Seritage Growth Properties — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Unaudited results; financial statement amounts below are in U.S. dollars. Seritage owns, redevelops, leases, manages and sells retail and mixed-use real estate. At quarter-end, its portfolio included interests in 161 properties and approximately 19.0 million square feet of gross leasable or build-to-suit area, plus land held for development and disposition.
Financial performance and position
| Metric | Q1 2022 | Q1 2021 / comparison |
|---|---|---|
| Total revenue | $30.9 million | $31.3 million; down $0.4 million |
| Rental income | $29.1 million | $31.1 million; down $2.1 million |
| Net loss | $67.0 million | $10.9 million |
| Net loss attributable to Seritage common shareholders | $53.4 million; $1.22 per share | $8.9 million; $0.23 per share |
| Net operating income (NOI; non-GAAP) | $9.0 million | $7.9 million |
| Total NOI, including Seritage’s share of unconsolidated properties (non-GAAP) | $10.5 million | $9.4 million |
| Net cash used in operating activities | $30.0 million | $23.1 million |
| Net cash used in investing activities | $21.5 million | Net cash provided of $18.5 million |
| Cash and cash equivalents at quarter-end | $53.8 million; $61.0 million including restricted cash | $106.6 million cash at December 31, 2021 |
| Term loan facility | $1.44 billion outstanding | Matures July 31, 2023, unless extension conditions are met |
- Operating expenses totaled $40.2 million, versus $45.2 million a year earlier. Interest expense was $22.6 million, down $3.6 million, chiefly reflecting the 2021 loan paydown and higher capitalized interest.
- The larger net loss primarily reflected a $33.1 million equity loss from unconsolidated entities, compared with $1.2 million in Q1 2021, and the absence of the prior-year $24.2 million real estate sale gain. The equity loss included Seritage’s share of a significant impairment recorded by a joint venture.
- At March 31, total assets were $2.34 billion and total equity was $777.1 million. Real estate held for sale was $92.1 million, covering 11 properties.
- Development expenditures were $22.5 million for consolidated properties and $7.6 million invested in unconsolidated entities. Net proceeds from real estate sales were $8.5 million.
Changes and significant developments
- Rental income fell as Sears/Kmart rental income ended: Seritage reported no Sears/Kmart rent in Q1 2022, versus $4.5 million in Q1 2021. Diversified non-Sears lease income increased by $1.6 million, partly offsetting the decline.
- The Board announced a review of a broad range of strategic alternatives on March 1, 2022. The review was ongoing at the filing date; the company gave no assurance that it would result in a transaction or strategic change.
- Seritage ended its REIT election and became a taxable C corporation effective January 1, 2022. It is now subject to income taxes and no longer has the REIT requirement to distribute at least 90% of taxable income. The filing reports a one-time, non-cash deferred tax benefit of approximately $160.3 million, alongside a full $174.9 million valuation allowance against deferred tax assets.
- Seritage collected 96% of Q1 rental income and agreed to no additional rent deferrals during the quarter. Management cautioned that tenant performance and pandemic impacts remain uncertain.
Liquidity, outlook and risks
- Rental income did not cover operating obligations and debt service; management expects obligations to continue exceeding rental income. It expects to use cash on hand and property or joint-venture interest sales, subject to required lender approvals, to fund obligations and development.
- The term loan may be extended from July 2023 to July 2025 only if principal is reduced to $800 million by July 31, 2023—a $640 million reduction from the reported $1.44 billion balance. Otherwise, the loan is due in July 2023. The loan bears 7% interest.
- As of May 9, 2022, nine assets were under contract for anticipated proceeds of $85.0 million; seven assets sold after quarter-end for gross proceeds of $74.7 million. Management also identified approximately $636.3 million of assets being marketed or expected to be marketed. Sale timing and proceeds are uncertain.
- Management said it believed its plans would probably fund obligations and development expenditures for the year after issuance of the financial statements. However, it warned that, beginning in July 2022, the full term loan may need to be treated as a current obligation in its going-concern assessment until extension or sufficient asset-sale contracts support projected cash flows. The filing does not establish that the required loan reduction has been achieved.
- Seritage was not in compliance with certain loan financial metrics at quarter-end. This did not constitute an event of default under the filing’s description, but it restricted asset sales and joint ventures absent lender consent. The lender had consented to submitted transactions as of March 31; future consent is not assured. The company also had not met the rental-income conditions to access its $400 million incremental facility.
- Unconsolidated entities recorded $61.1 million of impairment on two properties after Seritage exercised put rights; Seritage recognized its share through equity in loss of unconsolidated entities. Seritage also recorded $1.0 million of impairment on four consolidated properties planned for sale. Further impairments remain possible.
- Seritage remains a defendant in Sears-related litigation alleging, among other things, fraudulent transfers tied to the 2015 transactions. The company disputes the claims and intends to defend itself; no litigation liability was recorded at quarter-end. The filing describes mediation, but no outcome or loss estimate is provided.
- The company’s 40 multi-tenant retail assets were 82.7% leased, with a 0.2 million-square-foot leasing pipeline. Management also identified 33 sites as potential residential developments; execution depends on leasing, development, financing and disposition conditions.
Investor verification priorities
- Track asset-sale closings, net proceeds and lender approvals against the $640 million paydown needed to qualify for the term-loan extension.
- Review updated liquidity and going-concern disclosures, including the timing of any extension and whether asset-sale proceeds cover cash obligations.
- Assess leasing, occupancy, collections and development spending, including performance of unconsolidated properties and further impairment risk.
- Monitor the strategic alternatives process, potential transaction terms and the tax, liquidity and shareholder implications of C-corporation status.
- Follow Sears-related litigation and mediation for developments that could create material costs or other remedies.
- Reconcile the reported deferred tax benefit with the full valuation allowance and assess whether deferred tax assets can ultimately be realized.