Seritage Growth Properties — FY2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023. Seritage is a taxable C corporation and is executing a shareholder-approved Plan of Sale: sell its assets, distribute net proceeds and dissolve, subject to the board’s ability to suspend the plan. At year-end, its portfolio comprised interests in 32 properties, with approximately 4.1 million square feet and 460 acres.
Financial and operating performance
| Metric | FY2023 | FY2022 |
|---|---|---|
| Total revenue | $20.8 million | $107.1 million |
| Rental income | $15.1 million | $104.6 million |
| Net loss | $154.9 million | $120.1 million |
| Net loss per Class A share | $2.85 | $1.59 |
| Net cash used in operating activities | $53.1 million | $117.9 million |
| Net cash provided by investing activities | $732.9 million | $586.1 million |
| Net cash used in financing activities | $675.1 million | $437.0 million |
| Year-end cash and cash equivalents | $134.0 million | $133.5 million |
| Year-end term loan balance | $360.0 million | $1,029.8 million |
- Reported NOI was $4.7 million, down from $37.5 million; Total NOI, including Seritage’s share of unconsolidated entities, was $8.6 million versus $43.5 million.
- Seritage sold 60 wholly owned assets for $702.0 million gross proceeds and monetized eight unconsolidated properties for $140.7 million gross proceeds. It recorded a $96.2 million gain on real estate sales.
- Real estate impairment charges were $107.0 million, including $101.5 million for the Aventura, Florida development property. Equity in losses of unconsolidated entities was $55.9 million.
- Development investment totaled $79.7 million in consolidated properties and $13.4 million in unconsolidated joint ventures.
- At year-end, total assets were $973.9 million, total liabilities $410.7 million, and total equity $563.2 million. The $360 million term loan bears a fixed 7% rate and matures July 31, 2025. Subsequent prepayments reduced it to $330 million by March 22, 2024.
Material changes versus FY2022
- Rental income fell $89.5 million, primarily because of asset sales. Total revenue declined as the portfolio contracted under the sale strategy.
- Net loss widened by $34.8 million. Lower property costs, depreciation and interest expense were outweighed by lower sale gains and ongoing impairment and equity-method losses.
- Interest expense declined $42.2 million to $44.6 million following substantial loan repayments. Seritage repaid $670 million of term-loan principal during 2023.
- Operating cash outflow improved by $64.9 million, but property rental income still did not cover operating obligations and other expenses.
- Common dividends were not declared in 2023; the last common dividend was paid in 2019. Preferred dividends totaled $4.9 million in 2023.
Outlook, risks and unusual items
- Plan of Sale and liquidity: Management expects obligations and certain development spending to continue exceeding rental income. It plans to fund them with cash, property and joint-venture sales, and potentially financing. Management concluded these plans alleviate substantial doubt about the company’s ability to continue as a going concern for the year after the financial statements were issued; the auditor identified liquidity as a critical audit matter.
- As of March 22, 2024, assets under contract represented anticipated proceeds of $53.6 million. Sales remain subject to closing conditions. Management provided no assured amount or timing for shareholder distributions; proceeds depend on sale prices, debt repayment, preferred-share redemption, expenses, taxes and other liabilities.
- Management cited higher interest rates, limited debt availability, inflation and construction costs, weaker office demand and other market uncertainty as factors weighing on asset values and potential distributions. No quantified earnings or distribution guidance is provided.
- The company was not in compliance with certain term-loan financial metrics at year-end. The filing says this triggers collateral requirements and restricts certain actions, but is not itself an event of default. Nearly all consolidated properties were mortgaged at the lender’s request. The company reported compliance with other loan terms.
- Seritage recorded a $35.5 million Sears-related litigation settlement in 2022; it received $11.6 million from D&O insurers in 2023. The filing says ordinary-course legal matters are not expected to have a material effect, but discloses litigation over a ground-lease renewal option.
- The auditor gave an unqualified opinion on the financial statements but an adverse opinion on internal control over financial reporting. Unremediated material weaknesses involve impairment controls and accounting for certain non-routine transactions.
- The company remains a taxable corporation after ending its REIT election effective January 1, 2022. It recorded a full valuation allowance against deferred tax assets, totaling $198.8 million at year-end 2023.
Most important facts for investors to verify
- Actual net proceeds and timing of asset sales, and how those proceeds translate into common-shareholder distributions after debt, preferred claims, costs and taxes.
- Cash runway and execution of planned sales, given recurring operating cash outflows and reliance on asset monetizations.
- Term-loan repayment progress, maturity and covenant/collateral requirements, including any effect on asset dispositions.
- Progress in leasing and opening signed-not-yet-open leases, development costs and the recoverability of Aventura and other impaired assets.
- Remediation and testing of internal-control material weaknesses, and developments in the ground-lease litigation.
- Preferred-share dividend and redemption priorities relative to any eventual common-share distributions.