UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2017

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2022

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______to _______

Commission File Number 001-37420

SERITAGE GROWTH PROPERTIES

(Exact name of registrant as specified in its charter)

 

Maryland

38-3976287

(State of Incorporation)

(I.R.S. Employer Identification No.)

 

489500 Fifth Avenue 18th Floor, , Suite 1530, New York, New York

1001710110

(Address of principal executive offices)

(Zip Code)

 

Registrant’s telephone number, including area code: (212) (212) 355-7800

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbols

Name of each exchange on which registered

Class A common shares of beneficial interest, par value $0.01 per share

SRG

New York Stock Exchange

7.00% Series A cumulative redeemable preferred shares of beneficial interest, par value $0.01 per share

SRG-PA

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 (Do not check if a smaller reporting company)

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

As of October 27, 2017,August 8, 2022, the registrant had the following common shares outstanding:

 

Class

Shares Outstanding

Class A common shares of beneficial interest, par value $0.01 per share

28,672,642 56,032,381

Class B common shares of beneficial interest, par value $0.01 per share

1,434,922 0

Class C common shares of beneficial interest, par value $0.01 per share

5,280,630 0

 


SERITAGE GROWTH PROPERTIES

QUARTERLY REPORT ON FORM 10-Q

QUARTER ENDED SEPTEMBERJune 30, 20172022

TABLE OF CONTENTS

 

PART I.

FINANCIAL INFORMATION

 

 

 

Page

 

 

 

Item 1.

Condensed Consolidated Financial Statements (unaudited)

3

 

Condensed Consolidated Balance Sheets as of SeptemberJune 30, 20172022 and December 31, 20162021

3

 

Condensed Consolidated Statements of Operations for the three and ninesix months ended
September
June 30, 20172022 and 20162021

4

 

Condensed Consolidated Statements of Equity for the ninethree and six months ended SeptemberJune 30, 20172022 and 20162021

5

 

Condensed Consolidated Statements of Cash Flows for the ninesix months ended SeptemberJune 30, 20172022 and 20162021

6

 

Notes to Condensed Consolidated Financial Statements

78

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

2829

 

 

 

Item 3.

Quantitative and Qualitative Disclosure about Market Risk

40

 

 

 

Item 4.

Controls and Procedures

40

 

 

 

PART II.

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

41

 

 

 

Item 1A.

Risk Factors

41

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

4152

 

 

 

Item 3.

Defaults upon Senior Securities

4152

 

 

 

Item 4.

Mine Safety Disclosures

4152

 

 

 

Item 5.

Other Information

4152

 

 

 

Item 6.

Exhibits

4253

 

 

 

SIGNATURES

 

4354

 


PART I. FINANCIAL INFORMATION

FINANCIAL INFORMATION

Item 1.

Unaudited Condensed Consolidated Financial Statements

Item 1. Unaudited Condensed Consolidated Financial Statements

SERITAGE GROWTH PROPERTIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, amounts in thousands, except share and per share amounts)

 

 

September 30, 2017

 

 

December 31, 2016

 

 

June 30, 2022

 

 

December 31, 2021

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment in real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

Land

 

$

799,971

 

 

$

840,021

 

 

$

360,067

 

 

$

475,667

 

Buildings and improvements

 

 

859,782

 

 

 

839,663

 

 

 

818,496

 

 

 

994,221

 

Accumulated depreciation

 

 

(126,712

)

 

 

(89,940

)

 

 

(145,584

)

 

 

(154,971

)

 

 

1,533,041

 

 

 

1,589,744

 

 

 

1,032,979

 

 

 

1,314,917

 

Construction in progress

 

 

175,516

 

 

 

55,208

 

 

 

371,168

 

 

 

381,194

 

Net investment in real estate

 

 

1,708,557

 

 

 

1,644,952

 

 

 

1,404,147

 

 

 

1,696,111

 

Investment in unconsolidated joint ventures

 

 

338,326

 

 

 

425,020

 

Real estate held for sale

 

 

117,013

 

 

 

 

Investment in unconsolidated entities

 

 

445,152

 

 

 

498,563

 

Cash and cash equivalents

 

 

104,153

 

 

 

52,026

 

 

 

149,529

 

 

 

106,602

 

Restricted cash

 

 

202,513

 

 

 

87,616

 

 

 

7,155

 

 

 

7,151

 

Tenant and other receivables, net

 

 

28,166

 

 

 

23,172

 

 

 

42,816

 

 

 

29,111

 

Lease intangible assets, net

 

 

327,229

 

 

 

464,399

 

 

 

10,295

 

 

 

14,817

 

Prepaid expenses, deferred expenses and other assets, net

 

 

20,284

 

 

 

15,052

 

 

 

61,206

 

 

 

61,783

 

Total assets

 

$

2,729,228

 

 

$

2,712,237

 

Total assets (1)

 

$

2,237,313

 

 

$

2,414,138

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage loans payable, net

 

$

1,200,615

 

 

$

1,166,871

 

Unsecured term loan, net

 

 

84,009

 

 

 

 

Term loan facility, net

 

$

1,439,543

 

 

$

1,439,332

 

Sales-leaseback financing obligations

 

 

20,652

 

 

 

20,627

 

Litigation reserve

 

 

35,000

 

 

 

 

Accounts payable, accrued expenses and other liabilities

 

 

111,482

 

 

 

121,055

 

 

 

107,720

 

 

 

109,379

 

Total liabilities

 

 

1,396,106

 

 

 

1,287,926

 

Total liabilities (1)

 

 

1,602,915

 

 

 

1,569,338

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 9)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders' Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A shares $0.01 par value; 100,000,000 shares authorized;

28,001,411 and 25,843,251 shares issued and outstanding as of

September 30, 2017 and December 31, 2016, respectively

 

 

280

 

 

 

258

 

Class B shares $0.01 par value; 5,000,000 shares authorized;

1,434,922 and 1,589,020 shares issued and outstanding as of

September 30, 2017 and December 31, 2016, respectively

 

 

14

 

 

 

16

 

Class C shares $0.01 par value; 50,000,000 shares authorized;

5,951,861 and 5,754,685 shares issued and outstanding as of

September 30, 2017 and December 31, 2016, respectively

 

 

59

 

 

 

58

 

Class A common shares $0.01 par value; 100,000,000 shares authorized;
43,677,418 and 43,632,364 shares issued and outstanding
as of June 30, 2022 and December 31, 2021, respectively

 

 

437

 

 

 

436

 

Series A preferred shares $0.01 par value; 10,000,000 shares authorized;
2,800,000 shares issued and outstanding as of June 30, 2022
December 31, 2021; liquidation preference of $
70,000

 

 

28

 

 

 

28

 

Additional paid-in capital

 

 

996,047

 

 

 

925,563

 

 

 

1,242,165

 

 

 

1,241,048

 

Accumulated deficit

 

 

(177,394

)

 

 

(121,338

)

 

 

(719,181

)

 

 

(553,771

)

Total shareholders' equity

 

 

819,006

 

 

 

804,557

 

 

 

523,449

 

 

 

687,741

 

Non-controlling interests

 

 

514,116

 

 

 

619,754

 

 

 

110,949

 

 

 

157,059

 

Total equity

 

 

1,333,122

 

 

 

1,424,311

 

 

 

634,398

 

 

 

844,800

 

Total liabilities and equity

 

$

2,729,228

 

 

$

2,712,237

 

Total liabilities and shareholders' equity

 

$

2,237,313

 

 

$

2,414,138

 

(1) The Company's condensed consolidated balance sheets include assets and liabilities of consolidated variable interest entities ("VIEs"). See Note 2. The condensed consolidated balance sheets, as of June 30, 2022, include the following amounts related to our consolidated VIEs, excluding the Operating Partnership: $6.6 million of land, $3.9 million of building and improvements, $(1.0) million of accumulated depreciation and $4.0 million of other assets included in other line items. The Company's condensed consolidated balance sheets as of December 31, 2021, include the following amounts related to our consolidated VIEs, excluding the Operating Partnership: $6.6 million of land, $3.9 million of building and improvements, $(0.9) million of accumulated depreciation and $4.0 million of other assets included in other line items.

(1) The Company's condensed consolidated balance sheets include assets and liabilities of consolidated variable interest entities ("VIEs"). See Note 2. The condensed consolidated balance sheets, as of June 30, 2022, include the following amounts related to our consolidated VIEs, excluding the Operating Partnership: $6.6 million of land, $3.9 million of building and improvements, $(1.0) million of accumulated depreciation and $4.0 million of other assets included in other line items. The Company's condensed consolidated balance sheets as of December 31, 2021, include the following amounts related to our consolidated VIEs, excluding the Operating Partnership: $6.6 million of land, $3.9 million of building and improvements, $(0.9) million of accumulated depreciation and $4.0 million of other assets included in other line items.

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements. 

- 3 -


SERITAGE GROWTH PROPERTIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, amounts in thousands, except per share amounts)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

REVENUE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

48,167

 

 

$

45,584

 

 

$

139,526

 

 

$

136,737

 

Tenant reimbursements

 

 

15,881

 

 

 

12,023

 

 

 

47,813

 

 

 

45,741

 

Total revenue

 

 

64,048

 

 

 

57,607

 

 

 

187,339

 

 

 

182,478

 

EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property operating

 

 

4,311

 

 

 

4,505

 

 

 

13,985

 

 

 

17,176

 

Real estate taxes

 

 

11,335

 

 

 

7,965

 

 

 

35,707

 

 

 

31,101

 

Depreciation and amortization

 

 

61,059

 

 

 

44,532

 

 

 

170,293

 

 

 

121,365

 

General and administrative

 

 

5,272

 

 

 

4,252

 

 

 

16,639

 

 

 

13,104

 

Litigation charge

 

 

 

 

 

19,000

 

 

 

 

 

 

19,000

 

Provision for doubtful accounts

 

 

68

 

 

 

124

 

 

 

119

 

 

 

269

 

Acquisition-related expenses

 

 

 

 

 

 

 

 

 

 

 

73

 

Total expenses

 

 

82,045

 

 

 

80,378

 

 

 

236,743

 

 

 

202,088

 

Operating loss

 

 

(17,997

)

 

 

(22,771

)

 

 

(49,404

)

 

 

(19,610

)

Equity in (loss) income of unconsolidated joint

   ventures

 

 

(3,686

)

 

 

1,497

 

 

 

(4,226

)

 

 

4,495

 

Gain on sale of interest in unconsolidated

   joint venture

 

 

43,729

 

 

 

 

 

 

43,729

 

 

 

 

Gain on sale of real estate

 

 

13,018

 

 

 

 

 

 

13,018

 

 

 

 

Interest and other income

 

 

352

 

 

 

77

 

 

 

472

 

 

 

196

 

Interest expense

 

 

(18,049

)

 

 

(15,931

)

 

 

(53,072

)

 

 

(47,297

)

Unrealized loss on interest rate cap

 

 

(91

)

 

 

(47

)

 

 

(686

)

 

 

(1,898

)

Income (loss) before income taxes

 

 

17,276

 

 

 

(37,175

)

 

 

(50,169

)

 

 

(64,114

)

Provision for income taxes

 

 

 

 

 

(72

)

 

 

(266

)

 

 

(412

)

Net income (loss)

 

 

17,276

 

 

 

(37,247

)

 

 

(50,435

)

 

 

(64,526

)

Net (income) loss attributable to non-controlling

   interests

 

 

(6,762

)

 

 

16,145

 

 

 

19,892

 

 

 

27,972

 

Net income (loss) attributable to common shareholders

 

$

10,514

 

 

$

(21,102

)

 

$

(30,543

)

 

$

(36,554

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share attributable to Class A and

   Class C common shareholders - Basic

 

$

0.31

 

 

$

(0.67

)

 

$

(0.91

)

 

$

(1.16

)

Net income (loss) per share attributable to Class A and

   Class C common shareholders - Diluted

 

$

0.31

 

 

$

(0.67

)

 

$

(0.91

)

 

$

(1.16

)

Weighted average Class A and Class C common shares

   outstanding - Basic

 

 

33,774

 

 

 

31,419

 

 

 

33,685

 

 

 

31,414

 

Weighted average Class A and Class C common shares

   outstanding - Diluted

 

 

33,841

 

 

 

31,419

 

 

 

33,685

 

 

 

31,414

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

REVENUE

 

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

29,418

 

 

$

27,595

 

 

$

58,502

 

 

$

58,741

 

Management and other fee income

 

 

286

 

 

 

279

 

 

 

2,107

 

 

 

414

 

Total revenue

 

 

29,704

 

 

 

27,874

 

 

 

60,609

 

 

 

59,155

 

EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

Property operating

 

 

10,801

 

 

 

11,286

 

 

 

21,833

 

 

 

21,929

 

Real estate taxes

 

 

6,425

 

 

 

9,061

 

 

 

14,575

 

 

 

19,216

 

Depreciation and amortization

 

 

10,669

 

 

 

13,328

 

 

 

22,603

 

 

 

26,470

 

General and administrative

 

 

11,093

 

 

 

11,990

 

 

 

20,185

 

 

 

23,222

 

Litigation reserve

 

 

35,000

 

 

 

 

 

 

35,000

 

 

 

 

Total expenses

 

 

73,988

 

 

 

45,665

 

 

 

114,196

 

 

 

90,837

 

Gain on sale of real estate, net

 

 

68,031

 

 

 

18,097

 

 

 

67,016

 

 

 

42,305

 

Impairment of real estate assets

 

 

(109,343

)

 

 

(64,539

)

 

 

(110,334

)

 

 

(66,239

)

Equity in loss of unconsolidated entities

 

 

(33,720

)

 

 

(2,327

)

 

 

(66,796

)

 

 

(3,489

)

Interest and other income

 

 

99

 

 

 

530

 

 

 

110

 

 

 

8,154

 

Interest expense

 

 

(22,663

)

 

 

(28,976

)

 

 

(45,251

)

 

 

(55,126

)

Loss before income taxes

 

 

(141,880

)

 

 

(95,006

)

 

 

(208,842

)

 

 

(106,077

)

(Provision) for income taxes

 

 

(203

)

 

 

(298

)

 

 

(228

)

 

 

(160

)

Net loss

 

 

(142,083

)

 

 

(95,304

)

 

 

(209,070

)

 

 

(106,237

)

Net loss attributable to non-controlling interests

 

 

31,328

 

 

 

22,464

 

 

 

46,110

 

 

 

25,677

 

Net loss attributable to Seritage

 

$

(110,755

)

 

$

(72,840

)

 

$

(162,960

)

 

$

(80,560

)

Preferred dividends

 

 

(1,225

)

 

 

(1,225

)

 

 

(2,450

)

 

 

(2,450

)

Net loss attributable to Seritage common shareholders

 

$

(111,980

)

 

$

(74,065

)

 

$

(165,410

)

 

$

(83,010

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share attributable to Seritage Class A
   common shareholders - Basic

 

$

(2.56

)

 

$

(1.73

)

 

$

(3.79

)

 

$

(2.02

)

Net loss per share attributable to Seritage Class A
   common shareholders - Diluted

 

$

(2.56

)

 

$

(1.73

)

 

$

(3.79

)

 

$

(2.02

)

Weighted average Class A common shares
   outstanding - Basic

 

 

43,677

 

 

 

42,772

 

 

 

43,656

 

 

 

41,134

 

Weighted average Class A common shares
   outstanding - Diluted

 

 

43,677

 

 

 

42,772

 

 

 

43,656

 

 

 

41,134

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

- 4 -


SERITAGE GROWTH PROPERTIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(Unaudited, amounts in thousands)thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Non-

 

 

 

 

 

 

 

Class A

 

 

Class B

 

 

Class C

 

 

Paid-In

 

 

Accumulated

 

 

Controlling

 

 

Total

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Interests

 

 

Equity

 

Balance at January 1, 2016

 

 

24,818

 

 

$

248

 

 

 

1,589

 

 

$

16

 

 

 

6,773

 

 

$

68

 

 

$

924,508

 

 

$

(38,145

)

 

$

683,382

 

 

$

1,570,077

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(36,554

)

 

 

(27,972

)

 

 

(64,526

)

Dividends and

   distributions declared

   ($0.75 per share and unit)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(23,726

)

 

 

(18,133

)

 

 

(41,859

)

Vesting of restricted share units

 

 

7

 

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(13

)

 

 

 

 

 

 

 

 

(13

)

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

801

 

 

 

 

 

 

 

 

 

801

 

Share class exchanges, net

   (997,450 common shares)

 

 

997

 

 

 

10

 

 

 

 

 

 

 

 

 

(997

)

 

 

(10

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2016

 

 

25,822

 

 

$

258

 

 

 

1,589

 

 

$

16

 

 

 

5,776

 

 

$

58

 

 

$

925,296

 

 

$

(98,425

)

 

$

637,277

 

 

$

1,464,480

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2017

 

 

25,843

 

 

 

258

 

 

 

1,589

 

 

 

16

 

 

 

5,755

 

 

 

58

 

 

 

925,563

 

 

 

(121,338

)

 

 

619,754

 

 

 

1,424,311

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(30,543

)

 

 

(19,892

)

 

$

(50,435

)

Dividends and

   distributions declared

   ($0.75 per share and unit)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(25,513

)

 

 

(16,394

)

 

 

(41,907

)

Vesting of restricted share units

 

 

11

 

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(13

)

 

 

 

 

 

 

 

 

(13

)

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,166

 

 

 

 

 

 

 

 

 

1,166

 

Share class exchanges, net

   (197,176 common shares)

 

 

(197

)

 

 

(1

)

 

 

 

 

 

 

 

 

197

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

Share class surrenders

   (154,098 common shares)

 

 

 

 

 

 

 

 

(154

)

 

 

(2

)

 

 

 

 

 

 

 

 

2

 

 

 

 

 

 

 

 

 

 

OP Unit exchanges

   (2,344,589 units)

 

 

2,344

 

 

 

23

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

69,329

 

 

 

 

 

 

(69,352

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2017

 

 

28,001

 

 

$

280

 

 

 

1,435

 

 

$

14

 

 

 

5,952

 

 

$

59

 

 

$

996,047

 

 

$

(177,394

)

 

$

514,116

 

 

$

1,333,122

 

 

 

Class A
Common

 

 

Series A
Preferred

 

 

Additional
Paid-In

 

 

Accumulated

 

 

Non-
Controlling

 

 

Total

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Interests

 

 

Equity

 

Balance at January 1, 2021

 

 

38,896

 

 

$

389

 

 

 

2,800

 

 

$

28

 

 

$

1,177,260

 

 

$

(528,637

)

 

$

233,687

 

 

$

882,727

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(80,560

)

 

 

(25,677

)

 

 

(106,237

)

Preferred dividends declared ($0.875
   per share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,450

)

 

 

 

 

 

(2,450

)

Vesting of restricted share units

 

 

87

 

 

 

1

 

 

 

 

 

 

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

Share-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

849

 

 

 

 

 

 

 

 

 

849

 

OP Units exchanges (3,811,865 units)

 

 

3,812

 

 

 

38

 

 

 

 

 

 

 

 

 

51,901

 

 

 

 

 

 

(51,939

)

 

 

 

Balance at June 30, 2021

 

 

42,795

 

 

$

428

 

 

$

2,800

 

 

$

28

 

 

$

1,230,009

 

 

$

(611,647

)

 

$

156,071

 

 

$

774,889

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2022

 

 

43,632

 

 

$

436

 

 

 

2,800

 

 

$

28

 

 

$

1,241,048

 

 

$

(553,771

)

 

$

157,059

 

 

$

844,800

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(162,960

)

 

 

(46,110

)

 

 

(209,070

)

Preferred dividends declared ($0.875
   per share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,450

)

 

 

 

 

 

(2,450

)

Vesting of restricted share units

 

 

45

 

 

 

1

 

 

 

 

 

 

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

Share-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,118

 

 

 

 

 

 

 

 

 

1,118

 

Balance at June 30, 2022

 

 

43,677

 

 

$

437

 

 

 

2,800

 

 

$

28

 

 

$

1,242,165

 

 

$

(719,181

)

 

$

110,949

 

 

$

634,398

 

 

 

Class A
Common

 

 

Series A
Preferred

 

 

Additional
Paid-In

 

 

Accumulated

 

 

Non-
Controlling

 

 

Total

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Interests

 

 

Equity

 

Balance at April 1, 2021

 

 

40,587

 

 

$

406

 

 

 

2,800

 

 

$

28

 

 

$

1,200,874

 

 

$

(537,582

)

 

$

207,674

 

 

 

871,400

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(72,840

)

 

 

(22,464

)

 

 

(95,304

)

Preferred dividends declared ($0.4375
   per share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,225

)

 

 

 

 

 

(1,225

)

Vesting of restricted share units

 

 

55

 

 

 

1

 

 

 

 

 

 

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

Share-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(120

)

 

 

 

 

 

 

 

 

(120

)

OP Units exchanges (2,153,010 units)

 

 

2,153

 

 

 

21

 

 

 

 

 

 

 

 

 

29,256

 

 

 

 

 

 

(29,139

)

 

 

138

 

Balance at June 30, 2021

 

 

42,795

 

 

$

428

 

 

 

2,800

 

 

$

28

 

 

$

1,230,009

 

 

$

(611,647

)

 

$

156,071

 

 

$

774,889

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at April 1, 2022

 

 

43,675

 

 

$

437

 

 

 

2,800

 

 

$

28

 

 

$

1,241,583

 

 

$

(607,201

)

 

$

142,277

 

 

 

777,124

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(110,755

)

 

 

(31,328

)

 

 

(142,083

)

Preferred dividends declared ($0.4375
   per share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,225

)

 

 

 

 

 

(1,225

)

Vesting of restricted share
   units

 

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

582

 

 

 

 

 

 

 

 

 

582

 

Balance at June 30, 2022

 

 

43,677

 

 

$

437

 

 

 

2,800

 

 

$

28

 

 

$

1,242,165

 

 

$

(719,181

)

 

$

110,949

 

 

$

634,398

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

- 5 -


SERITAGE GROWTH PROPERTIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, amounts in thousands)

 

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

CASH FLOW FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net loss

 

$

(50,435

)

 

$

(64,526

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Equity in loss (income) of unconsolidated joint ventures

 

 

4,226

 

 

 

(4,495

)

Distributions from unconsolidated joint ventures

 

 

10,714

 

 

 

11,872

 

Gain on sale of interest in unconsolidated joint venture

 

 

(43,729

)

 

 

 

Gain on sale of real estate

 

 

(13,018

)

 

 

 

Unrealized loss on interest rate cap

 

 

686

 

 

 

1,898

 

Stock-based compensation

 

 

1,167

 

 

 

801

 

Depreciation and amortization

 

 

170,293

 

 

 

121,365

 

Amortization of deferred financing costs

 

 

6,390

 

 

 

4,021

 

Amortization of above and below market leases, net

 

 

(581

)

 

 

(520

)

Straight-line rent adjustment

 

 

(2,364

)

 

 

(11,242

)

Change in operating assets and liabilities

 

 

 

 

 

 

 

 

Tenants and other receivables

 

 

(3,444

)

 

 

8,425

 

Prepaid expenses, deferred expenses and other assets

 

 

(7,300

)

 

 

8,496

 

Accounts payable, accrued expenses and other liabilities

 

 

(15,657

)

 

 

24,043

 

Net cash provided by operating activities

 

 

56,948

 

 

 

100,138

 

CASH FLOW FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Investments in unconsolidated joint ventures

 

 

(36,038

)

 

 

 

Net proceeds from sale of real estate

 

 

50,887

 

 

 

 

Net proceeds from disposition of interest in unconsolidated joint venture

 

 

189,391

 

 

 

 

Development of real estate

 

 

(164,070

)

 

 

(47,236

)

Net cash provided by (used in) investing activities

 

 

40,170

 

 

 

(47,236

)

CASH FLOW FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Proceeds from Future Funding Facility

 

 

79,998

 

 

 

19,239

 

Proceeds from Unsecured Term Loan

 

 

85,000

 

 

 

 

Repayment of mortgage loans payable, net

 

 

(50,634

)

 

 

 

Payment of deferred financing costs

 

 

(2,686

)

 

 

(6

)

Common dividends paid

 

 

(25,379

)

 

 

(31,482

)

Non-controlling interests distributions paid

 

 

(16,393

)

 

 

(24,176

)

Net cash provided by (used in) financing activities

 

 

69,906

 

 

 

(36,425

)

Net increase in cash, cash equivalents, and restricted cash

 

 

167,024

 

 

 

16,477

 

Cash, cash equivalents, and restricted cash, beginning of period

 

 

139,642

 

 

 

155,342

 

Cash, cash equivalents, and restricted cash, end of period

 

$

306,666

 

 

$

171,819

 

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

 

 

 

 

 

 

 

 

Cash payments for interest

 

$

54,026

 

 

$

45,495

 

Capitalized interest

 

 

7,785

 

 

 

2,198

 

Income taxes paid

 

 

266

 

 

 

412

 

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Development of real estate financed with accounts payable

 

$

17,223

 

 

$

3,442

 

Dividends and distribution declared and unpaid

 

 

13,969

 

 

 

13,954

 

Decrease in assets and liabilities resulting from deconsolidated properties

 

 

 

 

 

 

 

 

Real estate, net

 

 

(64,998

)

 

 

 

Tenant and other receivables, net

 

 

(814

)

 

 

 

Lease intangible assets, net

 

 

(13,480

)

 

 

 

Prepaid expenses, deferred expenses and other assets, net

 

 

(8

)

 

 

 

Accounts payable, accrued expenses and other liabilities

 

 

3,612

 

 

 

 

 

 

Six Months Ended June 30,

 

 

 

2022

 

 

2021

 

CASH FLOW FROM OPERATING ACTIVITIES

 

 

 

 

 

 

Net loss

 

$

(209,070

)

 

$

(106,237

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

Equity in loss of unconsolidated entities

 

 

66,796

 

 

 

3,489

 

Distributions from unconsolidated entities

 

 

 

 

 

1,141

 

Gain on sale of real estate, net

 

 

(67,016

)

 

 

(42,305

)

Impairment of real estate assets

 

 

110,334

 

 

 

66,239

 

Share-based compensation

 

 

892

 

 

 

953

 

Depreciation and amortization

 

 

22,603

 

 

 

26,470

 

Amortization of deferred financing costs

 

 

211

 

 

 

212

 

Amortization of above and below market leases, net

 

 

121

 

 

 

63

 

Straight-line rent adjustment

 

 

(4,320

)

 

 

(1,028

)

Interest on sale-leaseback financing obligations

 

 

25

 

 

 

 

Litigation reserve

 

 

35,000

 

 

 

 

Change in operating assets and liabilities

 

 

 

 

 

 

Tenants and other receivables

 

 

(10,370

)

 

 

3,436

 

Prepaid expenses, deferred expenses and other assets

 

 

1,713

 

 

 

(1,224

)

Accounts payable, accrued expenses and other liabilities

 

 

(1,420

)

 

 

(18,811

)

Net cash used in operating activities

 

 

(54,501

)

 

 

(67,602

)

CASH FLOW FROM INVESTING ACTIVITIES

 

 

 

 

 

 

Investment in unconsolidated entities

 

 

(15,432

)

 

 

(21,279

)

Distributions from unconsolidated entities

 

 

160

 

 

 

 

Net proceeds from sale of real estate

 

 

168,186

 

 

 

133,313

 

Development of real estate

 

 

(53,032

)

 

 

(44,949

)

Net cash provided by investing activities

 

 

99,882

 

 

 

67,085

 

CASH FLOW FROM FINANCING ACTIVITIES

 

 

 

 

 

 

Proceeds from sale-leaseback financing obligations

 

 

 

 

 

183

 

Purchase of shares related to stock grant recipients' tax withholdings

 

 

 

 

 

(262

)

Preferred dividends paid

 

 

(2,450

)

 

 

(2,450

)

Net cash used in financing activities

 

 

(2,450

)

 

 

(2,529

)

Net increase (decrease) in cash and cash equivalents

 

 

42,931

 

 

 

(3,046

)

Cash and cash equivalents, and restricted cash, beginning of period

 

 

113,753

 

 

 

150,254

 

Cash and cash equivalents, and restricted cash, end of period

 

$

156,684

 

 

$

147,208

 

 

- 6 -


SERITAGE GROWTH PROPERTIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Unaudited, amounts in thousands)

 

 

Six Months Ended June 30,

 

 

 

2022

 

 

2021

 

RECONCILIATION OF CASH AND CASH EQUIVALENTS AND RESTRICTED CASH

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

$

106,602

 

 

$

143,728

 

Restricted cash at beginning of period

 

 

7,151

 

 

 

6,526

 

Cash and cash equivalents and restricted cash at beginning of period

 

$

113,753

 

 

$

150,254

 

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

149,529

 

 

$

140,058

 

Restricted cash at end of period

 

 

7,155

 

 

 

7,150

 

Cash and cash equivalents and restricted cash at end of period

 

$

156,684

 

 

$

147,208

 

 

 

Six Months Ended June 30,

 

 

 

2022

 

 

2021

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

 

 

 

 

 

 

Cash payments for interest

 

$

52,188

 

 

$

56,620

 

Capitalized interest

 

 

7,674

 

 

 

5,722

 

Income taxes paid

 

 

228

 

 

 

160

 

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
   FINANCING ACTIVITIES

 

 

 

 

 

 

Development of real estate financed with accounts payable

 

$

28,561

 

 

$

8,090

 

Preferred dividends declared and unpaid

 

 

1,225

 

 

 

1,225

 

Transfer to real estate assets held for sale

 

 

117,013

 

 

 

29,059

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

- 67 -


SERITAGE GROWTH PROPERTIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1 – Organization

Seritage Growth Properties (“Seritage”) was organized in(NYSE: SRG), a Maryland real estate investment trust formed on June 3, 2015, operated as a fully integrated, self-administered and was initially capitalized with 100 sharesself-managed real estate investment trust (“REIT”) as defined under Section 856(c) of Class A common shares.  The Company conductsthe Internal Revenue Code (the “Code”) from formation through December 31, 2021. On March 31, 2022, Seritage revoked its REIT election and became a taxable C Corporation effective January 1, 2022. Seritage’s assets are held by and its operations are primarily conducted, directly or indirectly, through Seritage Growth Properties, L.P. (the “Operating Partnership”), a Delaware limited partnership that was formed on April 22, 2015.(the “Operating Partnership”). Under the partnership agreement of the Operating Partnership, Seritage, as the sole general partner, has exclusive responsibility and discretion in the management and control of the Operating Partnership. Unless otherwise expressly stated or the context otherwise requires, “Seritage”the “Company” and the “Company”“Seritage” refer to Seritage, the Operating Partnership and its owned and controlled subsidiaries.

OnSeritage is principally engaged in the ownership, development, redevelopment, disposition, management and leasing of diversified retail and mixed-use properties throughout the United States. As of June 11,30, 2022, the Company’s portfolio consisted of interests in 150 properties comprised of approximately 19.5 million square feet of gross leasable area (“GLA”) or build-to-suit leased area, approximately 433 acres held for or under development and approximately 9.9 million square feet or approximately 821 acres to be disposed of. The portfolio consists of approximately 15.6 million square feet of GLA held by 125 wholly owned properties (such properties, the “Consolidated Properties”) and 3.9 million square feet of GLA held by 25 unconsolidated entities (such properties, the “Unconsolidated Properties”).

The Company commenced operations on July 7, 2015, following a rights offering to the shareholders of Sears Holdings Corporation (“Sears Holdings” or “Sears”) effected a rights offering (the “Rights Offering”) to Sears Holdings stockholders to purchase common shares of Seritage in order to fund, in part, the $2.7$2.7 billion acquisition of 234certain of Sears Holdings’ owned properties and one of its ground leased properties (the “Wholly Owned Properties”), and its 50%50% interests in three3 joint ventures (such joint ventures, the “JVs,” and such 50% joint venture interests, the “JV Interests”) that collectively owned 28 properties, groundwhich were simultaneously leased one property and leased two properties (collectively, the “JV Properties”) (collectively, the “Transaction”).  The Rights Offering ended on July 2, 2015, and the Company’s Class A common shares were listed on the New York Stock Exchange (“NYSE”) on July 6, 2015.

On July 7, 2015, the Company completed the Transaction with Sears Holdings and commenced operations.  The Company did not have any operations prior to the completion of the Rights Offering and the Transaction.

On July 12, 2017, the Company completed two transactions whereby it (i) sold its 50% JV Interests in eight JV Properties and (ii) sold a 50% interest in five Wholly-Owned Properties retaining a 50% JV Interest in the five new JV Properties.

Seritage is a fully-integrated, self-administered, self-managed real estate investment trust (“REIT”) primarily engaged in the real property business through the Company’s investment in the Operating Partnership.  As of September 30, 2017, the Company’s portfolio consisted of interests in 258 properties, including 230 Wholly Owned Properties and 28 JV Properties.   171 of the Wholly Owned Properties were leasedback to Sears Holdings pursuant tounder a master lease agreement (the “Master“Original Master Lease” and the “Original JV Master Leases”, respectively).

As of March 15, 2021, the Company no longer had any remaining properties leased to Holdco (as defined below) or Sears Holdings, as further described in Note 5.

On March 1, 2022, the Company announced that its Board of Trustees had commenced a process to review a broad range of strategic alternatives. The Board of Trustees has created a Special Committee (the “Special Committee”) of the Company’s Board of Trustees to oversee the process. The Special Committee has retained Barclays as its financial advisor. The Company strategic review process remains ongoing. There can be no assurance that the review process will result in any transaction or any strategic change at this time.

On March 31, 2022, the Company announced that its Board of Trustees, with the recommendation of the Special Committee, approved a plan to terminate the Company’s REIT status and become a taxable C Corporation, effective for the year ending December 31, 2022. As a result, the Company is no longer required to operate under REIT rules, including the requirement to distribute at least 90% of REIT taxable income to its stockholders, which provides the Company with greater flexibility to use its free cash flow. Effective January 1, 2022, the Company is subject to federal and state income taxes on its taxable income at applicable tax rates and is no longer entitled to a tax deduction for dividends paid. The Company operated as a REIT for the 2021 tax year, and existing REIT requirements and limitations, including those established by the Company’s organizational documents, remained in place until December 31, 2021.

As a result of the Company’s change in corporate structure to a taxable C Corporation in fiscal year 2022 as announced by the Board of Trustees, the Company incurred a one-time, non-cash deferred tax benefit of approximately $160.3 million during the quarter ended March 31, 2022. The Company also recorded a full valuation allowance against the deferred tax asset pursuant to ASC 740, as discussed in more detail below.

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On July 7, 2022, the Company filed its preliminary proxy materials with the SEC in connection with its 2022 Annual Meeting of Shareholders seeking a shareholder vote to approve a proposed plan of sale of the Company’s assets and dissolution (the “Plan of Sale”) that will allow the Board to sell all of the Company’s assets, distribute the net proceeds to shareholders and dissolve the Company. The Plan of Sale is expected to increase the universe of potential buyers by allowing Seritage and potential buyers to enter into and complete value maximizing transactions without subjecting any such transaction to the delay and conditionality associated with having to seek and obtain shareholder approval. The affirmative vote of at least two-thirds of all outstanding common shares of the Company is required to approve the Plan of Sale. On July 6, 2022, Edward Lampert, the Company’s former Chairman, entered into a Voting and Support Agreement under which he exchanged his equity interest in the Operating Partnership for Class A common shares and agreed to vote his shares in favor of the Plan of Sale. As of July 6, 2022, after giving effect to the exchange of his Operating Partnership interests, Mr. Lampert owns approximately 29.1% of the Company’s outstanding Class A common shares, and Seritage is the sole owner of all outstanding Operating Partnership interests. The strategic review process remains ongoing, and the Company remains open-minded to pursuing value maximizing alternatives, including a potential sale of the Company. There can be no assurance regarding the success of the process.

Liquidity

The Company’s primary uses of cash include the payment of property operating and other expenses, including general and administrative expenses and debt service (collectively, “Obligations”), and certain development expenditures. Currently, debt service obligations are comprised of interest expense and annual fees required by the Term Loan Facility (as defined in Note 6 below). The Term Loan Facility requires payments of interest only until maturity on July 31, 2023, unless the maturity is extended beyond July 31, 2023 at the Company’s option pursuant to the Second Term Loan Amendment (as defined below). Property rental income, which is the Company’s primary source of operating cash flow, did not fully fund Obligations and certain development expenditures incurred during the six months ended June 30, 2022 and the Company incurred net operating cash outflows of $54.5 million. The Company generated investing cash inflows of $99.9 million during the six months ended June 30, 2022, which were driven by asset sales partially offset by development expenditures and investments in unconsolidated entities.

