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EX-32.2 - EXHIBIT 32.2 - STRATUS PROPERTIES INC | a2q17exhibit322.htm |
EX-32.1 - EXHIBIT 32.1 - STRATUS PROPERTIES INC | a2q17exhibit321v2.htm |
EX-31.2 - EXHIBIT 31.2 - STRATUS PROPERTIES INC | a2q17exhibit312.htm |
EX-31.1 - EXHIBIT 31.1 - STRATUS PROPERTIES INC | a2q17exhibit311.htm |
EX-10.1 - EXHIBIT 10.1 - STRATUS PROPERTIES INC | a2q17exhibit101.htm |
EX-3.2 - EXHIBIT 3.2 - STRATUS PROPERTIES INC | a2q17exhibit32.htm |
UNITED STATES | |||
SECURITIES AND EXCHANGE COMMISSION | |||
Washington, D.C. 20549 | |||
FORM 10-Q | |||
(Mark One) | |||
[X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE | ||
SECURITIES EXCHANGE ACT OF 1934 | |||
For the quarterly period ended June 30, 2017 | |||
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 | |||

Stratus Properties Inc.
(Exact name of registrant as specified in its charter)
Delaware | 72-1211572 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
212 Lavaca St., Suite 300 | |
Austin, Texas | 78701 |
(Address of principal executive offices) | (Zip Code) |
(512) 478-5788 | |
(Registrant's telephone number, including area code) | |
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 ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). þ Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 filer ¨ | Accelerated filer þ | ||
Non-accelerated filer ¨ (Do not check if a smaller reporting company) | Smaller 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. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes þ No
On July 31, 2017, there were issued and outstanding 8,126,502 shares of the registrant’s common stock, par value $0.01 per share.
STRATUS PROPERTIES INC. | |
TABLE OF CONTENTS | |
Page | |
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
STRATUS PROPERTIES INC.
CONSOLIDATED BALANCE SHEETS (Unaudited)
(In Thousands)
June 30, 2017 | December 31, 2016 | ||||||
ASSETS | |||||||
Cash and cash equivalents | $ | 14,805 | $ | 13,597 | |||
Restricted cash | 10,597 | 11,892 | |||||
Real estate held for sale | 20,196 | 21,236 | |||||
Real estate under development | 102,974 | 111,373 | |||||
Land available for development | 12,717 | 19,153 | |||||
Real estate held for investment, net | 190,619 | 239,719 | |||||
Deferred tax assets | 29,973 | 17,223 | |||||
Other assets | 13,573 | 17,982 | |||||
Total assets | $ | 395,454 | $ | 452,175 | |||
LIABILITIES AND EQUITY | |||||||
Liabilities: | |||||||
Accounts payable | $ | 11,333 | $ | 6,734 | |||
Accrued liabilities, including taxes | 11,193 | 13,240 | |||||
Debt | 204,168 | 291,102 | |||||
Deferred gain | 38,714 | — | |||||
Other liabilities | 10,410 | 10,073 | |||||
Total liabilities | 275,818 | 321,149 | |||||
Commitments and contingencies | |||||||
Equity: | |||||||
Stockholders’ equity: | |||||||
Common stock | 93 | 92 | |||||
Capital in excess of par value of common stock | 185,080 | 192,762 | |||||
Accumulated deficit | (44,563 | ) | (41,143 | ) | |||
Common stock held in treasury | (21,057 | ) | (20,760 | ) | |||
Total stockholders’ equity | 119,553 | 130,951 | |||||
Noncontrolling interests in subsidiaries | 83 | 75 | |||||
Total equity | 119,636 | 131,026 | |||||
Total liabilities and equity | $ | 395,454 | $ | 452,175 |
The accompanying Notes to Consolidated Financial Statements (Unaudited) are an integral part of these consolidated financial statements.
2
STRATUS PROPERTIES INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Unaudited)
(In Thousands, Except Per Share Amounts)
Three Months Ended | Six Months Ended | ||||||||||||||
June 30, | June 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Revenues: | |||||||||||||||
Real estate operations | $ | 4,021 | $ | 1,448 | $ | 6,185 | $ | 3,703 | |||||||
Leasing operations | 1,811 | 2,141 | 4,092 | 4,194 | |||||||||||
Hotel | 9,765 | 10,658 | 20,079 | 21,233 | |||||||||||
Entertainment | 5,832 | 4,903 | 11,737 | 9,046 | |||||||||||
Total revenues | 21,429 | 19,150 | 42,093 | 38,176 | |||||||||||
Cost of sales: | |||||||||||||||
Real estate operations | 3,868 | 1,889 | 5,844 | 4,098 | |||||||||||
Leasing operations | 973 | 1,043 | 2,658 | 1,905 | |||||||||||
Hotel | 7,436 | 7,676 | 14,601 | 15,357 | |||||||||||
Entertainment | 4,255 | 3,775 | 8,632 | 6,819 | |||||||||||
Depreciation | 1,756 | 1,983 | 3,897 | 3,665 | |||||||||||
Total cost of sales | 18,288 | 16,366 | 35,632 | 31,844 | |||||||||||
General and administrative expenses | 2,846 | 4,146 | 6,242 | 7,221 | |||||||||||
Profit participation in sale of The Oaks at Lakeway | — | — | 2,538 | — | |||||||||||
Gain on sales of assets | — | — | (1,115 | ) | — | ||||||||||
Total | 21,134 | 20,512 | 43,297 | 39,065 | |||||||||||
Operating income (loss) | 295 | (1,362 | ) | (1,204 | ) | (889 | ) | ||||||||
Interest expense, net | (1,508 | ) | (2,346 | ) | (3,483 | ) | (4,315 | ) | |||||||
(Loss) gain on interest rate derivative instruments | (4 | ) | (101 | ) | 82 | (475 | ) | ||||||||
Loss on early extinguishment of debt | — | — | (532 | ) | (837 | ) | |||||||||
Other income, net | 13 | 4 | 18 | 8 | |||||||||||
Loss before income taxes and equity in unconsolidated affiliates' (loss) income | (1,204 | ) | (3,805 | ) | (5,119 | ) | (6,508 | ) | |||||||
Equity in unconsolidated affiliates' (loss) income | (2 | ) | (25 | ) | (19 | ) | 73 | ||||||||
Benefit from income taxes | 321 | 1,347 | 1,583 | 2,269 | |||||||||||
Net loss and total comprehensive loss | (885 | ) | (2,483 | ) | (3,555 | ) | (4,166 | ) | |||||||
Total comprehensive income attributable to noncontrolling interests in subsidiaries | (8 | ) | — | (8 | ) | — | |||||||||
Net loss and total comprehensive loss attributable to common stockholders | $ | (893 | ) | $ | (2,483 | ) | $ | (3,563 | ) | $ | (4,166 | ) | |||
Basic and diluted net loss per share attributable to common stockholders | $ | (0.11 | ) | $ | (0.31 | ) | $ | (0.44 | ) | $ | (0.52 | ) | |||
Basic and diluted weighted-average shares of common stock outstanding | 8,127 | 8,092 | 8,114 | 8,082 | |||||||||||
Dividends declared per share of common stock | $ | — | $ | — | $ | 1.00 | $ | — |
The accompanying Notes to Consolidated Financial Statements (Unaudited) are an integral part of these consolidated financial statements.
