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| STRS > SEC Filings for STRS > Form 10-Q on 5-May-2009 | All Recent SEC Filings |
5-May-2009
Quarterly Report
Management's discussion and analysis presented below should be read in conjunction with our discussion and analysis of financial results contained in our 2007 Annual Report on Form 10-K (2007 Form 10-K) filed with the Securities and Exchange Commission (SEC) and with Note 2. "Revisions of Previously Issued Consolidated Financial Statements" included in Notes to Consolidated Financial Statements (unaudited) contained elsewhere in this quarterly report on Form 10-Q. The operating results summarized in this report are not necessarily indicative of our future operating results. All subsequent references to Notes refer to Notes to Consolidated Financial Statements (unaudited), unless otherwise stated.
We are engaged in the acquisition, development, management and sale of commercial, multi-family and residential real estate located primarily in the Austin, Texas area. We conduct real estate operations on properties we own.
Our principal real estate holdings are currently in southwest Austin, Texas. We also own undeveloped commercial property in San Antonio, Texas. The number of developed lots, developed or under development acreage, and undeveloped acreage as of September 30, 2008, that comprise our principal development projects are provided in the following table.
Acreage
Developed or Under Development Undeveloped
Developed Single Multi- Single Total
Lots Family family Commercial Total Family Commercial Total Acreage
Austin
Barton Creek 90 409 249 376 1,034 510 20 530 1,564
Lantana - - - - - - 223 223 223
Circle C 115 a 148 a - 265 413 - 122 122 535
W Austin Hotel
& Residences - - - 2 b 2 - - - 2
San Antonio
Camino Real - - - - - - 2 2 2
Total 205 557 249 643 1,449 510 367 877 2,326
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a. Relates to Meridian, an 800-lot residential development.
b. Represents a city block in downtown Austin planned for a mixture of hotel, residential, retail, office and entertainment uses.
Our other Austin holdings at September 30, 2008, consisted of a 22,000-square-foot retail complex representing phase one of Barton Creek Village and two 75,000-square-foot office buildings at 7500 Rialto Boulevard (7500 Rialto) located in our Lantana development.
In 2005, we formed a joint venture partnership with Trammell Crow Central Texas Development, Inc. (Trammell Crow) that acquired an approximate 74-acre tract at the intersection of Airport Boulevard and Lamar Boulevard in Austin, Texas for $7.7 million. The property, known as Crestview Station, is a single-family, multi-family, retail and office development.
On October 12, 2007, we sold Escarpment Village, which is a 168,000-square-foot retail center anchored by a grocery store in the Circle C Ranch (Circle C) community, for $46.5 million, before closing costs and other adjustments. Accordingly, we have reported Escarpment Village's results of operations for the three-month and nine-month periods ended September 30, 2007, as discontinued operations.
Our financial condition and results of operations are highly dependent upon market conditions for real estate activity in Austin, Texas. Our future operating cash flows and, ultimately, our ability to develop our properties and expand our business will be largely dependent on the level of our real estate sales. In turn, these sales will be significantly affected by future real estate market conditions in Austin, Texas, including development costs, interest rate levels, the availability of credit to finance real estate transactions, demand for residential and commercial real estate, and regulatory issues including our land use and development entitlements.
The current economic conditions have resulted in a general decline in leasing activity across the United States (U.S.) in 2008, and have caused vacancy rates to increase in most markets, including Austin, Texas. U.S. investment sales activity declined sharply during the first nine months of 2008 because of, among other factors, limited availability and increased cost of financing, especially the absence of securitized debt, which was the source of recent heightened investment activity, and the resulting gap between buyer and seller expectations of value.
Periods of economic slowdown or recession, rising interest rates, tightening of the credit markets, declining demand for or increased supply of real estate, or the public perception that any of these events may occur can adversely affect our business. These conditions could result in a general decline in rents, which in turn would reduce revenue from property management fees and leases. In addition, these conditions could lead to a decline in property values as well as a decline in funds invested in commercial real estate and related assets, which in turn may reduce revenues from property management, leasing and development fees.
