Seritage Growth Properties — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. This filing reports annual results; it does not provide a clear standalone fourth-quarter results summary. Amounts below are in U.S. dollars.
Business context
Seritage is a REIT that owns, leases, redevelops and sells retail and mixed-use real estate. At year-end, its portfolio comprised interests in 162 properties with approximately 19.2 million square feet of gross leasable or build-to-suit area, including 137 wholly owned properties and 25 unconsolidated properties. The company had no remaining properties leased to Sears or Transform Holdco after the final five lease terminations in March 2021. Its stated priorities include multi-tenant retail, residential and mixed-use development, and monetization of non-core assets.
Financial and operating results
| Metric | 2021 | 2020 | Change / context |
|---|---|---|---|
| Total revenue | $116.7 million | $116.5 million | Little change |
| Rental income | $115.7 million | $116.2 million | Down $0.6 million; Sears/Kmart rent fell $10.2 million, partly offset by $4.1 million growth from diversified tenants |
| Net loss | $39.0 million | $153.0 million | Improved, with higher sale gains and lower depreciation, partly offset by impairments and higher interest expense |
| Net loss attributable to common shareholders | $33.0 million; $0.78 per share | $109.9 million; $2.87 per share | Improved |
| NOI / Total NOI | $29.9 million / $35.5 million | $33.9 million / $37.8 million | Both declined; company-defined non-GAAP measures |
| Operating cash flow | $(136.0) million | $(47.3) million | Cash outflow increased |
| Investing cash flow | $260.7 million | $42.9 million | Driven by property-sale proceeds |
| Financing cash flow | $(161.2) million | $15.4 million | Includes $160.0 million term-loan principal repayment |
Property-sale activity generated $395.4 million of gross proceeds from 21 properties and outparcels; Seritage also contributed a property to a joint venture for $30.0 million. Total reported gains on dispositions and contributions were approximately $219.6 million. The company recorded $95.8 million of impairment charges on 39 real estate assets, compared with $64.1 million in 2020. Interest expense rose to $108.0 million from $91.3 million.
At December 31, 2021, total assets were $2.41 billion, total equity was $844.8 million, cash and cash equivalents were $106.6 million, and restricted cash was $7.2 million. The $1.44 billion term loan carried a fixed 7.0% rate; sales-leaseback financing obligations were $20.6 million. Cash, cash equivalents and restricted cash together declined by $36.5 million during 2021.
Of the multi-tenant retail portfolio, 85.1% was leased, with a pipeline of 0.2 million square feet. Across all properties, the filing reports 39.8% leased (40.5% at Seritage’s proportional share). One tenant represented 10.2% of annualized base rent. COVID-related rent collection was 97% for 2021, with a further 1% agreed to be deferred.
Material changes, outlook and risks
- Liquidity and debt: Rental income did not cover operating, administrative and debt-service obligations in 2021. Management expects obligations to continue to exceed rental income and plans to rely on cash and asset sales, among other potential sources, to fund obligations and development. As of March 11, 2022, 13 assets were under contract for anticipated proceeds of $146.3 million, subject to diligence and closing conditions.
- Loan terms and covenants: Seritage was not compliant with certain financial metrics under its term loan facility at year-end. This was not described as an event of default, but restricts asset dispositions without lender consent and has triggered mortgage and collateral requirements. The lender had consented to transactions submitted through year-end; future consent is not assured. A $400 million incremental facility was unavailable because rental-income conditions had not been met.
- Maturity: The $1.44 billion loan matures July 31, 2023. An amendment permits a two-year extension to July 31, 2025 only if principal is reduced to $800 million by the applicable maturity date; otherwise the loan is due then. Seritage identified property sales as its primary planned source of repayment.
- Strategic review: On March 1, 2022, the board announced a review of strategic alternatives, overseen by a special committee with a financial advisor. The review was in its early stages, with no assurance of a transaction or strategic change. Chairman Edward Lampert retired and resigned from the board effective that date; two other trustees said they would not stand for reelection.
- Litigation: Sears-related plaintiffs allege that historical transactions, including Seritage’s 2015 formation and property acquisition, involved fraudulent transfers; the complaint cites an alleged property-value shortfall of $649 million to $749 million. Seritage disputes the claims. The company recorded no litigation liability at year-end and states it cannot predict the outcome or estimate potential losses. It also sued D&O insurers over coverage of defense costs.
- Distributions: No common-share dividend has been declared since 2019. The company continued quarterly dividends on its 7.00% Series A preferred shares; preferred dividends totaled $4.9 million in 2021. Common and preferred distributions remain subject to board discretion, cash needs and debt restrictions.
- Other risks and unusual items: COVID-19’s future effects could not be reasonably estimated. Development returns, lease-up, construction costs, asset-sale execution, environmental exposures and REIT qualification remain risks. The filing also corrected an immaterial classification error in previously reported quarterly 2021 cash flows, shifting approximately $11 million between operating and investing cash-flow classifications; annual cash flows were not otherwise affected.
Most important facts for investors to verify
- Whether asset sales close on expected terms and provide enough proceeds to cover recurring cash deficits and the loan’s required principal reduction.
- Current lender approvals, covenant status, collateral requirements and the feasibility of extending or refinancing the term loan.
- Progress and economics of signed-not-open leases, redevelopment projects and the reported retail leasing pipeline.
- Developments in the Sears litigation and the D&O insurance dispute, including any change in potential exposure or recorded contingencies.
- Outcomes of the strategic review, board changes, and any resulting effect on common-share value, preferred dividends or capital allocation.