3
STRATUS PROPERTIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In Thousands)
Six Months Ended | |||||||
June 30, | |||||||
2017 | 2016 | ||||||
Cash flow from operating activities: | |||||||
Net loss | $ | (3,555 | ) | $ | (4,166 | ) | |
Adjustments to reconcile net loss to net cash used in operating activities: | |||||||
Depreciation | 3,897 | 3,665 | |||||
Cost of real estate sold | 3,897 | 1,691 | |||||
Gain on sale of assets | (1,115 | ) | — | ||||
(Gain) loss on interest rate derivative contracts | (82 | ) | 475 | ||||
Loss on early extinguishment of debt | 532 | 837 | |||||
Debt issuance cost amortization and stock-based compensation | 647 | 698 | |||||
Equity in unconsolidated affiliates' loss (income) | 19 | (73 | ) | ||||
Deposits | (851 | ) | 21 | ||||
Deferred income taxes | (12,607 | ) | (38 | ) | |||
Purchases and development of real estate properties | (7,974 | ) | (7,629 | ) | |||
Municipal utility district reimbursement | 2,172 | — | |||||
Decrease (increase) in other assets | 2,205 | (5,843 | ) | ||||
(Increase) decrease in accounts payable, accrued liabilities and other | (895 | ) | 98 | ||||
Net cash used in operating activities | (13,710 | ) | (10,264 | ) | |||
Cash flow from investing activities: | |||||||
Capital expenditures | (5,100 | ) | (22,435 | ) | |||
Proceeds from sale of assets | 117,261 | — | |||||
Payments on master lease obligations | (927 | ) | — | ||||
Other, net | (48 | ) | (17 | ) | |||
Net cash provided by (used in) investing activities | 111,186 | (22,452 | ) | ||||
Cash flow from financing activities: | |||||||
Borrowings from credit facility | 20,200 | 12,000 | |||||
Payments on credit facility | (51,775 | ) | (3,139 | ) | |||
Borrowings from project loans | 7,766 | 168,875 | |||||
Payments on project and term loans | (63,723 | ) | (150,345 | ) | |||
Cash dividend paid | (8,127 | ) | — | ||||
Stock-based awards net payments | (234 | ) | (158 | ) | |||
Financing costs | (375 | ) | (987 | ) | |||
Net cash (used in) provided by financing activities | (96,268 | ) | 26,246 | ||||
Net increase (decrease) in cash and cash equivalents | 1,208 | (6,470 | ) | ||||
Cash and cash equivalents at beginning of year | 13,597 | 17,036 | |||||
Cash and cash equivalents at end of period | $ | 14,805 | $ | 10,566 |
The accompanying Notes to Consolidated Financial Statements (Unaudited), which include information regarding noncash transactions, are an integral part of these consolidated financial statements.
4
STRATUS PROPERTIES INC.
CONSOLIDATED STATEMENTS OF EQUITY (Unaudited)
(In Thousands)
Stockholders’ Equity | ||||||||||||||||||||||||||||||||||
Common Stock Held in Treasury | Total Stockholders' Equity | |||||||||||||||||||||||||||||||||
Common Stock | Capital in Excess of Par Value | Accum-ulated Deficit | Noncontrolling Interests in Subsidiaries | |||||||||||||||||||||||||||||||
Number of Shares | At Par Value | Number of Shares | At Cost | Total Equity | ||||||||||||||||||||||||||||||
Balance at December 31, 2016 | 9,203 | $ | 92 | $ | 192,762 | $ | (41,143 | ) | 1,105 | $ | (20,760 | ) | $ | 130,951 | $ | 75 | $ | 131,026 | ||||||||||||||||
Adjustment for cumulative effect of change in accounting for stock-based compensation | — | — | — | 143 | — | — | 143 | — | 143 | |||||||||||||||||||||||||
Cash dividend | — | — | (8,127 | ) | — | — | — | (8,127 | ) | — | (8,127 | ) | ||||||||||||||||||||||
Exercised and issued stock-based awards | 40 | 1 | 62 | — | — | — | 63 | — | 63 | |||||||||||||||||||||||||
Stock-based compensation | — | — | 383 | — | — | — | 383 | — | 383 | |||||||||||||||||||||||||
Tender of shares for stock-based awards | — | — | — | — | 12 | (297 | ) | (297 | ) | — | (297 | ) | ||||||||||||||||||||||
Total comprehensive loss | — | — | — | (3,563 | ) | — | — | (3,563 | ) | 8 | (3,555 | ) | ||||||||||||||||||||||
Balance at June 30, 2017 | 9,243 | $ | 93 | $ | 185,080 | $ | (44,563 | ) | 1,117 | $ | (21,057 | ) | $ | 119,553 | $ | 83 | $ | 119,636 |
Balance at December 31, 2015 | 9,160 | $ | 91 | $ | 192,122 | $ | (35,144 | ) | 1,093 | $ | (20,470 | ) | $ | 136,599 | $ | 75 | $ | 136,674 | ||||||||||||||||
Exercised and issued stock-based awards | 37 | 1 | (1 | ) | — | — | — | — | — | — | ||||||||||||||||||||||||
Stock-based compensation | — | — | 333 | — | — | — | 333 | — | 333 | |||||||||||||||||||||||||
Tax benefit for stock-based awards | — | — | 132 | — | — | — | 132 | — | 132 | |||||||||||||||||||||||||
Tender of shares for stock-based awards | — | — | — | — | 12 | (290 | ) | (290 | ) | — | (290 | ) | ||||||||||||||||||||||
Total comprehensive loss | — | — | — | (4,166 | ) | — | — | (4,166 | ) | — | (4,166 | ) | ||||||||||||||||||||||
Balance at June 30, 2016 | 9,197 | $ | 92 | $ | 192,586 | $ | (39,310 | ) | 1,105 | $ | (20,760 | ) | $ | 132,608 | $ | 75 | $ | 132,683 |
The accompanying Notes to Consolidated Financial Statements (Unaudited) are an integral part of these consolidated financial statements.
