Seritage Growth Properties — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; filed May 11, 2020. Unless noted, financial amounts below are in millions. Seritage is a retail and mixed-use property owner and developer. At quarter-end its portfolio comprised interests in 208 properties totaling approximately 32.8 million square feet.
Financial results and liquidity
| Metric | Q1 2020 | Q1 2019 / prior date |
|---|---|---|
| Total revenue | $33.3 | $43.9 |
| Rental income | $33.1 | $43.6 |
| Net loss attributable to Seritage | $(20.7) | $(7.0) |
| Net loss attributable to common shareholders | $(21.9); $(0.59) per share | $(8.2); $(0.23) per share |
| Net operating income (NOI) | $15.2 | $19.7 |
| Total NOI, including Seritage’s share of joint ventures | $15.8 | $24.3 |
| Net cash used in operating activities | $(10.2) | $(16.8) |
| Cash and cash equivalents at quarter-end | $96.7 | $139.3 at Dec. 31, 2019 |
Total expenses were $63.0 million, including $34.1 million of depreciation and amortization. A $20.8 million gain on property sales partially offset operating costs and interest expense; the filing reports a $31.0 million loss before taxes. Rental income from diversified tenants rose $8.6 million to $28.0 million, while Sears/Kmart-related rent fell $13.0 million to $7.7 million. Accelerated amortization of lease intangibles increased depreciation and amortization by $10.5 million.
Investing cash outflow was $31.0 million, including $73.6 million of real estate development spending and $16.9 million of joint-venture investment, partly offset by $58.3 million of property-sale proceeds. Financing cash outflow was $1.3 million. Total assets were $2.76 billion and total liabilities $1.75 billion at March 31.
Debt was $1.6 billion under a fixed-rate, 7.0% Term Loan Facility maturing July 31, 2023; reported interest expense was $21.5 million. The loan includes a $400 million incremental facility, but access requires, among other conditions, at least $200 million of qualifying annualized rental income from non-Sears tenants, a threshold Seritage had not achieved. The company was not in compliance with certain financial metrics at quarter-end, restricting asset sales or joint ventures without lender consent; the lender had consented to transactions submitted as of that date.
Material changes and operating context
- Revenue fell 24% year over year. The decline reflects reduced Sears/Kmart occupancy and lease termination/recapture activity; growth in diversified-tenant rents only partly offset it.
- NOI fell to $15.2 million from $19.7 million, and Total NOI to $15.8 million from $24.3 million. Joint ventures reported a $1.6 million net loss versus $2.4 million net income in Q1 2019.
- Net loss attributable to Seritage widened to $20.7 million from $7.0 million. Higher depreciation and amortization and a shift to a loss from joint ventures contributed; property-sale gains were similar year over year.
- Seritage sold four properties during the quarter for $60.4 million gross consideration and recognized $20.8 million in gains. Cash declined by $42.5 million during the quarter.
- The company issued 1.65 million Class A shares in exchange for Operating Partnership units. No common dividend was declared for 2020; a $0.4375-per-share Series A preferred dividend was declared for the quarter.
Outlook, risks and unusual items
COVID-19 sharply disrupted tenants and development activity. Substantially all non-essential tenants had closed stores, and substantially all construction projects were paused at the end of March. By May 6, Seritage had collected approximately 47% of April contractual base rent and tenant reimbursements billed (54% excluding Holdco). The company said it could not reasonably estimate the pandemic’s foreseeable financial impact and that Q1 results may not indicate subsequent periods.
Management said obligations were expected to continue to exceed property rental income and that available liquid funds were not then sufficient to cover obligations and development expenditures. It planned to rely on cash, property and joint-venture sales, potential financing and other capital-market transactions; management considered implementation of its funding plans probable within one year of issuance of the financial statements. Seritage also reduced operating and corporate expenses by approximately 20–25% and limited capital spending.
On May 5, 2020, after quarter-end, Seritage amended its loan agreement to permit conditional interest deferrals when defined Available Cash is $30 million or less. Deferred interest accrues at 2 percentage points above the applicable rate and is generally due at maturity; repaying deferred interest is a condition to incremental-facility borrowing. Asset dispositions remain subject to lender approval.
A material concentration remains in Holdco, an affiliate of ESL Investments; Edward Lampert chairs both Seritage and ESL and controls the Holdco tenant entities. The filing also describes ongoing Sears-related litigation alleging, among other claims, that the 2015 property transactions were fraudulent transfers; Seritage disputes the claims and reported no litigation accrual. No impairment losses were recorded in Q1, but further deterioration could lead to future impairment charges. The filing provides no formal earnings or operating guidance.
Important facts for investors to verify
- Subsequent rent collections, tenant relief arrangements, store reopenings, and the ability of tenants to meet revised or existing lease obligations.
- Cash requirements and funding-plan execution, including asset-sale proceeds, lender approvals, covenant status, and access to the incremental loan facility.
- Whether deferred interest is used, the amount accrued, and the effect on future interest burden and liquidity.
- Progress and revised costs or timing for paused redevelopment projects, and any resulting property or joint-venture impairments.
- Developments in the Sears litigation, including potential exposure; the filing states a loss amount or range is not clearly estimable.
- Changes in Holdco rent, lease terminations or recaptures, and tenant concentration; confirm the continued status of common and preferred dividends.