STRATUS PROPERTIES INC - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the Quarter Ended September 30, 2003



Commission File Number: 0-19989



Stratus Properties Inc.



Incorporated in Delaware	72-1211572
	(IRS Employer Identification No.)


98 San Jacinto Blvd., Suite 220, Austin, Texas 78701


Registrant's telephone number, including area code: (512) 478-5788


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. Yes X No _

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities and Exchange Act of 1934) Yes _ No X

On September 30, 2003, there were issued and outstanding 7,123,278 shares of the registrant's Common Stock, par value $0.01 per share.


STRATUS PROPERTIES INC.
TABLE OF CONTENTS

	Page

Part I. Financial Information

Financial Statements:

Condensed Consolidated Balance Sheets	3

Consolidated Statements of Operations	4

Consolidated Statements of Cash Flows	5

Notes to Consolidated Financial Statements	6

Report of Independent Accountants	11

Management’s Discussion and Analysis of Financial Condition and Results of Operations	12

Quantitative and Qualitative Disclosures about Market Risks	18

Controls and Procedures	18

Part II. Other Information	18

Signature	20

Exhibit Index	E-1

STRATUS PROPERTIES INC.

Part I. FINANCIAL INFORMATION

Item 1.

Financial Statements.

STRATUS PROPERTIES INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

	September 30,		December 31,
	2003		2002
	(In Thousands)
ASSETS
Current assets:
Cash and cash equivalents (including restricted cash of $0.2 million at September 30, 2003 and $0.4 million at December 31, 2002)	$	2,040	$	1,361
Accounts receivable		110		654
Current portion of notes receivable from property sales		503		60
Prepaid expenses		312		146
Total current assets		2,965		2,221
Real estate and facilities, net		112,082		110,761
Rental properties, net		22,308		22,422
Other assets		1,944		1,742
Notes receivable from property sales, net of current portion		174		2,103
Investments in and advances to unconsolidated affiliates		-		191
Total assets	$	139,473	$	139,440

LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable and accrued liabilities	$	2,009	$	1,663
Accrued interest, property taxes and other		2,992		3,067
Current portion of borrowings outstanding		434		2,316
Total current liabilities		5,435		7,046
Long-term debt		43,322		42,483
Other liabilities		3,294		3,292
Stockholders' equity		87,422		86,619
Total liabilities and stockholders' equity	$	139,473	$	139,440

The accompanying notes are an integral part of these financial statements.

STRATUS PROPERTIES INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2003			2002			2003			2002
	(In Thousands, Except Per Share Amounts)
Revenues:
Real estate	$	6,671		$	3,762		$	9,018		$	8,169
Rental income		951			817			2,799			1,731
Total revenues		7,622			4,579			11,817			9,900
Cost of sales:
Real estate, net		3,860			2,759			5,335			4,932
Rental		626			606			1,775			1,159
Depreciation and amortization		329			244			978			571
Total cost of sales		4,815			3,609			8,088			6,662
General and administrative expenses		952			1,058			3,067			3,414
Total costs and expenses		5,767			4,667			11,155			10,076
Operating income (loss)		1,855			(88	)		662			(176	)
Interest expense, net		(202	)		(167	)		(674	)		(379	)
Interest income		567			166			702			550
Equity in unconsolidated affiliates’ income		-			-			29			372
Other income		-			-			-			286
Net income (loss)	$	2,220		$	(89	)	$	719		$	653

Reconciliation of net income (loss) to net income (loss) applicable to common stock:
Net income (loss)	$	2,220		$	(89	)	$	719		$	653
Discount on purchase of mandatorily redeemable preferred stock		-			-			-			2,367
Net income (loss) applicable to common stock	$	2,220		$	(89	)	$	719		$	3,020

Net income (loss) per share of common stock:
Basic		$0.31			$(0.01	)		$0.10			$0.42
Diluted		$0.30			$(0.01	)		$0.10			$0.41

Weighted average shares outstanding:
Basic		7,123			7,116			7,123			7,116
Diluted		7,346			7,116			7,297			7,442

The accompanying notes are an integral part of these financial statements.

STRATUS PROPERTIES INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

	Nine Months Ended
	September 30,
	2003			2002
	(In Thousands)
Cash flow from operating activities:
Net income	$	719		$	653
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		978			571
Cost of real estate sold		4,494			2,950
Equity in unconsolidated affiliates’ income		(29	)		(372	)
Gain on sale of Stratus’ interest in Walden Partnership		-			(286	)
Amortization of deferred compensation		88			32
(Increase) decrease in working capital:
Accounts receivable and other		383			2
Accounts payable and accrued liabilities		266			(400	)
Long-term receivable and other		1,280			3,362
Distribution of unconsolidated affiliates’ income		29			278
Net cash provided by operating activities		8,208			6,790

Cash flow from investing activities:
Real estate and facilities, net of municipal utility district reimbursements		(6,680	)		(9,845	)
Net cash acquired from Barton Creek and 7000 West Joint Ventures		-			1,067
Proceeds from the sale of Stratus’ interest in the Walden Partnership		-			3,141
Acquisition of Olympus’ interest in the Barton Creek and 7000 West Joint Ventures		-			(3,858	)
Distributions from Lakeway Project		191			1,239
Net cash used in investing activities		(6,489	)		(8,256	)

