STRS US Equity☆

Items 7. and 7A. Management’s Discussion and Analysis of Financial Condition and Results of Operationsand Quantitative and Qualitative Disclosures About Market Risk

OVERVIEW

In Management’s Discussion and Analysis of Financial Condition and Results of Operations, “we,” “us,” “our” and “Stratus” refer to Stratus Properties Inc. and all entities owned or controlled by Stratus Properties Inc. You should read the following discussion in conjunction with our consolidated financial statements and the related discussion of “Business and Properties” and “Risk Factors” included elsewhere in this Form 10-K. The results of operations reported and summarized below are not necessarily indicative of future operating results, and future results could differ materially from those anticipated in forward-looking statements (refer to “Cautionary Statement” and Part I, Item 1A. "Risk Factors" herein). In particular, the impacts of the COVID-19 pandemic continue to affect our operations. As a result, our performance during 2020, as well as future periods while the COVID-19 pandemic is ongoing, will not be comparable to past performance or indicative of future performance. We expect continued uncertainty in our business and the global economy as a result of the duration and intensity of the COVID-19 pandemic and its related effects. All subsequent references to “Notes” refer to Notes to Consolidated Financial Statements located in Part II, Item 8. “Financial Statements and Supplementary Data.”

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

BUSINESS STRATEGY

Our portfolio includes approximately 1,700 acres of undeveloped acreage and acreage under development for commercial and multi-family and single-family residential projects, as well as several completed commercial and residential projects. Our W Austin Hotel and our ACL Live and 3TEN ACL Live entertainment venues are located in downtown Austin and are central to the city's world-renowned, vibrant music scene.

Our primary business objective is to create value for stockholders by methodically developing and enhancing the value of our properties and then selling them or holding them for lease. Our full cycle development program of acquiring properties, securing and maintaining development entitlements, developing and stabilizing properties, and selling them or holding them as part of our leasing operations is a key element of our strategy. We may also seek to refinance properties, in order to benefit from the increased value of the property, from lower interest rates or for other reasons.

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

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

During 2020, the COVID-19 pandemic caused substantial disruption in international and U.S. economies and markets. As discussed in detail below, the COVID-19 pandemic has had, and continues to have, a significant impact on our business, especially our hotel and entertainment segments. We acted quickly early in the COVID-19 pandemic to manage what was within our control under these extraordinary circumstances. We proactively managed our retail and multi-family tenants and associated banking relationships, continued to lease up properties,

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completed residential property sales, continued to advance land planning, engineering and permitting activities on several development projects, including The Saint June, actively explored refinancing and sale alternatives for certain properties and began analyzing a potential conversion to a real estate investment trust (REIT).

Despite the challenges presented by the COVID-19 pandemic, during 2020, we were able to achieve the following:

1.Executed an agreement to sell The Saint Mary for $60.0 million. The transaction closed January 11, 2021, generating approximately $34 million of net proceeds, of which we received $21.3 million.

2.Increased leasing operations revenue for 2020 by 24 percent to $24.1 million, compared with 2019.

3.Sold 19 lots and 2 completed homes at Amarra Drive in Barton Creek for an aggregate of $21.8 million and a pad site at West Killeen Market for $0.7 million, resulting in real estate operations revenues for 2020 increasing by 64 percent to $22.6 million, compared with 2019.

4.Collected $15.0 million of forfeited earnest money after the buyer terminated the agreements to purchase Block 21 for $275.0 million in May 2020.

In September 2020, our Board of Directors (Board) announced its approval of the initiation of an in-depth exploration of a conversion from a C-Corporation to a REIT. We have engaged financial, tax, accounting and legal advisors, and the Board will closely monitor and evaluate the findings to ultimately determine if conversion to a REIT is in the best interest of our stockholders. If the Board determines to move forward, we expect the conversion would occur no earlier than 2022. We believe that the REIT conversion would require consent from our major lenders and amendments to our major debt agreements, among other third-party consents. We also expect to seek stockholder approval to implement provisions in our organizational documents consistent with a public REIT structure, if the Board ultimately determines that a REIT conversion is in stockholders’ best interests.

OVERVIEW OF THE IMPACTS OF THE COVID-19 PANDEMIC

Since January 2020, the COVID-19 outbreak has caused substantial disruption in international and U.S. economies and markets, intensifying in the latter part of the first quarter of 2020 and continuing through and subsequent to 2020. The impacts of the pandemic are expected to continue during 2021. On March 11, 2020, the World Health Organization designated the COVID-19 outbreak a pandemic. The pandemic has resulted in government restrictions of various degrees effective at various times, including stay-at-home orders, bans on travel, limitations on the size of gatherings, limitations on the operations of businesses deemed non-essential, closures of work facilities, schools, public buildings and businesses, cancellation of events (including entertainment events, conferences and meetings), quarantines and social distancing measures. The pandemic and responses to it have also caused a steep increase in unemployment in the U.S. As a result, the pandemic is having, and we believe will continue to have, a significant adverse impact on our business and operations, particularly on the hotel and entertainment segments, as discussed further below.

The pandemic remains complex and rapidly-evolving. Effective March 10, 2021, the Governor of Texas issued an executive order lifting the mask mandate in Texas and increasing capacity of all businesses and facilities in the state to 100 percent. Businesses in Texas may still limit capacity or implement additional safety protocols at their own discretion. While we are considering ways to ramp up our hotel and entertainment operations, we plan to increase capacity gradually and safely and in compliance with all applicable regulations. The pandemic is expected to continue to adversely impact us in 2021. Because the pandemic is unprecedented in recent history, and its severity, duration and future economic consequences are difficult to predict, we cannot predict its future impact on our company with any certainty.

Termination of Sale of Block 21

As previously disclosed, our transaction to sell Block 21, which contains the W Austin Hotel and the ACL Live and 3TEN ACL Live entertainment venues, to Ryman Hospitality Properties, Inc. (Ryman) for $275.0 million was terminated by Ryman in May 2020. As a result of Ryman’s termination of the transaction, Ryman forfeited to us its $15.0 million of earnest money. We used $13.8 million of the earnest money to pay down our Comerica Bank credit facility and used the remaining $1.2 million for Block 21 debt service and required monthly reserves. We recorded the $15.0 million as operating income during 2020.

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Impacts on our Business

The COVID-19 pandemic adversely impacted our hotel and entertainment segments in 2020. Revenue in our hotel segment declined to $10.0 million in 2020 from $35.5 million in 2019. While our hotel has remained open throughout the pandemic, average occupancy during 2020 was 23 percent, compared to 73 percent in 2019. Revenue from our entertainment segment declined to $5.2 million in 2020 from $25.0 million in 2019. The number of events hosted at ACL Live declined to 82 in 2020 from 264 in 2019, and the number of events hosted at 3TEN ACL Live declined to 102 in 2020 from 201 in 2019.

Despite the pandemic, we experienced increases in revenues in our real estate operations and leasing operations segments. We believe our sales of residential real estate and leasing of our multi-family properties were positively impacted by home-centric trends resulting from the pandemic and from the increased attractiveness of Austin, Texas as a desirable place to live. Our leasing operations revenues were positively impacted by the continued lease-up of recently completed projects. However, our retail and multi-family base rent collections were five percent less than scheduled base rents during the period from April through December 2020, primarily due to rent deferrals we agreed to with certain retail tenants. The impacts of the COVID-19 pandemic on each of our segments are described below in more detail in “Results of Operations.”

Losses resulting from the pandemic contributed to us recording a $10.7 million non-cash tax charge in 2020 to record a valuation allowance on our deferred tax assets. Refer to Note 7 for further discussion.

Despite the COVID-19 pandemic, we continued to advance our land planning, engineering and permitting activities. We implemented measures such as increased sanitizing, physical distancing and remote work arrangements, with the goal of protecting employees, tenants, guests, customers and suppliers.

At this time, we are focusing on taking action to maintain liquidity and control costs; closing on asset sales in our real estate operations segment; closely monitoring our income-producing properties and continuing to lease up certain properties; regularly communicating with our lenders and investor groups; advancing our land planning, engineering and permitting activities; and evaluating refinance opportunities for our larger, stabilized assets to take advantage of historic low interest rates.

Impacts on our Liquidity and Capital Resources

On June 12, 2020, we extended the maturity date of our $60.0 million revolving credit facility to September 27, 2022. As of December 31, 2020, we had $16.5 million available under the credit facility, with a $150 thousand letter of credit committed against the credit facility.

During 2020, we proactively engaged with our project lenders in connection with formulating rent deferral arrangements for our tenants. We were granted waivers of and amendments to certain financial covenants in three of our project loans. With respect to our Block 21 loan, as a result of the COVID-19 pandemic, Stratus Block 21, LLC, our wholly owned subsidiary that owns Block 21 (the Block 21 subsidiary) did not meet the debt service coverage ratio test on the June 30, 2020, September 30, 2020, and December 31, 2020, test dates, resulting in a "Trigger Period," which is not a default but restricts our ability to receive cash distributions from the project. Although the Block 21 loan agreement is a non-recourse loan, we may contribute cash to our Block 21 subsidiary in order to prevent our Block 21 subsidiary from defaulting under the Block 21 loan agreement. Additionally, under our subsidiary’s hotel operating agreement, the hotel operator has and may continue to request funds from us if it reasonably determines that such funds are required in order to fund the operation of the hotel and specified reserves. Pursuant to such provisions, we contributed $9.6 million during 2020, and based on current projections, we expect to make additional contributions of approximately $18 million through early 2022.

We project that we will be able to meet our debt service and other cash obligations for at least the next 12 months. Our projections are based on many detailed and complex underlying assumptions, including (1) that operating income for our Block 21 businesses will gradually ramp up to a break-even point in the first half of 2021 and that Block 21 will generate sufficient cash to cover debt service by early 2022, (2) that current conditions in our leasing operations will not deteriorate materially, and (3) that we close on projected asset sales in our real estate operations segment. No assurances can be given that the results anticipated by our projections will occur. See Note 6, “Capital Resources and Liquidity” below, and “Risk Factors” included in Part II, Item 1A. further discussion.

We are continuing to closely monitor health and market conditions and are prepared to make further adjustments to our business strategy if and when appropriate.

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GENERAL

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

Our acreage under development and undeveloped as of December 31, 2020, is presented under “Operations - Real Estate Operations” in Items 1. and 2. "Business and Properties" herein.

Our single-family residential holdings at December 31, 2020, are principally in southwest Austin, Texas, and include developed lots, homes under development in Amarra Drive in Barton Creek and a condominium unit at the W Austin Residences in downtown Austin (which was sold in February 2021). Our multi-family and commercial holdings at December 31, 2020, consist of The Santal, Lantana Place, Jones Crossing, West Killeen Market, Kingwood Place, New Caney, and The Saint Mary (which was subsequently sold in January 2021). See “Development Activities - Residential” and “Development Activities - Commercial” below for further discussion.

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

In addition to our real estate and leasing operations, we own Block 21 in downtown Austin, Texas, which includes the W Austin Hotel and the ACL Live and 3TEN ACL entertainment venues, in addition to office and retail space.

Our revenues totaled $61.0 million for 2020, compared with $92.2 million for 2019. The decrease in revenues in 2020, compared with 2019, primarily reflects the decrease in revenue from our hotel and entertainment segments caused by the COVID-19 pandemic, partially offset by an increase in revenue from real estate and leasing operations.

Our net loss attributable to common stockholders totaled $22.8 million, or $2.78 per share, for 2020, compared to $2.5 million, $0.30 per share, for 2019. Our higher net loss for 2020, compared to 2019, is primarily the result of (i) operating losses from our hotel and entertainment segments in 2020, primarily as a result of the COVID-19 pandemic, (ii) a non-cash tax charge of $10.7 million in 2020 to record a valuation allowance on our deferred tax assets, (iii) higher interest expense related to lower capitalized interest as projects under development are completed, and (iv) municipal utility district (MUD) reimbursements and a gain on sale of assets being recognized in 2019 (refer to "Real Estate Operations" and "Leasing Operations," respectively, below), partially offset by $15.0 million in income from earnest money received as a result of the termination of the Block 21 transaction.

At December 31, 2020, we had total debt of $351.1 million (see “Debt Maturities and Other Contractual Obligations” below for further discussion), excluding debt related to The Saint Mary, which is reported as liabilities held for sale, and consolidated cash of $12.4 million. We have significant recurring costs, including property taxes, maintenance and marketing, and we believe we will have sufficient sources of debt financing and cash from operations to meet our cash requirements. For discussion of operating cash flows and debt transactions see “Capital Resources and Liquidity” below.

