Seritage Growth Properties — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021; filed August 9, 2021. Seritage is a REIT focused on owning, redeveloping, managing and leasing retail and mixed-use properties. Its portfolio included interests in 172 properties totaling approximately 24.9 million square feet. No properties remained leased to Sears or Transform Holdco after the final five lease terminations became effective March 15, 2021.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $27.9 million | $21.8 million | $59.2 million | $55.1 million |
| Rental income | $27.6 million | $21.6 million | $58.7 million | $54.8 million |
| Net income (loss), consolidated | $(95.3) million | $0.1 million | $(106.2) million | $(30.9) million |
| Net loss attributable to common shareholders | $(74.1) million | $(1.2) million | $(83.0) million | $(23.0) million |
| Loss per common share | $(1.73) | $(0.03) | $(2.02) | $(0.61) |
| Net operating income (NOI), non-GAAP | $6.1 million | $6.2 million | $14.0 million | $21.4 million |
| Total NOI, including unconsolidated properties, non-GAAP | $7.6 million | $7.3 million | $17.0 million | $23.1 million |
Q2 results included $64.5 million of real estate impairment, versus $1.8 million a year earlier; first-half impairment was $66.2 million versus $1.8 million. The company recorded $18.1 million of Q2 gains on property sales and $42.3 million for the first half. Interest expense increased to $29.0 million for Q2 and $55.1 million for the first half. The filing does not provide a single comparable operating-margin percentage.
- Cash flow, first half: Operating cash outflow was $56.6 million, compared with $18.3 million in 2020. Investing activities provided $56.1 million, principally from $122.3 million of property-sale proceeds, offset by $44.9 million of development spending and $21.3 million invested in unconsolidated entities. Financing cash outflow was $2.5 million. Cash and restricted cash ended at $147.2 million.
- Liquidity and balance sheet at June 30: Cash and cash equivalents were $140.1 million; total assets were $2.50 billion; total equity was $774.9 million. The $1.6 billion Term Loan Facility is due July 31, 2023, bears 7.0% interest, and is secured. Sales-leaseback financing obligations were $20.6 million.
- Other measures: The company reported negative FFO attributable to common shareholders and unitholders of $33.9 million for Q2 and $52.7 million for the first half. Company FFO, a company-defined non-GAAP measure, was negative $29.3 million and $51.3 million, respectively.
Material changes versus prior comparable periods
- Revenue increased, but the first-half consolidated net loss widened substantially. The quarter’s impairment charge was the principal unusual earnings item.
- First-half rental income rose by $4.0 million, partly reflecting new leases at former Sears/Kmart locations and changes in straight-line rent. Sears/Kmart rental income fell to $4.5 million from $7.7 million; the remaining Sears occupancy ended in March 2021.
- First-half NOI declined to $14.0 million from $21.4 million. The company cited lower Sears-related income and property sales; comparisons also reflect prior-year straight-line rent reversals and accelerated lease-intangible amortization.
- First-half general and administrative expense rose $5.2 million, including compensation, severance and restructuring, insurance and legal costs. Interest expense rose $11.5 million, including mortgage-recording costs and reduced capitalized interest.
- Class A shares outstanding increased to 42.8 million from 38.9 million at year-end 2020, principally through exchanges of Operating Partnership units.
Outlook, risks and unusual items
- Management said obligations are expected to continue exceeding property rental income. It plans to fund obligations and development with cash on hand and capital sources including property sales, joint ventures and other transactions. Management judged its plans probable to be implemented within one year of issuance, but liquidity depends in part on execution and required lender approvals. No formal earnings or operating guidance was provided.
- The company was not in compliance with certain Term Loan financial metrics at June 30. This was not reported as an event of default, but it restricts asset sales and joint-venture dispositions without Berkshire Hathaway’s consent; consent had been obtained for transactions submitted through the filing date. Access to the $400 million incremental facility remained unavailable because required annualized non-Sears tenant rent of at least $200 million had not been achieved.
- COVID-19 remained a source of uncertainty. Seritage reported collecting 96% of rent for the periods and agreeing to defer an additional 2%; it could not reasonably estimate the future financial impact or rule out further tenant modifications.
- The Q2 impairment review followed an organizational restructuring and portfolio review. Approximately $30.6 million of the quarter’s impairment related to a decision to monetize additional assets through sales or development joint ventures. The company sold 11 properties or pad sites for $126.9 million gross consideration in the first half. After quarter-end, it reported one property sale for $3.5 million and contracts for additional assets expected to generate $90.6 million, subject to due diligence and closing conditions; it also contributed interests in two properties to joint ventures for approximately $15.9 million.
- A Sears-related bankruptcy lawsuit alleges fraudulent transfers involving the 2015 transactions and seeks rescission or damages; plaintiffs allege the properties transferred to Seritage were worth $649 million to $749 million more than the purchase price. Seritage disputes the claims, is defending them, and recorded no litigation liability. The company also sued certain D&O insurers over defense costs. Outcomes and potential financial exposure are uncertain.
- No Class A common dividend was declared in the first half; the company continued preferred dividends at the 7.00% Series A rate. Management said distributions would be made at a minimum to satisfy REIT requirements.
Investor verification priorities
- Track operating cash burn, available unrestricted cash, required development spending and the timing and proceeds of planned asset sales or joint ventures.
- Verify continuing compliance with loan covenants, lender consent for dispositions, the collateral position, and the July 2023 loan maturity and refinancing plan.
- Assess whether new leases and redevelopment can replace former Sears occupancy and support rental income, NOI and the $200 million threshold for incremental borrowing.
- Review the assumptions behind the $66.2 million first-half impairment and subsequent portfolio monetization decisions.
- Monitor tenant rent collections and deferrals, as well as developments in the Sears litigation and the D&O insurance dispute.