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SRG Seritage Growth Properties

Filed: 15 Mar 21, 5:28pm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

 

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

 

For the fiscal year ended December 31, 2020

Commission file number 001-37420

 

SERITAGE GROWTH PROPERTIES

(Exact name of registrant as specified in its charter)

 

 

Maryland

38-3976287

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

 

500 Fifth Avenue, Suite 1530, New York, New York

10110

(Address of principal executive offices)

(Zip Code)

 

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

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

 

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

 

Securities registered pursuant to Section 12(g) of the Act: None.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes      No  

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes      No  

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 every Interactive Data File required to be submitted 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 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 the 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.   

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

On June 30, 2020, the last business day of the most recently completed second quarter of the registrant, the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was approximately $407,000,000 based upon the closing price of $11.40 of the common stock as reported on the New York Stock Exchange on such date.

As of March 9, 2021, the registrant had the following common shares outstanding:

 

Class

 

Shares Outstanding

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

 

38,903,146

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

 

0

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

 

0

 

DOCUMENTS INCORPORATED BY REFERENCE

Portions of Seritage Growth Properties’ Proxy Statement for its 2021 Annual Meeting of Shareholders, to be held May 20, 2021, are incorporated by reference into Part III of this Annual Report on Form 10-K.

 

 

 


 

SERITAGE GROWTH PROPERTIES

ANNUAL REPORT ON FORM 10-K

DECEMBER 31, 2020

TABLE OF CONTENTS

 

 

 

 

 

Page

PART I

 

 

 

 

Item 1.

 

Business

 

1

Item 1A.

 

Risk Factors

 

5

Item 1B.

 

Unresolved Staff Comments

 

29

Item 2.

 

Properties

 

30

Item 3.

 

Legal Proceedings

 

37

Item 4.

 

Mine Safety Disclosures

 

38

PART II

 

 

 

 

Item 5.

 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

39

Item 6.

 

Selected Financial Data

 

41

Item 7.

 

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

 

42

Item 7A.

 

Quantitative and Qualitative Disclosures About Market Risk

 

57

Item 8.

 

Financial Statements and Supplementary Data

 

57

Item 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

57

Item 9A.

 

Controls and Procedures

 

57

Item 9B.

 

Other Information

 

58

PART III

 

 

 

 

Item 10.

 

Directors, Executive Officers, and Corporate Governance

 

58

Item 11.

 

Executive Compensation

 

58

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

58

Item 13.

 

Certain Relationships and Related Transactions, and Director Independence

 

58

Item 14.

 

Principal Accounting Fees and Services

 

58

PART IV

 

 

 

 

Item 15.

 

Exhibits and Financial Statement Schedule

 

59

 

 

Signatures

 

63

 

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K (the “Annual Report”) of Seritage Growth Properties contains statements that constitute forward-looking statements within the meaning of the federal securities laws.  Any statements that do not relate to historical or current facts or matters are forward-looking statements.  You can identify forward-looking statements by the use of forward-looking terminology such as “believes,” “expects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “pro forma,” “estimates” or “anticipates” or the opposite of these words and phrases or similar words or phrases which are predictions of or indicate future events or trends and which do not relate solely to historical matters.  Statements concerning current conditions may also be forward-looking if they imply a continuation of current conditions.  You can also identify forward-looking statements by discussions of strategy, plans or intentions.

Forward-looking statements involve numerous risks and uncertainties and you should not rely on them as predictions of future events.  Forward-looking statements depend on assumptions, data or methods which may be incorrect or imprecise and we may not be able to realize them.  The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements:

 

Declines in retail, real estate and general economic conditions;

 

The impact of ongoing negative operating cash flow on our ability to fund operations and ongoing development;

 

The impact of the novel coronavirus (“COVID-19”) pandemic on the business of our tenants and our business, income, cash flow, results of operations, financial condition, liquidity, prospects, ability to service our debt obligations and our ability to pay dividends and other distributions to our shareholders;

 

Competition in the real estate and retail industries;

 

Risks relating to our redevelopment activities and potential acquisition or disposition of properties;

 

Failure to achieve expected occupancy and/or rent levels within the projected time frame or at all;

 

Contingencies to the commencement of rent under signed leases;

 

Our historical exposure to Sears Holdings and the effects of its previously announced bankruptcy filing;

 

The litigation filed against us and other defendants in the Sears Holdings adversarial proceeding pending in bankruptcy court;

 

The terms of our indebtedness and availability or sources of liquidity;

 

Environmental, health, safety and land use laws and regulations;

 

Restrictions with which we are required to comply in order to maintain REIT status and other legal requirements to which we are subject; and

 

Our relatively limited operating history as an independent public company.

While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance.  Except as required by law, we disclaim any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors of new information, data or methods, future events or other changes.  For a further discussion of these and other factors that could impact our future results, performance or transactions, see “Item 1A. Risk Factors.”

 

 

 

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PART I

ITEM 1.

BUSINESS

The Company

Seritage Growth Properties (“Seritage”) (NYSE: SRG), a Maryland real estate investment trust formed on June 3, 2015, is a fully integrated, self-administered and self-managed real estate investment trust (“REIT”) as defined under Section 856(c) of the Internal Revenue Code (the “Code”).  Seritage’s assets are held by and its operations are primarily conducted, directly or indirectly, through Seritage Growth Properties, L.P., a Delaware limited partnership (the “Operating Partnership”).  Under the partnership agreement of the Operating Partnership, Seritage, as the sole general partner, has exclusive responsibility for 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.

Seritage is principally engaged in the acquisition, ownership, development, redevelopment, management and leasing of diversified retail and mixed-use properties throughout the United States.  As of December 31, 2020, the Company’s portfolio consisted of interests in 183 properties totaling approximately 26.5 million square feet of gross leasable area, including 158 wholly owned properties totaling approximately 24.5 million square feet of gross leasable area (“GLA”) across 41 states and Puerto Rico (the “Wholly Owned Properties”), and interests in 25 properties totaling approximately 1.9 million square feet of GLA across 13 states that are owned in unconsolidated entities (the “Unconsolidated Properties”).

The Company’s mission is to create long-term value for our shareholders by unlocking the value of our portfolio whether through re-leasing, redevelopment, formation of strategic partnerships or other bespoke solutions.

Background

The Company commenced operations on July 7, 2015 following a rights offering to the shareholders of Sears Holding Corporation (“Sears Holdings” or “Sears”) to purchase common shares of Seritage in order to fund, in part, the $2.7 billion acquisition of certain of Sears Holdings’ owned properties and its 50% interests in three joint ventures which were simultaneously leased back to Sears Holdings under master lease agreements (the “Original Master Lease” and the “JV Original Master Leases”, respectively).  

On October 15, 2018, Sears Holdings and certain of its affiliates filed voluntary petitions for relief under chapter 11 of title 11 of the United States Code with the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”).  Subsequently, the Company and certain affiliates of Transform Holdco LLC (“Holdco”), an affiliate of ESL Investments, Inc., executed a master lease with respect to 51 Wholly Owned Properties (the “Holdco Master Lease”), which became effective when the Bankruptcy Court issued an order approving the rejection of the Original Master Lease.

As of December 31, 2020, the Company did not have any remaining properties leased to Holdco or Sears Holdings after giving effect to the pending termination of the last five Wholly Owned Properties which is scheduled to be completed in March 2021.

Edward S. Lampert is the Chairman and Chief Executive Officer of ESL Investments, Inc, which owns Holdco.  Mr. Lampert is also the Chairman of Seritage and controls each of the tenant entities that is a party to the Holdco Master Lease.

COVID-19 Pandemic

The COVID-19 pandemic continues to have a significant impact on the real estate industry in the United States, including the Company’s properties.  As of December 31, 2020, the Company had collected 93% of rental income for the three months ended December 31, 2020, and agreed to defer an additional 4%. As of March 5, 2021, the Company had also collected 95% of January and February 2021 rental income, and agreed to defer an additional 2%. While the Company intends to enforce its contractual rights under its leases, there can be no assurance that tenants will meet their future obligations or that additional rental modification agreements will not be necessary.

The Company continues to maintain a cautious approach as it responds to the evolving COVID-19 pandemic with an emphasis on managing its cash resources and preserving the value of its assets and its platform.  The Company intends to continue monetizing appropriate assets and selectively allocating capital to the assets with opportunistic risk-adjusted returns.

As a result of the fluidity and uncertainty surrounding the nation’s response to and limitations as a result of the pandemic, the Company expects that conditions will change, potentially significantly, in future periods and, as such, results for the year ended December 31, 2020 may not be indicative of the Company’s business results for future periods.  As such, the Company cannot reasonably estimate the impact of COVID-19 on its financial condition, results of operations or cash flows for the foreseeable future.

