Stratus(STRS) - 2024 Q4 - Annual Report

Part I Business and Properties Stratus Properties Inc. is a real estate company focused on residential and retail properties primarily in the Austin, Texas area, generating revenue from property sales, leasing, and management fees across Real Estate Operations and Leasing Operations segments, while navigating challenging market conditions. Overview Stratus Properties is a real estate company primarily engaged in the development, management, leasing, and sale of multi-family, single-family, and commercial properties in and around Austin, Texas, with recent major transactions including property sales, a joint venture, a special dividend, and share repurchases, all while maintaining its development pipeline and liquidity despite high interest rates. - The company is primarily a residential and retail-focused real estate developer in the Austin, Texas area and other select Texas markets[16] - Key transactions over the last three years include the sale of five Amarra Villas homes for $18.9 million and 47 acres at Magnolia Place for $14.5 million in 2024; a joint venture formation for the Holden Hills project generating $35.8 million in 2023; and the sale of Block 21 for $112.3 million in net proceeds in 2022[19] - Following the Block 21 sale, the Board declared a special cash dividend of $4.67 per share ($40.0 million total) in September 2022 and authorized share repurchase programs[18] - As of December 31, 2024, the company had $20.2 million in cash and $39.0 million available under its revolving credit facility, with no amounts drawn[21] - In late 2024 and early 2025, Stratus amended or refinanced loans for The Saint June, Kingwood Place, Lantana Place, and Jones Crossing at lower interest rates, generating approximately $7.7 million in additional cash proceeds[23][24] Operations The company's operations are divided into Real Estate Operations, which contributed 64% of 2024 revenue and manages 1,517 acres for development, and Leasing Operations, which accounted for 36% of 2024 revenue from leasing commercial and multi-family properties with average retail rentals of $22.52 per square foot. Revenue Contribution by Segment | Segment | 2024 Revenue % | 2023 Revenue % | | :--- | :--- | :--- | | Real Estate Operations | 64% | 15% | | Leasing Operations | 36% | 85% | Real Estate Development Portfolio (Acreage as of Dec 31, 2024) | Category | Single Family | Multi-family | Commercial | Total | | :--- | :--- | :--- | :--- | :--- | | Acreage Under Development | 502 | 4 | — | 506 | | Undeveloped Acreage | 12 | 326 | 673 | 1,011 | | Total Acreage | 514 | 330 | 673 | 1,517 | - The Leasing Operations segment's principal properties include Jones Crossing, Kingwood Place, Lantana Place, West Killeen Market, and The Saint June[44] - Average retail rental rates increased to $22.52 per square foot as of December 31, 2024, from $22.29 a year prior; 73% of leased retail square footage has lease expirations beyond 2029[41] Properties Stratus' property portfolio is concentrated in the Austin, Texas area, particularly within the Barton Creek community, with key developments including Amarra Villas, The Saint June, and the large-scale Holden Hills project, which is leveraging the new ETJ Law for potential density increases, alongside other projects like The Saint George and recent sales at Magnolia Place. - The Barton Creek community is a major focus, containing Amarra Drive lots, Amarra Villas (20-unit luxury development), The Saint June (182-unit multi-family), and the Holden Hills project[45][46][48][49] - The Holden Hills project is split into Phase 1 (495-acre residential, in a JV) and Phase 2 (570-acre mixed-use); the company has removed this land from Austin's extraterritorial jurisdiction (ETJ) under a new state law, which is expected to streamline permitting and increase development density[50][56][57] - The Saint George, a 316-unit multi-family project in north central Austin, is under construction and expected to be completed in the first half of 2025[64] - In 2024, the company sold 47 acres of undeveloped land at Magnolia Place for $14.5 million and the Magnolia Place – Retail phase for $8.9 million[66][67] Human Capital and Sustainability Stratus values its 34 non-unionized full-time employees and is a member of the U.S. Green Building Council, emphasizing sustainable development with a history of LEED-certified projects and green features in current and planned communities. - As of December 31, 2024, the company had 34 full-time employees, none of whom are represented by a union[82] - Stratus is a member of the U.S. Green Building Council and focuses on sustainable development, with projects like Block 21 achieving LEED Silver certification and Holden Hills Phase 1 being designed with a focus on health, wellness, and sustainability[83] Risk Factors The company faces a range of risks related to its business, debt, operations, and stock ownership, including strategic execution, capital