Commitments and Contingencies

12 Months Ended

Dec. 31, 2024

Commitments and Contingencies Disclosure [Abstract]

COMMITMENTS AND CONTINGENCIES

Construction Contracts. Stratus had firm commitments totaling approximately $10 million at December 31, 2024 primarily related to construction of Holden Hills Phase 1 and The Saint George. We have construction loans, as well as remaining equity capital contributed to the Holden Hills Phase 1 partnership, to fund over the next 12 months these projected cash outlays for the projects and 60 percent of the costs of the Tecoma Improvements for which we have agreed to reimburse the Holden Hills Phase 1 partnership. As of December 31, 2024, the remaining costs to complete the Tecoma Improvements totaled $3.5 million, of which Stratus’ share totaled $2.1 million. Also, Stratus anticipates making future operating loans to Stratus Block 150, L.P. totaling up to $1.7 million and a capital contribution to The Saint George partnership of $125 thousand over the next 12 months to enable the partnerships to pay debt service and project costs. The estimates of future operating loans are based on estimates of future costs of the partnership. The operating loans would bear interest at one-month Term SOFR plus 5.00 percent and would be subordinate to The Annie B land loan and required to be repaid before distributions may be made to the partners.

Letters of Credit. As of December 31, 2024, Stratus had letters of credit totaling $13.3 million issued under the revolving credit facility, of which $11.0 million secure our obligation to build certain roads and utilities facilities benefiting Holden Hills Phases 1 and 2 and $2.3 million secure Stratus’ obligations, which are subject to certain conditions, to construct and pay for certain utility infrastructure in Lakeway, Texas, which is expected to be utilized by the planned multi-family project on Stratus’ remaining land in Lakeway (refer to Note 6 for further discussion). In January 2025, the revolving credit facility was modified to increase the aggregate amount of letters of credit that may be committed against the facility to $15.6 million. In February 2025, an additional $2.3 million letter of credit was issued to secure Stratus’ obligation to complete certain infrastructure associated with the Holden Hills Phase 1 Project.

Rental Income. As of December 31, 2024, Stratus’ minimum rental income, including scheduled rent increases under noncancelable long-term leases of developed retail space and ground leases, totaled $10.8 million in 2025, $11.0 million in 2026, $10.8 million in 2027, $10.2 million in 2028, $8.4 million in 2029 and $76.0 million thereafter, with the longest lease extending through 2039.

H-E-B Profit Participation. H-E-B has profit participation rights in the Jones Crossing, Kingwood Place, and Lakeway projects. H-E-B is entitled to 10 percent of any cash flow from operations or profit from the sale of these properties after Stratus receives a return of its equity plus a preferred return of 10 percent. Stratus may enter into similar profit participation agreements for future projects.

Leases. Stratus’ most significant lease is a 99-year ground lease for approximately 72 acres of land in College Station, Texas on which it is developing the Jones Crossing project. Stratus also leases various types of assets, including office space, vehicles and office equipment, under non-cancelable leases. Stratus entered into one lease during fourth-quarter 2022 that is classified as a finance lease, and the other leases are classified as operating leases. As of December 31, 2024, the remaining term of the finance lease is approximately three years with a weighted-average discount rate of 6.4 percent used to determine the lease liability.

Supplemental balance sheet information related to leases is as follows (in thousands):


		December 31,
	Classification on the Consolidated Balance Sheet	2024		2023
Assets
Operating right-of-use assets	Lease right-of-use assets	$	10,088	$	11,174
Finance right-of-use assets	Other assets	46		62

Liabilities
Operating lease liability	Lease liabilities	$	15,436	$	15,866
Finance lease liability	Other liabilities	49		65

Operating lease costs were $2.1 million in both 2024 and 2023. Stratus paid $1.4 million during 2024 and $1.6 million in 2023 for operating lease liabilities recorded in the consolidated balance sheet (included in operating cash flows in the consolidated statements of cash flows). As of December 31, 2024 and 2023, the weighted-average discount rate used to determine the lease liabilities was 6.1 percent and 6.2 percent, respectively. As of December 31, 2024, the weighted-average remaining lease term was approximately 88 years (84 years as of December 31, 2023).

