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 JUNE 30, 2023
or
|
|
☐ 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.) |
|
|
(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 | ☐ |
| 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 11, 2023, the registrant had the following common shares outstanding:
Class | Shares Outstanding |
Class A common shares of beneficial interest, par value $0.01 per share |
|
Class B common shares of beneficial interest, par value $0.01 per share |
|
Class C common shares of beneficial interest, par value $0.01 per share |
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QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED SEPTEMBERJune 30, 20172023
TABLE OF CONTENTS
PART I. | ||
Page | ||
Item 1. | 3 | |
Condensed Consolidated Balance Sheets as of | 3 | |
4 | ||
5 | ||
6 | ||
| ||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
| |
Item 4. |
| |
PART II. | ||
Item 1. |
| |
Item 1A. |
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Item 2. |
| |
Item 3. |
| |
Item 4. |
| |
Item 5. |
| |
Item 6. |
| |
|
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, 2023 |
|
| December 31, 2022 |
| ||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Investment in real estate |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Land |
| $ | 799,971 |
|
| $ | 840,021 |
|
| $ | 134,291 |
|
| $ | 172,813 |
|
Buildings and improvements |
|
| 859,782 |
|
|
| 839,663 |
|
|
| 356,952 |
|
|
| 463,616 |
|
Accumulated depreciation |
|
| (126,712 | ) |
|
| (89,940 | ) |
|
| (43,369 | ) |
|
| (57,330 | ) |
|
|
| 1,533,041 |
|
|
| 1,589,744 |
|
|
| 447,874 |
|
|
| 579,099 |
|
Construction in progress |
|
| 175,516 |
|
|
| 55,208 |
|
|
| 128,931 |
|
|
| 185,324 |
|
Net investment in real estate |
|
| 1,708,557 |
|
|
| 1,644,952 |
|
|
| 576,805 |
|
|
| 764,423 |
|
Investment in unconsolidated joint ventures |
|
| 338,326 |
|
|
| 425,020 |
| ||||||||
Real estate held for sale |
|
| 98,084 |
|
|
| 455,617 |
| ||||||||
Investment in unconsolidated entities |
|
| 301,493 |
|
|
| 382,597 |
| ||||||||
Cash and cash equivalents |
|
| 104,153 |
|
|
| 52,026 |
|
|
| 124,850 |
|
|
| 133,480 |
|
Restricted cash |
|
| 202,513 |
|
|
| 87,616 |
|
|
| 12,904 |
|
|
| 11,459 |
|
Tenant and other receivables, net |
|
| 28,166 |
|
|
| 23,172 |
|
|
| 22,188 |
|
|
| 41,495 |
|
Lease intangible assets, net |
|
| 327,229 |
|
|
| 464,399 |
|
|
| 1,524 |
|
|
| 1,791 |
|
Prepaid expenses, deferred expenses and other assets, net |
|
| 20,284 |
|
|
| 15,052 |
|
|
| 30,119 |
|
|
| 50,859 |
|
Total assets |
| $ | 2,729,228 |
|
| $ | 2,712,237 |
| ||||||||
Total assets (1) |
| $ | 1,167,967 |
|
| $ | 1,841,721 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
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 |
| $ | 549,965 |
|
| $ | 1,029,754 |
| ||||||||
Accounts payable, accrued expenses and other liabilities |
|
| 111,482 |
|
|
| 121,055 |
|
|
| 56,320 |
|
|
| 89,368 |
|
Total liabilities |
|
| 1,396,106 |
|
|
| 1,287,926 |
| ||||||||
Total liabilities (1) |
|
| 606,285 |
|
|
| 1,119,122 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Commitments and contingencies (Note 9) |
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|
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|
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|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
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; |
|
| 562 |
|
|
| 561 |
| ||||||||
Series A preferred shares $0.01 par value; 10,000,000 shares authorized; |
|
| 28 |
|
|
| 28 |
| ||||||||
Additional paid-in capital |
|
| 996,047 |
|
|
| 925,563 |
|
|
| 1,360,718 |
|
|
| 1,360,411 |
|
Accumulated deficit |
|
| (177,394 | ) |
|
| (121,338 | ) |
|
| (800,674 | ) |
|
| (640,531 | ) |
Total shareholders' equity |
|
| 819,006 |
|
|
| 804,557 |
|
|
| 560,634 |
|
|
| 720,469 |
|
Non-controlling interests |
|
| 514,116 |
|
|
| 619,754 |
|
|
| 1,048 |
|
|
| 2,130 |
|
Total equity |
|
| 1,333,122 |
|
|
| 1,424,311 |
|
|
| 561,682 |
|
|
| 722,599 |
|
Total liabilities and equity |
| $ | 2,729,228 |
|
| $ | 2,712,237 |
|
| $ | 1,167,967 |
|
| $ | 1,841,721 |
|
(1) The Company's consolidated balance sheets include assets and liabilities of consolidated variable interest entities ("VIEs"). See Note 2. The consolidated balance sheets, as of June 30, 2023, include the following amounts related to our consolidated VIEs, excluding the Operating Partnership: $3.3 million of land, $2.8 million of building and improvements, $(0.8) million of accumulated depreciation and $2.3 million of other assets included in other line items. The Company's consolidated balance sheets as of December 31, 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. | (1) The Company's consolidated balance sheets include assets and liabilities of consolidated variable interest entities ("VIEs"). See Note 2. The consolidated balance sheets, as of June 30, 2023, include the following amounts related to our consolidated VIEs, excluding the Operating Partnership: $3.3 million of land, $2.8 million of building and improvements, $(0.8) million of accumulated depreciation and $2.3 million of other assets included in other line items. The Company's consolidated balance sheets as of December 31, 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 accompanying notes are an integral part of these condensed consolidated financial statements.
- 3 -
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 |
|
| Six Months Ended |
| ||||||||||
|
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||
REVENUE |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Rental income |
| $ | 5,517 |
|
| $ | 29,418 |
|
| $ | 5,935 |
|
| $ | 58,502 |
|
Management and other fee income |
|
| 367 |
|
|
| 286 |
|
|
| 629 |
|
|
| 2,107 |
|
Total revenue |
|
| 5,884 |
|
|
| 29,704 |
|
|
| 6,564 |
|
|
| 60,609 |
|
EXPENSES |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Property operating |
|
| 5,196 |
|
|
| 10,801 |
|
|
| 13,381 |
|
|
| 21,833 |
|
Real estate taxes |
|
| 2,170 |
|
|
| 6,425 |
|
|
| 3,707 |
|
|
| 14,575 |
|
Depreciation and amortization |
|
| 4,151 |
|
|
| 10,669 |
|
|
| 8,715 |
|
|
| 22,603 |
|
General and administrative |
|
| 10,099 |
|
|
| 11,093 |
|
|
| 22,319 |
|
|
| 20,185 |
|
Litigation settlement |
|
| — |
|
|
| 35,000 |
|
|
| — |
|
|
| 35,000 |
|
Total expenses |
|
| 21,616 |
|
|
| 73,988 |
|
|
| 48,122 |
|
|
| 114,196 |
|
Gain on sale of real estate, net |
|
| 33,488 |
|
|
| 68,031 |
|
|
| 45,880 |
|
|
| 67,016 |
|
Gain on sale of interest in unconsolidated entities |
|
| 7,323 |
|
|
| — |
|
|
| 7,323 |
|
|
| — |
|
Impairment of real estate assets |
|
| (104,467 | ) |
|
| (109,343 | ) |
|
| (107,043 | ) |
|
| (110,334 | ) |
Equity in loss of unconsolidated entities |
|
| (13,698 | ) |
|
| (33,720 | ) |
|
| (50,070 | ) |
|
| (66,796 | ) |
Interest and other income |
|
| 9,869 |
|
|
| 99 |
|
|
| 15,454 |
|
|
| 110 |
|
Interest expense |
|
| (12,528 | ) |
|
| (22,663 | ) |
|
| (27,730 | ) |
|
| (45,251 | ) |
Loss before income taxes |
|
| (95,745 | ) |
|
| (141,880 | ) |
|
| (157,744 | ) |
|
| (208,842 | ) |
Benefit (provision) for income taxes |
|
| 38 |
|
|
| (203 | ) |
|
| 51 |
|
|
| (228 | ) |
Net loss |
|
| (95,707 | ) |
|
| (142,083 | ) |
|
| (157,693 | ) |
|
| (209,070 | ) |
Net loss attributable to non-controlling interests |
|
| — |
|
|
| 31,328 |
|
|
| — |
|
|
| 46,110 |
|
Net loss attributable to Seritage |
| $ | (95,707 | ) |
| $ | (110,755 | ) |
| $ | (157,693 | ) |
| $ | (162,960 | ) |
Preferred dividends |
|
| (1,225 | ) |
|
| (1,225 | ) |
|
| (2,450 | ) |
|
| (2,450 | ) |
Net loss attributable to Seritage common shareholders |
| $ | (96,932 | ) |
| $ | (111,980 | ) |
| $ | (160,143 | ) |
| $ | (165,410 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net loss per share attributable to Seritage Class A |
| $ | (1.73 | ) |
| $ | (2.56 | ) |
| $ | (2.85 | ) |
| $ | (3.79 | ) |
Net loss per share attributable to Seritage Class A |
| $ | (1.73 | ) |
| $ | (2.56 | ) |
| $ | (2.85 | ) |
| $ | (3.79 | ) |
Weighted average Class A common shares |
|
| 56,173 |
|
|
| 43,677 |
|
|
| 56,116 |
|
|
| 43,656 |
|
Weighted average Class A common shares |
|
| 56,173 |
|
|
| 43,677 |
|
|
| 56,116 |
|
|
| 43,656 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
- 4 -
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 |
|
| Series A |
|
| Additional |
|
| Accumulated |
|
| Non- |
|
| Total |
| ||||||||||||||
|
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| Capital |
|
| Deficit |
|
| Interests |
|
| Equity |
| ||||||||
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Balance at January 1, 2023 |
|
| 56,053 |
|
| $ | 561 |
|
|
| 2,800 |
|
| $ | 28 |
|
| $ | 1,360,411 |
|
| $ | (640,531 | ) |
| $ | 2,130 |
|
| $ | 722,599 |
|
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (157,693 | ) |
|
| — |
|
|
| (157,693 | ) |
Preferred dividends declared ($0.875 per share) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2,450 | ) |
|
| — |
|
|
| (2,450 | ) |
Vesting of restricted share units |
|
| 130 |
|
|
| 1 |
|
|
| — |
|
|
| — |
|
|
| (1 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
Share-based compensation |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,443 |
|
|
| — |
|
|
| — |
|
|
| 1,443 |
|
Sale of consolidated joint venture |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,135 | ) |
|
| — |
|
|
| (1,082 | ) |
|
| (2,217 | ) |
Balance at June 30, 2023 |
|
| 56,183 |
|
| $ | 562 |
|
|
| 2,800 |
|
| $ | 28 |
|
| $ | 1,360,718 |
|
| $ | (800,674 | ) |
| $ | 1,048 |
|
| $ | 561,682 |
|
|
| Class A |
|
| Series A |
|
| Additional |
|
| Accumulated |
|
| Non- |
|
| Total |
| ||||||||||||||
|
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| Capital |
|
| Deficit |
|
| Interests |
|
| Equity |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
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 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Balance at April 1, 2023 |
|
| 56,060 |
|
| $ | 561 |
|
|
| 2,800 |
|
| $ | 28 |
|
| $ | 1,360,060 |
|
| $ | (703,742 | ) |
| $ | 1,048 |
|
|
| 657,955 |
|
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (95,707 | ) |
|
| — |
|
|
| (95,707 | ) |
Preferred dividends declared ($0.4375 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,225 | ) |
|
| — |
|
|
| (1,225 | ) |
Vesting of restricted share units |
|
| 123 |
|
|
| 1 |
|
|
| — |
|
|
| — |
|
|
| (1 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
Share-based compensation |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 659 |
|
|
| — |
|
|
| — |
|
|
| 659 |
|
Balance at June 30, 2023 |
|
| 56,183 |
|
| $ | 562 |
|
|
| 2,800 |
|
| $ | 28 |
|
| $ | 1,360,718 |
|
| $ | (800,674 | ) |
| $ | 1,048 |
|
| $ | 561,682 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
- 5 -
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, |
| |||||
|
| 2023 |
|
| 2022 |
| ||
CASH FLOW FROM OPERATING ACTIVITIES |
|
|
|
|
|
| ||
Net loss |
| $ | (157,693 | ) |
| $ | (209,070 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
| ||
Equity in loss of unconsolidated entities |
|
| 50,070 |
|
|
| 66,796 |
|
Gain on sale of interest in unconsolidated entities |
|
| (7,323 | ) |
|
| — |
|
Gain on sale of real estate, net |
|
| (45,880 | ) |
|
| (67,016 | ) |
Impairment of real estate assets |
|
| 107,043 |
|
|
| 110,334 |
|
Share-based compensation |
|
| 1,427 |
|
|
| 892 |
|
Depreciation and amortization |
|
| 8,715 |
|
|
| 22,603 |
|
Amortization of deferred financing costs |
|
| 211 |
|
|
| 211 |
|
Amortization of above and below market leases, net |
|
| 93 |
|
|
| 121 |
|
Straight-line rent adjustment |
|
| 14,638 |
|
|
| (4,320 | ) |
Interest on sale-leaseback financing obligations |
|
| — |
|
|
| 25 |
|
Litigation settlement |
|
| — |
|
|
| 35,000 |
|
Change in operating assets and liabilities |
|
|
|
|
|
| ||
Tenants and other receivables |
|
| 4,666 |
|
|
| (10,370 | ) |
Prepaid expenses, deferred expenses and other assets |
|
| 5,017 |
|
|
| 1,713 |
|
Accounts payable, accrued expenses and other liabilities |
|
| (12,511 | ) |
|
| (1,420 | ) |
Net cash used in operating activities |
|
| (31,527 | ) |
|
| (54,501 | ) |
CASH FLOW FROM INVESTING ACTIVITIES |
|
|
|
|
|
| ||
Investment in unconsolidated entities |
|
| (11,127 | ) |
|
| (15,432 | ) |
Distributions from unconsolidated entities |
|
| — |
|
|
| 160 |
|
Net proceeds from sale of real estate |
|
| 518,446 |
|
|
| 168,186 |
|
