STRATUS PROPERTIES INC

All of our periodic reports filed with the United States (U.S.) Securities and Exchange Commission (SEC) pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available, free of charge, through our website, “stratusproperties.com,” including our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports. These reports and amendments are available through our website as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the SEC. Our website is intended to provide information that may be of interest to investors and other stakeholders. None of the information on, or accessible through, our website is part of this Form 10-K or is incorporated by reference herein.

Except as otherwise described herein or where the context otherwise requires, all references to “Stratus,” “we,” “us” and “our” refer to Stratus Properties Inc. and all entities owned or controlled by Stratus Properties Inc. References to “Notes” refer to the Notes to Consolidated Financial Statements included herein (refer to Item 8.), and references to “MD&A” refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations and Quantitative and Qualitative Disclosures About Market Risk included herein (refer to Items 7. and 7A.). The following discussion includes forward-looking statements and actual results may differ materially from those anticipated in the forward-looking statements (refer to Item 1A. “Risk Factors” and “Cautionary Statement” in MD&A for additional information).

Overview

We are a diversified real estate company with headquarters in Austin, Texas. We are engaged primarily in the entitlement, development, management, leasing and sale of multi-family and single-family residential and commercial real estate properties in the Austin, Texas area and other select markets in Texas.

We generate revenues and cash flows primarily from the sale of our developed and undeveloped properties and the lease of our retail, mixed-use and multi-family properties. Developed property sales can include an individual tract of land that has been developed and permitted for residential use, a developed lot with a residence built on the lot or a property that has been developed for lease. In addition to our developed and leased properties, we have a development portfolio that consists of approximately 1,600 acres of commercial and multi-family and single-family residential projects under development or undeveloped land held for future use. We may sell properties under development, undeveloped properties or leased properties if opportunities arise that we believe will maximize overall asset value as part of our business strategy. 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 properties that we developed. Tenants in our retail and mixed-use properties are diverse and include grocery stores, restaurants, healthcare services, fitness centers, a movie theater, and other retail products and services.

During the last three fiscal years we produced substantial earnings and cash primarily from the following transactions:

•In 2023, the formation of a joint venture to develop our 495-acre Holden Hills residential project within the Barton Creek community in Austin, resulting in a cash distribution and payment of $35.8 million to us.

•In 2022, the sale of our mixed-use real estate property Block 21 in downtown Austin, producing net cash proceeds of $112.3 million and a pre-tax gain of $119.7 million. We also completed the sale of substantially all of our non-core assets.

•In 2021, the sale of multi-family properties in Austin, The Santal within the Barton Creek community and The Saint Mary located in the Circle C community. The sale of The Santal generated net cash proceeds of approximately $74 million and a pre-tax gain of $83.0 million. The sale of The Saint Mary, after establishing a reserve for remaining costs of the partnership, produced $20.9 million in cash and a pre-tax gain of $22.9 million($16.2 million net of noncontrolling interests).

•Over the last three fiscal years, we have raised third-party equity capital for development projects, totaling $101.3 million, including the Holden Hills third-party contribution mentioned above.

After the sale of Block 21 in May 2022, which eliminated our Hotel and Entertainment segments, our Board of Directors (the Board) and management team engaged in a strategic planning process, which included consideration of the uses of proceeds from recent property sales and our future business strategy. In September 2022, our Board declared a special cash dividend of $4.67 per share (totaling $40.0 million) on our common stock. Our Board also approved a share repurchase program authorizing repurchases of up to $10.0 million of our common stock, which was completed in October 2023. In November 2023, our Board authorized a new $5.0 million share repurchase program. Our Board decided to continue our successful development program, with our proven team focusing on pure residential and residential-centric mixed-use projects in Austin and other select markets in Texas, which we believe continue to be attractive locations. We also decided to continue to focus on developing properties using project-level debt and third-party equity capital through joint ventures in which we receive development management fees and asset management fees, with our potential returns increasing above our relative equity interest in each project as negotiated return hurdles are achieved.

Largely as a result of cash received from the property sales and joint venture distribution discussed above and focused liquidity management on our part, as of December 31, 2023, consolidated cash and cash equivalents totaled $31.4 million, and we had $40.5 million available under our revolving credit facility, net of $13.3 million of letters of credit committed against the facility, with no amounts drawn on the facility.