Obligations are projected to continue to exceed property rental income and the Company expects to fund such costs with a combination of capital sources including, cash on hand, and sales of Consolidated and Unconsolidated Properties. During the period from June 30, 2022 through August 8, 2022, the Company sold 10 assets for gross proceeds of $75.3 million and made a $100.0 million principal payment on the Term Loan Facility, bringing the outstanding Term Loan Facility balance as of August 8, 2022 to $1.34 billion. As of August 8, 2022, the Company had 20 assets under contract to sell for total anticipated proceeds of $260.8 million, subject to customary due diligence and closing conditions. In addition, the Company closed on the sale of previously exercised put rights that it has on 2 Unconsolidated Properties to generate additional gross proceeds of $23.8 million. Management believes that the Company will successfully sell enough assets to pay down its debt by at least $540 million by July 2023, which would allow the Company to exercise the two year extension option on its Term Loan Facility. However, no assurances can be given that the Company will be successful in executing its plan to generate sufficient proceeds required to extend the facility.

Going Concern

The accompanying condensed consolidated financial statements are prepared in accordance with GAAP applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Management is required to evaluate whether there are conditions and events that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. As part of this evaluation, the Company takes into consideration all obligations due within the subsequent 12 months, as well as, cash on hand and expected cash receipts.

The Company currently anticipates it will continue to use sales of Consolidated Properties as the primary source of capital to repay principal on the Term Loan Facility, its Obligations and certain development expenditures.

As of August 8, 2022, $260.8 million of assets are under contract and the Company is currently negotiating sales, evaluating bona fide offers received and marketing, or about to bring to market for sale, assets with an estimated fair value over $1.2 billion. The Company believes, that if these assets were sold, the Company will be able to meet the $540 million Term Loan Facility principal paydown required to extend the Term Loan Facility.

While the Company believes these assets intended for sale will close before July 31, 2023, these assets are not all under contract within one-year of the maturity date of the Term Loan Facility and are not within the Company’s control and therefore, cannot be deemed probable. As a result, the Company has concluded that management’s plans do not alleviate substantial doubt about the Company’s ability to continue as a going concern until either the Searsextension is executed or Kmart brand.  At 85 Wholly Owned Properties, third-party tenantsasset sales under direct leases occupiedcontract are sufficient to increase the Company’s projected cash flows.

- 9 -


The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a portion of leasable space alongside Sears or Kmart, and 41 Wholly Owned Properties were leased only to third parties. A substantial majoritygoing concern.

COVID-19 Pandemic

The Coronavirus (“COVID-19”) pandemic has caused significant impacts on the real estate industry in the United States, including the Company’s properties.

As a result of the space at the JV Properties is also leased (or subleased) by the JVs to Sears Holdings under master lease agreements (collectively, the “JV Master Leases”).  The Master Leasedevelopment, fluidity and the JV Master Leases provideuncertainty surrounding this situation, the Company expects that these conditions may change, potentially significantly, in future periods and results for the JVs withthree and six months ended June 30, 2022 may not be indicative of the rightimpact of the COVID-19 pandemic on the Company’s business for future periods. As such, the Company cannot reasonably estimate the impact of COVID-19 on its financial condition, results of operations or cash flows over the foreseeable future.

As of June 30, 2022, the Company had collected 99% of rental income for the three months ended June 30, 2022. While the Company intends to recapture certain space from Sears Holdings at each property for retenantingenforce its contractual rights under its leases, there can be no assurance that tenants will meet their future obligations or redevelopment purposes.that additional rental modification agreements will not be necessary.

Note 2 – Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

These condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q of the Securities and Exchange Commission (“SEC”) and should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K, as amended, (the “Annual Report”), for the year ended December 31, 2016.2021. Certain footnote disclosures which would substantially duplicate those contained in our Annual Report have been condensed or omitted from this quarterly report. In the opinion of management, all adjustments necessary for a fair presentation (which include only normal recurring adjustments) have been included in this quarterly report. Operating results offor the three and ninesix months ended SeptemberJune 30, 20172022 may not be indicative of the results that may be expected for any other interim period or for the year ending December 31, 2017.2022. Capitalized terms used, but not defined in this quarterly report, have the same meanings as set forth in our Annual Report.Report, as amended by Amendment No. 1 on Form 10-K/A filed with the SEC on May 2, 2022.

The accompanying condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The condensed consolidated financial statements include the accounts of the Company, the Operating Partnership, each of their wholly-owned subsidiaries,consolidated properties, and all other entities in which they havethe Company has a controlling financial interest orinterest. For entities that meet the definition of a variable interest entity (“VIE”) in which, the Company has, as a resultconsolidates those entities when the Company is the primary beneficiary of ownership, contractual interests or other financial interests,the entity. The Company is determined to be the primary beneficiary when it possesses both the unilateral power to direct activities that most significantly impact the economic performance of the VIE and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. All intercompany accounts and transactions have been eliminated.

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If theThe Company has an interest in a VIE butcontinually evaluates whether it is not determined to bequalifies as the primary beneficiary the Company accounts for its interest under the equity method of accounting.  Similarly, for those entities which are not VIEs and over which the Company has the ability to exercise significant influence, but does not have a controlling financial interest, the Company accounts for its interests under the equity method of accounting.  The Company continually reconsiders its determination of whether an entity is a VIE and whetherupon reconsideration events. As of June 30, 2022, the Company qualifiesconsolidates 2 VIEs in which we are considered the primary beneficiary, as its primary beneficiary.

To the extent such variable interests are in entities that cannot be evaluated under the VIE model, the Company evaluates its interests usinghas the voting interest entity model.  Thepower to direct the activities of the entities, specifically surrounding the development plan. As of June 30, 2022 and December 31, 2021, the Company has several investments in unconsolidated VIEs and does not consolidate these entities because the Company is not the primary beneficiary. All intercompany accounts and transactions have been eliminated.

As of June 30, 2022, the Company holds a 60.9%77.9% interest in the Operating Partnership and is the sole general partner which gives the Company exclusive and complete responsibility for the day-to-day management, authority to make decisions, and control of the Operating Partnership. Through consideration of new consolidation guidance effective for theThe Company as of January 1, 2016, it has been concludeddetermined that the Operating Partnership is a VIE as the limited partners in the Operating Partnership, although entitled to vote on certain matters, do not possess kick-out rights or substantive participating rights. Accordingly, theThe Company consolidates its interest in the Operating Partnership. However, as the Company holds what is deemed a majority voting interest in the Operating Partnership, it qualifies for the exemption from providing certainThe assets and liabilities of the disclosure requirements associated with investments in VIEs.

The portions of consolidated entities not owned by the Company and the Operating Partnership are the same as those of the Company and are presented as non-controllingin the condensed consolidated balance sheets.

To the extent such variable interests as of and duringare in entities that are not evaluated under the periods presented.VIE model, the Company evaluates its interests using the voting interest entity model.

Certain prior period amounts, if any, have been reclassified to conform to the current period’s presentation.

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Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The most significant assumptions and estimates relate to fair values of acquired assets and liabilities assumed for purposes of applying the acquisition method of accounting, the useful lives of tangible and intangible assets, real estate impairment assessments and assessing the recoverability of accounts receivables.receivable. These estimates are based on historical experience and other assumptions which management believes are reasonable under the circumstances. Management evaluates its estimates on an ongoing basis and makes revisions to these estimates and related disclosures as experience develops or new information becomes known. Actual results could differ from these estimates.

Segment Reporting

The Company currently operates in a single reportable segment which includes the acquisition, ownership, development, redevelopment, management, sale and leasing of retailreal estate properties. The Company’s chief operating decision maker, its Chief Executive Officer,principal executive officer, assesses and measures the operating and financial results for each property on an individual basis and does not distinguish or group properties based on geography, size, or type. The Company, therefore, aggregates all properties into one1 reportable segment due to their similarities with regard to the nature and economics of the properties, tenants, and operations.operational process.

Accounting for Real Estate Acquisitions

Upon the acquisition of real estate, the Company assesses the fair value of acquired assets and liabilities assumed, including land, buildings, improvements and identified intangibles such as above-market and below-market leases, in-place leases and other items, as applicable, and allocates the purchase price based on these assessments.  In making estimates of fair values, the Company may use a number of sources, including data provided by third parties, as well as information obtained by the Company as a result of its due diligence, including expected future cash flows of the property and various characteristics of the markets where the property is located.

The fair values of tangible assets are determined on an "if vacant" basis. The "if vacant" fair value allocated to land is generally estimated via a market or sales comparison approach with the subject site being compared to similar properties that have sold or are currently listed for sale. The comparable properties are adjusted for dissimilar characteristics such as market conditions, location, access/frontage, size, shape/topography, or intended use, including the impact of any encumbrances on such use.  The "if vacant" value allocated to buildings and site improvements is generally estimated using an income approach and a cost approach that utilizes published guidelines for current replacement cost or actual construction costs for similar, recently developed properties.  Assumptions used in the income approach include capitalization and discount rates, lease-up time, market rents, make-ready costs, land value, and site improvement value.

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The estimated fair value of in-place tenant leases includes lease origination costs (the costs the Company would have incurred to lease the property to the current occupancy level) and the lost revenues during the period necessary to lease-up from vacant to the current occupancy level. Such estimates include the fair value of leasing commissions, legal costs and tenant coordination costs that would be incurred to lease the property to this occupancy level. Additionally, the Company evaluates the time period over which such occupancy level would be achieved and includes an estimate of the net operating costs (primarily real estate taxes, insurance and utilities) incurred during the lease-up period, which generally ranges up to one year. The fair value of acquired in-place tenant leases is included in lease intangible assets on the condensed consolidated balance sheets and amortized over the remaining lease term for each tenant.

Identifiable intangible assets and liabilities are calculated for above-market and below-market tenant and ground leases where the Company is either the lessor or the lessee. The difference between the contractual rental rates and the Company’s estimate of market rental rates is measured over a period equal to the remaining non-cancelable term of the leases, including significantly below-market renewal options for which exercise of the renewal option appears to be reasonably assured. Above-market tenant leases and below-market ground leases are included in lease intangible assets on the condensed consolidated balance sheets; below-market tenant leases and above-market ground leases are included in accounts payable, accrued expenses and other liabilities on the condensed consolidated balance sheets.  The values assigned to above-market and below-market tenant leases are amortized as reductions and increases, respectively, to base rental revenue over the remaining term of the respective leases.  The values assigned to below-market and above-market ground leases are amortized as increases and reductions, respectively, to property operating expenses over the remaining term of the respective leases.

The Company expenses transaction costs associated with business combinations in the period incurred; these costs are included in acquisition-related expenses within the condensed consolidated statements of operations. The Company capitalizes transaction costs associated with asset acquisitions; these costs are allocated to the fair values of the net assets acquired, included within the condensed consolidated balance sheets and depreciated or amortized over the remaining life or term of the acquired assets.

Real Estate Investments

Real estate assets are recorded at cost, less accumulated depreciation and amortization.

Expenditures for ordinary repairs and maintenance will be expensed as incurred. Significant renovations which improve the property or extend the useful life of the assets are capitalized. As real estate is undergoing redevelopment activities, all amounts directly associated with and attributable to the project, including planning, development and construction costs, interest costs, personnel costs of employees directly involved, and other miscellaneous costs incurred during the period of redevelopment, are capitalized. The capitalization period begins when redevelopment activities are underway and ends when the project is substantially complete.

Depreciation of real estate assets, excluding land, is recognized on a straight-line basis over their estimated useful lives as follows:which generally range between:

 

Building:Buildings:

25 – 40 years

Site improvements:

5 – 15 years

Tenant improvements:

shorter of the estimated useful life or non-cancelable term of lease

The Company amortizes identified intangibles that have finite lives over the period they are expected to contribute directly or indirectly to the future cash flows of the property or business acquired, generally the remaining non-cancelable term of a related lease.

OnThe Company, on a periodic basis, management assesses whether there are indicators, including macroeconomic conditions, that the value of the Company’s real estate assets (including any related intangible assets or liabilities) may be impaired. If an indicator is identified, amanagement will estimate the real estate asset is considered impaired only if management’s estimate of current andrecoverability based on projected operating cash flows (undiscounted and unleveraged), taking into account the anticipated and probability weighted holding period and capitalization rates, to determine if the undiscounted cash flows are less than a real estate asset’s carrying value. VariousIf the carrying value of an asset exceeds the undiscounted cash flows, an analysis is performed to determine the estimated fair value of the real estate asset. In estimating the fair value of an asset, various factors are considered, in the estimation process, including expected future operating income, trends and leasing prospects and the effects of demand, competition, and other economic factors.factors such as discount rates and market comparables. Changes in any estimates and/or assumptions, including the anticipated holding period, could have a material impact on the projected operating cash flows. If management determines that the carrying value of a real estate asset is impaired, a loss will be recorded for the excess of its carrying amount over its estimated fair value. No suchAs discussed in Note 4, The Company recognized impairment losses were recognized forcharges of $109.3 million and $64.5 million during the three or nine months ended SeptemberJune 30, 20172022 and 2021, respectively, and impairment charges of $110.3 million and $66.2 million during the six months ended June 30, 2022 and 2021 respectively.

Real Estate Dispositions

When the Company disposes of all or Septembera portion of a real estate asset, it recognizes a gain or loss on sale of real estate as the difference between the carrying value and consideration received. Consideration consists of cash proceeds received and in certain circumstances, non-cash consideration which is typically in the form of equity and is reported in equity in loss of unconsolidated entities on the Company’s condensed consolidated statements of operations. Refer to Note 4 for more information on the Company’s unconsolidated entity transactions.

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The following table summarizes our gain on sale of real estate, net during the three and six months ended June 30, 2016.2022 and 2021 (in millions):

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Dispositions to third parties

 

 

 

 

 

 

 

 

 

 

 

 

    Gross proceeds

 

$

163.4

 

 

$

80.0

 

 

$

172.3

 

 

$

126.9

 

    Gain on sale of real estate, net

 

 

68.0

 

 

 

18.1

 

 

 

67.0

 

 

 

42.3

 

Real Estate Held for Sale

When a real estate asset is identified by management as held for sale, the Company ceases depreciation of the asset and estimates its fair value, net of estimated costs to sell. If the estimated fair value, net of estimated costs to sell, of an asset is less than its net carrying value, an adjustment is recorded to reflect the estimated fair value. Properties classified as real estate held for sale generally represent properties that are either under contract for sale or have been identified for sale and all requirements to sell have been satisfied and are probable to close within a year.

In evaluating whether a property meets the held for sale criteria, the Company makes a determination as to the point in time that it is probable that a sale will be consummated. Given the nature of all real estate sales contracts, it is not unusual for such contracts to allow potential buyers a period of time to evaluate the property prior to formal acceptance of the contract. In addition, certain other matters critical to the final sale, such as financing arrangements, often remain pending even upon contract acceptance. As a result, properties under contract may not close within the expected time period or at all.

As of June 30, 2022, 24 properties, including 5 partial sites and pad sites, were classified as held for sale with assets of $117.0 million and 0 liabilities, and, as of December 31, 2021, 0 properties were classified as held for sale.

Investments in Unconsolidated Joint VenturesEntities

The Company accounts for its investments in unconsolidated joint venturesentities using the equity method of accounting as the Company exercises significant influence but does not control these entities.have a controlling financial interest. These investments are initially recorded at cost and are subsequently adjusted for cash contributions, cash distributions, and earnings which are recognized in accordance with the terms of the applicable agreement.

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On a periodic basis, management assesses whether there are indicators, including the operating performance of the underlying real estate and general market conditions which include macroeconomic conditions, that the value of the Company’s investments in unconsolidated joint venturesentities may be impaired. An investment’s value is impaired only if management’s estimate of the fair value of the Company’s investment is less than its carrying value and such difference is deemed to be other-than-temporary. To the extent impairment has occurred, the loss is measured as the excess of the carrying amount of the investment over its estimated fair value.  No such

The Company recorded $32.5 million in impairment losses were recognizedin investments in unconsolidated entities for the three or nineand six months ended SeptemberJune 30, 2017 or September2022. There were no impairment losses in investments in unconsolidated entities for the three and six months ended June 30, 2016.2021.

Restricted Cash

As of June 30, 2022 and Cash Equivalents

The Company considers instruments with an original maturity of three months or less to be cash and cash equivalents. Cash and cash equivalents balances may, at a limited number of banks and financial institutions, exceed insurable amounts. The Company believes it mitigates this risk by investing in or through major financial institutions and primarily in funds that are insured by the United States federal government.

Restricted Cash

RestrictedDecember 31, 2021, restricted cash represents cash deposited in escrow accountscollateral for a letter of credit.

Rental Revenue Recognition and Tenant Receivables

Rental income is comprised of base rent and reimbursements of property operating expenses. The Company commences rental revenue recognition when the lessee takes control of the physical use of the leased asset based on evaluation of several factors. Base rent is recognized on a straight-line basis over the non-cancelable terms of the related leases. For leases that have fixed and measurable base rent escalations, the difference between such rental income earned and the cash rent due under the provisions of the lease is recorded as straight-line rent receivable and included as a component of tenant and other receivables on the condensed consolidated balance sheets. Reimbursement of property operating expenses arises from tenant leases which generally can only be usedprovide for the paymentrecovery of all or a portion of the operating expenses and real estate taxes debt service, insurance, and future capital expendituresof the respective property. This revenue is accrued in the same periods as required by certain loan and lease agreements, as well as legally restricted tenant security deposits.  As of September 30, 2017, the Company had approximately $202.5 million of restricted cash, including $174.4 million reserved for redevelopment costs, tenant allowances and leasing commissions, deferred maintenance, environmental remediation and other capital expenditures, $22.1 million reserved for basic property carrying costs such as real estate taxes, insurance and ground rent, and $6.0 million of other restricted cash which consisted primarily of prepaid rental income.expenses are incurred.

Tenant and Other Receivables

Accounts receivable includes unpaid amounts billed to tenants, accrued revenues for future billings to tenants for property expenses, and amounts arising from the straight-lining of rent.  - 12 -


The Company periodically reviews its receivables for collectability, taking into consideration changes in factors such as the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates, and economic conditions in the area where the property is located. InTenant receivables, including receivables arising from the eventstraight-lining of rents, are written-off directly when management deems that the collectability of substantially all future lease payments from a receivable with respectspecified lease is not probable of collection, at which point, the Company will begin recognizing revenue on a cash basis, based on actual amounts received. Any receivables that are deemed to any tenantbe uncollectible are recognized as a reduction to rental income in the Company’s condensed consolidated statements of operations. If future circumstances change such that the Company believes that it is in doubt,reasonably certain that the Company will collect all rental income remaining on such leases, the Company will resume accruing rental income and recognize a provisioncumulative catch up for uncollectible amounts will be established orpreviously written-off receivables.

The Company recorded a direct write-offreduction to rental income of $0.4 million and an increase to rental income of $0.8 million during the three months ended June 30, 2022 and 2021, respectively, as a result of the specificCompany’s evaluation of collectability. The Company recorded a reduction to rental income of $0.2 million and an increase to rental income of $1.0 million during the six months ended June 30, 2022 and 2021, respectively. In addition, the Company also recorded a reversal of previously recorded straight-line rent receivable will be made.  Forof $0.1 million for the three and six months ended June 30, 2022. The Company also recorded income of previously reserved straight-line rent of $0.5 million and a reduction of income of previously recorded straight-line rent of $0.5 million for the three and six months ended June 30, 2021, respectively. During the three and six months ended June 30, 2022, the Company recorded an increase to rental income of $0.2 million and $0.1 million related to the allowance for deferral agreements, respectively. During the three and six months ended June 30, 2021, the Company recorded an increase to rental income of $0.4 million and $0.5 million related to the allowance for deferral agreements.

Due to the COVID-19 pandemic, the Company has entered into amendments to existing leases with certain tenants (the “Rent Deferral Agreements”), that provide for the deferral of all or some portion of rental payments due during the period which such tenant was affected by the COVID-19 pandemic (“Deferred Rent”). The Rent Deferral Agreements typically provide for repayment of the Deferred Rent within six to 12 months following the end of the rent deferral period and, in many instances, waive certain other conditions in favor of the Company while Deferred Rent is outstanding. Deferred Rent generally becomes immediately due and payable under the Rent Deferral Agreements if the tenant does not make the minimum contractual payments or otherwise defaults on the lease. We recognize lease concessions related to the COVID-19 pandemic such as rent deferrals and abatements in accordance with the Lease Modification Q&A issued by the Financial Accounting Standards Board, (“FASB”), in April 2020, which provides entities with the option to elect to account for lease concessions as though the enforceable rights and obligations existed in the original lease. As a result, the Company has not adjusted accrued rental revenues or the portion of accrued rental revenues related to the straight-line method of reporting rental revenue,for the portion which has been deferred. When the Deferred Rents are repaid, the Company performs a periodic review of receivable balances to assesswill relieve the risk of uncollectible amounts and establish appropriate provisions.

Revenue Recognition

Rental income is recognized on a straight-line basis over the non-cancelable terms of the related leases.  For leases that have fixed and measurable rent escalations, the difference between such rental income earned and the cash rent due under the provisions of the lease is recorded as deferred rent receivable and included as a component ofaccrual in tenant and other receivables on the condensed consolidated balance sheets.receivables.

In leasing tenant space, the Company may provide funding to the lessee through a tenant allowance. In accounting for a tenant allowance, the Company will determine whether the allowance represents funding for the construction of leasehold improvements and evaluate the ownership of such improvements. If the Company is considered the owner of the improvements for accounting purposes, the Company will capitalize the amount of the tenant allowance and depreciate it over the shorter of the useful life of the improvements or the related lease term. If the tenant allowance represents a payment for a purpose other than funding leasehold improvements, or in the event the Company is not considered the owner of the improvements for accounting purposes, the allowance is considered to be a lease incentive and is recognized over the lease term as a reduction of rental revenue on a straight-line basis.

Tenant and Other Receivables

The Company commences recognizing revenue based on an evaluationTenant and other receivables includes unpaid amounts billed to tenants, accrued revenues for future billings to tenants for property expenses, and amounts arising from the straight-lining of rent, as discussed above. Tenant and other receivables also includes management fees receivable for services performed for the benefit of certain unconsolidated entities. In the event that the collectability of a number of factors. In most cases, revenue recognition undermanagement fee receivable is in doubt, a lease begins when the lessee takes possession ofprovision for uncollectible amounts will be established or controls the physical usea direct write-off of the leased asset.  Generally, this occurs on the lease commencement date.specific receivable will be made.

Management and Other Fee Income

Tenant reimbursementManagement and other fee income arises from tenant leases which providerepresents property management, construction, leasing and development fees for services performed for the recoverybenefit of all or a portioncertain unconsolidated entities.

Property management fee income is reported at 100% of the operating expenses and real estate taxes of the respective property.  This revenue is accruedearned from such unconsolidated properties in the same periods as the expenses are incurred.

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Accounting for Recapture and Termination Activity Pursuant to the Master Lease

Seritage 100% Recapture Rights.  The Company generally treats the delivery of a 100% recapture notice as a modification of the Master Lease as of the date of notice.  Such a notice and lease modification result in the following accounting adjustments for the recaptured property:

Accrued rental revenues related to the straight-line method of reporting rental revenue that are deemed uncollectable as result of the lease modification are amortized over the remaining shortened life of the lease from the date of notice to the date of vacancy.

Intangible lease assets and liabilities that are deemed to be impacted by the lease modification are amortized over the shorter of the shortened lease term from the date of notice to the date of vacancy or the remaining useful life of the asset or liability.

A 100% recapture will generally occur in conjunction with obtaining a new tenant or a real estate development project.  As such, termination fees, if any, associated with the 100% recapture notice are generally capitalized as either an initial direct cost of obtaining a new lease or a necessary cost of the real estate project and depreciated over the life of the new lease obtained or the real estate asset being constructed or improved.

Seritage 50% Recapture Rights.  The Company generally treats the delivery of a 50% recapture notice as a modification of the Master Lease as of the date of notice.  Such a notice and lease modification result in the following accounting adjustments for the recaptured property:

The portion of accrued rental revenues related to the straight-line method of reporting rental revenue that are subject to the lease modification are amortized over the remaining shortened life of the lease from the date of notice to the date of vacancy.  The portion of accrued rental revenues related to the straight-line method of reporting rental revenue that is attributable to the retained space is amortized over the remaining life of the Master Lease.

The portion of intangible lease assets and liabilities that is deemed to be impacted by the lease modification is amortized over the shorter of the shortened lease term from the date of notice to the date of vacancy or the remaining useful life of the asset or liability.  The portion of intangible lease assets and liabilities that is attributable to the retained space is amortized over the remaining useful life of the asset or liability.

Sears Holdings Termination Rights.  The Master Lease provides Sears Holdings with certain rights to terminate the Master Lease with respect to properties that cease to be profitable for operation by Sears Holdings.  Such a termination would generally result in the following accounting adjustments for the terminated property:

Accrued rental revenues related to the straight-line method of reporting rental revenue that are subject to the termination are amortized over the remaining shortened life of the lease from the date of notice to the date of vacancy.

Intangible lease assets and liabilities that are deemed to be impacted by the termination are amortized over the shorter of the shortened lease term from the date of notice to the date of vacancy or the remaining useful life of the asset or liability.

Termination fees required to be paid by Sears Holdings are recognized as follows:

For the portion of the termination fee attributable to the annual base rent of the subject property, termination income is recognized on a straight-line basis over the shortened life of the lease from the date the termination fee becomes legally binding to the date of vacancy.

For the portion of the termination fee attributable to estimated real estate taxes and property operating expenses for the subject property, prepaid rental income is recorded in the period such fee is received and recognized as tenant reimbursement revenue in the same periods as the expenses are incurred.

Derivatives

The Company’s use of derivative instruments is limited to the management of interest rate exposure and not for speculative purposes.  In connection with the issuance of the Company’s Mortgage Loans and Future Funding Facility, the Company purchased for $5.0 million an interest rate cap with a term of four years, a notional amount of $1,261 million and a strike rate of 3.5%.  The interest rate cap is measured at fair value and included as a component of prepaid expenses, deferred expenses and other assets on the condensed consolidated balance sheets.  The Company has elected not to utilize hedge accounting, and therefore, the change in fair value is included within change in fair value of interest rate capfee income on the condensed consolidated statements of operations. The Company’s share of management expenses incurred by the unconsolidated entities is reported in equity in loss of unconsolidated entities on the condensed consolidated statements of operations and in other expenses in the combined financial data in Note 4.

- 13 -


Leasing and development fees are initially reported at the portion of revenue earned attributable to outside ownership of the related unconsolidated entities. The Company’s share in leasing and development fee income is recognized over the useful life of the associated development project, in the case of development fees, or lease term, in the case of leasing fees, as the associated asset is depreciated over the same term and included in equity in loss of unconsolidated entities on the condensed consolidated statements of operations and in other expenses in the combined financial data in Note 4.

Management determined that property and asset management and construction and development management services each represent a series of stand-ready performance obligations satisfied over time with each day of service being a distinct performance obligation.For the three months ended September 30, 2017,property and asset management services, the Company recordedis typically compensated for its services through a lossmonthly management fee earned based on a specified percentage of $0.1 million compared to a loss of less than $0.1 million formonthly rental income or rental receipts generated from the three months ended September 30, 2016.property under management. For the nine months ended September 30, 2017,construction and development services, the Company recordedis typically compensated for planning, administering and monitoring the design and construction of projects within our unconsolidated entities based on a losspercentage of $0.7 million comparedproject costs or a fixed fee. Revenues from such management contracts are recognized over the life of the applicable contract.

Conversely, leasing services are considered to be performance obligations, satisfied as of a losspoint in time. The Company’s leasing fee is typically paid upon the occurrence of $1.9 million forcertain contractual event(s) that may be contingent and the nine months ended September 30, 2016.pattern of revenue recognition may differ from the timing of payment. For these services, the obligations are typically satisfied at lease execution and tenant opening date, and revenue is recognized in accordance with the related agreement at the point in time when the obligation has been satisfied.

Share-Based Compensation

- 11 -


Stock-Based Compensation

The Company generally recognizes equity awards to employees as compensation expense and includes such expense within general and administrative expenses onin the condensed consolidated statements of operations. Compensation expense for equity awards is generally based on the grant date fair value of the common shares at the date of the grant andawards. Compensation expense is recognized (i) ratably over the vesting period for awards with time-based vesting and (ii) forawards with market-based vesting conditions (e.g. total shareholder return). For awards with performance-based vesting determined by Company operating criteria, the Company recognizes compensation expense at the date the achievement of performance criteria is deemed probable anfor the amount equal to that which would have been recognized ratably from the date of the grant through the date the achievement of performance criteria is deemed probable, and then ratably from the date the achievement of performance criteria is deemed probable through the remainder of the vesting period. The Company utilizes a third-party valuation firm to measure the grant date fair value of restricted stock unit awards with market-based criteria using the Monte Carlo model. Forfeitures are recorded on an actual basis.

Concentration of Credit Risk

Concentrations of credit risk arise when a number of operators, tenants, or obligors related to the Company'sCompany’s investments are engaged in similar business activities, or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations, including those to the Company, to be similarly affected by changes in economic conditions. As of September 30, 2017, a majority of the Company's real estate properties were leased to Sears Holdings, and the majority of Company’s rental revenues were derived from the Master Lease (see Note 5).  Until the Company further diversifies the tenancy of its portfolio, an event that has a material adverse effect on Sears Holdings’ business, financial condition or results of operations could have a material adverse effect onManagement believes the Company’s business, financial condition or results of operations.  Sears Holdingsportfolio is a publicly traded company that is subject to the informational filing requirements of the Securities Exchange Act of 1934, as amended, and is required to file periodic reports on Form 10-K and Form 10-Q with the SEC.  Refer to www.sec.gov for Sears Holdings publicly-available financial information.

Other than the Company's tenant concentration, management believes the Company's portfolio was reasonably diversified by geographical location and diddoes not contain any other significant concentrations of credit risk. As of SeptemberJune 30, 2017,2022, the Company'sCompany has 1 tenant that comprises 13.8% of annualized based rent, with no other tenants exceeding 10.0% of annualized based rent. The Company’s portfolio of 230 Wholly Owned125 Consolidated Properties and 28 JV25 Unconsolidated Properties was diversified by location across 4937 states and Puerto Rico.

EarningsEarnings/(Loss) per Share

The Company has three classes of common stock. The rights, including the liquidation and dividend rights, of the holders of the Company’s Class A common shares and Class C non-voting common shares are identical, except with respect to voting. As the liquidation and dividend rights are identical, the undistributed earnings are allocated on a proportionate basis. The net earnings (loss) per share amounts are the same for Class A and Class C common shares because the holders of each class are legally entitled to equal per share distributions whether through dividends or in liquidation. Since August 29, 2018, all outstanding Class C common shares had been exchanged for Class A common shares and there are currently 0 Class C common shares outstanding.

Class B non-economic common shares are excluded from earnings per share computations as they do not have economic rights. Since December 31, 2020, all outstanding Class B common shares have been surrendered and there are currently 0 Class B common shares outstanding.

All outstanding non-vested shares that contain non-forfeitable rights to dividends are considered participating securities and are included in computing earnings per share pursuant to the two-class method which specifies that all outstanding non-vested share-based payment awards that contain non-forfeitable rights to distributions are considered participating securities and should be included in the computation of earnings per share.

Recently Issued Accounting Pronouncements- 14 -


Income Taxes

In February 2017, the Financial Accounting Standards Boards (“FASB”) issued Accounting Standards Update (“ASU”) 2017-05, “Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets” to provide guidance for recognizing gains and losses from the transfer of nonfinancial assets. The standard requires a company to derecognize nonfinancial assets once it transfers control of a distinct nonfinancial asset or distinct in substance nonfinancial assets to noncustomers. Additionally, when a company transfers its controlling interest in a nonfinancial asset, but retains a non-controlling ownership interest, the company is required to measure any non-controlling interest it receives or retains at fair value. ASU 2017-15 is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. The effective date of this guidance coincides with revenue recognition guidance. The Company is currently assessing the impact that adoption of this guidance will have on its condensed consolidated financial statements reflect provisions for federal, state and footnote disclosures.

- 12 -


In January 2017,local income taxes. The Company recognizes deferred tax assets and liabilities for the FASB issued ASU 2017-01future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis, as well as operating loss and tax credit carryforwards. The Company measures deferred tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which changes the definitionthose temporary differences and carryforwards are expected to be recovered or settled. The effect on deferred tax assets and liabilities as a result of a businesschange in tax rates is recognized as income in the period that includes the enactment date. For years prior to exclude acquisitions where substantially2022, the Company was taxed as a REIT and did not expect to pay federal, state or local income taxes at the REIT level (including its qualified REIT subsidiaries). While a REIT, the Company was required to distribute at least 90% of its REIT level taxable income to shareholders, and the resulting dividends paid deduction offset its REIT taxable income. Consequently, while a REIT, since the Company did not expect to pay taxes on its REIT taxable income, it did not recognize deferred tax assets or liabilities.

Deferred income taxes are determined based on the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities given the provisions of enacted tax laws. Significant judgments are required to determine the consolidated provision (benefit) for income taxes. Deferred income tax provisions and benefits are based on changes to the assets or liabilities from year to year. Realization of the Company’s deferred tax assets is dependent upon many factors such as tax regulations applicable to the jurisdictions in which the Company operates, estimates of future taxable income and the character of such taxable income.

Deferred tax assets are reduced by a valuation allowance when it is more likely than not that some portion or all of the fair valuedeferred tax assets will not be realized. A valuation allowance is recorded to adjust net deferred tax assets to the amount which management believes will more likely than not be recoverable. In making such determination, management considers available positive and negative evidence, including future reversals of existing taxable temporary differences, future taxable income, and the assets acquired are concentrated in a single identifiable asset or a groupimplementation of similar identifiable assets.  While there are various differences betweenprudent tax planning strategies. In the accounting for an asset acquisition and a business combination,event that the Company expects thatis able to utilize its deferred tax assets in excess of their recorded amount, the largest impactvaluation allowance will be the capitalization of transaction costs for asset acquisitions which are expensed for business combinations.  ASU 2017-01 is effective, onreduced with a prospective basis, for interim and annual periods beginning after January 1, 2019; early adoption is permitted.  corresponding reduction to income tax expense.

Recently Issued Accounting Pronouncements

The Company has chosen to early adopt ASU 2017-01not adopted any Accounting Standards Updates (“ASUs”) issued by the FASB during the current period onthree and six months ended June 30, 2022. Any other recently issued accounting standards or pronouncements not disclosed have been excluded as they either are not applicable to the Company, or they are not expected to have a prospective basis and it did not have an impactmaterial effect on the condensed consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, "Statement of Cash Flows - Restricted Cash." ASU 2016-18 requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or cash equivalents.  Therefore, amounts generally described as restricted cash and equivalents should be included with cash and cash equivalents when reconciling the beginning and end of period total amounts on the statement of cash flows.  ASU 2016-18 is effective, on a retroactive basis, for interim and annual periods beginning after December 15, 2017; early adoption is permitted.  The Company early adopted this guidance on March 31, 2017, which changes our statements of cash flows and related disclosure for all periods presented and accordingly, the following is a summary of our cash, cash equivalents, and restricted cash total as presented in our statements of cash flows for the nine months ended September 30, 2017 and September 30, 2016 (in thousands):Company.