Net proceeds from disposition of interest in unconsolidated entities |
|
| 49,376 |
|
|
| — |
|
Development of real estate |
|
| (49,903 | ) |
|
| (53,032 | ) |
Net cash provided by investing activities |
|
| 506,792 |
|
|
| 99,882 |
|
CASH FLOW FROM FINANCING ACTIVITIES |
|
|
|
|
|
| ||
Repayment of term loan |
|
| (480,000 | ) |
|
| — |
|
Preferred dividends paid |
|
| (2,450 | ) |
|
| (2,450 | ) |
Net cash used in financing activities |
|
| (482,450 | ) |
|
| (2,450 | ) |
Net (decrease) and increase in cash and cash equivalents |
|
| (7,185 | ) |
|
| 42,931 |
|
Cash and cash equivalents, and restricted cash, beginning of period |
|
| 144,939 |
|
|
| 113,753 |
|
Cash and cash equivalents, and restricted cash, end of period |
| $ | 137,754 |
|
| $ | 156,684 |
|
- 6 -
SERITAGE GROWTH PROPERTIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited, amounts in thousands)
|
| Six Months Ended June 30, |
| |||||
|
| 2023 |
|
| 2022 |
| ||
RECONCILIATION OF CASH AND CASH EQUIVALENTS AND RESTRICTED CASH |
|
|
|
|
|
| ||
Cash and cash equivalents at beginning of period |
| $ | 133,480 |
|
| $ | 106,602 |
|
Restricted cash at beginning of period |
|
| 11,459 |
|
|
| 7,151 |
|
Cash and cash equivalents and restricted cash at beginning of period |
| $ | 144,939 |
|
| $ | 113,753 |
|
|
|
|
|
|
|
| ||
Cash and cash equivalents at end of period |
| $ | 124,850 |
|
| $ | 149,529 |
|
Restricted cash at end of period |
|
| 12,904 |
|
|
| 7,155 |
|
Cash and cash equivalents and restricted cash at end of period |
| $ | 137,754 |
|
| $ | 156,684 |
|
|
| Six Months Ended June 30, |
| |||||
|
| 2023 |
|
| 2022 |
| ||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION |
|
|
|
|
|
| ||
Cash payments for interest |
| $ | 29,690 |
|
| $ | 52,188 |
|
Capitalized interest |
|
| 2,513 |
|
|
| 7,674 |
|
Income taxes (refunded) paid |
|
| (51 | ) |
|
| 228 |
|
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND |
|
|
|
|
|
| ||
Development of real estate financed with accounts payable |
| $ | 21,799 |
|
| $ | 28,561 |
|
Preferred dividends declared and unpaid |
|
| 1,225 |
|
|
| 1,225 |
|
Transfer to / (from) real estate assets held for sale |
|
| (357,533 | ) |
|
| 117,013 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
- 67 -
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(a) 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.
OnPrior to the adoption of the Company’s Plan of Sale (defined below), Seritage was principally engaged in the ownership, development, redevelopment, disposition, management and leasing of diversified retail and mixed-use properties throughout the United States. Seritage will continue to actively manage each remaining location until such time as each property is sold. As of June 11,30, 2023, the Company’s portfolio consisted of interests in 50 properties comprised of approximately 6.8 million square feet of gross leasable area (“GLA”) or build-to-suit leased area, approximately 157 acres held for or under development until time of sale and approximately 3.6 million square feet or approximately 303 acres to be disposed of in its current state. The portfolio consists of approximately 5.2 million square feet of GLA held by 38 consolidated properties (such properties, the “Consolidated Properties”) and 1.7 million square feet of GLA held by 12 unconsolidated properties (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 three 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 operated under either the “Original JV Master Leases,” respectively).
As of March 15, 2021, the Company no longer had any remaining properties leased to Transform Holdco LLC (“Holdco”), an affiliate of ESL Investments, Inc. or Sears or Kmart brand. At 85 Wholly Owned Properties, third-party tenants under direct leases occupiedHoldings.
On March 1, 2022, the Company announced that its Board of Trustees had commenced a portionprocess to review a broad range of leasable space alongside Sears or Kmart, and 41 Wholly Owned Properties were leased only to third parties. A substantial majoritystrategic alternatives. The Board of Trustees has created a Special Committee (the “Special Committee”) of the spaceCompany’s Board of Trustees to oversee the process. The Special Committee has retained Barclays as its financial advisor. The Company’s strategic review process remains ongoing as the Company executes sales pursuant to the Plan of Sale. There can be no assurance that the review process will result in any transaction or that the Company will be successful in fully executing the Plan of Sale.
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 ended 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 JV PropertiesCompany with greater flexibility to use its free cash flow. Effective January 1, 2022, the Company is also leased (or subleased)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 since inception and through the 2021 tax year, and existing REIT requirements and limitations, including those established by the JVsCompany’s organizational documents, remained in place until December 31, 2021.
As a result of the Company’s change in corporate structure to Sears Holdingsa taxable C Corporation in fiscal year 2022, the Company incurred a one-time, non-cash deferred tax benefit of approximately $161.3 million during the three months ended March 31, 2022. The Company also recorded a full valuation allowance against the deferred tax asset pursuant to ASC 740, Income Taxes, as discussed in more detail below.
The Company sought a shareholder vote to approve a proposed plan of sale of the Company’s assets and dissolution (the “Plan of Sale”) that would 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 allows 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. On July 6, 2022, Edward Lampert, the Company’s former Chairman, entered into a Voting and Support Agreement under master lease agreementswhich 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 June 30, 2023, Mr. Lampert owns approximately 26.8% of the Company’s outstanding Class A common shares, and Seritage, including its consolidated subsidiaries, is the sole owner of all outstanding Operating Partnership interests.
- 8 -
The affirmative vote of at least two-thirds of all outstanding common shares of the Company was required to approve the Plan of Sale. The 2022 Annual Meeting of Shareholders occurred on October 24, 2022, following the Company's filing of a final proxy statement with the SEC on September 14, 2022. During the meeting, the Plan of Sale was approved by the shareholders. The strategic review process remains ongoing as the Company executes the Plan of Sale. There can be no assurance that the review process will result in any transaction or that the Company will be successful in fully executing on the Plan of Sale.
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. Property rental income, which is the “JV Master Leases”). The Master LeaseCompany’s primary source of operating cash flow, did not fully fund Obligations and certain development expenditures incurred during the six months ended June 30, 2023 and the JV Master LeasesCompany incurred net operating cash outflows of $31.5 million. Additionally, the Company generated investing cash inflows of $506.8 million during the six months ended June 30, 2023, 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 six months ended June 30, 2023, the Company sold 43 consolidated assets and five unconsolidated properties for gross proceeds of $588.5 million and made aggregate principal prepayments of $480.0 million on the Term Loan Facility, reducing the outstanding Term Loan Facility balance to $550.0 million at June 30, 2023. Pursuant to the terms of the Term Loan Facility, by reducing the outstanding principal balance to $800 million, the maturity date for the Term Loan Facility was extended for two years to July 31, 2025.
Going Concern
In accordance with ASC 205-40, Presentation of Financial Statements - Going Concern, for each annual and interim reporting period, management evaluates 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. Management has determined that it is probable its plans, as described under Liquidity, will be effectively implemented within one year after the date the financial statements are issued and that these actions will provide the necessary cash flows to fund the Company’s obligations and development expenditures for the one-year period.
As the outstanding balance of the Term Loan Facility is not due within the 12 month period subsequent to the date that the financial statements are issued, the Company’s Term Loan Facility is not factored into the Company’s analysis as a current obligation.
The anticipated proceeds from the sales of assets under contract and expected minimum proceeds from the exercise of its put options of $160.2 and existing cash on hand, would allow the Company to fund its Obligations and certain development expenditures. As a result, the JVs withCompany has concluded that management’s plans do alleviate substantial doubt about the rightCompany’s ability to recapture certain space from Sears Holdings at each property for retenanting or redevelopment purposes.continue as a going concern.
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, 2016.2022. 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, 20172023 may not be indicative of the results that may be expected for any other interim period or for the year ending December 31, 2017.2023. Capitalized terms used, but not defined in this quarterly report, have the same meanings as set forth in our Annual Report.
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.
- 7 -
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, 2023, the Company qualifiesconsolidates one VIE in which we are considered the primary beneficiary, as itsthe Company has the power to direct the activities of the entity, specifically surrounding the development plan. As of June 30, 2023 and
- 9 -
December 31, 2022, 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.
To the extent such variable interests are in entities that cannot beare not evaluated under the VIE model, the Company evaluates its interests using the voting interest entity model. The
As of June 30, 2023, the Company, and its wholly owned subsidiaries, holds a 60.9%100% 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
Certain prior period amounts, if any, have been reclassified to conform to the Company as of January 1, 2016, it has been concluded 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, the 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 certain of the disclosure requirements associated with investments in VIEs.current period’s presentation.
The portions of consolidated entities not owned by the Company and the Operating Partnership are presented as non-controlling interests as of and during the periods presented.
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 one 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.
- 8 -
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:
| 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 suchThe Company recognized impairment losses were recognized forcharges of $104.5 million and $109.3 million during the three or nine months ended SeptemberJune 30, 20172023 and 2022, respectively, and impairment charges of $107.0 million and $110.3 million during the six months ended June 30, 2023 and 2022, 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.
- 10 -
The following table summarizes our gain on sale of real estate, net during the three and six months ended June 30, 2016.2023 and 2022 (in millions):
|
| Three Months Ended June 30, |
|
| Six Months Ended June 30, |
| ||||||||||
|
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||
Dispositions to third parties |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Gross proceeds |
| $ | 248.7 |
|
| $ | 163.4 |
|
| $ | 539.5 |
|
| $ | 172.3 |
|
Gain on sale of real estate, net |
|
| 33.5 |
|
|
| 68.0 |
|
|
| 45.9 |
|
|
| 67.0 |
|
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, 2023, nine properties, including three partial sites and pad sites, were classified as held for sale with assets of $98.1 million and no liabilities, and, as of December 31, 2022, 34 properties, including three partial sites and pad sites, were classified as held for sale with assets of $455.6 million and no liabilities.
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.