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Business Strategies

The Company’s primary objective is to create value for its shareholders through the re-leasing and redevelopment of the majority of its Wholly Owned Properties and Unconsolidated Properties.  In doing so, the Company intends to meaningfully grow net operating income (“NOI”) while diversifying its tenant base and adding other uses to its properties to more fully realize the value of the portfolio.

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

 

Maximize value of vast land holdings through accretive densification.  As of December 31, 2020, our portfolio included approximately 2,400 acres of land, or an average of 13 acres per site, and our most significant geographic concentrations were in higher growth markets in California, Florida, Texas and the Northeast.  We believe these land holdings will provide meaningful opportunities to create value through relevant investments and developments that maximize the potential of this additional land.

In particular, we have identified various sites that we believe have the demand and demographic profile to support other uses such as residential, biotechnology, office and others.  Given our fee ownership of these properties and control over parking lots and outparcels, we believe that these sites are well positioned for such value creation opportunities.

 

Convert single-tenant buildings into multi-tenant properties at meaningfully higher rents.  We intend to increase NOI and diversify our portfolio by actively redeveloping space at our properties and re-leasing such space to new, diversified tenants at higher rents than those paid for space currently or as formerly occupied by Sears or Kmart prior to redevelopment. This also further diversifies and improves the credit profile and duration of our rental revenue.

 

Leverage existing and future joint venture relationships with leading real estate and financial partners.  As of December 31, 2020, we owned interests in 25 Unconsolidated Properties in joint ventures with leading partners specifically chosen for their unique ability to drive value on the specific assets that best suit their and our abilities taken together. We are focused on making sure each party is adding their unique value and working together seamlessly for the ultimate success of the project.

 

Maintain a flexible capital structure to support value creation activities.  We intend to maintain a capital structure that provides us with the financial flexibility to leverage the various sources of capital that best fit the needs of the portfolio and the overall business at the most attractive rates. This capital will be used to fund accretive projects that will maximize our cash flow in the short and longer term.  

Significant Tenants

Management believes the Company's portfolio is reasonably diversified and does not contain any other significant concentrations of credit risk.  As of December 31, 2020, the Company's portfolio of 158 Wholly Owned Properties and 25 Unconsolidated Properties was diversified by location across 41 states and Puerto Rico.

Competition

We compete for investment opportunities and prospective tenants with other REITs, real estate partnerships and other real estate companies, private individuals, investment companies, private equity and hedge fund investors, sovereign funds, pension funds, insurance companies, lenders and other investors, including retailer operators that may close stores and pursue similar real estate strategies.  In addition, revenues from our properties are dependent on the ability of our tenants and operators to compete.

Some of our competitors are significantly larger and have greater financial resources and lower costs of capital than we have.  Increased competition will make it more challenging to identify and successfully capitalize on investment opportunities that meet our objectives.  Our ability to compete is also impacted by national and local economic trends, availability of investment alternatives, availability and cost of capital, construction and renovation costs, existing laws and regulations, new legislation and population trends.

As a landlord, we compete in the real estate market with numerous developers and owners of properties, including the shopping centers in which our properties are located.  Some of our competitors have greater economies of scale, relationships with national tenants at multiple properties which are owned or operated by such competitors, access to more resources and greater name recognition than we do.  If our competitors offer space at rental rates below the current market rates or below the rentals we currently charge, or on terms and conditions which include locations at multiple properties, we may lose our existing and/or potential tenants and we may be pressured to reduce our rental rates or to offer substantial rent abatements, tenant improvement allowances, early termination rights or below-market renewal options in order to win new tenants and retain tenants when our leases expire.

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Environmental Matters

Our properties are subject to environmental laws regulating, among other things, air emissions, wastewater discharges and the handling and disposal of wastes.  Certain of the properties were built during the time that asbestos-containing building materials were routinely installed in residential and commercial structures.  In addition, a substantial portion of the properties we acquired from Sears Holdings currently include, or previously included, automotive care center facilities and retail fueling facilities, and are or were subject to laws and regulations governing the handling, storage and disposal of hazardous substances contained in some of the products or materials used or sold in the automotive care center facilities (such as motor oil, fluid in hydraulic lifts, antifreeze and solvents and lubricants), the recycling/disposal of batteries and tires, air emissions, wastewater discharges and waste management.  In addition to these products or materials, the equipment in use or previously used at such properties, such as service equipment, car lifts, oil/water separators, and storage tanks, has been subject to increasing environmental regulation relating to, among other things, the storage, handling, use, disposal, and transportation of hazardous materials.  Our leases include, or are expected to include, provisions obligating the operator to comply with applicable environmental laws and to indemnify us if such operator’s noncompliance results in losses or claims against us with respect to environmental matters first arising during such operator’s occupancy.  An operator’s failure to comply could result in fines and penalties or the requirement to undertake corrective actions which may result in significant costs to the operator and thus adversely affect their ability to meet their obligations to us.

Pursuant to U.S. federal, state and local environmental laws and regulations, a current or previous owner or operator of real property may be required to investigate, remove and/or remediate a release of hazardous substances or other regulated materials at, or emanating from, such property.  Further, under certain circumstances, such owners or operators of real property may be held liable for property damage, personal injury and/or natural resource damage resulting from or arising in connection with such releases.  Certain of these laws have been interpreted to be joint and several unless the harm is divisible and there is a reasonable basis for allocation of responsibility.  We also may be liable under certain of these laws for damage that occurred prior to our ownership of a property or at a site where we sent wastes for disposal.  The failure to properly remediate a property may also adversely affect our ability to lease, sell or rent the property or to borrow funds using the property as collateral.

Under the Holdco Master Lease, Holdco is required to indemnify us from certain environmental liabilities at the Wholly Owned Properties before or during the period in which each Wholly Owned Property is leased to Holdco, including removal and remediation of all affected facilities and equipment constituting the automotive care center facilities.  In addition, an environmental reserve was funded concurrently with the formation of the Company in the amount of approximately $12.0 million.  As of December 31, 2020, the balance of the environmental reserve was approximately $9.5 million.

In connection with the ownership of our current or past properties and any properties that we may acquire in the future, we could be legally responsible for environmental liabilities or costs relating to a release of hazardous substances or other regulated materials at or emanating from such property.  We are not aware of any environmental issues that are expected to have a material impact on the operations of our properties. However, we can make no assurances that the discovery of previously unknown environmental conditions or future laws, ordinances or regulations will not impose material environmental liabilities on us, or the current environmental condition of our properties will not be affected by tenants, the condition of land or operations in the vicinity of our properties (such as releases from underground storage tanks), or by third parties unrelated to us.

Insurance

We have comprehensive liability, property and rental loss insurance with respect to our portfolio of properties. We believe that such insurance provides adequate coverage.

REIT Qualification

We elected to be treated as a REIT commencing with the taxable year ended December 31, 2015 and expect to continue to operate so as to qualify as a REIT.  So long as we qualify as a REIT, we generally will not be subject to U.S. federal income tax on net taxable income that we distribute annually to our shareholders.  In order to qualify as a REIT for U.S. federal income tax purposes, we must continually satisfy tests concerning, including, but not limited to, the real estate qualification of sources of our income, the composition and values of our assets, the amounts we distribute to our shareholders and the diversity of ownership of our stock.  In order to comply with REIT requirements, we may need to forego otherwise attractive opportunities and limit our expansion opportunities and the manner in which we conduct our operations.  See “Risk Factors—Risks Related to Status as a REIT.”

Financial Information about Industry Segments

We currently operate in a single reportable segment, which includes the acquisition, ownership, development, redevelopment, management and leasing of real estate properties.  We review operating and financial results for each property on an individual basis and do not distinguish or group our properties based on geography, size, or type.  We, therefore, aggregate all of our properties into

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one reportable segment due to their similarities with regard to the nature and economics of the properties, tenants and operational process.

Human Capital

 

We believe that our employees are our most important asset.  As of December 31, 2020, we had 61 full-time employees, all of whom are located in the United States, with the majority located in New York and California.  We strive to hire and develop the top talent in the industry, and we believe that our business offers a unique opportunity for individuals to grow and learn.

 

During 2020, our number one priority was the health and safety of our team, our families and loved ones, our communities and our partners, including our tenants, contractors, and other stakeholders. We understand the importance of the mental, physical and social health and well-being of our employees and take actions to promote good health such as providing mental health days off.

 

Our core principles guide how we conduct ourselves and approach the challenges and opportunities that we face. Our core principles are:

 

-

Maintain a diverse and inclusive culture based on respect

 

-

Build relationships for the long term

 

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Create an environment of constant improvement

 

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Be entrepreneurial and proactive

 

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Inspire people and communities through our projects

We believe that diversity and inclusion at all levels of our organization are imperative to our future successes. This means that bringing your authentic self to work every day is seen as an asset. We have focused our diversity and inclusion efforts on employee recruitment, employee engagement, community outreach and in partnering with like-minded organizations. Our organization is comprised of 33% women and 23% people of color.  Our management team, which is defined as Senior Vice Presidents and above, is comprised of 18% women and 18% people of color. We have two members of our Board of Trustees who are diverse candidates. We regularly review our compensation practices to ensure employees from underrepresented groups are not being underpaid relative to others doing the same or similar work. All employees receive training in the prevention and reporting of sexual harassment, discriminatory and abusive conduct in the workplace.

