Seritage Growth Properties — Q3 2019 Form 10-Q
Unaudited results for the quarter and nine months ended September 30, 2019; comparisons are with the corresponding 2018 periods. Dollar amounts are in millions except per-share data.
Business context and reporting period
Seritage owns, redevelops, manages and leases retail real estate. At quarter-end, its portfolio comprised interests in 217 properties totaling about 34.4 million square feet: 189 wholly owned properties and 28 joint-venture properties. Its strategy is to convert former Sears/Kmart space into diversified, multi-tenant retail and mixed-use assets.
Following Sears Holdings’ bankruptcy, a replacement master lease with Transform Holdco (Holdco) took effect March 12, 2019. Seritage leased space to Holdco at 49 wholly owned properties and three joint-venture properties at September 30.
Financial results and liquidity
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Total revenue | $47.6 | $56.6 | $132.0 | $159.6 |
| Rental revenue | $46.8 | $56.5 | $129.1 | $158.6 |
| Net loss | $(16.5) | $(34.7) | $(53.3) | $(29.1) |
| Net loss attributable to common shareholders | $(12.1) | $(23.4) | $(38.4) | $(22.3) |
| Loss per common share | $(0.33) | $(0.66) | $(1.06) | $(0.63) |
| NOI | $20.7 | $30.9 | $63.1 | $98.3 |
| Total NOI, including share of unconsolidated ventures | $14.7 | $35.7 | $53.6 | $109.1 |
| FFO attributable to common shareholders and unitholders | $(2.4) | $(0.4) | $(13.7) | $17.1 |
Q3 net loss narrowed year over year, primarily reflecting substantially lower depreciation and amortization; the nine-month net loss increased. Rental revenue fell as Sears/Kmart occupancy declined, partly offset by growth in diversified tenant rents. Sears/Kmart represented 27.8% of Q3 rental income and 38.3% of nine-month rental income, versus 68.4% and 69.6%, respectively, in 2018. Diversified tenants supplied the balance.
- Cash from operating activities was $(38.3) for nine months, versus $14.3 in 2018. Investing cash use was $(227.0), including $279.1 of real estate development spending, partly offset by $83.1 of sale proceeds. Financing cash use was $(35.2).
- Cash and cash equivalents were $232.3 at September 30, down from $532.9 at December 31, 2018. Total assets were $2,793.2; total liabilities were $1,714.0.
- Debt was $1.6 billion under a fixed-rate term loan bearing 7.0% interest and maturing July 31, 2023. Interest expense was $22.0 in Q3 and $67.6 for nine months. A $400 million incremental facility is available only if specified rental-income conditions are met.
- Seritage was not in compliance with certain term-loan financial metrics at September 30. Asset sales and joint-venture transactions therefore require lender consent, and the lender requested mortgages on a majority of the portfolio. The filing says required consents had been provided for transactions submitted to date; management reported compliance with other loan terms.
Material changes, outlook and risks
- Holdco/Sears-related rental income decreased by $28.1 in Q3 and $65.4 for nine months year over year. Diversified rental income increased by $10.8 and $22.4, respectively. The transition away from Sears tenancy remains a central operating change.
- Seritage reported 89 redevelopment projects with estimated total investment of $1.56–$1.635 billion ($1.435–$1.510 billion at its share); estimated remaining spend was $750–$825 million ($695–$775 million at its share). These are project estimates, not formal earnings guidance.
- Management stated it believed available liquidity—$232.3 million of cash plus the conditional incremental facility—was sufficient for current needs. It also cited possible additional capital from debt or equity issuance, asset sales and joint ventures. No specific earnings or full-year financial guidance was provided.
- The board did not expect to declare further common dividends for the remainder of 2019, subject to year-end review for REIT distribution requirements. It expected quarterly preferred dividends to continue.
- A Sears Holdings-related lawsuit alleges fraudulent transfers and illegal dividends, including that the 2015 property acquisition was undervalued by at least $649–$749 million. Plaintiffs seek rescission or damages. Seritage disputes the claims and intends to defend itself; no litigation liability was recorded. The case was at an early stage, and the filing says the ultimate outcome and potential loss could not be predicted.
- Holdco is a major tenant, creating concentration risk. Holdco has lease termination rights, including specified future rights without termination fees; it had not exercised Holdco Master Lease termination rights as of quarter-end. The filing also identifies potential execution, leasing, redevelopment funding and property-market risks.
- Subsequent to quarter-end, Seritage signed an agreement to sell 23 outparcel properties for gross proceeds of $67.9 million, subject to customary conditions and expected to close in tranches during 2019 and 2020.
Important facts for investors to verify
- Current compliance status, lender consent requirements and any additional collateral or mortgage demands under the term loan.
- Progress toward leasing, opening and stabilizing redevelopment projects, including actual costs against the estimated remaining investment.
- Holdco’s financial condition, lease payments and any exercise of termination rights, alongside the pace of diversified-tenant rent growth.
- Developments in the Sears litigation, including claims, defenses, potential remedies and any eventual estimate of financial exposure.
- Whether the outparcel sale closes as expected and how proceeds affect cash, development spending and liquidity.
- Future common-dividend decisions and the company’s ability to meet REIT distribution requirements while funding redevelopment.