Seritage Growth Properties — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; comparative period is Q1 2023. Seritage is executing a shareholder-approved plan to sell its assets, distribute net proceeds and dissolve, while remaining open to other value-maximizing alternatives, including a potential company sale. At quarter-end, its portfolio comprised interests in 27 properties, approximately 3.5 million square feet and 410 acres.
Financial performance and position
| Metric | Q1 2024 | Q1 2023 / prior date |
|---|---|---|
| Total revenue | $5.8 million | $0.7 million |
| Net loss | $19.0 million | $62.0 million |
| Net loss per Class A share | $0.36 | $1.13 |
| Net cash used in operating activities | $16.6 million | $22.0 million |
| Net cash provided by investing activities | $28.9 million | $240.3 million |
| Cash and cash equivalents | $114.9 million | $134.0 million at Dec. 31, 2023 |
| Restricted cash | $15.9 million | $15.7 million at Dec. 31, 2023 |
| Term loan principal | $330.0 million | $360.0 million at Dec. 31, 2023 |
| Total liabilities / total equity | $371.0 million / $543.6 million | $410.7 million / $563.2 million at Dec. 31, 2023 |
Amounts are rounded. Property NOI was $0.8 million and Total NOI, including Seritage’s proportional share of unconsolidated properties, was $2.1 million, versus $1.6 million and $3.1 million, respectively, in Q1 2023. These non-GAAP measures are not substitutes for cash flow or net income; the filing does not provide a clear operating margin measure.
Q1 investing cash inflows included $44.3 million of net real estate sale proceeds, offset by $12.5 million of consolidated development spending and $2.9 million invested in unconsolidated entities. Financing outflows included $30.0 million of loan principal repayment and $1.2 million of preferred dividends. Seritage reported $7.0 million of interest expense.
Changes versus Q1 2023
- Revenue increased, but this comparison is distorted by a much smaller straight-line rent expense in Q1 2024; in-place retail lease income decreased by $5.5 million, primarily due to property sales.
- Net loss narrowed by $43.0 million, principally because Q1 2023 included Seritage’s $35.4 million share of an unconsolidated entity’s impairment. Lower interest expense ($8.2 million less) also helped, following loan repayments.
- Property operating expenses fell $4.5 million, primarily due to asset sales and insurance refunds; general and administrative expenses fell $3.0 million due to lower compensation and consulting costs.
- Real estate sale gains declined to $1.1 million from $12.4 million. Seritage sold five consolidated properties for $48.8 million gross proceeds, versus $290.8 million in Q1 2023.
- Operating cash outflow improved by $5.3 million, while investing cash inflow was substantially lower because asset-sale proceeds were lower than in Q1 2023.
Outlook, risks and unusual items
- Asset-sale strategy: Management expects obligations and development spending to continue exceeding rental income and anticipates funding them through cash on hand, property sales and potentially financing. Subsequent to quarter-end, Seritage sold two consolidated properties for $31.8 million gross proceeds. As of May 7, four assets were under contract, with anticipated proceeds of $30.1 million, subject to closing conditions.
- Liquidity and going concern: Management concluded its plans alleviate substantial doubt about the company’s ability to continue as a going concern for one year after issuance of the financial statements. Its assessment relies on existing cash and anticipated proceeds from contracted asset sales. The loan matures July 31, 2025 and was not treated as an obligation due within that one-year assessment period.
- Debt: The term loan bears 7.0% annual interest. Seritage made a further $50.0 million principal prepayment after quarter-end, reducing the balance to $280.0 million as of May 1, 2024. It was not in compliance with certain financial metrics, which restrict asset dispositions and trigger collateral requirements, but the filing says this did not constitute an event of default. It has not met the rental-income conditions to access the $400 million incremental facility.
- Additional post-quarter item: Seritage exercised an early termination right for its corporate office lease, shortening the lease by 37 months and paying a $1.6 million termination fee after quarter-end.
- Impairments and tax: Q1 included $1.1 million of real estate impairment after accepting below-book offers for two properties. The company maintained a full $203.6 million valuation allowance against deferred tax assets, citing cumulative losses and uncertainty around asset sales and utilization.
- Distributions: No common dividend was declared. Preferred dividends were $1.225 million for the quarter; the Series A preferred shares have a $70 million liquidation preference.
- Controls and contingencies: Disclosure controls were deemed ineffective due to continuing material weaknesses involving real estate and equity-method investment impairment controls and accounting for certain non-routine transactions. Remediation remains ongoing. The company also describes environmental, insurance and ordinary-course legal risks; management does not expect current ordinary-course matters to have a material effect.
Important facts for investors to verify
- Whether asset sales close on expected terms and timing, and whether proceeds cover operating needs, development costs and debt repayment.
- Whether the plan of sale or another strategic alternative delivers value, given management’s statement that no transaction or full execution is assured.
- Liquidity assumptions supporting the going-concern conclusion, particularly contracted-sale proceeds and continuing operating cash outflows.
- Term-loan covenants, maturity and collateral restrictions, including the effect of further repayments and the inability to access incremental funding currently.
- Progress in remediating material weaknesses and the potential for additional impairments or changes in deferred-tax-asset recoverability.