STRATUS PROPERTIES INC - 10-Q Quarterly Report

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UNITED STATES
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, 2004



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, 2004, there were issued and outstanding 7,210,673 shares of the registrant's Common Stock, par value $0.01 per share.


STRATUS PROPERTIES INC.
TABLE OF CONTENTS

	Page

Part I. Financial Information	3

Item 1. Financial Statements (Unaudited):

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 Registered Public Accounting Firm	11

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	12

Item 3. Quantitative and Qualitative Disclosures about Market Risks	17

Item 4. Controls and Procedures	17

Part II. Other Information	17

Item 1. Legal Proceedings	17

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	18

Item 6. Exhibits	19

Signature	19

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,
	2004		2003
	(In Thousands)
ASSETS
Current assets:
Cash and cash equivalents, including restricted cash of $1.8 million and $0.2 million, respectively	$	4,130	$	3,413
Accounts receivable		161		768
Prepaid expenses		79		194
Notes receivable from property sales		43		60
Total current assets		4,413		4,435
Real estate and facilities, net		125,732		113,732
Commercial leasing assets, net		22,398		22,160
Other assets		2,055		1,929
Notes receivable from property sales		793		174
Total assets	$	155,391	$	142,430

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	1,912	$	1,773
Accrued interest, property taxes and other		2,774		3,015
Current portion of borrowings outstanding		434		434
Total current liabilities		5,120		5,222
Long-term debt		59,136		47,105
Other liabilities		5,388		3,282
Stockholders' equity		85,747		86,821
Total liabilities and stockholders' equity	$	155,391	$	142,430

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,
	2004			2003			2004			2003
	(In Thousands, Except Per Share Amounts)
Revenues:
Real estate	$	3,756		$	6,671		$	8,128		$	9,018
Rental income		1,103			951			2,905			2,799
Total revenues		4,859			7,622			11,033			11,817
Cost of sales:
Real estate, net		2,555			3,860			5,771			5,335
Rental		47			626			1,547			1,775
Depreciation		398			329			1,105			978
Total cost of sales		3,000			4,815			8,423			8,088
General and administrative expenses		1,081			952			3,681			3,067
Total costs and expenses		4,081			5,767			12,104			11,155
Operating income (loss)		778			1,855			(1,071	)		662
Interest expense, net		(233	)		(202	)		(701	)		(674	)
Interest income		12			567			35			702
Equity in unconsolidated affiliates’ income		-			-			-			29
Net income (loss)	$	557		$	2,220		$	(1,737	)	$	719

Net income (loss) per share of common stock:
Basic		$0.08			$0.31			$(0.24	)		$0.10
Diluted		$0.07			$0.30			$(0.24	)		$0.10

Average shares outstanding:
Basic		7,213			7,123			7,191			7,123
Diluted		7,571			7,346			7,191			7,297

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,
	2004			2003
	(In Thousands)
Cash flow from operating activities:
Net income (loss)	$	(1,737	)	$	719
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation		1,105			978
Cost of real estate sold		4,192			4,494
Stock-based compensation		127			88
Long-term notes receivable and other		(745	)		1,280
Equity in unconsolidated affiliates’ income		-			(29	)
Distribution of unconsolidated affiliates’ income		-			29
Decrease in working capital:
Accounts receivable and prepaid expenses		739			383
Accounts payable, accrued liabilities and other		2,004			266
Net cash provided by operating activities		5,685			8,208

Cash flow from investing activities:
Purchase and development of Deerfield property		(8,908	)		-
Development of other real estate and facilities, net of municipal utility district reimbursements		(8,626	)		(6,680	)
Distribution from Lakeway Project		-			191
Net cash used in investing activities		(17,534	)		(6,489	)

Cash flow from financing activities:
Borrowings from revolving credit facility, net		3,939			368
Borrowings from Calera Court project loan		1,157			-
Borrowings from Deerfield loan		5,167			-
Borrowings from (repayments of) 7500 Rialto project loan		1,946			(693	)
Payments on 7000 West project loan		(178	)		(719	)
Proceeds from exercise of stock options, net		535			4
Net cash provided by (used in) financing activities		12,566			(1,040	)
Net increase in cash and cash equivalents		717			679
Cash and cash equivalents at beginning of year		3,413			1,361
Cash and cash equivalents at end of period		4,130			2,040
Less cash restricted as to use		(1,775	)		(224	)
Unrestricted cash and cash equivalents at end of period	$	2,355		$	1,816