- 9 -
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 $12.7 million and $32.5 million in impairment losses were recognizedin investments in unconsolidated entities for the three or nineand six months ended SeptemberJune 30, 2017 or September2023 and 2022, respectively.
Restricted Cash
As of June 30, 2016.
Cash2023 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, 2022, respectively, restricted cash represents cash deposited in escrow accountscollateral for a letter of credit and cash escrowed for development purposes.
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. 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
- 11 -
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 an increase to rental income of $1.7 million and a direct write-offreduction to rental income of $0.4 million during the three months ended June 30, 2023 and 2022, respectively, as a result of the specificCompany’s evaluation of collectability. The Company recorded a reduction to rental income of $0.1 million and $0.2 million during the six months ended June 30, 2023 and 2022, respectively. In addition, the Company recorded a reduction of income of previously recorded straight-line rent receivable will be made. For accruedof $3.8 million and $0.1 million for the three months ended June 30, 2023 and 2022, respectively. The Company recorded a reduction of income of previously recorded straight-line rent of $14.7 million and $0.1 million for the six months ended June 30, 2023 and 2022, respectively. During the three and six months ended June 30, 2023 there was no impact on income related to deferral agreements. During the three and six months ended June 30, 2022, the Company recorded an increase to rental revenuesincome of $0.2 million and $0.1 million related to the straight-line method of reporting rental revenue, the Company performs a periodic review of receivable balances to assess the risk of uncollectible amounts and establish appropriate provisions.allowance for deferral agreements, respectively.
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 of tenant and other receivables on the condensed consolidated balance sheets.
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.
- 10 -
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:
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|
|
|
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:
|
|
|
|
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:
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|
|
|
|
|
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.
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.
- 1112 -
Stock-BasedShare-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 utilized 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, 2017,2023, the Company'sCompany has two tenants that comprise 33.7% of annualized based rent, with no other tenants exceeding 10.0% of annualized based rent. The Company’s portfolio of 230 Wholly Owned38 Consolidated Properties and 28 JV12 Unconsolidated Properties was diversified by location across 49 states and Puerto Rico.18 states.
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 no Class C common shares outstanding.
Class B non-economic common shares are excluded from earningsearnings/(loss) 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 no 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 earningsearnings/(loss) per share.
Income Taxes
Recently Issued Accounting Pronouncements
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 2017-01 which changes the definition of a businessfuture tax consequences attributable to exclude acquisitions where substantially all of the fair value of the assets acquired are concentrated in a single identifiable asset or a group of similar identifiable assets. While there are various differences between the accounting for an asset acquisitionfinancial 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 those temporary differences and carryforwards are expected to be recovered or settled. The effect on deferred tax assets and liabilities as a business combination,result of a change in tax rates is recognized as income in the period that includes the enactment date. For years prior to 2022, the Company expects thatwas taxed as a REIT and did not expect to pay federal, state or local income taxes at the largest impact will beREIT level (including its qualified REIT subsidiaries). While a REIT, the capitalizationCompany was required to distribute at least 90% of transaction costs for asset acquisitions which are expensed for business combinations. ASU 2017-01 is effective,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 a prospective basis, for interim and annual periods beginning after January 1, 2019; early adoption is permitted. The Company has chosen to early adopt ASU 2017-01 during the current period on a prospective basis andits 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.
The Inflation Reduction Act of 2022 was enacted on August 16, 2022 and is effective January 1, 2023. The Inflation Reduction Act includes a 15% corporate alternative minimum tax (the “CAMT”) based on the adjusted financial statement income (“book income”) of applicable corporations. The CAMT generally applies to corporations with average annual book income over a 3-year period
- 13 -
exceeding $1 billion. The Company does not expect this legislation to have an impacta material effect on the condensed consolidated financial statements.
Deferred tax assets are reduced by a valuation allowance when it is more likely than not that some portion or all of the deferred 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 November 2016,making such determination, management considers available positive and negative evidence, including future reversals of existing taxable temporary differences, future taxable income, and the FASB issued ASU 2016-18, "Statementimplementation of Cash Flows - Restricted Cash." ASU 2016-18 requiresprudent tax planning strategies. In the event 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 2016-18Company 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):
|
| 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 expectsable 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 venturesutilize its deferred tax assets in excess of cumulative equity in earningstheir recorded amount, the valuation allowance 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 andreduced with 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 leasereduction to income tax expense. The Company is currently assessing the impact that adoption of this guidance will have on its condensed consolidated financial statements and footnote disclosures.
Recently Issued Accounting Pronouncements
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 2015-16not adopted any Accounting Standards Updates (“ASUs”) issued by the FASB during the current period onthree and six months ended June 30, 2023. 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 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 asstatements 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.Company.
- 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, 20172023 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 liabilities2022 (in thousands):
September 30, 2017 |
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| ||||||||||||
June 30, 2023 |
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|
|
|
|
|
| |||||||||||||||||
|
| Gross |
|
| Accumulated |
|
|
|
|
|
| Gross |
|
| Accumulated |
|
|
|
| |||||
Lease Intangible Assets |
| Asset |
|
| Amortization |
|
| Balance |
|
| Asset |
|
| Amortization |
|
| Balance |
| ||||||
In-place leases, net |
| $ | 553,656 |
|
| $ | (243,872 | ) |
| $ | 309,784 |
|
| $ | 3,387 |
|
| $ | (1,983 | ) |
| $ | 1,404 |
|
Below-market ground leases, net |
|
| 11,766 |
|
|
| (457 | ) |
|
| 11,309 |
| ||||||||||||
Above-market leases, net |
|
| 8,925 |
|
|
| (2,789 | ) |
|
| 6,136 |
|
|
| 435 |
|
|
| (315 | ) |
|
| 120 |
|
Total |
| $ | 574,347 |
|
| $ | (247,118 | ) |
| $ | 327,229 |
|
| $ | 3,822 |
|
| $ | (2,298 | ) |
| $ | 1,524 |
|
|
| Gross |
|
| Accumulated |
|
|
|
|
|
| Gross |
|
| Accumulated |
|
|
|
| |||||
Lease Intangible Liabilities |
| Liability |
|
| Amortization |
|
| Balance |
|
| Liability |
|
| Amortization |
|
| Balance |
| ||||||
Below-market leases, net |
| $ | 19,730 |
|
| $ | (4,732 | ) |
| $ | 14,998 |
|
| $ | 1,602 |
|
| $ | (668 | ) |
| $ | 934 |
|
Total |
| $ | 19,730 |
|
| $ | (4,732 | ) |
| $ | 14,998 |
|
| $ | 1,602 |
|
| $ | (668 | ) |
| $ | 934 |
|
December 31, 2016 |
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| ||||||||||||
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| ||||||||||||
December 31, 2022 |
|
|
|
|
|
|
| |||||||||||||||||
|
| Gross |
|
| Accumulated |
|
|
|
|
|
| Gross |
|
| Accumulated |
|
|
|
| |||||
Lease Intangible Assets |
| Asset |
|
| Amortization |
|
| Balance |
|
| Asset |
|
| Amortization |
|
| Balance |
| ||||||
In-place leases, net |
| $ | 592,871 |
|
| $ | (146,964 | ) |
| $ | 445,907 |
|
| $ | 8,614 |
|
| $ | (6,978 | ) |
| $ | 1,636 |
|
Below-market ground leases, net |
|
| 11,766 |
|
|
| (305 | ) |
|
| 11,461 |
| ||||||||||||
Above-market leases, net |
|
| 8,964 |
|
|
| (1,933 | ) |
|
| 7,031 |
|
|
| 908 |
|
|
| (753 | ) |
|
| 155 |
|
Total |
| $ | 613,601 |
|
| $ | (149,202 | ) |
| $ | 464,399 |
|
| $ | 9,522 |
|
| $ | (7,731 | ) |
| $ | 1,791 |
|
|
| Gross |
|
| Accumulated |
|
|
|
|
|
| Gross |
|
| Accumulated |
|
|
|
| |||||
Lease Intangible Liabilities |
| Liability |
|
| Amortization |
|
| Balance |
|
| Liability |
|
| Amortization |
|
| Balance |
| ||||||
Below-market leases, net |
| $ | 20,011 |
|
| $ | (3,184 | ) |
| $ | 16,827 |
|
| $ | 1,826 |
|
| $ | (848 | ) |
| $ | 978 |
|
Total |
| $ | 20,011 |
|
| $ | (3,184 | ) |
| $ | 16,827 |
|
| $ | 1,826 |
|
| $ | (848 | ) |
| $ | 978 |
|
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, 20172023 and September 30, 2016, respectively, and $0.9 million and $0.9 million for the nine months ended September 30, 2017 and September 30, 2016,2022, 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, 20172023 and September 30, 2016, respectively, and $150 thousand for the nine months ended September 30, 2017 and September 30, 2016,2022, 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$0.1 million and $27.4$0.6 million for the three months ended SeptemberJune 30, 20172023 and September 30, 2016,2022, respectively and $124.3$0.2 million and $72.1$1.3 million for the ninesix months ended SeptemberJune 30, 20172023 and September 30, 2016,2022, respectively. Future estimated amortization of acquired in-placethese leases intangibles is set forth below (in thousands):
|
| (Above) / below market leases, net |
|
| Below market ground lease |
|
| In-place leases |
| |||
Remainder of 2023 |
| $ | 13 |
|
| $ | 101 |
|
| $ | 154 |
|
2024 |
|
| 26 |
|
|
| 203 |
|
|
| 309 |
|
2025 |
|
| 35 |
|
|
| 203 |
|
|
| 203 |
|
2026 |
|
| 54 |
|
|
| 203 |
|
|
| 82 |
|
2027 |
|
| 54 |
|
|
| 203 |
|
|
| 77 |
|
2028 |
|
| 54 |
|
|
| 203 |
|
|
| 77 |
|
Thereafter |
|
| 579 |
|
|
| 9,027 |
|
|
| 501 |
|
- 14 -
Remainder of 2017 |
| $ | 15,521 |
|
2018 |
|
| 42,303 |
|
2019 |
|
| 40,543 |
|
2020 |
|
| 40,097 |
|
2021 |
|
| 39,313 |
|
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, 2023, the Company had investments in seven unconsolidated entities as follows:
|
|
|
|
|
| Seritage % |
| # of |
| Total |
| |
Unconsolidated Entities |
| Entity Partner(s) |
| Ownership |
| Properties |
| GLA |
| |||
GS Portfolio Holdings II LLC |
| Brookfield Properties Retail |
| 50.0% |
| 2 |
|
| 136,000 |
| ||
GS Portfolio Holdings (2017) LLC |
| Brookfield Properties Retail |
| 50.0% |
| 3 |
|
| 262,500 |
| ||
SPS Portfolio Holdings II LLC |
| Simon Property Group, Inc. |
| 50.0% |
| 3 |
|
| 275,700 |
| ||
Mark 302 JV LLC |
| An investment fund managed |
| 50.0% |
| 1 |
|
| 51,500 |
| ||
SI UTC LLC |
| A separate account advised by |
| 50.0% |
| 1 |
|
| 106,200 |
| ||
Tech Ridge JV Holding LLC |
| An affiliate of |
| 50.0% |
| 1 |
|
| — |
| ||
Landmark Land Holdings, LLC |
| The Howard Hughes Corporation and Foulger-Pratt |
| 31.3% |
| 1 |
|
| — |
| ||
|
|
|
|
|
|
|
| 12 |
|
| 831,900 |
|
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 |
|
|
|
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.