Real Estate Market Conditions. Because of the concentration of our assets primarily in the Austin, Texas area, and in other select, fast-growing markets in Texas, market conditions in these regions significantly affect our business, including development costs, interest rates, the availability of credit to finance real estate transactions, demand for residential and commercial real estate, and regulatory factors including our use and development entitlements. These market conditions historically have moved in periodic cycles, and can be volatile. Real estate development in southwest Austin, where most of our real estate under development and undeveloped real estate is located, has historically been constrained as a result of various restrictions imposed by the city of Austin. Additionally, several special interest groups have traditionally opposed development in southwest Austin.

In addition to the traditional influence of state and federal government employment levels on the local economy, the Austin-Round Rock, Texas area (Austin-Round Rock) has been influenced by growth in the technology sector. Large, high-profile technology companies have expanded their profile in Austin-Round Rock recently as the technology sector has clustered in this market. The Austin-Round Rock-area population increased by 33 percent

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from 2009 through 2019, largely because of growing interest in Austin’s local job market. Median family income levels in the Austin-Round Rock area increased by 35 percent during the same period. The expanding economy resulted in rising demand for residential housing, commercial office space and retail services. From 2009 through 2019, sales tax receipts in the city of Austin rose by 78 percent, an indication of the increase in business activity during the period.

The following chart compares Austin-Round Rock’s five-county median family income and metro area population for 1999, 2009 and the most current information available for 2019 (actual) and 2020 (estimate), based on United States (U.S.) Census Bureau data and Austin-Round Rock’s data.

Based on the city of Austin's fiscal year of October 1 through September 30, the chart below compares the city of Austin's sales tax revenues for 1999, 2009 and 2019 (the latest period for which data is available).

Source: Comprehensive Annual Financial Report for the City of Austin, Texas

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Vacancy rates in the city of Austin, Texas as of December 31, 2020 and 2019, are noted below.

Vacancy Rates

Office Buildings (Class A) 16.7 % a 10.5 % a

Multi-Family Buildings 5.7 % b 5.5 % b

Retail Buildings 5.0 % b 4.1 % b

a.CB Richard Ellis: Austin MarketView

b.Marcus & Millichap Research Services, CoStar Group, Inc.

CRITICAL ACCOUNTING ESTIMATES

Management’s discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the U.S. The preparation of these financial statements requires that we make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. We base these estimates on historical experience and on assumptions that we consider reasonable under the circumstances; however, reported results could differ from those based on the current estimates under different assumptions and/or conditions. The areas requiring the use of management’s estimates are discussed in Note 1 under the heading “Use of Estimates.” Critical accounting estimates are those estimates made in accordance with U.S. generally accepted accounting principles that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition or results of operations. Our critical accounting estimates are discussed below.

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

In developing estimated future cash flows for impairment testing for our real estate assets, we have incorporated our own market assumptions including those regarding real estate prices, sales pace, sales and marketing costs, and infrastructure costs. Our assumptions are based, in part, on general economic conditions, the current state of the real estate industry, expectations about the short- and long-term outlook for the real estate market, and competition from other developers or operators in the area in which we develop or operate our properties. These assumptions can significantly affect our estimates of future cash flows. For those properties held for sale and deemed to be impaired, we determine fair value based on appraised values, adjusted for estimated costs to sell, as we believe this is the value for which the property could be sold. We recorded no impairment losses during the two years ended December 31, 2020.

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

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We regularly evaluate the recoverability of our deferred tax assets, considering available positive and negative evidence, including earnings history and the forecast of future taxable income. During 2020, we recorded a $10.7 million non-cash charge to record a valuation allowance on our deferred tax assets. We had deferred tax assets (net of deferred tax liabilities and valuation allowances) totaling $44 thousand at December 31, 2020. See Note 7 for further discussion.

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

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

Profit Participation Incentive Plan. In July 2018, the Compensation Committee of our Board adopted the Stratus Profit Participation Incentive Plan (the Plan), which provides participants with economic incentives tied to the success of the development projects designated by the Compensation Committee as approved projects under the Plan. Under the Plan, 25 percent of the profit for each approved project following a capital transaction (each as defined in the Plan) will be set aside in a pool. The Committee will allocate participation interests in each pool to certain officers, employees and consultants determined to be instrumental in the success of the project. We estimate the profit pool of each approved project by projecting the cash flow from operations, the net sales price, the timing of a capital transaction or valuation event and our equity and preferred return including costs to complete for projects under development, all of which involve significant judgment and estimates. Estimates related to the awards may change over time due to differences between projected and actual development progress and costs, market conditions and the timing of capital transactions or valuation events. During 2020, we accrued $1.3 million to project development costs ($0.7 million in 2019) and $2.4 million in general and administrative expense ($1.0 million in 2019) related to the Plan. The accrued liability for the Plan totaled $6.2 million at December 31, 2020 (included in other liabilities). See Notes 1 and 8 for further discussion.

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DEVELOPMENT ACTIVITIES

Residential. As of December 31, 2020, the number of our residential developed lots/units, lots/units under development and lot/units for potential development by area are shown below:

Residential Lots/Units

Developed UnderDevelopment Potential Developmenta Total

Barton Creek:

Amarra Drive:

Phase III lots 5 — — 5

Amarra Villas — 13 — 13

Other homes — — 20 20

Section N multi-family:

Other Barton Creek sections — — 156 156

Circle C multi-family:

Other — — 7 7

W Austin Residencesc 1 — — 1

a.Our development of the properties identified under the heading “Potential Development” is dependent upon the approval of our development plans and permits by governmental agencies, including the city of Austin and other cities in our Texas markets. Those governmental agencies may not approve one or more development plans and permit applications related to such properties or may require us to modify our development plans. Accordingly, our development strategy with respect to those properties may change in the future. While we may be proceeding with approved infrastructure projects or planning activities for some of these properties, they are not considered to be “under development” for disclosure in this table until construction activities have begun, infrastructure work over the entire property has been completed, is currently being completed or is able to be completed and for which necessary permits have been obtained.

b.We sold The Saint Mary in January 2021. See Notes 2 and 4 for further discussion.

c.We sold the final condominium unit at the W Austin Residences in February 2021.

Barton Creek

Amarra Drive. In 2008, we completed the development of Amarra Drive Phase II, which consists of 35 lots on 51 acres. We sold seven lots for $4.4 million in 2020, three of which were included in the contract discussed below, and two lots for $1.2 million in 2019. As of December 31, 2020, all developed Amarra Drive Phase II lots had been sold.

In 2015, we completed the development of Amarra Drive Phase III, which consists of 64 lots on 166 acres. We sold 12 lots in 2020 for $10.2 million, 4 of which were included in the contract discussed below, and 2 homes built on Phase III lots for $7.2 million. We sold 14 lots in 2019 for $8.9 million, 8 of which were included in the contract discussed below. As of December 31, 2020, five developed Phase III lots remained unsold, two of which are included in the contract discussed below.

In September 2019, we amended a contract previously entered into in March 2018, pursuant to which we agreed to sell 2 Amarra Drive Phase II lots and 15 Amarra Drive Phase III lots to a homebuilder for a total of $11.6 million (the original homebuilder contract). In January 2020, the original homebuilder contract was terminated and replaced with a similar contract with the same homebuilder in which we agreed to sell the three remaining Amarra Drive Phase III lots under the original contract as well as three new Amarra Drive Phase II lots and two new Amarra Drive Phase III lots for $5.2 million (the new homebuilder contract). In September 2020, the new homebuilder contract was further amended to add one additional Amarra Drive Phase III lot to the contract at a sales price of $0.7 million. In

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accordance with the new homebuilder contract the parties are required to close on the sale of these lots ratably before April 30, 2021. If the purchaser fails to close on the sale of the minimum number of lots by any of the specified closing dates, we may elect to terminate the homebuilder contract but would retain the related $45 thousand earnest money.

Subsequent to December 31, 2020, and through March 9, 2021, we sold one Amarra Drive Phase III lot and a multi-family tract of land in Amarra Drive for a total of $3.4 million. As of March 9, 2021, the last four unsold Amarra Drive Phase III lots were under contract, two of which are subject to the new homebuilder contract discussed above.

The Villas at Amarra Drive (Amarra Villas) project is a 20-unit development for which we completed construction of the first seven homes during 2017 and 2018. We sold the last two completed homes for $3.5 million in 2019. We began construction on the next two Amarra Villas homes in the first quarter of 2020, which are expected to be completed in mid-2021. As of March 9, 2021, one was under contract, and a contract had been signed to sell one home on which we expect to begin construction in mid-2021. As of March 9, 2021, a total of 11 units (1 of which is under construction and 10 on which construction has not started) remain available of the initial 20-unit development.

The Santal. The Santal is a garden-style luxury apartment complex located in Section N, which is part of the Barton Creek community. We completed construction of the second phase of The Santal, located directly adjacent to the first phase, during first-quarter 2019. As of December 31, 2020, The Santal multi-family project, consisting of 448 units, was fully leased.

The Saint June. In March 2021, we commenced site clearing on The Saint June, a 182-unit multi-family project within the Amarra subdivision. We expect to begin project construction in the second quarter of 2021, subject to completion of financing.

Section KLO and Section N. We are advancing the planning and permitting process for development of future phases of Barton Creek, including residential Section KLO and commercial and multi-family Section N. We redesigned Section KLO using a combination of traditional single-family lots and residential condominium lots, which is expected to increase our density from 154 to 450 home sites. The city of Austin and Travis County approved initial subdivision permit applications for Section KLO in October 2019 and the engineering for roads and utilities for the initial phase of Section KLO has been completed, and we anticipate securing final permits during the second quarter of 2021. Using a conceptual approach similar to that used for Section KLO, we are also evaluating a redesign of Section N, our approximately 570 acre tract located along Southwest Parkway in the southern portion of the Barton Creek community. If successful, this new project would be designed as a dense, mid-rise, mixed-use project surrounded by an extensive greenspace amenity, resulting in a significant potential increase in development density, as compared to our prior plans. These potential development projects require extensive additional permitting and will be dependent on market conditions. Because of the nature and cost of the approval and development process and uncertainty regarding market demand for a particular use, there is uncertainty regarding the nature of the final development plans and whether we will be able to successfully execute the plans. In addition, our development plans for Section KLO and Section N will require significant capital, which we may pursue through debt and/or equity financings, joint ventures, commercial, partner or other arrangements.

Circle C

We are developing our properties located in the Circle C community based on the entitlements secured in our Circle C settlement with the city of Austin. Our Circle C settlement, as amended in 2004, permits development of 1.16 million square feet of commercial space, 504 multi-family units and 830 single-family residential lots. As of December 31, 2020, our Circle C community had remaining entitlements for 660,985 square feet of commercial space and 56 multi-family units. See Note 9 for a summary of incentives we received in connection with the Circle C settlement.

The Saint Mary. During 2019, we completed construction of The Saint Mary, a 240-unit luxury garden-style apartment project located in the Circle C community. As of December 31, 2020, approximately 85 percent of the units were leased. In January 2021, our subsidiary sold The Saint Mary for $60.0 million. After closing costs and payment of the outstanding construction loan, the sale generated net proceeds of approximately $34 million. We received $21.3 million from the subsidiary in connection with the sale and expect to recognize a pre-tax gain on the sale, net of noncontrolling interests, of approximately $14 million in the first quarter of 2021. See Notes 2 and 4 for further discussion.

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W Austin Residences

As of December 31, 2020, one condominium unit remained unsold at the W Austin Residences, which was sold in February 2021 for $2.4 million.

Commercial. As of December 31, 2020, the number of square feet of our commercial property developed, under development and our remaining entitlements for potential development of commercial property are shown below:

Commercial Property

Developed Potential Development a Total

Barton Creek:

Lantana:

a.Our development of the properties identified under the heading “Potential Development” is dependent upon the approval of our development plans and permits by governmental agencies, including the city of Austin and other cities in our Texas markets. Those governmental agencies may not approve one or more development plans and permit applications related to such properties or may require us to modify our development plans. Accordingly, our development strategy with respect to those properties may change in the future. While we may be proceeding with approved infrastructure projects or planning activities for some of these properties, they are not considered to be “under development” for disclosure in this table until construction activities have begun.

Barton Creek and Circle C

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

Lantana, including Lantana Place

Lantana is a community south of Barton Creek in Austin. As of December 31, 2020, we had remaining entitlements for approximately 160,000 square feet of commercial use and 320 multi-family units on 37 acres after we rezoned a portion of the Lantana property for the potential multi-family development. Regional utility and road infrastructure is in place with capacity to serve Lantana at full build-out as permitted under our existing entitlements.