 

 

Nine Months Ended

 

 

 

September 30, 2017

 

 

September 30, 2016

 

Cash and cash equivalents

 

$

104,153

 

 

$

90,029

 

Restricted cash

 

 

202,513

 

 

 

81,790

 

Total cash, cash equivalents, and restricted cash shown in the statement of cash flows

 

$

306,666

 

 

$

171,819

 

In August 2016, the FASB issued ASU 2016-15, "Classification of Certain Cash Receipts and Cash Payments." ASU 2016-15 provides classification guidance for eight specific topics including debt extinguishment costs, contingent consideration payments made after a business combination, and distributions received from equity method investees. ASU 2016-18 is effective, on a prospective basis, for interim and annual periods beginning after December 15, 2017; early adoption is permitted.  The Company expects to retrospectively adopt ASU 2016-15 on the effective date of January 1, 2018, applying the cumulative earnings approach to classify distributions received from our equity method investees, which will impact our consolidated statements of cash flows upon adoption where distributions from unconsolidated joint ventures in excess of cumulative equity in earnings will be classified as an inflow from investing activities.

On February 25, 2016, the FASB issued Accounting Standards Codification (“ASC”) 842 (“ASC 842”), “Leases” which replaces the existing guidance in ASC 840, Leases.  ASC 842 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018.  ASC 842 requires a dual approach for lessee accounting under which a lessee would account for leases as finance leases or operating leases.  Both finance leases and operating leases will result in the lessee recognizing a right-of-use (ROU) asset and a corresponding lease liability.  For finance leases, the lessee would recognize interest expense and amortization of the ROU asset and for operating leases, the lessee would recognize a straight-line total lease expense.  The Company is currently assessing the impact that adoption of this guidance will have on its condensed consolidated financial statements and footnote disclosures.

In September 2015, the FASB issued ASU 2015-16, which amends Topic 805, Business Combinations, and requires the recognition of purchase price allocation adjustments that are identified during the measurement period in the reporting period in which the adjustment amounts are determined, and eliminates the requirement to retrospectively account for these adjustments.  ASU 2015-16 is effective, on a prospective basis, for interim and annual periods beginning after December 15, 2015; early adoption is permitted.  The Company has chosen to early adopt ASU 2015-16 during the current period on a prospective basis and it did not have an impact on the condensed consolidated financial statements.

In May 2014, with subsequent updates issued in August 2015 and March, April, May and December 2016, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance.  ASU 2014-09 states that “an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.”  While ASU 2014-09 specifically references contracts with customers, it does not apply to contracts within the scope of ASC 840 and ASC 842 (leases) and it may apply to certain other transactions such as the sale of real estate or equipment.  In July 2015, the FASB voted to defer the effective date of ASU 2014-09 by one year.  Accordingly, ASU 2014-09 is effective for annual periods beginning after December 15, 2017, with early adoption permitted for annual periods beginning after December 15, 2016.  The standard can be applied either retrospectively to each prior reporting period presented or as a cumulative-effect adjustment recognized as of the date of initial application. Expanded quantitative and qualitative disclosures regarding revenue recognition will be required for contracts that are subject to this guidance.

- 13 -


We have considered the sources of revenue that will be affected by ASU 2014-09, and do not believe our revenue recognition will be impacted by the new standard, as leases (the source of the majority of the Company's revenues) are excluded from ASU 2014-09. However, once the new lease guidance goes into effect on January 1, 2019 which sets forth principles for the recognition, measurement, presentation and disclosure of leases, we believe that the new revenue standard will apply to executory costs and other components of revenue due under leases that are deemed to be non-lease components (such as common area maintenance), which could affect our recognition pattern for such revenue.

Note 3 – Lease Intangible Assets and Liabilities

LeaseThe following tables summarize the Company’s lease intangible assets (acquired in-place leases above-market leases and below-market groundabove-market leases) and liabilities (acquired below-market leases)leases, which is included in accounts payable, accrued expenses and other liabilities on the consolidated balance sheets), net of accumulated amortization, were $327.2 million and $15.0 million, respectively, as of SeptemberJune 30, 20172022 and $464.4 million and $16.8 million, respectively, as of December 31, 2016.  The following table summarizes the Company’s lease intangible assets and liabilities2021 (in thousands):

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2022

 

 

 

 

 

 

 

 

Gross

 

 

Accumulated

 

 

 

 

 

 

Gross

 

 

Accumulated

 

 

 

 

Lease Intangible Assets

 

Asset

 

 

Amortization

 

 

Balance

 

 

Asset

 

 

Amortization

 

 

Balance

 

In-place leases, net

 

$

553,656

 

 

$

(243,872

)

 

$

309,784

 

 

$

23,982

 

 

$

(14,361

)

 

$

9,621

 

Below-market ground leases, net

 

 

11,766

 

 

 

(457

)

 

 

11,309

 

Above-market leases, net

 

 

8,925

 

 

 

(2,789

)

 

 

6,136

 

 

 

2,485

 

 

 

(1,811

)

 

 

674

 

Total

 

$

574,347

 

 

$

(247,118

)

 

$

327,229

 

 

$

26,467

 

 

$

(16,172

)

 

$

10,295

 

 

 

Gross

 

 

Accumulated

 

 

 

 

 

 

Gross

 

 

Accumulated

 

 

 

 

Lease Intangible Liabilities

 

Liability

 

 

Amortization

 

 

Balance

 

 

Liability

 

 

Amortization

 

 

Balance

 

Below-market leases, net

 

$

19,730

 

 

$

(4,732

)

 

$

14,998

 

 

$

4,731

 

 

$

(1,736

)

 

$

2,995

 

Total

 

$

19,730

 

 

$

(4,732

)

 

$

14,998

 

 

$

4,731

 

 

$

(1,736

)

 

$

2,995

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2021

 

 

 

 

 

 

 

 

Gross

 

 

Accumulated

 

 

 

 

 

 

Gross

 

 

Accumulated

 

 

 

 

Lease Intangible Assets

 

Asset

 

 

Amortization

 

 

Balance

 

 

Asset

 

 

Amortization

 

 

Balance

 

In-place leases, net

 

$

592,871

 

 

$

(146,964

)

 

$

445,907

 

 

$

30,071

 

 

$

(16,670

)

 

$

13,401

 

Below-market ground leases, net

 

 

11,766

 

 

 

(305

)

 

 

11,461

 

Above-market leases, net

 

 

8,964

 

 

 

(1,933

)

 

 

7,031

 

 

 

3,925

 

 

 

(2,509

)

 

 

1,416

 

Total

 

$

613,601

 

 

$

(149,202

)

 

$

464,399

 

 

$

33,996

 

 

$

(19,179

)

 

$

14,817

 

 

 

Gross

 

 

Accumulated

 

 

 

 

 

 

Gross

 

 

Accumulated

 

 

 

 

Lease Intangible Liabilities

 

Liability

 

 

Amortization

 

 

Balance

 

 

Liability

 

 

Amortization

 

 

Balance

 

Below-market leases, net

 

$

20,011

 

 

$

(3,184

)

 

$

16,827

 

 

$

5,802

 

 

$

(2,146

)

 

$

3,656

 

Total

 

$

20,011

 

 

$

(3,184

)

 

$

16,827

 

 

$

5,802

 

 

$

(2,146

)

 

$

3,656

 

- 15 -


Amortization of acquired below-market leases, net of acquired above-market leases, resulted in additional rental income of $0.3  million and $0.3$0.1 million for the three and six months ended SeptemberJune 30, 20172022 and September 30, 2016, respectively, and $0.9  million and $0.9 million for the nine months ended September 30, 2017 and September 30, 2016,2021, respectively. Future amortizationAmortization of these intangibles is estimated to increase rental income as set forth below (in thousands):

Remainder of 2017

 

$

(241

)

2018

 

 

(961

)

2019

 

 

(934

)

2020

 

 

(800

)

2021

 

 

(786

)

- 14 -


Amortization ofan acquired below-market ground leaseslease resulted in additional property expense of $50 thousand$0.1 million for the three and six months ended SeptemberJune 30, 20172022 and September 30, 2016, respectively, and $150 thousand for the nine months ended September 30, 2017 and September 30, 2016,2021, respectively. Future amortization of below-market ground leases is estimated to increase property expenses as set forth below (in thousands):

Remainder of 2017

 

$

51

 

2018

 

 

203

 

2019

 

 

203

 

2020

 

 

203

 

2021

 

 

203

 

Amortization of acquired in-place leases resulted in additional depreciation and amortization expense of $47.5$0.6 million and $27.4$0.8 million for the three months ended SeptemberJune 30, 20172022 and September 30, 2016,2021, respectively and $124.3$1.3 million and $72.1$1.6 million for the ninesix months ended SeptemberJune 30, 20172022 and September 30, 2016,2021, respectively. Future estimated amortization of acquired in-placethese leases intangibles is set forth below (in thousands):

Remainder of 2017

 

$

15,521

 

2018

 

 

42,303

 

2019

 

 

40,543

 

2020

 

 

40,097

 

2021

 

 

39,313

 

 

 

(Above) / below market leases, net

 

 

Below market ground lease

 

 

In-place leases

 

Remainder of 2022

 

$

(7

)

 

$

101

 

 

$

1,159

 

2023

 

 

(2

)

 

 

203

 

 

 

1,506

 

2024

 

 

22

 

 

 

203

 

 

 

979

 

2025

 

 

85

 

 

 

203

 

 

 

725

 

2026

 

 

166

 

 

 

203

 

 

 

478

 

2027

 

 

166

 

 

 

203

 

 

 

392

 

Thereafter

 

 

1,885

 

 

 

9,230

 

 

 

4,501

 

 

Note 4 – Investments in Unconsolidated Joint VenturesEntities

The Company conducts a portion of its property rental activities through investments in unconsolidated joint ventures for which the Company holds less than a controlling interest.entities. The Company’s partners in these unconsolidated joint venturesentities are unrelated real estate entities or commercial enterprises. The Company and its partners in these unconsolidated joint venture partnersentities make initial and/or ongoing capital contributions to these unconsolidated joint ventures.entities. The obligations to make capital contributions are governed by each unconsolidated joint venture’sentity’s respective operating agreement and related governing documents.

As of June 30, 2022, the Company had investments in 11 unconsolidated entities as follows:

 

 

 

 

 

 

Seritage %

 

# of

 

Total

 

Unconsolidated Entities

 

Entity Partner(s)

 

Ownership

 

Properties

 

GLA

 

GS Portfolio Holdings II LLC
   ("GGP I JV")

 

Brookfield Properties Retail
   (formerly GGP Inc.)

 

50.0%

 

3

 

 

402,900

 

GS Portfolio Holdings (2017) LLC
   ("GGP II JV")

 

Brookfield Properties Retail
   (formerly GGP Inc.)

 

50.0%

 

3

 

 

474,100

 

MS Portfolio LLC
   ("Macerich JV")

 

The Macerich Company

 

50.0%

 

7

 

 

1,266,600

 

SPS Portfolio Holdings II LLC
   ("Simon JV")

 

Simon Property Group, Inc.

 

50.0%

 

5

 

 

872,200

 

Mark 302 JV LLC
   ("Mark 302 JV")

 

An investment fund managed
   by Invesco Real Estate

 

50.0%

 

1

 

 

103,000

 

SI UTC LLC
   ("UTC JV")

 

A separate account advised by
   Invesco Real Estate

 

50.0%

 

1

 

 

226,200

 

SF WH Joint Venture LLC
   ("West Hartford JV")

 

An affiliate of First Washington
   Realty

 

50.0%

 

1

 

 

163,700

 

GGCAL SRG HV LLC
   ("Cockeysville JV")

 

An affiliate of
   Greenberg Gibbons

 

50.0%

 

1

 

 

160,200

 

Tech Ridge JV Holding LLC
   ("Tech Ridge JV")

 

An affiliate of
   RD Management

 

50.0%

 

1

 

 

 

J&J Baldwin Park LLC
   ("Carson Investment")

 

An affiliate of NewMark Merrilll Companies and other entities

 

20.0%

 

1

 

 

182,200

 

Landmark Land Holdings, LLC
   ("Landmark JV")

 

Landmark Holdings, LLC

 

31.3%

 

1

 

 

 

 

 

 

 

 

 

 

 

25

 

 

3,851,100

 

The Company currently has investmentscontributed certain properties to unconsolidated entities in fourexchange for equity interests in those unconsolidated entities: (i) GS Portfolio Holdings II LLCentities. The contribution of property to unconsolidated entities is accounted for as a sale of real estate and the Company recognizes the gain or loss on the sale (the “GGP I JV”“Gain (Loss)”), a joint venture between Seritage and a subsidiary of GGP Inc. (together with its subsidiaries, “GGP”); (ii) GS Portfolio Holdings (2017) LLC (the “GGP II JV”), a joint venture between Seritage and a subsidiary of GGP; (iii) SPS Portfolio Holdings LLC (the “Simon JV”), a joint venture between Seritage and a subsidiary of Simon Property Group, Inc. (together with its subsidiaries, “Simon”); and (iv) MS Portfolio LLC (the “Macerich JV”), a joint venture between Seritage and a subsidiary of The Macerich Company (together with its subsidiaries, “Macerich”).  A substantial majority based upon the transaction price attributed to the property at the closing of the space at the JV Properties is leased to Sears Holdings under the JV Master Leases which include recapture rights and termination rights with similar terms as those described under the Master Lease.

unconsolidated entities transaction (the “Contribution Value”). The Company’s investments in unconsolidated joint ventures at September 30, 2017, consisted of (in thousands, except number of properties):

 

 

Seritage %

 

 

# of

 

 

Total

 

 

Initial

 

Joint Venture

 

Ownership

 

 

Properties

 

 

GLA

 

 

Value (1)

 

GGP I JV

 

 

50

%

 

 

4

 

 

 

598

 

 

$

37,570

 

GGP II JV

 

 

50

%

 

 

5

 

 

 

1,187

 

 

 

57,500

 

Macerich JV

 

 

50

%

 

 

9

 

 

 

1,572

 

 

 

150,000

 

Simon JV

 

 

50

%

 

 

10

 

 

 

1,714

 

 

 

114,012

 

Total

 

 

 

 

 

 

28

 

 

 

5,071

 

 

$

359,082

 

(1)

Represents contribution value at formation of each JV.

On July 12, 2017, the Company completed two transactions with GGP for gross consideration of $247.6 million whereby the Company (i) sold to GGP the Company’s 50% JV Interests in eight of the 12 assets in the GGP I JV for $190.1 million and recorded a gain of $43.7 million which is included in gain on sale of interest in unconsolidated joint venture within the condensed consolidated statements of operations; and (ii) contributed five Wholly Owned Properties to the GGP II JV and sold a 50% interest in the new JV Properties to GGP for $57.5 million and recorded a gain of $13.0 million whichGain or (Loss) is included in gain on sale of real estate withinon the condensed consolidated statements of operations.

- 1516 -


SubsequentIn certain circumstances, the Contribution Value is subject to revaluation as defined in the respective unconsolidated entity agreements, which may result in an adjustment to the gain or loss recognized. If the Contribution Value is subject to revaluation, the Company initially recognizes the gain or loss at the value that is the expected amount within the range of possible outcomes and will re-evaluate the expected amount on a quarterly basis through the final determination date.

Upon revaluation, the primary inputs in determining the Contribution Value will be updated for actual results and may result in a cash settlement or capital account adjustment between the unconsolidated entity partners, as well as an adjustment to the initial gain or loss.

Each reporting period, the Company re-analyzes the primary inputs that determine the Contribution Value and the gain or loss for those unconsolidated entities subject to a revaluation. The following table summarizes the properties contributed to the Company’s unconsolidated entities (in millions):

 

 

 

 

June 30, 2022

 

Unconsolidated Entities

 

Contribution Date

 

Contribution Value

 

 

Gain (Loss)

 

2018

 

 

 

 

 

 

 

 

Mark 302 JV (1)

 

March 20, 2018

 

$

60.0

 

 

$

8.8

 

2019

 

 

 

 

 

 

 

 

Cockeysville JV (2)

 

March 29, 2019

 

$

14.6

 

 

$

5.9

 

Tech Ridge JV (3)

 

September 27, 2019

 

$

3.0

 

 

$

0.1

 

(1)
The Mark 302 JV was subject to a revaluation which resulted in the Company adjusting the Contribution Value down to $60.0 million and reduced the Gain (Loss) by $30.0 million. As of September 30, 2017,2021, the amended determination date, there has been no change to the adjusted Contribution Value and the final Contribution Value is $60.0 million.
(2)
The Cockeysville JV is subject to revaluation upon our partner contributing an adjacent parcel of land (the “Additional Land Parcel”) to the joint venture which was conditioned on certain milestones being met with respect to entitling the Additional Land Parcel for residential use. As of December 31, 2021, the parcel has been entitled and, with our consent, the partner entered a sales contract with a third party for the land. As a result, the Company agreedreceived its share of the proceeds from the sale in lieu of the parcel being contributed to sellthe venture and recorded an additional gain of $2.1 million during the year ended December 31, 2021. The Company has determined that the final contribution value is $14.6 million.
(3)
The Tech Ridge JV is subject to Simona revaluation primarily based upon the number of residential units constructed by the Tech Ridge JV. The Contribution Value cannot be less than $2.75 million.

The following tables present combined condensed financial data for the Company’s 50% JV Interestsunconsolidated entities (in thousands):

 

 

June 30, 2022

 

 

December 31, 2021

 

ASSETS

 

 

 

 

 

 

Investment in real estate

 

 

 

 

 

 

Land

 

$

396,463

 

 

$

410,323

 

Buildings and improvements

 

 

564,455

 

 

 

528,854

 

Accumulated depreciation

 

 

(109,708

)

 

 

(96,856

)

 

 

 

851,210

 

 

 

842,321

 

Construction in progress

 

 

162,236

 

 

 

206,109

 

Net investment in real estate

 

 

1,013,446

 

 

 

1,048,430

 

Cash and cash equivalents

 

 

52,764

 

 

 

50,279

 

Investment in unconsolidated entities

 

 

54,760

 

 

 

53,215

 

Tenant and other receivables, net

 

 

4,939

 

 

 

7,914

 

Other assets, net

 

 

28,492

 

 

 

33,812

 

Total assets

 

$

1,154,401

 

 

$

1,193,650

 

 

 

 

 

 

 

 

LIABILITIES AND MEMBERS' INTERESTS

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

Mortgage loans payable, net

 

$

56,075

 

 

$

56,075

 

Accounts payable, accrued expenses and other liabilities

 

 

58,807

 

 

 

56,398

 

Total liabilities

 

 

114,882

 

 

 

112,473

 

 

 

 

 

 

 

 

Members' Interest

 

 

 

 

 

 

Additional paid in capital

 

 

1,108,127

 

 

 

1,097,842

 

Retained earnings (accumulated deficit)

 

 

(68,608

)

 

 

(16,665

)

Total members' interest

 

 

1,039,519

 

 

 

1,081,177

 

Total liabilities and members' interest

 

$

1,154,401

 

 

$

1,193,650

 

- 17 -


 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Total revenue

 

$

7,919

 

 

$

6,526

 

 

$

15,759

 

 

$

14,255

 

Property operating expenses

 

 

(3,110

)

 

 

(2,834

)

 

 

(7,036

)

 

 

(5,413

)

Depreciation and amortization

 

 

(6,503

)

 

 

(6,563

)

 

 

(14,011

)

 

 

(13,044

)

Operating income / (loss)

 

 

(1,694

)

 

 

(2,871

)

 

 

(5,288

)

 

 

(4,202

)

Other expenses

 

 

(826

)

 

 

(1,676

)

 

 

(2,260

)

 

 

(2,719

)

Gains, losses and impairments

 

 

(32,474

)

 

 

 

 

 

(93,614

)

 

 

 

Net loss

 

$

(34,994

)

 

$

(4,547

)

 

$

(101,162

)

 

$

(6,921

)

Equity in loss of unconsolidated
   entities (1)

 

$

(33,720

)

 

$

(2,327

)

 

$

(66,796

)

 

$

(3,489

)

(1)
Equity in fiveloss of unconsolidated entities on the ten assets in the Simon JV for $68.0 million, subject to certain closing conditions (see Note 16).

The Company continues to own 50% interests in nine assets in the Macerich JV.

Each unconsolidated joint venture is obligated to maintain financialcondensed consolidated statements in accordance with GAAP.  of operations includes basis difference adjustments.

The Company shares in the profits and losses of these unconsolidated joint venturesentities generally in accordance with the Company’s respective equity interests. In some instances, the Company may recognize profits and losses related to investment in an unconsolidated joint ventureentity that differ from the Company’s equity interest in the unconsolidated joint venture.entity. This may arise from impairments that the Company recognizes related to its investment that differ from the impairments the unconsolidated joint ventureentity recognizes with respect to its assets;assets, differences between the Company’s basis in assets it has transferred to the unconsolidated joint ventureentity and the unconsolidated joint venture’sentity’s basis in those assets; the Company’s deferral of the unconsolidated joint venture’s profits from land sales to the Company;assets or other items. There were no joint ventureDuring the quarter ended June 30, 2022, in conjunction with the Plan of Sale, the Company recognized a change in plan to reduce the holding periods of all its investments in unconsolidated entities, which triggered the need for an impairment chargesanalysis pursuant to ASC 323, Equity Method and Joint Ventures. The Company utilized appraisals and third-party prepared fair value estimates as well as negotiated offers to sell the investments for the three or nine months ended September 30, 2017 or September 30, 2016.

The following tables present combined condensed financial data forimpairment analysis. As a result of the Company’s analysis, other-than-temporary impairment of $32.5 million was recorded against equity method investments in three unconsolidated joint ventures (in thousands):

 

 

September 30, 2017

 

 

December 31, 2016

 

ASSETS

 

 

 

 

 

 

 

 

Investment in real estate

 

 

 

 

 

 

 

 

Land

 

$

178,658

 

 

$

214,109

 

Buildings and improvements

 

 

510,641

 

 

 

598,978

 

Accumulated depreciation

 

 

(62,959

)

 

 

(56,324

)

 

 

 

626,340

 

 

 

756,763

 

Construction in progress

 

 

15,986

 

 

 

48,885

 

Net investment in real estate

 

 

642,326

 

 

 

805,648

 

Cash and cash equivalents

 

 

4,958

 

 

 

3,434

 

Tenant and other receivables, net

 

 

3,354

 

 

 

6,133

 

Other assets, net

 

 

47,564

 

 

 

38,646

 

Total assets

 

$

698,202

 

 

$

853,861

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND MEMBERS INTERESTS

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Mortgage loans payable, net

 

$

121,665

 

 

$

 

Accounts payable, accrued expenses and other liabilities

 

 

6,681

 

 

 

14,177

 

Total liabilities

 

 

128,346

 

 

 

14,177

 

 

 

 

 

 

 

 

 

 

Members Interest

 

 

 

 

 

 

 

 

Additional paid in capital

 

 

580,009

 

 

 

830,389

 

Retained earnings

 

 

(10,153

)

 

 

9,295

 

Total members interest

 

 

569,856

 

 

 

839,684

 

Total liabilities and members interest

 

$

698,202

 

 

$

853,861

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30, 2017

 

 

September 30, 2016

 

 

September 30, 2017

 

 

September 30, 2016

 

EQUITY IN INCOME OF UNCONSOLIDATED

   JOINT VENTURES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

$

12,550

 

 

$

16,266

 

 

$

46,062

 

 

$

50,113

 

Property operating expenses

 

 

(3,077

)

 

 

(3,103

)

 

 

(9,594

)

 

 

(9,703

)

Depreciation and amortization

 

 

(9,509

)

 

 

(10,382

)

 

 

(37,206

)

 

 

(31,304

)

Operating income

 

 

(36

)

 

 

2,781

 

 

 

(738

)

 

 

9,106

 

Other expenses

 

 

(7,337

)

 

 

212

 

 

 

(7,714

)

 

 

(117

)

Net (loss) income

 

$

(7,373

)

 

$

2,993

 

 

$

(8,452

)

 

$

8,989

 

Equity in (loss) income of unconsolidated

   joint ventures

 

$

(3,686

)

 

$

1,497

 

 

$

(4,226

)

 

$

4,495

 

- 16 -


Note 5 – Leases

Master Lease

On July 7, 2015, subsidiaries of Seritage and subsidiaries of Sears Holdings entered into the Master Lease.  The Master Lease generally is a triple net lease with respect to all space which is leased thereunder to Sears Holdings, subject to proportional sharing by Sears Holdings for repair and maintenance charges, real property taxes, insurance and other costs and expenses which are common to both the space leased by Sears Holdings and other space occupied by unrelated third-party tenants in the same or other buildings pursuant to third-party leases, space which is recaptured pursuant to the Company recapture rights described below and all other space which is constructed on the properties.  Under the Master Lease, Sears Holdings and/or one or more of its subsidiaries will be required to make all expenditures reasonably necessary to maintain the premises in good appearance, repair and condition for as long as they are in occupancy.

The Master Lease has an initial term of 10 years and contains three options for five-year renewals of the term and a final option for a four-year renewal.  As of September 30, 2017 and September 30, 2016, the annualized base rent paid directly by Sears Holdings and its subsidiaries under the Master Lease was approximately $108.5 million and $134.2 million, respectively.  In each of the initial and first two renewal terms, annual base rent will be increased by 2.0% per annum for each lease year over the rent for the immediately preceding lease year.  For subsequent renewal terms, rent will be set at the commencement of the renewal term at a fair market rent based on a customary third-party appraisal process, taking into account all the terms of the Master Lease and other relevant factors, but in no event will the renewal rent be less than the rent payable in the immediately preceding lease year.

Revenues from the Master Leaseentities for the three and ninesix months ended SeptemberJune 30, 20172022. NaN such impairment was recorded for the three and Septembersix months ended June 30, 2016 are as follows (in thousands2021. This impairment is included in the equity in loss of unconsolidated entities line in the condensed consolidated statements of operations.

During the three and excluding straight-line rental incomesix months ended June 30, 2022, the Company exercised the put rights that is has on two and 4 Unconsolidated Properties, respectively. One of ($1.7)the Company’s partners considered this to be a triggering event to assess impairment on its underlying assets pursuant to ASC 360, Property, Plant and Equipment, and recorded impairment on 2 Unconsolidated Properties of $0 million and $2.3$61.1 million for the three and six months ended June 30, 2022, respectively. There was 0 impairment recorded on Unconsolidated Properties for the three and six months ended June 30, 2021. Subsequent to June 30, 2022, the Company exercised put rights on an additional 2 Unconsolidated Properties, closed on the sale of two of the previously exercised put rights, and sold its interest in 1 Unconsolidated Entity.

Unconsolidated Entity Management and Related Fees

The Company acts as the operating partner and day-to-day manager for the Mark 302 JV, the West Hartford JV, the UTC JV, and Tech Ridge JV. The Company is entitled to receive certain fees for providing management, leasing, and construction supervision services to certain of its unconsolidated entities. Refer to Note 2 for the Company’s accounting policies.

Note 5 – Leases

Lessor Disclosures

Future minimum rental receipts, excluding variable payments and tenant reimbursements of expenses, under non-cancelable operating leases executed as of June 30, 2022 are approximately as follows:

(in thousands)

 

June 30, 2022

 

Remainder of 2022

 

$

43,779

 

2023

 

 

84,576

 

2024

 

 

81,785

 

2025

 

 

81,869

 

2026

 

 

78,034

 

2027

 

 

75,329

 

Thereafter

 

 

304,450

 

Total

 

$

749,822

 

- 18 -


The components of lease revenues for the three and six months ended June 30, 2022 and 2021 were as follows:

(in thousands)

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Fixed rental income

 

$

21,341

 

 

$

23,135

 

 

$

45,119

 

 

$

45,407

 

Variable rental income

 

 

4,482

 

 

 

3,222

 

 

 

9,083

 

 

 

12,268

 

Total rental income

 

$

25,823

 

 

$

26,357

 

 

$

54,202

 

 

$

57,675

 

Lessee Disclosures

The Company has 1 ground lease and 1 corporate office lease which are classified as operating leases. As of June 30, 2022, and December 31, 2021, the outstanding amount of right-of-use, or ROU, assets were $16.6 million and $17.0 million, respectively, which is included in prepaid expenses, deferred expenses and other assets, net on the condensed consolidated balance sheets.

The Company recorded rent expense related to leased corporate office space of $0.2 million and $0.3 million for the three months ended SeptemberJune 30, 20172022 and September 30, 2016, respectively, and $0.12021, respectively. The Company recorded rent expense related to leased corporate office space of $0.5 million and $8.4$0.7 million for the ninesix months ended SeptemberJune 30, 20172022 and September2021, respectively. Such rent expense is classified within general and administrative expenses in the condensed consolidated statements of operations.

In addition, the Company recorded ground rent expense of approximately $0.1 million for the three and six months ended June 30, 2016, respectively):2022 and 2021. Such ground rent expense is classified within property operating expenses in the condensed consolidated statements of operations. The ground lease requires the Company to make fixed annual rental payments and expires in 2073 assuming all extension options are exercised.

The Company expects to make cash payments on operating leases of $0.5 million in 2022, $1.1 million in 2023, $1.2 million in 2024, $1.2 million in 2025, $1.2 million in 2026, $1.2 million in 2027 and $2.9 million for the periods thereafter. The present value discount is ($3.0) million.

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Rental income

 

$

27,889

 

 

$

33,378

 

 

$

88,748

 

 

$

99,846

 

Termination fee income

 

 

10,596

 

 

 

 

 

 

17,361

 

 

 

 

Tenant reimbursements

 

 

10,639

 

 

 

10,627

 

 

 

38,370

 

 

 

41,895

 

Total revenue

 

$

49,124

 

 

$

44,005

 

 

$

144,479

 

 

$

141,741

 

The following table sets forth information related to the measurement of our lease liabilities as of June 30, 2022:

 

 

June 30, 2022

 

Weighted average remaining lease term (in years)

 

 

9.65

 

Weighted average discount rate

 

 

6.98

%

Cash paid for operating leases (in thousands)

 

$

847

 

 

Sale-leaseback Financing Obligations

During the year ended December 31, 2020, the Company completed a sale-leaseback transaction of a property in Hialeah, Florida for $21.0 million which is included in sales-leaseback financing obligations on the condensed consolidated balance sheets. As part of the sale-leaseback transaction, the Company agreed to lease all land and improvements on the land for a fixed term of 25 years at an initial base rent of $1.5 million per annum which will increase by 1.5% per year thereafter. For the initial periods of the sale-leaseback, cash payments are less than the interest expense recognized, which causes the obligation to increase during the initial years of the lease term. The implied interest rate is approximately 7.00%. The Company has a purchase option during years four, five or seven of the 25-year term to reacquire, solely at the Company’s option, the Hialeah property at a predetermined price. The Hialeah property continues to be reflected as a long-lived asset and depreciated over its remaining useful life.

Future sale-leaseback financing obligations as of June 30, 2022 are approximately as follows:

(in thousands)

 

June 30, 2022

 

Remainder of 2022

 

$

734

 

2023

 

 

1,486

 

2024

 

 

1,508

 

2025

 

 

1,531

 

2026

 

 

1,554

 

2027

 

 

1,577

 

Thereafter

 

 

32,445

 

Interest

 

 

(20,183

)

Total

 

$

20,652

 

- 19 -


Subsequent to June 30, 2022, the Company repurchased the property and concurrently sold it to another buyer, thus terminating the sales-leaseback financing obligation.

Original Master Lease providesand Holdco Master Lease

On February 28, 2019, the Company and certain affiliates of Transform Holdco LLC (“Holdco”), an affiliate of ESL Investments, Inc., executed the Holdco Master Lease (the “Holdco Master Lease”) which became effective on March 12, 2019 when the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”) issued an order approving the rejection of the Original Master Lease. The Company analyzed this transaction under applicable accounting guidance and determined that the termination of the Original Master Lease and entering into the Holdco Master Lease should be accounted for as a modification. The Holdco Master Lease provided the Company with the right to recapture up to approximately 50% of the space occupied by Sears Holdingsthe tenant at each of the 224 Wholly Owned Properties initially included in the Master Lease (subject to certain exceptions).  While the Company is permitted to exercise its recapture rights all at once or in stages as to any particular property, it is not permitted to recapture all or substantially all of the space subject to the recapture right at moreproperties (other than 50 Wholly Owned Properties during any lease year.  In addition, Seritage hasfive specified properties) and the right to recapture any automotive care centers which are free-standing or attached as “appendages” to the properties, all outparcels or outlots and certain portions of the parking areas and common areas. Upon exercise of these recapture rights,Under the Company will generally incur certain costs and expenses for the separationterms of the recaptured space from the remaining Sears Holdings space as it reconfigures and rents the recaptured space to third-party tenants.

The Company also hasHoldco Master Lease, Holdco had the right, to recapture 100% of the space occupied by Sears Holdings at each of 21 identified Wholly Owned Properties by making a specified lease termination payment to Sears Holdings, after which the Company can reposition and re-lease those stores.  The lease termination payment is calculated as the greater of an amount specified at theany time, the Company entered into the Master Lease with Sears Holdings and an amount equal to 10 times the adjusted EBITDA attributable to such space within the Sears Holdings main store which is not attributable to the space subject to the separate 50% recapture right discussed above for the 12-month period ending at the end of the fiscal quarter ending immediately prior to recapturing such space.

- 17 -


As of September 30, 2017, the Company had exercised certain recapture rights at 45 properties:

Property

Recapture Type

Notice Date

North Little Rock, AK

Auto Center

September 2017

Ft. Wayne, IN

Out parcel

September 2017

St. Clair Shores, MI

100%

September 2017

Austin, TX

Partial

September 2017

Redmond, WA

Auto Center

September 2017

Temecula, CA

Partial

June 2017

Roseville, CA

Auto center

June 2017

North Riverside, IL

Partial

June 2017

Watchung, NJ

100%

June 2017

Canton, OH

Partial

June 2017

Dayton, OH

Auto center

June 2017

Carson, CA

100% (1)

April 2017 / December 2016

San Diego, CA

100% (2)

April 2017

Aventura, FL

100%

April 2017

Hialeah, FL

100% (2)

April 2017

Anderson, SC

100% (1)

April 2017 / July 2016

Charleston, SC

100% (1)

April 2017 / October 2016

Valley View, TX

100%

April 2017

North Miami, FL

100%

March 2017

Cockeysville, MD

Partial

March 2017

Olean, NY

Partial

March 2017

Santa Cruz, CA

Partial

December 2016

Santa Monica, CA

100%

December 2016

Saugus, MA

Partial

December 2016

Guaynabo, PR

Partial

December 2016

Roseville, MI

Partial

November 2016

Troy, MI

Partial

November 2016

West Hartford, CT

100%

October 2016

Rehoboth Beach, DE

Partial

October 2016

St. Petersburg, FL

100%

October 2016

Warwick, RI

Auto center

October 2016

North Hollywood, CA

Partial

July 2016

Orlando, FL

100%

July 2016

Ft. Wayne, IN

Out parcel

July 2016

West Jordan, UT

Partial + auto center

July 2016

Madison, WI

Partial

July 2016

Bowie, MD

Auto center

May 2016

Hagerstown, MD

Auto center

May 2016

Wayne, NJ (3)

Partial

May 2016

Albany, NY

Auto center

May 2016

Fairfax, VA

Partial + auto center

May 2016

San Antonio, TX

Auto center

March 2016

Honolulu, HI

100%

December 2015

Memphis, TN

100%

December 2015

Braintree, MA

100%

November 2015

(1)

In April 2017, the Company converted previously exercised partial recapture rights to 100% recapture rights.

(2)

In April 2017, the Company converted partial recapture rights to 100% recapture rights and exercised such recapture rights.

(3)

In July 2017, the Company contributed this asset to the GGP II JV and retained a 50% JV Interest in the JV.

The Master Lease also provides for certain rights to Sears Holdings to terminate the Holdco Master Lease with respect to Wholly Owned Properties that cease to be profitable for operation by Sears Holdings.  In order to terminateany property upon the Master Lease with respect topayment of a certain property, Sears Holdings must make a payment to the Company of an amounttermination fee equal to one year of base rent (together withplus annual taxes and other expenses)operating expenses. Sears Holdings exercised termination rights with respect to such property.  Sears Holdings must provide notice of not less than 90 days of their intent to exercise such termination right and such termination right will be limited so that it will not have the effect of reducing the fixed rent87 properties under the Original Master Lease by more than 20% per annum.

As of September 30, 3017, Sears Holdings had terminated, or provided notice that it intendedprior to exercise its rejection on March 12, 2019 and Holdco exercised termination rights to terminate, the Master Lease with respect to 56 stores totaling 7.4 million square feet of gross leasable area.  The aggregate base rent atall remaining properties under the Holdco Master Lease during the year ended December 31, 2020, with the remaining five properties effective in March 2021.