In 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, 2023 |
| |||||
Unconsolidated Entities |
| Contribution Date |
| Contribution Value |
|
| Gain (Loss) |
| ||
2019 |
|
|
|
|
|
|
|
| ||
Tech Ridge JV (1) |
| September 27, 2019 |
| $ | 3.0 |
|
| $ | 0.1 |
|
- 15 -
Subsequent to September 30, 2017, the Company agreed to sell to SimonThe following tables present combined condensed financial data for the Company’s 50% JV Interestsunconsolidated entities (in thousands):
|
| June 30, 2023 |
|
| December 31, 2022 |
| ||
ASSETS |
|
|
|
|
|
| ||
Investment in real estate |
|
|
|
|
|
| ||
Land |
| $ | 207,508 |
|
| $ | 263,169 |
|
Buildings and improvements |
|
| 393,538 |
|
|
| 419,920 |
|
Accumulated depreciation |
|
| (73,869 | ) |
|
| (68,482 | ) |
|
|
| 527,177 |
|
|
| 614,607 |
|
Construction in progress |
|
| 144,164 |
|
|
| 219,870 |
|
Net investment in real estate |
|
| 671,341 |
|
|
| 834,477 |
|
Cash and cash equivalents |
|
| 37,930 |
|
|
| 29,072 |
|
Investment in unconsolidated entities |
|
| 53,901 |
|
|
| 55,247 |
|
Tenant and other receivables, net |
|
| 5,408 |
|
|
| 5,041 |
|
Other assets, net |
|
| 45,577 |
|
|
| 14,245 |
|
Total assets |
| $ | 814,157 |
|
| $ | 938,082 |
|
|
|
|
|
|
|
| ||
LIABILITIES AND MEMBERS' INTERESTS |
|
|
|
|
|
| ||
Liabilities |
|
| 495 |
|
|
| — |
|
Accounts payable, accrued expenses and other liabilities |
|
| 88,555 |
|
|
| 52,808 |
|
Total liabilities |
|
| 89,050 |
|
|
| 52,808 |
|
|
|
|
|
|
| |||
Members' Interest |
|
|
|
|
|
| ||
Additional paid in capital |
|
| 729,375 |
|
|
| 957,154 |
|
Retained earnings (accumulated deficit) |
|
| (4,268 | ) |
|
| (71,880 | ) |
Total members' interest |
|
| 725,107 |
|
|
| 885,274 |
|
Total liabilities and members' interest |
| $ | 814,157 |
|
| $ | 938,082 |
|
|
| Three Months Ended June 30, |
|
| Six Months Ended June 30, |
| ||||||||||
|
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||
Total revenue |
| $ | 5,072 |
|
| $ | 7,919 |
|
| $ | 11,376 |
|
| $ | 15,759 |
|
Property operating expenses |
|
| (2,852 | ) |
|
| (3,110 | ) |
|
| (5,845 | ) |
|
| (7,036 | ) |
Depreciation and amortization |
|
| (4,563 | ) |
|
| (6,503 | ) |
|
| (9,538 | ) |
|
| (14,011 | ) |
Operating loss |
|
| (2,343 | ) |
|
| (1,694 | ) |
|
| (4,007 | ) |
|
| (5,288 | ) |
Other expenses |
|
| (115 | ) |
|
| (826 | ) |
|
| (391 | ) |
|
| (2,260 | ) |
Gains (losses) and (impairments) |
|
| (24,918 | ) |
|
| (32,474 | ) |
|
| (95,718 | ) |
|
| (93,614 | ) |
Net loss |
| $ | (27,376 | ) |
| $ | (34,994 | ) |
| $ | (100,116 | ) |
| $ | (101,162 | ) |
Equity in loss of unconsolidated |
| $ | (13,698 | ) |
| $ | (33,720 | ) |
| $ | (50,070 | ) |
| $ | (66,796 | ) |
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 ventureIn 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 a quarterly impairment chargesanalysis pursuant to ASC 323, Equity Method and Joint Ventures. The Company utilizes 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 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, subsidiariesanalysis, other-than-temporary impairment 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$12.7 million and $134.2$32.5 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, butwas recorded against equity method investments in no event will the renewal rent be less than the rent payable in the immediately preceding lease year.
Revenues from the Master Leasethree unconsolidated entities for the three and ninesix months ended SeptemberJune 30, 20172023 and September2022, respectively.
During the three and six months ended June 30, 2016 are as follows (in thousands2023, the Company sold its interest in one unconsolidated entity, resulting in a gain of $7.3 million which is included on the condensed consolidated statements of operations.
During the three months ended June 30, 2023, the Company did not exercise any put rights. During the six months ended June 30, 2023, the Company exercised its put right on one Unconsolidated Property. The Company has exercised its put rights on seven Unconsolidated Properties since January 1, 2022. The Company closed on the sale of one exercised put right during the three and excluding straight-line rental incomesix
- 16 -
months ended June 30, 2023. During the year ended December 31, 2022, the Company closed on the sale of ($1.7)three of the previously exercised put rights. The Company’s partners assess impairment on its underlying assets pursuant to ASC 360, Property, Plant and Equipment, and recorded impairment on unconsolidated properties of $70.8 million and $2.3$61.1 million for the six months ended June 30, 2023 and 2022, respectively. The Company's 50% share of these impairment charges is included in equity in loss of unconsolidated entities on the condensed consolidated statements of operations. No such impairment was recorded during the three months ended June 30, 2023 and 2022, respectively.
Unconsolidated Entity Management and Related Fees
The Company acts as the operating partner and day-to-day manager for the Mark 302 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. During the three months ended June 30, 2023 and 2022, the Company recorded management and related fees of $0.4 million and $0.3 million, respectively. During the six months ended June 30, 2023 and 2022, the Company recorded management and related fees of $0.6 million and $2.1 million, respectively. These fees are included in management and other fee income on the condensed consolidated statements of operations. 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, 2023 are approximately as follows:
(in thousands) |
| June 30, 2023 |
| |
Remainder of 2023 |
| $ | 12,720 |
|
2024 |
|
| 26,593 |
|
2025 |
|
| 26,793 |
|
2026 |
|
| 24,538 |
|
2027 |
|
| 23,116 |
|
2028 |
|
| 20,077 |
|
Thereafter |
|
| 61,717 |
|
Total |
| $ | 195,554 |
|
The components of lease revenues for the three and six months ended June 30, 2023 and 2022 were as follows:
(in thousands) |
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||
|
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||
Fixed rental income |
| $ | 7,902 |
|
| $ | 21,341 |
|
| $ | 20,056 |
|
| $ | 45,119 |
|
Variable rental income |
|
| 1,404 |
|
|
| 4,482 |
|
|
| 508 |
|
|
| 9,083 |
|
Total rental income |
| $ | 9,306 |
|
| $ | 25,823 |
|
| $ | 20,564 |
|
| $ | 54,202 |
|
Lessee Disclosures
The Company has one ground lease and one corporate office lease which are classified as operating leases. As of June 30, 2023, and December 31, 2022, the outstanding amount of right-of-use, or ROU, assets were $14.9 million and $16.2 million, respectively, which is included in prepaid expenses, deferred expenses and other assets, net on the condensed consolidated balance sheets. During the three months ended June 30, 2023, the Company entered into a sublease agreement to sublease a portion of its corporate office. As a result, this triggered the need for an ROU impairment assessment and the Company determined that the ROU asset was impaired. The Company recorded impairment of $0.8 million which is included in impairment of real estate assets on the condensed consolidated statements of operations.
The Company recorded rent expense related to leased corporate office space of $0.3 million and $0.2 million for the three months ended SeptemberJune 30, 20172023 and September 30, 2016,2022, respectively and $0.1 million and $8.4$0.5 million for the ninesix months ended SeptemberJune 30, 20172023 and September 30, 2016, respectively):2022, respectively. Such rent expense is classified within general and administrative expenses in the condensed consolidated statements of operations.
|
| 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 Master Lease providesIn addition, the Company withrecorded ground rent expense of approximately $0.1 million for the right to recapture up to approximately 50% of the space occupied by Sears Holdings at each of the 224 Wholly Owned Properties initially includedthree and six months ended June 30, 2023 and 2022. Such ground rent expense is classified within property operating expenses in the Master Lease (subject to certain exceptions). Whilecondensed 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.
- 17 -
The Company expects to make cash payments on operating leases of $0.6 million for the remainder of 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 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($3.5) million.
The following table sets forth information related to the recapture right at more than 50 Wholly Owned Properties during anymeasurement of our lease year. In addition, Seritage has the right to recapture any automotive care centers which are free-standing or attachedliabilities 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, the Company will generally incur certain costs and expenses for the separation 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 has 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 the 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 SeptemberJune 30, 2017, the Company had exercised certain recapture rights at 45 properties:2023:
|
| June 30, 2023 |
| |
Weighted average remaining lease term (in years) |
|
| 11.0 |
|
Weighted average discount rate |
|
| 6.75 | % |
Cash paid for operating leases (in thousands) |
| $ | 1,161 |
|
|
|
| ||||
|
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| ||||
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| ||||
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| ||||
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The Master Lease also provides for certain rights to Sears Holdings to terminate the Master Lease with respect to Wholly Owned Properties that cease to be profitable for operation by Sears Holdings. In order to terminate the Master Lease with respect to a certain property, Sears Holdings must make a payment to the Company of an amount equal to one year of rent (together with taxes and other expenses) 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 rent under the Master Lease by more than 20% per annum.
As of September 30, 3017, Sears Holdings had terminated, or provided notice that it intended to exercise its 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 at 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.
- 18 -
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.
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- 19 -
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Note 6 – Debt
Mortgage Loans Payable
On July 7, 2015, pursuant to the Transaction, the Company entered into a mortgage loan agreement (the “Mortgage Loan Agreement”) and mezzanine loan agreement (collectively, the “Loan Agreements”), providing for term loans in an initial principal amount of approximately $1,161 million (collectively, the “Mortgage Loans”) and a $100 million future funding facility (the “Future Funding Facility”). Pursuant to the terms of the Loan Agreements, amounts available under the Future Funding Facility were fully drawn by the Company on June 30, 2017. Such amounts were deposited into a redevelopment reserve 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, the aggregate principal amount outstanding under the Mortgage Loans and the Future Funding Facility was $1,211 million.
Interest under the Mortgage Loans is due and payable on the payment dates, and all outstanding principal amounts are due when the loan matures on the payment date in July 2019, pursuant 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 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.
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 require the Company to obtain lender approval for certain major tenant leases or significant redevelopment projects. Such restrictions also include cash flow sweep provisions based upon certain measures 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 worth of not less than $1.0 billion and (ii) a minimum liquidity of not less than $50.0 million, throughout 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 of September 30, 2017, the unamortized balance of the Company’s debt issuance costs was $9.9 million as compared to $14.3 million as December 31, 2016.
Unsecured Term Loan Facility
On February 23, 2017 (the “Closing Date”)July 31, 2018, the Operating Partnership, as borrower, and the Company,, as guarantor, entered into a $200.0 million senior unsecured delayed drawSenior Secured Term Loan Agreement (the “Term Loan Agreement”) providing for a $2.0 billion term loan facility (the “Unsecured Term Loan”“Term Loan Facility”) with JPP, LLCBerkshire Hathaway Life Insurance Company of Nebraska (“JPP”Berkshire Hathaway”) as lender and JPP II, LLC, as lenders (collectively,administrative agent. The Term Loan Facility provided for an initial funding of $1.6 billion at closing and includes a $400.0 million incremental funding facility (the “Incremental Funding Facility”) subject to certain conditions described below. On February 2, 2023, the “Initial Lenders”),Company made a $230 million voluntary prepayment, reducing the unpaid principal balance to $800 million, and JPP, as administrative agent (the “Administrative Agent”)the debt maturity was extended for two years to July 31, 2025. The Company made additional voluntary prepayments aggregating $250 million during the second quarter of 2023, reducing the unpaid principal balance to $550 million at June 30, 2023. Subsequent to June 30, 2023, the Company made an additional $70 million in principal prepayments reducing the balance of our Term Loan Facility to $480 million.
LoansFunded amounts under the Unsecured Term Loan mayFacility bear interest at an annual rate of 7.0% and unfunded amounts under the Incremental Funding Facility are 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.
The Company’s ability to access 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 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) 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 requestednot less than $200 million, and (iii) the repayment by the Operating Partnership atof any time fromdeferred interest permitted under the Closing Date until thirty days prioramendment to the stated maturity date, upon five business days’ prior noticeTerm Loan Amendment as further described below. As of June 30, 2023, the Company has not yet achieved the requirements to access the Administrative Agent. Incremental Funding Facility.
The total commitmentTerm 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 lenders under the UnsecuredOperating Partnership. The Term Loan Facility 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 and (ii) the datesecured 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 maturitya first lien basis by a pledge 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 extensioncapital stock of the maturity date, or raise additional capital through a refinancing transaction or from the proceedsdirect subsidiaries 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 deferand the paymentguarantors, including its joint venture interests, except as prohibited by the organizational documents of interest which deferred amount would be addedsuch entities or any joint venture agreements applicable to such entities, and contains a requirement to provide mortgages and other customary collateral upon the outstanding principal balancebreach 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 loans.Company’s portfolio and during the year ended December 31, 2021, mortgages were recorded on the remaining unmortgaged properties in all but three locations.