Lantana Place is a partially developed, mixed-use real-estate development project. We completed construction of the 99,379-square-foot first phase of Lantana Place in 2018. We previously entered into a ground lease with a hotel operator in connection with its development of an AC Hotel by Marriott, and construction of that hotel is expected to be completed in May 2021. As of December 31, 2020, we had signed leases for approximately 85 percent of the retail space, including the anchor tenant, Moviehouse & Eatery, which opened in May 2018.

Block 21

Block 21 contains 38,316 square feet of Class A leasable office space of which approximately 60 percent was leased as of December 31, 2020, including 9,000 square feet occupied by our corporate office, and 18,327 square feet of retail space, substantially all of which was leased as of December 31, 2020, including 4,500 square feet of space occupied by 3TEN ACL Live.

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Magnolia Place

We are planning to proceed, subject to financing, with the first phase of development of Magnolia Place, a mixed-use project in Magnolia, Texas, currently planned for 18,410 square feet of commercial space; 9 pad sites; and 194 single-family lots and 495 multi-family units. Magnolia Place will be shadow-anchored by a 95,000-square-foot HEB grocery store to be constructed by HEB on an adjoining 18-acre site owned by HEB. The first phase of development is expected to consist of approximately 18,410 square feet of commercial space, 4 pads for lease and 3 pads to be held for sale, and we are currently evaluating the initial phase of multi-family development. We are currently in the process of securing a construction loan to finance the first phase of development. We began site clearing, which will be followed by site work and joint use road and utility infrastructure that will support the entire project. We expect substantially all of the infrastructure costs to be eligible for future reimbursement by the Magnolia East MUD. Refer to Note 1 for further discussion of this MUD and our accounting policy for MUD reimbursements. We expect to commence construction on Magnolia Place in mid-2021, subject to financing and market conditions. The HEB grocery store is currently expected to open in mid-2022. We are evaluating a sale of the land for the single family residential component of Magnolia Place.

West Killeen Market

In 2015, we acquired approximately 21 acres in Killeen, Texas, to develop the West Killeen Market project with 44,493 square feet of commercial space and three pad sites. The project is shadow-anchored by an adjacent 90,000 square-foot HEB grocery store. Construction was completed and the HEB grocery store opened in 2017. As of December 31, 2020, we had executed leases for approximately 70 percent of the retail space at West Killeen Market and leasing activities for the vacant retail space and two vacant pad sites are ongoing. In October 2020, we sold a pad site at West Killeen Market for $0.7 million.

Jones Crossing

Construction of the first phase of the retail component of Jones Crossing, an HEB-anchored, mixed-use development in College Station, Texas, was completed in 2018, consisting of 154,117 square feet. As of December 31, 2020, we had signed leases for approximately 95 percent of the completed retail space, including the HEB grocery store. As of December 31, 2020, we had approximately 23 undeveloped acres with estimated development potential of approximately 104,750 square feet of commercial space and 5 vacant pad sites. We have a 99-year ground lease with the property owner. We continue to evaluate options for the multi-family component of this project.

Kingwood Place

In 2018, we purchased a 54-acre tract of land in Kingwood, Texas (in the greater Houston area) to be developed as Kingwood Place, an HEB-anchored mixed-use development project. The Kingwood project is expected to total approximately 152,000 square feet of retail lease space, anchored by a 103,000-square-foot HEB grocery store, with 49,000 square feet of retail space, 5 pad sites and a 10-acre parcel planned for approximately 275 multi-family units. Construction of two retail buildings, totaling approximately 41,000 square feet, was completed in August 2019, and the HEB grocery store was completed and opened in November 2019. An 8,000-square-foot retail building was completed in July 2020 on a pad site. We have signed ground leases on two of the pad sites, and two pad sites remain available for lease. As of December 31, 2020, we had signed leases for approximately 85 percent of the retail space, including the HEB grocery store. See Note 2 for further discussion.

New Caney

In 2018, we purchased a 38-acre tract of land, in partnership with HEB, for approximately $9.5 million in New Caney, Texas, for the future development of an HEB-anchored, mixed-use project. Subject to completion of development plans, we currently expect the New Caney project will include restaurants and retail services, totaling approximately 145,000 square feet (inclusive of the HEB grocery store), 5 pad sites, and a 10-acre multi-family parcel planned for approximately 275 multi-family units. We finalized the lease for the HEB grocery store in March 2019, and upon execution of this lease, we acquired HEB’s interests in the partnership for approximately $5 million. We currently plan to commence construction on the New Caney project no earlier than 2022.

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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 the COVID-19 pandemic and numerous other factors affecting our business activities as described herein, our past operating results are not necessarily indicative of our future results. We use operating income or loss to measure the performance of each operating segment. Corporate, eliminations and other includes consolidated general and administrative expenses, which primarily consist of employee compensation and other costs.

The following table summarizes our operating results for the years ended December 31 (in thousands):

Operating income (loss):

Real estate operationsa $ 3,869 $ 3,830 b

Corporate, eliminations and otherf (519) g (13,068)

Net loss attributable to common stockholders $ (22,790) $ (2,464)

a.Includes sales commissions and other revenues together with related expenses.

b.Includes $3.4 million of MUD reimbursements, which were recorded as a reduction in real estate cost of sales.

c.Includes a $1.4 million charge for estimated uncollectible rents receivable and unrealizable deferred costs.

d.Includes a pre-tax gain on the sale of assets totaling $5.7 million, primarily related to the sales of Barton Creek Village and a retail pad subject to a ground lease located in the Circle C community.

e.Includes a $1.6 million charge related to the write-off of capitalized hotel remodel costs, partially offset by a $0.8 million credit related to recovery under a business interruption insurance claim filed as a result of water and smoke damage in the W Austin Hotel in January 2018.

f.Includes consolidated general and administrative expenses and eliminations of intersegment amounts.

g.Includes $15.0 million in income from earnest money received as a result of Ryman's termination of the agreements to sell Block 21.

h.Includes a $10.7 million non-cash tax charge to record a valuation allowance on our deferred tax assets.

We have four operating segments: Real Estate Operations, Leasing Operations, Hotel and Entertainment (see Note 10). The following is a discussion of our operating results by segment.

Real Estate Operations

COVID-19 Pandemic Impact

Despite the COVID-19 pandemic, Real Estate Operations revenue for 2020 increased by 64 percent to $22.6 million, compared with 2019. We continued to advance our land planning, engineering and permitting activities. For further discussion, see Part I, Item 1A. "Risk Factors."

Financial Results

The following table summarizes our Real Estate Operations results for the years ended December 31 (in thousands):

Revenues:

Undeveloped property sales 700 —

Cost of sales, including depreciation 18,761 10,004 a

a.Includes $3.4 million credit related to MUD reimbursements.

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Developed Property Sales. The following table summarizes our developed property sales for the years ended December 31 (in thousands):

Barton Creek

Amarra Drive:

Homes built on Phase III lots 2 7,178 3,273 — — —

Undeveloped Property Sales. In 2020, we sold a vacant pad site at West Killeen Market for $0.7 million.

Real Estate Revenue. The increase in revenue from the Real Estate Operations segment in 2020, compared with 2019, primarily reflects the sales of two homes built on Amarra Drive Phase III lots and an increase in lot sales in 2020, including two premium Amarra Drive Phase III hilltop lots. At December 31, 2020, all developed Amarra Drive Phase II lots had been sold, we had five remaining developed lots for sale at Amarra Drive Phase III and two homes under construction at Amarra Villas. We believe our sales of residential real estate were positively impacted by home-centric trends resulting from the pandemic and from the increased attractiveness of Austin, Texas as a desirable place to live. See “Development Activities” for further discussion.

Cost of Sales. Cost of sales includes cost of property sold, project operating and marketing expenses and allocated overhead costs, partly offset by reductions for certain MUD reimbursements. Cost of sales totaled $18.8 million in 2020 and $10.0 million in 2019. The increase in cost of sales in 2020, compared with 2019, primarily reflects an increase in real estate sales of higher priced homes and lots, which typically have a higher average cost per home or lot, and an increase in the number of lots sold 2020. The increase also results from $3.4 million in MUD reimbursements received in 2019 recorded as a reduction in real estate cost of sales as the reimbursed property had previously been sold.

Cost of sales for our real estate operations also includes significant recurring costs (including property taxes, maintenance and marketing), which totaled $5.6 million in 2020and$5.7 million in 2019.

Leasing Operations

COVID-19 Pandemic Impact

Despite the pandemic, Leasing Operations revenue for 2020 increased by 24 percent to $24.1 million, compared with 2019, as we continued to lease up The Saint Mary, including through “virtual” leasing, Kingwood Place and The Santal. However, the pandemic is negatively affecting our leasing operations, primarily at our retail properties. Tenants at our retail locations are diverse and include grocery and liquor stores, which have remained open and have paid rent owed to-date, and restaurants, healthcare services, fitness centers, a movie theater and other retail products and services, many of which had closed or were operating at significantly reduced capacity beginning late in the first quarter of 2020. Beginning in April 2020, we agreed, generally, to 90-day base rent deferrals with a majority of these tenants. The deferred rents are expected to be collected over either a 12-month or 24-month period, per agreements with each tenant, starting in January 2021. Rent deferrals with our retail tenants resulted in a reduction of scheduled base rent collections of 10 percent during the period from April through December 2020. As of December 31, 2020, all of our retail tenants who were open prior to the pandemic had reopened, although operating with capacity restrictions.

At our multi-family properties, we have granted rent deferral accommodations on a case-by-case basis, which during the period from April through December 2020 resulted in a reduction of scheduled rent collections of one percent of contractual rents, with no material decline in occupancy. We will continue to consider rent deferral accommodations on a case-by-case basis. In the aggregate, our retail and multi-family base rent collections were five percent less than scheduled base rents during the period from April through December 2020.

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We cannot assure you that our tenants will recommence rental payments in accordance with our agreements when the deferral period ends nor whether tenants will request additional accommodations or be willing or able to meet future lease obligations. For further discussion, see Part I, Item 1A. "Risk Factors."

Financial Results

The following table summarizes our Leasing Operations results for the years ended December 31 (in thousands):

Rental cost of sales, excluding depreciation 12,611 a 9,420

Gain on sales of assets — (5,683)

a.Includes a $1.4 million charge for estimated uncollectible rents receivable and unrealizable deferred costs.

Rental Revenue. Rental revenue primarily includes revenue from The Santal, Lantana Place, Jones Crossing, The Saint Mary, Kingwood Place, the office and retail space at Block 21, and West Killeen Market. The increase in rental revenue in 2020, compared with 2019, primarily reflects commencement of new leases at The Saint Mary, Kingwood Place and The Santal.

In December 2020, we entered into an agreement to sell The Saint Mary for $60.0 million, and completed the sale in January 2021. The Saint Mary had rental revenue of $3.2 million in 2020 and $0.5 million in 2019, and operating losses of $0.4 million in both 2020 and 2019 (see Notes 2 and 4).

Rental Cost of Sales and Depreciation. Rental costs of sales and depreciation expense increased in 2020, compared with 2019, primarily as a result of the completion of construction and the start of leasing operations at The Saint Mary and Kingwood Place. During the second-quarter of 2020, our lease with Moviehouse, our anchor tenant at Lantana Place, was terminated and we charged $1.3 million to cost of sales to write off uncollectible rents receivable and unrealizable deferred costs associated with this lease. In July 2020, we entered into a new six-month lease agreement with Moviehouse in which rent is based on a percentage of Moviehouse's revenue. The new lease was amended in December 2020 to extend the term through June 30, 2021.

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

Hotel

COVID-19 Pandemic Impact

As a result of the pandemic, Hotel revenue in 2020 was significantly lower than in 2019, and we incurred significant operating losses in our hotel segment in 2020. The pandemic has had, and we believe will continue to have, a significant adverse impact on the hospitality industry, as it has resulted in dramatically curtailed business and leisure travel and caused cancellations and delays of events. While our hotel has remained open throughout the pandemic, average occupancy during 2020 was 23 percent, compared to 73 percent in 2019. We are working with the hotel operator on plans to gradually ramp up hotel operations to a break-even point in the first half of 2021, health and market conditions permitting.