 

Because the engagement of our employees is important, we encourage a work environment that fosters collaboration across departments and levels. We take pride in being able to have the newest member of the teamwork side-by-side with our most tenured and senior executives.  We believe this encourages creativity, creates opportunities for improvements and efficiencies, and strengthens our team. We regularly solicit feedback from our employees and take actions designed to increase employee engagement.

We depend on our people to create value in our portfolio and company. We offer attractive compensation with comprehensive benefits for employees and their dependents.

Available Information

Our principal offices are located at 500 Fifth Avenue, New York, New York 10110 and our telephone number is (212) 355-7800. Our website address is www.seritage.com. Our reports electronically filed with or furnished to the Securities and Exchange Commission (“SEC”) pursuant to Section 13(a) or 15(d) of the Exchange Act can be accessed through this site, free of charge, as soon as reasonably practicable after we electronically file or furnish such reports. These filings are also available on the SEC’s website at www.sec.gov. Our website also contains copies of our corporate governance guidelines and code of business conduct and ethics as well as the charters of our audit, compensation and nominating and corporate governance committees. The information on our website is not part of this or any other report we file with or furnish to the SEC.

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ITEM 1A.

RISK FACTORS

Certain factors may have a material adverse effect on our business, financial condition and results of operations. You should consider carefully the risks and uncertainties described below, in addition to other information contained in this Annual Report, including our consolidated financial statements and related notes. The risks and uncertainties described below are not the only ones we face.  Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business.  If any of the following risks actually occurs, our business, financial condition, results of operations, and future prospects could be materially and adversely affected.  In that event, the trading price of our common shares of beneficial interest could decline, and you could lose part or all of your investment.

 

Risk Factor Summary

The following is a summary of the principal factors that make an investment in our securities speculative or risky.

Risks Related to Our Business and Operations

 

The COVID-19 pandemic is expected to, and the future outbreak of other highly infectious or contagious diseases may, materially and adversely impact the business of our tenants and our business.

 

We are dependent on the ability of our top tenants to successfully operate their businesses and a failure to operate successfully, including a bankruptcy or insolvency, could have a material adverse effect on our business.

 

We may not be able to renew leases or re-lease space at our properties and property vacancies could result in significant capital expenditures.

 

Following the Sears Holdings bankruptcy, we have been named as a defendant in litigation that could adversely affect our business, divert management’s attention from our business and subject us to liabilities.

 

Real estate investments are relatively illiquid and our pursuit of investments, including redevelopments, in properties may be unsuccessful or fail to meet our expectations.

 

Both we and our tenants face a wide range of competition that could affect our ability to operate profitably.

 

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

 

We have ongoing capital needs and may not be able to obtain additional financing on acceptable terms. We may incur mortgage indebtedness and other borrowings, which may increase our business risks.

 

Changes in federal tax law could materially adversely affect our business by increasing our tax or tax compliance costs, including if we are unable to pass increased taxes on any real estate onto our tenants.

 

Changes in building and/or zoning laws may require us to meet additional or more stringent construction requirements.

 

Our real estate assets may be subject to impairment charges.

 

Properties in our portfolio may be subject to ground leases; if we are found to be in breach of these ground leases or are unable to renew them, we could be materially and adversely affected.

 

Certain properties within our portfolio are subject to restrictions, some of which contain a purchase option or right of first refusal or right of first offer in favor of a third party.

 

Compliance with the Americans with Disabilities Act may require us to make expenditures.

 

Environmental, health, safety and land use laws and regulations may limit or restrict some of our operations and compliance costs or liabilities may materially and adversely affect us.

 

Possible terrorist activity or other acts of violence or cybersecurity incidents could adversely affect our financial condition and results of operations.

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Covenants in our Term Loan Facility may limit our operational flexibility and a covenant breach or default could adversely affect our business and financial condition.

 

We have limited operating history as a REIT and an independent public company, and our inexperience may impede our ability to successfully manage our business or implement effective internal controls.

 

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

 

Seritage’s and the Operating Partnership’s organizational documents and Maryland law contain provisions that may delay, defer or prevent an acquisition of Class A common shares or a change in control.

 

We may experience insurance related losses or insurance proceeds may not be available to us, which could result in a significant loss, decrease anticipated future revenues or cause us to incur unanticipated expense.

 

Conflicts of interest may exist between the interests of Seritage shareholders and the interests of holders of Operating Partnership units, which could result in harm the interests of Seritage shareholders.

 

ESL exerts substantial influence over us, and its interests may differ from or conflict with the interests of our other shareholders. ESL owns a substantial percentage of the Operating Partnership units, which may be exchanged, and which will result in certain transactions requiring the approval of ESL.

 

The businesses of several of our unconsolidated entities are similar to each other and the occurrence of risks that adversely affect one unconsolidated entity could also adversely affect the others.

Risks Related to Status as a REIT

 

Qualifying as a REIT involves highly technical and complex provisions of the Code. If we do not qualify to be taxed as a REIT, or fail to remain qualified as a REIT, we will be subject to U.S. federal income tax as a regular corporation and could face a substantial tax liability, which would reduce the amount of cash available for distribution to our shareholders. Even if we remain qualified as a REIT, we may face other tax liabilities that reduce our cash flow.

 

Dividends payable by REITs do not qualify for the reduced tax rates available for certain “qualified dividends,” but would generally qualify for a partial deduction with respect to certain taxpayers. We may from time to time make distributions to our shareholders in the form of taxable stock dividends, which could result in shareholders incurring tax liability without receiving sufficient cash to pay such tax.

 

REIT distribution requirements could adversely affect our ability to execute our business plan. Complying with REIT requirements may cause us to liquidate or forgo otherwise attractive opportunities, including limitations on our ability to hedge effectively, and may cause us to incur tax liabilities.

 

Changes in federal tax law affected the taxation of us and may affect the desirability of investing in a REIT. Further legislation or other actions could have a negative effect on us.

Risks Related to Ownership of our Securities

 

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

 

Debt or preferred equity securities, such as the Series A Preferred Shares, rank senior to our common shares and may adversely affect the market price of our common shares.

 

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

 

The number of shares available for future sale, our earnings and cash distributions could adversely affect the market price of Class A common shares.

 

A lack of active trading market for the Series A Preferred Shares may negatively affect the market value of, and the ability of holders of our Series A Preferred Shares to transfer or sell, their shares.

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The Series A Preferred Shares are subordinate in right of payment to debt. The interests of holders of Series A Preferred Shares could be diluted by transactions such as the issuance of additional preferred shares.

 

Dividends on our preferred shares, including the Series A Preferred Shares, are discretionary.

 

Holders of Series A Preferred Shares will have limited voting rights.

Risks Related to Our Business and Operations

 

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

Since being reported in December 2019, COVID-19 has spread globally, including to every state in the United States. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic, and on March 13, 2020, the United States declared a national emergency with respect to COVID-19.

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

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

These containment measures and other factors have affected operations at the Company’s properties.  As of December 31, 2020, the Company had collected 93% of rental income for the three months ended December 31, 2020, and agreed to defer an additional 4%.  As of March 5, 2021, the Company had also collected 95% of January and February 2021 rental income, and agreed to defer an additional 2%.  While the Company intends to enforce its contractual rights under its leases, there can be no assurance that tenants will meet their future obligations or that additional rental modification agreements will not be necessary.  Some of our tenants may not re-open even after the aforementioned restrictions are lifted, which could have a material impact on occupancy at our properties which could result in an increase in the number of co-tenancy claims due to falling below required occupancy thresholds and may impact our results.

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

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

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The COVID-19 pandemic has also led to complete or partial shutdowns of manufacturing facilities and distribution centers in many countries, which could result in temporary or long-term disruptions in our tenants’ supply chains, or otherwise delay the delivery of inventory or other goods necessary for our tenants’ operations. Our tenants may also be negatively impacted if the outbreak of COVID-19 occurs within their workforce or otherwise disrupts their management. Further, certain of our tenants may not have been eligible for or successful in securing stimulus funds under the Coronavirus Aid, Relief, and Economic Security Act of 2020.