5
STRATUS PROPERTIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. | GENERAL |
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, 2016, included in Stratus Properties Inc.’s (Stratus) Annual Report on Form 10-K (Stratus 2016 Form 10-K) filed with the United States (U.S.) Securities and Exchange Commission. In the opinion of management, the accompanying consolidated financial statements reflect all adjustments considered necessary for a fair statement of the results for the interim periods reported. With the exception of the accounting for the deferred gain on the sale of The Oaks at Lakeway, all such adjustments are, in the opinion of management, of a normal recurring nature. Operating results for the three-month and six-month periods ended June 30, 2017, are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.
2. | EARNINGS PER SHARE |
Stratus’ basic and diluted net loss per share of common stock was calculated by dividing the net loss attributable to common stockholders by the weighted-average shares of common stock outstanding during the period. The weighted-average shares exclude approximately 102 thousand shares of common stock for second-quarter 2017, 123 thousand shares of common stock for second-quarter 2016, 115 thousand shares of common stock for the first six months of 2017 and 124 thousand shares of common stock for the first six months of 2016 associated with outstanding stock options with exercise prices less than the average market price of Stratus' common stock and restricted stock units that were anti-dilutive.
3. | DISPOSITIONS |
On February 15, 2017, Stratus sold The Oaks at Lakeway to FHF I Oaks at Lakeway, LLC for $114.0 million in cash. Net cash proceeds were $50.8 million after repayment of the Lakeway construction loan (see Note 5). Stratus used a portion of these net cash proceeds to pay indebtedness outstanding under the Comerica Bank credit facility. The parties entered into three master lease agreements at closing: (1) one covering unleased in-line retail space, with a 5-year term, (2) one covering four unleased pad sites, three of which have 10-year terms, and one of which has a 15-year term, and (3) one covering the hotel pad with a 99-year term. Stratus projects that its master lease payment obligation will average $170 thousand per month and will decline over time until leasing is complete and all leases are assigned to the purchaser, which is projected to occur by February 2019. The hotel tenant began paying rent in May 2017 and construction of the hotel is expected to commence in third-quarter 2017.
Stratus agreed to guarantee the obligations of its selling subsidiary under the sales agreement, up to a liability cap of two percent of the purchase price. This cap does not apply to Stratus' obligation to satisfy the selling subsidiary's indemnity obligations for its broker commissions or similar compensation or Stratus' liability in guaranteeing the selling subsidiary's obligations under the master leases. To secure its obligations under the master leases, Stratus has provided a $1.5 million irrevocable letter of credit with a three-year term. As a result of Stratus’ continuing involvement under the master lease agreements with the purchaser, the transaction does not qualify as a sale under U.S. generally accepted accounting principles. Accordingly, a deferred gain totaling $39.7 million was recorded and is being reduced by payments made under the master lease agreements, which totaled $0.9 million for the first six months of 2017. All or a portion of the deferred gain may be recognized in future periods when Stratus’ continuing involvement ends or substantially all of the risks and rewards of ownership have transferred to the buyer and Stratus' remaining obligation under the master leases is less than the deferred gain.
Upon the sale of The Oaks at Lakeway, HEB Grocery Company, L.P. (HEB) earned a profit participation of $2.5 million (of which $2.2 million was paid at closing), which is presented separately in the Consolidated Statements of Comprehensive Loss.
On February 28, 2017, Stratus completed the sale of its 3,085-square-foot bank building and an adjacent 4.1 acre undeveloped tract of land in Barton Creek, for $3.1 million. Stratus recorded a gain on the sale of $1.1 million and paid $2.1 million on the Barton Creek Village term loan (see Note 5).
4. | FAIR VALUE MEASUREMENTS |
Fair value accounting guidance includes a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 inputs) and the lowest priority to unobservable inputs (Level 3 inputs).
6
The carrying value for certain Stratus financial instruments (i.e., cash and cash equivalents, restricted cash, accounts payable and accrued liabilities) approximates fair value because of their short-term nature and generally negligible credit losses.
A summary of the carrying amount and fair value of Stratus' other financial instruments follows (in thousands):
June 30, 2017 | December 31, 2016 | ||||||||||||||
Carrying Value | Fair Value | Carrying Value | Fair Value | ||||||||||||
Liabilities: | |||||||||||||||
Debt | $ | 204,168 | $ | 205,908 | $ | 291,102 | $ | 293,620 | |||||||
Interest rate swap agreement | 345 | 345 | 427 | 427 |
Debt. Stratus' debt is recorded at cost and is not actively traded. Fair value is estimated based on discounted future expected cash flows at estimated current market interest rates. Accordingly, Stratus' debt is classified within Level 2 of the fair value hierarchy. The fair value of debt does not represent the amounts that will ultimately be paid upon the maturities of the loans.
Interest Rate Swap Agreement. The interest rate swap does not qualify for hedge accounting and changes in its fair value are recorded in the Consolidated Statements of Comprehensive Loss. Stratus evaluated the counterparty credit risk associated with the interest rate swap agreement, which is considered a Level 3 input, but did not consider such risk to be significant. Therefore, the interest rate swap agreement is classified within Level 2 of the fair value hierarchy.
5. | DEBT AND EQUITY |
Debt. The components of Stratus' debt are as follows (in thousands):
June 30, 2017 | December 31, 2016 | |||||||
Goldman Sachs loan | $ | 146,113 | $ | 147,025 | ||||
Lakeway construction loan | — | 57,912 | ||||||
Santal construction loan | 32,046 | 30,286 | ||||||
Comerica Bank credit facility | 14,972 | 46,547 | ||||||
Amarra Villas credit facility | 4,280 | 3,777 | ||||||
Barton Creek Village term loan | 3,420 | 5,555 | ||||||
West Killeen Market construction loan | 3,337 | — | ||||||
Total debta | $ | 204,168 | $ | 291,102 |
a. | Includes net reductions for unamortized debt issuance costs of $1.6 million at June 30, 2017, and $2.2 million at December 31, 2016. |
In February 2017, Stratus repaid the Lakeway construction loan with proceeds from the sale of The Oaks at Lakeway and paid $2.1 million on the Barton Creek Village term loan (see Note 3). As of June 30, 2017, Stratus had $30.0 million available under its $45.0 million revolving loan under its Comerica Bank credit facility.