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

STRATUS PROPERTIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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, 2003, included in Stratus Properties Inc.’s (Stratus) Annual Report on Form 10-K (Stratus 2003 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, 2004, and the results of operations for the three-month and nine-month periods ended September 30, 2004 and 2003, and cash flows for the nine-months ended September 30, 2004 and 2003. Operating results for the three months and nine months ended September 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004.

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, L.P.; Stratus 7000 West, Ltd.; 7500 Rialto Boulevard, L.P.; Austin 290 Properties, Inc.; Stratus Management L.L.C.; Stratus Realty Inc.; Longhorn Properties Inc.; Stratus Investments L.L.C., STRS Plano, L.P., Southwest Property Services L.L.C. and STRS L.L.C. All significant intercompany transactions have been eliminated in consolidation.

EARNINGS PER SHARE

Stratus’ basic net income (loss) per share of common stock was calculated by dividing net income (loss) applicable to common stock by the weighted average number of common shares outstanding during the period. The following is a reconciliation of net income (loss) and weighted average common shares outstanding for purposes of calculating diluted net income (loss) per share (in thousands, except per share amounts):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2004		2003		2004			2003
Net income (loss) applicable to common stock	$	557	$	2,220	$	(1,737	)	$	719

Weighted average common shares outstanding		7,213		7,123		7,191			7,123
Add: Dilutive stock options		339		213		-			169
Restricted stock		19		10		-			5
Weighted average common shares outstanding for purposes of calculating diluted net income (loss) per share		7,571		7,346		7,191			7,297

Diluted net income (loss) per share of common stock	$	0.07	$	0.30	$	(0.24	)	$	0.10

Stock options representing 323,000 shares for the nine months ended September 30, 2004 that otherwise would have been included in the diluted earnings per share calculation were excluded because of the net loss reported for the period.

Outstanding stock options with exercise prices greater than the average market price of the common stock during the period are excluded from the computation of diluted net income (loss) per share of common stock. A recap of the excluded amounts follows (in thousands, except exercise prices):

	Third Quarter		Nine Months
	2004	2003	2004	2003
Weighted average outstanding options	-	149	47	283
Weighted average exercise price	-	$12.28	$12.38	$10.95

Stock-Based Compensation Plans.

As of September 30, 2004, Stratus had four stock-based employee and director compensation plans, which are described in Note 7 of the Stratus 2003 Form 10-K. Stratus accounts for those plans under the recognition and measurement principles of Accounting Principles Board 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 (SFAS) 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,
	2004			2003			2004			2003
Net income (loss), as reported	$	557		$	2,220		$	(1,737	)	$	719
Add: Stock-based employee compensation expense included in reported net income (loss) for restricted stock units		37			24			111			71
Deduct: Total stock-based employee compensation expense determined under fair value-based method for all awards		(182	)		(177	)		(569	)		(561	)
Pro forma net income (loss)	$	412		$	2,067		$	(2,195	)	$	229

Earnings per share:
Basic – as reported	$	0.08		$	0.31		$	(0.24	)	$	0.10
Basic – pro forma	$	0.05		$	0.28		$	(0.31	)	$	0.03

Diluted – as reported	$	0.07		$	0.30		$	(0.24	)	$	0.10
Diluted – pro forma	$	0.05		$	0.26		$	(0.31	)	$	0.03

For the pro forma computations, the values of option grants were calculated on the dates of grant using the Black-Scholes option-pricing model. The following table summarizes the options granted, calculated average fair values and weighted average assumptions used to determine the fair value of Stratus’ stock option grants under SFAS No. 123 during the periods presented:

	Third Quarter				Nine Months
	2004		2003		2004		2003
Options granted	7,500		7,500		7,500		7,500
Fair value per stock option	$8.54		$6.99		$8.54		$6.99
Weighted average risk-free interest rate	4.34	%	4.57	%	4.34	%	4.57	%
Weighted average expected volatility rate	49.4	%