Seritage Growth Properties — Q1 2021 Form 10-Q
Business context and period. This quarterly report covers the three months ended March 31, 2021, compared with Q1 2020. Seritage owns, redevelops, manages, and leases retail and mixed-use real estate. Its portfolio included interests in 179 properties totaling approximately 26.0 million square feet. The last five properties under the Holdco master lease were terminated effective March 15, 2021; Seritage reported no remaining Sears or Holdco-occupied properties at quarter-end.
Key financial metrics
| Metric | Q1 2021 | Q1 2020 / prior date |
|---|---|---|
| Total revenue | $31.3 million | $33.3 million |
| Rental income | $31.1 million | $33.1 million |
| Net loss | $10.9 million | $31.0 million |
| Net loss attributable to common shareholders | $8.9 million; $0.23 per share | $21.9 million; $0.59 per share |
| Operating cash flow | $(12.1) million | $(10.2) million |
| Investing cash flow | $7.5 million | $(31.0) million |
| Cash and cash equivalents | $137.9 million | $143.7 million at December 31, 2020 |
| Term Loan Facility | $1.6 billion principal; 7.0% rate; due July 2023 | $1.6 billion at December 31, 2020 |
At March 31, total assets were $2.61 billion, total liabilities $1.74 billion, and total equity $871.4 million. Restricted cash was $6.5 million. The company reported $24.2 million of gains on real estate sales, a $1.7 million impairment of one property, $26.2 million of interest expense, and $7.6 million of interest and other income. The filing does not provide a clear breakdown of that interest and other income amount.
Supplemental non-GAAP measures: NOI was $7.9 million versus $15.2 million, Total NOI (including Seritage’s share of unconsolidated properties) was $9.4 million versus $15.8 million, and Company FFO attributable to common shareholders and unitholders was a loss of $22.0 million versus a loss of $18.4 million. Management cautions that these measures are not substitutes for GAAP results or cash flow.
Material changes versus Q1 2020
- Revenue declined $2.0 million, including a $3.2 million reduction in Sears/Kmart rental income as master-lease properties were terminated. Q1 2021 Sears/Kmart income of $4.5 million consisted of termination income and agreed reimbursements.
- Net loss narrowed by $20.0 million, primarily because Q1 2020 included $19.1 million of accelerated depreciation and amortization. Q1 2021 also recorded higher gains on property sales. Interest expense increased $4.6 million, largely because less interest was capitalized as development activity declined.
- Four properties were sold for aggregate consideration of $46.9 million, producing $24.2 million of gains. Net sale proceeds were $44.2 million. The company invested $26.8 million in consolidated real estate development and $9.9 million in unconsolidated entities.
- General and administrative expense rose $1.8 million, driven by legal costs related to litigation and annual audit fees. Real estate taxes increased $0.9 million and property operating expenses increased $0.3 million.
- Class A shares outstanding increased to 40.6 million from 38.9 million at year-end, primarily following exchange of Operating Partnership units for shares.
Liquidity, outlook, and risks
- Rental income did not cover operating obligations, debt service, and other costs in Q1; operating cash outflow was $12.1 million. Management expects obligations to continue exceeding rental income and plans to rely on cash on hand and asset dispositions, among other possible capital sources.
- Seritage was not in compliance with certain Term Loan financial metrics at quarter-end. As a result, Berkshire Hathaway’s consent is required for asset sales or joint ventures. The lender had consented to submitted transactions as of the filing, but future consent is not assured. The filing says the company believes it complied with the other loan terms.
- The $400 million incremental loan facility was not available based on current conditions: access requires annualized rental income from non-Sears tenants of at least $200 million, and Seritage had not achieved that threshold. The company had not deferred any loan interest.
- Management stated it believed its liquidity plans were probable to be implemented within one year after the financial statements were issued and would provide necessary cash flows. Subsequent to quarter-end, two properties were sold for $16.3 million gross proceeds; as of April 30, the company had contracts to sell additional assets for anticipated gross proceeds of $90.2 million, subject to due diligence and closing conditions.
- COVID-19 remained a significant uncertainty. Seritage reported collecting 97% of Q1 rental income and agreeing to defer an additional 2%; it could not reasonably estimate the pandemic’s future financial impact or assure future tenant payments.
- A pending Sears-related lawsuit alleges, among other claims, that the 2015 transactions were fraudulent transfers and asserts that the acquired real estate was worth $649 million to $749 million more than the purchase price. The plaintiffs seek rescission or damages; Seritage disputes the claims and intends to defend itself. No litigation liability was recorded. The company also sued certain D&O insurers over coverage for defense costs.
- No common-share dividends were declared in Q1. The Series A preferred shares carry a 7.00% dividend; $1.225 million of preferred dividends were paid during the quarter. No formal earnings guidance is provided in the filing.
Important facts for investors to verify
- Progress and realized proceeds from planned property sales, and whether lender approvals continue to be obtained.
- Cash burn, upcoming obligations, and the company’s ability to maintain liquidity without access to the incremental facility.
- Compliance with Term Loan covenants, collateral requirements, interest payments, and the July 2023 maturity.
- Tenant rent collections, deferred rent recoveries, and leasing or occupancy trends following the Sears/Holdco exits.
- Developments and potential exposure in the Sears litigation and the dispute with D&O insurers.
- Expected spending, financing, and execution risks for major redevelopment and multifamily projects.