Seritage Growth Properties — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Amounts below are in millions unless otherwise noted. Seritage owns, leases, redevelops and is selling retail and mixed-use real estate. Its September 30 portfolio comprised interests in 121 properties and approximately 16.1 million square feet of gross leasable or build-to-suit area.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $23.5 | $29.0 | $84.1 | $88.2 |
| Net loss | $(3.5) | $(26.3) | $(212.6) | $(132.6) |
| Net loss attributable to common shareholders | $(4.7) | $(21.8) | $(170.1) | $(104.8) |
| Loss per common share, diluted | $(0.08) | $(0.50) | $(3.57) | $(2.50) |
| Interest expense | $21.9 | $26.7 | $67.2 | $81.8 |
- Rental income was $23.3 million in Q3, down from $28.8 million; for the nine months it was $81.8 million versus $87.6 million. The company attributed the Q3 decline mainly to property sales and lower straight-line rent adjustments. The year-to-date comparison also reflects the absence of Sears/Kmart rent, which ended in March 2021.
- Q3 included a $45.4 million gain on real estate sales and $10.3 million of real estate impairments. Nine-month results included $112.4 million of sale gains, $120.6 million of real estate impairments, $69.1 million of equity-method losses and a $35.5 million litigation reserve. These items materially affect comparisons of reported losses.
- Non-GAAP NOI was $10.0 million for Q3 and $27.5 million for the nine months, versus $7.4 million and $21.4 million, respectively, in 2021. Total NOI, including Seritage’s proportional share of unconsolidated properties, was $12.2 million and $33.2 million, compared with $8.1 million and $25.1 million. These measures are not GAAP cash flow or net income.
- At September 30, cash and cash equivalents were $129.8 million and restricted cash was $10.8 million. Total assets were $2.05 billion, total liabilities $1.42 billion, and total equity $630.6 million.
- Term-loan principal was $1.27 billion at quarter-end, bearing 7.0% interest and maturing July 31, 2023. The company had repaid $330 million through September 30. The loan balance was $1.16 billion as of November 4, after a further $110 million payment.
- For the first nine months, operating cash flow was negative $73.5 million; investing cash flow was positive $296.1 million, driven by asset-sale proceeds; financing cash flow was negative $195.7 million, mainly from debt repayments. Real estate sale proceeds were $329.1 million, while development spending was $78.1 million for consolidated properties and $22.4 million for unconsolidated entities.
Material changes and strategy
- Seritage revoked its REIT election effective January 1, 2022 and became a taxable C corporation. The change removes the REIT distribution requirement but subjects the company to corporate income taxes. It recorded a one-time, non-cash deferred tax benefit of approximately $160.3 million in Q1, then recorded a full $188.9 million valuation allowance against deferred tax assets at September 30; the reported effective tax rate was 0%.
- Shareholders approved the Plan of Sale on October 24, 2022. It authorizes sales of the company’s assets, distributions of net proceeds and dissolution. The company estimated asset sales could take 18 to 30 months after the annual meeting; timing and final distributions remain uncertain, and contingent liabilities must be resolved before the final distribution.
- During Q3, Seritage sold 22 properties for $147.0 million aggregate consideration; for the nine months, it sold 36 properties for $319.4 million. As of September 30, 19 properties were classified as held for sale, with $202.8 million of related assets.
- After quarter-end through November 4, the company sold 12 assets for $176.4 million gross proceeds and had 10 assets under contract without due-diligence contingencies for $124.9 million, plus 26 assets under contract subject to customary due diligence for $421.5 million. It also expected at least $65.7 million from two exercised put options. Transactions remain subject to closing conditions.
- The company recognized $35.5 million for its contribution to the Sears litigation settlement; the amount was paid in October. After quarter-end, it reached settlements with two D&O insurers for $12.7 million gross proceeds; litigation with the remaining insurers continued.
Outlook, liquidity and risks
- Management expects obligations and development costs to continue exceeding rental income and plans to fund them with cash and asset sales. The loan’s two-year extension option requires principal to be reduced to $800 million by July 31, 2023. Management said it believes asset sales will enable at least $360 million of additional principal reduction by July 2023. The company had not yet met the separate $200 million annualized non-Sears tenant-rent threshold for access to the loan’s $400 million incremental funding facility.
- The filing says management concluded its plans alleviate substantial doubt about the company’s ability to continue as a going concern. It also notes that the full loan balance is treated as a current obligation in the relevant assessment until the extension is executed or asset sales sufficiently support projected cash flows. Sale closings, proceeds and extension eligibility are therefore central uncertainties.
- Impairment charges reflect the shortened expected holding periods associated with the sale plan, negotiated sale prices below carrying values and updated valuations. Management said further impairments may occur as it continues evaluating properties and development plans.
- The company collected 99% of Q3 base rent, but cautioned that tenant payment performance and the effects of COVID-19 remain uncertain. One tenant represented 14.4% of annualized base rent.
- Other risks include asset-sale execution and pricing, market conditions, the high debt burden and maturity, tax-asset recoverability and possible limits on tax-loss carryforwards. No common-share dividends were declared in 2022; Series A preferred dividends continued at $0.4375 per share quarterly. Future distributions are at the board’s discretion.
Investor verification points
- Track completed sales and net proceeds against the amounts under contract or expected from put options; confirm any due-diligence, financing or other closing conditions.
- Verify the pace of debt repayment and whether the loan extension requirements are satisfied by July 2023, including the required $800 million principal balance.
- Monitor operating cash burn, rental income, development spending and liquidity against the company’s sale timetable.
- Review future impairment charges and sale prices relative to carrying values, especially for unconsolidated investments.
- Confirm the status of insurer recoveries, remaining litigation, tax attributes and any contingent liabilities that could affect eventual shareholder distributions.