The pandemic is expected to continue to negatively affect our hotel business, and the extent to which such adverse impacts continue depends on numerous evolving factors that we cannot predict. Moreover, even as travel advisories and restrictions are lifted, travel demand may remain weak for a significant length of time and attractions and events that previously brought visitors to the city of Austin may not proceed or may proceed with limited capacity. We cannot predict if or when our hotel will return to pre-pandemic demand or pricing. For further discussion, see Part I, Item 1A. "Risk Factors."

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Financial Results

The following table summarizes our Hotel results for the years ended December 31 (in thousands):

Hotel cost of sales, excluding depreciation 15,436 a 26,984

Operating (loss) income $ (9,232) $ 5,158

a.Includes a $1.6 million charge related to the write-off of capitalized hotel remodel costs, partially offset by a $0.8 million credit related to recovery under a business interruption insurance claim filed as a result of water and smoke damage in the W Austin Hotel in January 2018.

Hotel Revenue. Hotel revenue primarily includes revenue from W Austin Hotel room reservations and food and beverage sales. Hotel revenues were $10.0 million in 2020 and $35.5 million in 2019. The decrease in hotel revenue in 2020, compared with 2019, is primarily a result of lower room reservations and food and beverage sales as a result of the COVID-19 pandemic. Revenue per available room (RevPAR), which is calculated by dividing total room revenue by the average total rooms available during the year, was $61 in 2020, compared with $235 in 2019.

Hotel Cost of Sales. The decrease in hotel cost of sales, excluding depreciation, in 2020, compared to the 2019, is primarily a result of lower room reservations and food and beverage sales. The increase in depreciation during 2020, compared to 2019, is primarily because of a $202 thousand adjustment made in 2020 for the period in December 2019 when the hotel was held for sale and, therefore, not depreciated.

Entertainment

COVID-19 Pandemic Impact

As a result of the pandemic, our Entertainment revenue in 2020 was significantly lower than in 2019, and we incurred significant operating losses in our entertainment segment in 2020. The pandemic has had, and we believe will continue to have, a significant adverse impact on the entertainment industry and our entertainment operations. Our entertainment venues, ACL Live and 3TEN ACL Live, continue to be subject to capacity restrictions and have held only a limited number of events since the start of the pandemic. It is unclear to what extent pandemic-related concerns will continue to impact the use of and/or demand for our entertainment venues, even as government restrictions are modified or lifted. We hosted a small number of events at our venues during the second half of 2020, and have several events scheduled in 2021, but they have been, and will continue to be, subject to capacity restrictions as in effect at the time. Our scheduled programs will occur only to the extent health and safety conditions, and regulations, permit. For further discussion, see Part I, Item 1A. "Risk Factors."

Financial Results

The following table summarizes our Entertainment results for the years ended December 31 (in thousands):

Entertainment cost of sales, excluding depreciation 7,082 18,871

Operating (loss) income $ (3,507) $ 4,666

Entertainment Revenue. Entertainment revenue primarily reflects the results of operations for ACL Live, including ticket sales, revenue from private events, sponsorships, personal seat license sales and suite sales, and sales of concessions and merchandise. Entertainment revenue also reflects revenues associated with events hosted at venues other than ACL Live, including 3TEN ACL Live. Revenues from the Entertainment segment varies from period to period as a result of factors such as the price of tickets and number of tickets sold, as well as the number and type of events hosted at ACL Live and 3TEN ACL Live. Entertainment revenues were $5.2 million in 2020 and $25.0 million in 2019. The decrease in entertainment revenue primarily reflects a decrease in the number of events hosted at ACL Live and 3TEN ACL Live, as many scheduled events in 2020 were cancelled or rescheduled as a result of the COVID-19 pandemic.

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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, for the years ended December 31.

ACL Live

Events:

Ancillary net revenue per attendee $ 69.47 $ 46.05

Ticketing:

Gross value of tickets sold (in thousands) $ 1,982 $ 14,411

3TEN ACL Live

Events:

Ancillary net revenue per attendee $ 32.78 $ 52.10

Ticketing:

Gross value of tickets sold (in thousands) $ 126 $ 550

Entertainment Cost of Sales. The decrease in Entertainment cost of sales, excluding depreciation, in 2020, compared to 2019, reflects that many scheduled events in 2020 were rescheduled or cancelled as a result of the COVID-19 pandemic. The increase in depreciation in 2020, compared to 2019, is primarily because of an $89 thousand adjustment made in 2020 for the period in December 2019 when the entertainment venues were held for sale and, therefore, not depreciated.

Corporate, Eliminations and Other

Corporate, eliminations and other (see Note 10) includes consolidated general and administrative expenses, which primarily consist of employee compensation and other costs. Consolidated general and administrative expenses totaled $15.0 million in 2020 and $12.4 million in 2019. The increase in general and administrative expenses in 2020, compared to 2019, primarily reflects increased charges associated with our Profit Participation Incentive Plan (Plan), of $2.4 million in 2020 compared to $1.0 million in 2019, reflecting a valuation event for West Killeen Market in fourth quarter-2020 and the agreement to sell The Saint Mary, which closed in January 2021. The valuation event and agreement to sell both resulted in profit pools under our Plan to be distributed to Plan participants, in amounts that were higher than our previous estimates. See Note 8 for further discussion of our Plan. Consolidated general and administrative expenses for 2020 also included $1.3 million in professional fees related to our exploration of a conversion to a REIT. Corporate, eliminations and other also includes eliminations of intersegment amounts incurred by our operating segments.

Non-Operating Results

Interest Expense, Net. Interest costs (before capitalized interest) totaled $19.6 million in 2020and$20.1 million in 2019. The decrease in interest costs in 2020, compared with 2019, primarily reflects a decrease in average interest rates.

Capitalized interest totaled $4.7 million in 2020 and $7.7 million in 2019, and is primarily related to development activities at Barton Creek. The 2019 period also included capitalized interest costs associated with the development activities at Kingwood Place and The Saint Mary.

Other Income, Net. Other income, net of $116 thousand in 2020 decreased, compared to $424 thousand in 2019, as a result of receiving proceeds in 2019 related to MUD reimbursements of infrastructure costs incurred for development of Barton Creek. Of the total MUD reimbursements received in 2019, we recorded $0.3 million as interest income in other income, net in the consolidated statements of comprehensive loss.

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Provision for Income Taxes. We recorded a provision for income taxes of $3.8 million in 2020 and $0.1 million in 2019. The 2020 income tax provision included a $10.7 million non-cash tax charge to record a valuation allowance on our deferred tax assets. We had deferred tax assets (net of deferred tax liabilities and valuation allowances) totaling less than $0.1 million at December 31, 2020, and $12.3 million at December 31, 2019. Refer to Note 7 for further discussion of income taxes.

Total Comprehensive Loss Attributable to Noncontrolling Interests in Subsidiaries. Our partners' share of losses totaled $1.7 million in 2020 for projects that began operations in late 2019, primarily The Saint Mary. Of the total share of losses in 2020, $573 thousand relates to losses incurred prior to 2020.

CAPITAL RESOURCES AND LIQUIDITY

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

Comparison of Year-to-Year Cash Flows

Operating Activities. Cash used in operating activities totaled $4.1 million in 2020 and $2.4 million in 2019. Expenditures for purchases and development of real estate properties totaled $13.8 million in 2020, primarily related to development of our Barton Creek properties and the purchase of an office building in Austin, and $11.3 million in 2019, primarily related to development of our Barton Creek properties. The working capital increase in other assets in 2020 is primarily related to the timing of federal and state income tax receivables. In connection with the CARES Act and the ability to carry back net operating losses, we have filed for a $1.9 million U.S. federal tax refund for 2019 and plan to file for a $5.3 million refund for 2020.

During 2019, our operating cash flows included MUD reimbursements totaling $4.6 million related to infrastructure costs incurred in Barton Creek (of which $3.7 million increased net income before taxes for the period and $0.9 million reduced purchases and development of real estate properties).

Investing Activities. Cash used in investing activities totaled $7.8 million in 2020 and $63.9 million in 2019. Capital expenditures totaled $6.2 million for 2020, primarily related to the Kingwood Place and Lantana Place projects, and $62.6 million for 2019, primarily related to the development of the Kingwood Place and The Saint Mary projects. The year 2019 included $10.8 million in proceeds from the sales of Barton Creek Village and a retail pad subject to a ground lease located in the Circle C community.

We also made payments totaling $1.6 million in 2020 and $1.8 million in 2019 under our master lease obligations associated with the 2017 sale of The Oaks at Lakeway. In 2019, we used $10.3 million to acquire (i) HEB’s noncontrolling interest in the New Caney project and (ii) a limited partner's 33.33 percent interest in the Kingwood Place project.

Financing Activities. Cash provided by financing activities totaled $7.5 million in 2020 and $65.9 million in 2019. Net borrowings on the Comerica Bank credit facility totaled $0.8 million in 2020, compared with net repayments of $7.7 million in 2019. Net borrowings on other project and term loans totaled $7.6 million in 2020, primarily from the Paycheck Protection Program loan and for the Kingwood Place and The Saint Mary projects, partially offset by repayment on the Amarra Villas credit facility, compared with net borrowings of $75.4 million in 2019, primarily related to The Santal refinancing and The Saint Mary, Kingwood Place, Jones Crossing and New Caney projects. See Note 6 and “Credit Facility and Other Financing Arrangements” below for a discussion of our outstanding debt at December 31, 2020.

In 2013, our Board approved an increase in the open market share purchase program from 0.7 million shares to 1.7 million shares of our common stock. There were no purchases under this program during 2020or2019. As of December 31, 2020, a total of 991,695 shares of our common stock remained available under this program. Our ability to repurchase shares of our common stock is restricted by the terms of our loan agreements with Comerica Bank, which prohibit us from repurchasing shares of our common stock in excess of $1.0 million without the bank’s prior written consent.

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Credit Facility and Other Financing Arrangements

At December 31, 2020, we had total debt of $353.2 million based on the principal amounts outstanding, compared with $347.1 million at December 31, 2019, excluding debt related to The Saint Mary included in liabilities held for sale. Our Comerica Bank credit facility, which is comprised of a $60.0 million revolving line of credit, had $16.5 million available at December 31, 2020, net of a $150 thousand letter of credit committed against the credit facility.

On June 12, 2020, we amended our credit facility agreement with Comerica Bank to extend the maturity date from September 27, 2020, to September 27, 2022. Refer to Note 6 for further discussion of our outstanding debt. Refer to “Debt Maturities and Other Contractual Obligations” below for a table illustrating the timing of principal payments due on our outstanding debt as of December 31, 2020.

Our debt agreements require compliance with specified financial covenants. The Santal loan includes a requirement that we maintain liquid assets, as defined in the agreement, of not less than $7.5 million. The New Caney land loan includes a requirement that we maintain liquid assets, as defined in the agreement, of not less than $10 million. The Comerica Bank credit facility, the Lantana Place construction loan, the Jones Crossing construction loan, the Amarra Villas credit facility, the Kingwood Place construction loan, the West Killeen Market construction loan, the New Caney land loan and The Santal loan include a requirement that we maintain a net asset value, as defined in each agreement, of $125 million. The Comerica Bank credit facility, the Amarra Villas credit facility and the Kingwood Place construction loan also include a requirement that we maintain a debt-to-gross asset value, as defined in the agreement, of less than 50 percent. The Santal loan, the West Killeen Market construction loan, the Jones Crossing construction loan, and the Lantana Place construction loan each include a financial covenant requiring the applicable Stratus subsidiary to maintain a debt service coverage ratio as defined in each agreement. The Comerica Bank credit facility includes a requirement that we maintain a loan-to-value ratio of less than or equal to 50 percent, and if the ratio is exceeded, we must make a mandatory prepayment to achieve compliance. As of December 31, 2020, we were in compliance with all of our financial covenants; however, for the last three quarters of 2020, our Block 21 subsidiary did not pass the debt service coverage ratio financial test under the Block 21 loan, which, though not a financial covenant, caused the Block 21 subsidiary to enter into a “Trigger Period” as discussed below.

Stratus’ and its subsidiaries’ debt arrangements contain significant limitations that may restrict Stratus’ and its subsidiaries’ ability to, among other things: borrow additional money or issue guarantees; pay dividends, repurchase equity or make other distributions to equityholders; make loans, advances or other investments; create liens on assets; sell assets; enter into sale-leaseback transactions; enter into transactions with affiliates; permit a change of control; sell all or substantially all of its assets; and engage in mergers, consolidations or other business combinations. Our Comerica Bank credit facility requires Comerica Bank’s prior written consent for any common stock repurchases in excess of $1.0 million or any dividend payments.