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

 

Difficulty accessing debt and equity capital on attractive terms, or at all, impacts to our credit ratings, and a severe disruption and instability in the global financial markets or deteriorations in credit and financing conditions may affect our access to capital necessary to fund business operations or address maturing liabilities on a timely basis and our tenants' ability to fund their business operations and meet their obligations to us;

 

The financial impact could negatively impact our ability to pay dividends to our shareholders;

 

The financial impact of the COVID-19 pandemic could negatively impact our future compliance with financial covenants of our $2.0 billion term loan facility (the “Term Loan Facility”) with Berkshire Hathaway Life Insurance Company of Nebraska (“Berkshire Hathaway”) or result in a default and potentially an acceleration of indebtedness, which non-compliance could negatively impact our ability to make additional borrowings under our Incremental Funding Facility (as defined below), conduct asset sales, fund development activity or pay dividends to our shareholders;

 

The worsening of estimated future cash flows due to a change in our plans, policies, or views of market and economic conditions as it relates to one or more of our adversely impacted properties could result in the recognition of substantial impairment charges imposed on our assets;

 

The credit quality of our tenants could be negatively impacted and we may significantly increase our allowance for doubtful accounts;

 

Difficulties completing our redevelopment projects on a timely basis, on budget or at all;

 

A general decline in business activity and demand for real estate transactions could adversely affect our ability or desire to reinvest in or redevelop our properties; and

 

The potential negative impact on the health of our personnel, particularly if a significant number of them are impacted, could result in a deterioration in our ability to ensure business continuity during this disruption.

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

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

 

We are dependent on the ability of our major tenants, to successfully operate their businesses. Our tenants’ failure to operate their businesses successfully, or the occurrence of an event that has a material adverse effect on the business, financial condition or results of operations of any of our major tenants, could have a material adverse effect on our business, financial condition or results of operations.

A significant portion of our leased properties are leased to our major tenants. As a result, the success of our investments, at least in the short-term, is materially dependent on the financial condition of our major tenants. At any time, our tenants may experience a downturn in their respective businesses that may significantly weaken their financial condition, particularly during periods of economic uncertainty.  This uncertainty may be exacerbated as a result of actual changes in economic conditions, including as a result of market dynamics, trends in consumer income, rising energy prices, tariffs or trade disputes, and natural or manmade disasters, including epidemic or pandemic disease, or the impact of the fear of such changes on consumer behavior.  As a result, our tenants may delay lease commencements, decline to extend or renew leases upon expiration, fail to make rental payments when due, close a number of locations or declare bankruptcy.

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The inability or unwillingness of our any of major tenants to meet rent obligations and other obligations could materially adversely affect our business, financial condition or results of operations, including a reduction in operating cash flow that can be used to pay the interest, principal and other costs and expenses under our financings, or to pay cash dividends to Seritage shareholders.

In addition, certain of our lease agreements require our tenants to pay certain insurance, taxes, utilities and maintenance and repair expenses in connection with the leased properties and to indemnify, defend and hold us harmless from and against various claims, litigation and liabilities arising in connection with their respective business, subject to proportionate sharing of expenses and certain other limitations. Our exposure to rental payments from our major tenants as a material source of our rental income may limit our ability to enforce our rights under our lease agreements with such tenants.

The risk of financial failure of, or default in payment by, a major tenant is magnified in situations where we lease multiple properties to a single tenant under a master lease, and we may be limited in our ability to enforce our rights under such agreements.  In such event, we may have been unable to locate a suitable master lessee or a lessee for individual properties at similar rental rates and other obligations and in a timely manner at all, which would have had the effect of reducing our rental revenues.

There can be no assurance as to how our major tenants will perform in the future. Outcomes not currently foreseen by us may occur, any of which could have a material and adverse impact on our business, results of operations and financial condition.

The future bankruptcy or insolvency of any of our tenants could result in the termination of such tenant’s lease and material losses to us.

The future bankruptcy or insolvency of any of our tenants, could diminish the rental revenue we receive from that property or could force us to take back tenant space as a result of a default or a rejection of the lease by a tenant in bankruptcy. Any claims against bankrupt tenants for unpaid future rent are subject to statutory limitations that would likely result in our receipt of rental revenues that are substantially less than the contractually specified rent we are owed under their leases or no payments at all. In addition, any claim we have for unpaid past rent may not be paid in full. Federal law may prohibit us from evicting a tenant based solely upon its recent bankruptcy filing (or a tenant in the event of such tenants bankruptcy or insolvency). We may also be unable to re-lease a terminated or rejected space or re-lease it on comparable or more favorable terms. If we do re-lease rejected space, we may incur costs for brokerage, marketing and tenant expenses.

Bankruptcy laws afford certain protections to tenants that may also affect the treatment of master leases. Subject to certain restrictions, a tenant under a master lease generally is required to assume or reject the master lease as a whole, rather than making the decision on a property-by-property basis. This prevents the tenant from assuming only the better performing properties and terminating the master lease with respect to the poorer performing properties.

We may not be able to renew leases or re-lease space at our properties and property vacancies could result in significant capital expenditures.

When leases for our properties expire or are terminated, the premises may not be re-leased in a timely manner or at all, or the terms of re-leasing, including the cost of allowances and concessions to tenants, may be less favorable than the then-existing lease terms. The loss of a tenant through lease expiration or other circumstances may require us to spend (in addition to other re-letting expenses) significant amounts of capital to renovate the property before it is suitable for a new tenant and cause us to incur significant costs in the form of ongoing expenses for property maintenance, taxes, insurance and other expenses. Many of the leases we will enter into or acquire may be for properties that are especially suited to the particular business of the tenants operating on those properties. Because these properties have been designed or physically modified for a particular tenant, if the current lease is terminated or not renewed, we may be required to renovate the property at substantial costs, decrease the rent we charge or provide other concessions to re-lease the property. In addition, if we are required or otherwise determine to sell the property, we may have difficulty selling it to a party other than the tenant due to the special purpose for which the property may have been designed or modified. This potential illiquidity may limit our ability to quickly modify our portfolio in response to changes in economic or other conditions, including tenant demand. Also, we may not be able to lease new properties to an appropriate mix of tenants or for rents that are consistent with our expectations. To the extent that our leasing plans are not achieved or we incur significant capital expenditures as a result of property vacancies, our business, results of operations and financial condition could be materially adversely affected.

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

On April 18, 2019, at the direction of the Restructuring Sub-Committee of the Restructuring Committee of the Board of Directors of Sears Holdings, plaintiffs Sears Holdings, Sears, Roebuck & Co., Sears Development Co., Kmart Corporation, and Kmart of Washington, LLC commenced a litigation (the “Litigation”) in the Bankruptcy Court naming us and certain of our affiliates, as well as

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affiliates of ESL Investments, Inc. and Sears Holdings, and certain other third parties, as defendants. The Litigation is dual captioned as In re: Sears Holdings Corporation, et al., Case No. 18-23538 (RDD) and Sears Holdings Corporation et al., v. Lampert et al., Case No. 19-08250 (RDD).  The initial complaint has been superseded by the Amended Complaint described below.

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

On November 25, 2019, the Creditors’ Committee filed a first amended complaint (the “Amended Complaint”) in the Bankruptcy Court naming us and certain of our affiliates, as well as affiliates of ESL Investments, Inc. and Sears Holdings, and certain other third parties, as defendants. The Amended Complaint alleges, among other things, that certain transactions undertaken by Sears Holdings since 2011 (including the July 2015 transactions giving rise to Seritage, the execution of the Master Lease with Sears Holdings (the “Original Master Lease”), and the acquisition of real estate from Sears Holdings) constituted actual and/or constructive fraudulent transfers and/or illegal dividends by Sears Holdings and that the real estate acquired by Seritage from Sears Holdings in July 2015 was worth hundreds of millions of dollars more than the purchase price paid.  The Amended Complaint further alleges that certain releases provided to Seritage and certain other defendants in connection with the Sears Holdings derivative litigation in the Delaware Court of Chancery in 2017 should be avoided and/or declared null and void as an actual and/or constructive fraudulent conveyance.  The Amended Complaint seeks as relief, among other things, declaratory relief, avoidance of the allegedly actual and/or constructive fraudulent transfers, disgorgement, recovery of the property fraudulently transferred or, in the alternative, compensatory damages in an unspecified amount to be determined at trial, equitable subordination and disallowance of defendants’ claims as creditors, punitive and exemplary damages for any intentional wrongdoing, and reasonable attorneys’ fees, costs, and expenses.  On February 21, 2020, the Seritage defendants filed a partial motion to dismiss seeking dismissal of the claims in the Amended Complaint relating to the release received in the Sears Holdings derivative litigation unjust enrichment and equitable subordination.

On February 21, 2020, the Seritage defendants filed a partial motion to dismiss seeking dismissal of the claims in the operative complaint in the Litigation relating to the release received in the Sears Holdings derivative litigation, unjust enrichment, and equitable subordination. Briefing and oral argument on the motions were completed in August 2020, and the parties are awaiting a decision.  The Company believes that the claims against the Seritage Defendants in the Litigation are without merit and intends to defend against them vigorously.