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 thatFacility includes certain financial metrics to govern springing collateral requirements and certain covenant exceptions set forth in the Company at all times maintainTerm Loan Agreement, including: (i) a net worthtotal fixed charge coverage ratio of not less than $1.0 billion,1.00 to 1.00 for each fiscal quarter beginning with the fiscal quarter ending September 30, 2018 through the fiscal quarter ending June 30, 2023, and not less than 1.20 to 1.00 for each fiscal quarter thereafter; (ii) an unencumbered fixed charge coverage ratio of not less than 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, 2023, and 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.
- 18 -
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.
TheAs of June 30, 2023, the Company believes it is currentlywas 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. The Third Term Loan Amendment (defined below) executed on June 16, 2022 eliminates this requirement and allows the Company to dispose of assets without Berkshire Hathaway's consent. There are no other impacts from non-compliance with financial metrics.
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, 2023 and December 31, 2022, the unamortized balance of the Company’s debt issuance costs were $0.1 million and $0.2 million, respectively.
On May 5, 2020, the Operating Partnership and Berkshire Hathaway entered into an amendment (the “Term Loan Amendment”) to the Term Loan Agreement 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 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 condition to any borrowings under the $400.0 million Incremental Funding Facility under the Term Loan Agreement. The Company has paid all materialinterest 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 occurrence of a Financial Metric Trigger Event, as such term is defined under the Term Loan Agreement.
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 July 31, 2023. The outstanding principal balance was reduced to $800 million on February 2, 2023, and the Maturity Date has been extended to July 31, 2025.
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 use of such net proceeds will be subject to the terms and conditions of the Unsecured Term Loan.
Mr. 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 Term Loan were approved byAgreement, including but not limited to the Company’s Audit Committeerestricted payments and investments/loans covenants.
As of June 30, 2023, the Company’s BoardCompany has paid down a total of Trustees (with Mr. Edward S. Lampert recusing himself).$1.05 billion towards the Term Loan’s unpaid principal balance. The aggregate principal amount outstanding under the Term Loan Facility as of June 30, 2023 was $550 million. Subsequent to June 30, 2023, the Company made an additional $70 million in principal prepayments reducing the balance of our Term Loan Facility to $480 million.
- 2119 -
The Company hashad previously elected to be taxed as a REIT as defined under Section 856(c)856(a) 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 ended 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 since inception and through 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 $161.3 million during the three months ended March 31, 2022 and had a deferred tax benefit balance of $162.8 million as of December 31, 2022. As a result of ongoing operations and sales activity, the Company recognized a deferred tax benefit of $33.0 million and $38.5 million during the three and six months ended June 30, 2023. As of June 30, 2023, the Company has recorded a full valuation allowance of $201.3 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 utilized 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 2023 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 $201.3 million as of June 30, 2023 consist of book to tax basis differences, net operating losses, and carryover net operating losses. As discussed below, the Company has recorded a full valuation allowance on the deferred tax assets as of June 30, 2023 and 2022, respectively.
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, 2023. 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.
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
- 20 -
Assets and Liabilities Measured at Fair Value on a Recurring or Non-RecurringNonrecurring Basis
All derivative instruments are carriedThe following tables present the Company's assets measured at fair value and are valued using Level 2 input. The Company’s derivative instrumentson a non-recurring basis as of SeptemberJune 30, 20172023 and December 31, 2016 consisted2022, aggregated by the level in the fair value hierarchy within which those measurements fall:
|
| Balance |
|
| Fair Value Measurements Using |
| ||||||||||
Description (1) |
| June 30, 2023 |
|
| (Level 1) |
|
| (Level 2) |
|
| (Level 3) |
| ||||
Impaired real estate assets |
| $ | 216,768 |
|
| $ | 6,000 |
|
| $ | 13,800 |
|
| $ | 196,968 |
|
Impaired right-of-use assets |
|
| 3,020 |
|
|
| - |
|
|
| - |
|
|
| 3,020 |
|
Other-than-temporary impaired investments in unconsolidated entities |
|
| 108,116 |
|
|
| 67,414 |
|
|
| 40,702 |
|
|
| - |
|
(1) Represents non-recurring fair value measurement. The fair value is calculated as of the impairment date.
|
| Balance |
|
| Fair Value Measurements Using |
| ||||||||||
Description (1) |
| December 31, 2022 |
|
| (Level 1) |
|
| (Level 2) |
|
| (Level 3) |
| ||||
Impaired real estate assets |
| $ | 343,237 |
|
| $ | 68,125 |
|
| $ | 254,005 |
|
| $ | 21,107 |
|
Other-than-temporary impaired investments in unconsolidated entities |
|
| 153,215 |
|
|
| 23,795 |
|
|
| 38,124 |
|
|
| 91,296 |
|
(1) Represents non-recurring fair value measurement. The fair value is calculated as of the impairment date.
During the three months ended June 30, 2023 and 2022, respectively, in accordance with ASC 360-10, Property, Plant and Equipment, the Company recorded impairment losses of $104.5 million and $109.3 million, respectively, on real estate assets which are included in impairment on real estate assets within the condensed consolidated statements of operations. During the six months ended June 30, 2023 and 2022, respectively, the Company recorded impairment losses of $107.0 million and $110.3 million, respectively. The $104.5 million of impairment recorded during the three months ended June 30, 2023 is the result of continued increases to development and construction costs, deteriorating market conditions and, in certain instances excluding Aventura, the Company agreeing to sell a single interest rate cap. property for less than its carrying value. 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.
During the three and six months ended June 30, 2023 and 2022, respectively, in accordance with ASC 323, Equity Method and Joint Ventures, the Company recorded other-than-temporary impairment losses on investments in unconsolidated entities of $12.7 million and 32.5 million, respectively, as a result of the Company agreeing to sell Unconsolidated Properties for less than their carrying value.
The Company utilizes an independent third partyfair value estimates used to determine the impairment charges for consolidated and interest rateunconsolidated properties were determined primarily by discounted cash flow analyses, market pricing models to assist managementcomparable 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. The most significant unobservable inputs utilized in determining the fair value of this instrument.
these assets are capitalization rates and discount rates which were between 5.5% and 8.0%. Because of these inputs, we have determined that the fair values of these properties are classified within Level 3 of the fair value hierarchy. The most significant observable inputs utilized in determining the fair value of these assets are market comparables for land and building. Comparable data utilizes comparable sales, listings, sales contracts and letters of intent which are subject to judgment as to comparability to the Company’s interest rate cap at September 30, 2017 and December 31, 2016 was less than $0.1 million and approximately $0.7 million, respectively, and is included as a componentvalued property. Because these inputs are derived from observable market data, we have determined that the fair values of prepaid expenses, deferred expenses and other assets onthese properties are classified within Level 2 of the condensed consolidated balance sheets.
The Company has elected not to utilize hedge accounting, and therefore, the change in fair value is includedhierarchy. We consider fair values based upon the agreed-upon contract sales price to be classified within change inLevel 1 of the fair value of interest rate cap on the condensed consolidated statements of operations. 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 September 30, 2016. For the nine months ended September 30, 2017, the Company recorded a loss of $0.7 million compared to a loss of $1.9 million for the nine months ended September 30, 2016.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, 20172023 and December 31, 2016,2022, respectively, the estimated fair values of the Company’s debt obligations were $1.3$0.5 billion and $1.2$1.0 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.
- 2221 -
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.
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 Master Lease, Sears Holdings has indemnified the Company from certain environmental liabilities at the Wholly Owned Properties existing before, or caused by Sears Holdings during, the period in which each Wholly Owned Property is leased to Sears Holdings, including removal and remediation of all affected facilities and equipment constituting the automotive care center facilities (and each JV Master Lease includes a similar requirement of Sears Holdings). As of September 30, 2017 and December 31, 2016, the Company had approximately $11.2 million and $11.8 million, respectively, of restricted cash in a lender reserve account to fund potential environmental costs that were identified during due diligence related to the Transaction.
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,
Beginning in 2019, the Company discloseshad been in litigation related to the naturebankruptcy of Sears Holdings (the “Litigation”). On September 2, 2022, the United States Bankruptcy Court for the Southern District of New York entered an order approving a settlement amongst the parties to the Litigation and, on October 18, 2022, the Litigation was dismissed.
The Company made a settlement payment of $35.5 million based on the Company’s contributions to the settlement of the contingency,Litigation. This payment is recorded as litigation settlement in the consolidated statements of operations during the three and an estimatesix 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 possible loss, rangeCompany (the “D&O Insurers”). The Company’s lawsuit sought, among other things, declaratory relief and money damages as a result of loss, or disclosecertain of the fact that an estimate cannot be made.D&O Insurers refusal to pay certain costs and expenses related to the defense of the Litigation. During the year ended December 31, 2022, the Company reached settlement agreements with two of the D&O Insurers and received gross proceeds of $12.7 million, which was recorded in interest and other income in the consolidated statements of operations during the year ended December 31, 2022. During the three months ended March 31, 2023, the Company reached settlement agreements with the other two D&O Insurers for gross proceeds of $11.6 million. The Company received $11.6 million during the six months ended June 30, 2023, which is recorded in interest and other income in the consolidated statements of operations.
TheIn 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.
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 September 30, 2017,On July 6, 2022, Mr. Lampert beneficially owned a 39.1% interest in theconverted all Operating Partnership and approximately 3.8% and 100%Units (“OP Units”) to Class A common shares. As a result, he owns 26.8% of the outstanding Class A common shares as of June 30, 2023.
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).Lease.
Unsecured Term Loan
- 22 -
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 for services and reimbursement for certain employees. The Company paid Winthrop $0.4 million during the three months ended June 30, 2023 and 2022, respectively. The Company paid Winthrop $1.1 million and $0.7 million during the six months ended June 30, 2023 and 2022, respectively.
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, 2023 and December 31, 2022, respectively, the Company had incurred no development expenditures at properties owned by certain unconsolidated entities for which the Company will be repaid by the respective unconsolidated entities.
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, 20172023, the Company did not incur any fees under the TSA.exercised its put rights on one property. During the three and ninesix months ended SeptemberJune 30, 2016,2022, the Company incurred feesput two and four properties, respectively to two 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 and further amended and restated on January 4, 2023. 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, 2,344,589On July 6, 2022, ESL converted all Operating Partnership units were convertedUnits to Class A common shares.
As of September 30, 2017,a result, the Company, heldand its wholly owned subsidiaries, holds a 60.9%100% interest in the Operating Partnership and ESL held a 39.1% interest. The portions of consolidated entities not owned by the Company are presented as non-controlling interest as of and during the periods presented.June 30, 2023.
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, 28,001,4112023, 56,182,522 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 common shares.shares have a par value of $0.01 per share.
Class B Non-Economic Common Shares
During the nine months ended SeptemberAs of June 30, 2017, 154,0982023, there were no 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.
As of 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. 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 SharesDividends 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 2023 or 2022. 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 issued and outstanding. that 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 Class C non-voting common shares have economic rights, but do not have voting rights. Upon any transferBoard of a Class C non-voting common share to any person other than an affiliateTrustees will determine future distributions following the pay down of the holder of such share, such share shall automatically convert into one Class A common share.Term Loan Facility.
Subsequent to September 30, 2017, 671,231 net Class C non-voting common shares were converted to Class A common shares.