Our project loans are generally secured by all or substantially all of the assets of the project, and our Comerica Bank credit facility is secured by substantially all of our assets other than those encumbered by separate project financing. In addition, we are typically required to guarantee the payment of our project loans, in some cases until certain development milestones and/or financial conditions are met, except for the Block 21 loan and The Santal loan guarantees which are generally limited to non-recourse carve-out obligations. Refer to Note 6 for additional discussion.

We proactively engaged and will continue to proactively engage with our project lenders in connection with formulating rent deferral arrangements for tenants at our projects as a result of the pandemic. During second-quarter 2020 and first-quarter 2021, we entered into amendments to the Lantana Place and West Killeen Market construction loans in which we were granted waivers of the debt service coverage ratio covenants until September 30, 2021, and December 31, 2020, respectively. Effective November 2, 2020, the West Killeen Market construction loan was modified to replace the financial covenant that we maintain a minimum total stockholders’ equity balance of $110 million with a financial covenant that we maintain a minimum net asset value, as defined in the agreement, of $125 million.

The Block 21 loan agreement secured by the Block 21 assets contains financial tests that we must meet in order to avoid a “Trigger Period” (as described below). Specifically, we must maintain (i) a net worth in excess of $125 million and (ii) liquid assets having a market value of at least $10 million, each as defined in the Block 21 loan agreement. Additionally, our Block 21 subsidiary must maintain a trailing-12-month debt service coverage ratio, tested quarterly, as defined in the Block 21 loan agreement. If any of these financial tests are not met, a “Trigger Period”, which is not a default, results. As a result of the pandemic, our Block 21 subsidiary did not meet the debt

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service coverage ratio test on the June 30, 2020, September 30, 2020, and December 31, 2020, test dates, resulting in a "Trigger Period." During a "Trigger Period," any cash generated from the Block 21 project in excess of amounts necessary to fund loan obligations, budgeted operating expenses and specified reserves would not be available to be distributed to us until after we meet a higher debt service coverage ratio requirement for two consecutive quarters. As the ratio is calculated on a trailing-12-month basis, we currently expect the "Trigger Period" to continue through at least 2021.

Although the Block 21 loan agreement is a non-recourse loan, we may contribute cash to our Block 21 subsidiary in order to prevent our Block 21 subsidiary from defaulting under the Block 21 loan agreement. Additionally, under our Block 21 subsidiary's hotel operating agreement, the hotel operator has and may continue to request funds from us if it reasonably determines that such funds are required in order to fund the operation of the hotel and specified reserves. Pursuant to such provisions, we contributed $9.6 million during 2020, and based on current projections, we expect to make additional contributions of approximately $18 million through early 2022. As of December 31, 2020, we had $5.9 million of liabilities for deferred income and deposits that primarily related to ticket and sponsorship presales at our venues. We have refunded amounts related to events that have been cancelled, and we may refund additional amounts if more events are cancelled in the future.

We project that we will be able to meet our debt service and other cash obligations for at least the next 12 months. Our projections are based on many detailed and complex underlying assumptions, including (1) that operating income for our Block 21 businesses will gradually ramp up to a break-even point in the first half of 2021 and that Block 21 will generate sufficient cash to cover debt service by early 2022, (2) that current conditions in our leasing operations will not deteriorate materially, and (3) that we close on projected asset sales in our real estate operations segment. No assurances can be given that the results anticipated by our projections will occur. See Notes 6 and 7 and “Risk Factors” included in Part I, Item 1A. for further discussion.

Our ability to meet our cash obligations over the longer term, including our significant debt maturities in 2022, will depend on our future operating and financial performance and cash flows, including our ability to sell or lease properties profitably and extend or refinance debt as it becomes due, which is subject to economic, financial, competitive and other factors beyond our control, including risks related to the COVID-19 pandemic.

DEBT MATURITIES AND OTHER CONTRACTUAL OBLIGATIONS

The following table summarizes our total debt maturities based on the principal amounts outstanding as of December 31, 2020 (in thousands), excluding debt related to The Saint Mary included in liabilities held for sale:

Comerica Bank credit facilityb — 43,304 — — — — 43,304

New Caney land loanc 5,000 — — — — — 5,000

Construction loans:

Amarra Villas credit facility — 1,109 — — — — 1,109

a.We have the option to extend the maturity date for two additional 12-month periods, subject to certain debt service coverage conditions.

b.Refer to Note 6 for further information.

c.In March 2021, we exercised our option to extend the loan for an additional 12 months from March 8, 2021, to March 8, 2022, which required a principal payment of approximately $0.5 million.

d.We intend to apply for forgiveness of the entire balance under the federal paycheck protection program, however, no assurance of full forgiveness can be provided.

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We had commitments under noncancelable construction contracts totaling $1.5 million at December 31, 2020. See Note 9 for further discussion of future cash requirements.

NEW ACCOUNTING STANDARDS

No new accounting standards in 2020 had a material impact on us.

OFF-BALANCE SHEET ARRANGEMENTS

See Note 9 for discussion of our off-balance sheet arrangements.

CAUTIONARY STATEMENT

Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements in which we discuss factors we believe may affect our future performance. Forward-looking statements are all statements other than statements of historical fact, such as plans, projections or expectations related to the impacts of the COVID-19 pandemic, our ability to meet our future debt service and other cash obligations, potential future rent deferrals or other concessions to our tenants, our ability to collect rents timely, our ability to ramp-up operations at Block 21 according to our currently anticipated timeline, our ability to open and hold events at our venues, future cash flows and liquidity, our ability to comply with or obtain waivers of financial and other covenants in debt agreements, our intention to engage in an in-depth exploration of conversion to a REIT, potential steps necessary prior to conversion to a REIT, the potential timing of any REIT conversion, our expectations about the Austin and Texas real estate markets, potential changes in governance practices and Board composition, the planning, financing, development, construction, completion and stabilization of our development projects, plans to sell, recapitalize or refinance properties, future operational and financial performance, MUD reimbursements for infrastructure costs, regulatory matters, leasing activities, estimated costs and timeframes for development and stabilization of properties, tax rates, the impact of interest rate changes, future capital expenditures and financing plans, possible joint ventures, partnerships, strategic relationships or other arrangements, our projections with respect to our obligations under the master lease agreements entered into in connection with the 2017 sale of The Oaks at Lakeway, other plans and objectives of management for future operations and development projects, future dividend payments and share repurchases. The words “anticipate,” “may,” “can,” “plan,” “believe,” “potential,” “estimate,” “expect,” “project,” "target," “intend,” “likely,” “will,” “should,” “to be” and any similar expressions and/or statements that are not historical facts are intended to identify those assertions as forward-looking statements.

Under our Comerica Bank credit facility, we are not permitted to pay dividends on common stock without Comerica Bank's prior written consent. The declaration of dividends is at the discretion of our Board, subject to restrictions under our Comerica Bank credit facility, and will depend on our financial results, cash requirements, projected compliance with covenants in our debt agreements, outlook and other factors deemed relevant by the Board.

We caution readers that forward-looking statements are not guarantees of future performance and actual results may differ materially from those anticipated, expected, projected or assumed in the forward-looking statements. Important factors that can cause our actual results to differ materially from those anticipated in the forward-looking statements include, but are not limited to, evolving risks relative to the COVID-19 pandemic and its economic effects, our ability to pay or refinance our debt or comply with or obtain waivers of financial and other covenants in debt agreements and to meet other cash obligations, our ability to ramp up operations at Block 21 and collect anticipated rental payments, close projected asset sales, the availability and terms of financing for development projects and other corporate purposes, implementation, operational, financing and tax complexities to be evaluated and addressed before we decide whether to pursue a REIT conversion, our ability to qualify as a REIT, which involves the application of highly technical and complex provisions of the Internal Revenue Code of 1986, as amended, our ability to complete the steps that must be taken in order to convert to a REIT and the timing thereof, the potential costs of converting to and operating as a REIT, whether our Board will determine that conversion to a REIT is in the best interests of our stockholders, whether stockholders will approve changes to our organizational documents consistent with a public REIT structure, our ability to enter into and maintain joint ventures, partnerships, strategic relationships or other arrangements, our ability to implement our business strategy successfully, including our ability to develop, construct and sell properties at prices our Board considers acceptable, market conditions or corporate developments that could preclude, impair or delay any opportunities with respect to plans to sell, recapitalize or refinance properties, our ability to obtain various entitlements and permits, a decrease in the demand for real estate in select markets in Texas where we operate, changes in economic, market and business conditions, reductions in discretionary spending by consumers and businesses, competition from other real estate developers,

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hotel operators and/or entertainment venue operators and promoters, our ability to open and hold events at our venues, challenges associated with booking events and selling tickets and event cancellations at our entertainment venues, which may result in refunds to customers, the termination of sales contracts or letters of intent because of, among other factors, the failure of one or more closing conditions or market changes, our ability to secure qualifying tenants for the space subject to the master lease agreements entered into in connection with the 2017 sale of The Oaks at Lakeway and to assign such leases to the purchaser and remove the corresponding property from the master leases, the failure to attract customers or tenants for our developments or such customers’ or tenants’ failure to satisfy their purchase commitments or leasing obligations, increases in interest rates and the phase out of the London Interbank Offered Rate, declines in the market value of our assets, increases in operating costs, including real estate taxes and the cost of building materials and labor, changes in external perception of the W Austin Hotel, unanticipated issues experienced by the third-party operator of the W Austin Hotel, changes in consumer preferences, industry risks, changes in laws, regulations or the regulatory environment affecting the development of real estate, opposition from special interest groups or local governments with respect to development projects, weather-related risks, including the extent to which the February 2021 severe winter storm and resulting power and water disruptions will impact our prospects, loss of key personnel, cybersecurity incidents and other factors described in more detail under the heading “Risk Factors” in Part I, Item 1A. of this Form 10-K.

We can provide no assurance as to when, if at all, we will convert to a REIT. We can give no assurance that our Board will approve a conversion to a REIT, even if there are no impediments to such conversion. Our exploration of a potential REIT conversion may divert management's attention from traditional business concerns. If we determine to convert to a REIT, we cannot give assurance that we will qualify or remain qualified as a REIT.

Investors are cautioned that many of the assumptions upon which our forward-looking statements are based are likely to change after the forward-looking statements are made, some of which we may not be able to control. Further, we may make changes to our business plans that could affect our results. We caution investors that we do not intend to update our forward-looking statements more frequently than quarterly notwithstanding any changes in our assumptions, business plans, actual experience, or other changes, and we undertake no obligation to update any forward-looking statements.

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Item 8. Financial Statements and Supplementary Data

MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Stratus Properties Inc.’s (the Company’s) management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

•Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the Company’s assets;

•Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

•Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the Company’s financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

The Company’s management, including its principal executive officer and principal financial officer, assessed the effectiveness of its internal control over financial reporting as of the end of the fiscal year covered by this annual report on Form 10-K. In making this assessment, the Company’s management used the criteria set forth in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). Based on its assessment, management concluded that, as of December 31, 2020, the Company’s internal control over financial reporting is effective based on the COSO criteria.

/s/ William H. Armstrong III /s/ Erin D. Pickens

William H. Armstrong III Erin D. Pickens

Chairman of the Board, President Senior Vice President

and Chief Executive Officer and Chief Financial Officer

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders

Stratus Properties Inc.

Austin, Texas

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Stratus Properties Inc. and subsidiaries (the Company) as of December 31, 2020 and 2019, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2020, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current-period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

1.Impairment assessment - Refer to Notes 1 and 3 to the consolidated financial statements

•Critical Audit Matter Description

The Company’s long-lived assets consist primarily of held for sale real estate assets of $4,204,000, real estate under development of $98,137,000, real estate held for investment, net of $286,529,000 and land available for development of $53,432,000. The real estate assets are individually reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. For real estate held for sale, if estimated fair value less costs to sell is less than the related carrying amount, a reduction of the asset’s carrying value to fair value less costs to sell is required. For real estate under development, land available for development and real estate held for investment, an impairment exists when the carrying amount of an asset exceeds the aggregate projected future cash flows over the anticipated holding period on an undiscounted basis. An impairment loss is measured based on the excess of the property’s carrying amount over its fair value. The Company’s undiscounted cash flows are subjective and are based, in part, on estimates and assumptions such as real estate prices, sales pace, sales and marketing costs, infrastructure costs and capitalization rates.

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In the event a property’s carrying amount is not recoverable, the Company determines fair value based on appraised values, adjusted for estimated costs to sell. Evaluation of appraisals is subjective and is based, in part, on estimates and assumptions such as real estate prices, market rental rates, capitalization rates, and discount rates that could differ materially from actual results.

