Buying Certainty for Stratus

A publicity-shy billionaire real estate magnate from California -- not Jim Bob Moffett -- is in the driver's seat at Stratus Properties. He's going to stay rich -- and Stratus will stay in business -- whether or not the City Council finalizes its almost-but-not-quite-finished peace treaty with the real estate company.

In early 2000, Silicon Valley real estate tycoon Carl E. Berg began buying shares of Stratus Properties, in big chunks. Now the company's largest individual shareholder, Berg has spent nearly $7.4 million in the past 30 months to gain control of Stratus. According to Stratus' latest proxy filing with the Securities and Exchange Commission, Berg now owns 1.4 million shares (about 19.7%) of the company's stock. That's about the same amount held altogether by Ingalls & Snyder, a New York City-based investment management firm that holds 1.4 million shares of Stratus stock for a group of individual investors. (The firm refuses to say who those people are.)

Last year, Forbes magazine estimated that Berg, 64, is worth $1.2 billion. A resident of Atherton, Calif., Berg avoids publicity, apparently for good reason. In 1982, his wife and young daughter were kidnapped but escaped unharmed a few hours after they were abducted. Since then, he's rarely been quoted in news stories. He didn't return phone calls from the Chronicle.

Berg built his fortune over the past 30 years by investing in Silicon Valley real estate and high tech companies. He's now the chairman and CEO of Mission West Properties, a Cupertino, Calif.-based real estate investment trust that owns and manages about 100 properties containing nearly 7 million square feet of space, almost all of it in Silicon Valley. The company promotes itself by saying, "We Build the Buildings for the High Tech Companies That Build the Internet." The company's main tenants are Microsoft, JDS Uniphase, Amdahl, and Apple Computer.

Given Berg's ownership stake, Stratus has made certain to keep him happy. At Berg's urging, the company recently appointed money manager Bruce G. Garrison to its board of directors. Berg is known for his buy-and-hold investment strategy, and it appears he's planning to stick with Stratus for a while. A review of the company's filings with the SEC shows that Stratus is a mature company that will almost certainly survive whether or not the just-concluded agreement undergoes any potential court challenge.

While the city's settlement agreement covers much of what Stratus can do at Circle C, the company is going full-speed-ahead developing its other properties at Lantana and around the Barton Creek Country Club. At Lantana, the company recently completed construction of a 75,000-square-foot office building, and it's planning to build an identical one beside it. The company expects eventually to have 800,000 square feet of office and retail space, as well as 400 upscale apartments on the Lantana tract, which lies near the intersection of William Cannon and Southwest Parkway. Some units are already occupied. The company also has several dozen lots for sale around the country club. One of them, a 1.7-acre site at 7528 Escala Dr., is on the market for $325,000. An almost-complete house next door, which sits on a 2.1-acre lot, has 7,300 square feet of living space and is listed for $2.385 million.

Stability + Poison = Certainty

Stratus' financial situation, precarious for most of the 1990s, appears to have stabilized. The company's shareholder equity (the value of the company after all debts have been paid) has risen from $66.8 million at the end of 1999 to $84.6 million at the end of 2001. However, that doesn't mean the company faces an easy future. Stratus' cash flow from operations -- the key standard of a company's profitability -- plunged in 2001 to $3.2 million from $17.9 million in 2000. And the ongoing recession could severely hamper its prospects. The company acknowledges this difficulty in its 2001 10-K filing with the SEC, which reports, "Until the Austin real estate market improves, our available cash flow and cash flow requirements may preclude any near-term expansion." The company also warns investors that Austin is heavily influenced by the technology business. "As the technology market weakens, as in the current condition, we experience reduced sales, primarily affecting our 'high-end' properties, which can significantly affect our financial condition and results of operations."

Although Stratus cannot predict when -- or if -- the market will rebound, it is protecting itself against the possibility of a hostile takeover. On May 21, Stratus announced a new "poison pill" plan that allows current stockholders to buy additional stock from the company at 50% of the market price. The move, often adopted by companies that are potential takeover targets, allows Stratus to trigger a huge dilution of the outstanding shares of the company, thereby devaluing the shares accumulated by the entity attempting a takeover. The poison pill replaces an earlier measure that had expired.

Although as a company Stratus may fear a takeover, the poison pill also reflects that the company's managers want to keep their jobs. Chairman, president, and CEO Beau Armstrong certainly has a comfortable gig. By almost any measure, Stratus is a small company, with just 22 employees. Yet last year Armstrong's pay package, including salary, bonus, and perks, totaled $539,000. This year Armstrong's base salary will increase by $30,000, to $280,000.

How does that compare, for example, with Berg's pay? As the chairman and CEO of Mission West, Berg's 2000 pay package totaled $122,500. That's fairly small, given that his company has a market capitalization (the value of all outstanding stock) of $203 million, compared to Stratus' $63 million.

That market capitalization will almost certainly rise now that Stratus has struck a deal with the city. After years of fighting Austin over its future, Stratus will have certainty about the future marketability of more than 25% of its acreage, certainty that it has never had before. And as Armstrong told me last week, "certainty is valuable to us."

Robert Bryce, author of the forthcoming Pipe Dreams: Greed, Ego and the Death of Enron, covered the SOS story for the Chronicle for many years.

Stratus Properties Inc. by the Numbers

Revenues (2001): $14.8 million

Profits: $3.9 million

Employees: 22

Main assets: Land, including 2,039 acres in the Barton Creek Country Club area, 436 acres in Lantana, and 1,300 acres in Circle C. In addition, Stratus owns 13 acres in Houston and 21 acres in San Antonio, both of which are now being sold.

CEO: William H. (Beau) Armstrong III

CEO's 2001 pay: $539,000

Shares owned by CEO: 196,025

Recent stock price: $8.81

Price to earnings ratio: 10.3

Market capitalization: $63 million

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