Seritage Growth Properties — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Amounts below are in U.S. dollars; financial statement figures are in millions unless otherwise indicated.
Business context
Seritage is a REIT that owns, leases, redevelops and manages retail and mixed-use real estate. At quarter-end, it had interests in 199 properties totaling approximately 31.6 million square feet: 171 wholly owned properties and 28 joint-venture properties. Its strategy is to redevelop former Sears/Kmart space and diversify tenants. COVID-19 disrupted tenant operations, rent collections and construction.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $21.8 | $40.5 | $55.1 | $84.4 |
| Rental income | $21.6 | $38.7 | $54.8 | $82.3 |
| GAAP net income (loss) | $0.1 | $(25.9) | $(30.9) | $(36.8) |
| Net loss attributable to common shareholders | $(1.2) | $(18.1) | $(23.0) | $(26.3) |
| Net loss per common share | $(0.03) | $(0.50) | $(0.61) | $(0.73) |
- Q2 GAAP income was supported by a $52.1 million real-estate sale gain; the six-month gain was $72.9 million and included $1.8 million of impairment losses. These gains are not recurring rental earnings.
- Q2 NOI was $6.2 million versus $13.5 million; Total NOI, including Seritage’s share of joint ventures, was $7.3 million versus $14.6 million. For six months, NOI was $21.4 million versus $33.2 million and Total NOI was $23.1 million versus $38.9 million.
- Six-month operating cash flow was negative $18.3 million; investing cash flow was negative $36.7 million and financing cash flow was negative $2.5 million. Cash fell to $81.7 million from $139.3 million at year-end 2019.
- Development spending was $139.3 million and net proceeds from real-estate sales were $142.5 million in the first half. Management said rental income did not cover obligations and expects obligations to continue to exceed rental income.
- Debt was approximately $1.6 billion, under a fixed-rate 7.0% term loan due July 31, 2023. The loan includes a $400 million incremental facility, but Seritage had not met its $200 million annualized non-Sears tenant-rent test for access. Certain financial metrics were not met; asset sales and joint-venture dispositions require lender consent.
Material changes and management commentary
- Rental income declined $17.0 million year over year in Q2 and $27.5 million in the first half. Lower Sears/Kmart rent, lease recaptures and terminations, uncollectible rent, and reversal or accelerated amortization of straight-line rent contributed. Diversified-tenant rent increased, partly offsetting the declines.
- On June 3, Seritage amended the Holdco master lease: 12 properties were terminated for a $5.3 million payment due by the earlier of completion of going-out-of-business sales or September 30, 2020; base rent at five remaining stores was deferred for April–September, repayable over 12 months beginning October 2020.
- As of August 4, 93% of in-place tenants, representing 92% of leased area and 86% of annual base rent, were open or operating in some capacity. For Q2 rent from tenants other than Holdco, 66% had been collected and 21% deferred; for July, 74% had been collected and 7% deferred.
- Management reported that the company did not then have liquid funds available to meet all obligations and development expenditures, but expected to fund them through cash, asset and joint-venture interest sales, and potential financing. Management judged these plans probable of effective implementation within one year after issuance of the statements. The filing gives no numerical earnings or revenue guidance and says COVID-19’s future effects cannot be reasonably estimated.
- Most construction projects remained on hold. Seritage restarted selected project components representing approximately $42.7 million of potential investment and $12.7 million of potential annual rent; another $400–$450 million of announced suburban redevelopment investment remained on hold.
- Common-share dividends were not declared in 2020; the last common dividend was declared in Q1 2019. Series A preferred dividends continued at $0.4375 per share quarterly. The loan amendment permits conditional interest deferrals, with deferred interest accruing at 2 percentage points above the stated rate.
Risks, contingencies and unusual items
- COVID-19 creates material uncertainty around tenant solvency, rent collections, asset values, construction schedules, access to capital, covenant compliance and the ability to service debt or pay distributions. Further impairment charges are possible.
- Seritage is a defendant in Sears-related litigation alleging, among other matters, that the 2015 property acquisition was worth $649–$749 million more than the price paid. Requested relief includes rescission or damages. Seritage disputes the claims; it recorded no litigation liability at June 30, 2020.
- Edward Lampert is Seritage’s chairman, controls Holdco, and beneficially owned 30.9% of the Operating Partnership; Holdco is a tenant. The lease amendments and related rent exposure warrant attention.
Most important facts for investors to verify
- Subsequent rent collections, deferred-rent repayment and tenant defaults, including Holdco’s $5.3 million termination payment and deferred rent.
- Cash runway and execution of planned asset sales or other financing; confirm lender approvals and the status of covenant metrics and interest deferrals.
- Whether the $400 million incremental facility becomes accessible and whether non-Sears tenant rent can meet its conditions.
- Progress, costs and leasing outcomes for restarted redevelopment projects, and the duration of projects remaining on hold.
- Developments in the Sears litigation and any resulting financial exposure; assess potential impairments as market conditions evolve.
- Any changes to common or preferred distributions and the company’s ability to maintain debt service.