On April 28, 2017, Lantana Place, LLC., a wholly owned subsidiary of Stratus, entered into a $26.3 million construction loan with Southside Bank (the Lantana Place construction loan) to finance the initial phase of Lantana Place, a 320,000-square-foot, mixed-use development project in southwest Austin. Construction of the first phase of Lantana Place began in June 2017. No amounts were drawn on the Lantana Place construction loan as of June 30, 2017. Interest is variable at the one-month London Interbank Offered Rate plus 2.75 percent, subject to a minimum interest rate of 3.0 percent. Payments of interest only will be due and payable monthly, through November 1, 2020. The principal balance outstanding after November 1, 2020, will be payable in equal monthly installments of principal and interest based on a 30-year amortization. Outstanding amounts must be repaid in full on or before April 28, 2023, and can be prepaid without penalty. Outstanding amounts will be secured by the Lantana Place project and all subsequent improvements, including all leases and rents associated with the development. The agreement contains affirmative and negative covenants usual and customary for loan agreements of this nature, including, but not limited to, a financial covenant to maintain a debt service coverage ratio of at least 1.35 to 1.00 at all times beginning on December 31, 2019. Stratus will guarantee outstanding amounts under the loan until the development is able to maintain a debt service ratio of 1.50 to 1.00 for a period of six consecutive months.
7
For a description of Stratus' outstanding loans, refer to Note 7 in the Stratus 2016 Form 10-K.
Interest Expense and Capitalization. Interest expense (before capitalized interest) totaled $2.9 million in second-quarter 2017, $3.9 million in second-quarter 2016, $6.3 million for the first six months of 2017 and $7.6 million for the first six months of 2016. Stratus' capitalized interest costs totaled $1.4 million in second-quarter 2017, $1.6 million in second-quarter 2016, $2.8 million for the first six months of 2017 and $3.3 million for the first six months of 2016, primarily related to development activities at Barton Creek in 2017, and development activities at Barton Creek and The Oaks at Lakeway in 2016.
Equity. Stratus' Comerica Bank credit facility requires the bank's prior written consent to pay a dividend on Stratus' common stock. On March 15, 2017, Stratus' Board of Directors (the Board), after receiving written consent from Comerica Bank, declared a special cash dividend of $1.00 per share ($8.1 million), which was paid on April 18, 2017, to stockholders of record on March 31, 2017. The special cash dividend was declared after the Board’s consideration of the results of the sale of The Oaks at Lakeway. Comerica Bank’s consent to the payment of this special dividend is not indicative of the bank’s willingness to consent to the payment of future dividends. The declaration of future dividends is at the discretion of the Board, subject to the restrictions under Stratus' Comerica Bank credit facility, and will depend on Stratus' financial results, cash requirements, projected compliance with covenants in its debt agreements, outlook and other factors deemed relevant by the Board.
6. | INCOME TAXES |
Stratus’ accounting policy for and other information regarding its income taxes is further described in Notes 1 and 8 in the Stratus 2016 Form 10-K.
Stratus had deferred tax assets (net of deferred tax liabilities) totaling $30.0 million at June 30, 2017, and $17.2 million at December 31, 2016. The increase in deferred tax assets of $12.8 million in 2017 is primarily associated with the gain on the sale of The Oaks at Lakeway, which is taxable but was deferred under U.S. Generally Accepted Accounting Principles. Stratus’ income tax benefit for the first six months of 2017 includes current income tax expense of $11.0 million offset by a deferred tax benefit of $12.6 million. Stratus’ future results of operations may be negatively impacted by an inability to realize a tax benefit for future tax losses or for items that will generate additional deferred tax assets.
The difference between Stratus' consolidated effective income tax rate for the first six months of 2017 and the first six months of 2016, and the U.S. Federal statutory income tax rate of 35 percent, was primarily attributable to the Texas state margin tax.
7. | BUSINESS SEGMENTS |
Stratus currently has four operating segments: Real Estate Operations, Leasing Operations, Hotel and Entertainment.
The Real Estate Operations segment is comprised of Stratus’ real estate assets (developed, under development and available for development), which consists of its properties in Austin, Texas (the Barton Creek community, the Circle C community, Lantana and the condominium units at the W Austin Hotel & Residences); in Lakeway, Texas located in the greater Austin area (Lakeway); and in Magnolia, Texas, located in the greater Houston area (Magnolia).
The Leasing Operations segment includes the office and retail space at the W Austin Hotel & Residences, a retail building in Barton Creek Village, the Santal multi-family project and the West Killeen Market in Killeen, Texas.
The Hotel segment includes the W Austin Hotel located at the W Austin Hotel & Residences in downtown Austin, Texas.
The Entertainment segment includes ACL Live, a live music and entertainment venue and production studio at the W Austin Hotel & Residences. In addition to hosting concerts and private events, this venue is the home of Austin City Limits, a television program showcasing popular music legends. The Entertainment segment also includes revenues and costs associated with events hosted at other venues, including 3TEN ACL Live, which opened in March 2016 on the site of the W Austin Hotel & Residences, and the results of the Stageside Productions joint venture with Pedernales Entertainment LLC (see Note 2 in the Stratus 2016 Form 10-K for further discussion).
8
Stratus uses operating income or loss to measure the performance of each segment. General and administrative expenses, which primarily consist of employee salaries, wages and other costs, are managed on a consolidated basis and are not allocated to Stratus' operating segments. The following segment information reflects management determinations that may not be indicative of what the actual financial performance of each segment would be if it were an independent entity. The following segment information was prepared on the same basis as Stratus’ consolidated financial statements (in thousands).