Revenues from the Holdco Master Lease as amended by the Amendment, and the Original Master Lease for the three months ended June 30, 2022 and 2021 are as follows (in thousands). No straight line rental income was recorded during these stores at the time of termination was approximately $23.6 million.  Sears Holdings continued to pay the Company rent until it vacated the stores and also paid aggregate termination fees of approximately $45.1 million, amounts equal to one year of aggregate annual base rent plus one year of estimated real estate taxes and operating expense.periods.

- 18 -


(in thousands)

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Fixed rental income

 

$

 

 

$

 

 

$

 

 

$

 

Variable rental income

 

 

 

 

 

 

 

 

 

 

 

4,510

 

Total rental income

 

$

 

 

$

 

 

$

 

 

$

4,510

 

As of September 30, 2017, the Company had announced redevelopment projects at 17 of the terminated properties and will continue to announce redevelopment activity as new leases are signed to occupy the space formerly occupied by Sears Holdings.

 

Announced

Property

Square Feet

Notice

Termination

Redevelopment

Cullman, AL

98,500

September 2016

January 2017

Q2 2017

Sierra Vista, AZ

86,100

September 2016

January 2017

Thornton, CO

190,200

September 2016

January 2017

Q1 2017

Chicago, IL

118,800

September 2016

January 2017

Springfield, IL

84,200

September 2016

January 2017

Q3 2016

Elkhart, IN

86,500

September 2016

January 2017

Q4 2016

Merrillville, IN

108,300

September 2016

January 2017

Q4 2016

Houma, LA

96,700

September 2016

January 2017

New Iberia, LA

91,700

September 2016

January 2017

Q2 2017

Alpena, MI

118,200

September 2016

January 2017

Manistee, MI

87,800

September 2016

January 2017

Sault Sainte Marie, MI

92,700

September 2016

January 2017

Kearney, NE

86,500

September 2016

January 2017

Q3 2016

Deming, NM

96,600

September 2016

January 2017

Harlingen, TX

91,700

September 2016

January 2017

Yakima, WA

97,300

September 2016

January 2017

Riverton, WY

94,800

September 2016

January 2017

Riverside, CA

94,500

January 2017

April 2017

Kissimmee, FL

112,505

January 2017

April 2017

Leavenworth, KS

76,853

January 2017

April 2017

Hopkinsville, KY

70,326

January 2017

April 2017

Paducah, KY

108,244

January 2017

April 2017

Q3 2017

Owensboro, KY

68,334

January 2017

April 2017

Detroit Lakes, MN

79,102

January 2017

April 2017

Jefferson City, MO

92,016

January 2017

April 2017

Q2 2017

Henderson, NV

122,823

January 2017

April 2017

Q1 2017

Concord, NC

137,499

January 2017

April 2017

Chapel Hill, OH

187,179

January 2017

April 2017

Kenton, OH

96,066

January 2017

April 2017

Muskogee, OK

87,500

January 2017

April 2017

Mount Pleasant, PA

83,536

January 2017

April 2017

Sioux Falls, SD

72,511

January 2017

April 2017

El Paso, TX

103,657

January 2017

April 2017

Layton, UT

90,010

January 2017

April 2017

Elkins, WV

94,885

January 2017

April 2017

Platteville, WI

94,841

January 2017

April 2017

Sarasota, FL

204,500

June 2017

October 2017 (1)

Chicago, IL

293,700

June 2017

October 2017 (1)

Overland Park, KS

215,000

June 2017

October 2017 (1)

Lafayette, LA

194,900

June 2017

October 2017 (1)

Cockeysville, MD

83,900

June 2017

October 2017 (1)

Q1 2017

Hagerstown, MD

107,300

June 2017

October 2017 (1)

Q1 2016

Roseville, MI

277,000

June 2017

October 2017 (1)

Q3 2016

Burnsville, MN

161,700

June 2017

October 2017 (1)

Albany, NY

216,200

June 2017

October 2017 (1)

Q1 2016

East Northport, NY

187,000

June 2017

October 2017 (1)

Q2 2017

Johnson City, NY

155,100

June 2017

October 2017 (1)

Olean, NY

75,100

June 2017

October 2017 (1)

Q1 2017

Mentor, OH

208,700

June 2017

October 2017 (1)

Middleburg Heights, OH

351,600

June 2017

October 2017 (1)

Toledo, OH

209,900

June 2017

October 2017 (1)

York, PA

82,000

June 2017

October 2017 (1)

Warwick, RI

169,200

June 2017

October 2017 (1)

Q3 2016 / Q3 2017

Friendswood, TX (2)

166,000

June 2017

October 2017 (1)

Westwood, TX (3)

215,000

June 2017

October 2017 (1)

Greendale, WI

238,400

June 2017

October 2017 (1)

Total square feet

7,411,187

(1)

Sears Holdings vacated this property subsequent to September 30, 2017.

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(2)

The Company and Sears Holdings agreed to extend occupancy, under the existing Master Lease terms, through November 2017 to support Hurricane Harvey relief efforts.

(3)

The Company and Sears Holdings agreed to extend occupancy, under the existing Master Lease terms, through January 2018 to support Hurricane Harvey relief efforts.

Note 6 – Debt

Mortgage Loans PayableTerm Loan Facility

On July 7, 2015, pursuant to31, 2018, the Transaction,Operating Partnership, as borrower, and the Company, as guarantor, entered into a mortgage loan agreementSenior Secured Term Loan Agreement (the “Mortgage“Term Loan Agreement”) and mezzanine loan agreement (collectively, the “Loan Agreements”), providing for a $2.0 billion term loans inloan facility (the “Term Loan Facility”) with Berkshire Hathaway Life Insurance Company of Nebraska (“Berkshire Hathaway”) as lender and administrative agent. The Term Loan Facility provided for an initial principal amountfunding of approximately $1,161$1.6 billion at closing and includes a $400.0 million (collectively, the “Mortgage Loans”) and a $100 million futureincremental funding facility (the “Future“Incremental Funding Facility”).  Pursuant subject to certain conditions described below. The Term Loan Facility matures on July 31, 2023, with the terms of the Loan Agreements,ability to extend based on meeting certain criteria.

Funded amounts available under the FutureTerm Loan Facility bear interest at an annual rate of 7.0% and unfunded amounts under the Incremental Funding Facility were fully drawn byare subject to an annual fee of 1.0% until drawn. The Company prepays the annual fee and amortizes the expense to interest expense on the condensed consolidated statements of operations.

On December 31, 2021, the Company onpaid down $160 million towards the Term Loan’s unpaid principal balance. As of June 30, 2017.  Such amounts were deposited into a redevelopment reserve2022 and will be used to fund redevelopment activity at the Company’s properties.

On July 12, 2017, as a result of the transaction whereby the Company contributed five Wholly Owned Properties to the GGP II JV and sold a 50% interest in the new JV Properties to GGP for $57.5 million, the Company reduced amounts outstanding under its mortgage loan by $50.6 million.

As of September 30, 2017,December 31, 2021, the aggregate principal amount outstanding under the Mortgage Loans and the Future FundingTerm Loan Facility was $1,211 million.

Interest under$1.44 billion, respectively. Subsequent to June 30, 2022, the Mortgage Loans is due and payable onCompany made a $100.0 million principal paydown, thus bringing the payment dates, and all outstanding principal amounts are due when the loan matures on the payment date in July 2019, pursuantbalance down to the Loan Agreements.  The Company has two one-year extension options subject to the payment of an extension fee and satisfaction of certain other conditions.  Borrowings under the Mortgage Loans bear interest$1.34 billion at the London Interbank Offered Rates (“LIBOR”) plus, as of September 30, 2017, a weighted-average spread of 470 basis points; payments are made monthly on an interest-only basis.  The weighted-average interest rates for the Mortgage Loans and Future Funding Facility for the three months ended September 30, 2017 and September 30, 2016 were 5.97% and 5.24%, respectively.  The weighted-average interest rates for the Mortgage Loans and Future Funding Facility for the nine months ended September 30, 2017 and September 30, 2016 were 5.92% and 5.19%, respectively.issuance date.

The Loan Agreements contain a yield maintenance provision for the early extinguishment of the debt before March 9, 2018.  

The Mortgage Loans and Future Funding Facility are secured by all of the Company’s Wholly Owned Properties and a pledge of its equity in the JVs.  The Loan Agreements contain customary covenants for a real estate financing, including restrictions that limit the Company’s ability to grant liens on its assets, incur additional indebtedness, or transfer or sell assets, as well as those that may requireaccess the Incremental Funding Facility is subject to (i) the Company achieving rental income from non-Sears Holdings tenants, on an annualized basis (after giving effect to obtain lender approvalSNO Leases expected to commence rent payment within 12 months) for certain major tenant leases or significant redevelopment projects.  Such restrictions also include cash flow sweep provisions based upon certain measuresthe fiscal quarter ending prior to the date of incurrence of the Company’s and Sears Holdings’ financial and operating performance, including (a) where the “Debt Yield” (the ratio of net operating income for the mortgage borrowers to their debt) is less than 11.0%, (b) if the performance of Sears Holdings at the stores subject to the Master Lease with Sears Holdings fails to meet specified rent ratio thresholds, (c) if the Company fails to meet specified tenant diversification tests and (d) upon the occurrence of a bankruptcy or insolvency action with respect to Sears Holdings or if there is a payment default under the Master Lease with Sears Holdings, in each case, subject to cure rights, including providing specified amounts of cash collateral or satisfying tenant diversification thresholds.

In November 2016, the Company and the servicer for its Mortgage Loans entered into amendments to the Loan Agreements to resolve a disagreement regarding one of the cash flow sweep provisions in the Loan Agreements.  The principal terms of these amendments are that the Company (i) posted $30.0 million, and will post $3.3 million on a monthly basis, to a redevelopment project reserve account, which amounts may be used by the Company to fund redevelopment activity and (ii) extended the spread maintenance provision for prepayment of the loan by two months through March 9, 2018 (with the spread maintenance premium for the second month at a reduced amount).  As a result of this agreement and the resolution of the related disagreement, no cash flow sweep was imposed.

All obligations under the Loan Agreements are non-recourse to the borrowers and the pledgors of the JV Interests and the guarantors thereunder, except that (i) the borrowers and the guarantors will be liable, on a joint and several basis, for losses incurred by the lenders in respect of certain matters customary for commercial real estate loans, including misappropriation of funds and certain environmental liabilities and (ii) the indebtedness under the Loan Agreements will be fully recourse to the borrowers and guarantors upon the occurrence of certain events customary for commercial real estate loans, including without limitation prohibited transfers, prohibited voluntary liens, and bankruptcy.  Additionally the guarantors delivered a limited completion guaranty with respect to future redevelopments undertaken by the borrowers at the properties, and the Company must maintain (i) a net worthIncremental Funding Facility, of not less than $1.0 billion$200 million, (ii) the Company’s good faith projection that rental income from non-Sears Holdings tenants (after giving effect to SNO Leases expected to commence rent payment within 12 months) for the succeeding four consecutive fiscal quarters (beginning with the fiscal quarter during which the incremental facility is accessed) will be not less than $200 million, and (ii)(iii) the repayment by the Operating Partnership of any deferred interest permitted under the amendment to the Term Loan Amendment as further described below. As of June 30, 2022, the Company has not yet achieved the requirements to access the Incremental Funding Facility.

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The Term Loan Facility is guaranteed by the Company and, subject to certain exceptions, is required to be guaranteed by all existing and future subsidiaries of the Operating Partnership. The Term Loan Facility is secured on a minimum liquidityfirst lien basis by a pledge of the capital stock of the direct subsidiaries of the Operating Partnership and the guarantors, including its joint venture interests, except as prohibited by the organizational documents of such entities or any joint venture agreements applicable to such entities, and contains a requirement to provide mortgages and other customary collateral upon the breach of certain financial metrics described below, the occurrence and continuation of an event of default and certain other conditions set forth in the Term Loan Agreement. During 2019, mortgages were recorded on a majority of the Company’s portfolio and during the year ended December 31, 2021, mortgages, mortgages were recorded on the remaining unmortgaged properties in all but three locations.

The Term Loan Facility includes certain financial metrics to govern springing collateral requirements and certain covenant exceptions set forth in the Term Loan Agreement, including: (i) a total fixed charge coverage ratio of not less than $50.0 million, throughout1.00 to 1.00 for each fiscal quarter beginning with the term of the Loan Agreements.

- 20 -


The Company believes it is currently in compliance with all material terms and conditions of the Loan Agreements.

The Company incurred $22.3 million of debt issuance costs related to the Mortgage Loans and Future Funding Facility which are recorded as a direct deduction from the carrying amount of the Mortgage Loans and Future Funding Facility and amortized over the term of the Loan Agreements.  As offiscal quarter ending September 30, 2017,2018 through the unamortized balance of the Company’s debt issuance costs was $9.9 million as comparedfiscal quarter ending June 30, 2022, and not less than 1.20 to $14.3 million as December 31, 2016.

Unsecured Term Loan

On February 23, 2017 (the “Closing Date”), the Operating Partnership, as borrower, and the Company, as guarantor, entered into a $200.0 million senior unsecured delayed draw term loan facility (the “Unsecured Term Loan”) with JPP, LLC (“JPP”) and JPP II, LLC, as lenders (collectively, the “Initial Lenders”), and JPP, as administrative agent (the “Administrative Agent”).

Loans under the Unsecured Term Loan may be requested by the Operating Partnership at any time from the Closing Date until thirty days prior to the stated maturity date, upon five business days’ prior notice to the Administrative Agent.  The total commitment of the lenders under the Unsecured Term Loan is $200.0 million.  Amounts drawn under the Unsecured Term Loan and repaid may not be redrawn.  

As of September 30, 2017, the total principal amount outstanding under the Unsecured Term Loan was $85.0 million.

The Unsecured Term Loan will mature the earlier of (i) December 31, 2017 and1.00 for each fiscal quarter thereafter; (ii) the date on which the outstanding indebtedness under the Loan Agreements are repaid or refinanced in full.  The Unsecured Term Loan may be prepaid at any time in whole or in part, without any penalty or premium.    

With respect to the December 31, 2017 maturity of the Unsecured Term Loan, the Company may repay the $85.0 million total principal amount outstanding as of September 30, 2017 with unrestricted cash on hand, seek an extension of the maturity date, or raise additional capital through a refinancing transaction or from the proceeds of asset sales or new joint ventures.

The principal amount of loans outstanding under the Unsecured Term Loan bear a base annual interest rate of 6.50%.  If a cash flow sweep period were to occur and be continuing under the Company’s Mortgage Loan Agreement (i) the interest rate on any outstanding advances would increase from and after such date by 1.5% per annum above the base interest rate and (ii) the interest rate on any advances made after such date would increase by 3.5% per annum above the base interest rate.  Accrued and unpaid interest will be payable in cash, except that during the continuance of a cash flow sweep period under the existing mortgage loan agreement, the Operating Partnership may defer the payment of interest which deferred amount would be added to the outstanding  principal balance of the loans.

On the Closing Date, the Operating Partnership paid to the Initial Lenders an upfront commitment fee equal to $1.0 million.  On May 24, 2017, the Operating Partnership paid an additional, and final, commitment fee of $1.0 million.  

The Unsecured Term Loan documentation requires that the Company at all times maintain (i) a net worthunencumbered fixed charge coverage ratio of not less than $1.0 billion,1.05 to 1.00 for each fiscal quarter beginning with the fiscal quarter ending September 30, 2018 through the fiscal quarter ending June 30, 2022, and (ii)not less than 1.30 to 1.00 for each fiscal quarter thereafter; (iii) a total leverage ratio of not more than 65%; (iv) an unencumbered ratio of not more than 60%; and (v) a minimum net worth of at least $1.2 billion. Any failure to exceed 60.0%.

satisfy any of these financial metrics triggers the springing mortgage and collateral requirements but will not result in an event of default. The Unsecured Term Loan Facility also includes customary representationscertain limitations relating to, among other activities, the Company’s ability to: sell assets or merge, consolidate or transfer all or substantially all of its assets; incur additional debt; incur certain liens; enter into, terminate or modify certain material leases and/or the material agreements for the Company’s properties; make certain investments (including limitations on joint ventures) and warranties, covenantsother restricted payments; pay distributions on or repurchase the Company’s capital stock; and indemnities.  enter into certain transactions with affiliates.

The Unsecured Term Loan also hasFacility contains customary events of default, including (subject to certain materiality thresholds and grace periods) payment default, failure to comply with covenants, material inaccuracy of representationrepresentations or warranty,warranties, and bankruptcy or insolvency proceedings. If there is an event of default, the Lenderslenders may declare all or any portion of the outstanding indebtedness to be immediately due and payable, exercise any rights they might have under any of the Unsecured Term Loan Facility documents, and require the Operating PartnershipCompany to pay a default interest rate on overdue amounts equal to 1.50%2.0% in excess of the then applicable base interest rate.

As of June 30, 2022, the Company was not in compliance with certain of the financial metrics described above. As a result, the Company was previously required to receive the consent of Berkshire Hathaway to dispose of assets via sale or joint venture and, as of June 30, 2022, Berkshire Hathaway had provided such consent for all such transactions submitted for approval. The Third Term Loan Amendment (defined below) executed on June 16, 2022 eliminates this requirement. The Company believes it is currently in compliance with all materialother terms and conditions of the Unsecured Term Loan.Loan Agreement.

Mr. Edward S. Lampert,The Company incurred $2.1 million of debt issuance costs related to the Term Loan Facility which are recorded as a direct deduction from the carrying amount of the Term Loan Facility and amortized over the term of the Term Loan Agreement. As of June 30, 2022 and December 31, 2021, the unamortized balance of the Company’s Chairman,debt issuance costs were $0.5 million and $0.7 million, respectively.

On May 5, 2020, the Operating Partnership and Berkshire Hathaway entered into an amendment to the Term Loan Agreement (the “First Term Loan Amendment”) by and among the Operating Partnership and Berkshire Hathaway as initial lender and administrative agent that permits the deferral of payment of interest under the Term Loan Agreement if, as of the first day of each applicable month, (x) the amount of unrestricted and unencumbered (other than liens created under the Term Loan Agreement) cash on hand of the Operating Partnership and its subsidiaries, minus (y) the aggregate amount of anticipated necessary expenditures for such period (such sum, “Available Cash”) is equal to or less than $30.0 million. In such instances, for each interest period, the ChairmanOperating Partnership is obligated to make payments of interest in an amount equal to the difference between (i) Available Cash and Chief Executive Officer(ii) $20.0 million (provided that such payment shall not exceed the amount of ESL, which controls JPP, LLCcurrent interest otherwise due under the Term Loan Agreement). Any deferred interest shall accrue interest at 2.0% in excess of the then applicable interest rate and JPP II, LLC.shall be due and payable on July 31, 2023; provided, that the Operating Partnership is required to pay any deferred interest from Available Cash in excess of $30.0 million (unless otherwise agreed to by the administrative agent under the Term Loan Agreement in its sole discretion). In addition, repayment of any outstanding deferred interest is a condition to any borrowings under the $400.0 million Incremental Funding Facility under the Term Loan Agreement. The Company has paid all interest due under the Term Loan Agreement and has not deferred any interest as permitted under the amendment to the Term Loan Amendment.

Additionally, the First Term Loan Amendment provides that the administrative agent and the lenders express their continued support for asset dispositions, subject to the administrative agent’s right to approve the terms of individual transactions due to the Unsecuredoccurrence of a Financial Metric Trigger Event, as such term is defined under the Term Loan were approvedAgreement. The Third Term Loan Amendment (defined below) executed on June 16, 2022 eliminated this right.

- 21 -


On November 24, 2021, the Operating Partnership, the Company and Berkshire Hathaway entered into an amendment (the “Second Term Loan Amendment”) to the Term Loan Agreement by and among the Operating Partnership, the Company and Berkshire Hathaway to which the Operating Partnership, the Company and Berkshire Hathaway mutually agreed that (i) the “make whole” provision in the Senior Secured Term Loan Agreement shall not be applicable to prepayments of principal ; and (ii) the Senior Secured Term Loan Agreement, as amended for (i) above, may at the Operating Partnership's election be extended for two years from July 31, 2023 to July 31, 2025 (the “Maturity Date”) if its principal has been reduced to $800 million by the Company’s Audit CommitteeJuly 31, 2023. If it has not been reduced to this limit by the Maturity Date, the loan will be due and payable on that date. In all other respects, the Senior Secured Term Loan Agreement remains unchanged.

On June 16, 2022, the Operating Partnership, the Company and Berkshire Hathaway entered into an amendment (the “Third Term Loan Amendment”) to the Term Loan Agreement by and among the Operating Partnership, the Company and Berkshire Hathaway to which the Operating Partnership, the Company and Berkshire Hathaway mutually agreed that notwithstanding anything to the contrary in the asset sale covenant, the parent, borrower, and their respective subsidiaries will be permitted without the consent of the administrative agent to sell, transfer, or otherwise dispose of properties (including but not limited to properties or equity interests of any subsidiary) to unaffiliated third parties for no less than fair market value, provided that the borrower deposits all net proceeds received into a controlled account and the Company’s Boarduse of Trustees (with Mr. Edward S. Lampert recusing himself).such net proceeds will be subject to the terms and conditions of the Term Loan Agreement, including but not limited to the restricted payments and investments/loans covenants.

- 21 -


Note 7 – Income Taxes

The Company hashad previously elected to be taxed as a REIT as defined under Section 856(c) of the Code for federal income tax purposes upon formation and expectsthrough December 31, 2021. On March 31, 2022, the Company announced that its Board of Trustees unanimously approved a plan to continueterminate the Company’s REIT status and become a taxable C Corporation, effective for the year ending December 31, 2022. As a result, the Company is no longer required to operate to qualify as a REIT.  To qualify as aunder REIT the Company must meet a number of organizational and operational requirements,rules, including athe requirement to currently distribute at least 90%90% of its adjusted REIT taxable income to its shareholders.

As a REIT,stockholders, which provides the Company generally will not be subjectwith greater flexibility to federal income tax on taxable income that is distributed touse its shareholders.  If the Company fails to qualify as a REIT or does not distribute 100% of its taxable income in any taxable year, it will be subject to federal taxes at regular corporate rates (including any applicable alternative minimum tax) and may not be able to qualify as a REIT for four subsequent taxable years.

Even if the Company qualifies for taxation as a REIT,free cash flow. Effective January 1, 2022, the Company is subject to certainfederal, state and local and Puerto Ricoincome taxes on its taxable income at applicable tax rates and property,is no longer entitled to a tax deduction for dividends paid. The Company operated as a REIT for the 2021 tax year, and existing REIT requirements and limitations, including those established by the Company’s organizational documents, remained in place until December 31, 2021.

As a result of the Company’s revocation of its REIT status in fiscal year 2022, the Company incurred a one-time, non-cash deferred tax benefit of approximately $160.3 million during the three months ended March 31, 2022. As a result of ongoing operations and sales activity, the Company recognized an additional deferred tax benefit of $40.9 million during the six months ended June 30, 2022. As of June 30, 2022, the Company has recorded a full valuation allowance of $201.2 million against the deferred tax asset pursuant to federal income and exciseASC 740, as discussed in more detail below. While the Company has recorded a full valuation allowance against its DTAs due to the uncertainty that it will be able to utilize them, if the Company is able to sell assets at prices above its tax basis, the DTAs will be utilize to offset any taxes due on those gains to the extent of the DTAs.

The Company’s effective tax rate of 0% differs from the U.S. statutory rate of 21% in 2022 primarily due to the placement of a valuation allowance on its undistributed taxable income.deferred tax assets.

The significant components of the Company’s deferred tax assets of $201.2 million as of June 30, 2022 consist of basis differences in its investment in the Operating Partnership and net operating losses. As discussed below, the Company has recorded a full valuation allowance on the deferred tax assets as of June 30, 2022. As the Company was a REIT as of December 31, 2021, it reported 0 deferred tax assets.

Valuation allowances are recorded related to deferred tax assets based on the “more likely than not” criteria. ASC 740 states that deferred tax assets shall be reduced by a valuation allowance if there is insufficient objectively verifiable evidence to support that it is more likely than not that they will be realized. This evaluation requires significant judgment which should be weighted commensurate with the extent to which the evidence can be objectively verified. Additionally, under ASC 740, forming a conclusion that a valuation allowance is not needed is difficult when there is negative evidence such as cumulative losses in recent years. Given the Company’s history of cumulative losses combined with the fact that the Company’s utilization of deferred tax assets is highly dependent on the outcome of the review of a broad range of strategic alternatives announced by its Board of Trustees and the uncertainty in timing and volume of future property sales, we have deemed that their realization, at this time, cannot be objectively verified. The Company has therefore recorded a full valuation allowance against the Company’s deferred tax assets as of June 30, 2022. The Company will evaluate this position each quarter as verifiable positive evidence becomes available, such as the execution of asset sales, to support the future utilization of the deferred tax assets.

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Note 8 – Fair Value Measurements

ASC 820, Fair Value Measurement, defines fair value and establishes a framework for measuring fair value. The objective of fair value is to determine the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (the “exit price”). ASC 820 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three levels:

Level 1 - quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities

Level 2 - observable prices based on inputs not quoted in active markets, but corroborated by market data

Level 3 - unobservable inputs used when little or no market data is available

The fair value hierarchy gives the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs. In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company also considers counterparty credit risk in its assessment of fair value.

Financial Assets and Liabilities Measured at Fair Value on a Recurring or Non-RecurringNonrecurring Basis

All derivative instruments are carriedAssets measured at fair value on a nonrecurring basis on our condensed consolidated balance sheets consist of real estate assets that have been written down to estimated fair value and are valued usingclassified as Level 2 input.  The Company’s derivative instruments as of September 30, 2017 and December 31, 2016 consisted of a single interest rate cap.  The Company utilizes an independent third party and interest rate market pricing models to assist management in determining3 within the fair value hierarchy.

During the three and six months ended June 30, 2022, in accordance with ASC 360-10, Property, Plant and Equipment, the Company recorded impairment losses of this instrument.

The fair value of the Company’s interest rate cap at September 30, 2017 and December 31, 2016 was less than $0.1$109.3 million and approximately $0.7$110.3 million, respectively, and ison real estate assets which are included as a component of prepaid expenses, deferred expenses and otherin impairment on real estate assets on the condensed consolidated balance sheets.

The Company has elected not to utilize hedge accounting, and therefore, the change in fair value is included within change in fair value of interest rate cap on the condensed consolidated statements of operations. ForDuring the three and six months ended June 30, 2022, in accordance with ASC 323, Equity Method and Joint Ventures, the Company recorded other than temporary impairment losses of $32.5 million on investments in unconsolidated entities which are included in equity in loss of unconsolidated entities within the condensed consolidated statements of operations. During the three months ended SeptemberJune 30, 2017,2022, the Company, in connection with the strategic review and the Plan of Sale, determined that the best plan for all assets and its investments in unconsolidated entities is to pursue sales. As a result of the foregoing, the Company’s anticipated holding periods with respect to certain assets and investments has decreased. This affected the Company’s view of recoverability of the carrying value of those assets over their respective holding periods. Of the $109.3 million of impairments recorded during the second quarter, approximately $70.7 million resulted from the change in holding period as a lossresult of $0.1the Company’s decision to monetize additional assets through sales calculated based on fair value estimates described below. Additionally, $13.7 million comparedof impairment is the result of the Company agreeing to a losssell certain assets below their carrying value and is driven from negotiated contract values. We continue to evaluate our portfolio, including our development plans and holding periods, which may result in additional impairments in future periods on our consolidated properties. Impairment losses of less than $0.1$64.5 million and $66.2 million were recognized for the three and six months ended SeptemberJune 30, 2016.  For2021.

The fair value estimates used to determine the nine months ended September 30, 2017,impairment charges were determined primarily by discounted cash flow analyses, market comparable data, third-party appraisals/valuations and/or offers received, as applicable. The cash flows utilized in such analyses are comprised of unobservable inputs which include, among other things, estimated revenue and expense growth rates, discount rates and capitalization rates based upon market conditions and future expectations. Comparable data utilizes comparable sales, listings, sales contracts and letters of intent which are subject to judgment as to comparability to the Company recorded a lossvalued property. Because of $0.7 million compared to a lossthese inputs, we have determined that the fair values of $1.9 million forthese properties are classified within Level 3 of the nine months ended September 30, 2016.fair value hierarchy.

Financial Assets and Liabilities not Measured at Fair Value

Financial assets and liabilities that are not measured at fair value on the condensed consolidated balance sheets include cash equivalents, restricted cash and debt obligations.the term loan facility. The fair value of cash equivalents isand restricted cash are classified as Level 1 and the fair value of debt obligationsterm loan facility is classified as Level 2.

Cash equivalents and restricted cash are carried at cost, which approximates fair value. The fair value of debt obligations is calculated by discounting the future contractual cash flows of these instruments using current risk-adjusted rates available to borrowers with similar credit ratings. As of SeptemberJune 30, 20172022 and December 31, 2016,2021, the estimated fair values of the Company’s debt obligations were $1.3$1.4 billion and $1.2$1.5 billion, respectively, which approximated the carrying value at such dates as the current risk-adjusted rate approximates the stated rates on the Company’s debt obligations.

 

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Note 9 – Commitments and Contingencies

Insurance

The Company maintains general liability insurance and all-risk property and rental value, with sub-limits for certain perils such as floods and earthquakes on each of the Company’s properties. The Company also maintains coverage for terrorism acts as defined by the Terrorism Risk Insurance Program Reauthorization Act, which expires in December 2020.2027.

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Insurance premiums are charged directly to each of the retail properties. The Company or its tenants maywill be responsible for deductibles and losses in excess of insurance coverage, which losses could be material, subject to the terms of the respective tenant leases.material. The Company continues to monitor the state of the insurance market and the scope and costs of coverage for acts of terrorism. However, the Company cannot anticipate what coverage will be available on commercially reasonable terms in the future.

Environmental Matters

Under various federal, state and local laws, ordinances and regulations, the Company may be considered an owner or operator of real property or may have arranged for the disposal or treatment of hazardous or toxic substances. As a result, the Company may be liable for certain costs including removal, remediation, government fines and injuries to persons and property.  The Company does not believe that any resulting liability from such matters will have a material effect on the condensed consolidated financial position, results of operations, or liquidity of the Company.  

Under the Original Master Lease Sears Holdings has indemnifiedand the Holdco Master Lease, Holdco is required to indemnify the Company from certain environmental liabilities at the Wholly OwnedConsolidated Properties existing before or caused by Sears Holdings during the period in which each Wholly OwnedConsolidated Property iswas leased to Sears Holdings,Holdco, including removal and remediation of all affected facilities and equipment constituting the automotive care center facilities (and each JV Master Lease includes a similar requirementcenter. In addition, an environmental reserve was funded at the closing of Sears Holdings).the transactions in connection with the Company commencing operations in the amount of approximately $12.0 million. As of SeptemberJune 30, 20172022 and December 31, 2016,2021, the Company hadbalance of the environmental reserve was approximately $11.2 million and $11.8$9.5 million, respectively, of restricted cashand is included in a lender reserve account to fund potential environmental costs that were identified during due diligence related toaccounts payable, accrued expenses and other liabilities in the Transaction.condensed consolidated balance sheets.

Litigation and Other Matters

In accordance with accounting standards regarding loss contingencies, the Company accrues an undiscounted liability for those contingencies where the incurrence of a loss is probable and the amount can be reasonably estimated, and the Company discloses the amount accrued and the amount of a reasonably possible loss in excess of the amount accrued or disclosediscloses the fact that such a range of loss cannot be estimated. The Company does not record liabilities when the likelihood that the liability has been incurred is probable but the amount cannot be reasonably estimated, or when the liability is believed to be only reasonably possible or remote. In such cases,

On April 18, 2019, at the direction of the Restructuring Sub-Committee of the Restructuring Committee of the Board of Directors of Sears Holdings, plaintiffs Sears Holdings, Sears, Roebuck & Co., Sears Development Co., Kmart Corporation, and Kmart of Washington, LLC filed a lawsuit (the “Litigation”) in the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”) against, among others, Edward S. Lampert, ESL Investments, Inc. and certain of its affiliates and investors, Fairholme Capital Management, L.L.C., certain members of the Sears Holdings board of directors, and the Company, discloses the natureOperating Partnership, and certain of our affiliates and subsidiaries (the Company, the Operating Partnership, and certain of our affiliates and subsidiaries collectively, the “Seritage Defendants”). The Litigation is dual captioned as In re: Sears Holdings Corporation, et al., Case No. 18-23538 (RDD) and Sears Holdings Corporation et al., v. Lampert et al., Case No. 19-08250 (RDD). The initial complaint has been superseded by the Amended Complaint, as described below.

On October 15, 2019, the Bankruptcy Court entered an order (the “Confirmation Order”) confirming the Modified Second Amended Joint Chapter 11 Plan of Sears Holdings and its affiliated debtors (the “Chapter 11 Plan”). Pursuant to the terms of the contingency,Confirmation Order, upon the effective date of the Chapter 11 Plan, a liquidating trust will be formed, and the Litigation will vest in the liquidating trust. The Confirmation Order further provides that, prior to the effective date of the Chapter 11 Plan and the formation of the liquidating trust, the Litigation shall be controlled by five litigation designees selected by Sears Holdings and the Official Committee of Unsecured Creditors’ (the “Creditors' Committee”). For further information, refer to the Chapter 11 Plan, Confirmation Order and liquidating trust agreement, each of which has been publicly filed with the Bankruptcy Court.

On November 25, 2019, the Creditors’ Committee filed a first amended complaint (the “Amended Complaint”) in the Bankruptcy Court. The Amended Complaint alleges, among other things, that certain transactions undertaken by Sears Holdings since 2011 (including the July 2015 transactions giving rise to Seritage, the execution of the Master Lease with Sears Holdings (the “Original Master Lease”), and the acquisition of real estate from Sears Holdings) constituted actual and/or constructive fraudulent transfers and/or illegal dividends by Sears Holdings and that the real estate acquired by Seritage from Sears Holdings in July 2015 was worth hundreds of millions of dollars more than the purchase price paid. (The Company notes the original complaint filed in the Litigation alleged, among other things, that the real estate acquired by Seritage from Sears Holdings in July 2015 was worth at least $649 million to $749 million more than the purchase price paid.) The Amended Complaint further alleges that certain releases provided to Seritage and certain other defendants in connection with the Sears Holdings derivative litigation in the Delaware Court of Chancery in 2017 should be avoided and/or declared null and void as an actual and/or constructive fraudulent conveyance. The Litigation seeks as relief, among other things, declaratory relief, avoidance of the allegedly actual and/or constructive fraudulent transfers and either (i) rescission of the transfers of real estate from Sears Holdings to Seritage in 2015 and return of the proceeds of the transactions between Sears Holdings and Seritage, or, in the alternative, (ii) payment by Seritage to Sears Holdings of damages at least equal to the value of the transferred property.

- 24 -


On February 21, 2020, the Seritage Defendants filed a partial motion to dismiss seeking dismissal of the claims in the Amended Complaint relating to the release received in the Sears Holdings derivative litigation, unjust enrichment and equitable subordination. Briefing and oral argument on the motions were completed in August 2020, and the parties are awaiting a decision.

On March 15, 2021, the Court consolidated the Litigation with a case captioned Sears Holding Corp. et al. v. Andrew H. Tisch, et al., Case No. 20-07007 (RDD) (the “Shareholder Litigation,” and, together with the Litigation, the “Consolidated Litigation”). The Shareholder Litigation was brought by the UCC (as defined below), Sears Holdings Corporation, and Sears, Roebuck and Co., against certain shareholders of Sears Holdings or its related companies. Seritage was not named as a defendant in the Shareholder Litigation, which alleges, among other things, that certain transactions undertaken by Sears Holdings since 2014 (including the July 2015 transactions giving rise to Seritage, the execution of the Original Master Lease with Sears Holdings, and the acquisition of real estate from Sears Holdings) constituted actual and/or constructive fraudulent transfers and/or illegal dividends.

