Controlling Shareholder

Robert Bryce has written an expose for The Austin Chronicle profiling Carl E. Berg, the publicity-shy billionaire real estate magnate from California who now controls the purse strings at Stratus. Read all about how he has bought certainty for Stratus's survival.

Why STRATUS STINKS

financials

By most measures, the company has been in constant financial trouble ever since it began life as FMP. It began 'independence' owing a very large debt to its former parent company, Freeport McMoran. Stratus/FMP has never once posted a dividend to its shareholders.

The company survived by selling off assets and applying the proceeds to debt reduction. For instance, oil and gas properties were sold off in 1997. Properties in Houston, Dallas, and San Antonio were unloaded. Their interest in Barton Creek Country Club was sold to ClubCorp of America. In Dec. 2000, it sold a 36.4 acre multifamily site at Lantana.

Property was also added in this period-most notably Lantana, acquired at a bargain price in a government auction of bankrupt S&L assets. However, the overall trend has been to shrink the asset base along with their debt, and to concentrate their remaining holdings within the Austin area. Stratus conducts no business activities apart from real estate development.

Recent gains might seem to foreshadow recovery of financial health for Stratus. After racking up years of losses, they finally turned profits in each of the last three years. However, this is no Cinderella story. The profits in 1999 and 2000 were entirely due to payments of $17.4 million made by the City to Stratus. The City of Austin was this company's life support. The payments were made to settle disputes over reimbursement for the construction of utilities and roads at Circle C.

While the law says cities should reimburse developers for infrastructure upon annexation, those actual expenses were owed by the now-bankrupt Gary Bradley companies to contractors, banks, and bondholders. By the time FMP acquired the land, those debts were effectively wiped out by the bankruptcy. It should be noted that the US taxpayer paid off this bad Circle C debt when it bailed out Gibraltar Savings, the S&L that loaned Gary Bradley the money for his development. A federal court later hit Bradley with a judgment for $65 million that still has not been repaid to the US taxpayer.

There was also a dispute between the City and Stratus about the proper amount of the reimbursements. Had the City not chosen to settle, Stratus might be tied up in litigation today. Had the City chosen to fight, Stratus could have found itself insolvent.

Instead, the City made an unpublicized deal to allow higher density development on 417 acres of Lantana, announced by Stratus in an SEC filing dated Nov. 13, 2001. This City agreement allows 2.9 million square feet of office and retail space, 400 apartments and 330 residential lots. The City thus chose to further strengthen its long-time adversary.

In the first quarter of 2002, Stratus eked out a profit of $386,000. However, they recorded an operating loss of $531,000, the casualty of a weakening economy. They successfully offset these losses in their core activity by selling income properties in Houston and Lakeway. They still have money coming in from real estate sales of $1.7 million in the first quarter. However, debt is once again increasing as a result of extensive restructuring. A development partnership with Olympus Real Estate Corporation ( a subsidiary of Hicks, Muse, Tate and Furst) was terminated (see Stratus press release, May 7, 2002). For the future, Stratus still has a $30 million line of credit with Comerica Bank.

Absent renewed large scale market activity in the near term, Stratus has limited choices for survival. They can take on more debt, worsening their balance sheet and increasing the risk of insolvency. They can sell off more assets to meet current expenses, but that shrinks their future earning potential. They can take on partners who, like Olympus, can supply working capital in exchange for a share of the earnings from development. However, this latter possibility may not occur, if either Stratus' financial capability as a partner, or the market for its land, appear weak. In any case, they seem to be moving in the opposite direction, shedding Olympus as a partner in order to develop and sell real estate on their own.

Will the City of Austin choose to bail out a failing company which is threatening us with lawsuits and Austin-bashing legislation?

Stay tuned.