access, market concentration, interest rate sensitivity, restrictive debt covenants, project delays, regulatory challenges (like the ETJ Law litigation), competition, and stock liquidity. Risks Relating to our Business and Industry Stratus's success is not guaranteed and depends on executing its development plans amid challenging market conditions like high inflation and interest rates, which increase costs and can delay projects, with operations heavily concentrated in the Austin, Texas residential market, making it vulnerable to local economic downturns and difficulties in securing capital for future projects, while joint ventures introduce additional risks. - The company's business is sensitive to inflation, higher borrowing costs, tightened credit, and increased construction costs, which have adversely impacted project profitability and timelines[89] - Operations are heavily concentrated in the Austin, Texas area and focused on residential projects, creating vulnerability to local economic conditions and weakening in the Austin residential market[96][98] - The capital-intensive nature of the industry means the company may not be able to raise additional debt or equity for future projects on acceptable terms, if at all[99] - Investments through joint ventures involve risks such as partners taking contrary actions, having inconsistent goals, or defaulting on financial obligations[102] Risks Relating to our Indebtedness The company has significant variable-rate debt totaling $194.9 million as of year-end 2024, exposing it to interest rate fluctuations and requiring a substantial portion of cash flow for service payments, which limits funds for other corporate purposes and increases vulnerability to adverse economic conditions, while loan agreements contain restrictive covenants that could lead to default if not complied with. - As of December 31, 2024, total outstanding debt was $194.9 million, with principal payments of $48.9 million and estimated interest payments of $12.9 million due in 2025[112] - All consolidated debt as of year-end 2024 was variable-rate, making the company susceptible to increased interest costs if market rates rise[91][112] - Debt agreements contain restrictive covenants that limit Stratus's ability to borrow additional money, pay dividends, repurchase equity, sell assets, or engage in mergers[115][119] Risks Relating to Real Estate Operations The real estate industry's cyclical nature poses a significant risk, with development projects facing delays and cost overruns due to financing, permits, and labor issues, while ongoing litigation challenging the ETJ Law creates uncertainty for the Holden Hills development, and large holdings of undeveloped land are subject to value deterioration if demand weakens, further complicated by intensive regulatory approval processes and environmental regulations. - Development projects are subject to numerous risks including inability to obtain permits, financing challenges, cost overruns, and contractor defaults[121][123] - Litigation challenging the Texas ETJ Law creates uncertainty for the Holden Hills Phases 1 and 2 projects; if the law is invalidated, it could make development more complex and costly, while if upheld, it could streamline the process and increase density[124][125] - Real estate is an illiquid asset, and the company may not be able to sell properties at advantageous times or prices, potentially leading to losses or impairment charges[128] - Operations are subject to extensive regulatory approval processes and environmental laws, which can cause delays, increase costs, or prevent development entirely[130][132] Risks Relating to Leasing Operations The company's leasing operations face risks of being unable to achieve or sustain satisfactory occupancy and rental rates for both its retail and multi-family properties due to market oversupply, competition, economic conditions affecting tenants' ability to pay rent, and the ongoing threat of online shopping to brick-and-mortar retail, while short lease terms for multi-family properties make rental revenues sensitive to market declines. - Achieving satisfactory occupancy and rental rates is challenged by market oversupply, competition, and potential declines in market rental rates[136][138] - Retail tenants face competition from online shopping, which could impact their ability to meet lease obligations[137] - Multi-family leases are typically for 12 months, making rental revenues sensitive to short-term declines in market rents[139] Cybersecurity Stratus has implemented a cybersecurity risk management program based on the NIST Cybersecurity Framework, with oversight from the Audit Committee and day-to-day management by an internal IT Steering Committee and IT Security Team, and while incidents have occurred, none have had a material effect to date. - The company's cybersecurity program is based on the National Institute of Standards and Technology Cybersecurity Framework (NIST CSF)[148] - Oversight is