On April 6, 2022, the Court entered an order in the Consolidated Litigation, upon the agreement of the parties thereto, providing for a mediation of the litigation. The parties and the Court extended the mediation several times, through August, and up until the settlement described below was reached.

On August 9, 2022, following the mediation, all of the parties to the Litigation and certain of the parties to the Shareholder Litigation (to which Seritage is not a defendant) entered into a settlement agreement pursuant to which, pending final Court approval, the defendants will pay to the Sears estate $175 million (of which the Seritage Defendants will contribute approximately $35 million) in exchange for dismissal of the Consolidated Litigation and for the full and final satisfaction and release of all claims in the Consolidated Litigation (including, in the case of the Seritage Defendants, any and all claims between the Seritage Defendants and the Sears estate in the Sears bankruptcy proceeding). The settlement is subject to final Court approval, following notice and an estimateopportunity for objections (if any) at a hearing currently scheduled for August 31, 2022. As previously disclosed, the Company remains in active litigation with its D&O insurers concerning potential coverage for the Litigation, and any amounts received from the insurers will offset the Seritage Defendants’ approximately $35 million contribution.

While the Company believes that the claims against the Seritage Defendants in the Litigation are without merit, the Company has entered into the settlement, without admitting any fault or wrongdoing, in order to avoid the continued imposition of legal defense costs, distraction, and the uncertainty and risk inherent in any litigation. If the settlement does not receive final Court approval, the Company intends to defend against the claims in the Litigation vigorously. The Company has reserved $35 million based on the Company’s contributions to the proposed settlement, subject to final Court approval, of the possible loss, rangeLitigation. This estimate is recorded as litigation reserve in the condensed consolidated statement of loss, or discloseoperations during the fact that an estimate cannot be made.three and six months ended June 30, 2022.

On March 2, 2021, the Company brought a lawsuit in Delaware state court against QBE Insurance Corporation, Endurance American Insurance Company, Allianz Global Risks US Insurance Company and Continental Casualty Company, each of which are D&O insurance providers of the Company (the “D&O Insurers”). The Company’s lawsuit is seeking, among other things, declaratory relief and money damages as a result of certain of the D&O Insurers refusal to pay certain costs and expenses related to the defense of the Litigation discussed above.

In addition to the litigation described above, the Company is subject, from time to time, to various legal proceedings and claims that arise in the ordinary course of business.business and due to the current environment. While the resolution of such matters cannot be predicted with certainty, management believes, based on currently available information, that the final outcome of such matters will not have a material effect on the condensed consolidated financial position, results of operations, cash flows or liquidity of the Company. As of June 30, 2022, and December 31, 2021, the Company did not record any amounts for litigation or other matters.

Note 10 – Related Party Disclosure

Edward S. Lampert

Edward S. Lampert is Chairman and Chief Executive Officer of Sears Holdings and is the Chairman and Chief Executive Officer of ESL.ESL, which owns Holdco, and was Chairman of Sears Holdings. Mr. Lampert beneficially owned approximately 53.9% of Sears Holdings’ outstanding common stock at September 30, 2017.  Mr. Lampert iswas also the Chairman of Seritage.Seritage prior to his retirement effective March 1, 2022.

As of SeptemberJune 30, 2017,2022, Mr. Lampert beneficially owned a 39.1%22.1% interest in the Operating Partnership and approximately 3.8% and 100%9.0% of the outstanding Class A common shares. On July 6, 2022, Mr. Lampert converted all of his Operating Partnership Units (“OP Units”) to Class A common shares. As a result, he owned 29.1% of the outstanding Class A shares of the Company as of such date.

Subsidiaries of Holdco, as lessees, and Class B non-economic common shares, respectively.

Subsidiariessubsidiaries of the Company, as lessors, were parties to the Holdco Master Lease and subsidiaries of Sears Holdings, as lessees, and subsidiaries of the Company, as lessors, arewere parties to the Original Master Lease (see Note 5).

Unsecured Term Loan

- 25 -


Winthrop Capital Advisors

On February 23, 2017, the Operating Partnership, as borrower, andDecember 29, 2021, the Company, as guarantor, entered into a $200.0 million senior unsecured delayed draw term loan facilityServices Agreement with JPP,Winthrop Capital Advisors LLC and JPP II, LLC as lenders, and JPP, LLC as administrative agent.

- 23 -


Edward S. Lampert, the Company’s Chairman, is the Chairman and Chief Executive Officer of ESL, which controls JPP, LLC and JPP II, LLC.  The terms of the unsecured delayed draw term loan facility were approved by the Company’s Audit Committee and the Company’s Board of Trustees (with Mr. Edward S. Lampert recusing himself).

Transition Services Agreement

On July 7, 2015, the Operating Partnership and Sears Holdings Management Corporation (“SHMC”), a wholly owned subsidiary of Sears Holdings, entered into a transition services agreement (the “Transition Services Agreement” or “TSA”).  Pursuantto provide additional staffing to the TSA, SHMC was to provide certain limited services to the Operating Partnership during the period from the closing of the Transaction through the 18-month anniversary of the closing.Company. On January 7, 2017,2022, the TSA expiredCompany announced that John Garilli, an employee of Winthrop, has been appointed interim chief financial officer on a full-time basis, effective January 14, 2022. The Company pays Winthrop a monthly fee of $0.1 million and reimbursement for certain employee expenses.

Unconsolidated Entities

Certain unconsolidated entities have engaged the Company to provide management, leasing, construction supervision and development services at the properties owned by its terms.the unconsolidated entities. Refer to Note 2 for the Company’s significant accounting policies.

In addition, as of June 30, 2022, the Company had incurred 0 development expenditures at properties owned by certain unconsolidated entities for which the Company will be repaid by the respective unconsolidated entities. As of December 31, 2021, the Company had incurred $0.2 million of such development expenditures. These amounts are included in tenant and other receivables, net on the Company’s condensed consolidated balance sheets.

The Company has certain put rights on properties held by the Unconsolidated Entities, which may require the Company’s partner to buy out the Company’s investment in such properties. During the three and ninesix months ended SeptemberJune 30, 20172022, the Company did not incur any fees under the TSA.  During the threeput 2 and nine months ended September4 properties, respectively to two of their partners. Subsequent to June 30, 2016,2022, the Company incurred feesput an additional 2 properties to one of approximately $0.1 million for certain accounting and tax services provided in support of the Company’s 2015 yearend activities.  These fees are included in general and administrative expenses on the condensed consolidated statements of operations.their partners.

Note 11 – Non-Controlling Interests

Partnership Agreement

On July 7, 2015, Seritage and ESL entered into the agreement of limited partnership of the Operating Partnership (the “Partnership Agreement”).which was amended and restated on December 14, 2017. Pursuant to the Partnership Agreement,this partnership agreement, as the sole general partner of the Operating Partnership, Seritage exercises exclusive and complete responsibility and discretion in its day-to-day management, authority to make decisions, and control of the Operating Partnership, and may not be removed as general partner by the limited partners.

During the nine months ended September 30, 2017, 2,344,589 Operating Partnership units were converted to Class A common shares.

As of SeptemberJune 30, 2017,2022, the Company held a 60.9%77.9% interest in the Operating Partnership and ESL held a 39.1%22.1% interest. The portions of consolidated entities not owned by the Company are presented as non-controlling interest as of and during the periods presented. Refer to Note 10 above for subsequent changes to Operating Partnership ownership.

Note 12 – Shareholders’ Equity

Class A Common Shares

During the nine months ended September 30, 2017, 2,344,589 Operating Partnership units were converted to Class A common shares and 197,176 net Class A common shares were converted to Class C non-voting common shares.

As of SeptemberJune 30, 2017, 28,001,4112022, 43,677,418 Class A common shares were issued and outstanding.

Subsequent to September 30, 2017, 671,231 net Class C non-voting common shares were converted to Class A commonshares have a par value of $0.01 per share. During the six months ended June 30, 2022, 0 OP Units were issued and exchanged for an equal number of Class A shares.

Class B Non-Economic Common Shares

During the nine months ended SeptemberAs of June 30, 2017, 154,0982022, there were 0 Class B non-economic common shares were surrendered to the Company.

As of September 30, 2017, 1,434,922 Class B non-economic common shares were issued and outstanding.

Series A Preferred Shares

In December 2017, the Company issued 2,800,0007.00% Series A Cumulative Redeemable Preferred Shares (the “Series A Preferred Shares”) in a public offering at $25.00 per share. The Class B non-economic common sharesCompany received net proceeds from the offering of approximately $66.4 million, after deducting payment of the underwriting discount and offering expenses.

The Company may not redeem the Series A Preferred Shares before December 14, 2022, or upon the occurrence of a Change of Control, as defined in the trust agreement addendum designating the Series A Preferred Shares. On and after December 14, 2022, the Company may redeem any or all of the Series A Preferred Shares at $25.00 per share plus any accrued and unpaid dividends. In addition, upon the occurrence of a Change of Control, the Company may redeem any or all of the Series A Preferred Shares for cash within 120 days after the first date on which such Change of Control occurred at $25.00 per share plus any accrued and unpaid dividends. The Series A Preferred Shares have voting rights, but do not have economic rights and, as such, do not receive dividends andno stated maturity, are not included in earnings per share computations.subject to any sinking fund or mandatory redemption and will remain outstanding indefinitely unless the Company redeems or otherwise repurchases them or they are converted.

Class C Non-Voting Common Shares- 26 -


Dividends and Distributions

DuringThe Company’s Board of Trustees has not declared dividends on the nine months ended September 30, 2017, 197,176 netCompany’s Class A common shares were converted toduring 2022, 2021 or 2020. The last dividend on the Company’s Class A and C non-voting common shares.

As of September 30, 2017, 5,951,861 Class C non-voting common shares were issuedthat the Board of Trustees declared was on February 25, 2019, which was paid on April 11, 2019 to shareholders of record on March 29, 2019.

The Board of Trustees will continue to assess the Company’s investment opportunities and outstanding.  The Class C non-voting common shares have economic rights, but do not have voting rights.  Upon any transferits expectations of a Class C non-voting common share to any person other than an affiliatetaxable income in its determination of the holder of such share, such share shall automatically convert into one Class A common share.future distributions, if any.

Subsequent to September 30, 2017, 671,231 net Class C non-voting common shares were converted to Class A common shares.

- 24 -


Dividends and Distributions

The Company’s Board of Trustees declared the following common stock dividends on preferred shares during 20172022 and 2016, with holders of Operating Partnership units entitled to an equal distribution per Operating Partnership unit held on the record date:2021:

 

 

 

 

 

 

 

Series A

 

Declaration Date

 

Record Date

 

Payment Date

 

Preferred Share

 

2022

 

 

 

 

 

 

 

July 26

 

September 30

 

October 17

 

$

0.43750

 

April 26

 

June 30

 

July 15

 

 

0.43750

 

February 16

 

March 31

 

April 15

 

 

0.43750

 

2021

 

 

 

 

 

 

 

October 26

 

December 31

 

January 14, 2022

 

$

0.43750

 

July 27

 

September 30

 

October 15

 

 

0.43750

 

April 27

 

June 30

 

July 15

 

 

0.43750

 

February 23

 

March 31

 

April 15

 

 

0.43750

 

 

 

 

 

 

 

Dividends per

 

 

 

 

 

 

 

Class A and Class C

 

Declaration Date

 

Record Date

 

Payment Date

 

Common Share

 

2017

 

 

 

 

 

 

 

 

October 24

 

December 29

 

January 11, 2018

 

$

0.25

 

July 25

 

September 29

 

October 12

 

 

0.25

 

April 25

 

June 30

 

July 13

 

 

0.25

 

February 28

 

March 31

 

April 13

 

 

0.25

 

2016

 

 

 

 

 

 

 

 

November 1

 

December 31

 

January 12, 2017

 

$

0.25

 

August 2

 

September 30

 

October 13

 

 

0.25

 

May 3

 

June 30

 

July 14

 

 

0.25

 

March 8

 

March 31

 

April 14

 

 

0.25

 

Note 13 – Earnings per Share

The table below provides a reconciliation of net income income/(loss) and the number of common shares used in the computations of “basic”“basic�� earnings per share (“EPS”), which utilizes the weighted-average number of common shares outstanding without regard to dilutive potential common shares, and “diluted” EPS, which includes all such shares. Potentially dilutive securities consist of shares of non-vested restricted stock and the redeemable non-controlling interests in the Operating Partnership.

All outstanding non-vested shares that contain non-forfeitable rights to dividends are considered participating securities and are included in computing EPS pursuant to the two-class method which specifies that all outstanding non-vested share-based payment awards that contain non-forfeitable rights to distributions are considered participating securities and should be included in the computation of EPS.

Earnings per share has not been presented for Class B shareholders, as they do not have economic rights.

 

(in thousands except per share amounts)

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Numerator

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

17,276

 

 

$

(37,247

)

 

$

(50,435

)

 

$

(64,526

)

Net (income) loss attributable to non-controlling interests

 

 

(6,762

)

 

 

16,145

 

 

 

19,892

 

 

 

27,972

 

Net income (loss) attributable to common shareholders

 

$

10,514

 

 

$

(21,102

)

 

$

(30,543

)

 

$

(36,554

)

Earnings allocated to unvested participating securities

 

 

(21

)

 

 

-

 

 

 

-

 

 

 

-

 

Net income (loss) available to common shareholders -

   Basic and diluted

 

$

10,493

 

 

$

(21,102

)

 

$

(30,543

)

 

$

(36,554

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average Class A common shares

   outstanding

 

 

27,758

 

 

 

25,671

 

 

 

27,810

 

 

 

25,443

 

Weighted average Class C common shares

   outstanding

 

 

6,016

 

 

 

5,748

 

 

 

5,875

 

 

 

5,971

 

Weighted average Class A and Class C

   common shares outstanding -  Basic

 

 

33,774

 

 

 

31,419

 

 

 

33,685

 

 

 

31,414

 

Restricted shares and share units

 

 

67

 

 

 

-

 

 

 

-

 

 

 

-

 

Weighted average Class A and Class C

   common shares outstanding - Diluted

 

 

33,841

 

 

 

31,419

 

 

 

33,685

 

 

 

31,414

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share attributable to Class A and

   Class C common shareholders - Basic

 

$

0.31

 

 

$

(0.67

)

 

$

(0.91

)

 

$

(1.16

)

Net income (loss) per share attributable to Class A and

   Class C common shareholders - Diluted

 

$

0.31

 

 

$

(0.67

)

 

$

(0.91

)

 

$

(1.16

)

(in thousands except per share amounts)

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Numerator - Basic and Diluted

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(142,083

)

 

$

(95,304

)

 

$

(209,070

)

 

$

(106,237

)

Net loss attributable to non-controlling interests

 

 

31,328

 

 

 

22,464

 

 

 

46,110

 

 

 

25,677

 

Preferred dividends

 

 

(1,225

)

 

 

(1,225

)

 

 

(2,450

)

 

 

(2,450

)

Net loss attributable to common shareholders - Basic

 

$

(111,980

)

 

$

(74,065

)

 

$

(165,410

)

 

$

(83,010

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator - Basic and Diluted

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average Class A common shares outstanding

 

 

43,677

 

 

 

42,772

 

 

 

43,656

 

 

 

41,134

 

Weighted average Class A common shares
   outstanding - Basic

 

 

43,677

 

 

 

42,772

 

 

 

43,656

 

 

 

41,134

 

Weighted average Class A common shares
   outstanding - Diluted

 

 

43,677

 

 

 

42,772

 

 

 

43,656

 

 

 

41,134

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss per share attributable to Class A
   common shareholders - Basic

 

$

(2.56

)

 

$

(1.73

)

 

$

(3.79

)

 

$

(2.02

)

Loss per share attributable to Class A
   common shareholders - Diluted

 

$

(2.56

)

 

$

(1.73

)

 

$

(3.79

)

 

$

(2.02

)

 

- 25 -


No adjustments were made to the numerator for the three and six months ended SeptemberJune 30, 2016 or the nine months ended September 30, 2017 or September 30, 20162022 and 2021 because the Company generated a net loss. During periods of net loss, undistributed losses are not allocated to the participating securities as they are not required to absorb losses.

- 27 -


No adjustments were made to the denominator for the three and six months ended SeptemberJune 30, 2016 or the nine months ended September 30, 2017 or September 30, 20162022 and 2021 because (i) the inclusion of outstanding non-vested restricted shares would have had an anti-dilutive effect and (ii) including the non-controlling interest in the Operating Partnership would also require that the share of the Operating Partnership loss attributable to such interests be added back to net loss, therefore, resulting in no effect on earnings per share.

As of SeptemberJune 30, 20172022 and December 31, 2016,2021, there were 245,570573,861 and 216,348288,068 shares, respectively, of non-vested restricted shares and share units outstanding.

Note 14 – Stock BasedShare-Based Compensation

On July 7, 2015, the Company adopted the Seritage Growth Properties 2015 Share Plan (the “Plan”). The number of shares of common stock reserved for issuance under the Plan is 3,250,000.3,250,000. The Plan provides for grants of restricted shares, share units, other share-based awards, options, and share appreciation rights, each as defined in the Plan (collectively, the "Awards"“Awards”). Directors, officers, other employees, and consultants of the Company and its subsidiaries and affiliates are eligible for Awards.

Restricted Shares and Share Units

Pursuant to the Plan, the Company has periodically made grants of restricted shares or share units during the nine months ended September 30, 2017 and September 30, 2016, as well as the period from July 7, 2015 (Date Operations Commenced) through December 31, 2015.units. The vesting terms of these grants are specific to the individual grant and vary in that a portion of the restricted shares and share units vest in equal annual amounts over the next subsequent three years (time-based vesting) and a portion of the restricted shares and share units vest on the third, and in some instances, the fourth anniversary of the grants subject to the achievement of certain performance criteria (performance-based and market-based vesting).  As of September 30, 2017, the performance criteria have not been met for any outstanding restricted shares or share units with performance-based vesting.

In general, participating employees are required to remain employed for vesting to occur (subject to certain limited exceptions). Restricted shares and share units that do not vest are forfeited. Dividends on restricted shares and share units with time-based vesting are paid to holders of such shares and share units and are not returnable, even if the underlying shares or share units do not ultimately vest. Dividends on restricted shares and share units with performance-based vesting are accrued when declared and paid to holders of such shares on the third, and in some instances, the fourth anniversary of the initial grant subject to the vesting of the underlying shares. See Note 2 for valuation information related to the grants of the awards that are subject to market-based vesting conditions.

The following table summarizes restricted share activity for the ninesix months ended SeptemberJune 30, 2017:2022:

 

 

 

 

 

 

 

Nine Months Ended September 30, 2017

 

 

Six Months Ended June 30,

 

 

 

 

 

 

Weighted-

 

 

 

 

 

Weighted-

 

 

 

 

 

 

Average Grant

 

 

 

 

 

Average Grant

 

 

Shares

 

 

Date Fair Value

 

 

Shares

 

 

Date Fair Value

 

Unvested restricted shares at beginning of period

 

 

216,348

 

 

$

38.98

 

 

 

288,068

 

 

$

17.65

 

 

 

 

 

 

 

 

 

Restricted shares granted

 

 

62,135

 

 

 

45.23

 

Share units granted

 

 

335,033

 

 

 

11.31

 

Restricted shares vested

 

 

(32,345

)

 

 

33.02

 

 

 

(38,400

)

 

 

15.18

 

Restricted shares forfeited

 

 

(568

)

 

 

45.23

 

 

 

(10,840

)

 

 

13.22

 

 

 

 

 

 

 

 

 

Unvested restricted shares at end of period

 

 

245,570

 

 

$

41.33

 

 

 

573,861

 

 

$

14.20

 

 

The Company recognized $0.4$0.5 million and $0.3$0.1 million in compensation expense related to the restricted shares for the three months ended SeptemberJune 30, 20172022 and September 30, 2016,2021, respectively and $1.2$0.9 million and $0.82$1.0 million in compensation expensefor the six months ended June 30, 2022 and 2021, respectively. Compensation expenses related to the restricted shares for the nine months ended September 30, 2017 and September 30, 2016, respectively. Such expenses are included in general and administrative expenses on the Company'sCompany’s condensed consolidated statements of operations.

As of SeptemberJune 30, 2017,2022, there were approximately $10.2$6.3 million of total unrecognized compensation costs related to the outstanding restricted shares.

- 26 -


Note 15 – Accounts Payable, Accrued Expenses and Other Liabilities

The following table summarizes the significant componentsshares which are expected to be recognized over a weighted-average period of accounts payable, accrued expenses and other liabilities asapproximately 2.3 years. As of SeptemberJune 30, 2017 and December 31, 2016 (in thousands):

 

 

September 30, 2017

 

 

December 31, 2016

 

Accounts payable and accrued expenses

 

$

21,905

 

 

$

22,424

 

Accrued real estate taxes

 

 

21,576

 

 

 

23,942

 

Unearned tenant reimbursements

 

 

17,133

 

 

 

4,039

 

Below-market leases

 

 

14,998

 

 

 

16,827

 

Dividends payable

 

 

14,648

 

 

 

14,132

 

Environmental reserve

 

 

11,322

 

 

 

11,584

 

Prepaid rental income

 

 

3,875

 

 

 

1,979

 

Accrued interest

 

 

3,444

 

 

 

3,004

 

Deferred maintenance

 

 

2,581

 

 

 

4,124

 

Litigation charge

 

 

 

 

 

19,000

 

Total accounts payable, accrued expenses and other

   liabilities

 

$

111,482

 

 

$

121,055

 

Note 16 – Subsequent Events

Subsequent to September 30, 2017, the Company agreed to sell to Simon the Company’s 50% interest in five of the ten assets in the Simon JV for $68.0 million, subject to certain closing conditions.  Upon closing, which is expected in the fourth quarter of 2017, the Company would realize2021, there were approximately $7.0$3.8 million of value creation above its basis acrosstotal unrecognized compensation costs related to the five propertiesoutstanding restricted shares which were expected to be recognized over a weighted-average period of approximately 2.3 years.

- 28 -


Item 2. Management’s Discussion and generate unrestricted cash proceeds, after closing costsAnalysis of Financial Condition and any required tax distributions, to fund its redevelopment pipeline and for general corporate purposes.Results of Operations

The table below presents the properties sold in the transaction and the properties remaining in the Company’s JV with Simon:

Five Existing JV Assets to be Sold to Simon

Five Remaining Assets in JV with Simon

Retail Center

Location

Retail Center

Location

Brea Mall

Brea, CA

Barton Creek Square

Austin, TX

Burlington Mall

Burlington, MA

Briarwood Mall

Ann Arbor, MI

Midland Park Mall

Midland, TX

Santa Rosa Plaza

Santa Rosa, CA

Ross Park Mall

Pittsburgh, PA

The Shops at Nanuet

Nanuet, NY

Ocean County Mall

Toms River, NJ

Woodland Hills Mall

Tulsa, OK

- 27 -


Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Certain statements contained herein constitute forward-looking statements as such term is defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are not guarantees of future performance. They represent our intentions, plans, expectations and beliefs and are subject to numerous assumptions, risks and uncertainties. Our future results, financial condition and business may differ materially from those expressed in these forward-looking statements. You can find many of these statements by looking for words such as “approximates,” “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “projects,” “will,” “would,” “may” or other similar expressions in this Quarterly Report on Form 10-Q. Many of the factors that will determine the outcome of these and our other forward-looking statements are beyond our ability to control or predict. For further discussion of factors that could materially affect the outcome of our forward-looking statements, see “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016.2021 and in Part II, Item 1A of this Quarterly Report on Form 10-Q. For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. You are cautioned not to place undue reliance on our forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. We do not undertake any obligation to release publicly any revisions to our forward-looking statements to reflect events or circumstances occurring after the date of this Quarterly Report on Form 10-Q. The following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto included in Part 1 of this Quarterly Report.

Overview

Seritage Growth Properties (NYSE: SRG), a Maryland real estate investment trust formed on June 3, 2015, is a fully integrated, self-administered and self-managed real estate investment trust (“REIT”) as defined under Section 856(c) of the Internal Revenue Code (the “Code”).  Seritage’s assets are held by and its operations are primarily conducted through, directly or indirectly, the Operating Partnership.  Under the partnership agreement of the Operating Partnership, Seritage, as the sole general partner, has exclusive responsibility and discretion in the management and control of the Operating Partnership.  Unless otherwise expressly stated or the context otherwise requires, the “Company”, “we,” “us,” and “our” as used herein refer to Seritage, the Operating Partnership, and its owned and controlled subsidiaries.

We are principally engaged in the acquisition, ownership, development, redevelopment, disposition, management and leasing of diversified retail real estateand mixed-use properties throughout the United States. As of SeptemberJune 30, 2017,2022, our portfolio included over 40.0consisted of interests in 150 properties comprised of approximately 19.5 million square feet of gross leasable area (“GLA”) or build-to-suit leased area, approximately 3.9 million of which is held by unconsolidated entities (the “Unconsolidated Properties”), consisting of 230 Wholly Owned Properties totaling over 35.4approximately 433 acres held for or under development and approximately 9.9 million square feet or approximately 821 acres to be disposed of.

In the second quarter of GLA across 49 states2021, we announced an organizational restructuring and Puerto Rico, and interests in 28 JV Properties totaling approximately 5.1 million square feet of GLA across 15 states.

As of September 30, 2017, 171conjunction commenced a portfolio review resulting in the modification of the Company’s wholly-owned properties were leasedplan for certain assets. We continue to Sears Holdings pursuant to the Master Leaseevaluate our strategy and operated under either the Sears or Kmart brand.  At 85 properties, third-party tenants under direct leases occupy a portion of leasable space alongside Sears and Kmart, and 41 properties are leased only to third parties. A substantial majority of the space at the JV Properties is also leased to Sears Holdings under the JV Master Leases.

We generate revenues primarily by leasing our properties to tenants, including both Sears Holdings and third-party tenants, who operate retail stores (and potentially other uses) in the leased premises, a business model common to many publicly traded REITs.  In addition to revenues generated under the Master Lease through rent payments from Sears Holdings, we generate revenue through leases to third-party tenants under existing and future leases for space at our properties.

The Master Lease provides us with the right to recapture up to approximately 50% of the space occupied by Sears Holdings at each of the 224 Wholly Owned Properties initially included in the Master Lease (subject to certain exceptions and limitations).  In addition, Seritage has the right to recapture any automotive care centers which are free-standing or attached as “appendages” to the properties, and all outparcels or outlots and certain portions of parking areas and common areas.  Upon exercise of this recapture right, we will generally incur certain costs and expenses for the separation of the recaptured space from the remaining Sears Holdings space and can reconfigure and rent the recaptured space to third-party tenants on potentially superior terms determined by us and for our own account.  We also have the right to recapture 100% of the space occupied by Sears Holdings at each of 21 identified Wholly Owned Properties by making a specified lease termination payment to Sears Holdings, after whichtime, we expect to be able to reposition our portfolio into three business lines: residential developments, premier mixed-use assets, and re-lease those stores on potentially superior terms determined by us and for our own account.multi-tenant retail destinations.

AsReview of September 30, 2017, we had exercised recapture rights at 45 properties, including 17 properties at which we exercised partial recapture rights, 17 properties at which we exercised 100% recapture rights (five of which were converted from partial recapture properties), and 11 properties at which we exercised our rights to recapture only automotive care centers or outparcels.Strategic Alternatives

- 28 -


Effects of Natural Disasters

WhileOn March 1, 2022, the Company continuesannounced that its Board of Trustees has commenced a process to assess the impactreview a broad range of strategic alternatives to enhance shareholder value. The Board of Trustees created a special committee of the natural disasters (wildfiresBoard of Trustees (the “Special Committee”) to oversee the process. The Special Committee has retained a financial advisor. The strategic review process remains ongoing. There can be no assurance that the review process will result in Californiaany transaction or any strategic change at this time. See “Item 1A. Risk Factors—Risks Related to Our Business and Hurricanes Harvey, Irma,Operations—There can be no assurance that our review of strategic alternatives will result in any transaction or any strategic change at this time.” On July 7, 2022, we filed our preliminary proxy materials with the SEC in connection with our 2022 Annual Meeting of Shareholders seeking a shareholder vote to approve a proposed plan of sale of our assets and Maria)dissolution (the “Plan of Sale”) that occurredwill allow our board to sell all of our assets, distribute the net proceeds to shareholders and dissolve the Company. See Note 1 – Organization of the Notes to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information about the Plan of Sale.

Impairment of Real Estate Assets and Investments in Unconsolidated Entities

In the first quarter of 2022, we announced a Review of Strategic Alternatives and during the second quarter ended September 30, 2017 on our operations our abilitydetermined that the best plan for all assets is to collect rent from tenants, we do not believe these natural disasters will havepursue sales. As a material impact on our operating results or financial position.  All stores occupied by Sears Holdings are currently open for business andresult of the Company has not experienced interruptions in rental payments nor does it expect to incur material capital expenditures to repair any property damage.

GGP Transactions

On July 12, 2017, the Company completed two transactions with GGP for gross consideration of $247.6 million whereby the Company (i) sold to GGPforegoing, the Company’s 50% JV Interests in eightanticipated holding periods with respect to certain assets has changed. This affected our view of recoverability of the 12carrying value of those assets in the GGP I JV for $190.1over their respective holding periods. We have recognized $109.3 million and recorded a gain$110.3 million of $43.7 millionimpairment losses during the three and six months ended June 30, 2022, respectively, which isare included in gainimpairment on sale of interest in unconsolidated joint venturereal estate assets within the condensed consolidated statements of operations;operations. We have recognized $32.5 million of other than temporary impairment losses to our investments in unconsolidated entities during the three and (ii) contributed five Wholly Owned Properties to the GGP II JV and sold a 50% interest in the new JV Properties to GGP for $57.5 million and recorded a gain of $13.0 millionsix months ended June 30, 2022, respectively, which isare included in gain on saleequity in loss of real estateunconsolidated entities within the condensed consolidated statements of operations. We continue to evaluate our portfolio, including our development plans and offers received, which may result in additional impairments in future periods on our consolidated properties and investments in unconsolidated entities.

- 29 -


REIT Election

On March 31, 2022, the Company announced that its Board of Trustees, with the recommendation of the Special Committee, approved a plan to terminate the Company's REIT status and become a taxable C Corporation, effective for the year ending December 31, 2022. As a result, the Company is no longer required to operate under REIT rules, including the requirement to distribute at least 90% of REIT taxable income to its stockholders, which provides the Company with greater flexibility to use its free cash flow. Effective January 1, 2022, the Company is subject to federal and state income taxes on its taxable income at applicable tax rates and is no longer entitled to a tax deduction for dividends paid. The Company operated as a REIT for the 2021 tax year, and existing REIT requirements and limitations, including those established by the Company’s organizational documents, remained in place until December 31, 2021. Refer to Note 7 – Income Taxes of the Notes to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Business Strategies

The Company’s primary objective is to create value for its shareholders through either the re-leasing and redevelopment of its core Consolidated Properties and Unconsolidated Properties, disposition certain of its non-core assets which have been identified for near term disposition, or through the monetization of assets through our strategic review process. In particular, we have identified various sites that we believe have the demand and demographic profile to support other uses such as residential, biotechnology, office and others. Given our fee ownership of these properties and control over parking lots and outparcels, we believe that these sites are well positioned for such value creation opportunities. We additionally look to further lease our built retail footprint and densify any excess parking land through the addition of triple net (“NNN”) pad sites, which are standalone sites upon which a customized space can be built or leased for a tenant. We have identified 103 pad site opportunities across our portfolio.

In order to achieve its objective, the Company intends to execute the following strategies:

Multi-tenant Retail: Our portfolio of 38 multitenant retail assets provide positive cash flow and are primarily leased to a variety of national credit tenants. As of June 30, 2022, this portfolio was 84.0% leased with a pipeline of 0.2 million square feet. A majority of our leases are effectively NNN based on the structure of our leases, providing an important inflation hedge. This portfolio also affords numerous further densification opportunities through the addition of pads on excess parking areas.
Densification and Redevelopment Opportunities: In particular, we have identified various sites that we believe have the demand and demographic profile to support other uses such as residential, biotechnology, office and others. Given our fee ownership of these properties and control over parking lots and outparcels, we believe that these sites are well positioned for such value creation opportunities. We additionally look to further densification by converting vacant land to pad sites.
Premier/Master Planned Mixed Use and Residential: As of June 30, 2022, our full portfolio included approximately 2,000 acres of land, or an average of 13 acres per site, and our most significant geographic concentrations were in higher growth markets in California, Florida, Texas, and the Northeast. We believe these land holdings will provide meaningful opportunities to create value through entitlements, leasing and developments. Twenty sites have been identified as potential residential developments. The average acreage per site is 11.9.
Non-core Assets for Monetization: We continue to assess the best use for all sites within our portfolio, including residential, retail, and converting excess land area to pad sites, and will strategically dispose of non-core assets in order to fund development and deploy capital more strategically.

On March 1, 2022, the Company announced that its Board of Trustees has commenced a process to review a broad range of strategic alternatives to enhance shareholder value. The Company will continue to evaluate its portfolio strategy and corporate structure to optimize the outcome of such review. See within “—Review of Strategic Alternatives” above.

On July 7, 2022, we filed our preliminary proxy materials with the SEC in connection with our 2022 Annual Meeting of Shareholders seeking a shareholder vote to approve a proposed plan of sale of our assets and dissolution (the “Plan of Sale”) that will allow our board to sell all of our assets, distribute the net proceeds to shareholders and dissolve the Company. See Note 1 – Organization of the Notes to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information about the Plan of Sale.

COVID-19 Pandemic

The Coronavirus (“COVID-19”) pandemic has caused and continues to cause significant impacts on the real estate industry in the United States, including the Company’s properties.

- 30 -


As a result of the transactions,development, fluidity and uncertainty surrounding this situation, the Company reduced amounts outstandingexpects that these conditions may change, potentially significantly, in future periods and results for the three and six months ended June 30, 2022 may not be indicative of the impact of the COVID-19 pandemic on the Company’s business for future periods. As such, the Company cannot reasonably estimate the impact of COVID-19 on its financial condition, results of operations or cash flows over the foreseeable future.

As of June 30, 2022, we had collected 99% of rental income for the three months ended June 30, 2022. While the Company intends to enforce its contractual rights under its mortgage loan by $50.6 million and received approximately $171.6 million ofleases, there can be no assurance that tenants will meet their future obligations or that additional cash proceeds before closing costs, which it intends to use to fund its redevelopment pipeline and for general corporate purposes.rental modification agreements will not be necessary.

Simon Transaction

Subsequent to September 30, 2017, the Company agreed to sell to Simon the Company’s 50% JV Interests in five of the ten assets in the Simon JV for $68.0 million, subject to certain closing conditions.

Upon closing, which is expected in the fourth quarter of 2017, the Company would realize approximately $7.0 million of value creation above its basis across the five properties and generate unrestricted cash proceeds, after closing costs and any required tax distributions, to fund its redevelopment pipeline and for general corporate purposes.

Results of Operations

We derive substantially all of our revenue from rents received from tenants under existing leases at each of our properties. This revenue generally includes fixed base rents and recoveries of expenses that we have incurred and that we pass through to the individual tenants, in each case as provided in the respective leases.

Our primary cash expenses consist of our property operating expenses, general and administrative expenses, interest expense, and construction and development related costs. Property operating expenses include:include real estate taxes, repairs and maintenance, management expenses,fees, insurance, ground lease costs and utilities; general and administrative expenses include payroll, office expenses, professional fees, and other administrative expenses; and interest expense is primarily on our mortgage loans payable.term loan facility. In addition, we incur substantial non-cash charges for depreciation and amortization onof our properties and relatedamortization of intangible assets and liabilities resultingliabilities.

Comparison of the Three Months Ended June 30, 2022 to the Three Months Ended June 30, 2021

The following table presents selected data on comparative results from the Transaction.

We did not have any revenues or expenses until we completed the Transaction on July 7, 2015.

Rental Income

ForCompany’s condensed consolidated statements of operations for the three months ended SeptemberJune 30, 2017:

The Company recognized total rental income of $48.2 million2022, as compared to $45.6 million for the three months ended September 30, 2016.  The $2.6 million increase was driven primarily by (i) termination fee income of $10.6 million and (ii) increased third-party rental income of $1.5 million, offset by (iii) reduced rental income under the Master Lease of $5.4 million and (iv) reduced straight-line rent of $4.1 million, in each case for the three months ended September 30, 2017 as compared to the prior year period.