We identified the impairment of long-lived assets as a critical audit matter because of the significant estimates and assumptions management makes to evaluate the recoverability and fair value of the assets, specifically the estimates of real estate prices, market rental rates, capitalization rates, and discount rates for each real estate asset. Performing audit procedures to evaluate the reasonableness of these estimates and assumptions required a high degree of auditor judgment and an increased extent of effort.

•How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the undiscounted discounted cash flow analyses and appraisals included, among other things, the following:

–We obtained an understanding and evaluated the design of internal controls over management’s evaluation of the recoverability of the carrying amount of long-lived assets based on undiscounted cash flows and the measurement of impairment based on appraisals less estimated costs to sell.

–We evaluated the reasonableness of significant assumptions in the undiscounted cash flow analyses and appraisals, including estimates of real estate prices, market rental rates, capitalization rates, and discount rates, for properties with impairment indicators. In addition, we tested the mathematical accuracy of the undiscounted cash flow analyses.

–We evaluated the reasonableness of management’s undiscounted cash flow analyses by comparing management’s projections to the Company’s historical results and external market sources.

–We evaluated whether the assumptions were consistent with evidence obtained in other areas of the audit.

2.Liquidity - Refer to Notes 6 and 9 to the consolidated financial statements

•Critical Audit Matter Description

The Company’s primary uses of cash include the payment of property operating, general and administrative, other expenses, debt service and reserves (collectively, “obligations”), and the reinvestment in and development of its properties (“development expenditures”). As a result of the COVID-19 pandemic, the Company’s revenue, operating income, and cash flows have been adversely impacted, particularly from its hotel and entertainment segments. Obligations are projected to continue to exceed operating cash flow.

The Company plans to fund its obligations and development expenditures with cash flows from operating activities, sales of properties, the revolving credit facility, and potential joint venture partners.

We identified the Company’s liquidity disclosure as a critical audit matter because of the significant judgments in management’s plans to fund its obligations and development expenditures. This required a high degree of auditor judgment and an increased extent of effort when performing audit procedures to evaluate management’s conclusion that it is not probable the Company will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued or available to be issued.

•How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the going concern analysis included, among other things, the following:

–We obtained an understanding and evaluated the design of internal controls that address the risks of material misstatement relating to management’s plans and related disclosures.

–We tested management’s key assumptions, including projected hotel and entertainment revenue and rental income and property operating costs by comparing such assumptions to underlying lease agreements and historical operating costs.

–We evaluated management’s estimates relating to development costs by comparing to underlying development plans and costs spent to date.

–We evaluated the timing and likelihood of potential sales of properties by comparing expected proceeds to comparable market information and historical transactions effectuated by the Company.

–We evaluated the likelihood of the availability of additional borrowings under the revolving credit facility.

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–We engaged in discussions with management, including the Chief Executive Officer and Chief Financial Officer, regarding management’s intent and ability to generate the planned sources of funds.

–We evaluated management’s plans in the context of other audit evidence obtained during the audit to determine whether it supported or contradicted the conclusion reached by management.

/s/ BKM Sowan Horan, LLP

We have served as the Company’s auditor since 2010.

Austin, Texas

March 15, 2021

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STRATUS PROPERTIES INC.

CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Par Value)

December 31,

ASSETS

Assets held for sale - The Saint Mary 36,516 37,321

LIABILITIES AND EQUITY

Liabilities:

Liabilities held for sale - The Saint Mary 25,607 22,066

Commitments and contingencies (Notes 7 and 9)

Equity:

Stockholders’ equity:

Common stock, par value of $0.01 per share, 150,000 shares authorized,

9,358 and 9,330 shares issued, respectively and

Capital in excess of par value of common stock 186,777 186,082

Common stock held in treasury, 1,137 shares and 1,133 shares

Noncontrolling interests in subsidiaries 10,850 12,983

The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.

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STRATUS PROPERTIES INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In Thousands, Except Per Share Amounts)

Years Ended December 31,

Revenues:

Cost of sales:

Income from forfeited earnest money (15,000) —

Gain on sales of assets — (5,683)

Gain (loss) on interest rate derivative instruments 111 (188)

Loss on early extinguishment of debt — (247)

Provision for income taxes (3,818) (117)

Equity in unconsolidated affiliates’ loss (16) (19)

Net loss and total comprehensive loss (24,475) (2,467)

Total comprehensive loss attributable to noncontrolling interests 1,685 3

Basic and diluted weighted-average common shares outstanding 8,211 8,182

The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.

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STRATUS PROPERTIES INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

Years Ended December 31,

Cash flow from operating activities:

Adjustments to reconcile net loss to net cash used in

operating activities:

Gain on sales of assets — (5,683)

(Gain) loss on interest rate derivative contracts (111) 188

Loss on early extinguishment of debt — 247

Debt issuance cost amortization and stock-based compensation 2,099 1,574

Equity in unconsolidated affiliates’ loss 16 19

Purchases and development of real estate properties (13,775) (11,277)

Write-off of capitalized hotel remodel costs 1,584 —

Municipal utility districts reimbursements — 1,143

Decrease in accounts payable, accrued liabilities and other (2,446) (1,836)

Increase in deposits and other, net 44 75

Net cash used in operating activities (4,058) (2,360)

Cash flow from investing activities:

Proceeds from sales of assets — 10,820

Payments on master lease obligations (1,637) (1,798)

Purchase of noncontrolling interests in consolidated subsidiaries — (10,345)

Investment in unconsolidated affiliates and other, net 6 (9)

Net cash used in investing activities (7,822) (63,882)

Cash flow from financing activities:

Payments on project and term loans (8,708) (67,943)

Cash dividend paid on vested stock-based awards (10) (31)

Stock-based awards net payments (68) (234)

Distributions to noncontrolling interests (448) (90)

Net cash provided by financing activities 7,472 65,915

Net decrease in cash, cash equivalents and restricted cash (4,408) (327)

Cash, cash equivalents and restricted cash at beginning of year 38,591 38,918

Cash, cash equivalents and restricted cash at end of year $ 34,183 $ 38,591

The accompanying Notes to Consolidated Financial Statements, which include information regarding noncash transactions, are an integral part of these consolidated financial statements.

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STRATUS PROPERTIES INC.

CONSOLIDATED STATEMENTS OF EQUITY

(In Thousands)

Stratus Stockholders’ Equity

CommonStock Common StockHeld in Treasury

Exercised and vested stock-based awards 42 — 15 — — — 15 — 15

Stock-based compensation — — 397 — — — 397 — 397

Forfeited dividends — — 11 — — — 11 — 11

Tender of shares for stock-based awards — — — — 9 (249) (249) — (249)

Distributions to noncontrolling interests — — — — — — — (90) (90)

Exercised and vested stock-based awards 28 1 22 — — — 23 — 23

Stock-based compensation — — 673 — — — 673 — 673

Tender of shares for stock-based awards — — — — 4 (91) (91) — (91)

Distributions to noncontrolling interests — — — — — — — (448) (448)

The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.

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STRATUS PROPERTIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business and Principles of Consolidation. Stratus Properties Inc. (Stratus), a Delaware corporation, is engaged primarily in the acquisition, entitlement, development, management and sale of commercial, and multi-family and single-family residential real estate properties, real estate leasing, and the operation of hotel and entertainment businesses located in the Austin, Texas area and other select markets in Texas. The real estate development, leasing, hotel, entertainment and marketing operations of Stratus are conducted primarily through its subsidiaries. Stratus consolidates its wholly owned subsidiaries, subsidiaries in which Stratus has a controlling interest and variable interest entities (VIEs) in which Stratus is deemed the primary beneficiary. All significant intercompany transactions have been eliminated in consolidation.

Concentration of Risks. Stratus conducts its operations in the Austin, Texas area and other select markets in Texas. Consequently, any significant economic downturn in the Texas market, and the Austin market specifically, could potentially have an effect on Stratus’ business, results of operations and financial condition. Since January 2020, the COVID-19 pandemic has caused substantial disruption in international and U.S. economies and markets. Stratus’ revenue, operating income and cash flow in its hotel and entertainment segments were adversely impacted during 2020 and are expected to continue to be adversely impacted in 2021.

Use of Estimates. The preparation of Stratus’ financial statements in conformity with accounting principles generally accepted in the United States (U.S.) requires management to make estimates and assumptions that affect the amounts reported in these financial statements and accompanying notes. The more significant areas requiring the use of management estimates include the estimates of future cash flow from development and sale of real estate properties used in the assessment of impairments; profit recognition related to the sales of real estate; deferred income taxes and related valuation allowances; income taxes; allocation of certain indirect costs; profit pools under the Profit Participation Incentive Plan; and asset lives for depreciation. Actual results could differ from those estimates.

Cash and cash equivalents. All highly liquid investments with a maturity of three months or less when purchased are considered cash equivalents.

Real Estate. Real estate held for sale is stated at the lower of cost or fair value less costs to sell. The cost of real estate held for sale includes acquisition, development, construction and carrying costs, and other related costs incurred through the development stage. Real estate under development and land available for development are stated at cost. Real estate held for investment is stated at cost, less accumulated depreciation. Stratus capitalizes interest on funds used in developing properties from the date of initiation of development activities through the date the property is substantially complete and ready for use, sale or lease. Common costs are allocated based on the relative fair value of individual land parcels. Certain carrying costs are capitalized for properties currently under active development. Stratus capitalizes improvements that increase the value of properties and have useful lives greater than one year. Costs related to repairs and maintenance are charged to expense as incurred.

Stratus performs an impairment test when events or circumstances indicate that an asset’s carrying amount may not be recoverable. Events or circumstances that Stratus considers indicators of impairment include significant decreases in market values, adverse changes in regulatory requirements (including environmental laws), significant budget overruns for properties under development, and current period or projected operating cash flow losses from properties held for investment. Impairment tests for properties held for investment and properties under development involve the use of estimated future net undiscounted cash flows expected to be generated from the operation of the property and its eventual disposition. If projected undiscounted cash flow is less than the related carrying amount, then a reduction of the carrying amount of the long-lived asset to fair value is required. Generally, Stratus determines fair value using valuation techniques such as discounted expected future cash flows. Impairment tests for properties held for sale involve management estimates of fair value based on estimated market values for similar properties in similar locations and management estimates of costs to sell. If estimated fair value less costs to sell is less than the related carrying amount, then a reduction of the carrying amount of the asset to fair value less costs to sell is required.

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Stratus recorded no impairment charges for the two years ended December 31, 2020. Should market conditions deteriorate in the future or other events occur that indicate the carrying amount of Stratus’ real estate assets may not be recoverable, Stratus will reevaluate the expected cash flows from each property to determine whether any impairment exists.

Depreciation. Real estate held for investment is depreciated on a straight-line basis over the properties' estimated lives of 30 to 40 years. Furniture, fixtures and equipment are depreciated on a straight-line basis over a 3 to 15-year period. Tenant improvements are depreciated over the related lease terms.

Accrued Property Taxes. Stratus estimates its property taxes based on prior year property tax payments and other current events that may impact the amount. Upon receipt of the property tax bill, Stratus adjusts its accrued property tax balance at year-end to the actual amount of taxes due for such year. Accrued property taxes included in accrued liabilities totaled $10.0 million at December 31, 2020, and $7.1 million at December 31, 2019.

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

Stratus recognizes its rental income on a straight-line basis based on the terms of its signed leases with tenants. Recoveries from tenants for taxes, insurance and other commercial property operating expenses are recognized as revenues in the period the related costs are incurred. Stratus recognizes sales commissions and management and development fees when earned, as properties are sold or when the services are performed.

Cost of Sales. Cost of sales includes the cost of real estate sold as well as costs directly attributable to the properties sold, properties held for sale, and land available for development, such as marketing, maintenance and property taxes. Cost of sales also includes operating costs and depreciation for properties held for investment and municipal utility district reimbursements. A summary of Stratus’ cost of sales follows (in thousands):

Years Ended December 31,

Project expenses and allocation of overhead costs (see below) 5,604 5,705

Cost of undeveloped property sales 632 16

Municipal utility district reimbursements (see below) — (3,360)

Allocation of Overhead Costs. Stratus allocates a portion of its overhead costs to both capitalized real estate costs and cost of sales based on the percentage of time certain employees worked in the related areas (i.e. costs of construction and development activities are capitalized to real estate under development, and costs of project management, sales and marketing activities are charged to expense as cost of sales). Stratus capitalizes only direct and certain indirect project costs associated with the acquisition, development and construction of a real estate project. Indirect costs include allocated costs associated with certain pooled resources (such as office supplies, telephone and postage) which are used to support Stratus’ development projects, as well as general and administrative functions. Allocations of pooled resources are based only on those employees directly responsible for development (i.e., project managers and subordinates). Stratus charges to expense indirect costs that do not clearly relate to a real estate project, such as all salaries and costs related to its Chief Executive Officer and Chief Financial Officer.

