Seritage Growth Properties — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020; filed November 6, 2020. Seritage is a REIT focused on owning, leasing, redeveloping and repositioning retail and mixed-use real estate. At quarter-end, its portfolio included interests in 195 properties totaling approximately 30.4 million square feet. The financial statements are unaudited.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $33.7 million | $47.6 million | $88.8 million | $132.0 million |
| Net loss | $72.4 million | $16.5 million | $103.3 million | $53.3 million |
| Net loss attributable to Seritage common shareholders | $51.3 million | $12.1 million | $74.3 million | $38.4 million |
| Net loss per common share | $1.33 | $0.33 | $1.95 | $1.06 |
| Company-defined NOI | $4.7 million | $13.9 million | $26.1 million | $47.1 million |
| Company-defined Total NOI, including share of unconsolidated entities | $6.0 million | $14.7 million | $29.1 million | $53.6 million |
| Net cash used in operating activities | — | $25.3 million | $38.3 million | |
| Net cash used in investing activities | — | $9.7 million | $227.0 million | |
| Cash and cash equivalents at September 30 | — | $118.2 million | — |
Amounts are in U.S. dollars. NOI and Total NOI are non-GAAP supplemental measures; the filing cautions that they are not substitutes for GAAP results or cash flow. The filing does not present a clear consolidated operating-margin measure.
- Balance sheet: Total assets were $2.743 billion, total liabilities $1.803 billion and total equity $939.8 million. Cash and restricted cash together were $120.9 million.
- Debt: The Term Loan Facility had approximately $1.6 billion outstanding, at a fixed 7.0% annual rate, and matures July 31, 2023. The company reported $66.4 million of interest expense for the nine-month period; cash interest paid was $85.6 million, with $22.2 million capitalized.
- Liquidity and cash use: Nine-month development expenditures were $195.0 million; real estate sale proceeds were $234.8 million. Preferred dividends paid were $3.7 million; no common dividends were paid in 2020.
Material changes versus prior comparable periods
- Q3 revenue fell 29% year over year, and nine-month revenue fell 33%. Rental income declined $12.9 million in Q3 and $40.4 million for the nine-month period.
- The nine-month decline in rental income reflected $30.1 million less Sears/Kmart rent and a $19.2 million reduction in straight-line rent, partly offset by $7.6 million more rent from diversified tenants. Recaptures and lease terminations, asset sales, collectability concerns and rent reversals affected results.
- Q3 loss widened to $72.4 million, including a $30.0 million downward revaluation of the Mark 302 joint venture contribution value and $14.6 million of real estate impairment charges. Nine-month results included a $60.0 million net gain on real estate sales, partly offset by the Mark 302 revaluation and $16.4 million of impairments.
- Nine-month depreciation and amortization rose $13.4 million, while general and administrative expense rose $3.1 million, partly due to litigation costs and lower capitalization of personnel costs as development slowed. Interest expense decreased $1.2 million for the nine months.
- Operating cash outflow improved by $13.0 million year over year, while investing cash outflow was substantially lower, chiefly reflecting reduced development spending and higher property-sale proceeds.
Outlook, risks and unusual items
- COVID-19 and rent collection: As of October 30, approximately 95% of in-place tenants were open or operating in some capacity. Seritage had collected 86% of Q3 rental income and agreed to defer another 10%; it had collected 86% of October rent and agreed to defer another 8%. Management said it could not reasonably estimate the pandemic’s future financial impact.
- Liquidity: Management said obligations were projected to continue to exceed property rental income and that it did not then have liquid funds available to meet obligations and development expenditures. It planned to rely on cash, asset and joint-venture interest sales, and potential credit or capital-markets transactions. Management judged it probable these plans would be implemented within one year and provide necessary cash flows. Substantial reliance on dispositions and financing remains a key risk.
- Loan covenants and funding: Seritage was not in compliance with certain Term Loan financial metrics at September 30. As a result, lender consent was required for asset dispositions; the lender had approved transactions submitted through that date, but future consent was not assured. The $400 million incremental facility requires at least $200 million of qualifying annualized rent from non-Sears tenants; the company said it had not achieved that threshold. It had not deferred loan interest under the May 2020 amendment.
- Development: Most announced redevelopment projects remained on hold. Seritage reported 12 projects in various stages of redevelopment. It continued limited work on selected suburban retail projects and premier properties, while reassessing schedules and financing for multifamily projects.
- Portfolio and leases: In June, Seritage terminated the Holdco master lease at 12 properties for a $5.3 million termination payment and deferred six months of base rent for the five remaining Holdco-leased stores. Holdco had a right to terminate those 12 properties without penalty. By October 30, Seritage had collected 86% of Q3 rental income, with agreed deferrals as noted above.
- Unusual valuation item: Seritage reduced the Mark 302 JV contribution value from $90 million to $60 million, recognized a $30 million loss and recorded a $15 million reduction in its JV investment plus a $15 million payable. Subsequent to quarter-end, the revaluation date was extended to September 30, 2021, subject to a $1.1 million fee.
- Legal contingency: Sears-related plaintiffs allege, among other matters, that Seritage’s 2015 property acquisition was worth $649–$749 million more than the purchase price and seek rescission or damages. Seritage disputes the claims and is defending them; it recorded no litigation liability. A partial motion to dismiss was awaiting a decision.
- Distributions: The board had not declared common dividends since the first quarter of 2019. The 7.00% Series A preferred shares continued to receive declared dividends. Management said distributions would be made at least as needed to satisfy REIT requirements.
Important facts for investors to verify
- Whether rent collections and deferred-rent repayments improve, and whether tenants remain open and meet lease obligations.
- Whether asset sales, joint-venture transactions or new financing generate enough liquidity, and whether the lender approves required dispositions.
- Compliance with Term Loan metrics, access to the incremental facility, and the company’s ability to service or refinance its $1.6 billion loan before its 2023 maturity.
- Further developments in the Sears litigation, including potential exposure and whether any liability is ultimately recognized.
- Mark 302 JV valuation and settlement outcomes, future impairment charges, and progress or delays in restarting redevelopment projects.