Rental income attributable to Sears Holdings was $27.9 million (excluding termination fee income of $10.6 million and straight-line rental income of $(1.7) million), or 72.7% of total rental income earned in the period.  For the prior year period, the comparable rental income attributable to Sears Holdings was $33.4 million, or approximately 79.0% of total rental income earned in the period.

Rental income attributable to third-party tenants was $10.5 million (excluding straight-line rental income of $0.6 million), or 27.3% of total rental income earned in the period.  For the prior year period, the comparable rental income attributable to third-party tenants was $9.0 million, or approximately 21.0% of total rental income earned in the period.

- 29 -


Straight-line rent was ($1.1) million as compared to $3.0 million for the prior year period. The reduction in straight-line rent was primarily due to reduced rental income under the Master Lease and the amortization of accrued rental revenues related to the straight-line method of reporting that are deemed uncollectable as result of recapture and termination activity under the Master Lease.

For the nine months ended September 30, 2017:

The Company recognized total rental income of $139.5 million as compared to $136.7 million for the nine months ended September 30, 2016.  The $2.8 million increase was driven primarily by (i) termination fee income of $17.4 million and (ii) increased third-party rental income of $5.2 million, offset by (iii) reduced rental income under the Master Lease of $11.0 million and (iv) reduced straight-line rent of $8.8 million, in each case for the nine months ended September 30, 2017 as compared to the prior year period.

Rental income attributable to Sears Holdings was $88.8 million (excluding termination fee income of $17.4 million and straight-line rental income of $0.1 million), or 74.7% of total rental income earned in the period.  For the prior year period, the comparable rental income attributable to Sears Holdings was $99.8 million, or approximately 80.0% of total rental income earned in the period.

Rental income attributable to third-party tenants was $30.1 million (excluding straight-line rental income of $2.3 million), or 25.3% of total rental income earned in the period.  For the prior year period, the comparable rental income attributable to third-party tenants was $25.0 million, or approximately 20.0% of total rental income earned in the period.

Straight-line rent was $2.4 million as compared to $11.2 million for the prior year period. The reduction in straight-line rent was primarily due to reduced rental income under the Master Lease and the amortization of accrued rental revenues related to the straight-line method of reporting that are deemed uncollectable as result of recapture and termination activity under the Master Lease.

On an annual basis, and taking into account all signed leases, including those which have not yet commenced rental payments, rental income attributable to third-party tenants would have represented approximately 45.4% of total annual base rental income as of September 30, 2017.

The increase in rental income attributable to third-party tenants, and the reduction in rental income attributable directly to Sears Holdings, are driven by the Company’s leasing and redevelopment activity, including signing leases with new, third-party tenants and recapturing space from Sears Holdings.

Tenant Reimbursements and Property Operating Expenses

Pursuant to the provisions of the Master Lease and many third-party leases, the Company is entitled to be reimbursed for certain property related expenses.  For the three months ended SeptemberJune 30, 2017 and September 30, 2016,2021 (in thousands):

 

 

Three Months Ended June 30,

 

 

 

 

 

 

2022

 

 

2021

 

 

$ Change

 

Revenue

 

 

 

 

 

 

 

 

 

Rental income

 

$

29,418

 

 

$

27,595

 

 

$

1,823

 

Expenses

 

 

 

 

 

 

 

 

 

Property operating

 

 

10,801

 

 

 

11,286

 

 

 

(485

)

Real estate taxes

 

 

6,425

 

 

 

9,061

 

 

 

(2,636

)

Depreciation and amortization

 

 

10,669

 

 

 

13,328

 

 

 

(2,659

)

General and administrative

 

 

11,093

 

 

 

11,990

 

 

 

(897

)

Litigation reserve

 

 

35,000

 

 

 

-

 

 

 

35,000

 

Gain on sale of real estate, net

 

 

68,031

 

 

 

18,097

 

 

 

49,934

 

Impairment of real estate assets

 

 

109,343

 

 

 

64,539

 

 

 

44,804

 

Equity in loss of unconsolidated entities

 

 

33,720

 

 

 

2,327

 

 

 

31,393

 

Interest expense

 

 

22,663

 

 

 

28,976

 

 

 

(6,313

)

Rental Income

The following table presents the Company recorded tenant reimbursementresults for rental income of $15.9 million and $12.0 million, respectively, compared to property operating expenses and real estate tax expense aggregating of $15.6 million and $12.5 million, respectively.  For the nine months ended September 30, 2017 and September 30, 2016, the Company recorded tenant reimbursement income of $47.8 million and $45.7 million, respectively, compared to property operating expenses and real estate tax expense aggregating of $49.7 million and $48.3 million, respectively.

Depreciation and Amortization Expenses

Depreciation and amortization expenses consist of depreciation of real property, depreciation of furniture, fixtures and equipment, and amortization of certain lease intangible assets.

Forfor the three months ended SeptemberJune 30, 2017,2022, as compared to the Company incurredcorresponding period in 2021 (in thousands):

 

 

Three Months Ended June 30,

 

 

Three Months Ended June 30,

 

 

 

 

 

 

2022

 

 

2021

 

 

 

 

 

 

Rental Income

 

 

% of Total
Rental Income

 

 

Rental Income

 

 

% of Total
Rental Income

 

 

$ Change

 

In-place retail leases

 

$

25,823

 

 

 

87.8

%

 

$

26,357

 

 

 

95.5

%

 

 

(534

)

Straight-line rent

 

 

3,599

 

 

 

12.2

%

 

 

1,238

 

 

 

4.5

%

 

 

2,361

 

Amortization of the above/below market leases

 

 

(4

)

 

 

0.0

%

 

 

 

 

 

0.0

%

 

 

(4

)

Total rental income

 

$

29,418

 

 

 

100.0

%

 

$

27,595

 

 

 

100.0

%

 

$

1,823

 

The increase of $2.4 million in straight-line rental income was primarily due to the commencing of new leases with fixed rent increases.

- 31 -


Property Operating Expenses and Real Estate Taxes

The decrease of $0.5 million in property operating expense for the three months ended June 30, 2022 was due primarily to asset sales.

The decrease of $2.6 million in real estate taxes for the three months ended June 30, 2022 was due primarily to asset sales and was partially offset by a decrease in amounts capitalized.

Depreciation and Amortization Expenses

The decrease of $2.7 million in depreciation and amortization expenses for the three months ended June 30, 2022 was primarily due to a decrease of $61.1 million as compared to depreciation and amortization expenses of $44.5$1.8 million in the prior year period.  The increase of $16.6 million wasnet scheduled depreciation due primarily to approximately $30.2 million of additional accelerated amortization attributable to certain lease intangible assets, offset by (i) approximately $11.0 million of lower scheduled amortization resulting from an increase in fully-amortized lease intangibles, (ii) approximately $2.1 million of lower depreciation resulting from the accelerated depreciation in the prior year period of certain buildings that were demolished for redevelopment, and (iii) approximately $0.5 million of lower scheduled amortization and depreciation as a result of the contribution of five Wholly Owned Properties into the GGP II JV and sale of a 50% interest in the new JV Properties in July 2017.property sales.

For the nine months ended September 30, 2017, the Company incurred depreciation and amortization expenses of $170.3 million as compared to depreciation and amortization expenses of $121.4 million in the prior year period.  The increase of $48.9 million was due primarily to approximately (i) $67.6 million of additional accelerated amortization attributable to certain lease intangible assets and (ii) $1.1 million of additional accelerated depreciation in the current year period of certain buildings that were demolished for redevelopment, offset by (i) approximately $19.3 million of lower scheduled amortization resulting from an increase in fully-amortized lease intangibles and (ii) approximately $0.5 million of lower scheduled amortization and depreciation as a result of the contribution of five Wholly Owned Properties into the GGP II JV and sale of a 50% interest in the new JV Properties in July 2017.

- 30 -


Accelerated amortization results from the recapture of space from, or the termination of space by, Sears Holdings.  Such recaptures and terminations are deemed lease modifications and require related lease intangibles to be amortized over the shorter of the shortened lease term or the remaining useful life of the asset.

General and Administrative Expenses

General and administrative expenses consist of personnel costs, including stock-basedshare-based compensation, professional fees, office expenses and overhead expenses.

For the three months ended September 30, 2017, the Company incurredThe decrease of $0.9 million in general and administrative expenses of $5.3 million compared to general and administrative expenses of $4.3 million for the prior year period.  The $1.0 million increase was driven primarily by increased personnel costs.

For the nine months ended September 30, 2017, the Company incurred general and administrative expenses of $16.6 million compared to general and administrative expenses of $13.1 million for the prior year period.  The $3.5 million increase was driven primarily by increased personnel costs and an increase in fees to firms providing professional services.

Acquisition-Related Expenses

The Company did not incur any acquisition-related expenses for the three or nine months ended September 30, 2017.  For the three and nine months ended September 30, 2016, the Company recorded less than $0.1 million of acquisition-related expenses, primarily remaining legal fees.

Interest Expense

For the three months ended September 30, 2017, the Company incurred $18.0 million of interest expense (net of amounts capitalized) as compared to interest expense of $15.9 million for the prior year period.  For the nine months ended September 30, 2017, the Company incurred $53.1 million of interest expense (net of amounts capitalized) as compared to interest expense of $47.3 million for the prior year period.  The increase in interest expense in both periods was driven by higher average borrowings under the Future Funding Facility and Unsecured Term Loan, as well as higher average LIBOR rates.

Unrealized Loss on Interest Rate Cap

For the three months ended September 30, 2017, the Company recorded a loss of $0.1 million compared to a loss of less than $0.1 million for the three months ended SeptemberJune 30, 2016.  For2022 was driven by a decrease in compensation expenses resulting from a decrease in employee head count and a decrease in restructuring costs which had been incurred in the ninesecond quarter of 2021. This was partially offset by an increase in legal fees resulting from the comprehensive review of strategic alternatives and litigation.

Litigation Reserve

During the three months ended SeptemberJune 30, 2017,2022, the Company recorded a $35 million litigation reserve related to the Company’s contribution to the proposed settlement, subject to final Court approval, of the Litigation. See Note 9 – Commitments and Contingencies.

Gain on Sale of Real Estate, Net

During the three months ended June 30, 2022, the Company sold 13 properties for aggregate consideration of $163.4 million and recorded a gain totaling $68.0 million, which is included in gain on sale of real estate, net within the condensed consolidated statements of operations.

Impairment of Real Estate Assets

During the three months ended June 30, 2022, the Company recognized $109.3 million in impairment on 32 real estate assets, which is included within the condensed consolidated statements of operations. These impairments arose from the Company’s plan to sell these properties resulting in a reduction to the holding periods of all properties, which triggered the need for an impairment analysis pursuant to ASC 360, Property, Plant and Equipment.

Equity in Loss of Unconsolidated Entities

The increase of $31.4 million in loss of $0.7unconsolidated entities for the three months ended June 30, 2022 was driven by a $32.5 million other-than-temporary impairment charge recorded against three investments. These impairments arose from the Company’s plan to sell these properties resulting in a reduction to the holding periods of all its investments in unconsolidated entities, which triggered the need for an impairment analysis pursuant to ASC 323, Equity Method and Joint Ventures.

Interest Expense

The decrease of $6.3 million in interest expense for the three months ended June 30, 2022 was driven by a decrease in interest expense incurred resulting from the partial term loan pay down of $160 million in December 2021 and an increase in amounts capitalized due to an increase in project development activity.

- 32 -


Comparison of the Six Months Ended June 30, 2022 to the Six Months Ended June 30, 2021

The following table presents selected data on comparative results from the Company’s condensed consolidated statements of operations for the six months ended June 30, 2022, as compared to the six months ended June 30, 2021 (in thousands):

 

 

Six Months Ended June 30,

 

 

 

 

 

 

2022

 

 

2021

 

 

$ Change

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

 

 

 

 

 

 

 

 

Rental income

 

$

58,502

 

 

$

58,741

 

 

$

(239

)

Expenses

 

 

 

 

 

 

 

 

 

Property operating

 

 

21,833

 

 

 

21,929

 

 

 

(96

)

Real estate taxes

 

 

14,575

 

 

 

19,216

 

 

 

(4,641

)

Depreciation and amortization

 

 

22,603

 

 

 

26,470

 

 

 

(3,867

)

General and administrative

 

 

20,185

 

 

 

23,222

 

 

 

(3,037

)

Litigation reserve

 

 

35,000

 

 

 

 

 

 

35,000

 

Gain on sale of real estate, net

 

 

67,016

 

 

 

42,305

 

 

 

24,711

 

Impairment of real estate assets

 

 

110,334

 

 

 

66,239

 

 

 

44,095

 

Equity in loss of unconsolidated entities

 

 

66,796

 

 

 

3,489

 

 

 

63,307

 

Interest expense

 

 

45,251

 

 

 

55,126

 

 

 

(9,875

)

Rental Income

The following table presents the results for rental income for the six months ended June 30, 2022, as compared to the corresponding period in 2021 (in thousands):

 

 

Six Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

 

 

 

2022

 

 

2021

 

 

 

 

 

 

Rental Income

 

 

% of Total
Rental Income

 

 

Rental Income

 

 

% of Total
Rental Income

 

 

$ Change

 

Sears or Kmart

 

$

 

 

 

0.0

%

 

$

4,510

 

 

 

7.7

%

 

$

(4,510

)

In-place retail leases

 

 

54,202

 

 

 

92.6

%

 

 

53,165

 

 

 

90.5

%

 

 

1,037

 

Straight-line rent / (expense)

 

 

4,320

 

 

 

7.4

%

 

 

1,028

 

 

 

1.8

%

 

 

3,292

 

Amortization of above/below market leases

 

 

(20

)

 

 

0.0

%

 

 

38

 

 

 

0.0

%

 

 

(58

)

Total rental income

 

$

58,502

 

 

 

100.0

%

 

$

58,741

 

 

 

100.0

%

 

$

(239

)

The decrease of $4.5 million in Sears or Kmart rental income is due to a reduction in the number of properties leased to Sears or Kmart under the Holdco Master Lease, as a result of terminations. As of March 15, 2021, Sears no longer occupied any space in the portfolio.

The increase of $1.0 million in diversified tenants rental income during 2022 is primarily due to newly commenced leases at locations formerly occupied by Sears or Kmart.

The increase of $3.3 million in straight-line rental income was primarily due to the commencement of new leases with fixed rent increases.

The decrease of $0.1 million in amortization of above/below market leases during 2022 was due primarily to the termination of certain leases previously acquired by the Company.

Property Operating Expenses and Real Estate Taxes

The decrease of $0.1 million in property operating expense for the six months ended June 30, 2022 was due primarily to asset sales.

The decrease of $4.6 million in real estate taxes for the six months ended June 30, 2022 was due primarily to asset sales and was partially offset by a decrease in amounts capitalized.

- 33 -


Depreciation and Amortization Expenses

The decrease of $3.9 million in depreciation and amortization expenses for the six months ended June 30, 2022 was primarily due to a $3.0 million decrease in net scheduled depreciation due to property sales.

General and Administrative Expenses

General and administrative expenses consist of personnel costs, including share-based compensation, professional fees, office expenses and overhead expenses.

The decrease of $3.0 million in general and administrative expenses for the six months ended June 30, 2022 was driven by a decrease in compensation expenses and share based compensation resulting from a decrease in employee head count and a decrease in restructuring costs which had been incurred in the second quarter of 2021. This was partially offset by an increase in legal fees resulting from the comprehensive review of strategic alternatives.

Litigation Reserve

During the six months ended June 30, 2022, the Company recorded a $35 million litigation reserve related to the Company’s contribution to the proposed settlement, subject to final Court approval, of the Litigation. See Note 9 – Commitments and Contingencies.

Gain on Sale of Real Estate, Net

During the six months ended June 30, 2022, the Company sold 14 properties for aggregate consideration of $172.3 million and recorded a gain totaling $67.0 million, which is included in gain on sale of real estate, net within the condensed consolidated statements of operations.

Impairment of Real Estate Assets

During the six months ended June 30, 2022, the Company recognized $110.3 million in impairment on 36 real estate assets, which is included within the condensed consolidated statements of operations. These impairments arose from the Company’s plan to sell these properties resulting in a reduction to the holding periods of all properties, which triggered the need for an impairment analysis pursuant to ASC 360, Property, Plant and Equipment.

Equity in Loss of Unconsolidated Entities

The increase of $63.3 million in loss of $1.9 millionunconsolidated entities for the ninesix months ended SeptemberJune 30, 2016.2022 was driven by $61.1 million impairment charge recorded in one investment, resulting in the Company picking up their share of this impairment at $30.6 million plus other-than-temporary impairment recorded to our investments of $32.5 million. These impairments arose from the Company’s plan to sell these properties resulting in a reduction to the holding periods of all its investments in unconsolidated entities, which triggered the need for an impairment analysis pursuant to ASC 323, Equity Method and Joint Ventures.

Interest Expense

The decrease of $9.9 million in interest expense for the six months ended June 30, 2022 was driven by a decrease in interest expense incurred resulting from the partial term loan pay down of $160 million in December 2021, and an increase in amounts capitalized due to an increase in project development activity. Interest was decreased due to mortgage recording costs incurred in the prior year.

Liquidity and Capital Resources

Property rental income is our primary source of cash and is dependent on a number of factors, including occupancy levels and rental rates, as well as our tenants’ ability to pay rent.  Our primary uses of cash include the payment of property operating and other expenses, including general and administrative expenses and debt service reinvestment in(collectively, “Obligations”), and redevelopmentcertain development expenditures. Property rental income, which is the Company’s primary source of properties,operating cash flow, did not fully fund obligations incurred during the six months ended June 30, 2022 and distributionsthe Company recorded net operating cash outflows of $54.5 million. Additionally, the Company’s generated investing cash inflows of $99.9 million during the six months ended June 30, 2022, which were driven by asset sales and partially offset by development expenditures.

Obligations are projected to shareholderscontinue to exceed property rental income and unitholders.  We believe that we currently have sufficient liquidityexpect to fund such usesobligations and any development expenditures with cash on hand and a combination of capital sources including, but not limited to the following, subject to any approvals that may be required under the Term Loan Agreement:

Sales of Consolidated Properties. As of June 30, 2022, we had sold 102 Consolidated Properties, and additional outparcels at certain properties, and generated approximately $1.2 billion of gross proceeds since we began our capital recycling program in July 2017.

- 34 -


Sales of interests in Unconsolidated Properties. As of June 30, 2022, we had sold our interests in 15 Unconsolidated Properties and generated approximately $278.1 million of gross proceeds since July 2017. Certain of our unconsolidated entity agreements also include rights that allow us to sell our interests in select Unconsolidated Properties to our partners at fair market value. During the six months ended June 30, 2022, the Company exercised such rights to put four properties to two of our partners, two of which closed subsequent to June 30, 2022 and generated approximately $23.8 million of gross proceeds. Additionally, subsequent to June 30, 2022, we exercised two additional put rights and we closed on the sale of our interest in one Unconsolidated Entity for gross proceeds of $3.3 million;
Unconsolidated Properties. As of June 30, 2022, we had contributed interests in 12 properties to unconsolidated entities, which generated approximately $242.4 million of gross proceeds since July 2017. In addition to generating liquidity upon closing, these entities also reduce our development expenditures by the amount of our partners’ interests in the form of, as of September 30, 2017, (i) $104.1 million of unrestricted cash, (ii) $202.5 million of restricted cash, (iii) anticipated cash provided by operations; and subsequent to September 30, 2017, unrestricted cash proceeds, after closing costs and any required tax distributions, that we expect to receive as a result of selling certain JV Interests to Simon.unconsolidated entities;
Unconsolidated entities debt. We may alsoincur property-level debt in new or existing unconsolidated entities, including construction financing for properties under development and longer-term mortgage debt for stabilized properties; and
Other credit and capital markets transactions. We may raise additional capital through the public or private issuance of debt securities, common or preferred equity or other instruments convertible into or exchangeable for common or preferred equity, as well as through assetequity.

As of August 8, 2022, we had nine assets under contract for sale with no contingencies for total anticipated proceeds of $83.5 million. We had 11 assets under contract for sale for total anticipated proceeds of $177.3 million, subject to customary due diligence and closing conditions. We are currently negotiating sales, evaluating bona fide offers received and marketing, or joint ventures.about to bring to market for sale, assets with an estimated fair value over $1.2 billion. In addition, we exercised the put rights that we have on four Unconsolidated Properties. Subsequent to June 30, 2022, we sold 10 assets for gross proceeds of $75.3 million, closed on the sale of two previously exercised puts of Unconsolidated Properties for gross proceeds of $23.8 million and sold our interest in one Unconsolidated Entity for gross proceeds of $3.3 million.

With respectAs previously disclosed, on May 5, 2020, the Operating Partnership and Berkshire Hathaway entered into an amendment (the “Term Loan Amendment”) to the Company’s Unsecured Term Loan due December 31, 2017,Agreement by and among the Company may repayOperating Partnership and Berkshire Hathaway as initial lender and administrative agent that permits the $85.0 million total principal amount outstandingdeferral of payment of interest under the Term Loan Agreement if, as of September 30, 2017 withthe first day of each applicable month, (x) the amount of unrestricted and unencumbered (other than liens created under the Term Loan Agreement) cash on hand seek an extension of the maturity date,Operating Partnership and its subsidiaries, minus (y) the aggregate amount of anticipated necessary expenditures for such period (such sum, “Available Cash”) is equal to or raise additional capital throughless than $30.0 million. In such instances, for each interest period, the Operating Partnership is obligated to make payments of interest in an amount equal to the difference between (i) Available Cash and (ii) $20.0 million (provided that such payment shall not exceed the amount of current interest otherwise due under the Term Loan Agreement). Any deferred interest shall accrue interest at 2.0% in excess of the then applicable interest rate and shall be due and payable on July 31, 2023; provided, that the Operating Partnership is required to pay any deferred interest from Available Cash in excess of $30.0 million (unless otherwise agreed to by the administrative agent under the Term Loan Agreement in its sole discretion). In addition, repayment of any outstanding deferred interest is a refinancing transaction orcondition to any borrowings under the $400.0 million incremental funding facility under the Term Loan Agreement (the “Incremental Funding Facility”).

Additionally, the Term Loan Amendment provides that the administrative agent and the lenders express their continued support for asset dispositions, subject to the administrative agent’s right to approve the terms of individual transactions due to the occurrence of a Financial Metric Trigger Event, as such term is defined under the Term Loan Agreement. The Third Term Loan Amendment (defined below) executed on June 16, 2022 eliminated this right.

Our Term Loan Facility includes a $400.0 million Incremental Funding Facility, access to which is subject to rental income from non-Sears Holdings tenants of at least $200.0 million, on an annualized basis and after giving effect to SNO leases expected to commence rent payment within 12 months, which we have not yet achieved, as disclosed in Note 6. There is no assurance of the proceeds of asset sales or new JVs.Company’s ability to access the Incremental Funding Facility.

InOn November 2016,24, 2021, the Operating Partnership, the Company and the servicer for our Mortgage LoansBerkshire Hathaway entered into amendmentsan amendment (the “Second Term Loan Amendment”) to ourthe Term Loan AgreementsAgreement by and among the Operating Partnership, the Company and Berkshire Hathaway to resolve a disagreement regarding onewhich the Operating Partnership, the Company and Berkshire Hathaway mutually agreed that (i) the “make whole” provision in the Senior Secured Term Loan Agreement shall not be applicable to prepayments of principal; and (ii) the Senior Secured Term Loan Agreement, as amended for (i) above, may at the Operating Partnership's election be extended for two years from July 31, 2023 to July 31, 2025 (the “Maturity Date”) if its principal has been reduced to $800 million by the Maturity Date. If it has not been reduced to this limit by the Maturity Date, the loan will be due and payable on that date. In all other respects, the Term Loan Agreement remains unchanged.

- 35 -


On June 16, 2022, the Operating Partnership, the Company and Berkshire Hathaway entered into an amendment (the “Third Term Loan Amendment”) to the Term Loan Agreement by and among the Operating Partnership, the Company and Berkshire Hathaway to which the Operating Partnership, the Company and Berkshire Hathaway mutually agreed that notwithstanding anything to the contrary in the asset sale covenant, the parent, borrower, and their respective subsidiaries will be permitted without the consent of the cash flow sweep provisions in our Loan Agreements.  The principal termsadministrative agent to sell, transfer, or otherwise dispose of these amendments areproperties (including but not limited to properties or equity interests of any subsidiary) to unaffiliated third parties for no less than fair market value, provided that the Company has (i) posted $30.0 million,borrower deposits all net proceeds received into a controlled account and the use of such net proceeds will post $3.3 million on a monthly basis,be subject to a redevelopment project reserve account, which amounts may be used by the Company to fund redevelopment activity and (ii) extended the spread maintenance provision for prepayment of the loan by two months through March 9, 2018 (with the spread maintenance premium for the second month at a reduced amount).

- 31 -


The Company believes it is currently in compliance with all material terms and conditions of the Term Loan Agreements.Agreement, including but not limited to the restricted payments and investments/loans covenants.

SummaryDuring the year ended December 31, 2021, we repaid $160.0 million against the principal of the Term Loan Facility. Our outstanding balance as of June 30, 2022, is $1.44 billion. Subsequent to June 30, 2022, we made a $100.0 million repayment against the principal, bringing our outstanding balance to $1.34 billion as of August 8, 2022.

In addition to the $260.8 million of assets referenced above under contract, the Company is currently negotiating sales, evaluating received bona fide offers received and marketing, or about to bring to market for sale, assets with an estimated fair value over $1.2 billion, which would, if sold, allow the Company to meet the $540 million Term Loan Facility principal pay down required to extend the facility. While these assets are intended for sale, and the Company believes that they will close before the maturity, there is no assurance that these assets will be under contract within the one year timeframe in which the Term Loan Facility principal will need to be factored into the going concern analysis, which raises substantial doubt about its ability to continue as a going concern. See Note 1 – Going Concern of the Notes to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for a discussion of the going concern.

Cash Flows

Net cash provided by operating activities was $56.9 million for the nineSix Months Ended June 30, 2022 Compared to the Six Months Ended June 30, 2021

The following table summarizes the Company’s cash flow activities for the six months ended SeptemberJune 30, 20172022 and $100.1 million for the nine months ended September 30, 2016.  2021 (in thousands):

 

 

Six Months Ended June 30,

 

 

 

 

 

 

2022

 

 

2021

 

 

$ Change

 

 Net cash used in operating activities

 

$

(54,501

)

 

$

(67,602

)

 

$

13,101

 

 Net cash provided by investing activities

 

 

99,882

 

 

 

67,085

 

 

 

32,797

 

 Net cash used in financing activities

 

 

(2,450

)

 

 

(2,529

)

 

 

79

 

Cash Flows from Operating Activities

Significant changes in the components of net cash provided byused in operating activities include:

In 2017, a decrease in operating cash inflows due the payment of a previously recorded litigation expense;

In 2017, a decrease in operating cash inflows due to net reductions in rental income under the Master Lease and increased interest expense,

In 2022, a decrease in rental income and a decrease in accounts payable, accrued expenses and other liabilities, partially offset by termination fee income and additional third-party rental income;

In 2016, an increase in operating cash inflows due to changes in operating assets and liabilities.

Net cash provided by investing activities was $40.2 million for the nine months ended September 30, 2017 compared to net cash used by investing activities of $47.2 million for the nine months ended September 30, 2016.  a decrease in tenant and other receivables.

Cash Flows from Investing Activities

Significant components of net cash provided by and used in(used in) investing activities include:

In 2017,

In 2022, $168.2 million of net proceeds from the sale of real estate offset by development of real estate of ($53.0) million and investments in unconsolidated entities of ($15.4); and
In 2021, $122.3 million of net proceeds from the sale of real estate offset by development of real estate of ($44.9) million and investments in unconsolidated entities of ($21.3) million.

Cash Flows from Financing Activities

Significant components of real estate and JV Interests, $240.3 million;

In 2017, development of real estate and property improvements, ($164.1) million;

In 2017, investments in unconsolidated joint ventures, ($36.0) million; and

In 2016, development of real estate and property improvements, ($47.2) million.

Net cash provided by financing activities was $69.9 million for the nine months ended September 30, 2017 compared to net cash used in financing activities include:

In 2022, cash payments of $36.4 million forpreferred dividends, ($2.5) million; and
In 2021, cash payments of preferred dividends, ($2.5) million.

- 36 -


Dividends and Distributions

The Company’s Board of Trustees did not declared dividends on the nineCompany’s Class A common shares during the six months ended SeptemberJune 30, 2016. Significant components of net cash provided by2022 and used in financings activities include:

In 2017, proceeds from the Future Funding Facility, $80.0 million;

In 2017, proceeds from the Unsecured Term Loan, $85.0 million;

In 2017, repayment of mortgage loan payables, ($50.6) million;

In 2017, cash distributions to common stockholders and holders of Operating Partnership units, ($41.8) million; and

In 2016, cash distributions to common stockholders and holders of Operating Partnership units, ($55.7) million.

Dividends and Distributions2021.

The Company’s Board of Trustees declared the following common stock dividends on preferred shares during 20172022 and 2016, with holders2021:

 

 

 

 

 

 

Series A

 

Declaration Date

 

Record Date

 

Payment Date

 

Preferred Share

 

2022

 

 

 

 

 

 

 

July 26

 

September 30

 

October 17

 

$

0.43750

 

April 26

 

June 30

 

July 15

 

 

0.43750

 

February 16

 

March 31

 

April 15

 

 

0.43750

 

2021

 

 

 

 

 

 

 

October 26

 

December 31

 

January 14, 2022

 

$

0.43750

 

July 27

 

September 30

 

October 15

 

 

0.43750

 

April 27

 

June 30

 

July 15

 

 

0.43750

 

February 23

 

March 31

 

April 15

 

 

0.43750

 

Our Board of Operating Partnership units entitledTrustees will continue to an equal distribution per Operating Partnership unit heldassess the Company’s investment opportunities and its expectations of taxable income in its determination of future distributions, if any.

Off-Balance Sheet Arrangements

The Company accounts for its investments in entities that it does not have a controlling interest in or is not the primary beneficiary using the equity method of accounting and those investments are reflected on the record date:condensed consolidated balance sheets of the Company as investments in unconsolidated entities. As of June 30, 2022 and December 31, 2021, we did not have any off-balance sheet financing arrangements.

 

 

 

 

 

 

Dividends per

 

 

 

 

 

 

 

Class A and Class C

 

Declaration Date

 

Record Date

 

Payment Date

 

Common Share

 

2017

 

 

 

 

 

 

 

 

October 24

 

December 29

 

January 11, 2018

 

$

0.25

 

July 25

 

September 29

 

October 12

 

 

0.25

 

April 25

 

June 30

 

July 13

 

 

0.25

 

February 28

 

March 31

 

April 13

 

 

0.25

 

2016

 

 

 

 

 

 

 

 

November 1

 

December 31

 

January 12, 2017

 

$

0.25

 

August 2

 

September 30

 

October 13

 

 

0.25

 

May 3

 

June 30

 

July 14

 

 

0.25

 

March 8

 

March 31

 

April 14

 

 

0.25

 

Contractual Obligations

There have been no significant changes in the contractual obligations disclosed in our Form 10-K for the year ended December 31, 2021.

Capital Expenditures

During the three and six months ended June 30, 2022 the Company invested $30.6 million and $53.0 million, respectively, in our consolidated development and operating properties and an additional $7.8 million and $15.4 million, respectively, into our unconsolidated joint ventures, as we continue to advance our business plans, including our previously announced projects.

During the three and six months ended June 30, 2021 the Company invested $18.1 million and $44.9 million, respectively, in our consolidated development and operating properties and an additional $11.4 million and $21.3 million, respectively, into our unconsolidated joint ventures.

During the three and six months ended June 30, 2022, we incurred no maintenance capital expenditures that were not associated with re-tenanting and redevelopment projects.

During the three and six months ended June 30, 2021, we incurred maintenance capital expenditures of approximately $0.3 million and $0.9 million, respectively, that were not associated with re-tenanting and redevelopment projects.

Litigation and Other Matters

In accordance with accounting standards regarding loss contingencies, the Company accrueswe accrue an undiscounted liability for those contingencies where the incurrence of a loss is probable and the amount can be reasonably estimated, and the Company discloseswe disclose the amount accrued and the amount of a reasonably possible loss in excess of the amount accrued or disclose the fact that such a range of loss cannot be estimated. The Company doesWe do not record liabilities when the likelihood that the liability has been incurred is probable

- 32 -


but the amount cannot be reasonably estimated, or when the liability is believed to be only reasonably possible or remote. In such cases, the Company discloseswe disclose the nature of the contingency, and an estimate of the possible loss, range of loss, or disclose the fact that an estimate cannot be made.

- 37 -


During the Sears Holdings bankruptcy proceedings, the Official Committee of Unsecured Creditors of Sears Holdings (the “UCC”) and others, including the Restructuring Subcommittee of the Board of Directors of Sears Holdings, alleged that the 2015 transactions between us and Sears Holdings constituted a fraudulent conveyance, and indicated an intent to pursue litigation challenging the 2015 transactions on that and other grounds. The approval of the Holdco Acquisition by the Bankruptcy Court expressly preserved claims relating to the 2015 transactions between us and Sears Holdings.

On April 6, 2022, the Court entered an order in the Consolidated Litigation, upon the agreement of the parties thereto, providing for a mediation of the litigation. The parties and the Court extended the mediation several times, through August, and up until the settlement described below was reached.

On August 9, 2022, following the mediation, all of the parties to the Litigation and certain of the parties to the Shareholder Litigation (to which Seritage is not a defendant) entered into a settlement agreement pursuant to which, pending final Court approval, the defendants will pay to the Sears estate $175 million (of which the Seritage Defendants will contribute approximately $35 million) in exchange for dismissal of the Consolidated Litigation and for the full and final satisfaction and release of all claims in the Consolidated Litigation (including, in the case of the Seritage Defendants, any and all claims between the Seritage Defendants and the Sears estate in the Sears bankruptcy proceeding). The settlement is subject to final Court approval, following notice and an opportunity for objections (if any) at a hearing currently scheduled for August 31, 2022. As previously disclosed, the Company remains in active litigation with its D&O insurers concerning potential coverage for the Litigation, and any amounts received from the insurers will offset the Seritage Defendants’ approximately $35 million contribution.

See Note 9 – Commitments and Contingencies Litigation and Other Matters of the Notes to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for a discussion of the Consolidated Litigation in respect of the Sears Holdings bankruptcy and related matters.

On March 2, 2021, the Company brought a lawsuit in Delaware state court against QBE Insurance Corporation, Endurance American Insurance Company, Allianz Global Risks US Insurance Company and Continental Casualty Company, each of which are D&O insurance providers of the Company (the “D&O Insurers”). The Company’s lawsuit is seeking, among other things, declaratory relief and money damages as a result of certain of the D&O Insurers refusal to pay certain costs and expenses related to the defense of the Litigation discussed above. The parties to the Company’s lawsuit have cross-moved for summary judgment, and those motions currently are pending.

We are subject, from time to time, to various legal proceedings and claims that arise in the ordinary course of business.business and due to the current environment. While the resolution of such matters cannot be predicted with certainty, management believes, based on currently available information, that the final outcome of such mattersordinary course legal proceedings and claims will not have a material effect on the condensed consolidated financial position, results of operations cash flows or liquidity of the Company.

Off-Balance Sheet ArrangementsCritical Accounting Policies

The Company accountsA summary of our critical accounting policies is included in our Annual Report on Form 10-K for its investments in joint ventures that it does not have a controlling interest or is not the primary beneficiary using the equity method of accounting and those investments are reflected on the condensed consolidated balance sheets of the Company as investments in unconsolidated joint ventures.  As of September 30, 2017 andyear ended December 31, 2016, we did not have any off-balance sheet financing arrangements.2021 in Management’s Discussion and Analysis of Financial Condition and Results of Operations. For the six months ended June 30, 2022, there were no material changes to these policies aside from changes resulting from our decision to terminate the Company's REIT status and become a taxable C Corporation, effective for the year ending December 31, 2022.