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Municipal Utility District Reimbursements. Stratus capitalizes infrastructure costs and receives Barton Creek municipal utility district (MUD) reimbursements for certain infrastructure costs incurred in the Barton Creek area. MUD reimbursements received for infrastructure projects are recorded as a reduction of the related asset’s carrying amount or cost of sales if the property has been sold. Stratus has long-term agreements with seven independent MUDs in Barton Creek to build the MUDs’ utility systems and to be eligible for future reimbursements for the related costs.

In November 2017, the city of Magnolia and the state of Texas approved the creation of a MUD which will provide an opportunity for Stratus to recoup approximately $26 million over the life of the project for future road and utility infrastructure costs incurred in connection with its development of Magnolia Place, a mixed-use project that will be shadow-anchored by an H-E-B, L.P. (HEB) grocery store.

Stratus received $4.8 million of proceeds in 2019 related to Travis County MUD reimbursements of infrastructure costs incurred for development of Barton Creek. Of the total amount, Stratus recorded $1.1 million as a reduction of real estate under development on the consolidated balance sheet, and $3.4 million as a reduction in real estate cost of sales and $0.3 million in other income, net in the consolidated statement of comprehensive loss.

The amount and timing of MUD reimbursements depends upon the respective MUD having a sufficient tax base within its district to issue bonds and obtain the necessary state approval for the sale of the bonds. Because the timing of the issuance and approval of the bonds is subject to considerable uncertainty, coupled with the fact that interest rates on such bonds cannot be fixed until they are approved, the amounts associated with MUD reimbursements are not known until approximately one month before the MUD reimbursements are received. To the extent the reimbursements are less than the costs capitalized, Stratus records a loss when such determination is made. MUD reimbursements represent the actual amounts received.

Advertising Costs. Advertising costs are expensed as incurred and are included as a component of cost of sales. Advertising costs totaled $1.0 million in 2020and$1.4 million in 2019.

Income Taxes. Stratus accounts for deferred income taxes under an asset and liability method, whereby deferred tax assets and liabilities are recognized based on the tax effects of temporary differences between the financial statements and the tax basis of assets and liabilities, as measured by currently enacted tax rates. The effect on deferred income tax assets and liabilities of a change in tax rates or laws is recognized in income or loss in the period in which such changes are enacted. Stratus periodically evaluates the need for a valuation allowance to reduce deferred tax assets to estimated recoverable amounts. Stratus establishes a valuation allowance to reduce its deferred tax assets and records a corresponding charge to earnings if it is determined, based on available evidence at the time, that it is more likely than not that any portion of the deferred tax assets will not be realized. In evaluating the need for a valuation allowance, Stratus estimates future taxable income based on projections and ongoing tax strategies. This process involves significant management judgment about assumptions that are subject to change based on variances between projected and actual operating performance and changes in Stratus’ business environment or operating or financial plans. See Note 7 for further discussion.

Earnings Per Share. Stratus’ 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 86 thousand shares for the year 2020 and 88 thousand shares for the year 2019 associated with restricted stock units (RSUs) and outstanding stock options that were anti-dilutive because of net losses.

Stock-Based Compensation. Compensation costs for share-based payments to employees are measured at fair value and charged to expense over the requisite service period for awards that are expected to vest. The fair value of RSUs and performance based RSUs is based on Stratus’ stock price on the date of grant. Stratus estimates forfeitures at the time of grant and revises those estimates in subsequent periods if actual forfeitures differ from those estimates through the final vesting date of the awards.

Stratus grants awards that settle in either cash or RSUs to employees and nonemployees under a profit participation plan. As required for liability-based awards under Accounting Standards Codification 718, Stock-Based Compensation, at the date of grant, Stratus estimates the fair value of each award and adjusts the fair value in each subsequent reporting period. The awards are amortized on a straight-line basis over the estimated service period. See Note 8 for further discussion.

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Reclassifications. For comparative purposes, certain prior year amounts have been reclassified to conform with current year presentation. The reclassifications relate to (i) Stratus' presentation of The Saint Mary assets and liabilities as held for sale as of December 31, 2020 and 2019, and (ii) the termination of Stratus' agreements to sell Block 21 by the purchaser. The assets, liabilities and net income of Block 21 were previously presented as discontinued operations in the consolidated balance sheet at December 31, 2019, and consolidated statement of comprehensive loss for the year ended December 31, 2019. Refer to Note 4 for a discussion of each transaction and the impacts to the consolidated financial statements.

Subsequent Events. Stratus evaluated events after December 31, 2020, 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.

NOTE 2.RELATED PARTY TRANSACTIONS

The Saint Mary, L.P.

On June 19, 2018, The Saint Mary, L.P., a Texas limited partnership and a consolidated subsidiary of Stratus, completed a series of financing transactions to develop The Saint Mary, a 240-unit luxury, garden-style apartment project in the Circle C community in Austin, Texas. The financing transactions included (1) a $26.0 millionconstruction loan with Texas Capital Bank, National Association (see Note 4 for further discussion) and (2) an $8.0 million private placement. The Saint Mary, L.P. issued, in a private placement exempt from registration under federal and state securities laws, Class B limited partnership interests to a limited number of investors (the Saint Mary Class B limited partners), for $8.0 million (the Saint Mary Offering) resulting in the Saint Mary Class B limited partners owning an aggregate 49.1 percent equity interest in The Saint Mary, L.P.

In accordance with the terms of the Saint Mary Offering, Circle C Land, L.P., a Texas limited partnership and a subsidiary of Stratus and the sole Class A limited partner of The Saint Mary, L.P. (Circle C) purchased Class B limited partnership interests representing a 6.1 percent equity interest in The Saint Mary, L.P. for $1.0 million. Upon completion of the Saint Mary Offering, Stratus holds, in aggregate, a 57 percent indirect equity interest in The Saint Mary, L.P. Additionally, among the participants in the Saint Mary Offering, LCHM Holdings, LLC (LCHM), a related party as a result of its greater than 5 percent beneficial ownership of Stratus’ common stock, purchased Saint Mary Class B limited partnership interests representing a 6.1 percent equity interest in The Saint Mary, L.P. for $1.0 million.

As discussed further in Note 4, The Saint Mary, L.P. sold The Saint Mary property in January 2021.

Stratus Kingwood Place, L.P.

On August 3, 2018, Stratus Kingwood Place, L.P., a Texas limited partnership and a consolidated subsidiary of Stratus (the Kingwood, L.P.), completed a $10.7 million private placement, approximately $7 million of which, combined with a $6.75 million loan from Comerica Bank, was used to purchase a 54-acre tract of land located in Kingwood, Texas for $13.5 million, for the development of Kingwood Place, a new HEB-anchored mixed-use development project (Kingwood Place). The Kingwood, L.P. issued, in a private placement exempt from registration under federal and state securities laws, Class B limited partnership interests to a limited number of investors (the Kingwood Class B limited partners), for $11.0 million (the Kingwood Offering), representing approximately 70 percent of the projected partnership equity. Among the participants in the Kingwood Offering, LCHM purchased Kingwood Class B limited partnership interests initially representing an 8.8 percent equity interest in the Kingwood, L.P. for $1.0 million.

In connection with the Kingwood Offering, Stratus Northpark, L.L.C., a Texas limited liability company, a subsidiary of Stratus and the general partner of the Kingwood, L.P. (the Kingwood General Partner), Stratus Properties Operating Co., L.P., a Delaware limited partnership, also a subsidiary of Stratus (the Class A limited partner), and the Kingwood Class B limited partners entered into an Amended and Restated Limited Partnership Agreement (the Kingwood Partnership Agreement) effective as of August 3, 2018.

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The Kingwood Partnership Agreement includes the following key provisions:

•The Kingwood General Partner manages the Kingwood, L.P., in exchange for an asset management fee of $283 thousand per year.

•The Kingwood General Partner earns a development management fee equal to four percent of the construction costs for Kingwood Place for the overall coordination and management of the development and construction of Kingwood Place.

•The partners are entitled to preferred returns, which change after certain returns are achieved as specified in the Kingwood Partnership Agreement.

On December 6, 2018, the Kingwood, L.P., entered into a construction loan agreement with Comerica Bank, which supersedes and replaces the land acquisition loan agreement discussed above and provided for a loan totaling $32.9 million to finance nearly 70 percent of the costs associated with construction of Kingwood Place (see Note 6 for further discussion), which was subsequently modified and increased to $35.4 million in January 2020. The remaining 30 percent of the project’s cost (totaling approximately $15 million) is being funded by borrower equity, contributed by Stratus and private equity investors.

On October 31, 2019, Stratus acquired a limited partner's 33.33 percent interest in Kingwood, L.P. for $5.8 million. The limited partner was not a related party.

Stratus has performed evaluations and concluded that The Saint Mary, L.P. and the Kingwood, L.P. are variable interest entities and that Stratus is the primary beneficiary. Stratus will continue to evaluate which entity is the primary beneficiary of The Saint Mary, L.P. and the Kingwood, L.P. in accordance with applicable accounting guidance.

Stratus’ consolidated balance sheets include the following assets and liabilities of the Kingwood, L.P. (in thousands). The assets and liabilities of The Saint Mary (primarily the real estate held for investment and the related debt) are presented as held for sale in Stratus' consolidated balance sheets. Refer to Note 4 for further details of The Saint Mary sale, and assets and liabilities held for sale.

December 31,

Assets:

Cash and cash equivalents $ 745 $ 908

Real estate under development 2,380 3,703

Land available for development 8,143 9,273

Liabilities:

Accounts payable and accrued liabilities 850 4,084

Other Transactions

Stratus has an arrangement with Austin Retail Partners for services provided by a consultant of Austin Retail Partners who is the son of Stratus' President and Chief Executive Officer. Payments to Austin Retail Partners for the consultant's consulting services and expense reimbursements totaled $120 thousand during 2020 and $111 thousand during 2019. In addition, during 2019, Stratus granted an award to the consultant under its Profit Participation Incentive Plan in one development project (refer to Note 8).

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NOTE 3.REAL ESTATE, NET

Stratus’ consolidated balance sheets include the following net real estate assets (in thousands):

December 31,

Real estate held for sale:

Developed lots and condominium unit $ 4,204 $ 14,872

Real estate under development:

Acreage, multi-family units, commercial square footage and homes 98,137 95,026

Land available for development:

Real estate held for investment:

Furniture, fixtures and equipment 1,253 1,131

Real estate held for sale. Developed lots and a condominium unit include individual tracts of land that have been developed and permitted for residential use and a condominium unit at the W Austin Residences in Block 21. As of December 31, 2020, Stratus owned five developed lots and one condominium unit at the W Austin Residences.

Real estate under development. Acreage under development includes real estate for which infrastructure work over the entire property has been completed, is currently being completed or is able to be completed and for which necessary permits have been obtained. Real estate under development also includes commercial and residential properties under construction.

Land available for development. Undeveloped acreage includes real estate that can be sold “as is” (i.e., planning, infrastructure or development work is not currently in progress on such property). Stratus’ undeveloped acreage as of December 31, 2020, included land permitted for residential and commercial development and vacant pad sites at West Killeen Market, Jones Crossing and Kingwood Place.

Real estate held for investment. Following is a discussion of real estate held for investment as of December 31, 2020.

The Santal multi-family project is a garden-style apartment complex consisting of 448 units. The Kingwood Place project includes 151,855 square-feet of commercial space anchored by a HEB grocery store and leased pad sites. The Lantana Place project includes 99,379-square-foot for the first retail phase. The Jones Crossing project includes 154,117 square-feet for the first phase of the retail component of an HEB-anchored, mixed-use development. The West Killeen Market project includes 44,493 square-feet of commercial space adjacent to a 90,000 square-foot HEB grocery store.

Block 21 contains the 251-room W Austin Hotel. Block 21 also contains 38,316 square feet of Class A leasable office space and 18,327 square feet of retail space, including entertainment space occupied by ACL Live, a 2,750-seat entertainment venue, and 3TEN ACL Live, an entertainment venue with capacity of approximately 350 people.

Capitalized interest. Stratus recorded capitalized interest of $4.7 million in 2020 and $7.7 million in 2019.

