amarra Villas credit facility, the Kingwood Place construction loan, the New Caney land loan and The Santal loan include a requirement that we maintain a net asset value, as defined in each agreement, of $125 million. The Comerica Bank credit facility, the Amarra Villas credit facility and the Kingwood Place construction loan also include a requirement that we maintain a promissory note debt-to-gross asset value, as defined in the agreement, of less than 50 percent. The Santal loan, the West Killeen Market construction loan, the Lantana Place construction loan, the Jones Crossing construction loan, and the Kingwood Place construction loan include a financial covenant to maintain a debt service coverage ratio as defined in each agreement. In addition, our loan agreements with Comerica Bank require Comerica Bank’s prior written consent for any common stock repurchases in excess of $1.0 million or dividend payments. As of December 31, 2019, we were in compliance with all of our financial covenants.

See Note 6 for further discussion of our outstanding debt as of December 31, 2019.

DEBT MATURITIES AND OTHER CONTRACTUAL OBLIGATIONS

The following table summarizes our total debt maturities based on the principal amounts outstanding as of December 31, 2019 (in thousands), excluding the debt related to Block 21 included in discontinued operations:
 2020 202120222023Total
The Santal loana
$—  $—  $75,000  $—  $75,000  
Comerica Bank credit facilityb
42,482  —  —  —  42,482  
New Caney land loanc
—  5,000  —  —  5,000  
Construction loans:
Kingwood Placea
—  —  24,473  —  24,473  
Lantana Place31  368  385  22,673  23,457  
The Saint Mary—