Seritage Growth Properties — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Dollar amounts below are in millions unless noted. The company is executing a shareholder-approved Plan of Sale to monetize its real estate assets and ultimately dissolve; it continues to manage properties pending sale.
Business context and portfolio
At June 30, the portfolio comprised interests in 50 properties, with approximately 6.8 million square feet of gross leasable or build-to-suit area. This included 38 consolidated properties and 12 unconsolidated properties. Eight multitenant retail assets were 73% leased, with a 0.1 million-square-foot leasing pipeline. Seritage operates as a taxable C corporation effective January 1, 2022, rather than as a REIT.
Financial results and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $5.9 | $29.7 | $6.6 | $60.6 |
| Net loss | $(95.7) | $(142.1) | $(157.7) | $(209.1) |
| Net loss per Class A share | $(1.73) | $(2.56) | $(2.85) | $(3.79) |
| Net cash from (used in) operating activities | Not presented quarterly | Not presented quarterly | $(31.5) | $(54.5) |
| Net cash provided by investing activities | Not presented quarterly | Not presented quarterly | $506.8 | $99.9 |
- Q2 rental income was $5.5 million versus $29.4 million; six-month rental income was $5.9 million versus $58.5 million. Management attributes the decrease primarily to property sales and reversals of straight-line rent, including a $14.6 million six-month reversal.
- Q2 impairment charges were $104.5 million, including $101.5 million related to the Aventura, Florida development. Six-month real estate impairment was $107.0 million; impairment of unconsolidated investments was $12.7 million for the six months.
- Six-month real estate sales generated $539.5 million gross proceeds; disposition of an unconsolidated-entity interest generated $49.4 million in net proceeds. Investing cash flow also reflects $49.9 million of consolidated development costs and $11.1 million invested in unconsolidated entities.
- Cash and cash equivalents were $124.9 million and restricted cash was $12.9 million at June 30. Total assets were $1.168 billion; total liabilities were $606.3 million; total equity was $561.7 million.
- The term loan carried a 7.0% rate and had $550 million principal outstanding at June 30, after $480 million of repayments during the half. Its maturity was extended to July 31, 2025. The company reported subsequent $70 million of principal repayments, but the filing gives conflicting resulting balances: $480 million in Note 6 and $470 million in MD&A.
- Q2 Total NOI, a company-defined non-GAAP measure, was $3.0 million versus $10.6 million; six-month Total NOI was $6.1 million versus $21.1 million. The filing cautions that NOI is not a substitute for GAAP earnings or cash flow.
Changes, outlook, and risks
- Lower rental income and property expenses mainly reflect asset dispositions. Interest expense fell to $12.5 million in Q2 from $22.7 million, and to $27.7 million for the half from $45.3 million, primarily following debt paydowns. The prior-year periods included a $35.0 million litigation-settlement expense; 2023 also included $11.6 million of insurer-settlement proceeds in the first half.
- Management expects obligations and development spending to continue exceeding property rental income, and expects to fund them through cash on hand and asset sales, among other potential sources. It stated that contracted-sale proceeds, expected minimum put-option proceeds of $160.2 million, and existing cash should fund obligations and certain development costs over the next year, and concluded its plans alleviate substantial doubt about going concern.
- The strategic review remains ongoing; management gives no assurance that all assets can be sold or that the review will result in another transaction. Additional impairment charges remain possible as sale plans, offers, development costs, market conditions, and holding periods are reassessed.
- The company was not in compliance with certain loan financial metrics at June 30, triggering springing collateral requirements, but said there were no other impacts from noncompliance. Access to the $400 million incremental facility remains unavailable because the company has not met its rental-income tests.
- Seritage reported a material weakness in controls over timely identification of real estate impairment indicators and documentation of review. Remediation is underway but is not considered complete; management said the financial statements fairly present the reported periods.
- The company recorded a full $201.3 million valuation allowance against deferred tax assets. Common dividends were not declared; preferred dividends continued. The Sears-related litigation was settled and dismissed in 2022; insurer settlements produced $11.6 million in 2023. Ordinary-course legal matters were not expected by management to have a material effect.
Most important facts for investors to verify
- Confirm the post-quarter term-loan balance: the filing states both $480 million and $470 million after the $70 million repayment.
- Track sale closings, realized proceeds versus carrying values, and whether remaining sale proceeds cover operating costs, debt service, and development spending.
- Monitor further impairments, particularly for Aventura and unconsolidated investments, and the assumptions used in property valuations.
- Assess progress in remediating the impairment-control material weakness and whether it affects future reporting reliability.
- Review the timing and terms of expected put-option proceeds, the status of the strategic review, and the company’s ability to meet obligations through the planned sale process.