Real Estate Operationsa | Leasing Operations | Hotel | Entertainment | Eliminations and Otherb | Total | ||||||||||||||||||
Three Months Ended June 30, 2017: | |||||||||||||||||||||||
Revenues: | |||||||||||||||||||||||
Unaffiliated customers | $ | 4,021 | $ | 1,811 | $ | 9,765 | $ | 5,832 | $ | — | $ | 21,429 | |||||||||||
Intersegment | 8 | 221 | 82 | 85 | (396 | ) | — | ||||||||||||||||
Cost of sales, excluding depreciation | 3,868 | 980 | 7,456 | 4,449 | (221 | ) | 16,532 | ||||||||||||||||
Depreciation | 57 | 568 | 789 | 377 | (35 | ) | 1,756 | ||||||||||||||||
General and administrative expenses | — | — | — | — | 2,846 | 2,846 | |||||||||||||||||
Operating income (loss) | $ | 104 | $ | 484 | $ | 1,602 | $ | 1,091 | $ | (2,986 | ) | $ | 295 | ||||||||||
Capital expendituresc | $ | 4,306 | $ | 2,748 | $ | 11 | $ | 40 | $ | — | $ | 7,105 | |||||||||||
Total assets at June 30, 2017 | 160,713 | 69,629 | 103,154 | 37,392 | 24,566 | 395,454 |
Three Months Ended June 30, 2016: | |||||||||||||||||||||||
Revenues: | |||||||||||||||||||||||
Unaffiliated customers | $ | 1,448 | $ | 2,141 | $ | 10,658 | $ | 4,903 | $ | — | $ | 19,150 | |||||||||||
Intersegment | 8 | 225 | 71 | 51 | (355 | ) | — | ||||||||||||||||
Cost of sales, excluding depreciation | 1,889 | 1,051 | 7,719 | 3,927 | (203 | ) | 14,383 | ||||||||||||||||
Depreciation | 54 | 766 | 851 | 371 | (59 | ) | 1,983 | ||||||||||||||||
General and administrative expenses | — | — | — | — | 4,146 | 4,146 | |||||||||||||||||
Operating (loss) income | $ | (487 | ) | $ | 549 | $ | 2,159 | $ | 656 | $ | (4,239 | ) | $ | (1,362 | ) | ||||||||
Capital expendituresc | $ | 4,504 | $ | 8,138 | $ | 174 | $ | 255 | $ | — | $ | 13,071 | |||||||||||
Total assets at June 30, 2016 | 180,039 | 116,554 | 105,167 | 39,405 | 13,093 | 454,258 |
Six Months Ended June 30, 2017: | |||||||||||||||||||||||
Revenues: | |||||||||||||||||||||||
Unaffiliated customers | $ | 6,185 | $ | 4,092 | $ | 20,079 | $ | 11,737 | $ | — | $ | 42,093 | |||||||||||
Intersegment | 21 | 431 | 173 | 125 | (750 | ) | — | ||||||||||||||||
Cost of sales, excluding depreciation | 5,844 | 2,673 | 14,645 | 8,957 | (384 | ) | 31,735 | ||||||||||||||||
Depreciation | 114 | 1,331 | 1,768 | 753 | (69 | ) | 3,897 | ||||||||||||||||
General and administrative expenses | — | — | — | — | 6,242 | 6,242 | |||||||||||||||||
Profit participation | — | 2,538 | — | — | — | 2,538 | |||||||||||||||||
Gain on sales of assets | — | (1,115 | ) | — | — | — | (1,115 | ) | |||||||||||||||
Operating income (loss) | $ | 248 | $ | (904 | ) | $ | 3,839 | $ | 2,152 | $ | (6,539 | ) | $ | (1,204 | ) | ||||||||
Capital expendituresc | $ | 7,974 | $ | 4,779 | $ | 258 | $ | 63 | $ | — | $ | 13,074 |
Six Months Ended June 30, 2016: | |||||||||||||||||||||||
Revenues: | |||||||||||||||||||||||
Unaffiliated customers | $ | 3,703 | $ | 4,194 | $ | 21,233 | $ | 9,046 | $ | — | $ | 38,176 | |||||||||||
Intersegment | 16 | 361 | 160 | 84 | (621 | ) | — | ||||||||||||||||
Cost of sales, excluding depreciation | 4,098 | 1,921 | 15,429 | 7,032 | (301 | ) | 28,179 | ||||||||||||||||
Depreciation | 114 | 1,242 | 1,697 | 706 | (94 | ) | 3,665 | ||||||||||||||||
General and administrative expenses | — | — | — | — | 7,221 | 7,221 | |||||||||||||||||
Operating (loss) income | $ | (493 | ) | $ | 1,392 | $ | 4,267 | $ | 1,392 | $ | (7,447 | ) | $ | (889 | ) | ||||||||
Capital expendituresc | $ | 7,629 | $ | 21,895 | $ | 261 | $ | 279 | $ | — | $ | 30,064 |
a. | Includes sales commissions and other revenues together with related expenses. |
b. | Includes consolidated general and administrative expenses and eliminations of intersegment amounts. |
c. | Also includes purchases and development of residential real estate held for sale. |
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8. | NEW ACCOUNTING STANDARD |
In March 2016, the Financial Accounting Standards Board issued an Accounting Standards Update that simplifies various aspects of the accounting for share-based payment transactions, including the income tax consequences, statutory tax withholding requirements, an accounting policy election for forfeitures and the classification on the statement of cash flows. Stratus adopted this ASU on January 1, 2017, on a modified retrospective basis and recorded a cumulative effect adjustment of $0.1 million to its opening accumulated deficit balance.
9. | SUBSEQUENT EVENTS |
On August 3, 2017, Stratus extended the maturity of its credit facility with Comerica Bank by three months to November 30, 2017. Stratus is currently negotiating a modification and a longer-term extension of the credit facility, which is expected to close by the November 2017 maturity.
In August 2017, Stratus finalized a 99-year ground lease for 72 acres in College Station, Texas, for Jones Crossing, a new HEB Grocery Company, L.P.-anchored, approximately $50 million, mixed-use project planned for approximately 258,000 square feet of commercial space.
Stratus evaluated events after June 30, 2017, and through the date the financial statements were issued, and determined any events or transactions occurring during this period that would require recognition or disclosure are appropriately addressed in these financial statements.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
OVERVIEW
In Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A), “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 financial statements, the related MD&A and the discussion of our business and properties included in our Annual Report on Form 10-K for the year ended December 31, 2016 (2016 Form 10-K) filed with the United States (U.S.) Securities and Exchange Commission (SEC). 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 (Unaudited) located in Part I, Item 1. “Financial Statements” of this Form 10-Q, unless otherwise stated.
We are a diversified real estate company engaged primarily in the acquisition, entitlement, development, management, operation and sale of commercial, hotel, entertainment, and multi- and single-family residential real estate properties, primarily located in the Austin, Texas area, but including projects in certain other select markets in Texas. We generate revenues and cash flows from the sale of developed properties, rental income from our leased properties and our hotel and entertainment operations. See Note 7 for further discussion of our operating segments.
Developed property sales can include an individual tract of land that has been developed and permitted for residential use, a developed lot with a home already built on it or condominium units at the W Austin Residences. We may sell properties under development, undeveloped properties or commercial properties, if opportunities arise that we believe will maximize overall asset value as part of our business plan. See "Business Strategy" below.
The number of developed lots/units, acreage under development and undeveloped acreage as of June 30, 2017, that comprise our real estate development operations are presented in the following table.