We were challenged by difficult conditions in the real estate business in 2023. Interest rates, which began rising in 2022, continued to increase, and costs remained elevated. We saw limited opportunities for transactions on favorable terms. Accordingly, during this market cycle, we have been working to maintain our business, advance our projects under construction or development, control costs, and advance entitlements, relationships and opportunities to position us to capture value when market conditions improve. During 2023, among other things, we completed construction and began lease-up of The Saint June multi-family project in Austin, continued construction of the Saint George multi-family project in Austin, advanced construction on the Holden Hills project in Austin, managed our completed retail projects and advanced entitlements on other projects.

Although 2023 was challenging, we see reasons for optimism regarding improving real estate market conditions in our markets as the year 2024 progresses. Our retail portfolio consists of five stabilized projects, namely Jones Crossing, Kingwood Place, Lantana Place, Magnolia Place and West Killeen Market, and we are in the process of engaging brokers to explore the sale of these properties. In connection with any such sales, we anticipate returning capital to stockholders, subject to obtaining required consents from Comerica Bank. We believe we have sufficient liquidity and access to capital to sell properties when market conditions are favorable to us and to hold our properties or to continue to develop our properties, as applicable, through the market cycle. We expect to re-evaluate our strategy as sales and development progress on the projects in our portfolio and as market conditions continue to evolve. Refer to “Business Strategy” in MD&A for further discussion.

Continuing Operations

The following discussion describes the properties included in our Real Estate Operations and Leasing Operations segments. Refer to Note 10, the section “Properties” below, and MD&A for more detailed discussion of the properties.

Real Estate Operations. Our Real Estate Operations segment is comprised of our operations with respect to our properties under various stages of development: developed for sale, under development and available for development. As part of our real estate operations, we entitle, develop and sell properties, focused on the Austin, Texas area and other select markets in Texas. The current focus of our real estate operations is developing multi-family and single-family residential properties and residential-centric mixed-use properties. We may sell or lease the real estate we develop, depending on market conditions. Real estate that we develop and then lease becomes part of our Leasing Operations (refer to “Leasing Operations” below).

We develop properties on our own and also through joint ventures in which we partner with third-party equity investors, serve as general partner, receive fees for development and asset management and may receive a preferred return after negotiated returns are reached. We may develop projects on land we have owned for many years, such as in Barton Creek in Austin, Texas, or on land that we purchase to develop in the future, such as The Saint George project described herein. We may enter into land purchase contracts in which we obtain the right, but not the obligation, to buy land at an agreed-upon price within a specified period of time. These contracts generally limit our financial exposure to our earnest money deposited into escrow and pre-acquisition diligence and planning costs we incur.

We engage and manage third-party general contractors to construct our projects typically on a fixed-price basis. Our employees oversee extensive work done by individuals and companies we engage as consultants for services including site selection, obtaining entitlements, architecture, engineering, landscaping and land preservation, design, sustainability, and developing and implementing marketing and sales plans.

Revenue from our Real Estate Operations segment accounted for 15 percent of our total revenue for 2023 and 66 percent for 2022. Revenue from our Real Estate Operations segment was a lower percentage of total revenue in 2023 compared to 2022 primarily due to significant revenue from sales of undeveloped properties during 2022 as compared to 2023.

Real estate held for sale includes developed properties in the Real Estate Operations segment and at December 31, 2023 consisted of two residential lots in Amarra Drive Phase III and two Amarra Villas homes. See “Properties – Barton Creek” for further discussion.

The acreage under development and undeveloped as of December 31, 2023 that comprise our real estate operations other than real estate held for sale is presented in the following table.

•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.