The recovery of U.S. credit markets has yet to materialize, and this lingering problem is impacting the broader U.S. economy. Commercial real estate lenders have substantially tightened underwriting standards or have withdrawn from the lending market, materially impacting liquidity in the real estate debt markets, making financing terms for owners of retail properties less attractive, and in certain cases resulting in the unavailability of certain types of debt financing. Tighter lending standards and higher borrower costs have exerted downward pressure on the value and liquidity of real estate assets which will impact the values we could obtain from the sale of our properties. These factors may make it more difficult for us to sell properties or may adversely affect the price we receive for properties that we do sell, as prospective buyers may experience increased costs of debt financing or difficulties in obtaining debt financing. Our future performance will, in part, be dependent upon the recovery of the credit markets and the underlying strength of the U.S. economy.
Over the past several years, we have successfully worked cooperatively with the City of Austin (the City) to obtain approvals that allow the development of our properties to proceed in a timely manner while protecting the environment. We believe the desirable location and overall quality of our properties, in combination with the land use and development entitlements we have obtained, will under normal market conditions command a premium over the value of other Austin-area properties.
Our long-term success will depend on our ability to maximize the value of our real estate through obtaining required approvals that permit us to develop and sell our properties in a timely manner at a reasonable cost. We must incur significant development expenditures and secure additional permits prior to the development and sale of certain properties. In addition, we continue to pursue additional development opportunities, and currently believe we can obtain bank financing necessary for developing our properties, although our ability to obtain bank financing in the future may be impacted by the current U.S. economic conditions. See "Risk Factors" located herein and in Item 1A of our 2007 Form 10-K.
As discussed in Note 2, certain accounting matters were identified in the third quarter of 2008 and subsequently that required revisions of our financial statements for the three-month and nine-month periods ended September 30, 2007 and for the year ended December 31, 2007. Management's Discussion and Analysis has been updated to discuss changes in comparative results of operations and cash flows after considering the impacts of the items discussed in detail in Notes 2 and 3 of the Consolidated Financial Statements.
W Austin Hotel & Residences. In 2005, the City selected our proposal to develop a mixed-use project in downtown Austin immediately north of the new City Hall complex. The W Austin Hotel & Residences project includes an entire city block and is planned for a mixture of hotel, residential, retail, office and entertainment uses. In December 2006, we acquired the property for $15.1 million. We have executed agreements with Starwood Hotels & Resorts Worldwide, Inc. for the development of a W Hotel &
Residences on the site. In May 2007, we announced our proposed partnership with Canyon-Johnson Urban Fund II, L.P. (Canyon-Johnson) for the development of the W Austin Hotel & Residences project. The grand opening for the onsite sales center was held in conjunction with the groundbreaking ceremony in October 2007. Effective May 1, 2008, we entered into a joint venture with Canyon-Johnson for the development of the project (see Note 5). At September 30, 2008, we had $2.1 million of borrowings outstanding under the W Austin Hotel & Residences project construction loan and total remaining commitments available of approximately $163 million (see Notes 5 and 14). Construction of the $300 million project commenced in the second quarter of 2008 and is proceeding as scheduled.
Crestview Station. In 2005, we formed a joint venture with Trammell Crow to acquire an approximate 74-acre tract at the intersection of Airport Boulevard and Lamar Boulevard in Austin, Texas, for $7.7 million. The property, known as Crestview Station, is a single-family, multi-family, retail and office development, which is located on the site of a future commuter rail line approved by City of Austin voters. With Trammell Crow, we have completed environmental remediation, which the State of Texas certified as complete in September 2007, and permitting of the property. Infrastructure development of Crestview Station is progressing. The initial phase of utility and roadway infrastructure is under construction and expected to be completed by year-end 2009. Crestview Station sold substantially all of its multi-family and commercial properties in 2007 and one commercial site in the first quarter of 2008. The joint venture retained the single-family component of Crestview Station and two commercial sites. The joint venture is currently processing permits to develop Crestview Station as a 450-unit transit-oriented neighborhood. At September 30, 2008, our investment in the Crestview Station project totaled $2.1 million and the joint venture partnership had $7.7 million of outstanding debt, of which we guarantee $1.9 million (see Notes 7 and 14).