Acreage | ||||||||||||||||||||||||||
Under Development | Undeveloped | |||||||||||||||||||||||||
Developed Lots/Units | Multi- family | Commercial | Total | Single family | Multi-family | Commercial | Total | Total Acreage | ||||||||||||||||||
Austin: | ||||||||||||||||||||||||||
Barton Creek | 295 | 20 | — | 20 | 512 | 289 | 394 | 1,195 | 1,215 | |||||||||||||||||
Circle C | 5 | — | — | — | — | 36 | 216 | 252 | 252 | |||||||||||||||||
Lantana | — | — | 11 | 11 | — | — | 44 | 44 | 55 | |||||||||||||||||
W Austin Residences | 2 | — | — | — | — | — | — | — | — | |||||||||||||||||
Other | — | — | — | — | 7 | — | — | 7 | 7 | |||||||||||||||||
Lakewaya | — | — | — | — | 35 | — | — | 35 | 35 | |||||||||||||||||
Magnolia | — | — | — | — | — | — | 124 | 124 | 124 | |||||||||||||||||
West Killeen Market | — | — | 9 | 9 | — | — | — | — | 9 | |||||||||||||||||
San Antonio: | ||||||||||||||||||||||||||
Camino Real | — | — | — | — | — | — | 2 | 2 | 2 | |||||||||||||||||
Total | 302 | 20 | 20 | 40 | 554 | 325 | 780 | 1,659 | 1,699 |
a. | On February 15, 2017, we sold The Oaks at Lakeway, which included 52 acres of land under development at December 31, 2016, but we retained 34.7 acres of undeveloped land adjacent to the project. |
In second-quarter 2017, our revenues increased to $21.4 million and our net loss attributable to common stockholders totaled $0.9 million, compared with revenues of $19.2 million and a net loss attributable to common stockholders of $2.5 million for second-quarter 2016. For the first six months of 2017 our revenues totaled $42.1 million and our net loss attributable to common stock holders totaled $3.6 million, compared with revenues of $38.2 million and a net loss attributable to common stockholders of $4.2 million for the first six months of 2016.
The increase in revenues for the 2017 periods primarily reflects an increase in real estate revenues resulting from the sale of higher-priced real estate properties, as well as an increase in entertainment revenue as a result of higher ticket sales and more events at both Austin City Limits Live (ACL Live) and 3TEN ACL Live. The results for the first six months of 2017 include a $2.5 million charge ($1.6 million to net loss attributable to common stockholders) for
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profit participation costs and a $0.5 million loss ($0.3 million to net loss attributable to common stockholders) on early extinguishment of debt (see "Results of Operations"), both related to our sale of The Oaks at Lakeway in February 2017, partly offset by a $1.1 million gain ($0.7 million to net loss attributable to common stockholders) on the sale of a bank building and an adjacent undeveloped 4.1 acre tract of land at Barton Creek (see "Development Activities"). The results for the first six months of 2016 include a loss on early extinguishment of debt totaling $0.8 million ($0.5 million to net loss attributable to common stockholders) associated with the refinancing of the W Austin Hotel & Residences and a $0.5 million loss ($0.3 million to net loss attributable to common stockholders) related to interest rate derivative instruments.
In February 2017, we completed the sales of The Oaks at Lakeway for $114.0 million in cash and our 3,085-square-foot bank building in Barton Creek Village and an adjacent undeveloped 4.1 acre tract of land for $3.1 million in cash. We used the proceeds from the sale of The Oaks at Lakeway to repay the Lakeway construction loan and our outstanding balances under the Comerica Bank credit facility. A portion of the proceeds from the sale of the Barton Creek property was used to repay a portion of the Barton Creek term loan (see "Development Activities - Commercial" and Note 3 for further discussion).
At June 30, 2017, we had total debt of $204.2 million and total cash and cash equivalents of $14.8 million, compared with total debt of $291.1 million and cash and cash equivalents of $13.6 million at December 31, 2016. As of June 30, 2017, we have $16.1 million of scheduled debt maturities in 2017 and $34.4 million in 2018. 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. See "Capital Resources and Liquidity" below regarding debt repayments and “Risk Factors” included in Part 1, Item 1A. of our 2016 Form 10-K for further discussion.
BUSINESS STRATEGY
Our strategy has been to manage our diverse asset base of residential, commercial, hotel and entertainment real estate located in the premier Austin, Texas, market and in other select, fast-growing Texas markets. We enhance the value of our residential, multi-family and commercial properties by securing and maintaining development entitlements and developing and building real estate projects on these properties for sale or investment. Our hotel and ACL Live venue, which are central to Austin’s world renowned, vibrant music scene, are located in downtown Austin.
We are continuing our successful program of actively developing our properties and strategically marketing and selling developed assets at appropriate times in order to maximize stockholder value. Our active development plan includes completion of both residential and commercial development projects. Our development portfolio consists of approximately 1,700 acres of undeveloped land with development plans that include necessary regulatory approvals, entitlements and utility capacity. We believe that our portfolio, along with management’s extensive experience in Austin-area real estate development, support our ability to obtain project financing and/or seek joint venture partners including on the development projects described in "Development Activities - Commercial".
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DEVELOPMENT ACTIVITIES
Residential. As of June 30, 2017, the number of our multi-and single-family residential developed lots/units, lots under development and lots for potential development by area are shown below:
Residential Lots/Units | ||||||||||||
Developed | Under Development | Potential Developmenta | Total | |||||||||
Barton Creek: | ||||||||||||
Amarra Drive: | ||||||||||||
Phase II Lots | 13 | — | — | 13 | ||||||||
Phase III Lots | 46 | — | — | 46 | ||||||||
Amarra Villas | — | 19 | 170 | 189 | ||||||||
Section N: | ||||||||||||
Santal multi-family Phase I | 236 | — | — | 236 | ||||||||
Santal multi-family Phase II | — | — | 212 | 212 | ||||||||
Other Section N | — | — | 1,412 | 1,412 | ||||||||
Other Barton Creek sections | — | — | 156 | 156 | ||||||||
Circle C: | ||||||||||||
Meridian | 5 | — | — | 5 | ||||||||
The St. Mary | — | — | 240 | 240 | ||||||||
Tract 102 multi-family | — | — | 56 | 56 | ||||||||
Lakeway | — | — | 100 | 100 | ||||||||
Other | — | — | 7 | 7 | ||||||||
W Austin Residences: | ||||||||||||
Condominium units | 2 | — | — | 2 | ||||||||
Total Residential Lots/Units | 302 | 19 | 2,353 | 2,674 |
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 (the City). 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. |
Current Activities.
During second-quarter 2017, we sold one Amarra Villa townhome for $2.2 million, one Phase III lot at Amarra Drive for $0.7 million and two Meridian lots for $0.6 million. During the first six months of 2017, we sold one Amarra Villa townhome for $2.2 million, two Phase III lots at Amarra Drive for $1.4 million and seven Meridian lots for $2.0 million (see "Results of Operations-Real Estate Operations"). As of July 31, 2017, one Phase II lot and two Phase III lots at Amarra Drive and four lots at Meridian were under contract. Also, as of July 31, 2017, two Amarra Villas townhomes were under contract, one of which is under construction.