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

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

Real estate investments are relatively illiquid.

Our properties represent a substantial portion of our total consolidated assets, and these investments are relatively illiquid. Significant expenditures associated with each equity investment, such as mortgage payments, real estate taxes, insurance, and repair and maintenance costs, are generally not reduced when circumstances cause a reduction in income from the investment. If income from a property declines while the related expenses do not decline, our income and cash available to us would be adversely affected. If it becomes necessary or desirable for us to dispose of one or more of our mortgaged properties, we might not be able to obtain a release of the lien on the mortgaged property without payment of the associated debt or other costs and expenses. As a result, our ability to

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sell one or more of our properties or investments in real estate in response to any changes in economic or other conditions may be limited. If we want to sell a property, we may not be able to dispose of it in the desired time period or at a sale price that would exceed the cost of our investment in that property. In addition, our ability to enter into asset sales or joint ventures is subject to among other uncertainties, our ability to identify prospective purchasers, the willingness of prospective purchasers to enter into transactions on commercially reasonable terms, negotiations with counterparties, satisfactory examination of property and title by the purchasers, the ability to obtain title and other relevant insurance, applicable consent rights of the lender under our term loan facility, the ability of purchasers to obtain adequate financing, and customary closing conditions.

The number of potential buyers for certain properties that we may seek to sell may be limited by the presence of such properties in retail or mall complexes owned or managed by other property owners. If we decide to sell any of our properties, we may provide financing to purchasers and bear the risk that the purchasers may default, which may delay or prevent our use of the proceeds of the sales for other purposes or the distribution of such proceeds to our shareholders.

Both we and our tenants face a wide range of competition that could affect our ability to operate profitably.

The presence of competitive alternatives, both to our properties and the businesses that lease our properties, affects our ability to lease space and the level of rents we can obtain. Our properties operate in locations that compete with other retail properties and also compete with other forms of retailing, such as catalogs and e-commerce websites. Competition may also come from strip centers, outlet centers, lifestyle centers and malls, and both existing and future development projects. New construction, renovations and expansions at competing sites could also negatively affect our properties. In addition, we compete with other retail property companies for tenants and qualified management. These other retail property companies may have relationships with tenants that we do not have since we have a limited operating history, including with respect to national chains that may be desirable tenants. If we are unable to successfully compete, our business, results of operations and financial condition could be materially adversely affected. See also Item 1. Business - Competition.

In addition, the retail business is highly competitive and if our retail tenants fail to differentiate their shopping experiences, create an attractive value proposition or execute their business strategies, they may terminate, default on, or fail to renew their leases with us, and our results of operations and financial condition could be materially adversely affected. Furthermore, we believe that the increase in digital and mobile technology usage has increased the speed of the transition from shopping at physical locations to web-based purchases and that our tenants, including Holdco, may be negatively affected by these changing consumer spending habits. If our tenants are unsuccessful in adapting their businesses, and, as a result terminate, default on, or fail to renew their leases with us, our results of operations and financial condition could be materially adversely affected.

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

We intend to grow our business through investments in, and acquisitions or development of, properties, including through the recapture and redevelopment of space at many of our properties. However, our industry is highly competitive, and we face competition from other REITs, investment companies, private equity and hedge fund investors, sovereign funds, lenders, and other investors, some of whom are significantly larger and have greater resources and lower costs of capital. This competition will make it more challenging to identify and successfully capitalize on acquisition and development opportunities that meet our investment objectives. If we are unable to finance acquisitions or other development opportunities on commercially favorable terms, our business, financial condition or results of operations could be materially adversely affected. Additionally, the fact that we must distribute 90% of our net taxable income in order to maintain our qualification as a REIT may limit our ability to rely upon rental payments from leased properties or subsequently acquired properties in order to finance acquisitions. As a result, if debt or equity financing is not available on acceptable terms, further acquisitions or other development opportunities might be limited or curtailed.

Investments in, and acquisitions of, properties we might seek to acquire entail risks associated with real estate investments generally, including (but not limited to) the following risks and as noted elsewhere in this section:

 

we may be unable to acquire a desired property because of competition;

 

even if we are able to acquire a desired property, competition from other potential acquirers may significantly increase the purchase price;

 

even if we enter into agreements for the acquisition of properties, these agreements are subject to customary conditions to closing, including completion of due diligence investigations to our satisfaction;

 

we may incur significant costs and divert management attention in connection with evaluation and negotiation of potential acquisitions, including ones that we are subsequently unable to complete;

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we may acquire properties that are not initially accretive to our results upon acquisition, and we may not successfully manage and lease those properties to meet our expectations;

 

we may be unable to finance the acquisition on favorable terms in the time period we desire, or at all;

 

even if we are able to finance the acquisition, our cash flow may be insufficient to meet our required principal and interest payments;

 

we may spend more than budgeted to make necessary improvements or renovations to acquired properties;

 

we may be unable to quickly and efficiently integrate new acquisitions, particularly the acquisition of portfolios of properties, into our existing operations;

 

market conditions may result in higher than expected vacancy rates and lower than expected rental rates; and

 

we may acquire properties subject to liabilities and without any recourse, or with only limited recourse, with respect to unknown liabilities.

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

Current and future redevelopment may not yield expected returns.

We expect to undertake redevelopment, expansion and reinvestment projects involving our properties as part of our long-term strategy. Likewise, each unconsolidated entity expects to undertake redevelopment, expansion and reinvestment projects involving its Unconsolidated Properties, with respect to which we may be required to make additional capital contributions to the applicable unconsolidated entity under certain circumstances. These projects are subject to a number of risks, including (but not limited to):

 

abandonment of redevelopment activities after expending resources to determine feasibility;

 

loss of rental income, as well as payments of maintenance, repair, real estate taxes and other charges, including from Holdco related to space that is recaptured pursuant to the Holdco Master Lease, which may not be re-leased to third parties;

 

restrictions or obligations imposed pursuant to other agreements;

 

construction and/or lease-up costs (including tenant improvements or allowances) and delays and cost overruns, including construction costs that exceed original estimates;

 

failure to achieve expected occupancy and/or rent levels within the projected time frame or at all;

 

inability to operate successfully in new markets where new properties are located;

 

failure to successfully manage, or find suitable third-party development partners for, the development of residential, office or other mixed-use properties;

 

inability to successfully integrate new or redeveloped properties into existing operations;

 

difficulty obtaining financing on acceptable terms or paying operating expenses and debt service costs associated with redevelopment properties prior to sufficient occupancy and commencement of rental obligations under new leases;

 

changes in zoning, building and land use laws, and conditions, restrictions or limitations of, and delays or failures to obtain, necessary zoning, building, occupancy, land use and other governmental permits;

 

changes in local real estate market conditions, including an oversupply of, or a reduction in demand for, retail space or retail goods, and the availability and creditworthiness of current and prospective tenants;

 

negative perceptions by retailers or shoppers of the safety, convenience and attractiveness of the property;

 

exposure to fluctuations in the general economy due to the significant time lag between commencement and completion of redevelopment projects; and

 

vacancies or ability to rent space on favorable terms, including possible market pressures to offer tenants rent abatements, tenant improvements, early termination rights or below-market renewal options.

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If any of these events occur at any time during the process with respect to any project, overall project costs may significantly exceed initial cost estimates, which could result in reduced returns or losses from such investments. In addition, we may not have sufficient liquidity to fund such projects, and delays in the completion of a redevelopment project may provide various tenants the right to withdraw from a property.

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

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

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

As of December 31, 2020, we had aggregate outstanding indebtedness of $1.6 billion. We may incur additional indebtedness in the future to refinance our existing indebtedness, to finance newly acquired properties or capital contributions to joint ventures, or to fund retenanting and redevelopment projects. Our existing debt and any significant additional indebtedness could require a substantial portion of our cash flow to make interest and principal payments. Demands on our cash resources from debt service will reduce funds available to us to pay dividends, make capital expenditures and acquisitions or carry out other aspects of our business strategy. Our indebtedness may also limit our ability to adjust rapidly to changing market conditions, make us more vulnerable to general adverse economic and industry conditions and create competitive disadvantages for us compared to other companies with relatively lower debt levels. Increased future debt service obligations may limit our operational flexibility, including our ability to acquire properties, finance or refinance our properties, contribute properties to joint ventures or sell properties as needed.