The future minimum payments for operating leases recorded on the consolidated balance sheet at December 31, 2024 follow (in thousands):


Years ending December 31,
2025	$	1,387
2026	701
2027	711
2028	744
2029	744
Thereafter	106,361
Total payments	110,648
Present value adjustment	(95,212)
Present value of net minimum lease payments	$	15,436

Circle C Settlement. In 2002, the City of Austin granted final approval of a development agreement (the Circle C settlement) and permanent zoning for Stratus’ real estate located within the Circle C community in southwest Austin. The Circle C settlement firmly established all essential municipal development regulations applicable to Stratus’ Circle C properties until 2032. The City of Austin also provided Stratus $15.0 million of development fee credits, which are in the form of credit bank capacity, in connection with its future development of its Circle C and other Austin-area properties for waivers of fees and reimbursement for certain infrastructure costs. In addition, Stratus can elect to sell up to $1.5 million of the incentives per year to other developers for their use in paying city fees related to their projects as long as the projects are within the desired development zone, as defined within the Circle C settlement. To the extent Stratus sells the incentives to other developers, Stratus recognizes the income from the sale when title is transferred and compensation is received. As of December 31, 2024, Stratus had permanently used $12.9 million of its city-based development fee credits, including cumulative amounts sold to third parties totaling $5.1 million. Fee credits used for the development of Stratus’ properties effectively reduce the basis of the related properties and Stratus defers recognition of any gain associated with the use of the fees until the affected properties are sold. Stratus also had $0.3 million in credit bank capacity in use as temporary fiscal deposits as of December 31, 2024. Available credit bank capacity was $2.3 million at December 31, 2024.

Deferred Gain on Sale of The Oaks at Lakeway. In 2017, Stratus sold The Oaks at Lakeway to FHF I Oaks at Lakeway, LLC for $114.0 million in cash. The Oaks at Lakeway is an H-E-B anchored retail project located in Lakeway, Texas. The parties entered into three master lease agreements at closing: (1) one covering unleased in-line retail space, with a five-year term (the In-Line Master Lease), (2) one covering the hotel pad with a 99-year term (the Hotel Master Lease) and (3) one covering four unleased pad sites, three of which have ten-year terms, and one of which has a 15-year term (the Pad Site Master Lease).

The In-Line Master Lease expired in February 2022 and the Hotel Master Lease was terminated in November 2020. As such, Stratus has no further obligations under these two master leases. With respect to the Pad Site Master Lease, Stratus has leased one pad site with a 15-year term, reducing the monthly rent payment net of rent collections for this pad site to approximately $2,500. Stratus may assign this lease to the purchaser and terminate the obligation under the Pad Site Master Lease for this pad site with a payment of $560 thousand to the purchaser. The lease for the remaining three unleased pad sites under the Pad Site Master Lease expires in February 2027. To the extent leases are executed for the remaining three unleased pad sites, tenants open for business, and the leases are then assigned to the purchaser, the master lease obligation could be reduced further.

In first-quarter 2022, Stratus reassessed its plans with respect to construction of the remaining buildings on the three remaining unleased pad sites and determined that, rather than execute leases and build the buildings, it is less costly to continue to pay the monthly rent (approximately $73 thousand per month) pursuant to the Pad Site Master Lease until the lease expires in February 2027. In connection with this determination, Stratus reversed an accrual of costs to lease and construct these buildings, resulting in recognition of an additional $4.8 million of pre-tax gain during 2022. A contract liability of $1.8 million is presented as a deferred gain in the consolidated balance sheets at December 31, 2024, compared with $2.7 million at December 31, 2023. The reduction in the deferred gain balance primarily reflects Pad Site Master Lease payments. The remaining deferred gain balance is expected to be reduced primarily by future Pad Site Master Lease payments.

Environmental Regulations. Stratus has made, and will continue to make, expenditures for protection of the environment. Increasing emphasis on environmental matters can be expected to result in additional costs, which could be charged against Stratus’ operations in future periods. Present and future environmental laws and regulations applicable to Stratus’ operations may require substantial capital expenditures that could adversely affect the development of its real estate interests or may affect its operations in other ways that cannot be accurately predicted at this time.

Litigation. Stratus may from time to time be involved in various legal proceedings of a character normally incident to the ordinary course of its business. Stratus believes that potential liability from any of these pending or threatened proceedings will not have a material adverse effect on Stratus’ financial condition or results of operations.