- 33 -


Retenanting and Redevelopment Projects

We are currently retenanting or redeveloping several properties primarily to convert single-tenant buildings occupied by Sears Holdings into multi-tenant properties occupied by a diversity of retailers and related concepts.  The table below provides a brief description of each of the 55 new redevelopment projects originated on the Seritage platform as of September 30, 2017.  These projects represent an estimated total investment of $676.0 million, of which $520.5 million remained to be spent.

Total Project Costs under $10 Million

Total

Estimated

Estimated

Project

Construction

Substantial

Property

Description

Square Feet

Start

Completion

King of Prussia, PA

Repurpose former auto center space for Outback Steakhouse, Yard House and small shop retail

29,100

Substantially complete

Merrillville, IN

Termination property; redevelop existing store for At Home, Powerhouse Gym and small shop retail

132,000

Substantially complete

Elkhart, IN

Termination property; existing store has been released to Big R Stores

86,500

Substantially complete

San Antonio, TX

Recapture and repurpose auto center space for Orvis, Jared's Jeweler, Shake Shack and small shop retail

18,900

Substantially complete

Bowie, MD

Recapture and repurpose auto center space for BJ's Brewhouse

8,200

Delivered to tenant

Albany, NY

Recapture and repurpose auto center space for BJ's Brewhouse and additional small shop retail

28,000

Underway

Q4 2017

Hagerstown, MD

Recapture and repurpose auto center space for BJ's Brewhouse, Verizon and additional restaurants

15,400

Underway

Q4 2017

Roseville, MI

Partial recapture; redevelop existing store for At Home

100,400

Underway

Q4 2017

Troy, MI

Partial recapture; redevelop existing store for At Home

100,000

Underway

Q4 2017

Henderson, NV

Termination property; redevelop existing store for At Home, Seafood City and additional retail

144,400

Underway

Q4 2017

Rehoboth Beach, DE

Partial recapture; redevelop existing store for Christmas Tree Shops andThat! and PetSmart

56,700

Underway

Q1 2018

Ft. Wayne, IN

Site densification; new outparcels for BJ's Brewhouse (substantially complete) and Chick-Fil-A (project expansion)

12,000

Underway

Q1 2018

Kearney, NE

Termination property; redevelop existing store for Marshall's, PetSmart and additional junior anchors

92,500

Underway

Q2 2018

Jefferson City, MO

Termination property; redevelop existing store for Orscheln Farm and Home

96,000

Underway

Q2 2018

Olean, NY

Partial recapture; redevelop existing store for Marshall's and additional retail

45,000

Underway

Q2 2018

Cullman, AL

Termination property; redevelop existing store for Bargain Hunt, Tractor Supply and Planet Fitness

99,000

Underway

Q3 2018

Guaynabo, PR

Partial recapture; redevelop existing store for Planet Fitness and Capri

56,100

Underway

Q3 2018

Roseville, CA

Recapture and repurpose auto center space for AAA

10,400

Q4 2017

Q2 2018

Dayton, OH

Recapture and repurpose auto center space for Outback Steakhouse and additional restaurants

14,100

Q4 2017

Q4 2018

Florissant, MO

Site densification; new outparcel for Chick-Fil-A

5,000

Q1 2018

Q3 2018

New Iberia, LA

Termination property; redevelop existing store for Rouses Supermarkets, additional junior anchors and small shop retail

93,100

Q1 2018

Q1 2019

North Little Rock, AR

Recapture and repurpose auto center space for LongHorn Steakhouse and additional small shop retail

17,300

Q2 2018

Q2 2019

St. Clair Shores, MI

100% recapture; demolish existing store and develop site for new Kroger store

107,200

Q2 2018

Q2 2019

Oklahoma City, OK

Site densification; new fitness center for Vasa Fitness

59,500

Q3 2018

Q3 2019

- 34 -


Total Project Costs $10 - $20 Million

Total

Estimated

Estimated

Project

Construction

Substantial

Property

Description

Square Feet

Start

Completion

Braintree, MA

100% recapture; redevelop existing store for Nordstrom Rack, Saks OFF 5th and additional retail

90,000

Substantially complete

Honolulu, HI

100% recapture; redevelop existing store for Longs Drugs (CVS), PetSmart and Ross Dress for Less

79,000

Substantially complete

Madison, WI

Partial recapture; redevelop existing store for Dave & Busters, Total Wine & More, additional retail and restaurants

75,300

Underway

Q4 2017

West Jordan, UT

Partial recapture; redevelop existing store and attached auto center for Burlington Stores and additional retail

81,400

Underway

Q4 2017

Anderson, SC

100% recapture (project expansion); redevelop existing store for Burlington Stores, Sportsman's Warehouse, additional retail and restaurants

111,300

Underway

Q4 2017

Fairfax, VA

Partial recapture; redevelop existing store and attached auto center for Dave & Busters, Seasons 52, additional junior anchors and restaurants

110,300

Underway

Q1 2018

North Hollywood, CA

Partial recapture; redevelop existing store for Burlington Stores and additional junior anchors

79,800

Underway

Q1 2018

Saugus, MA

Partial recapture; redevelop existing store and detached auto center for Round One and restaurants

99,000

Underway

Q1 2018

Thornton, CO

Termination property; redevelop existing store for Vasa Fitness and additional junior anchors

191,600

Underway

Q1 2018

Orlando, FL

100% recapture; demolish and construct new buildings for Floor & Décor, Orchard Supply Hardware, LongHorn Steakhouse, Olive Garden, additional small shop retail and restaurants

139,200

Underway

Q2 2018

Springfield, IL

Termination property; redevelop existing store for Burlington Stores, Binny's Beverage Depot, Orange Theory Fitness, Outback Steakhouse, CoreLife Eatery, additional junior anchors and small shop retail

133,400

Underway

Q2 2018

North Miami, FL

100% recapture; redevelop existing store for Michael's, PetSmart and Ross Dress for Less

124,300

Underway

Q2 2018

Hialeah, FL

100% recapture; redevelop existing store for Bed, Bath & Beyond, Ross Dress for Less and additional junior anchors to join current tenant, Aldi

88,400

Underway

Q2 2018

Charleston, SC

100% recapture (project expansion); redevelop existing store and detached auto center for Burlington Stores and additional retail

126,700

Underway

Q3 2018

Warwick, RI

Termination property; repurpose auto center space for BJ's Brewhouse and additional retail

Redevelop existing store for At Home and Raymour & Flanigan (project expansion)

190,700

Underway

Q4 2018

Cockeysville, MD

Partial recapture; redevelop existing store for HomeGoods, Michael's Stores, additional junior anchors and restaurants

83,500

Q4 2017

Q2 2018

Salem, NH

Site densification; new theatre for Cinemark

Recapture and repurpose auto center for restaurant space.

71,200

Q4 2017

Q3 2018

Paducah, KY

Termination property; redevelop existing store for Burlington Stores and additional retail

102,300

Q1 2018

Q3 2018

Santa Cruz, CA

Partial recapture; redevelop existing store for TJ Maxx, HomeGoods and Petco

62,200

Q1 2018

Q4 2018

Temecula, CA

Partial recapture; redevelop existing store and detached auto center for Round One, small shop retail and restaurants

65,100

Q1 2018

Q4 2018

Canton, OH

Partial recapture; redevelop existing store for Dave & Busters and restaurants

83,900

Q1 2018

Q2 2019

North Riverside, IL

Partial recapture; redevelop existing store and detached auto center for Round One, additional junior anchors, small shop retail and restaurants

103,900

Q1 2018

Q3 2019

Austin, TX

Partial recapture; redevelop existing store for AMC Theatres, additional retail and restaurants

80,500

Q2 2018

Q3 2019

- 35 -


Total Project Costs over $20 Million

Total

Estimated

Estimated

Project

Construction

Substantial

Property

Description

Square Feet

Start

Completion

Memphis, TN

100% recapture; demolish and construct new buildings for LA Fitness, Nordstrom Rack, Ulta Beauty, Hopdoddy Burger Bar, additional junior anchors, restaurants and small shop retail

135,200

Delivered to tenants

West Hartford, CT

100% recapture; redevelop existing store and detached auto center for Buy Buy Baby, Cost Plus World Market, REI, Saks OFF Fifth, other junior anchors, Shake Shack and additional small shop retail

147,600

Underway

Q1 2018

St. Petersburg, FL

100% recapture; demolish and construct new buildings for Dick's Sporting Goods, Lucky's Market, PetSmart, Five Below, Chili's Grill & Bar, Pollo Tropical, LongHorn Steakhouse and additional small shop retail and restaurants

142,400

Underway

Q2 2018

Wayne, NJ

Partial recapture; redevelop existing store for Dave & Busters, additional junior anchors and restaurants

Recapture and repurpose detached auto center for Cinemark (project expansion)

NOTE: contributed to GGP II JV in July 2017

156,700

Underway

Q3 2018

Carson, CA

100% recapture (project expansion); redevelop existing store for Burlington Stores, Ross Dress for Less and additional retail

163,800

Underway

Q1 2019

Santa Monica, CA

100% recapture; redevelop existing building into premier, mixed-use asset featuring unique, small-shop retail and creative office space

96,500

Q4 2017

Q4 2019

Watchung, NJ

100% recapture; demolish full-line store and construct new buildings for HomeSense, Sierra Trading Post, Ulta Beauty and additional small shop retail and restaurants

Demolish detached auto center and construct a freestanding Cinemark theater

126,700

Q1 2018

Q2 2019

East Northport, NY

Termination property (notice period); redevelop existing store and attached auto center for AMC Theatres, 24 Hour Fitness, additional junior anchors and small shop retail

179,700

Q2 2018

Q4 2019

Non-GAAP Supplemental Financial Measures and Definitions

The Company makes reference to NOI and Total NOI FFO, Company FFO, EBITDA and Adjusted EBITDA which are considered non-GAAP measures.financial measures that include adjustments to GAAP.

Net Operating Income ("NOI"(“NOI”) and Total NOI

We define NOI is defined as income from property operations less property operating expenses. Other REITsreal estate companies may use different methodologies for calculating NOI, and accordingly the Company'sCompany’s depiction of NOI may not be comparable to other REITs.  We believereal estate companies. The Company believes NOI provides useful information regarding the Company,Seritage, its financial condition, and results of operations because it reflects only those income and expense items that are incurred at the property level.

The Company also uses Total NOI, which includes its proportional share of unconsolidated properties. We believeThe Company believes this form of presentation offers insights into the financial performance and condition of the Company as a whole given our ownership of unconsolidated properties that are accounted for under GAAP using the equity method.  We

The Company also considerconsiders NOI and Total NOI to be a helpful supplemental measure of ourits operating performance because it excludes from NOI variable items such as termination fee income, as well as non-cash items such as straight-line rent and amortization of lease intangibles.

Due to the adjustments noted, NOI and Total NOI should only be used as an alternative measure of the Company'sCompany’s financial performance.

Earnings Before Interest Expense, Income Tax, Depreciation, and Amortization ("EBITDA") and Adjusted EBITDA

We define EBITDA as net income less depreciation, amortization, interest expense and provision for income and other taxes.  EBITDA is a commonly used measure of performance in many industries, but may not be comparable to measures calculated by other companies.  We believe EBITDA provides useful information to investors regarding our results of operations because it removes the impact of our capital structure (primarily interest expense) and our asset base (primarily depreciation and amortization).  Management also believes the use of EBITDA facilitates comparisons between us and other equity REITs, retail property owners who are not REITs, and other capital-intensive companies.

- 3638 -


The Company makes certain adjustments to EBITDA, which it refers to as Adjusted EBITDA, to account for certain non-cash and non-comparable items, such as termination fee income, unrealized loss on interest rate cap, litigation charges, acquisition-related expenses, up-front-hiring and personnel costs and gains (or losses) from property sales, that it does not believe are representative of ongoing operating results.

Due to the adjustments noted, EBITDA and Adjusted EBITDA should only be used as an alternative measure of the Company's financial performance

Funds From Operations ("FFO") and Company FFO

We define FFO using the definition set forth by the National Association of Real Estate Investment Trusts ("NAREIT"), which may not be comparable to measures calculated by other companies who do not use the NAREIT definition of FFO.  FFO is calculated as net income computed in accordance with GAAP, excluding gains (or losses) from property sales, real estate related depreciation and amortization, and impairment charges on depreciable real estate assets.

We consider FFO a helpful supplemental measure of the operating performance for equity REITs and a complement to GAAP measures because it is a recognized measure of performance by the real estate industry.  FFO facilitates an understanding of the operating performance of our properties between periods because it does not give effect to real estate depreciation and amortization which are calculated to allocate the cost of a property over its useful life.  Since values for well-maintained real estate assets have historically increased or decreased based upon prevailing market conditions, the Company believes that FFO provides investors with a clearer view of the Company's operating performance.

The Company makes certain adjustments to FFO, which it refers to as Company FFO, to account for certain non-cash and non-comparable items, such as termination fee income, unrealized loss on interest rate cap, litigations charges, acquisition-related expenses, amortization of deferred financing costs and up-front-hiring and personnel costs, that it does not believe are representative of ongoing operating results.  The Company previously referred to this metric as Normalized FFO; the definition and calculation remain the same.

Due to the adjustments noted, FFO and Company FFO should only be used as an alternative measure of the Company's financial performance.

Reconciliation of Non-GAAP Financial Measures to GAAP Financial Measures

None ofNeither NOI nor Total NOI EBITDA, Adjusted EBITDA, FFO and Company FFO are measures that (i) represent cash flow from operations as defined by GAAP; (ii) are indicative of cash available to fund all cash flow needs, including the ability to make distributions; (iii) are alternatives to cash flow as a measure of liquidity; or (iv) should be considered alternatives to net income (which is determined in accordance with GAAP) for purposes of evaluating the Company’s operating performance. Reconciliations of these measures to the respective GAAP measures we deem most comparable are presented below on a comparative basis for all periods.

- 37 -


The following table reconciles NOI and Total NOI to GAAP net loss for the three and ninesix months ended SeptemberJune 30, 20172022 and September 30, 20162021 (in thousands):

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

NOI and Total NOI

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Net loss

 

$

(142,083

)

 

$

(95,304

)

 

$

(209,070

)

 

$

(106,237

)

Termination fee income

 

 

(92

)

 

 

 

 

 

(369

)

 

 

(2,611

)

Management and other fee (income)

 

 

(286

)

 

 

(279

)

 

 

(2,107

)

 

 

(414

)

Depreciation and amortization

 

 

10,669

 

 

 

13,328

 

 

 

22,603

 

 

 

26,470

 

General and administrative expenses

 

 

11,093

 

 

 

11,990

 

 

 

20,185

 

 

 

23,222

 

Litigation reserve

 

 

35,000

 

 

 

 

 

 

35,000

 

 

 

 

Equity in loss of unconsolidated entities

 

 

33,720

 

 

 

2,327

 

 

 

66,796

 

 

 

3,489

 

Gain on sale of real estate, net

 

 

(68,031

)

 

 

(18,097

)

 

 

(67,016

)

 

 

(42,305

)

Impairment of real estate assets

 

 

109,343

 

 

 

64,539

 

 

 

110,334

 

 

 

66,239

 

Interest and other income

 

 

(99

)

 

 

(530

)

 

 

(110

)

 

 

(8,154

)

Interest expense

 

 

22,663

 

 

 

28,976

 

 

 

45,251

 

 

 

55,126

 

Provision for income taxes

 

 

203

 

 

 

298

 

 

 

228

 

 

 

160

 

Straight-line rent

 

 

(3,599

)

 

 

(1,238

)

 

 

(4,320

)

 

 

(1,028

)

Above/below market rental expense

 

 

56

 

 

 

102

 

 

 

121

 

 

 

63

 

NOI

 

$

8,557

 

 

$

6,112

 

 

$

17,526

 

 

$

14,020

 

Unconsolidated entities

 

 

 

 

 

 

 

 

 

 

 

 

Net operating income of unconsolidated entities

 

 

2,267

 

 

 

1,646

 

 

 

4,113

 

 

 

4,083

 

Straight-line rent

 

 

(228

)

 

 

(168

)

 

 

(556

)

 

 

(304

)

Above/below market rental (income)/expense

 

 

6

 

 

 

(29

)

 

 

12

 

 

 

(62

)

Termination fee income

 

 

 

 

 

(9

)

 

 

 

 

 

(751

)

Total NOI

 

$

10,602

 

 

$

7,552

 

 

$

21,095

 

 

$

16,986

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

NOI

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net income (loss)

 

$

17,276

 

 

$

(37,247

)

 

$

(50,435

)

 

$

(64,526

)

Termination fee income

 

 

(10,596

)

 

 

 

 

 

(17,360

)

 

 

 

Depreciation and amortization

 

 

61,059

 

 

 

44,532

 

 

 

170,293

 

 

 

121,365

 

General and administrative

 

 

5,272

 

 

 

4,252

 

 

 

16,639

 

 

 

13,104

 

Litigation charge

 

 

 

 

 

19,000

 

 

 

 

 

 

19,000

 

Acquisition-related expenses

 

 

 

 

 

 

 

 

 

 

 

73

 

Equity in loss (income) of unconsolidated joint

   ventures

 

 

3,686

 

 

 

(1,497

)

 

 

4,226

 

 

 

(4,495

)

Gain on sale of interest in unconsolidated

   joint venture

 

 

(43,729

)

 

 

 

 

 

(43,729

)

 

 

 

Gain on sale of real estate

 

 

(13,018

)

 

 

 

 

 

(13,018

)

 

 

 

Interest and other income

 

 

(352

)

 

 

(77

)

 

 

(472

)

 

 

(196

)

Interest expense

 

 

18,049

 

 

 

15,931

 

 

 

53,072

 

 

 

47,297

 

Unrealized loss on interest rate cap

 

 

91

 

 

 

47

 

 

 

686

 

 

 

1,898

 

Provision for income taxes

 

 

 

 

 

72

 

 

 

266

 

 

 

412

 

NOI

 

$

37,738

 

 

$

45,013

 

 

$

120,168

 

 

$

133,932

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total NOI

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOI

 

 

37,738

 

 

 

45,013

 

 

 

120,168

 

 

 

133,932

 

NOI of unconsolidated joint ventures

 

 

4,830

 

 

 

6,431

 

 

 

18,328

 

 

 

20,057

 

Straight-line rent adjustment (1)

 

 

1,230

 

 

 

(3,100

)

 

 

(2,396

)

 

 

(11,526

)

Above/below market rental income/expense (1)

 

 

(212

)

 

 

(257

)

 

 

(902

)

 

 

(681

)

Total NOI

 

$

43,586

 

 

$

48,087

 

 

$

135,198

 

 

$

141,782

 

(1)

Includes adjustments for unconsolidated joint ventures.

The following table reconciles EBITDA and Adjusted EBITDA to GAAP net loss for the three and nine months ended September 30, 2017 and September 30, 2016 (in thousands):

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

EBITDA

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net income (loss)

 

$

17,276

 

 

$

(37,247

)

 

$

(50,435

)

 

$

(64,526

)

Depreciation and amortization

 

 

61,059

 

 

 

44,532

 

 

 

170,293

 

 

 

121,365

 

Depreciation and amortization (unconsolidated

   joint ventures)

 

 

4,755

 

 

 

5,191

 

 

 

18,583

 

 

 

15,653

 

Interest expense

 

 

18,049

 

 

 

15,931

 

 

 

53,072

 

 

 

47,297

 

Provision for income and other taxes

 

 

 

 

 

72

 

 

 

266

 

 

 

412

 

EBITDA

 

$

101,139

 

 

$

28,479

 

 

$

191,779

 

 

$

120,201

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EBITDA

 

$

101,139

 

 

$

28,479

 

 

$

191,779

 

 

$

120,201

 

Termination fee income

 

 

(10,596

)

 

 

 

 

 

(17,360

)

 

 

 

Unrealized loss on interest rate cap

 

 

91

 

 

 

47

 

 

 

686

 

 

 

1,898

 

Litigation charge

 

 

 

 

 

19,000

 

 

 

 

 

 

19,000

 

Acquisition-related expenses

 

 

 

 

 

 

 

 

 

 

 

73

 

Up-front hiring and personnel costs

 

 

 

 

 

 

 

 

 

 

 

328

 

Gain on sale of interest in unconsolidated

   joint venture

 

 

(43,729

)

 

 

 

 

 

(43,729

)

 

 

 

Gain on sale of real estate

 

 

(13,018

)

 

 

 

 

 

(13,018

)

 

 

 

Adjusted EBITDA

 

$

33,887

 

 

$

47,526

 

 

$

118,358

 

 

$

141,500

 

- 38 -


The following table reconciles FFO and Company FFO to GAAP net loss for the three and nine months ended September 30, 2017 and September 30, 2016 (in thousands):

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

Funds from Operations

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net income (loss)

 

$

17,276

 

 

$

(37,247

)

 

$

(50,435

)

 

$

(64,526

)

Real estate depreciation and amortization

   (consolidated properties)

 

 

60,483

 

 

 

44,307

 

 

 

169,158

 

 

 

120,845

 

Real estate depreciation and amortization

   (unconsolidated joint ventures)

 

 

4,755

 

 

 

5,191

 

 

 

18,583

 

 

 

15,653

 

Gain on sale of interest in unconsolidated

   joint venture

 

 

(43,729

)

 

 

 

 

 

(43,729

)

 

 

 

Gain on sale of real estate

 

 

(13,018

)

 

 

 

 

 

(13,018

)

 

 

 

FFO attributable to common shareholders

   and unitholders

 

$

25,767

 

 

$

12,251

 

 

$

80,559

 

 

$

71,972

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FFO per diluted common share and unit

 

$

0.46

 

 

$

0.22

 

 

$

1.45

 

 

$

1.29

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company Funds from Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Funds from Operations attributable to Seritage

   Growth Properties

 

$

25,767

 

 

$

12,251

 

 

$

80,559

 

 

$

71,972

 

Termination fee income

 

 

(10,596

)

 

 

 

 

 

(17,360

)

 

 

 

Unrealized loss on interest rate cap

 

 

91

 

 

 

47

 

 

 

686

 

 

 

1,898

 

Amortization of deferred financing costs

 

 

2,329

 

 

 

1,340

 

 

 

6,390

 

 

 

4,020

 

Litigation charge

 

 

 

 

 

19,000

 

 

 

 

 

 

19,000

 

Acquisition-related expenses

 

 

 

 

 

 

 

 

 

 

 

73

 

Up-front hiring and personnel costs

 

 

 

 

 

 

 

 

 

 

 

328

 

Company FFO attributable to common

   shareholders and unitholders

 

$

17,591

 

 

$

32,638

 

 

$

70,275

 

 

$

97,291

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company FFO per diluted common share and unit

 

$

0.32

 

 

$

0.59

 

 

$

1.26

 

 

$

1.75

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted Average Common Shares and Units Outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

33,841

 

 

 

31,419

 

 

 

33,685

 

 

 

31,414

 

Weighted average OP units outstanding

 

 

21,832

 

 

 

24,176

 

 

 

21,916

 

 

 

24,176

 

Weighted average common shares and

   units outstanding

 

 

55,673

 

 

 

55,595

 

 

 

55,601

 

 

 

55,590

 

- 39 -


Item 3.

Quantitative and Qualitative Disclosure about Market Risk

Except as discussed below, thereItem 3. Quantitative and Qualitative Disclosure about Market Risk

There were no material changes in the Quantitative and Qualitative Disclosures about Market Risk set forth in our 20162021 Annual Report on Form 10-K.

Interest Rate Fluctuations

As of September 30, 2017, we had $1.30 billion of consolidated debt, including $1.21 billion outstanding under our variable-rate Mortgage Loans and Future Funding Facility.  The interest rate on the loans is the 30-day LIBOR rate plus, as of September 30, 2017, a weighted average spread of 470 basis points.  We have purchased a LIBOR interest rate cap that has a LIBOR strike rate of 3.5% and a term of four years.  We are subject to market risk with respect to changes in the LIBOR rate.  An immediate 100 basis point change in interest rates would have affected annual pretax funding costs by approximately $12.1 million.

Fair Value of Debt

As of September 30, 2017, the estimated fair value of our consolidated debt was $1.3 billion.  The estimated fair value of our consolidated debt is calculated based on current market prices and discounted cash flows at the current rate at which similar loans would be made to borrowers with similar credit ratings for the remaining term of such debt.

Item 4.

Controls and Procedures

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures.

Under the supervision and with the participation of our management, including the Chief Executive Officerprincipal executive officer and the Chief Financial Officer,principal financial officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officerprincipal executive officer and our Chief Financial Officerprincipal financial officer concluded that our disclosure controls and procedures were effective as of such date.

Changes in Internal Controls.

There were no changes in our internal control over financial reporting that occurred during the period ended SeptemberJune 30, 20172022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

OTHER INFORMATION

Item 1.

Legal Proceedings

The information required by this Item is incorporated by reference to Note 9 of the condensed consolidated financial statements included herein.

Item 1A.

Risk Factors

Item 1A. Risk Factors

Information regarding risk factors appears in our 20162021 Annual Report on Form 10-K in Part I, Item 1A. Risk Factors. Except as discussed below, thereThere have been no material changes from the risk factors previously disclosed in our 20162021 Annual Report on Form 10-K.10-K, except for the following updates:

WeRisks Related to Our Business and Operations

Following the Sears Holdings bankruptcy, we have been named as a defendant in litigation that could adversely affect our business and financial condition, divert management’s attention from our business, and subject us to significant liabilities, including remedies that may be imposed as a result of a finding of fraudulent conveyance.

On April 18, 2019, at the direction of the Restructuring Sub-Committee of the Restructuring Committee of the Board of Directors of Sears Holdings, plaintiffs Sears Holdings, Sears, Roebuck & Co., Sears Development Co., Kmart Corporation, and Kmart of Washington, LLC filed a lawsuit (the “Litigation”) in the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”) against, among others, Edward S. Lampert, ESL Investments, Inc. and certain of its affiliates and investors, Fairholme Capital Management, L.L.C., certain members of the Sears Holdings board of directors, and the Company, the Operating Partnership, and certain of our affiliates and subsidiaries (the Company, the Operating Partnership, and certain of our affiliates and subsidiaries, collectively, the “Seritage Defendants”). The Litigation is dual captioned as In re: Sears Holdings Corporation, et al., Case No. 18-23538 (RDD) and Sears Holdings Corporation et al., v. Lampert et al., Case No. 19-08250 (RDD). The initial complaint has been superseded by the Amended Complaint, as described below.

On October 15, 2019, the Bankruptcy Court entered an order (the “Confirmation Order”) confirming the Modified Second Amended Joint Chapter 11 Plan of Sears Holdings and its affiliated debtors (the “Chapter 11 Plan”). Pursuant to the terms of the Confirmation Order, upon the effective date of the Chapter 11 Plan, a liquidating trust will be substantially dependent onformed, and the Litigation will vest in the liquidating trust. The Confirmation Order further provides that, prior to the effective date of the Chapter 11 Plan and the formation of the liquidating trust, the Litigation will be controlled by five litigation designees selected by Sears Holdings and the Official Committee of Unsecured Creditors’ (the “Creditors’ Committee”). For further information, refer to the Chapter 11 Plan, Confirmation Order and liquidating trust agreement, each of which has been publicly filed with the Bankruptcy Court.

On November 25, 2019, the Creditors’ Committee filed a first amended complaint (the “Amended Complaint”) in the Bankruptcy Court. The Amended Complaint alleges, among other things, that certain transactions undertaken by Sears Holdings since 2011 (including the July 2015 transactions giving rise to Seritage, the execution of the Master Lease with Sears Holdings (the “Original Master Lease”), and the acquisition of real estate from Sears Holdings) constituted actual and/or constructive fraudulent transfers
and/or illegal dividends by Sears Holdings and that the real estate acquired by Seritage from Sears Holdings in July 2015 was worth hundreds of millions of dollars more than the purchase price paid. (The Company notes the original complaint filed in the Litigation alleged, among other things, that the real estate acquired by Seritage from Sears Holdings in July 2015 was worth at least $649 to $749 million more than the purchase price paid.) The Amended Complaint further alleges that certain releases provided to Seritage and certain other defendants in connection with the Sears Holdings derivative litigation in the Delaware Court of Chancery in 2017 should be avoided and/or declared null and void as an actual and/or constructive fraudulent conveyance. The Litigation seeks as relief, among other things, declaratory relief, avoidance of the allegedly actual and/or constructive fraudulent transfers and either (i) rescission of the transfers of real estate from Sears Holdings to Seritage in 2015 and return of the proceeds of the transactions between Sears Holdings and Seritage, or, in the alternative, (ii) payment by Seritage to Sears Holdings of damages at least equal to the value of the transferred property.

On February 21, 2020, the Seritage Defendants filed a partial motion to dismiss seeking dismissal of the claims in the Amended Complaint relating to the release received in the Sears Holdings derivative litigation unjust enrichment and equitable subordination. Briefing and oral argument on the motions were completed in August 2020, and the parties are awaiting a decision.

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On March 15, 2021, the Court consolidated the Litigation with a case captioned Sears Holding Corp. et al. v. Andrew H. Tisch, et al., Case No. 20-07007 (RDD) (the “Shareholder Litigation,” and, together with the Litigation, the “Consolidated Litigation”). The Shareholder Litigation was brought by the UCC, Sears Holdings Corporation, and Sears, Roebuck and Co., against certain shareholders of Sears Holdings or its related companies. Seritage was not named as a tenant,defendant in the Shareholder Litigation, which alleges, among other things, that certain transactions undertaken by Sears Holdings since 2014 (including the July 2015 transactions giving rise to Seritage, the execution of the Original Master Lease with Sears Holdings, and the acquisition of real estate from Sears Holdings) constituted actual and/or constructive fraudulent transfers and/or illegal dividends.

On April 6, 2022, the Court entered an order in the Consolidated Litigation, upon the agreement of the parties thereto, providing for a mediation of the litigation. The parties and the Court extended the mediation several times, through August, and up until the settlement described below was reached.

On August 9, 2022, following the mediation, all of the parties to the Litigation and certain of the parties to the Shareholder Litigation (to which Seritage is not a defendant) entered into a settlement agreement pursuant to which, pending final Court approval, the defendants will pay to the Sears estate $175 million (of which the Seritage Defendants will contribute approximately $35 million) in exchange for dismissal of the Consolidated Litigation and for the full and final satisfaction and release of all claims in the Consolidated Litigation (including, in the case of the Seritage Defendants, any and all claims between the Seritage Defendants and the Sears estate in the Sears bankruptcy proceeding). The settlement is subject to final Court approval, following notice and an opportunity for objections (if any) at a hearing currently scheduled for August 31, 2022. As previously disclosed, the Company remains in active litigation with its D&O insurers concerning potential coverage for the Litigation, and any amounts received from the insurers will offset the Seritage Defendants’ approximately $35 million contribution.

While the Company believes that the claims against the Seritage Defendants in the Litigation are without merit, the Company has entered into the settlement, without admitting any fault or wrongdoing, in order to avoid the continued imposition of legal defense costs, distraction, and the uncertainty and risk inherent in any litigation. If the settlement does not receive final Court approval, the Company intends to defend against the claims in the Litigation vigorously.

Fraudulent transfers or conveyances include transfers made or obligations incurred with the actual intent to hinder, delay or defraud current or future creditors, or transfers made or obligations incurred in exchange for less than reasonably equivalent value when the debtor was, or was rendered, insolvent, inadequately capitalized or unable to pay its debts as they become due. To remedy a fraudulent conveyance, a court could void the challenged transfer or obligation, requiring us to return consideration that we further diversifyreceived, or impose substantial liabilities upon us for the tenancybenefit of unpaid creditors of the debtor that made the fraudulent conveyance, which could adversely affect our financial condition and our results of operations. Among other things, a court could require our shareholders to return to Sears Holdings or its creditors some or all of the securities issued in the distribution made in connection with the formation of Seritage.

Although we believe that the claims against us in the Litigation are without merit and intend, if settlement does not receive final Court approval, to defend against them vigorously, we are not able to predict the ultimate outcome of the Litigation, the magnitude of any potential losses or the effect such litigation may have on us or our operations. It is possible that the Litigation could cause us to incur substantial costs and that one or more of the claims against us could be resolved adversely to us, result in substantial damages or other forms of relief, result in or be connected to additional claims, affect our relations with counterparties to commercial transactions and divert management’s attention and resources, any of which could harm our business. Protracted litigation, including any adverse outcomes, may have an adverse impact on our business, results of operations or financial condition and could subject us to adverse publicity and require us to incur significant legal fees. The Company has reserved $35 million based on the Company’s contribution to the settlement, subject to final Court approval, of the Litigation. Please see Note 9 – Commitments and Contingencies – in our Annual Report on Form 10-K and Note 9 – Commitments and Contingencies – in this Quarterly Report for additional information regarding the Litigation.

On March 2, 2021, the Company brought a lawsuit in Delaware state court against QBE Insurance Corporation, Endurance American Insurance Company, Allianz Global Risks US Insurance Company and Continental Casualty Company, each of which are D&O insurance providers of the Company (the “D&O Insurers”). The Company’s lawsuit is seeking, among other things, declaratory relief and money damages as a result of certain of the D&O Insurers refusal to pay certain costs and expenses related to the defense of the Litigation discussed above. The parties to the Company’s lawsuit have cross-moved for summary judgment, and those motions are pending.

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Our investments in and redevelopment of properties, and investments in and acquisitions or development of additional properties, may be unsuccessful or fail to meet our expectations.

We have historically grown our business through investments in, and acquisitions or development of, properties, including through the recapture and redevelopment of space at many of our portfolio,properties. However, our industry is highly competitive, and an eventwe face competition from REITs, investment companies, private equity and hedge fund investors, sovereign funds, lenders, and other investors, some of whom are significantly larger and have greater resources and lower costs of capital. This competition makes it more challenging to successfully capitalize on acquisition and development opportunities that has a material adverse effectmeet our investment objectives. If we are unable to finance development opportunities on Sears Holdings’commercially favorable terms, our business, financial condition or results of operations could be materially adversely affected. Further, if debt or equity financing is not available on acceptable terms, our ability to execute on development opportunities might be limited or curtailed.

Our business entails risks associated with real estate investments generally, including (but not limited to) the following risks and as noted elsewhere in this section:

we may be unable to acquire a desired property because of competition;
even if we are able to acquire a desired property, competition from other potential acquirers may significantly increase the purchase price;
even if we enter into agreements for the acquisition of properties, these agreements are subject to customary conditions to closing, including completion of due diligence investigations to our satisfaction;
we may incur significant costs and divert management attention in connection with evaluation and negotiation of potential acquisitions, including ones that we are subsequently unable to complete;
we may acquire properties that are not initially accretive to our results upon acquisition, and we may not successfully manage and lease those properties to meet our expectations;
we may be unable to finance the acquisition on favorable terms in the time period we desire, or at all;
even if we are able to finance the acquisition, our cash flow may be insufficient to meet our required principal and interest payments;
we may spend more than budgeted to make necessary improvements or renovations to acquired properties;
we may be unable to quickly and efficiently integrate new acquisitions, particularly the acquisition of portfolios of properties, into our existing operations;
market conditions may result in higher than expected vacancy rates and lower than expected rental rates; and
we may acquire properties subject to liabilities and without any recourse, or with only limited recourse, with respect to unknown liabilities.

In addition, we intend to redevelop a significant portion of the properties after termination or recapture of asset from the Holdco Master Lease or Original Master Lease in order to make space available for lease to additional retail tenants and potentially other lessees for other uses. The redevelopment of these properties involves the risks associated with real estate development activities generally. If we are unable to successfully redevelop properties or to lease the redeveloped properties to third parties on acceptable terms, our business, results of operations and financial condition could be materially adversely affected.

There can be no assurance that any strategic transaction or strategic change of the type contemplated by the Special Committee of our Board of Trustees will be approved by shareholders, or that we will be able to complete any such transaction on terms satisfactory to the Special Committee.