Our primary uses of cash include the payment of property operating and other expenses, including general and administrative expenses and debt service, and the reinvestment in and redevelopment of our properties.  As a result of a decrease in occupancy levels due to our recapture of space for redevelopment purposes and the execution of termination rights under the Original Master Lease and Holdco Master Lease, our property rental income, which is our primary source of operating cash flow, did not fully fund property operating and other expenses incurred during the year ended December 31, 2020. Property operating and other expenses are projected to continue to exceed property rental income until such time as additional tenants commence paying rent, and we plan to incur additional development expenditures as we continue to invest in the redevelopment of our portfolio. While we do not currently have the liquid funds available to fully fund projected property and other expenses and planned development expenditures, we expect to fund these uses of cash with a combination of capital sources including, but not limited to, sales of Wholly Owned Properties, sales of interests in Unconsolidated Properties and potential credit and capital markets transactions, subject to compliance with certain conditions and/or the consent of our lender under our Term Loan Facility.

As of December 31, 2020, we were not in compliance with certain financial metrics applicable to us under the agreements governing our term loan facility. As a result, we must receive the consent of the lender to dispose of assets via sale or joint venture and, as of December 31, 2020, the lender had provided such consent for all such transactions submitted for approval. There can be no assurance that the lender will consent to future dispositions of assets.  Additionally, the lender has the right to request mortgages against our assets pursuant to the mortgage and collateral requirement. During the year ended December 31, 2019, the lender requested mortgages on a majority of our portfolio, and then during the year ended December 31, 2020, the lender requested mortgages on the remaining unencumbered assets.

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

We may be unable to obtain additional financing or financing on favorable terms or our operating cash flow may be insufficient to satisfy our financial obligations under any indebtedness outstanding from time to time. Among other things, the absence of an

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investment grade credit rating or any credit rating downgrade could increase our financing costs and could limit our access to financing sources. If financing is not available when needed, or is available only on unfavorable terms, we may be unable to enhance our properties or develop new properties, complete acquisitions or otherwise take advantage of business opportunities or respond to competitive pressures, any of which could have a material adverse effect on our business, financial condition and results of operations. A decrease in available liquidity could also impair our ability to pay dividends to our shareholders.

If additional funds are raised through the issuance of equity securities, our shareholders may experience significant dilution. Additionally, sales of substantial amounts of Class A common shares in the public market, or the perception that such sales could occur, could adversely affect the market price of Class A common shares, may make it more difficult for our shareholders to sell their common shares at a time and price that they deem appropriate, and could impair our future ability to raise capital through an offering of our equity securities.

Changes in federal tax law could materially adversely affect our business, financial condition and profitability by increasing our tax or tax compliance costs.

On December 20, 2017, the U.S. Congress passed Public Law No. 115-97, known as the Tax Cuts and Jobs Act of 2017 (the TCJA), which was signed into law on December 22, 2017. The enactment of the TCJA has given rise to numerous interpretive issues and ambiguities and future legislation may be enacted to clarify or modify the TCJA. In addition, federal legislation intended to ameliorate the economic impact of the COVID-19 pandemic has been enacted that makes technical corrections to, or modifies on a temporary basis, certain provisions of the TCJA, including the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which was signed into law as Public Law No. 116-136 on March 27, 2020.   It is possible that additional legislation may be enacted in the future. Any such future legislation, as well as any regulations or other interpretive guidance, could take effect retroactively, and could adversely affect our business and financial condition increasing our tax or tax compliance costs. The impact of any such law, regulation or interpretation may have a material and adverse impact on us and our shareholders.

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

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

Changes in building and/or zoning laws may require us to update a property or prevent us from fully restoring a property in the event of a substantial casualty loss and/or require us to meet additional or more stringent construction requirements.

Due to changes in, among other things, applicable building and zoning laws, ordinances and codes that may affect certain of our properties that have come into effect after the initial construction of the properties, certain properties may not comply fully with current building and/or zoning laws, including electrical, fire, health and safety codes and regulations, use, lot coverage, parking and setback requirements, but may qualify as permitted non-conforming uses. Such changes in building and zoning laws may require updating various existing physical conditions of buildings in connection with our recapture, renovation, and/or redevelopment of properties. In addition, such changes in building and zoning laws may limit our or our tenants ability to restore the premises of a property to its previous condition in the event of a substantial casualty loss with respect to the property or the ability to refurbish, expand or renovate such property to remain compliant, or increase the cost of construction in order to comply with changes in building or zoning codes and regulations. If we are unable to restore a property to its prior use after a substantial casualty loss or are required to comply with more stringent building or zoning codes and regulations, we may be unable to re-lease the space at a comparable effective rent or sell the property at an acceptable price, which may materially and adversely affect us.

Our real estate assets may be subject to impairment charges.

On a periodic basis, we must assess whether there are any indicators that the value of our real estate assets and other investments may be impaired. If an impairment indicator is identified, a propertys value is considered to be impaired only if managements estimate of current and projected operating cash flows (undiscounted and unlevered), taking into account the anticipated and probability weighted holdings periods, are less than the carrying value of the property. In our estimate of cash flow projections, we consider factors such as expected future operating income, trends and prospects, the effects of demand, competition and other factors. If we are evaluating the potential sale of an asset or development alternatives, the undiscounted future cash flows consider the most likely course of action at the balance sheet date based on current plans, intended holding periods and available market information. We are required to make subjective assessments as to whether there are impairments in the value of our real estate assets and other investments. These assessments may have a direct impact on our earnings because recording an impairment charge results in an immediate negative

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adjustment to earnings. We may take impairment charges in the future related to the impairment of our assets, and any future impairment could have a material adverse effect on our results of operations in the period in which the impairment charge is taken.

Properties in our portfolio may be subject to ground leases; if we are found to be in breach of these ground leases or are unable to renew them, we could be materially and adversely affected.

We currently have two properties in our wholly-owned portfolio that are on land subject to a ground lease. Accordingly, we only own a long-term leasehold in the land underlying these properties, and we own the improvements thereon only during the term of the ground lease. In the future, our portfolio may include additional properties subject to ground leases or similar interests. If we are found to be in breach of a ground lease, we could lose the right to use the property and could also be liable to the ground lessor for damages. In addition, unless we can purchase a fee interest in the underlying land or extend the terms of these leases before their expiration, which we may be unable to do, we will lose our right to operate these properties and our interest in the improvements upon expiration of the leases. Our ability to exercise options to extend the term of our ground lease is subject to the condition that we are not in default under the terms of the ground lease at the time that we exercise such options, and we may not be able to exercise our options at such time. In addition, two Unconsolidated Properties are currently ground leased or leased and, therefore, subject to similar risks. Furthermore, we may not be able to renew our ground lease or future ground leases upon their expiration (after the exercise of all renewal options). If we were to lose the right to use a property due to a breach or non-renewal or final expiration of the ground lease, we would be unable to derive income from such property, which could materially and adversely affect our business, financial conditions or results of operations.

Certain properties within our portfolio are subject to restrictions pursuant to reciprocal easement agreements, operating agreements, or similar agreements, some of which contain a purchase option or right of first refusal or right of first offer in favor of a third party.

Many of the properties in our portfolio are, and properties that we acquire in the future may be, subject to use restrictions and/or operational requirements imposed pursuant to ground leases, restrictive covenants or conditions, reciprocal easement agreements or operating agreements (collectively, Property Restrictions) that could adversely affect our ability to redevelop the properties or lease space to third parties. Such Property Restrictions could include, for example, limitations on alterations, changes, expansions, or reconfiguration of properties; limitations on use of properties, including for retail uses only; limitations affecting parking requirements; restrictions on exterior or interior signage or facades; or access to an adjoining mall, among other things. In certain cases, consent of the other party or parties to such agreements may be required when altering, reconfiguring, expanding, redeveloping or re-leasing properties. Failure to secure such consents when necessary may harm our ability to execute leasing, redevelopment or expansion strategies, which could adversely affect our business, financial condition or results of operations. In certain cases, a third party may have a purchase option or right of first refusal or right of first offer that is activated by a sale or transfer of the property, or a change in use or operations, including a closing of the Sears operation or cessation of business operations, on the encumbered property.  From time to time, we have been involved in disputes or legal proceedings relating to such Property Restrictions, which may result in the incurrence of legal costs and diversion of management resources to resolve.

Economic conditions may affect the cost of borrowing, which could materially adversely affect our business.

Our business is affected by a number of factors that are largely beyond our control but may nevertheless have a significant negative impact on us. These factors include, but are not limited to:

 

interest rates and credit spreads;

 

the availability of credit, including the price, terms and conditions under which it can be obtained;

 

a decrease in consumer spending or sentiment, including as a result of increases in savings rates and tax increases, and any effect that this may have on retail activity;

 

the actual and perceived state of the real estate and retail markets, market for dividend-paying stocks and public capital markets in general; and

 

unemployment rates, both nationwide and within the primary markets in which we operate.

