Seritage Growth Properties — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also reports fourth-quarter results. Seritage is a REIT focused on acquiring, leasing, redeveloping and repositioning retail and mixed-use real estate, much of it acquired from Sears Holdings. Unless noted otherwise, financial amounts below are in U.S. dollars.
Business context and portfolio
- At year-end, the portfolio comprised interests in 212 properties totaling approximately 33.4 million square feet: 184 wholly owned properties and 28 joint venture properties.
- The strategy is to convert former Sears/Kmart space into diversified, often multi-tenant retail and mixed-use developments. Seritage reported 91 redevelopment projects originated since inception, with estimated total investment of $1.6–$1.7 billion.
- Portfolio occupancy, based on signed leases and including signed-but-not-open leases, was 42.6%, down from 67.0% at year-end 2018. Annual rent on this basis was $192.0 million, versus $210.8 million.
Financial performance and liquidity
| Metric | 2019 | 2018 |
|---|---|---|
| Total revenue | $168.6 million | $214.8 million |
| Net loss | $90.6 million | $114.9 million |
| Net loss attributable to common shareholders | $64.3 million | $78.4 million |
| Loss per Class A and Class C share, basic and diluted | $1.77 | $2.20 |
| Total NOI, a non-GAAP measure | $72.7 million | $143.1 million |
| FFO attributable to common shareholders and unitholders, non-GAAP | $(33.8) million | $24.1 million |
| Net cash from operating activities | $(57.7) million | $54.9 million |
| Net cash used in investing activities | $(299.5) million | $(119.5) million |
Revenue fell as Sears/Kmart rent declined; higher diversified-tenant rent only partly offset the reduction. Sears/Kmart rental income was $51.2 million, or 30.6% of revenue, compared with $151.7 million, or 71.0%, in 2018. Diversified-tenant rental income rose to $99.8 million from $63.8 million.
Fourth-quarter 2019 revenue was $36.6 million and net loss was $37.3 million; loss attributable to common shareholders was $25.9 million, or $0.70 per share. In fourth-quarter 2018, revenue was $55.1 million and net loss was $85.7 million, or $1.57 per share attributable to common shareholders. Quarterly results include potentially significant depreciation, amortization and property-sale gains.
At year-end, cash and cash equivalents were $139.3 million, down from $532.9 million. Total assets were $2.75 billion, total liabilities $1.71 billion, and total equity $1.04 billion. The $1.6 billion term loan bears a fixed 7.0% rate and matures July 31, 2023. Interest expense was $94.5 million, compared with $90.0 million in 2018. The filing does not provide a clear consolidated operating margin measure.
Management said rental income did not cover operating obligations in 2019 and expects obligations to continue exceeding rental income until more tenants begin paying rent. Approximately $84.3 million of annual rent under signed diversified leases was associated with leases not yet open; commencement and rent timing remain important uncertainties. The company reported $387.7 million of development and property-improvement cash outflows during 2019.
Material changes, outlook and risks
- Lease transitions: Following Sears Holdings’ bankruptcy, Seritage and Holdco entered a replacement master lease effective March 12, 2019. Holdco exercised termination rights for 29 stores, effective March 2020; 16 of those terminations were not subject to a termination fee. Holdco represented 30.6% of 2019 revenue.
- Funding and asset sales: Seritage reported selling 21 properties and generating $144.3 million in gross proceeds in 2019, plus $10.9 million from two joint ventures with adjacent owners. After year-end, it sold three assets for $57 million and had seven additional assets under contract; anticipated proceeds under contracts as of February 28, 2020 were $125 million, subject to closing conditions.
- Debt covenant and lender constraints: At December 31, 2019, the company was not in compliance with certain financial metrics under its term loan. This restricted asset sales and joint ventures without lender consent and triggered mortgage collateral requirements; the lender requested mortgages on a majority of the portfolio. The lender had consented to submitted transactions as of year-end, but future consent was not assured. The $400 million incremental facility remained inaccessible because the company had not met its non-Sears rental-income conditions.
- Liquidity outlook: Management expected to fund obligations and development through property and joint venture interest sales and potential credit or capital-markets transactions, subject to loan terms and approvals. Management concluded these plans were probable to be implemented within one year after the financial statements were issued and would provide necessary cash flows. The auditor identified liquidity planning as a critical audit matter, reflecting significant judgment about implementation and timing.
- Litigation: In the Sears bankruptcy litigation, plaintiffs allege, among other things, that the 2015 transactions were fraudulent transfers or illegal dividends and that the acquired real estate was worth $649–$749 million more than the purchase price. The amended complaint seeks remedies including recovery of property or damages in an unspecified amount. Seritage disputes the claims and intends to defend itself; it recorded no litigation liability at year-end. The outcome and potential loss were not determinable from the filing.
- Shareholder distributions: The company declared a $0.25 common dividend for first-quarter 2019 and none thereafter through the filing date, citing investment opportunities and expected taxable income. It continued quarterly dividends on its 7.00% Series A preferred shares. Future common dividends are discretionary and subject to financial condition, debt covenants and REIT requirements.
- Other risks: Redevelopment costs, leasing delays, vacancies, tenant credit and retail-sector weakness; environmental liabilities; and potential conflicts involving ESL/Holdco are material considerations. Edward Lampert chairs Seritage and leads ESL, which owns Holdco and holds a 33.9% interest in the Operating Partnership.
The filing provides no specific earnings, occupancy or development-completion guidance. It describes strategic plans and funding assumptions, not guaranteed outcomes.
Important facts for investors to verify
- Progress in converting the $84.3 million of signed-but-not-open lease rent into occupied space and cash collections, and the resulting portfolio occupancy and tenant mix.
- Holdco’s March 2020 terminations, any further termination or recapture notices, and the timing and cost of re-leasing affected properties.
- Cash runway and realized proceeds from asset sales and joint ventures, including lender approvals, collateral demands and access to the incremental loan facility.
- Redevelopment spending remaining, project budgets, leasing commitments and expected rent commencement; compare actual outcomes with project estimates.
- Developments in the Sears litigation, including any rulings, settlement discussions, claims asserted against Seritage and any change in the company’s loss assessment.
- Common-dividend policy and compliance with preferred dividend obligations, REIT distribution requirements and loan restrictions.