Residential. As of September 30, 2008, the number of our residential developed lots, lots under development and development potential by area are shown below (excluding lots and units associated with our Canyon-Johnson and Crestview joint ventures):
Residential Lots
Potential
Under Development
Developed Development a Total
Barton Creek:
Calera:
Calera Court
Courtyard Homes 4 - - 4
Calera Drive 8 - - 8
Verano Drive 68 - - 68
Amarra Drive:
Phase I Lots 7 - - 7
Phase II Lots - 35 - 35
Phase II Townhomes - - 97 97
Phase III - - 89 89
Mirador Estate 2 - - 2
Wimberly Lane Phase
II 1 - - 1
Section N
Multi-family - - 1,860 1,860
Other Barton Creek
Sections - - 154 154
Circle C:
Meridian 115 57 - 172
Total Residential
Lots 205 92 2,200 2,497
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a. Our development of the properties identified under the heading "Potential Development" is dependent upon the approval of our development plans and permits by governmental agencies, including the City. Those governmental agencies may either not approve one or more development plans and permit applications related to such properties or require us to modify our development plans. Accordingly, our development strategy with respect to those properties may change in the future.
Calera. In 2002, we secured subdivision plat approval for a new residential subdivision called Calera, which consists of 155 lots. During 2004, we began construction of 16 courtyard homes at Calera Court, the 16-acre initial phase of the Calera subdivision. The second phase of Calera, Calera Drive, consisting of 53 single-family lots, many of which adjoin the Fazio Canyons Golf Course, received final plat and construction permit approval in 2005. As of September 30, 2008, four courtyard homes at Calera Court and eight lots at Calera Drive remained unsold. Construction of the final phase, known as Verano Drive, began in the first quarter of 2007 and was completed in July 2008. Verano Drive includes 71 single-family lots, three of which were sold in July 2008.
Amarra Drive. During 2007, we completed development of Amarra Drive Phase I, the initial phase of the Amarra Drive subdivision. Amarra Drive Phase I includes eight lots, one of which was sold in September 2007, with sizes ranging from approximately one to four acres, some of which are course-side lots on the Fazio Canyons Golf Course and others are secluded lots adjacent to the Nature Conservancy of Texas. In January 2008, we commenced development of Amarra Drive Phase II, which consists of 35 lots on 51 acres and two townhome tracts on 31 acres. Development was substantially completed in October 2008.
Mirador Estate. We completed construction of the Mirador subdivision, which included the development of 34 estate lots with each lot averaging approximately 3.5 acres in size, and have sold 32 of these lots. As of September 30, 2008, we owned two Mirador estate lots.
Wimberly Lane Phase II. In 2004, we entered into a contract with a national homebuilder to sell 41 lots within the Wimberly Lane Phase II subdivision. The average purchase price for each of the 41 lots was $150,400, subject to a six percent annual escalator. We sold the last homebuilder lot in January 2008 and have one Wimberly Lane lot remaining for sale.
Circle C. We are developing the Circle C community based on the entitlements secured in our Circle C settlement with the City. 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. Meridian is an 800-lot residential development at the Circle C community. In 2005, we commenced the first phase of construction and contracted to sell a total of 494 lots in our Meridian project to three national homebuilders in four phases. Sales for each of the four phases commence upon substantial completion of development for that phase, and continue every quarter until all of the lots have been sold. The first and second phases each consisted of 134 lots. The first phase was substantially completed at the end of 2005. Development of the second phase was substantially completed in March 2006. Development of the 108-lot third phase of Meridian was completed in September 2007. The 118-lot fourth phase commenced in early 2008 and was completed in June 2008.