provided by the Board's Audit Committee, which receives reports from the Chief Financial Officer[150][152] - An IT Steering Committee of senior management and an IT Security Team are responsible for managing cybersecurity risks and responding to incidents[153][154] - To date, no cybersecurity threats or incidents have materially affected the company's business, operations, or financial condition[149] Information About Our Executive Officers The company's executive officers include William H. Armstrong III, Chairman, President, and CEO since 1992, and Erin D. Pickens, Senior Vice President and Chief Financial Officer since 2009. Executive Officers (as of March 21, 2025) | Name | Age | Position or Office | | :--- | :--- | :--- | | William H. Armstrong III | 60 | Chairman of the Board, President and Chief Executive Officer | | Erin D. Pickens | 63 | Senior Vice President and Chief Financial Officer | Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Stratus's common stock trades on NASDAQ under "STRS," with its ability to pay dividends restricted by debt agreements, though special dividends were paid in 2017 and 2022, and the company completed a $10.0 million share repurchase program in October 2023, followed by a new $5.0 million program with $3.0 million remaining as of March 21, 2025, during which 62,686 shares were repurchased in Q4 2024. - The company's common stock trades on The Nasdaq Stock Market under the symbol "STRS"[165] - The ability to pay dividends or repurchase shares is restricted by debt covenants with Comerica Bank, requiring prior written consent[166][167] - A $10.0 million share repurchase program was completed in October 2023; a new $5.0 million program was authorized in November 2023, with $3.0 million remaining as of March 21, 2025[167][171] Issuer Purchases of Equity Securities (Q4 2024) | Period | Total Number of Shares Purchased | Average Price Paid Per Share | Approximate Dollar Value of Shares That May Yet Be Purchased | | :--- | :--- | :--- | :--- | | Oct 2024 | — | $ — | $5,000,000 | | Nov 2024 | 52,767 | $25.33 | $3,663,598 | | Dec 2024 | 9,919 | $25.58 | $3,409,906 | | Total | 62,686 | — | $3,409,906 | Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) This section provides management's perspective on the company's financial condition and results of operations, detailing a business strategy focused on developing and monetizing properties in Texas, primarily through project-level debt and joint ventures, which led to a significant revenue increase to $54.2 million in 2024 and a net income of $2.0 million, with management confident in sufficient liquidity for the next 12 months. Business Strategy The company's primary objective is to create stockholder value by developing properties for sale or lease, focusing on residential and residential-centric mixed-use projects in Austin and other select Texas markets, utilizing project-level debt and third-party equity from joint ventures to earn fees and limit risk, while maintaining liquidity and potentially returning capital to stockholders. - The primary business objective is to create value by developing properties and then selling or holding them for lease based on favorable market conditions[176] - The company plans to continue developing properties using project-level debt and third-party equity through joint ventures, earning management fees and potential preferred returns[178] - Capital may be returned to stockholders via special dividends or share repurchases, as demonstrated in 2017, 2022, and 2023[177] Overview of Financial Results for 2024 For fiscal year 2024, total revenues significantly increased to $54.2 million from $17.3 million in 2023, primarily driven by a $32.3 million increase in Real Estate Operations from property sales and a $4.6 million increase in Leasing Operations, resulting in a net income attributable to common stockholders of $2.0 million ($0.24 per diluted share), a substantial improvement from a $14.8 million net loss in 2023, despite increased multi-family supply and dropping rental rates in the Austin market. Financial Highlights (2024 vs. 2023) | Metric | 2024 | 2023 | | :--- | :--- | :--- | | Total Revenues | $54.2 million | $17.3 million | | Net Income (Loss) to Common Stockholders | $2.0 million | $(14.8) million | | Diluted EPS | $0.24 | $(1.85) | - The revenue increase in 2024 was primarily due to sales of five Amarra Villas homes ($18.9 million), 47 acres at Magnolia Place ($14.5 million), and one Amarra Drive lot ($1.4 million)[191] - In the Austin-Round Rock multi-family market in 2024, supply grew by 10.3%, causing rental rates to drop by 6.9%, while occupancy remained high at 92.8%[196] Results of Operations The company's operating loss narrowed significantly to $2.2 million in 2024 from $16.9 million in 2023, driven by a turnaround in Real Estate Operations to a $4.7 million operating income from $34.9 million in property sales revenue, and an increase in Leasing Operations operating income to $8.1 million from higher rental revenue and a $1.6 million gain on sale, while general and administrative expenses remained stable and interest costs increased to $15.7 million due to higher rates and debt balances. Operating Income (Loss) by Segment (in thousands) | Segment | 2024 | 2023 | | :--- | :--- | :--- | | Real Estate Operations | $4,727 | $(7,219) | | Leasing Operations | $8,070 | $5,440 | | General & administrative expenses | $(14,952) | $(15,167) | | Total Operating Loss | $(2,155) | $(16,946) | - Real Estate Operations revenue surged to $34.9 million in 2024 from $2.6 million in 2023, primarily from sales of developed and undeveloped properties[235] - Leasing Operations rental revenue increased to $19.3 million in 2024 from $14.7 million in 2023, mainly reflecting a full year of operations from The Saint June[239] - A pre-tax gain of $1.6 million was recognized in Q3 2024 from the sale of Magnolia Place – Retail[241] Capital Resources and Liquidity As of December 31, 2024, Stratus had $20.2 million in cash and $39.0 million available under its revolving credit facility, with total debt increasing to $196.7 million, while cash used in operating activities decreased significantly to $5.8 million, and the company made operating loans and capital contributions to joint ventures, recently refinancing several project loans to extend maturities and lower interest rates, with management confident in compliance with all financial covenants and sufficient liquidity for the next 12 months. Liquidity Position (as of Dec 31, 2024) | Metric | Amount | | :--- | :--- | | Cash and cash equivalents | $20.2 million | | Availability under revolving credit facility | $39.0 million | | Total Debt (principal) | $196.7 million | - Cash used in operating activities totaled $5.8 million in 2024, a significant decrease from $51.3 million used in 2023[248] - The company made operating loans to The Annie B project ($3.5 million in 2024) and The Saint June project ($424 thousand in 2024) to support debt service and other costs[256][257] - The company was in compliance with all financial covenants as of December 31, 2024[268] Debt Maturities and Other Contractual Obligations As of December 31, 2024, the company has total debt maturities of $50.2 million in 2025, $88.3 million in 2026, and $58.2 million in 2027, all with variable interest rates, and projects it will meet its debt service and other cash obligations for at least the next 12 months, supported by cash, credit facility availability, and expected cash flows, while also having approximately $10 million in firm construction commitments. Debt Maturities by Year (Principal, in thousands, as of Dec 31, 2024) | Year | Amount | | :--- | :--- | | 2025 | $50,181 | | 2026 | $88,301 | | 2027 | $58,183 | | 2028 | $— | | 2029 | $— | | Thereafter | $— | | Total | $196,665 | - Estimated interest payments for 2025 are approximately $12.9 million[277] - The company had firm construction commitments of approximately $10 million at year-end 2024, primarily for Holden Hills Phase 1 and The Saint George[278] Financial Statements and Supplementary Data This section contains the company's audited consolidated financial statements for fiscal years 2024 and 2023, including Management's Annual Report on Internal Control Over Financial Reporting, which concluded controls were effective, and the Independent Registered Public Accounting Firm's unqualified opinion, encompassing the Consolidated Balance Sheets, Statements of Comprehensive Income (Loss), Statements of Cash Flows, Statements of Equity, and detailed Notes. Consolidated Financial Statements The consolidated financial statements present the company's financial position and performance, with total assets increasing to $532.6 million in 2024 from $517.8 million in 2023, total liabilities growing to $235.0 million from $223.2 million, and a shift from a net loss of $16.5 million in 2023 to a net loss of $1.9 million in 2024, resulting in net income attributable to common stockholders of $2.0 million, while cash decreased by $11.3 million, ending the year with $21.2 million. Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2024 | Dec 31, 2023 | | :--- | :--- | :--- | | Total Assets | $532,606 | $517,766 | | Total Liabilities | $235,039 | $223,161 | | Total Stockholders' Equity | $194,705 | $191,479 | | Total Equity | $297,567 | $294,605 | Consolidated Income Statement Highlights (in thousands) | Account | 2024 | 2023 | | :--- | :--- | :--- | | Total Revenues | $54,183 | $17,270 | | Operating Loss | $(2,155) | $(16,946) | | Net Loss | $(1,908) | $(16,493) | | Net Income (Loss) Attributable to Common Stockholders | $1,956 | $(14,807) | Notes to Consolidated Financial Statements The notes provide detailed explanations of accounting policies and financial statement line items, covering business and consolidation principles, extensive details on limited partnership and joint venture structures, a breakdown of real estate assets, recent asset sales, a