Seritage Growth Properties annual report, FY2022

Seritage Growth Properties — FY2022 Form 10-K

Reporting period: Year ended December 31, 2022. This is an annual filing, not a standalone fourth-quarter report. Seritage is monetizing its real estate under a shareholder-approved Plan of Sale and expects to distribute net proceeds and dissolve, although the Board may suspend the plan. In 2022, the company revoked its REIT election and became a taxable C corporation, effective January 1, 2022.

Financial performance and position

Metric	FY2022	FY2021
Total revenue	$107.1 million	$116.7 million
Rental income	$104.6 million	$115.7 million
Net loss	$120.1 million	$39.0 million
Net loss attributable to common shareholders	$78.8 million; $1.59 per share	$33.0 million; $0.78 per share
Net operating income (NOI, non-GAAP)	$37.5 million	$29.9 million
Cash from operating activities	$(117.9) million	$(136.0) million
Cash from investing activities	$586.1 million	$260.7 million
Cash from financing activities	$(437.0) million	$(161.2) million

Rental income declined 9.5%, mainly from property sales and the absence of Sears/Kmart rent. Sears/Kmart rental income was zero in 2022, versus $4.5 million in 2021.
NOI improved despite lower rental income; it is a company-defined non-GAAP measure and should not be treated as cash flow or cash available for distributions.
At year-end, cash and cash equivalents were $133.5 million, restricted cash was $11.5 million, and total assets were $1.84 billion. Total liabilities were $1.12 billion and total equity was $722.6 million.
Term-loan debt was $1.03 billion at December 31, 2022, at a stated 7% fixed rate. The company reported $86.7 million of interest expense and $99.0 million of cash interest paid during 2022.
Common dividends have not been declared since 2019. The company has 2.8 million 7% Series A preferred shares outstanding; preferred dividends paid in 2022 were $4.9 million.
The multi-tenant retail portfolio was 81% leased at year-end, including signed-not-open leases.

Material changes and unusual items

Seritage sold 65 wholly owned assets for $650.3 million gross proceeds and monetized eight unconsolidated properties for a further $69.3 million gross proceeds during 2022. Real estate sale gains were $211.9 million.
The sale plan and shorter expected holding periods led to $126.9 million of impairment charges on 42 real estate assets, compared with $95.8 million on 39 assets in 2021. The company also recorded $35.6 million of other-than-temporary impairment on unconsolidated investments; equity in loss of unconsolidated entities rose to $72.1 million from $9.2 million.
A $35.5 million Sears-related litigation settlement was expensed and paid in 2022, without admission of fault. The company also recognized $12.7 million of insurance proceeds, with a further $11.6 million insurer settlement reached after year-end.
Interest and other income included releases of $13.9 million of historical Sears liabilities and a $9.5 million environmental reserve. The reserve liability was eliminated following the litigation settlement.
The C-corporation conversion produced a one-time, non-cash deferred tax benefit, but Seritage recorded a full $162.8 million valuation allowance against its deferred tax assets. FY2022 income tax expense was $0.5 million.
After year-end, the company sold 18 assets for $238.6 million gross proceeds and prepaid $230 million on its term loan. Debt fell to $800 million, extending the loan maturity to July 31, 2025. As of March 6, 2023, reported assets under contract had anticipated proceeds of $366.3 million; the company also cited about $98 million of accepted offers under negotiation and at least $90 million expected from exercised put options.

Outlook, liquidity and key risks

Management expects property and other obligations to continue exceeding rental income and relies principally on asset sales to fund operations, debt service and development costs. Operating cash outflow was $117.9 million in 2022.
Management concluded that expected asset-sale proceeds, put-option proceeds and cash on hand would fund obligations and certain development spending for one year after issuance of the statements, and therefore alleviate substantial doubt about going concern. The auditor identified liquidity planning as a critical audit matter, reflecting significant judgment about the timing and likelihood of sales.
The company was out of compliance with certain term-loan financial metrics at year-end. It reported that this was not an event of default, but triggered collateral requirements and may constrain transactions. At the lender’s request, all assets were mortgaged as of year-end. The $400 million incremental facility remained inaccessible because income requirements had not been met.
Management described worsening commercial real estate conditions, including higher interest rates, tighter debt availability, inflation-driven construction costs, weaker office demand and slower rent-growth expectations. These factors may reduce sale proceeds or delay shareholder distributions; no assured distribution amount or timing is provided.
Other material risks include vacant or redeveloped assets requiring further capital, tenant credit and lease-up risk, possible additional impairments, environmental liabilities, restrictions on property sales, and the company’s ability to execute the Plan of Sale. COVID-19 rent collections were 99.6% for 2022, but future collections are not assured.
The company’s independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management and the auditor assessed controls as effective.

Important facts for investors to verify

Actual closed sale proceeds, net of costs, and the pace and pricing of remaining dispositions versus the company’s estimates.
Whether the anticipated contract, offer and put-option proceeds close on the disclosed terms and are sufficient to cover operating cash burn, development needs and debt service.
Debt repayment progress, compliance with loan covenants, collateral requirements and the July 2025 maturity extension conditions.
Future impairments, including valuation assumptions for properties and unconsolidated investments, and the recoverability of tax loss carryforwards subject to the full valuation allowance.
Preferred-dividend payments and the amount, timing and priority of any eventual common-shareholder distributions after debt, preferred claims, taxes, costs and other liabilities.
Any material changes to the Plan of Sale, strategic review, litigation or environmental exposure.