On March 1, 2022, we announced that our Board of Trustees had commenced a process to review a broad range of strategic alternatives to enhance shareholder value. The Board of Trustees created a Special Committee to oversee the process. The strategic review process remains ongoing. On July 7, 2022, in connection with the strategic review process, we filed preliminary proxy materials with the SEC in connection with our 2022 Annual Meeting of Shareholders seeking a shareholder vote to approve a proposed plan of sale of our assets and dissolution (the “Plan of Sale”) that will allow our board to sell all of our assets, distribute the net proceeds to shareholders and dissolve the Company. The affirmative vote of at least two-thirds of all outstanding common shares of the Company is required to approve the Plan of Sale. Edward Lampert, our former Chairman, entered into a Voting and Support Agreement under which he exchanged his equity interest in the Operating Partnership for Class A common shares and agreed to vote his shares in favor of the Plan of Sale. As of July 6, 2022, after giving effect to the exchange of his operating partnership interests, Mr. Lampert owns approximately 29.1% of the Company’s outstanding Class A common shares, and Seritage is the sole owner of all outstanding Operating Partnership interests. The strategic review process remains ongoing, and the Company remains open-minded to pursuing value maximizing alternatives, including a potential sale of the Company. There can be no assurance regarding the success of the process.

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Further, if our shareholders approve the Plan of Sale and we commence implementing the Plan of Sale, it may dissuade parties that might have an interest in acquiring our Company as a whole by means of a merger transaction or otherwise from pursuing such an acquisition and may also preclude other possible courses of action not yet identified by our Board. The strategic review process remains ongoing, and the Company remains open-minded to pursuing value maximizing alternatives, including a potential sale of the Company. There can be no assurance regarding the success of the process.

We have ongoing capital needs and may not be able to obtain additional financing or other sources of funding on acceptable terms.

As of June 30, 2022, we had aggregate outstanding indebtedness of $1.44 billion. We may incur additional indebtedness in the future to refinance our existing indebtedness, to finance our ongoing operations, or to fund retenanting and redevelopment projects. Our existing debt and any significant additional indebtedness could require a substantial portion of our cash flow to make interest and principal payments. Demands on our cash resources from debt service will reduce funds available to us to pay dividends, make capital expenditures and acquisitions or carry out other aspects of our business strategy. Our indebtedness may also limit our ability to adjust rapidly to changing market conditions, make us more vulnerable to general adverse economic and industry conditions and create competitive disadvantages for us compared to other companies with relatively lower debt levels. Increased future debt service obligations may limit our operational flexibility, including our ability to finance or refinance our properties, contribute properties to joint ventures or sell properties as needed.

Our primary uses of cash include the payment of property operating and other expenses, including general and administrative expenses and debt service, and the reinvestment in and redevelopment of our properties. As a result of a decrease in occupancy levels due to our recapture of space for redevelopment purposes and the execution of termination rights under the Original Master Lease and Holdco Master Lease, our property rental income, which is our primary source of operating cash flow, did not fully fund property operating and other expenses incurred during the year ended December 31, 2021. Property operating and other expenses are projected to continue to exceed property rental income until such time as additional tenants commence paying rent, and we plan to incur additional development expenditures as we continue to invest in the redevelopment of our portfolio. While we do not currently have the liquid funds available to fully fund projected property and other expenses and planned development expenditures, we expect to fund these uses of cash with a combination of capital sources including, but not limited to, sales of Consolidated Properties, sales of interests in Unconsolidated Properties and potential credit and capital markets transactions, subject to compliance with certain conditions and/or the consent of our lender under our Term Loan Facility.

As of December 31, 2021, we were not in compliance with certain financial metrics applicable to us under the agreements governing our term loan facility. Additionally, the lender had the right to request mortgages against our assets pursuant to the mortgage and collateral requirement. During the year ended December 31, 2019, the lender requested mortgages on a majority of our portfolio, and then during the year ended December 31, 2020, the lender requested mortgages on the remaining unencumbered assets.

The Term Loan Facility also provides for the $400 million Incremental Funding Facility. Our ability to access the Incremental Funding Facility is subject to (i) our achieving rental income from non-Sears Holdings tenants, on an annualized basis (after giving effect to SNO Leases expected to commence rent payment within 12 months) for the fiscal quarter ending prior to the date of incurrence of the Incremental Funding Facility, of not less than $200 million, (ii) our good faith projection that rental income from non-Sears Holdings tenants (after giving effect to SNO Leases expected to commence rent payment within 12 months) for the succeeding four consecutive fiscal quarters (beginning with the fiscal quarter during which the incremental facility is accessed) will be not less than $200 million, and (iii) the repayment by the Operating Partnership of any deferred interest permitted under the amendment to the Term Loan Agreement (as defined below) as further described below. As of June 30, 2022, the Company has not yet achieved the requirements to access the Incremental Funding Facility.

As of August 8, 2022, the Company is currently negotiating sales, evaluating bona fide offers received and marketing, or about to bring to market for sale, assets with an estimated fair value over $1.2 billion, inclusive of the assets noted above as under contract, which would, if sold, allow the Company to meet the $540 million Term Loan Facility principal pay down to extend the term loan. While these assets are intended for sale, and the Company believes that they will close before the maturity, there is no assurance that these assets will be under contract within the one-year timeframe in which the Term Loan Facility principal will need to be factored into the going concern analysis. See Note 1 – Going Concern of the Notes to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for a discussion of the going concern.

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If the Plan of Sale is approved, we will seek to sell all of our assets and make shareholder distributions (either directly or through a liquidating trust or similar liquidating entity) as soon as possible in order to maximize shareholder value, and we estimate that such sales may be completed within 18 to 30 months after the plan of sale is approved. There are no assurances that sales of assets will be completed within that timeframe, which may be impacted by, among other things, market conditions, the nature and terms of the proposals received from third parties and what the Board determines to be in the best interests of the Company. The final distribution in connection with the Plan of Sale or any other strategic transaction, if completed, will not be made until the resolution of all contingent liabilities. Additionally, our Board has discretion as to the timing of distributions of net sales proceeds.

Real estate related taxes may increase, and if these increases are not passed on to tenants, our income will be reduced.

Some local real property tax assessors may seek to reassess some of our properties as a result of our acquisitions and/or redevelopment of properties. Generally, from time to time, our property taxes increase as property values or assessment rates change or for other reasons deemed relevant by the assessors. An increase in the assessed valuation of a property for real estate tax purposes will result in an increase in the related real estate taxes on that property. Although some leases may permit us to pass through such tax increases to the tenants for payment, there is no assurance that renewal leases or future leases will be negotiated on the same basis. Increases not passed through to tenants will reduce our income.

Rising expenses could reduce cash flow and funds available for future development.

If any property is not fully occupied or becomes vacant in whole or in part, or if rents are being paid in an amount that is insufficient to cover operating costs and expenses, we could be required to expend funds with respect to that property for operating expenses. Our properties are subject to increases in tax rates and tax assessments, utility costs, insurance costs, repairs, maintenance and administrative expenses, and other operating expenses. We may also incur significant expenditures as a result of deferred maintenance for the properties we own (subject to reserved funds to cover certain of these costs). If we are unable to lease properties on a triple-net-lease basis or on a basis requiring the tenants to pay all or some of such expenses, or if tenants fail to pay required tax, utility and other impositions and other operating expenses, we could be required to pay those costs which could adversely affect funds available for future development.

We may incur mortgage indebtedness and other borrowings, which may increase our business risks.

We may incur mortgage debt and pledge all or some of our real properties as security for that debt to finance newly acquired properties or capital contributions to joint ventures, or to fund retenanting and redevelopment projects. Since December 31, 2019, we were required to provide mortgages to the lender under our term loan facility on a majority of our portfolio. This restriction, together with the other provisions of the Term Loan Facility, limits our ability to obtain additional secured financing using such properties as collateral. In addition, incurring mortgage debt increases the risk of loss since defaults on indebtedness secured by a property may result in lenders initiating foreclosure actions. In that case, we could lose the property securing the loan that is in default. For U.S. federal income tax purposes, a foreclosure of any of our properties generally would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income on foreclosure, but would not receive any cash proceeds. If any mortgages contain cross-collateralization or cross-default provisions, a default on a single property could affect multiple properties.

Our rights and the rights of our shareholders to take action against our trustees and officers are limited.

As permitted by the Maryland law, the Company’s Declaration of Trust limits the liability of its trustees and officers to Seritage and its shareholders for money damages, except for liability resulting from:

actual receipt of an improper benefit or profit in money, property or services; or
a final judgment based upon a finding of active and deliberate dishonesty by the trustee or officer that was material to the cause of action adjudicated.

In addition, our Declaration of Trust authorizes us and our bylaws obligate us to indemnify our present and former trustees and officers for actions taken by them in those capacities and to pay or reimburse their reasonable expenses in advance of final disposition of a proceeding to the maximum extent permitted by Maryland law, and we have entered into indemnification agreements with our trustees and executive officers. As a result, the Company and our shareholders may have more limited rights against our trustees and officers than might otherwise exist absent the provisions in our Declaration of Trust and bylaws or that might exist with other companies. Accordingly, in the event that actions taken by any of our trustees or officers are immune or exculpated from, or indemnified against, liability but which impede our performance, the Company and our shareholders’ ability to recover damages from that trustee or officer will be limited.

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Our Declaration of Trust and bylaws and Maryland law contain provisions that may delay, defer or prevent an acquisition of Class A common shares or a change in control.

The Company’s Declaration of Trust and bylaws, Maryland law and the partnership agreement of the Operating Partnership contain a number of provisions, the exercise or existence of which could delay, defer or prevent a transaction or a change in control that might involve a premium price for our shareholders or otherwise be in their best interests, including the following:

The Company’s Board of Trustees Has the Power to Cause Us to Issue Additional Shares of Beneficial Interest and Classify and Reclassify Any Unissued Class A Common Shares without Shareholder Approval. Our Declaration of Trust authorizes us to issue additional authorized but unissued common shares or preferred shares of beneficial interest. We have also issued 2,800,000 shares of Series A Preferred Shares that are senior to our common shares with respect to priority of dividend payments and rights upon liquidation, dissolution or winding up. In addition, the Board of Trustees may, without shareholder approval, (i) amend the Declaration of Trust to increase or decrease the aggregate number of shares of beneficial interest or the number of shares of beneficial interest of any class or series that we have authority to issue and (ii) classify or reclassify any unissued common shares or preferred shares of beneficial interest and set the preferences, rights and other terms of the classified or reclassified shares. As a result, the Board of Trustees may establish a class or series of common shares or preferred shares of beneficial interest that could delay or prevent a transaction or a change in control that might involve a premium price for Class A common shares or otherwise be in the best interests of our shareholders.
The Board of Trustees Is Divided into Three Classes and Trustee Elections Require a Vote of Two-Thirds of the Class A Common Shares and Class B Non-Economic Common Shares Votes Cast. The Board of Trustees is divided into three classes of trustees, with each class to be as nearly equal in number as possible. As a result, approximately one-third of the Board of Trustees will be elected at each annual meeting of shareholders, with, in both contested and uncontested elections, trustees elected by the vote of two-thirds of the votes cast of the Class A common shares and Class B non-economic common shares (voting together as a single class) entitled to be cast in the election of trustees. In the event that an incumbent trustee does not receive a sufficient percentage of votes cast for election, he or she will continue to serve on the Board of Trustees until a successor is duly elected and qualifies. The classification of trustees and requirement that trustee nominees receive a vote of two-thirds of the votes cast of the Class A common shares and Class B non-economic shares (voting together as a single class) entitled to be cast in the election of trustees may have the effect of making it more difficult for shareholders to change the composition of the Board of Trustees. The requirement that trustee nominees receive a vote of two-thirds of the votes cast of the common shares entitled to be cast in the election of trustees may also have the effect of making it more difficult for shareholders to elect trustee nominees that do not receive the votes of shares of our largest shareholder, Mr. Lampert, who owns approximately 29.1% of the Company’s outstanding Class A common shares as of July 6, 2022.
Certain Provisions of Maryland Law May Limit the Ability of a Third Party to Acquire Control of Us. Certain provisions of the Maryland General Corporation Law (the “MGCL”) applicable to Maryland REITs may have the effect of inhibiting a third party from acquiring us or of impeding a change of control of the Company under circumstances that otherwise could provide Class A common shareholders with the opportunity to realize a premium over the then-prevailing market price of such shares or otherwise be in the best interest of shareholders, including:
“business combination” provisions that, subject to certain exceptions and limitations, prohibit certain business combinations between a Maryland REIT and an “interested shareholder” (defined generally as any person who beneficially owns, directly or indirectly, 10% or more of the voting power of the Company’s outstanding voting shares or an affiliate or associate of the Maryland REIT who, at any time within the two-year period immediately prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then-outstanding shares of the Company) or an affiliate of any interested shareholder and the Maryland REIT for five years after the most recent date on which the shareholder becomes an interested shareholder, and thereafter imposes two supermajority shareholder voting requirements on these combinations;
“control share” provisions that provide that, subject to certain exceptions, holders of “control shares” of our company (defined as voting shares that, if aggregated with all other shares owned or controlled by the acquirer, would entitle the acquirer to exercise one of three increasing ranges of voting power in electing trustees) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of issued and outstanding “control shares”) have no voting rights with respect to the control shares except to the extent approved by our shareholders by the affirmative vote of at least two-thirds of all of the votes entitled to be cast on the matter, excluding all interested shares; and;
Additionally, Title 3, Subtitle 8 of the MGCL permits the Board of Trustees, without shareholder approval and regardless of what is currently provided in our Declaration of Trust or bylaws, to implement certain takeover defenses.

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The Board of Trustees has, by resolution, exempted from the provisions of the Maryland Business Combination Act all business combinations (a) between us and (i) Sears Holdings or its affiliates or (ii) ESL or Fairholme Capital Management L.L.C. (“FCM”) and/or certain clients of FCM or their respective affiliates and (b) between us and any other person, provided that in the latter case the business combination is first approved by the Board of Trustees (including a majority of our trustees who are not affiliates or associates of such person). In addition, our bylaws contain a provision opting out of the Maryland control share acquisition act.

The COVID-19 pandemic has continued to, and the future outbreak of other highly infectious or contagious diseases may, materially and adversely impact the business of our tenants and materially or adversely impact and disrupt our business, income, cash flow, results of operations, financial condition, liquidity, prospects and ability to service our debt obligations.

In March 2020, the World Health Organization declared COVID-19 a global pandemic. The COVID-19 pandemic has had, and other pandemics in the future could have, repercussions across regional and global economies and financial markets. The outbreak of COVID-19 in many countries, including the United States, has significantly adversely impacted global economic activity, the U.S. economy and the local economies in which our properties are located and has contributed to significant volatility and negative pressure in financial markets. The global impact of the outbreak has been rapidly evolving and, as cases of COVID-19 have continued to be identified in additional countries, many countries, including the United States, have reacted by instituting quarantines, mandating business and school closures and restricting travel.

Certain states and cities, including where our tenants conduct their business and where we own properties, have development sites and where our corporate offices are located, have also reacted to the COVID-19 pandemic by instituting quarantines, restrictions on travel, “shelter in place” rules, restrictions on types of business that may continue to operate, and/or restrictions on the types of construction projects that may continue. The Company cannot predict if additional states and cities will implement similar restrictions, when restrictions currently in place will expire or if such restrictions will be implemented again. As a result, the COVID-19 pandemic is negatively impacting almost every industry directly or indirectly, including industries in which the Company and our tenants operate.

These containment measures and other factors have affected operations at the Company’s properties. As of June 30, 2022, the Company had collected 99% of rental income for the three months ended June 30, 2022. While the Company intends to enforce its contractual rights under its leases, there can be no assurance that tenants will meet their future obligations or that additional rental modification agreements will not be necessary. Some of our tenants may not re-open even after the aforementioned restrictions are lifted, which could have a material impact on occupancy at our properties which could result in an increase in the number of co-tenancy claims due to falling below required occupancy thresholds and may impact our results.

Furthermore, in the event of any default by a tenant for non-payment of lease charges or early or limited cessation of operations, we might not be able to fully recover and/or experience delays and additional costs in enforcing our rights as landlord to recover amounts due to us under the terms of our agreements with such parties due to potential moratoriums imposed by various jurisdictions in light of the COVID-19 pandemic on landlord initiated commercial eviction and collection actions. One or more of our tenants may seek the protection of the bankruptcy laws as a result of the prolonged impact of the COVID-19 pandemic, which could result in the termination of such tenants’ leases, and consequently causing a reduction in our income. Tenant bankruptcies may make it more difficult for us to lease the remainder of the property or properties in which the bankrupt tenant operates and adversely impact our ability to successfully execute our re-leasing strategy.

A sustained downturn in the U.S. economy and reduced consumer spending as well as consumer activity at brick-and-mortar commercial establishments due to the prolonged existence and threat of the COVID-19 pandemic, or a future pandemic, could impose an economic slowdown or recession in the United States which could impact our tenants’ ability to meet their lease obligations due to poor operating results, lack of liquidity or other reasons and therefore decrease the revenue generated by our properties or the value of our properties. Our ability to lease space and negotiate and maintain favorable rents could also be negatively impacted by a prolonged recession in the U.S. economy. Moreover, the demand for leasing space in our properties could substantially decline during a significant downturn in the U.S. economy which could make it difficult for us to renew or re-lease our properties at lease rates equal to or above historical rates and lead us to incur significant re-leasing costs.

The COVID-19 pandemic has also led to complete or partial shutdowns of manufacturing facilities and distribution centers in many countries and disruptions in our tenants’ supply chains, and may otherwise delay the delivery of inventory or other goods necessary for our tenants’ operations. Our tenants may also be negatively impacted if the outbreak of COVID-19 occurs within their workforce or otherwise disrupts their management.

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The COVID-19 pandemic, or a future pandemic, could also have material and adverse effects on our ability to successfully operate and on our financial condition, results of operations, liquidity and cash flows due to, among other factors:

Difficulty accessing debt and equity capital on attractive terms, or at all, impacts to our credit ratings, and a severe disruption and instability in the global financial markets or deteriorations in credit and financing conditions may affect our access to capital necessary to fund business operations or address maturing liabilities on a timely basis and our tenants' ability to fund their business operations and meet their obligations to us;
The financial impact could negatively impact our ability to pay dividends to our shareholders;
The financial impact of the COVID-19 pandemic could negatively impact our future compliance with financial covenants of our term loan facility (the “Term Loan Facility”) with Berkshire Hathaway Life Insurance Company of Nebraska (“Berkshire Hathaway”) or result in a default and potentially an acceleration of indebtedness, which non-compliance could negatively impact our ability to make additional borrowings under our Incremental Funding Facility (as defined below), conduct asset sales, fund development activity or pay dividends to our shareholders;
The worsening of estimated future cash flows due to a change in our plans, policies, or views of market and economic conditions as it relates to one or more of our adversely impacted properties could result in the recognition of substantial impairment charges imposed on our assets;
The credit quality of our tenants could be negatively impacted and we may significantly increase our allowance for doubtful accounts;
Difficulties completing our redevelopment projects on a timely basis, on budget or at all;
A general decline in business activity and demand for real estate transactions could adversely affect our ability or desire to reinvest in or redevelop our properties; and
The potential negative impact on the health of our personnel, particularly if a significant number of them are impacted, could result in a deterioration in our ability to ensure business continuity during this disruption.

The extent to which the COVID-19 pandemic, or a future pandemic, impacts our operations and those of our tenants will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures, among others. Additional closures by our tenants of their stores and early terminations by our tenants of their leases could reduce our cash flows, which could impact our ability to pay dividends.

The fluidity of this situation precludes any prediction as to the full adverse impact of the COVID-19 pandemic. Nevertheless, the COVID-19 pandemic presents, and future outbreaks of other highly infectious or contagious diseases may present, material uncertainty and risk with respect to our business, income, cash flow, results of operations, financial condition, liquidity, prospects and ability to service our debt obligations.

Risks Related to Our Tax Status

Our obligations to pay income taxes are expected to increase beginning in 2022, which could result in a reduction to our earnings, and could have negative consequences to us.

We revoked our REIT election and become a taxable C corporation effective January 1, 2022. As a result, we will not be allowed a deduction for dividends paid to our stockholders in computing our taxable income and will be subject to U.S. federal and state taxes on our taxable income at corporate rates. This treatment could also reduce our net earnings available for investment or distribution to our stockholders because of the additional tax liability on us. Further, U.S. federal and state income tax rates could increase in the future, exacerbating these risks. The Administration of President Biden has proposed increasing the U.S. federal corporate income tax rate from 21% to 28%, and the U.S. Congress has, in the past, made similar proposals. We also will be disqualified from electing REIT status through December 31, 2026.

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We may fail to realize the anticipated benefits of revoking our REIT election and becoming a taxable C corporation, or those benefits may take longer to realize than expected, if at all, or may not offset the costs of revoking our REIT election and becoming a taxable C corporation.

We believe that revoking our REIT election and becoming a taxable C corporation, among other things, provides us with the enhanced flexibility to efficiently pursue a variety of potential alternatives to maximize the value of our diverse portfolio of assets, including a potential sale or series of sales of assets. In reaching this determination, we considered, among other things, the potential timing and transaction limitations that would be imposed on us if we remained subject to the REIT tax rules, the significant tax basis we have in our assets, and our net operating losses. However, our ability to pursue potential alternatives to maximize the value of our assets, including the timing and amount of sales of assets, may not meet our expectations or may cause us to incur increased U.S. federal and state income taxes which may reduce, or eliminate, the anticipated benefits of the transition from a REIT to a taxable C corporation. Moreover, there can be no assurance that the anticipated benefits of the transition from a REIT to a taxable C corporation will offset its costs, which could be greater than we expect. Our failure to achieve the anticipated benefits of the transition from a REIT to a taxable C corporation at all, or in a timely manner, or a failure of any benefits realized to offset its costs, could negatively affect our business, financial condition, results of operations or the market price of our common stock.

We no longer qualify for taxation as a REIT for U.S. federal income tax purposes effective as of January 1, 2022, and there can be no assurance that the IRS will not challenge our previous REIT status.

Although we elected for U.S. federal income tax purposes to be treated as a REIT for the 2021 taxable year and in prior taxable years, we revoked our REIT election for the tax year beginning January 1, 2022 and intend to be treated as a regular C corporation for the current year and any year in the foreseeable future, and, as a result, we will be unable to claim the U.S. federal income tax benefits associated with REIT status. Moreover, there can be no assurance that the IRS will not challenge our qualification as a REIT for years in which we intended to qualify as a REIT. Although we believe we did qualify as a REIT in each such year, if the IRS were to successfully challenge our previous REIT status, we would suffer adverse tax consequences, such as those described below.

For the 2022 taxable year and future years (and for any prior year if we were to fail to qualify as a REIT in such year), we will generally be subject to U.S. federal income tax on our taxable income at regular corporate rates, and distributions to stockholders would not be deductible by us in computing our taxable income. Any such corporate tax liability could be substantial and would reduce the amount of cash available for distribution to our stockholders, which in turn could have an adverse impact on the value of, and trading prices for, our stock. Our decision to revoke our REIT election could also have other effects on any given stockholder,
depending on its particular circumstances. For example, certain foreign investors that own large positions in our stock may be subject to less favorable rules under the Foreign Investment in Real Property Tax Act of 1980 following the revocation of our REIT election. Stockholders are urged consult their tax advisors regarding the effects to them of the revocation of our REIT elections in light of their particular circumstances.

Our board of directors’ decision to revoke our REIT election means we will no longer be required to distribute substantially all of our net taxable income to our stockholders.

Prior to termination of our REIT election, we made distributions of a minimum of 90% of our taxable income each year in order to maintain our REIT status. On March 31, 2022, we revoked our election to be treated as a REIT, effective January 1, 2022. Consequently, we are no longer subject to the distribution requirements applicable to REITs. All future dividend distributions will be made at the discretion of our board of directors and will depend upon, among other things, our earnings, investment strategy, financial condition and liquidity, and such other factors as the board of directors deems relevant, as well as any contractual restrictions.

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If we experience an “ownership change” for purposes of Section 382 of the Code, our ability to utilize our net operating loss and net capital loss carryforwards and certain built-in losses to reduce our future taxable income could be limited, potentially increasing the net taxable income on which we must pay corporate-level taxes, and potentially adversely affecting our liquidity, and our desire to preserve our net operating losses and net capital loss carryforwards may cause us to forgo otherwise attractive opportunities.

If we experience an “ownership change,” our future ability to utilize our net operating loss and net capital loss carryforwards to reduce our taxable income may be limited by certain provisions of the Code. Specifically, the Code limits the ability of a company that undergoes an “ownership change” to utilize its net operating loss and net capital loss carryforwards and certain built-in losses to offset taxable income earned in years after the ownership change. An ownership change occurs if, during a three-year testing period, more than 50% of the stock of a company is acquired by one or more persons (or certain groups of persons) who own, directly or constructively, 5% or more of the stock of such company. An ownership change can occur as a result of a public offering of stock, as
well as through secondary market purchases of our stock and certain types of reorganization transactions. Generally, when an ownership change occurs, the annual limitation on the use of net operating loss and net capital loss carryforwards and certain built-in losses is equal to the product of the applicable long-term tax exempt rate and the value of the company’s stock immediately before the ownership change. We have substantial net operating and net capital loss carry forwards which we have used, and will continue to use, to offset our taxable income.

If we experience an ownership change, our income tax liability could materially increase. In addition, if we were to undergo an ownership change, our net operating losses and net capital loss carryforwards could become subject to additional limitations, which could result in us incurring materially greater tax liability than if we had not undergone such an ownership change. The determination of whether an ownership change has occurred or will occur is complicated and depends on changes in percentage stock ownership among stockholders. In addition, we may decide in the future that it is necessary or in our interest to take certain actions that could result in an ownership change. Therefore, no assurance can be provided as to whether an ownership change will occur in the future. Moreover, the potential negative consequences of the limitations that would result from an ownership change may discourage us from, among other things, redeeming our stock or issuing additional common stock to raise capital or to acquire businesses or assets. Accordingly, our desire to preserve our net operating losses and net capital loss carryforwards may cause us to forgo otherwise attractive opportunities.

If we do not qualify to be taxed as a REIT for any taxable year through 2021, we will be subject to U.S. federal income tax as a regular corporation and could face a substantial tax liability, which would reduce the amount of cash available for distribution to our shareholders.

As described above, we operated through December 31, 2021 in a manner intended to qualify us as a REIT for U.S. federal income tax purposes. However, qualification as a REIT involves the application of highly technical and complex provisions of the Code, for which only a limited number of judicial and administrative interpretations exist. Even a technical or inadvertent violation could jeopardize our REIT qualification through 2021. Our qualification as a REIT through 2021 depends on the satisfaction of certain asset, income, organizational, distribution, shareholder ownership and other requirements.

If we were to fail to qualify as a REIT in any taxable year through 2021, and no available relief provision applied, we would be subject to U.S. federal income tax on our taxable income at regular corporate rates (which is 21% for periods ending after December 31, 2017 through 2021), as well as U.S. state and local income tax, and dividends paid to our shareholders would not be deductible by us in computing our taxable income. Any resulting corporate tax liability could be substantial and would reduce the amount of cash available for distribution to our shareholders, which in turn could have an adverse impact on the value of our common shares.

We could fail to qualify to be taxed as a REIT through 2021 if income we received is not treated as qualifying income.

Under applicable provisions of the Code, we will not be treated as a REIT through 2021 unless we satisfied various requirements, including requirements relating to the sources of our gross income. Rents we received or accrued from tenants may not be treated as qualifying rent for purposes of these requirements if the applicable lease is not respected as a true lease for U.S. federal income tax purposes and is instead treated as a service contract, joint venture, financing, or some other type of arrangement. We believe that the Holdco Master Lease should be respected as a true lease for U.S. federal income tax purposes for the years in which such lease was in effect. If, contrary to expectations, the Holdco Master Lease is not respected as a true lease for U.S. federal income tax purposes, the IRS may determine that we failed to qualify to be taxed as a REIT during such time. Furthermore, our qualification as a REIT through 2021 depended on the satisfaction of certain asset, income, organizational, distribution, shareholder ownership and other requirements. Our ability to satisfy the asset tests depends upon our analysis of the characterization and fair market values of our assets, some of which are not susceptible to a precise determination, and for some of which we did not obtain independent appraisals.

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In addition, subject to certain exceptions, rents we received or accrued from our tenants would not be treated as qualifying rent for purposes of these requirements if we or an actual or constructive owner of 10% or more of our outstanding shares (by value) actually or constructively owned 10% or more of the interests in the assets or net profits of a non-corporate tenant, or, if the tenant is a corporation, 10% or more of the total combined voting power of all classes of stock of such tenant entitled to vote or 10% or more of the total value of all classes of stock of such tenant. For purposes of determining whether rental payments received by a REIT are treated as qualifying rent, the stock, assets or net profits owned by a partner in an entity classified as a partnership for U.S. federal income tax purposes are attributed to such partnership only if the partner owns (directly or indirectly) 25% or more of the capital interest or profits interest in the partnership. As a result of these constructive ownership rules, it is possible that we could have been treated as owning 10% or more of a tenant, and in such case rent payments received from such tenant may not be treated as qualifying rent for purposes of these requirements. Our Declaration of Trust provided for restrictions on ownership and transfer of Class A common shares and Series A Preferred Shares prior to the revocation of our REIT election for 2022, including restrictions on such ownership or transfer that would cause the rents we received or accrued from a tenant to be treated as non-qualifying rent for purpose of the REIT gross income requirements. Nevertheless, such restrictions may not be effective in ensuring that rents we received or accrued from our tenants will be treated as qualifying rent for purposes of REIT qualification requirements.

We may be subject to adverse legislative or regulatory tax changes that could increase our tax liability, reduce our operating flexibility and reduce the price of our common stock.

The rules dealing with U.S. federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Department of the Treasury. Changes to the tax laws or interpretations thereof, with or without retroactive application, could materially and adversely affect our investors or us. We cannot predict how changes in the tax laws might affect our investors or us. Any such changes could have an adverse effect on an investment in our shares or on the market value or the resale potential of our assets. You are urged to consult with your tax advisor with respect to the status of legislative, regulatory or administrative developments and proposals and their potential effect on an investment in our shares.

Risks Related to Ownership of our Securities

The market price and trading volume of our securities may be volatile.

The market price of our securities may be volatile, and the trading volume in our securities may fluctuate and cause significant price variations to occur. Some of the factors that could negatively affect the market price of our securities or result in fluctuations in the price or trading volume of our securities include:

actual or anticipated variations in our quarterly results of operations;
changes in our funds from operations or earnings estimates;
publication of research reports about us or the real estate or retail industries;
increases in market interest rates that may cause purchasers of our securities to demand a higher yield;
changes in market valuations of similar companies;
adverse market reaction to any additional debt we may incur in the future;
actions by ESL, or by institutional shareholders;
speculation in the press or investment community about our company or industry or the economy in general;
adverse performance or potential financial distress or bankruptcy of our major tenants, including Holdco;
the occurrence of any of the other risk factors presented in this filing;
adverse developments in the Litigation;
complications regarding the Plan of Sale;
specific real estate market and real estate economic conditions; and
general market and economic conditions.

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The transactions with Sears Holdings and Holdco could give rise to disputes or other unfavorable effects, which could have a material adverse effect on our business, financial condition or results of operations.

Disputes with third parties could arise out of our historical transactions with Sears Holdings is the lesseeor future transactions with Holdco, and we could experience unfavorable reactions from employees, ratings agencies, regulators or other interested parties. These disputes and reactions of third parties could have a substantial majority of our properties and accounts for a substantial majority of our revenues.  Under the Master Lease, Sears Holdings is required to pay all insurance, taxes, utilities and maintenance and repair expenses in connection with these leased properties and to indemnify, defend and hold us harmless from and against various claims, litigation and liabilities arising in connection with its business, subject to proportionate sharing of certain of these expenses with occupants of the remainder of the space not leased to Sears Holdings.  Sears Holdings may not in the future have sufficient assets, income and access to financing to enable it to satisfy its payment obligations under the Master Lease.  In its most recent Form 10-K, Sears Holdings disclosed, among other things, that its historical operating results indicate substantial doubt exists related to Sears Holdings’ ability to continue as a going concern.  In addition, Sears Holdings has disclosed that its domestic pension and postretirement benefit plan obligations are currently underfunded.  Sears Holdings may have to make significant cash payments to some or all of its pension and postretirement benefit plans, which would reduce the cash available for its businesses, potentially including its rent obligations under the Master Lease.  The inability or unwillingness of Sears Holdings to meet its rent obligations and other obligations under the Master Lease could materially adversely affectmaterial adverse effect on our business, financial condition or results of operations, including our ability to pay the interest, principaloperations. In addition, disputes between us and other costs and expenses under our financings, or to pay cash dividends to Seritage shareholders.  For these reasons, if Sears Holdings wereor Holdco could arise in connection with any of our past or future agreements with those counterparties. See “—Risks Related to experienceOur Business and Operations—Following the Sears Holdings bankruptcy, we have been named as a material adverse effect on itsdefendant in litigation that could adversely affect our business and financial condition, or results of operations,divert management’s attention from our business, financial condition or results of operations could also be materially adversely affected.

Our dependence on rental payments from Sears Holdings as our main source of revenues may limit our abilityand subject us to enforce our rights under the Master Lease.  In addition, wesignificant liabilities, including remedies that may be limited in our ability to enforce our rights under the Master Lease because it isimposed as a unitary lease and does not provide for termination with respect to individual properties by reasonresult of the defaulta finding of the tenant.  Failure by Sears Holdings to comply with the terms of the Master Lease or to comply with the regulations to which the leased properties are subject could require us to find another master lessee for all such leased property and there could be a decrease or cessation of rental payments by Sears Holdings.  In such event, we may be unable to locate a suitable master lessee or a lessee for individual properties at similar rental rates and other obligations and in a timely manner or at all, which would have the effect of reducing our rental revenues.  In addition, each JV is subject to similar limitations on enforcements of remedies and risks under its respective JV Master Lease, which could reduce the value of our investment in, or distributions to us by, one or more of the JVs.fraudulent conveyance.”

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

None.

Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.Defaults Upon Senior Securities

None.

Defaults Upon Senior Securities

None.

Item 4.

Mine Safety Disclosures

Item 4. Mine Safety Disclosures

Not applicable.

Item 5.

Other Information

None.

Item 5. Other Information

None.

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Item 6. Exhibits

Item 6.Exhibit No.

Exhibits

Exhibit No.

Description

Description

SEC Document Reference

 

 

 

 

 

  31.1  10.1

 

Amendment No. 3 to the
Senior Secured Term Loan Agreement, dated June 16, 2022, among Seritage Growth Properties, L.P., Seritage Growth Properties and Berkshire Hathaway Life Insurance Company of Nebraska.

Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K, filed June 21, 2022.

  31.1

Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

Filed herewith.

 

 

 

 

 

  31.2

 

Certification of the Interim Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

Filed herewith.

 

 

 

 

 

  32.1

 

Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350

 

FiledFurnished herewith.

 

 

 

 

 

  32.2

 

Certification of the Interim Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350

 

FiledFurnished herewith.

 

 

 

 

 

101.INS

 

Inline XBRL Instance Document - the instance document does not appear

in the Interactive Data File because its XBRL tags are embedded

within the Inline XBRL document.

 

Filed herewith.

 

 

 

 

 

101.SCH

 

Inline XBRL Taxonomy Extension Schema Document

 

Filed herewith.

 

 

 

 

 

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document

 

Filed herewith.

 

 

 

 

 

101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase Document

 

Filed herewith.

 

 

 

 

 

101.LAB

 

Inline XBRL Taxonomy Extension Label Linkbase Document

 

Filed herewith.

 

 

 

 

 

101.PRE

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document

 

Filed herewith.

104

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

Filed herewith.

 

- 4253 -


SIGNATURESSIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

 

SERITAGE GROWTH PROPERTIES

 

 

 

Dated: November 3, 2017August 9, 2022

 

 

 

/s/ Benjamin SchallAndrea Olshan

 

 

 

 

By:

 

Benjamin SchallAndrea Olshan

 

 

 

 

President and Chief Executive Officer

(Principal Executive Officer)

 

 

 

 

 

Dated: November 3, 2017August 9, 2022

 

 

 

/s/ Brian DickmanJohn Garilli

 

 

 

 

By:

 

Brian DickmanJohn Garilli

 

 

 

 

Executive Vice President andInterim Chief Financial Officer

(Principal Financial and Accounting Officer)

 

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