•Undeveloped acreage is presented according to anticipated uses for multi-family units, single-family lots and commercial space based upon our understanding of the properties’ existing entitlements. However, because of the nature and cost of the approval and development process and uncertainty regarding market demand for a particular use, the anticipated use of the undeveloped acreage may change over time, and there is no assurance that it will ever be developed. Undeveloped acreage includes vacant pad sites at Magnolia Place (which were sold in February 2024), Jones Crossing and Kingwood Place, as well as other real estate that can be sold “as is.”

a. Refer to“Properties – Barton Creek” below for a discussion of our properties within Barton Creek. The single-family acreage under development includes 495 acres in Holden Hills on which we commenced infrastructure construction during first-quarter 2023. The multi-family and commercial undeveloped acreage includes approximately 570 acres representing our Section N project.

b. We are pursuing rezoning of approximately 216 undeveloped acres from commercial to multi-family.

c. In February 2024, we completed the sale of approximately 47 acres planned for up to 600 multi-family units, a second phase of retail development of approximately 15,000 square feet and all remaining pad sites in Magnolia Place for $14.5 million. As of March 25, 2024, the remaining potential development is approximately 11 acres planned for 275 multi-family units.

The following table summarizes the estimated development potential of our acreage under development and undeveloped acreage as of December 31, 2023:

a. Substantially all of the single-family lots relate to Holden Hills and substantially all of the multi-family and commercial relates to Section N. Refer to “Properties – Barton Creek” below for further discussion of recent legal developments and ongoing development planning that may result in changes in our development plans and increased densities for Holden Hills and Section N.

b. We are pursuing rezoning of approximately 216 undeveloped acres planned for 660,985 square feet of commercial space from commercial to multi-family.

c. In February 2024, we completed the sale of approximately 47 acres planned for up to 600 multi-family units, a second phase of retail development of approximately 15,000 square feet and all remaining pad sites in Magnolia Place for $14.5 million. As of March 25, 2024, the remaining potential development is approximately 11 acres planned for 275 multi-family units.

Real estate under development as of December 31, 2023 in the tables above included a multi-family property under construction in Austin, Texas: The Saint George, a 316-unit luxury wrap-style project. The Saint George is expected to be reclassified into the Leasing Operations segment upon its completion, which is expected to occur by third-quarter 2024.

The development potential of our undeveloped acreage at December 31, 2023 also included the following, which are not reflected in the table above:

•13 acres planned for up to seven retail pad sites at Magnolia Place, which were sold in February 2024;

•one retail pad site at Kingwood Place; and

•four retail pad sites at Jones Crossing.

For additional information regarding the estimated development potential for each of our properties under development and undeveloped properties, please refer to “Recent Development Activities” in MD&A.

Leasing Operations. Our Leasing Operations segment primarily involves the lease of space at retail and mixed-use properties that we developed and the lease of residences in multi-family projects that we developed. We engage third-party leasing and property management companies to manage our leased operations. 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.

Our principal properties in our Leasing Operations segment at December 31, 2023 consisted of:

•a 154,092-square-foot retail property representing the first retail phase of Jones Crossing;

•a 151,877-square-foot retail property at Kingwood Place;

•a 99,377-square-foot retail property representing the first phase of Lantana Place;

•a 44,493-square-foot retail property at West Killeen Market;

•a 18,582-square-foot retail property representing the first phase of Magnolia Place; and

•The Saint June, a luxury garden-style multi-family project consisting of 182 units.

Revenue from our Leasing Operations segment accounted for 85 percent of our total revenue for 2023 and 34 percent for 2022. Revenue from our Leasing Operations segment was a higher percentage of total revenue in 2023 compared to 2022 primarily due to lower revenue in our Real Estate Operations segment in 2023 compared to 2022, which had significant revenue from sales of undeveloped properties. Leasing Operations segment revenue increased $2.0 million in 2023 compared to 2022, as a result of the commencement of operations at Magnolia Place in late 2022 and The Saint June in mid-2023, as well as, increased revenue at Kingwood Place, in connection with new leases. Refer to the charts below for our leasing operations revenue by property during 2023 and our developed square feet of retail space by geographic location as of December 31, 2023.

Retail properties in our Leasing Operations segment had average rentals of $22.29 per square foot as of December 31, 2023, compared to $20.27 per square foot as of December 31, 2022. Our scheduled expirations of leased retail square footage as of December 31, 2023 as a percentage of total space leased was 2 percent in 2024, none in 2025, 1 percent in 2026, 4 percent in 2027, 8 percent in 2028 and 85 percent thereafter.

For additional information about our operating segments refer to “Results of Operations” in MD&A. Refer to Note 10 for a summary of our revenues, operating income or loss and total assets by operating segment.