As of July 31, 2017, nearly 100 percent of the 236 units at our Santal multi-family Phase I project were leased. We expect to commence construction of the approximately $40 million Santal Phase II, a 212-unit garden style multi-family project in Barton Creek in third-quarter 2017, subject to completion of construction financing.
For further discussion of our multi- and single-family residential properties listed in the table above, see MD&A in our 2016 Form 10-K.
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Commercial. As of June 30, 2017, the number of square feet of our commercial property developed, under development and our remaining entitlements for potential development (excluding property associated with our unconsolidated joint venture with Tramell Crow Central Texas Development, Inc. relating to Crestview Station in Austin) are shown below:
Commercial Property | |||||||||||
Developed | Under Development | Potential Developmenta | Total | ||||||||
Barton Creek: | |||||||||||
Barton Creek Village | 22,366 | — | — | 22,366 | |||||||
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 | — | 99,663 | 220,337 | 320,000 | |||||||
Tract G07 | — | — | 160,000 | 160,000 | |||||||
W Austin Hotel & Residences: | |||||||||||
Office | 38,316 | — | — | 38,316 | |||||||
Retail | 18,327 | — | — | 18,327 | |||||||
Magnolia | — | — | 351,000 | 351,000 | |||||||
West Killeen Market | 44,000 | — | — | 44,000 | |||||||
Total Square Feet | 123,009 | 99,663 | 2,994,360 | 3,217,032 |
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. 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. |
Current Activities.
In August 2017, we finalized a 99-year ground lease on a 72 acre tract of land in College Station, Texas, for Jones Crossing, a new HEB Grocery Company, L.P. (HEB)-anchored, approximately $50 million, mixed-use project. The Jones Crossing project is expected to total approximately 258,000 square feet of commercial space, including a 106,000 square-foot HEB grocery store. Zoning has been approved by the City of College Station and site engineering work has been completed. Stratus expects to break ground on the project during third-quarter 2017, subject to completion of construction financing. The HEB store is presently expected to open in mid-2018.
During second-quarter 2017, construction commenced on the first phase of Lantana Place, an approximately $40 million, 320,000 square foot mixed-use development project in southwest Austin. The first phase will be anchored by a 12-screen Moviehouse, a state of the art movie theater that provides a high-quality dining experience. We expect to complete construction of Moviehouse in second-quarter 2018. In addition, construction of the HEB-anchored retail project at the West Killeen Market was completed in June and certain leases commenced. Leases for 46 percent of the space have been executed and leasing activities for the remaining space continues. The HEB store opened in April 2017.
In February 2017, we completed the sale of The Oaks at Lakeway for $114.0 million and we sold the 3,085-square-foot bank building and the adjacent undeveloped 4.1 acre tract of land in Barton Creek for $3.1 million (see Note 3). In connection with the sale of The Oaks at Lakeway, we entered into three master lease agreements with the buyer that require us to make monthly lease payments for unleased space. We currently expect master lease payments to average $170 thousand per month, which will decline over time as we lease space covered by the master leases. Our exposure under the master leases will terminate once leasing at The Oaks at Lakeway is complete, the remaining buildings have been constructed, new subleases are assigned to the purchaser, and subtenants are open for business and paying rent, which is projected to occur by February 2019. The hotel tenant began paying rent in May 2017 and construction of the hotel is expected to begin in third-quarter 2017. As additional conditions are met, primarily completion and opening of the hotel, the hotel master lease will terminate, reducing our selling subsidiary's master lease payment obligation by $48 thousand per month. See Note 13 of our 2016 Form 10-K for further discussion.
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For further discussion of our commercial properties listed in the table above, see MD&A in our 2016 Form 10-K.
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.
The following table summarizes our results (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Operating income (loss): | |||||||||||||||
Real estate operations | $ | 104 | $ | (487 | ) | $ | 248 | $ | (493 | ) | |||||
Leasing operations | 484 | 549 | (904 | ) | 1,392 | ||||||||||
Hotel | 1,602 | 2,159 | 3,839 | 4,267 | |||||||||||
Entertainment | 1,091 | 656 | 2,152 | 1,392 | |||||||||||
Corporate, eliminations and other | (2,986 | ) | (4,239 | ) | (6,539 | ) | (7,447 | ) | |||||||
Operating income (loss) | $ | 295 | $ | (1,362 | ) | $ | (1,204 | ) | $ | (889 | ) | ||||
Interest expense, net | $ | (1,508 | ) | $ | (2,346 | ) | $ | (3,483 | ) | $ | (4,315 | ) | |||
Net loss attributable to common stockholders | $ | (893 | ) | $ | (2,483 | ) | $ | (3,563 | ) | $ | (4,166 | ) |
We have four operating segments: Real Estate Operations, Leasing Operations, Hotel and Entertainment (see Note 7 for further discussion). The following is a discussion of our operating results by segment.
Real Estate Operations
The following table summarizes our Real Estate Operations results (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Revenues: | |||||||||||||||
Developed property sales | $ | 3,443 | $ | 1,300 | $ | 5,576 | $ | 3,365 | |||||||
Undeveloped property sales | 544 | 73 | 544 | 73 | |||||||||||
Commissions and other | 42 | 83 | 86 | 281 | |||||||||||
Total revenues | 4,029 | 1,456 | 6,206 | 3,719 | |||||||||||
Cost of sales, including depreciation | 3,925 | 1,943 | 5,958 | 4,212 | |||||||||||
Operating income (loss) | $ | 104 | $ | (487 | ) | $ | 248 | $ | (493 | ) | |||||
Operating income (loss) from the Real Estate Operations segment increased in the 2017 periods, compared to the 2016 periods, primarily reflecting the sale of higher-priced developed properties and the sale of a six-acre tract of undeveloped land.