- 2423 -
The Company’s Board of Trustees declared the following common stock dividends on preferred shares during 20172023 and 2016, with holders of Operating Partnership units entitled to an equal distribution per Operating Partnership unit held on the record date:2022:
|
|
|
|
|
| Series A |
| |
Declaration Date |
| Record Date |
| Payment Date |
| Preferred Share |
| |
2023 |
|
|
|
|
|
|
| |
July 25 |
| September 29 |
| October 13 |
| $ | 0.43750 |
|
April 27 |
| June 30 |
| July 14 |
|
| 0.43750 |
|
February 15 |
| March 31 |
| April 17 |
|
| 0.43750 |
|
2022 |
|
|
|
|
|
|
| |
November 1 |
| December 30 |
| January 16, 2023 |
| $ | 0.43750 |
|
July 26 |
| September 30 |
| October 17 |
|
| 0.43750 |
|
April 26 |
| June 30 |
| July 15 |
|
| 0.43750 |
|
February 16 |
| 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 (loss)loss and the number of common shares used in the computations of “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, |
| ||||||||||
|
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||
Numerator - Basic and Diluted |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net loss |
| $ | (95,707 | ) |
| $ | (142,083 | ) |
| $ | (157,693 | ) |
| $ | (209,070 | ) |
Net loss attributable to non-controlling interests |
|
| — |
|
|
| 31,328 |
|
|
| - |
|
|
| 46,110 |
|
Preferred dividends |
|
| (1,225 | ) |
|
| (1,225 | ) |
|
| (2,450 | ) |
|
| (2,450 | ) |
Net loss attributable to common shareholders - Basic |
| $ | (96,932 | ) |
| $ | (111,980 | ) |
| $ | (160,143 | ) |
| $ | (165,410 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Denominator - Basic and Diluted |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Weighted average Class A common shares outstanding |
|
| 56,173 |
|
|
| 43,677 |
|
|
| 56,116 |
|
|
| 43,656 |
|
Weighted average Class A common shares |
|
| 56,173 |
|
|
| 43,677 |
|
|
| 56,116 |
|
|
| 43,656 |
|
Weighted average Class A common shares |
|
| 56,173 |
|
|
| 43,677 |
|
|
| 56,116 |
|
|
| 43,656 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Loss per share attributable to Class A |
| $ | (1.73 | ) |
| $ | (2.56 | ) |
| $ | (2.85 | ) |
| $ | (3.79 | ) |
Loss per share attributable to Class A |
| $ | (1.73 | ) |
| $ | (2.56 | ) |
| $ | (2.85 | ) |
| $ | (3.79 | ) |
- 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, 20162023 and 2022, respectively, 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.
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, 20162023 and 2022, respectively, 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, 20172023 and December 31, 2016,2022, there were 245,570379,718 and 216,348535,650 shares, respectively, of non-vested restricted shares and share units outstanding.
- 24 -
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 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, 2017:2023:
|
|
|
|
|
| |||||||||||
|
| Nine Months Ended September 30, 2017 |
|
| Six Months Ended June 30, 2023 |
| ||||||||||
|
|
|
|
|
| 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 |
|
|
| 535,650 |
|
| $ | 14.31 |
|
|
|
|
|
|
|
|
|
| ||||||||
Restricted shares granted |
|
| 62,135 |
|
|
| 45.23 |
| ||||||||
Restricted shares vested |
|
| (32,345 | ) |
|
| 33.02 |
|
|
| (144,173 | ) |
|
| 13.81 |
|
Restricted shares forfeited |
|
| (568 | ) |
|
| 45.23 |
|
|
| (11,759 | ) |
|
| 24.52 |
|
|
|
|
|
|
|
|
|
| ||||||||
Unvested restricted shares at end of period |
|
| 245,570 |
|
| $ | 41.33 |
|
|
| 379,718 |
|
| $ | 14.18 |
|
The Company recognized $0.4$0.6 million and $0.3$0.5 million in compensation expense related to the restricted shares for the three months ended SeptemberJune 30, 20172023 and September 30, 2016,2022, respectively and $1.2$1.4 million and $0.82$0.9 million in compensation expensefor the six months ended June 30, 2023 and 2022, 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, 2017,2023, there were approximately $10.2$3.1 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 1.4 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 realize2022, there were approximately $7.0$6.3 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.
- 25 -
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:
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| |||||
|
|
|
| |||
|
|
|
| |||
|
|
|
| |||
|
|
|
| |||
|
|
|
| |||
|
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|
|
- 27 -
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, 2016.2022. 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)Prior to the adoption 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 agreementCompany’s Plan of the Operating Partnership,Sale (defined below), 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 arewas principally engaged in the acquisition, ownership, development, redevelopment, disposition, management and leasing of diversified retail real estateand mixed-use properties throughout the United States. Seritage will continue to actively manage each remaining location until such time as each property is sold. As of SeptemberJune 30, 2017, our2023, the Company’s portfolio included over 40.0consisted of interests in 50 properties comprised of approximately 6.8 million square feet of gross leasable area (“GLA”), consisting or build-to-suit leased area, approximately 157 acres held for or under development until time of 230 Wholly Owned Properties totaling over 35.4sale and approximately 3.6 million square feet or approximately 303 acres to be disposed of in its current state. The portfolio consists of approximately 5.2 million square feet of GLA across 49 statesheld by 38 consolidated properties (such properties, the “Consolidated Properties”) and Puerto Rico, and interests in 28 JV Properties totaling approximately 5.11.7 million square feet of GLA across 15 states.held by 12 unconsolidated properties (such properties, the “Unconsolidated Properties”).
AsReview of September 30, 2017, 171Strategic Alternatives
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 Board of Trustees created a special committee of the Company’s wholly-owned properties were leasedBoard of Trustees (the “Special Committee”) to Sears Holdings pursuantoversee the process. The Special Committee has retained a financial advisor. The Company sought a shareholder vote to approve a proposed plan of sale of our assets and dissolution (the “Plan of Sale”) that would allow our board to sell all of our assets, distribute the net proceeds to shareholders and dissolve the Company.
The 2022 Annual Meeting of Shareholders occurred on October 24, 2022, at which time the Plan of Sale was approved by the shareholders, following our filing of a final proxy statement with the SEC on September 14, 2022. See Note 1 – Organization of the Notes to the Master Leasecondensed 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. The strategic review process remains ongoing as the Company executes the Plan of Sale. There can be no assurance that the review process will result in any transaction or that the Company will be successful in fully executing on the Plan of Sale.
Impairment of Real Estate Assets and operated under eitherInvestments in Unconsolidated Entities
In the Sears or Kmart brand. At 85 properties, third-party tenants under direct leases occupyfirst quarter of 2022, we announced a portionReview of leasable space alongside SearsStrategic Alternatives and Kmart, and 41 properties are leased onlyduring the second quarter determined that the best plan for all assets is to third parties. A substantial majoritypursue sales. As a result of the space atforegoing, the JV Properties is also leasedCompany’s anticipated holding periods with respect to Sears Holdings under the JV Master Leases.
We generate revenues primarily by leasingcertain assets has changed. This affected 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%view of recoverability of the space occupied by Sears Holdings at eachcarrying value of those assets over their respective holding periods and during the 224 Wholly Owned Properties initiallyyear ended December 31, 2022, $126.9 million of impairment was recorded. Due to increasing development and construction costs, deteriorating market conditions and, in certain instances excluding Aventura, agreeing to sell below carrying value, we have recognized $104.5 million and $107.0 million of impairment losses during the three and six months ended June 30, 2023, respectively, which are 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 tenantsimpairment 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 which we expect to be able to reposition and re-lease those stores on potentially superior terms determined by us and for our own account.
As 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.
- 28 -
While the Company continues to assess the impact of the natural disasters (wildfires in California and Hurricanes Harvey, Irma, and Maria) that occurred during the quarter ended September 30, 2017 on our operations our ability to collect rent from tenants, we do not believe these natural disasters will have a material impact on our operating results or financial position. All stores occupied by Sears Holdings are currently open for business and 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 GGP the Company’s 50% JV Interests in eight of the 12real estate 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;operations. We recognized $12.7 million of other-than-temporary impairment losses to our investments in unconsolidated entities during the three and (ii) contributed five Wholly Owned Propertiessix months ended June 30, 2023, respectively. 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.
- 26 -
REIT Election
On March 31, 2022, the GGP II JVCompany announced that its Board of Trustees, with the recommendation of the Special Committee, approved a plan to terminate the Company's REIT status and soldbecome a 50% interesttaxable C Corporation, effective for the year ended 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 since inception and through 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 new JV PropertiesNotes to GGP for $57.5 million and recorded a gain of $13.0 million which is included in gain on sale of real estate within the condensed consolidated financial statements included in Part I, Item 1 of operations.this Quarterly Report on Form 10-Q.
As a resultBusiness Strategies
The Company’s primary objective is to create value for its shareholders through the monetization of the transactions,Company's assets through the Plan of Sale, which can be suspended by the Board of Trustees. Additionally, 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, to the extent that we believe these actions would be accretive to shareholder value.
The Company continues to assess the best use for all sites within its portfolio, including residential, retail and converting land area to pad sites. In order to achieve its objective, the Company reduced amounts outstanding under its mortgage loan by $50.6 million and received approximately $171.6 million of additional cash proceeds before closing costs, which it intends to useexecute the following strategies:
Simon Transaction
Subsequentsale.
Upon closing, which is expected in the fourth quarter of 2017, the Company would realize approximately $7.0 million ofsuch value creation aboveopportunities through entitlements, leasing and developments. As of June 30, 2023, our full portfolio included approximately 719 acres of land, or an average of 14.4 acres per site, and our most significant geographic concentrations were in higher growth markets in California, Florida, Texas, and the Northeast.
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.
- 27 -
Comparison of the Three Months Ended June 30, 2023 to the Three Months Ended June 30, 2022
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:
|
|
|
|
|
|
- 29 -
For the nine months ended September 30, 2017:
|
|
|
|
|
|
|
|
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, 2016,2022 (in thousands):
|
| Three Months Ended June 30, |
|
|
|
| ||||||
|
| 2023 |
|
| 2022 |
|
| $ Change |
| |||
Revenue |
|
|
|
|
|
|
|
|
| |||
Rental income |
| $ | 5,517 |
|
| $ | 29,418 |
|
| $ | (23,901 | ) |
Expenses |
|
|
|
|
|
|
|
|
| |||
Property operating |
|
| (5,196 | ) |
|
| (10,801 | ) |
|
| 5,605 |
|
Real estate taxes |
|
| (2,170 | ) |
|
| (6,425 | ) |
|
| 4,255 |
|
Depreciation and amortization |
|
| (4,151 | ) |
|
| (10,669 | ) |
|
| 6,518 |
|
General and administrative |
|
| (10,099 | ) |
|
| (11,093 | ) |
|
| 994 |
|
Litigation settlement |
|
| - |
|
|
| (35,000 | ) |
|
| 35,000 |
|
Gain on sale of real estate, net |
|
| 33,488 |
|
|
| 68,031 |
|
|
| (34,543 | ) |
Gain on sale of interest in unconsolidated entities |
|
| 7,323 |
|
|
| — |
|
|
| 7,323 |
|
Impairment of real estate assets |
|
| (104,467 | ) |
|
| (109,343 | ) |
|
| 4,876 |
|
Equity in loss of unconsolidated entities |
|
| (13,698 | ) |
|
| (33,720 | ) |
|
| 20,022 |
|
Interest and other income |
|
| 9,869 |
|
|
| 99 |
|
|
| 9,770 |
|
Interest expense |
|
| (12,528 | ) |
|
| (22,663 | ) |
|
| 10,135 |
|
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, 2017,2023, as compared to the Company incurredcorresponding period in 2022 (in thousands):
|
| Three Months Ended June 30, |
|
| Three Months Ended June 30, |
|
|
|
| |||||||||||
|
| 2023 |
|
| 2022 |
|
|
|
| |||||||||||
|
| Rental Income |
|
| % of Total |
|
| Rental Income |
|
| % of Total |
|
| $ Change |
| |||||
In-place retail leases |
| $ | 9,306 |
|
|
| 168.7 | % |
| $ | 25,823 |
|
|
| 87.8 | % |
|
| (16,517 | ) |
Straight-line rent (expense) |
|
| (3,796 | ) |
|
| (68.8 | %) |
|
| 3,599 |
|
|
| 12.2 | % |
|
| (7,395 | ) |
Amortization of the above/below market leases |
|
| 7 |
|
|
| 0.1 | % |
|
| (4 | ) |
|
| 0.0 | % |
|
| 11 |
|
Total rental income |
| $ | 5,517 |
|
|
| 100.0 | % |
| $ | 29,418 |
|
|
| 100.0 | % |
| $ | (23,901 | ) |
The decrease of $16.5 million in in-place retail lease rental income during 2023 is primarily due to property sales.
The decrease of $7.4 million in straight-line rental income was primarily due to a reversal of $3.8 million of straight-line rent due to property sales.