In addition, economic conditions such as inflation or deflation could materially adversely affect our business, financial condition and results of operations. Deflation may have an impact on our ability to repay our debt. Deflation may delay consumption and thus weaken tenant sales, which may reduce our tenants ability to pay rents. Deflationary pressure on retailers may diminish their ability to rent our space and decrease our ability to re-lease the space on favorable terms to us. In an inflationary economic environment, increased inflation may have a pronounced negative impact on the interest expense we pay in connection with our indebtedness and our general and administrative expenses, as these costs could increase at a rate higher than rents we collect. Also, inflation may

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adversely affect tenant leases with stated rent increases, which could be lower than the increase in inflation at any given time. Inflation could also have an adverse effect on consumer spending, which could impact our tenants sales and, in turn, our own results of operations. Restricted lending practices may impact our ability to obtain financing for our properties and may also negatively impact our tenants ability to obtain credit. Decreases in consumer demand can have a direct impact on our tenants and the rents we receive.

Compliance with the Americans with Disabilities Act may require us to make expenditures that adversely affect our cash flows.

The Americans with Disabilities Act (the ADA) has separate compliance requirements for public accommodations and commercial facilities, but generally requires that buildings be made accessible to people with disabilities. Compliance with the ADA requirements could require removal of access barriers, and non-compliance could result in imposition of fines by the United States government or an award of damages to private litigants, or both. While the tenants to whom our properties are leased are generally obligated by law or lease to comply with the ADA provisions applicable to the property being leased to them, if required changes involve other property not being leased to such tenants, if the required changes include greater expenditures than anticipated, or if the changes must be made on a more accelerated basis than anticipated, the ability of these tenants to cover costs could be adversely affected. Moreover, certain other leases may require the landlord to comply with the ADA with respect to the building as a whole and/or the tenants space. As a result of any of the foregoing circumstances, we could be required to expend funds to comply with the provisions of the ADA, which could adversely affect our results of operations and financial condition.

Environmental, health, safety and land use laws and regulations may limit or restrict some of our operations or otherwise cause us to incur significant costs.

As the owner or operator of various real properties and facilities, we must comply with various federal, state and local environmental, health, safety and land use laws and regulations. We and our properties are subject to such laws and regulations relating to the use, storage, disposal, emission and release of hazardous and non-hazardous substances and employee health and safety, as well as zoning restrictions. A substantial portion of our properties that have resulted in certain remediation activities currently include, or previously included, automotive care center facilities and retail fueling facilities, and/or above-ground or underground storage tanks, and are or were subject to laws and regulations governing the handling, storage and disposal of hazardous substances contained in some of the products or materials used or sold in the automotive care center facilities (such as gasoline, motor oil, fluid in hydraulic lifts, antifreeze, solvents and lubricants), the recycling/disposal of batteries and tires, air emissions, wastewater discharges and waste management. In addition to these products, the equipment in use or previously used at such properties, such as service equipment, car lifts, oil/water separators, and storage tanks, has been subject to increasing environmental regulation relating to, among other things, the storage, handling, use, disposal and transportation of hazardous materials. There are also federal, state and local laws, regulations and ordinances that govern the use, removal and/or replacement of underground storage tanks in the event of a release on, or an upgrade or redevelopment of, certain properties. Such laws, as well as common-law standards, may impose liability for any releases of hazardous substances associated with the underground storage tanks and may provide for third parties to seek recovery from owners or operators of such properties for damages associated with such releases. If hazardous substances are released from any underground storage tanks on any of our properties, we may be materially and adversely affected. In a few states, transfers of some types of sites are conditioned upon clean-up of contamination. If any of our properties are subject to such contamination, we may be subject to substantial clean-up costs in order to sell or otherwise transfer the property.

As the owner or operator of real property, we may also incur liability based on various building conditions. For example, buildings and other structures on properties that we currently own or operate or those we acquire or operate in the future contain, may contain, or may have contained, asbestos-containing material (or “ACM”). Environmental, health and safety laws require that ACM be properly managed and maintained and may impose fines or penalties on owners, operators or employers for non-compliance with those requirements.  These requirements include special precautions, such as removal, abatement or air monitoring, if ACM would be disturbed during maintenance, renovation or demolition of a building, potentially resulting in substantial costs.  In addition, we may be subject to liability for personal injury or property damage sustained as a result of exposure to ACM or releases of ACM into the environment.  In addition, the presence of significant mold or other airborne contaminants at any of our properties could require us to undertake a costly remediation program to contain or remove the mold or other airborne contaminants or increase ventilation and/or expose us to liability from our tenants, employees of our tenants, or others if property damage or personal injury occurs.

Moreover, additional laws which may be passed in the future, or a finding of a violation of or liability under existing laws, could require us and/or one or more of the unconsolidated entities to make significant expenditures and otherwise limit or restrict some of our or its or their operations, which could have an adverse effect on our business, financial condition and results of operations.

Environmental costs and liabilities associated with contamination at real estate properties owned by us may materially and adversely affect us.

Our properties may be subject to known and unknown environmental liabilities under various federal, state and local laws and regulations relating to human health and the environment. Certain of these laws and regulations may impose joint and several liability on certain statutory classes of persons, including current and former owners or operators, for the costs of investigation or remediation

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of contaminated properties. These laws and regulations apply to past and present business operations on the properties, including the use, storage, handling and recycling or disposal of hazardous substances or wastes. We may face liability for costs relating to the investigation and clean-up of any of our properties from which there has been a release or threatened release of hazardous substances or other regulated material or any third-party sites to which we have arranged for the disposed of hazardous substances, regardless of our knowledge of the contamination, the timing of the contamination, the cause of the contamination or the party responsible for the contamination of the property.

In addition to these costs, which could exceed a propertys value, we could be liable for certain other costs, including governmental fines, and injuries to persons, property or natural resources. Further, some environmental laws create a lien on the contaminated site in favor of the government for damages and the costs the government incurs in connection with such contamination. Any such costs or liens could have a material adverse effect on our business or financial condition. Moreover, the presence of contamination or the failure to remediate contamination may adversely affect our ability to sell or lease the real estate or to borrow using the real estate as collateral.

The Original Master Lease contained requirements that Sears Holdings indemnify us from certain environmental liabilities; however, following Sears Holdings bankruptcy, there can be no assurance that we would be able to collect any amounts due under such indemnification obligations. Under the Holdco Master Lease, Holdco is required to indemnify us from certain environmental liabilities at certain properties, including removal and remediation of all affected facilities and equipment constituting the automotive care center facilities. Although existing and future leases are expected to require tenants generally to indemnify us for their non-compliance with environmental laws as a result of their occupancy, such tenants typically will not be required to indemnify us for environmental non-compliance arising prior to their occupancy.   In such cases, we may incur costs and expenses under such leases or as a matter of law. The amount of any environmental liabilities could exceed the amounts for which Holdco or other third parties would be required to indemnify us (or the applicable unconsolidated entity) or their financial ability to do so. In addition, under the terms of the agreements governing our indebtedness, we have deposited funds in a reserve account that will be used to fund costs incurred in correcting certain environmental and other conditions. The amount of such funds may not be sufficient to correct the environmental and other conditions to which they are expected to be applied.

Each unconsolidated entity is subject to similar risks relating to environmental compliance costs and liabilities associated with its Unconsolidated Properties, which may reduce the value of our investment in, or distributions to us by, one or more unconsolidated entities, or require that we make additional capital contributions to one or more unconsolidated entities.

 

Our business faces potential risks associated with natural disasters, severe weather conditions and climate change and related legislation and regulations, which could have an adverse effect on our cash flow and operating results.

Climate change may add to the unpredictability and frequency of natural disasters and severe weather conditions and create additional uncertainty as to future trends and exposures. Certain of our properties are located in areas that are subject to natural disasters and severe weather conditions, such as hurricanes, droughts, snow storms, floods and fires.  Over time, the impact of climate change or the occurrence of natural disasters can delay new development and redevelopment projects, increase the costs of such projects if required to include resiliency measures to address climate-related risks, increase investment costs to repair or replace damaged properties, increase operating costs, create additional investment costs to make improvements to existing properties to comply with climate change regulations, increase future property insurance costs, and otherwise negatively impact the tenant demand for space. In addition, changes in federal, state and local legislation and regulations relating to climate change, such as “green building codes,” could result in increased operating expenses and capital expenditures to improve the energy efficiency of our properties, or potentially result in fines for noncompliance.  We may not be able to effectively pass on such costs to our tenants. Moreover, any such legislation and regulations could impose substantial costs on our tenants, thereby impacting the financial condition of our tenants and their ability to meet their lease obligations and to lease or re-lease our properties.

Possible terrorist activity or other acts of violence could adversely affect our financial condition and results of operations.

