Seritage Growth Properties — Q2 2022 Form 10-Q
Business context and reporting period. This unaudited report covers the quarter and six months ended June 30, 2022. Seritage owns, redevelops, leases, manages and sells U.S. retail and mixed-use real estate. Its portfolio included interests in 150 properties, about 19.5 million square feet of gross leasable or build-to-suit area, and approximately 9.9 million square feet or 821 acres identified for disposal. The company is pursuing a strategic review and has shifted toward asset sales.
Financial results and key metrics
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $29.7 million | $27.9 million | $60.6 million | $59.2 million |
| Net loss | $142.1 million | $95.3 million | $209.1 million | $106.2 million |
| Net loss attributable to common shareholders | $112.0 million | $74.1 million | $165.4 million | $83.0 million |
| Basic and diluted loss per share | $2.56 | $1.73 | $3.79 | $2.02 |
| NOI, non-GAAP | $8.6 million | $6.1 million | $17.5 million | $14.0 million |
| Total NOI, including proportional share of unconsolidated entities, non-GAAP | $10.6 million | $7.6 million | $21.1 million | $17.0 million |
At June 30, cash and cash equivalents were $149.5 million; cash plus restricted cash was $156.7 million. The company reported $1.44 billion of term-loan principal, carrying value of $1.44 billion, and $20.7 million of sale-leaseback financing obligations. Total liabilities were $1.60 billion and total equity was $634.4 million. Rental income collected for Q2 was 99%, according to management.
For the six months, operating cash outflow was $54.5 million, investing cash inflow was $99.9 million and financing cash outflow was $2.5 million. Investing cash inflows included $168.2 million net proceeds from property sales, offset by $53.0 million of consolidated real-estate development and $15.4 million invested in unconsolidated entities.
Material changes versus the prior comparable period
- Q2 revenue rose 6.6% year over year, largely reflecting higher straight-line rent; six-month revenue increased 2.5%. Six-month rental income was slightly lower, in part because Sears/Kmart rental income fell by $4.5 million after the remaining Sears space ceased to be occupied in March 2021.
- Losses widened substantially. Q2 included $109.3 million of real-estate impairments, $33.7 million of equity-method investment losses and a $35.0 million litigation reserve. For the six months, corresponding charges included $110.3 million, $66.8 million and $35.0 million.
- Q2 gains on real-estate sales increased to $68.0 million from $18.1 million. The company sold 13 properties in Q2 for $163.4 million aggregate consideration; for the first half, it sold 14 properties for $172.3 million.
- Six-month interest expense declined to $45.3 million from $55.1 million, reflecting the December 2021 principal paydown and greater capitalization of interest, among other items. Property tax, depreciation and G&A expenses also declined, primarily due to asset sales and lower headcount/restructuring costs.
- The company recorded $32.5 million of other-than-temporary impairment on three unconsolidated-entity investments after reducing expected holding periods in connection with its sale plans. A partner’s impairment of underlying joint-venture properties also contributed to reported equity-method losses.
Outlook, liquidity, risks and unusual items
- Going concern and debt maturity: Management concluded that substantial doubt exists about the company’s ability to continue as a going concern. The $1.44 billion term loan bears interest at 7% and matures July 31, 2023. An option to extend maturity to July 31, 2025 requires principal to be reduced to $800 million by July 2023. The filing states that management expects asset sales to provide the required paydown, but also concludes its plans do not alleviate substantial doubt because prospective sales are not all under contract or within its control.
- Subsequent liquidity developments: As of August 8, 2022, the company reported $260.8 million of assets under contract, subject to customary conditions, and said it had sold 10 assets after quarter-end for $75.3 million gross proceeds. It also made a $100 million loan principal payment, bringing the outstanding balance to $1.34 billion. Management cited assets with estimated fair value exceeding $1.2 billion that were being marketed, negotiated or evaluated for sale; closing and proceeds are not assured.
- Strategic alternatives and proposed liquidation: The strategic review remained ongoing. In July 2022, the company filed preliminary proxy materials seeking shareholder approval for a plan to sell all assets, distribute net proceeds and dissolve the company. Approval requires at least two-thirds of outstanding common shares. If approved, management estimated asset sales could take 18 to 30 months, with no assurance of timing or outcome.
- REIT status and taxes: Seritage revoked its REIT election effective January 1, 2022 and became a taxable C corporation. The company recorded deferred tax benefits but fully reserved its $201.2 million deferred tax asset because realization was uncertain; the six-month effective tax rate was 0%. It will generally be unable to elect REIT status through December 31, 2026.
- Litigation settlement: The company had accrued a $35 million reserve at June 30 for its expected contribution to a proposed Sears-related litigation settlement. On August 9, after quarter-end, parties agreed to a $175 million total settlement, including approximately $35 million from Seritage, subject to court approval. Any insurance recovery would offset Seritage’s contribution; litigation with D&O insurers remained active.
- Other risks: Further impairments may arise as sale plans, offers and development assumptions evolve. Management cited uncertainty around asset-sale execution, tenant performance and COVID-19 effects. The company had not met the $200 million annualized non-Sears rental-income threshold required to access its $400 million incremental funding facility.
Most important facts for investors to verify
- Progress and realized proceeds from property and joint-venture sales, and whether net proceeds are sufficient to meet the loan extension paydown condition.
- Term-loan balance, the July 2023 maturity/extension requirements, covenant status and any future changes in lender terms.
- Whether shareholders approve the Plan of Sale, the eventual sale timetable and estimated net distributions after debt and contingent liabilities.
- Final court approval and payment terms of the Sears litigation settlement, plus any D&O insurance recovery.
- Basis and sensitivity of the $110.3 million real-estate impairment and $32.5 million investment impairment, including possible additional write-downs.
- Rental collections, leasing progress, development spending and the company’s continuing cash burn and going-concern assessment.