Cash flow from financing activities:
Borrowings under revolving credit facility, net		1,145			1,453
Borrowings on term loan component of credit facility		-			4,645
Payments on term loan portion of credit facility		(777	)		(1,497	)
(Payments on) proceeds from 7500 Rialto project loan		(693	)		1,966
Payments on 7000 West project loan		(719	)		(127	)
Repurchase of mandatorily redeemable preferred stock		-			(7,633	)
Exercise of stock options and other		4			47
Net cash used in financing activities		(1,040	)		(1,146	)
Net increase (decrease) in cash and cash equivalents		679			(2,612	)
Cash and cash equivalents at beginning of year		1,361			3,705
Cash and cash equivalents at end of period		2,040			1,093
Less cash restricted as to use		(224	)		(234	)
Unrestricted cash and cash equivalents at end of period	$	1,816		$	859

The accompanying notes are an integral part of these financial statements.

STRATUS PROPERTIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2002, included in Stratus Properties Inc.’s (Stratus) Annual Report on Form 10-K, filed with the Securities and Exchange Commission. In the opinion of management, the accompanying consolidated financial statements reflect all adjustments (consisting only of normal recurring items) considered necessary to present fairly the financial position of Stratus at September 30, 2003 and December 31, 2002, and the results of operations for the three-month and nine-month periods ended September 30, 2003 and 2002, and cash flows for the nine-month periods ended September 30, 2003 and 2002. Operating results for the three months and nine months ended September 30, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003.< /P>

The consolidated financial statements include accounts of those subsidiaries where Stratus has more than 50 percent of the voting rights and for which the right to participate in significant management decisions is not shared with other shareholders. Stratus consolidates its wholly owned subsidiaries, which include: Stratus Properties Operating Co., L.P.; Circle C Land Corp.; Austin 290 Properties, Inc.; Stratus Management L.L.C.; Stratus Realty Inc.; Longhorn Properties Inc.; Stratus Investments LLC and STRS L.L.C. All significant intercompany transactions have been eliminated in consolidation.

Certain prior year amounts have been reclassified to conform to the current year presentation.

2. EARNINGS PER SHARE

Below is a reconciliation of net income (loss) and weighted average common shares outstanding for purposes of calculating basic and diluted net income (loss) per share (in thousands, except per share amounts):

	Three Months Ended September 30,					Nine Months Ended September 30,
	2003		2002			2003		2002
Net income (loss)	$	2,220	$	(89	)	$	719	$	653
Add: Discount on purchase of mandatorily redeemable preferred stock		-		-			-		2,367
Net income (loss) applicable to common stock	$	2,220	$	(89	)	$	719	$	3,020

Weighted average common shares outstanding		7,123		7,116			7,123		7,116

Basic net income (loss) per share of common stock		$0.31		$(0.01	)		$0.10		$0.42

Weighted average common shares outstanding		7,123		7,116			7,123		7,116
Dilutive stock options		213		-	^a		169		137
Restricted stock units		10		-			5		-
Assumed redemption of preferred stock		-		-			-		189
Weighted average common shares outstanding for purposes of calculating diluted net income (loss) per share		7,346		7,116			7,297		7,442

Diluted net income (loss) per share of common stock		$0.30		$(0.01	)		$0.10		$0.41

Options representing approximately 149,000 shares of Stratus common stock in the third quarter of 2002 that otherwise would have been included in the diluted earnings per share calculation were excluded as anti-dilutive considering the net loss incurred during the period.

There were no dividends accrued or paid on Stratus’ mandatorily redeemable preferred stock through February 27, 2002, the date Stratus purchased all the related outstanding shares held by Olympus Real Estate Corporation (Olympus). For more information regarding Stratus’ purchase of its mandatorily redeemable preferred stock and other transactions associated with Stratus ending its business relationship with Olympus see Notes 2, 3 and 4 of Stratus’ 2002 Annual Report on Form 10-K.

Outstanding stock options excluded from the computation of diluted net income per share of common stock because their exercise prices were greater than the average market price of the common stock during the periods presented are as follows:

	Third Quarter		Nine Months
	2003	2002	2003	2002
Weighted average outstanding options	149,000	275,000	283,000	275,000
Weighted average exercise price	$12.28	$10.96	$10.95	$10.96

Stock-Based Compensation Plans.

As of September 30, 2003, Stratus has four stock-based employee and director compensation plans, which are described in Note 8 of Stratus’ 2002 Annual Report on Form 10-K. Stratus accounts for those plans under the recognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25 “Accounting for Stock Issued to Employees,” and related interpretations. The following table illustrates the effect on net income (loss) and earnings per share if Stratus had applied the fair value recognition provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation,” to all stock-based employee compensation (in thousands, except per share amounts).

Three Months Ended September 30,

Nine Months Ended

September 30,

2003