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NOTE 4. ASSET SALES

The Saint Mary. In January 2021, The Saint Mary, L.P. sold The Saint Mary for $60.0 million. After closing costs and payment of the outstanding construction loan, the sale generated net proceeds of approximately $34 million. Stratus received $21.3 million from the subsidiary in connection with the sale with the remainder being distributed to the noncontrolling interests. Stratus expects to recognize a pre-tax gain on the sale, net of noncontrolling interests, of approximately $14 million in the first quarter of 2021. See Note 2 further discussion of The Saint Mary, L.P. and The Saint Mary project.

As the sale agreement was entered into prior to December 31, 2020, Stratus reported the assets and liabilities of The Saint Mary as held for sale in the consolidated balance sheets for all periods presented. The carrying amounts of the major classes of assets and liabilities related to the sale follow (in thousands):

December 31,

Assets:

Real estate held for investment, net $ 36,341 $ 37,091

Liabilities:

Accrued liabilities $ 68 $ 85

The Saint Mary had rental revenue of $3.2 million in 2020 and $0.5 million in 2019, and operating losses of $0.4 million in both 2020 and 2019. Interest expense, net of capitalized amounts, on The Saint Mary construction loan was $1.1 million in 2020 and $0.2 million in 2019. The Saint Mary, L.P. had a total comprehensive loss attributable to noncontrolling interests of $1.5 million in 2020, including $0.5 million related to losses incurred prior to 2020.

Barton Creek Village. In November 2019, Stratus sold Barton Creek Village for $7.7 million. Stratus used a portion of the proceeds to repay the Barton Creek Village term loan. Stratus recorded a pre-tax gain on this sale totaling $3.7 million for the year 2019.

Circle C. In January 2019, Stratus sold a retail pad subject to a ground lease located in the Circle C community for $3.2 million. Stratus used a portion of the proceeds from the sale to repay $2.5 million of its Comerica Bank credit facility borrowings and recorded a pre-tax gain on this sale totaling $2.0 million for the year 2019.

Terminated Block 21 Sale. Block 21 is Stratus’ wholly owned mixed-use real estate development and entertainment business in downtown Austin, Texas that contains the 251-room W Austin Hotel and is home to Austin City Limits Live at the Moody Theater, a 2,750-seat entertainment venue that serves as the location for the filming of Austin City Limits, the longest running music series in American television history. Block 21 also includes Class A office space, retail space and the 3TEN ACL Live entertainment venue and business.

On December 9, 2019, Stratus announced that it had agreed to sell Block 21 to Ryman Hospitality Properties, Inc. (Ryman) for $275.0 million. Ryman deposited $15.0 million in earnest money to secure its performance under the agreements governing the sale. As the proposed sale represented a strategic shift for Stratus, the assets and liabilities of Block 21 were classified as held for sale - discontinued operations in the consolidated balance sheet and the net income associated with Block 21 was classified as net income from discontinued operations in the consolidated statements of comprehensive loss included in Stratus' 2019 consolidated financial statements. On May 21, 2020, Ryman delivered a termination letter, which was agreed to and accepted by Stratus, terminating the agreements to sell Block 21 and authorizing the release of Ryman's $15.0 million in earnest money to Stratus. During the second quarter of 2020, Stratus recorded the $15.0 million as operating income, used $13.8 million of the $15.0 million earnest money to pay down its Comerica Bank revolving credit facility and used the remaining $1.2 million for Block 21 debt service and required monthly reserves. As a result of the termination of the agreements to sell Block 21, Stratus concluded that such assets and liabilities no longer qualified as held for sale.

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The carrying amounts as of December 31, 2019, of Block 21’s major classes of assets and liabilities, which were previously classified as held for sale - discontinued operations in Stratus' consolidated balance sheet follow (in thousands):

Assets:

Cash and cash equivalents $ 10,408

Real estate held for investment, net 131,286

Liabilities:

Accounts payable and accrued liabilities, including taxes $ 7,005

Other liabilities 7,036

The revenues and expenses for the year ended December 31, 2019, which were previously classified as net income from discontinued operations in Stratus' consolidated statement of comprehensive loss follow (in thousands):

Revenues:

Entertainment Revenue 24,565

Leasing operations and other 2,363

Cost of Sales:

Leasing operations and other 1,739

Total cost of sales 52,188

General and administrative expenses 1,040

Operating income 8,947

Interest expense, net (8,235)

Provision for income taxes (392)

Net income $ 320

NOTE 5. 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).

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):

CarryingValue FairValue CarryingValue FairValue

Assets:

Interest rate cap agreement $ — $ — $ 3 $ 3

Liabilities:

Interest rate swap agreement — — 114 114

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Interest Rate Cap and Swap Agreements. In September 2019, a Stratus subsidiary paid $24 thousand to enter into an interest rate cap agreement, which caps the maximum London Interbank Offered Rate (LIBOR) at 3.0 percent, on a total notional amount of $75.0 million (the principal amount of The Santal loan). The interest rate cap agreement provides that the Stratus subsidiary will collect the difference between 3.0 percent and the one-month LIBOR if one-month LIBOR is greater than 3.0 percent (refer to Note 6 for further discussion of The Santal loan). The interest rate cap agreement terminates on October 5, 2021.

The interest rate swap agreement with Comerica Bank was entered into in 2013, was effective through December 31, 2020, and had a fixed interest rate of 2.3 percent compared to the variable rate based on the one-month LIBOR. The agreement amortized to a notional amount of $14.8 million at December 31, 2020, and as of December 31, 2019, had a notional amount of $15.3 million.

The interest rate cap and swap agreements do not qualify for hedge accounting so changes in the agreements' fair values are recorded in the consolidated statements of comprehensive loss. Stratus uses an interest rate pricing model that relies on market observable inputs such as LIBOR to measure the fair value of both agreements. Stratus also evaluated the counterparty credit risk associated with both agreements, which is considered a Level 3 input, but did not consider such risk to be significant. Therefore, the interest rate cap and swap agreements are classified within Level 2 of the fair value hierarchy.

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.

NOTE 6.DEBT

Stratus’ debt follows (in thousands):

December 31,

Block 21 loan,

The Santal loan,

Comerica Bank credit facility,

New Caney land loan,

Paycheck Protection Program loan

Construction loans:

Kingwood Place construction loan

Lantana Place construction loan,

Jones Crossing construction loan

West Killeen Market construction loan,

Amarra Villas credit facility,

a. Includes net reductions for unamortized debt issuance costs of $2.2 million at December 31, 2020, and $3.2 million at December 31, 2019.

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Block 21 loan. In 2016, Stratus completed the refinancing of Block 21. Goldman Sachs Mortgage Company provided a $150.0 million, ten-year, non-recourse term loan (the Block 21 loan) with a fixed interest rate of 5.58 percent per annum and payable monthly based on a 30-year amortization. Stratus’ wholly owned subsidiary, Stratus Block 21, LLC (the Block 21 subsidiary), is the borrower under the Block 21 loan agreement. The Block 21 loan agreement contains financial tests that Stratus and the Block 21 subsidiary must meet in order to avoid a “Trigger Period.” Specifically, Stratus must maintain (i) a net worth in excess of $125 million and (ii) liquid assets having a market value of at least $10 million, each as defined in the guaranty under the Block 21 loan agreement.

Additionally, the Block 21 subsidiary must maintain a trailing-12-month debt service coverage ratio, tested quarterly, as defined in the Block 21 loan agreement. If any of these financial tests are not met, a “Trigger Period” results, which is not a default, but limits Stratus’ ability to receive cash from the Block 21 subsidiary. Although the Block 21 loan agreement is a non-recourse loan, Stratus may contribute cash to the Block 21 subsidiary in order to prevent the Block 21 subsidiary from defaulting under the Block 21 loan or to fund the operation of the hotel and specified reserves. Stratus contributed $9.6 million to the Block 21 subsidiary during 2020, and based on current projections, Stratus expects to make additional contributions of approximately $18 million through early 2022. The obligations of the Block 21 subsidiary are secured by all assets owned from time to time by the Block 21 subsidiary. Additionally, certain obligations of the Block 21 subsidiary under the Block 21 loan are guaranteed by Stratus, including environmental indemnification and other customary non-recourse carve-out obligations. In connection with any acceleration of the Block 21 loan, the Block 21 subsidiary must pay a yield maintenance premium in the amount of at least three percent of the amount of indebtedness prepaid. Prepayment of the Block 21 loan is not permitted except for certain prepayments resulting from casualty or condemnation and in whole within 90 days of the maturity date.

The Santal Loan. On September 30, 2019, a Stratus subsidiary entered into a $75.0 million loan with ACRC Lender LLC (The Santal loan) to refinance the Phase I and Phase II construction loans for The Santal. The Santal loan has a three-year primary term maturing on October 5, 2022, with the possibility of two12-month extensions, subject to satisfying specified conditions. Interest on the loan is variable at LIBOR plus 2.85 percent (or, if applicable, a replacement rate), provided that at no time shall the interest rate be less than 4.80 percent per annum. The Santal loan contains financial covenants, including a requirement that Stratus maintain a net asset value of $125 million and liquid assets of at least $7.5 million, each as defined in the agreement. The Santal loan also contains a financial test for Stratus' subsidiary that own The Santal to maintain a debt service coverage ratio of at least 1.05 to 1.00. If the debt service coverage ratio test is not met, a “Cash Trap Period” results, which is not a default, but limits Stratus’ ability to receive cash from our Santal subsidiary. The loan is secured by The Santal project, and certain obligations of the borrower are guaranteed by Stratus, including customary non-recourse carve-out obligations. Approximately $57.9 million of the proceeds were used to repay, in full, The Santal Phase I and Phase II construction loans. Remaining proceeds after paying transaction costs, were approximately $16 million, inclusive of reserves presented in restricted cash. In October 2019, Stratus used $13.0 million of the net proceeds to reduce the outstanding balance on its Comerica Bank credit facility. As a result of entering into The Santal loan, Stratus recognized a loss on early extinguishment of debt of $231 thousand for 2019. As required by The Santal loan, Stratus entered into an interest rate cap agreement (see Note 5 for further discussion).

Comerica Bank credit facility.Stratus' loan agreement with Comerica Bank provides for a revolving credit facility of $60.0 million and a $7.5 million sublimit for letters of credit issuance, subject to a borrowing base limitation as described in the loan agreement. Effective April 14, 2020, Stratus and Comerica Bank agreed to modify the Comerica Bank credit facility to (i) extend the maturity date of the credit facility from June 29, 2020, to September 27, 2020, and (ii) revise the definition of LIBOR to provide for an increase in the LIBOR floor from zero percent to one percent. On June 12, 2020, Stratus entered into a further amendment to its credit facility agreement with Comerica Bank to (i) extend the maturity date of the facility to September 27, 2022, and (ii) permit reappraisals of portions of the mortgaged property in the event of certain entitlement upgrades. Advances under the credit facility bear interest at the annual LIBOR (with a floor of 1.0 percent) plus 4.0 percent. The Comerica Bank credit facility is secured by substantially all of Stratus’ and its subsidiaries' assets, except for properties that are encumbered by separate debt financing. The loan agreement contains financial covenants, including a requirement that Stratus maintain a net asset value, as defined in the agreement, of $125 million and an aggregate debt-to-gross asset value of less than 50 percent. In addition, Stratus must maintain a loan-to-value ratio of less than or equal to 50 percent; if the ratio is exceeded, Stratus must make a mandatory prepayment to achieve compliance. The loan agreement requires Comerica Banks’ prior written consent for any common stock repurchases in excess of $1 million or any dividend payments. As of December 31, 2020, Stratus had $16.5 million available under its $60.0 million Comerica Bank revolving line of credit, with a $150 thousand letter of credit committed against the credit facility.

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New Caney loan. On March 8, 2019, a Stratus subsidiary entered into a $5.0 million land loan with Texas Capital Bank. Proceeds from the loan were used to fund the acquisition of HEB's portion of the New Caney partnership in which Stratus and HEB purchased a tract of land for the future development of an HEB-anchored mixed-use project in New Caney, Texas. In March 2021, Stratus exercised its option to extend the loan for an additional 12 months from March 8, 2021, to March 8, 2022, which required a principal payment of approximately $0.5 million. The loan bears interest at LIBOR plus 3.0 percent. Borrowings are secured by the New Caney land and are guaranteed by Stratus. The loan agreement contains financial covenants including a requirement that Stratus maintain a net asset value of $125 million and unencumbered liquid assets of no less than $10 million.