Property Operating Expenses and Real Estate Taxes
The decrease of $5.6 million in property operating expense for the three months ended June 30, 2023 was due primarily to asset sales and partially offset by a decrease in amounts capitalized.
The decrease of $4.3 million in real estate taxes for the three months ended June 30, 2023 was due primarily to asset sales and refunds received during the three months ended June 30, 2023.
Depreciation and Amortization Expenses
The decrease of $6.5 million in depreciation and amortization expenses for the three months ended June 30, 2023 was primarily due to a decrease of $61.1 million as compared to depreciation and amortization expenses of $44.5$7.1 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 $1.0 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. For2023 was driven by a decrease in legal expenses resulting from settling the nineoutstanding Litigation described below in 2022 as well as a decrease in compensation expenses due to a decrease in employee headcount. This was partially offset by an increase in consulting related expenses utilized to execute the plan of sale.
- 28 -
Gain on Sale of Real Estate, Net
During the three months ended SeptemberJune 30, 2017,2023, the Company sold 19 properties for aggregate consideration of $248.7 million and recorded a gain totaling $33.5 million, which is included in gain on sale of real estate, net within the condensed consolidated statements of operations.
Gain on Sale of Interest in Unconsolidated Entities
During the three months ended June 30, 2023, the Company sold its interest in one unconsolidated entity, and recorded a gain totaling $7.3 million, which is included in gain on sale of interest in unconsolidated entities within the consolidated statements of operations.
Impairment of Real Estate Assets
During the three months ended June 30, 2023, the Company recognized $104.5 million in impairment of real estate assets, which is included within the condensed consolidated statements of operations. This impairment arose primarily from recognizing $101.5 million of impairment on the Company's development property in Aventura, FL due to continued increasing development and construction costs and deteriorating market conditions, which triggered the need for an impairment analysis pursuant to ASC 360, Property, Plant and Equipment. The Company determined the fair value of this property by applying a discount to projected cash flows. During the three months ended June 30, 2022, the Company recognized $109.3 million of impairment losses as a result of the Company's plan to pursue the Plan of Sale.
Equity in Loss of Unconsolidated Entities
The decrease of $20.0 million in loss of $0.7unconsolidated entities for the three months ended June 30, 2023 was driven by a $12.7 million other-than-temporary impairment charge recorded against two investments compared to recording a loss$32.5 million other-than-temporary impairment charge against three investments during the three months ended June 30, 2022. These impairments arose from the Company’s impairment analysis pursuant to ASC 323, Equity Method and Joint Ventures.
Interest and other income
The increase of $1.9$9.8 million of interest and other income is primarily due to the receipt of $7.8 million during the three months ended June 30, 2023, relating to the settlement with the D&O Insurers.
Interest Expense
The decrease of $10.1 million in interest expense for the ninethree months ended SeptemberJune 30, 2016.2023 was driven by the partial Term Loan Facility pay down totaling $1.1 billion as of June 30, 2023.
Comparison of the Six Months Ended June 30, 2023 to the Six Months Ended June 30, 2022
The following table presents selected data on comparative results from the Company’s condensed consolidated statements of operations for the three months ended June 30, 2023, as compared to the three months ended June 30, 2022 (in thousands):
|
| Six Months Ended June 30, |
|
|
|
| ||||||
|
| 2023 |
|
| 2022 |
|
| $ Change |
| |||
|
|
|
|
|
|
|
|
|
| |||
Revenue |
|
|
|
|
|
|
|
|
| |||
Rental income |
| $ | 5,935 |
|
| $ | 58,502 |
|
| $ | (52,567 | ) |
Expenses |
|
|
|
|
|
|
|
|
| |||
Property operating |
|
| (13,381 | ) |
|
| (21,833 | ) |
|
| 8,452 |
|
Real estate taxes |
|
| (3,707 | ) |
|
| (14,575 | ) |
|
| 10,868 |
|
Depreciation and amortization |
|
| (8,715 | ) |
|
| (22,603 | ) |
|
| 13,888 |
|
General and administrative |
|
| (22,319 | ) |
|
| (20,185 | ) |
|
| (2,134 | ) |
Litigation settlement |
|
| — |
|
|
| (35,000 | ) |
|
| 35,000 |
|
Gain on sale of real estate, net |
|
| 45,880 |
|
|
| 67,016 |
|
|
| (21,136 | ) |
Gain on sale of interest in unconsolidated entities |
|
| 7,323 |
|
|
| — |
|
|
| 7,323 |
|
Impairment of real estate assets |
|
| (107,043 | ) |
|
| (110,334 | ) |
|
| 3,291 |
|
Equity in loss of unconsolidated entities |
|
| (50,070 | ) |
|
| (66,796 | ) |
|
| 16,726 |
|
Interest and other income |
|
| 15,454 |
|
|
| 110 |
|
|
| 15,344 |
|
Interest expense |
|
| (27,730 | ) |
|
| (45,251 | ) |
|
| 17,521 |
|
- 29 -
Rental Income
The following table presents the results for rental income for the three months ended June 30, 2023, as compared to the corresponding period in 2022 (in thousands):
|
| Six Months Ended June 30, |
|
| Six Months Ended June 30, |
|
|
|
| |||||||||||
|
| 2023 |
|
| 2022 |
|
|
|
| |||||||||||
|
| Rental Income |
|
| % of Total |
|
| Rental Income |
|
| % of Total |
|
| $ Change |
| |||||
In-place retail leases |
| $ | 20,564 |
|
|
| 346.5 | % |
| $ | 54,202 |
|
|
| 92.6 | % |
| $ | (33,638 | ) |
Straight-line rent (expense) |
|
| (14,638 | ) |
|
| (246.6 | %) |
|
| 4,320 |
|
|
| 7.4 | % |
|
| (18,958 | ) |
Amortization of above/below market leases |
|
| 9 |
|
|
| 0.1 | % |
|
| (20 | ) |
|
| 0.0 | % |
|
| 29 |
|
Total rental income |
| $ | 5,935 |
|
|
| 100.0 | % |
| $ | 58,502 |
|
|
| 100.0 | % |
| $ | (52,567 | ) |
The decrease of $33.6 million in in-place retail lease rental income during 2023 is primarily due to property sales.
The decrease of $19.0 million in straight-line rental income was primarily due to a reversal of $14.6 million of straight-line rent due to property sales.
Property Operating Expenses and Real Estate Taxes
The decrease of $8.5 million in property operating expense for the six months ended June 30, 2023 was due primarily to asset sales and partially offset by a decrease in amounts capitalized.
The decrease of $10.9 million in real estate taxes for the six months ended June 30, 2023 was due primarily to asset sales and refunds received during the six months ended June 30, 2023.
Depreciation and Amortization Expenses
The decrease of $13.9 million in depreciation and amortization expenses for the six months ended June 30, 2023 was primarily due to a decrease of $13.7 million 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 increase of $2.1 million in general and administrative expenses for the six months ended June 30, 2023 increases in consulting expenses utilized to execute the plan of sale and bonuses to retain employees. This was partially offset by decreases in legal expenses resulting from settling the outstanding Litigation described below in 2022 and compensation expenses due to a decrease in employee headcount.
Gain on Sale of Real Estate, Net
During the six months ended June 30, 2023, the Company sold 43 properties for aggregate consideration of $539.5 million and recorded a gain totaling $45.9 million, which is included in gain on sale of real estate, net within the condensed consolidated statements of operations.
Gain on Sale of Interest in Unconsolidated Entities, Net
During the six months ended June 30, 2023, the Company sold its interest in one unconsolidated entity, and recorded a gain totaling $7.3 million, which is included in gain on sale of interest in unconsolidated entities within the consolidated statements of operations.
Impairment of Real Estate Assets
During the six months ended June 30, 2023, the Company recognized $107.0 million in impairment of real estate assets, which is included within the condensed consolidated statements of operations. This impairment arose primarily from recognizing $101.5 million of impairment on the Company's development property in Aventura, FL due to continued increasing development and construction costs and deteriorating market conditions, which triggered the need for an impairment analysis pursuant to ASC 360, Property, Plant and Equipment. The Company determined the fair value of this property by applying a discount to projected cash flows. During the six months ended June 30, 2022, the Company recognized $110.3 million of impairment losses as a result of the Company's plan to pursue the Plan of Sale.
Equity in Loss of Unconsolidated Entities
The decrease of $16.7 million in loss in the unconsolidated entities for the six months ended June 30, 2023 was driven by a $12.7 million other-than-temporary impairment charge recorded against two investments compared to recording a $32.5 million
- 30 -
other-than-temporary impairment charge against three investments during the three months ended June 30, 2022. These impairments arose from the Company’s impairment analysis pursuant to ASC 323, Equity Method and Joint Ventures.
Interest and other income
The increase of $15.3 million of interest and other income is primarily due to the receipt of $11.6 million relating to the settlement with the D&O Insurers.
Interest Expense
The decrease of $17.5 million in interest expense for the six months ended June 30, 2023 was driven by the partial Term Loan Facility pay down totaling $1.1 billion as of June 30, 2023.
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, 2023 and distributionsthe Company recorded net operating cash outflows of $31.5 million. Additionally, the Company generated investing cash inflows of $506.8 million during the six months ended June 30, 2023, 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:
With respect- 31 -
As 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 (as defined in Note 6 – Debt of the Notes to the condensed consolidated financial statements included in Part I, Item I of this Quarterly Report on Form 10-Q) 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 proceedsCompany’s ability to access the Incremental Funding Facility.
During the six months ended June 30, 2023, we have repaid $480.0 million against the principal of asset sales or new JVs.
In November 2016,the Term Loan Facility. Our outstanding balance as of June 30, 2023, is $550.0 million. Subsequent to June 30, 2023, the Company andmade an additional $70 million in principal prepayments reducing the servicer forbalance of our Mortgage Loans entered into amendmentsTerm Loan Facility to our Loan Agreements to resolve a disagreement regarding one$470 million.
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 a discussion of liquidity and going concern.
Cash Flows for the Six Months Ended June 30, 2023 Compared to the Six Months Ended June 30, 2022
The following table summarizes the Company’s cash flow sweep provisions in our Loan Agreements. The principal terms of these amendments are that the Company has (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 premiumactivities 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 Loan Agreements.
Summary of Cash Flows
Net cash provided by operating activities was $56.9 million for the ninesix months ended SeptemberJune 30, 20172023 and $100.1 million for the nine months ended September 30, 2016. 2022, respectively (in thousands):
|
| Six Months Ended June 30, |
|
|
|
| ||||||
|
| 2023 |
|
| 2022 |
|
| $ Change |
| |||
Net cash used in operating activities |
| $ | (31,527 | ) |
| $ | (54,501 | ) |
| $ | 22,974 |
|
Net cash provided by investing activities |
|
| 506,792 |
|
|
| 99,882 |
|
|
| 406,910 |
|
Net cash used in financing activities |
|
| (482,450 | ) |
|
| (2,450 | ) |
|
| (480,000 | ) |
Cash Flows from Operating Activities
Significant changes in the components of net cash provided byused in operating activities include:
|
|
|
In 2023, a decrease in rental income and a decrease to accounts payable, accrued expenses and other liabilities, partially offset |
|
|
Net cash provided by investing activities was $40.2 million for the nine months ended September 30, 2017 compareda decrease to net cash used by investing activities of $47.2 million for the nine months ended September 30, 2016. tenant and other receivables.
Cash Flows from Investing Activities
Significant components of net cash provided by and used in investing activities include:
|
In 2023, $567.8 million of net proceeds from the sale of real estate and investments in unconsolidated entities, offset by development of real estate of ($49.9) million and investments in unconsolidated entities of ($11.1) million; and − 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) million. Cash Flows from Financing Activities Significant components of |
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|
|
|
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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:
- 32 -
Dividends and Distributions
The Company’s Board of Trustees did not declare dividends on the nineCompany’s Class A common shares during the six months ended SeptemberJune 30, 2016. Significant components of net cash provided by2023 and used in financings activities include:
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Dividends and Distributions2022, respectively.