In 2006, we signed another contract with a national homebuilder for 42 additional lots. Development of those lots commenced in April 2007 and substantial completion occurred in April 2008. Construction of the final phase of Meridian, which consists of 57 one-acre lots, is expected to commence in 2009.
Commercial. As of September 30, 2008, the number of square feet of our commercial property developed, under development and our remaining entitlements are shown below (excluding property associated with our Canyon-Johnson and Crestview joint ventures):
Commercial Property
Potential
Under Development
Developed Development a Total
Barton Creek:
Barton Creek Village
Phase I 22,000 - - 22,000
Barton Creek Village
Phase II - 18,000 - 18,000
Entry Corner - - 5,000 5,000
Amarra Retail/Office - - 90,000 90,000
Section N - - 1,500,000 1,500,000
Circle C:
Chase Ground Lease 4,000 - - 4,000
Tract 106 21,000 - - 21,000
Tract 110 - 760,000 - 760,000
Tract 107 - 80,000 - 80,000
Tract 101 - - 90,000 90,000
Tract 102 - - 25,000 25,000
Tract 114 - - 5,000 5,000
Lantana:
7500 Rialto 150,000 - - 150,000
Advanced Micro
Devices
Option Tracts - - 760,000 760,000
Tract GR1 - - 325,000 325,000
Tract G07 - - 210,000 210,000
Tract CS5 - - 175,000 175,000
Tract CS1-CS3 - - 150,000 150,000
Tract LR1 - - 75,000 75,000
Tract L04 - - 70,000 70,000
Austin 290 Tract - - 20,000 20,000
Total Square Feet 197,000 858,000 3,500,000 4,555,000
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a. Our development of the properties identified under the heading "Potential Development" is dependent upon the approval of our development plans and permits by governmental agencies, including the City. Those governmental agencies may either not approve one or more development plans and permit applications related to such properties or require us to modify our development plans. Accordingly, our development strategy with respect to those properties may change in the future.
Barton Creek. In the second quarter of 2007, we completed the first phase of the Barton Creek Village. The first phase includes a 22,000-square-foot retail complex. In July 2007, we began construction of a 3,300-square-foot bank building within this 22,000-square-foot retail complex, and it was completed in early 2008. Construction of the second retail complex is expected to begin during 2010.
Circle C. During the third quarter of 2008, Stratus completed the construction of two retail buildings, totaling 21,000 square feet, at the 5700 Slaughter project. This retail project also includes a 4,000-square-foot building on an existing ground lease. Leasing for the two retail buildings is under way with 18 percent of the 21,000-square-foot retail complex leased as of September 30, 2008, and the initial tenants have opened for business. We expect the 21,000-square-foot retail complex to be fully leased during 2009.
Lantana. Lantana is a partially developed, mixed-use project with remaining entitlements for approximately 1.0 million square feet of office and retail use on 223 acres as of September 30, 2008. Regional utility and road infrastructure is in place with capacity to serve Lantana at full build-out permitted under our existing entitlements.
In Lantana, we also own two 75,000-square-foot office buildings at 7500 Rialto. As of September 30, 2008, we had leased 97 percent of the space at the original office building and 94 percent of the space at the second office building.
We are continually evaluating the development potential of our properties and will continue to consider opportunities to enter into significant transactions involving our properties. In addition, since the third quarter of 2007, U.S. economic activity has progressively weakened because of stresses in the residential housing and financial sectors, aggravated by the impact of rising food and energy prices on consumer spending. As a result, and because of numerous other factors affecting our business activities as described herein, our past operating results are not necessarily indicative of our future results.