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Developed Property Sales. The following tables summarize our developed property sales (dollars in thousands):
Three Months Ended June 30, | |||||||||||||||||||||
2017 | 2016 | ||||||||||||||||||||
Lots/Units | Revenues | Average Cost Per Lot/Unit | Lots | Revenues | Average Cost Per Lot | ||||||||||||||||
Barton Creek | |||||||||||||||||||||
Amarra Drive: | |||||||||||||||||||||
Phase III Lots | 1 | $ | 700 | $ | 303 | — | $ | — | $ | — | |||||||||||
Amarra Villas | 1 | 2,193 | 2,004 | — | — | — | |||||||||||||||
Circle C | |||||||||||||||||||||
Meridian | 2 | 550 | 156 | 5 | 1,300 | 147 | |||||||||||||||
Total Residential | 4 | $ | 3,443 | 5 | $ | 1,300 | |||||||||||||||
Six Months Ended June 30, | |||||||||||||||||||||
2017 | 2016 | ||||||||||||||||||||
Lots/Units | Revenues | Average Cost Per Lot/Unit | Lots | Revenues | Average Cost Per Lot | ||||||||||||||||
Barton Creek | |||||||||||||||||||||
Amarra Drive: | |||||||||||||||||||||
Phase II Lots | — | $ | — | $ | — | 1 | $ | 550 | $ | 190 | |||||||||||
Phase III Lots | 2 | 1,365 | 292 | — | — | — | |||||||||||||||
Amarra Villas | 1 | 2,193 | 2,004 | — | — | — | |||||||||||||||
Circle C | |||||||||||||||||||||
Meridian | 7 | 2,018 | 161 | 10 | 2,815 | 159 | |||||||||||||||
Total Residential | 10 | $ | 5,576 | 11 | $ | 3,365 | |||||||||||||||
Undeveloped Property Sales. During second-quarter 2017, we sold a six-acre tract of land at the Circle C community, which had entitlements for 14,000 square feet of commercial space, for $0.5 million.
Cost of Sales. Cost of sales includes costs of property sold, project operating and marketing expenses and allocated overhead costs, partly offset by reductions for certain municipal utility district (MUD) reimbursements. Cost of sales totaled $3.9 million for second-quarter 2017 and $6.0 million for the first six months of 2017, compared with $1.9 million for second-quarter 2016 and $4.2 million for for the first six months of 2016. Real estate cost of sales increased in the 2017 periods primarily as a result of costs associated with the sales of the Amarra Villas townhome and six-acre tract of undeveloped land in the Circle C community.
Leasing Operations
The following table summarizes our Leasing Operations results (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Rental revenue | $ | 2,032 | $ | 2,366 | $ | 4,523 | $ | 4,555 | |||||||
Rental cost of sales, excluding depreciation | 980 | 1,051 | 2,673 | 1,921 | |||||||||||
Depreciation | 568 | 766 | 1,331 | 1,242 | |||||||||||
Profit participation | — | — | 2,538 | — | |||||||||||
Gain on sales of assets | — | — | (1,115 | ) | — | ||||||||||
Operating income (loss) | $ | 484 | $ | 549 | $ | (904 | ) | $ | 1,392 |
Operating income (loss) from the Leasing Operations segment totaled $0.5 million in second-quarter 2017 and $(0.9) million for the first six months of 2017, compared to $0.5 million in second-quarter 2016 and $1.4 million for the first six months of 2016. The first six months of 2017 included a $2.5 million profit participation charge associated with our sale of The Oaks at Lakeway partly offset by a $1.1 million gain on the sale of our bank building and an adjacent undeveloped 4.1 acre tract of land in Barton Creek (see "Business Strategy").
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Rental Revenue. Rental revenue for 2017 primarily includes revenue from office and retail space at the W Austin Hotel & Residences, retail space at Barton Creek Village, the Santal multi-family project and The Oaks at Lakeway prior to its sale in February 2017. Rental revenue for 2016 included revenue from The Oaks at Lakeway, office and retail space at the W Austin Hotel & Residences, retail space at Barton Creek Village and the Santal multi-family project. The decrease in rental revenue in the 2017 periods primarily reflects the sale of The Oaks at Lakeway, partially offset by an increase in revenue from the Santal multi-family project.
Rental Cost of Sales and Depreciation. Rental operating costs totaled $1.0 million for second-quarter 2017 and $2.7 million for the first six months of 2017, compared with $1.1 million for second-quarter 2016 and $1.9 million for the first six months of 2016. Depreciation expense totaled $0.6 million in second-quarter 2017 and $1.3 million for the first six months of 2017, compared with $0.8 million in second-quarter 2016 and $1.2 million for the first six months of 2016. Rental cost of sales and depreciation expense decreased in second-quarter 2017, compared with second-quarter 2016, as a result of the sale of The Oaks at Lakeway, partly offset by increased costs related to the Santal multi-family project. Rental cost of sales and depreciation expense increased in the first six months of 2017, compared with the first six months of 2016, as a result of increased costs related to the Santal multi-family project and West Killeen Market.
Hotel
The following table summarizes our Hotel results (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Hotel revenue | $ | 9,847 | $ | 10,729 | $ | 20,252 | $ | 21,393 | |||||||
Hotel cost of sales, excluding depreciation | 7,456 | 7,719 | 14,645 | 15,429 | |||||||||||
Depreciation | 789 | 851 | 1,768 | 1,697 | |||||||||||
Operating income | $ | 1,602 | $ | 2,159 | $ | 3,839 | $ | 4,267 |
Operating income from the Hotel segment decreased in the 2017 periods, compared with the 2016 periods, primarily as a result of increased competition.
Hotel Revenue. Hotel revenue primarily includes revenue from W Austin Hotel room reservations and food and beverage sales. Hotel revenues decreased in second-quarter 2017, primarily because of increased competition from several newly completed hotels in the downtown Austin area. Hotel revenues decreased during the first six months of 2017 primarily as a result of lower banquet and catering revenue, and increased competition from several newly completed hotels in the downtown Austin area. Revenue per available room (RevPAR), which is calculated by dividing total room revenue by the average total rooms available, was $263 for second-quarter 2017 and $281 for the the first six months of 2017, compared with $285 for second-quarter 2016 and $283 for the first six months of 2016.
Hotel Cost of Sales. Hotel operating costs (excluding depreciation) were $7.5 million in second-quarter 2017 and $14.6 million for the the first six months of 2017, compared with $7.7 million in second-quarter 2016 and $15.4 million for the first six months of 2016. Lower costs in the 2017 periods were primarily because of lower food and beverage costs.
Entertainment
The following table summarizes our Entertainment results (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Entertainment revenue | $ | 5,917 | $ | 4,954 | $ | 11,862 | $ | 9,130 | |||||||
Entertainment cost of sales, excluding depreciation | 4,449 | 3,927 | 8,957 | 7,032 | |||||||||||
Depreciation | 377 | 371 | 753 | 706 | |||||||||||
Operating income | $ | 1,091 | $ | 656 | $ | 2,152 | $ | 1,392 |
Operating income for the Entertainment segment increased in the 2017 periods, compared with the 2016 periods, primarily as a result of an increase in the number of events hosted and higher ticket sales. Entertainment segment revenue and cost of sales will vary from period to period as a result of factors such as the price of tickets and the number of tickets sold, as well as the number and type of events hosted at ACL Live and 3TEN ACL Live.
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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.
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2017 | 2016 | 2017 |