The Company’s Board of Trustees declared the following common stock dividends on preferred shares during 20172023 and 2016, with holders2022:
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|
| Series A |
| |
Declaration Date |
| Record Date |
| Payment Date |
| Preferred Share |
| |
2023 |
|
|
|
|
|
|
| |
July 25 |
| September 29 |
| October 13 |
| $ | 0.43750 |
|
April 27 |
| June 30 |
| July 14 |
|
| 0.43750 |
|
February 15 |
| March 31 |
| April 17 |
|
| 0.43750 |
|
2022 |
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|
|
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|
| |
November 1 |
| December 30 |
| January 16, 2023 |
| $ | 0.43750 |
|
July 26 |
| September 30 |
| October 17 |
|
| 0.43750 |
|
April 26 |
| June 30 |
| July 15 |
|
| 0.43750 |
|
February 16 |
| March 31 |
| April 15 |
|
| 0.43750 |
|
The Board of Operating Partnership units entitled to an equal distribution per Operating Partnership unit heldTrustees will determine future distributions following the pay down of the Term Loan Facility.
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, 2023 and December 31, 2022, we did not have any off-balance sheet financing arrangements.
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| Dividends per |
| |
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| Class A and Class C |
| |
Declaration Date |
| Record Date |
| Payment Date |
| Common Share |
| |
2017 |
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|
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 |
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|
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, 2022.
Capital Expenditures
During the three and six months ended June 30, 2023, the Company invested $17.9 million and $49.9 million, respectively, in our consolidated development and operating properties and an additional $3.5 million and $11.1 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, 2022, the Company invested $30.6 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.
During the three and six months ended June 30, 2023 and 2022, respectively, we incurred no maintenance capital expenditures 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.
TheBeginning in 2019, the Company had been engaged in litigation related to the bankruptcy of Sears Holding (the “Litigation”). On September 2, 2022, the United States Bankruptcy Court for the Southern District of New York entered an order approving a settlement amongst the parties to the Litigation and, on October 18, 2022, the Litigation was dismissed.
We made a settlement payment of $35.5 million based on our contributions to the settlement of the Litigation. This payment is recorded as litigation settlement in the consolidated statements of operations during the year ended December 31, 2022.
- 33 -
On March 2, 2021, we 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”). Our lawsuit sought, 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. Any amounts received from the insurers will offset the Seritage Defendants’ contribution. We reached settlement agreements with two of the D&O Insurers for gross proceeds of $12.7 million which is recorded in interest and other income in the consolidated statements of operations during the year ended December 31, 2022. During the six months ended June 30, 2023, we reached settlement agreements with the other two D&O Insurers for gross proceeds of $11.6 million. We received $11.6 million during the six months ended June 30, 2023, which is recorded in interest and other income in the consolidated statements of operations.
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 Arrangements
The Company accounts for its investments in joint ventures that it does not have a controlling interest or is notSee Note 9 – Commitments and Contingencies Litigation and Other Matters of the primary beneficiary using the equity method of accounting and those investments are reflected onNotes to the condensed consolidated balance sheetsfinancial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for a discussion of the Company as investmentsLitigation and related matters.
Critical Accounting Policies
A summary of our critical accounting policies is included in unconsolidated joint ventures. As of September 30, 2017 andour Annual Report on Form 10-K for the year ended December 31, 2016, we did not have any off-balance sheet financing arrangements.2022 in Management’s Discussion and Analysis of Financial Condition and Results of Operations. For the six months ended June 30, 2023, there were no material changes to these policies.
- 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.
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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.
- 3634 -
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, 20172023 and September 30, 20162022 (in thousands):
|
| Three Months Ended June 30, |
|
| Six Months Ended June 30, |
| ||||||||||
NOI and Total NOI |
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||
Net loss |
| $ | (95,707 | ) |
| $ | (142,083 | ) |
| $ | (157,693 | ) |
| $ | (209,070 | ) |
Termination fee income |
|
| — |
|
|
| (92 | ) |
|
| — |
|
|
| (369 | ) |
Management and other fee income |
|
| (367 | ) |
|
| (286 | ) |
|
| (629 | ) |
|
| (2,107 | ) |
Depreciation and amortization |
|
| 4,151 |
|
|
| 10,669 |
|
|
| 8,715 |
|
|
| 22,603 |
|
General and administrative expenses |
|
| 10,099 |
|
|
| 11,093 |
|
|
| 22,319 |
|
|
| 20,185 |
|
Litigation settlement |
|
| — |
|
|
| 35,000 |
|
|
| — |
|
|
| 35,000 |
|
Equity in loss of unconsolidated entities |
|
| 13,698 |
|
|
| 33,720 |
|
|
| 50,070 |
|
|
| 66,796 |
|
Gain on sale of interest in unconsolidated entities |
|
| (7,323 | ) |
|
| — |
|
|
| (7,323 | ) |
|
| — |
|
Gain on sale of real estate, net |
|
| (33,488 | ) |
|
| (68,031 | ) |
|
| (45,880 | ) |
|
| (67,016 | ) |
Impairment of real estate assets |
|
| 104,467 |
|
|
| 109,343 |
|
|
| 107,043 |
|
|
| 110,334 |
|
Interest and other income |
|
| (9,869 | ) |
|
| (99 | ) |
|
| (15,454 | ) |
|
| (110 | ) |
Interest expense |
|
| 12,528 |
|
|
| 22,663 |
|
|
| 27,730 |
|
|
| 45,251 |
|
(Benefit) provision for income taxes |
|
| (38 | ) |
|
| 203 |
|
|
| (51 | ) |
|
| 228 |
|
Straight-line rent |
|
| 3,796 |
|
|
| (3,599 | ) |
|
| 14,638 |
|
|
| (4,320 | ) |
Above/below market rental expense |
|
| 45 |
|
|
| 56 |
|
|
| 93 |
|
|
| 121 |
|
NOI |
| $ | 1,992 |
|
| $ | 8,557 |
|
| $ | 3,578 |
|
| $ | 17,526 |
|
Unconsolidated entities |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net operating income of unconsolidated entities |
|
| 1,301 |
|
|
| 2,267 |
|
|
| 2,959 |
|
|
| 4,113 |
|
Straight-line rent |
|
| (294 | ) |
|
| (228 | ) |
|
| (440 | ) |
|
| (556 | ) |
Above/below market rental expense |
|
| (3 | ) |
|
| 6 |
|
|
| 2 |
|
|
| 12 |
|
Total NOI |
| $ | 2,996 |
|
| $ | 10,602 |
|
| $ | 6,099 |
|
| $ | 21,095 |
|
|
| 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 |
|
|
|
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 |
|
- 3835 -
The following table reconciles FFOItem 3. Quantitative and Company FFO to GAAP net loss for the three and nine months ended September 30, 2017 and September 30, 2016 (in thousands):Qualitative Disclosure about Market Risk
|
| 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 -
Except as discussed below, thereThere were no material changes in the Quantitative and Qualitative Disclosures about Market Risk set forth in our 20162022 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
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, as of the end of the reporting period covered by this report, our disclosure controls and procedures were not effective due to the material weakness described below.
Notwithstanding the material weaknesses in our internal control over financial reporting, our principal executive officer and principal financial officer have concluded that the unaudited condensed consolidated financial statements included in this Form 10-Q fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States of America.
Material Weakness
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. In the course of preparing our financial statements for the interim period ended June 30, 2023, management identified a material weakness in our internal control over financial reporting that existed due to a deficiency in the design of our control over the identification of impairment indicators for investments in real estate and documentation of evidence of review. The deficiency relates to the failure to identify potential indicators of impairment related to development projects in a timely manner. This deficiency contributed to the potential for there to be material errors in our financial statements.
Remediation Plan
Management is enhancing its internal control over the identification of impairment indicators for investments in real estate to include specific indicators related to development assets. In addition, management is enhancing the documentation of evidence reviewed as part of such date.the control.
The material weakness cannot be considered completely remediated until the applicable control has operated for a sufficient period of time and management has concluded, through testing, that the control is operating effectively.
Changes in Internal Controls.
ThereOther than the remediation efforts described above, there were no other changes in our internal control over financial reporting that occurred during the periodthree months ended SeptemberJune 30, 20172023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
- 4036 -
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.
Information regarding risk factors appears in our 2016 Annual Report on Form 10-K in Part I, Item 1A. Risk Factors. Except as discussed below, therefor the year ended December 31, 2022 for a description of certain material risks and uncertainties to which our business, financial condition and results of operations are subject. There have been no material changes fromto the risk factors previously discloseddiscussed in our 2016 Annual Report on Form 10-K.10-K for the year ended December 31, 2022, except as set forth below.
We have identified a material weakness in our internal control over financial reporting, and our management has concluded that our internal control over financial reporting and disclosure controls and procedures were not effective as of the end of the period covered by this report. While we are working to remediate the identified material weakness, we cannot assure you that additional material weaknesses or significant deficiencies will not occur in the future. If we fail to maintain an effective system of internal controls, we may not be substantially dependent on Sears Holdings, asable to accurately report our financial results or prevent fraud. As a tenant, until we further diversifyresult, our stockholders could lose confidence in our financial reporting, which could harm our business and the tenancytrading price of our portfolio, and an event that has a material adverse effect on Sears Holdings’ business, financial condition or resultscommon stock
The Sarbanes-Oxley Act of operations could have a material adverse effect on our business, financial condition or results of operations.
Sears Holdings is the lessee of 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,2002 requires, among other things, that its historical operating results indicate substantial doubt existswe maintain effective disclosure controls and procedures and internal control over financial reporting. As disclosed in this Quarterly Report on Form 10-Q, in the course of preparing our interim financial statements for the quarter ended June 30, 2023, we identified a material weakness in our internal control over financial reporting. The material weakness was due to a deficiency in the design of our control over the identification of impairment indicators for investments in real estate and documentation of evidence of review. The deficiency relates to the failure to identify potential indicators related to Sears Holdings’ ability to continuedevelopment projects in a timely manner, 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 obligationsdescribed in more detail under the Master Lease. The inability or unwillingness of Sears Holdingsheading Part I—Item 4. Controls and Procedures in this Quarterly Report on Form 10-Q. We have commenced efforts to meet its rent obligations and other obligationsremediate the material weakness as described in more detail under the Master Lease could materially adversely affect our business, financial condition or results of operations, including our ability to pay the interest, principalheading Part I—Item 4. Controls and other costs and expenses under our financings, or to pay cash dividends to Seritage shareholders. For these reasons, if Sears Holdings were to experience aProcedures in this Quarterly Report on Form 10-Q. The material adverse effect on its business, financial condition or results of operations, 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 ability to enforce our rights under the Master Lease. In addition, we may be limitedweakness in our ability to enforce our rights underinternal control over financial reporting will not be considered remediated until the Master Lease because it iscontrols operate for a unitary leasesufficient period of time and doesmanagement has concluded, through testing, that these controls operate effectively. If we do not provide for termination with respect to individual properties by reason ofsuccessfully remediate the default ofmaterial weakness, or if other material weaknesses or other deficiencies arise in 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,future, we may be unable to locateaccurately report our financial results, which could cause our financial results to be materially misstated and require restatement. In such case, we may be unable to maintain compliance with securities law requirements regarding timely filing of periodic reports in addition to applicable stock exchange listing requirements, investors may lose confidence in our financial reporting and our stock price may decline as a suitable master lesseeresult. We cannot assure you that the measures we have taken to date, or any measures we may take in the future, will be sufficient to remediate the control deficiencies that led to a lessee for individual properties at similar rental rates and other obligations andmaterial weakness in a timely mannerour internal control over financial reporting or at all, which would have the effect of reducing our rental revenues.that they will prevent or avoid potential future material weaknesses. In addition, each JV is subjectthe Company will continue to similar limitations on enforcements of remediesevaluate its portfolio, including its development plans and risks under its respective JV Master Lease,holdings periods, which could reduce the value of our investmentmay result in or distributions to us by, one or more of the JVs.additional impairments in future periods.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds None. |
None.
None.
Item 4. Mine Safety Disclosures
Not applicable.
None.
Item 5. Other Information
None.
- 4137 -
| Description |
| SEC Document Reference | ||||
31.1 | Filed herewith. | ||||||
31.2 | Filed herewith. | ||||||
32.1 |
| ||||||
32.2 |
| ||||||
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. |
- 4238 -
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: | /s/ | |||||
By: |
| |||||
President and Chief Executive Officer (Principal Executive Officer) | ||||||
Dated: | /s/ | |||||
By: |
| |||||
(Principal Financial and Accounting Officer) |
- 4339 -