comprehensive summary of all debt facilities including terms and covenants, income taxes, equity transactions, stock-based compensation plans, and various commitments and contingencies. - Stratus consolidates several limited partnerships (Holden Hills, The Saint George, The Annie B, The Saint June, Kingwood Place) as Variable Interest Entities (VIEs) for which it is the primary beneficiary[348][373] - Total net real estate assets increased to $486.6 million at year-end 2024 from $459.6 million in 2023, with the largest component being 'Real estate under development' at $274.1 million[378] - Note 6 provides a detailed breakdown of the company's $194.9 million in debt, outlining terms, maturity dates, interest rates, and covenants for each facility, including the main revolving credit facility and various project-specific construction and land loans[392] - The company maintains a Profit Participation Incentive Plan (PPIP) and a Long-Term Incentive Plan (LTIP) to provide economic incentives to key employees tied to the success of designated development projects; the accrued liability for these plans was $1.9 million at year-end 2024[441][447] Controls and Procedures Based on an evaluation by the Chief Executive Officer and Chief Financial Officer, the company concluded that its disclosure controls and procedures were effective as of December 31, 2024, with no material changes to internal control over financial reporting during the fourth quarter of 2024. - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of December 31, 2024[471] Other Information This section reports on significant events, including the amendment of the Comerica Bank revolving credit facility effective March 25, 2025, extending its maturity to March 27, 2027, and lowering the interest rate, and the entry into new three-year Severance and Change of Control Agreements with the CEO and CFO, effective April 1, 2025. - Effective March 25, 2025, the Comerica Bank revolving credit facility was amended to extend the maturity to March 2027 and lower the interest rate[474][475] - New Severance and Change of Control Agreements were entered into with the CEO and CFO, effective April 1, 2025, for a term through March 31, 2028[478] Part III Directors, Executive Officers and Corporate Governance Information required for this item, including details on directors and corporate governance, will be provided in the company's definitive proxy statement for its 2025 annual meeting of stockholders and is incorporated by reference, with executive officer information presented in Part I of this report. - Information required by this item is incorporated by reference from the registrant's definitive proxy statement for its 2025 annual meeting of stockholders[485] Executive Compensation The information regarding executive compensation required for this item will be provided in the company's definitive proxy statement for its 2025 annual meeting of stockholders and is incorporated by reference. - Information required by this item is incorporated by reference from the registrant's definitive proxy statement for its 2025 annual meeting of stockholders[486] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information regarding security ownership required for this item will be provided in the company's definitive proxy statement for its 2025 annual meeting of stockholders and is incorporated by reference. - Information required by this item is incorporated by reference from the registrant's definitive proxy statement for its 2025 annual meeting of stockholders[487] Certain Relationships and Related Transactions, and Director Independence The information regarding related party transactions and director independence required for this item will be provided in the company's definitive proxy statement for its 2025 annual meeting of stockholders and is incorporated by reference. - Information required by this item is incorporated by reference from the registrant's definitive proxy statement for its 2025 annual meeting of stockholders[488] Principal Accounting Fees and Services The information regarding principal accounting fees and services required for this item will be provided in the company's definitive proxy statement for its 2025 annual meeting of stockholders and is incorporated by reference. - Information required by this item is incorporated by reference from the registrant's definitive proxy statement for its 2025 annual meeting of stockholders[489] Part IV Exhibits, Financial Statement Schedules This section indicates that the consolidated financial statements are included in Part II, Item 8, and provides a comprehensive list of all exhibits filed with the Form 10-K, including agreements, corporate governance documents, loan modifications, and certifications, many of which are incorporated by reference from previous filings. - This item lists all exhibits filed with the Form 10-K, including loan agreements, corporate bylaws, and executive compensation plans[492][493][494]