Seritage Growth Properties — Q3 2023 Form 10-Q
Business context and reporting period
Quarter and nine months ended September 30, 2023. Seritage is executing a shareholder-approved plan to sell its assets, distribute net proceeds and dissolve, while continuing to manage remaining properties. The portfolio comprised interests in 42 properties: 33 consolidated and nine unconsolidated. The strategic review remains ongoing; completion of the plan is not assured.
Key financial metrics
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $5.0m | $23.5m | $11.6m | $84.1m |
| Net loss | $0.9m | $3.5m | $158.6m | $212.6m |
| Net loss per common share | $0.04 | $0.08 | $2.89 | $3.57 |
| NOI, non-GAAP | $0.3m | $10.0m | $3.9m | $27.5m |
| Total NOI, including proportionate share of unconsolidated properties, non-GAAP | $1.1m | $12.2m | $7.2m | $33.2m |
At September 30, total assets were $1.016bn, total liabilities $456.0m, and equity $560.3m. Cash and cash equivalents were $98.9m, plus restricted cash of $16.0m. Operating cash flow was negative $42.0m for the nine months; investing cash flow was positive $645.6m, and financing cash flow was negative $633.6m. Capital expenditures/development spending was $61.6m for consolidated properties and $11.9m for unconsolidated entities.
Term-loan principal was $400m at quarter-end, bearing 7% interest and due July 31, 2025; a $40m post-quarter prepayment reduced the balance to $360m. The Company had repaid $630m during the first nine months of 2023. Preferred dividends were $3.7m for the nine-month period; no common dividends were declared.
Changes versus prior comparable periods
- Revenue fell substantially, primarily because of asset sales; nine-month rental income also included a $16.3m reversal of previously recorded straight-line rent related to property sales.
- Interest expense declined to $37.5m for nine months from $67.2m, reflecting debt repayments. Lower property expenses and depreciation also largely reflect the smaller portfolio.
- Nine-month net loss improved from $212.6m to $158.6m, but remained significant. Results included $107.0m of real-estate impairment, versus $120.6m a year earlier, and $49.1m of equity-method losses, versus $69.1m.
- Asset-sale gains were lower: $64.4m for nine months versus $112.4m. The Company reported $602.4m of gross proceeds from consolidated property sales and $141.6m of proceeds from dispositions of unconsolidated interests.
Outlook, risks and unusual items
- Management expects obligations and development spending to continue exceeding rental income, with funding expected from cash on hand and asset sales. It cited $78m of anticipated proceeds from properties under contract and concluded its plans alleviate substantial doubt about the Company’s ability to continue as a going concern for the applicable assessment period.
- The Company was not in compliance with certain financial metrics under its term loan, but disclosed no other impacts from that noncompliance; asset-sale exceptions are provided by a loan amendment. The $400m incremental facility remains inaccessible because rental-income requirements have not been met.
- Real-estate impairments of $107.0m for nine months included $101.5m related to the Aventura, Florida development, citing rising construction costs and deteriorating market conditions. The Company recorded $12.7m of other-than-temporary impairment on unconsolidated investments and warned that further impairments are possible.
- The Company recognized $11.6m of insurance-settlement proceeds in interest and other income during the nine months. The Sears-related litigation was settled and dismissed in 2022; the $35.5m settlement expense was recorded then.
- A full $213.1m valuation allowance was recorded against deferred tax assets. Management cited cumulative losses and uncertainty around future asset sales and tax-asset utilization.
- Disclosure controls and internal control over financial reporting were deemed ineffective due to a material weakness in identifying impairment indicators for real-estate investments and documenting review. Remediation is underway but was not complete at quarter-end.
- No specific financial guidance was provided. Key execution risks include sale timing and prices, continued cash burn, development costs, asset-value impairments, and the unresolved control weakness. Environmental liabilities and uninsured losses exceeding coverage are also disclosed risks.
Most important facts for investors to verify
- Progress, prices and timing of asset sales, including whether contracted proceeds close as anticipated and the remaining assets’ sale values.
- Cash needs, development commitments and debt paydown pace relative to declining rental income; confirm the post-quarter $40m loan prepayment and $360m balance.
- Compliance with loan covenants, the July 2025 maturity, and whether the Company can maintain liquidity through completion of its sale plan.
- Potential further impairments, particularly at Aventura and in unconsolidated investments, and the assumptions supporting reported fair values.
- Whether management remediates the material weakness and establishes effective impairment controls.
- Distribution priorities between debt repayment, preferred dividends and any future shareholder distributions; the Board says future distributions will be considered following further loan paydown.