Summary operating results follow (in thousands):
Third Quarter Nine Months
2008 2007 2008 2007
Revenues:
Real estate operations $ 5,751 $ 7,270 $ 12,786 $ 17,994
Commercial leasing 1,158 766 3,278 2,146
Total revenues $ 6,909 $ 8,036 $ 16,064 $ 20,140
Operating (loss) income $ (998 ) $ (557 ) $ (3,732 ) $ 691
Benefit from (provision for) income taxes $ 216 $ 120 $ 469 $ (501 )
(Loss) income from continuing operations $ (350 ) $ (401 ) $ (1,399 ) $ 762
Income (loss) from discontinued operations - 179 (105 )a 400
Net (loss) income $ (350 ) $ (222 ) $ (1,504 ) $ 1,162
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a. Relates to the revised amount of Texas margin tax accrued on Escarpment Village income earned during 2007 (see Note 11).
We have two operating segments, "Real Estate Operations" and "Commercial Leasing" (see Note 12). The following is a discussion of our operating results by segment.
Real Estate Operations
Summary real estate operating results follow (in thousands):
Third Quarter Nine Months
2008 2007 2008 2007
Revenues:
Developed property sales $ 5,691 $ 7,002 $ 11,953 $ 15,662
Undeveloped property sales - - 41 1,083
Commissions, management fees and other 60 268 792 1,249
Total revenues 5,751 7,270 12,786 17,994
Cost of sales, including depreciation (4,858 ) (5,841 ) (10,772 ) (10,938 )
General and administrative expenses (1,482 ) (1,345 ) (4,538 ) (4,653 )
Operating (loss) income $ (589 ) $ 84 $ (2,524 ) $ 2,403
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Developed Property Sales. Residential property sales for the third-quarter and nine-month periods of 2008 and 2007 included the following (revenues in thousands):
Third Quarter
2008 2007
Lots Revenues Lots Revenues
Barton Creek
Calera Court Courtyard Homes 1 $ 643 1 $ 657
Wimberly Lane Phase II
Standard Homebuilder - - 3 516
Amarra Drive Phase I - - 1 1,250
Verano Drive 3 1,875 - -
Circle C
Meridian 48 3,173 58 3,575
Deerfielda - - 15 1,004
Total Residential 52 $ 5,691 78 $ 7,002
Nine Months
2008 2007
Lots Revenues Lots Revenues
Barton Creek
Calera Court Courtyard Homes 2 $ 1,278 1 $ 657
Calera Drive - - 2 809
Mirador Estate - - 2 1,559
Wimberly Lane Phase II
Standard Homebuilder 1 265 b 9 1,561
Amarra Drive Phase I - - 1 1,250
Verano Drive 3 1,875 - -
Circle C
Meridian 103 7,125 106 6,814
Deerfielda 21 1,410 45 3,012
Total Residential 130 $ 11,953 166 $ 15,662
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a. In 2004, we acquired the Deerfield property in Plano, Texas, for $7.0 million. We executed agreements with a national homebuilder, whereby the homebuilder paid us $1.4 million for an option to purchase all 234 lots over 36 monthly take-downs. In 2005, we executed a revised agreement with the homebuilder, increasing the lot sizes and average purchase price to $67,150 based on a new total of 224 lots. In January 2008, we sold the final 21 lots for $1.4 million.
b. Includes $0.1 million for homebuilder contract termination fee.
Undeveloped Property Sales. We sold a five-acre tract at Circle C for $1.1 million during the first nine months of 2007.
Cost of Sales. Cost of sales totaled $4.9 million for the third quarter of 2008, $5.8 million for the third quarter of 2007, $10.8 million for the first nine months of 2008 and $10.9 million for first nine months of 2007, which include ongoing project and marketing costs that are relatively fixed. Most of the sales for the 2008 periods were Circle C lots, which have lower profit margins than Barton Creek lots.
Cost of sales for the first nine months of 2008 included $0.4 million related to costs incurred for our proposal for the right to develop a new project in downtown Austin, which was awarded to another developer. Cost of sales also included reductions for Barton Creek Municipal Utility District (MUD) . . .
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