Terrorist attacks or other acts of violence may result in declining economic activity, which could harm the demand for goods and services offered by our tenants and the value of our properties and might adversely affect the value of an investment in our securities. Such a resulting decrease in retail demand, could make it difficult for us to renew or re-lease our properties at lease rates equal to or above historical rates. Terrorist activities or violence also could directly affect the value of our properties through damage, destruction or loss, and the availability of insurance for such acts, or of insurance generally, might be lower or cost more, which could increase our operating expenses and adversely affect our financial condition and results of operations. To the extent that our tenants are affected by future attacks, their businesses similarly could be adversely affected, including their ability to continue to meet obligations under their existing leases. These acts might erode business and consumer confidence and spending and might result in increased volatility in national and international financial markets and economies. Any one of these events might decrease demand for real estate, decrease or delay the occupancy of our new or redeveloped properties, and limit our access to capital or increase our cost of raising capital.

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Cybersecurity incidents could cause a disruption to our operations, a compromise of confidential information and damage to our business relationships, all of which could negatively impact our business, financial condition and operating results.

Seritage is susceptible to cybersecurity risks that include, among other things, theft, unauthorized monitoring, release, misuse, loss, destruction or corruption of confidential and highly restricted data; denial of service attacks; unauthorized access to relevant systems, compromises to networks or devices; or operational disruption or failures in the physical infrastructure or operating systems of Seritages information systems. Seritages information systems are essential to the operation of our business and our ability to perform day-to-day operations, including for the secure processing, storage and transmission of confidential and personal information. Seritage must continuously monitor and develop its systems to protect its technology infrastructure and data from misappropriation, corruption and disruption. Cybersecurity risks may also impact properties in which we invest on behalf of clients and tenants of those properties, which could result in a loss of value in our clients investment. In addition, due to Seritages interconnectivity with third-party service providers and other entities with which Seritage conducts business, Seritage could be adversely impacted if any of them is subject to a successful cyber incident. Although we and our service providers have implemented processes, procedures and controls to help mitigate these risks, there can be no assurance that these measures will be effective or that security breaches or disruptions will not occur. The result of these incidents may include disrupted operations, liability for loss or misappropriation of data, stolen assets or information, increased cybersecurity protection and insurance costs, increased compliance costs, litigation, regulatory enforcement actions and damage to our reputation or business relationships.

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

We may incur mortgage debt and pledge all or some of our real properties as security for that debt to finance newly acquired properties or capital contributions to joint ventures, or to fund retenanting and redevelopment projects. As of December 31, 2019, we were required to provide mortgages to the lender under our term loan facility on a majority of our portfolio. This restriction, together with the other provisions of the Term Loan Facility, will limit our ability to obtain additional secured financing using such properties as collateral. We may also borrow if we need funds or deem it necessary or advisable to ensure that we maintain our qualification as a REIT for U.S. federal income tax purposes. If there is a shortfall between the cash flow from a property and the cash flow needed to service mortgage debt on a property, then the amount available for distributions to shareholders may be reduced. In addition, incurring mortgage debt increases the risk of loss since defaults on indebtedness secured by a property may result in lenders initiating foreclosure actions. In that case, we could lose the property securing the loan that is in default. For U.S. federal income tax purposes, a foreclosure of any of our properties generally would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income on foreclosure, but would not receive any cash proceeds. In such event, the Company may be unable to pay the amount of distributions required in order to maintain its REIT status. If any mortgages contain cross-collateralization or cross-default provisions, a default on a single property could affect multiple properties. If any properties are foreclosed upon due to a default, our ability to pay cash distributions to our shareholders may be adversely affected.

Covenants in our Term Loan Facility may limit our operational flexibility and a covenant breach or default could adversely affect our business and financial condition.

Our Term Loan Facility includes certain financial metrics to govern certain collateral and covenant exceptions set forth in the agreement, including: (i) a total fixed charge coverage ratio of not less than 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, 2021, 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, 2021, 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 satisfy any of these financial metrics will limit our ability to dispose of assets via sale or joint venture and trigger a requirement for us to provide mortgage collateral to our lender, but will not result in an event of default, mandatory amortization, cash flow sweep or similar provision. As of December 31, 2019, we were in breach of one or more of the financial metrics described above, as a result of which we were required to provide mortgages to the lender under the Term Loan Facility with respect to a majority of our portfolio. Additionally, the lender under our Term Loan Facility has the right to consent to dispositions of properties via asset sales and formation of new joint ventures. This consent right may have the effect of limiting our ability to dispose of properties, whether for strategic reasons or to raise liquidity to fund our operations. The Term Loan Facility also includes certain limitations relating to, among other activities, our ability to: sell assets or merge, consolidate or transfer all or substantially all of our assets; incur additional debt; incur certain liens; enter into, terminate or modify certain material leases and/or the material agreements for our properties; make certain investments (including limitations on joint ventures) and other restricted payments; pay distributions on or repurchase our capital stock; and enter into certain transactions with affiliates.

The Term Loan Facility also provides for the Incremental Funding Facility. Our ability to access the incremental facility is subject to (i) our achieving rental income from non-Sears Holdings tenants, on an annualized basis (after giving effect to SNO Leases expected to commence rent payment within 12 months) for the fiscal quarter ending prior to the date of incurrence of the Incremental Funding Facility, of not less than $200 million and (ii) our good faith projection that rental income from non-Sears Holdings tenants (after giving effect to SNO Leases expected to commence rent payment within 12 months) for the succeeding four consecutive fiscal

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quarters (beginning with the fiscal quarter during which the incremental facility is accessed) will be not less than $200 million. As of December 31, 2020, we have not achieved this level of rental income from non-Sears Holdings tenants.

We have limited operating history as a REIT and an independent public company, and our inexperience may impede our ability to successfully manage our business or implement effective internal controls.

We have limited operating history owning, leasing or developing properties or operating as a REIT. Similarly, we have limited operating history as an independent public company. We cannot assure you that our past experience will be sufficient to successfully operate our company as a REIT and an independent public company. We are required to implement substantial control systems and procedures in order to maintain our qualification as a REIT, satisfy our periodic and current reporting requirements under applicable SEC regulations and comply with the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and the NYSE listing standards. As a result, our management and other personnel need to devote a substantial amount of time to comply with these rules and regulations and establish the corporate infrastructure and controls demanded of a publicly traded REIT. These costs and time commitments could be substantially more than we currently expect. If our finance and accounting organization is unable for any reason to respond adequately to the increased demands, the quality and timeliness of our financial reporting may suffer, and we could experience significant deficiencies or material weaknesses in our disclosure controls and procedures or our internal control over financial reporting.

An inability to establish effective disclosure controls and procedures and internal control over financial reporting or remediate existing deficiencies could cause us to fail to meet our reporting obligations under the Exchange Act, or result in material weaknesses, material misstatements or omissions in our Exchange Act reports, any of which could cause investors to lose confidence in our company, which could have an adverse effect on our revenues and results of operations or the market price of Class A common shares, par value $0.01 per share, Class B non-economic common shares of beneficial interest, par value $0.01 per share (Class B non-economic common shares), and Class C non-voting common shares of beneficial interest, par value $0.01 per share (Class C non-voting common shares).

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

As permitted by the Maryland REIT Law, the Companys Declaration of Trust limits the liability of its trustees and officers to Seritage and its shareholders for money damages, except for liability resulting from:

 

actual receipt of an improper benefit or profit in money, property or services; or

 

a final judgment based upon a finding of active and deliberate dishonesty by the trustee or officer that was material to the cause of action adjudicated.

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

Seritage’s Declaration of Trust and bylaws, Maryland law, and the partnership agreement of Operating Partnership contain provisions that may delay, defer or prevent an acquisition of Class A common shares or a change in control.

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

 

The Company’s Declaration of Trust Contains Restrictions on the Ownership and Transfer of Seritage Shares of Beneficial Interest. In order for us to qualify as a REIT, no more than 50% of the value of all outstanding shares of beneficial interest may be owned, beneficially or constructively, by five or fewer individuals at any time during the last half of each taxable year other than 2015, the first taxable year for which we elected to be taxed as a REIT. Additionally, at least 100 persons must beneficially own our shares of beneficial interest during at least 335 days of a taxable year (other than 2015, the first taxable year for which we elected to be taxed as a REIT). The Company’s Declaration of Trust, with certain exceptions, authorizes the Company’s board of trustees (the “Board of Trustees”) to take such actions as are necessary and desirable to preserve its qualification as a REIT. For this and other purposes, subject to certain exceptions, our Declaration of Trust provides that no person may beneficially or constructively own more than 9.6%, in value or in number of shares, whichever is more restrictive, of all outstanding shares, or all outstanding common shares (including our Class A common shares, our Class B

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non-economic common shares and our Class C non-voting common shares), of beneficial interest of the Company. We refer to these restrictions collectively as the “ownership limits.” The constructive ownership rules under the Code are complex and may cause shares owned directly or constructively by a group of related individuals or entities to be deemed to be constructively owned by one individual or entity. As a result, the acquisition of less than 9.6% of the outstanding shares of beneficial interest by an individual or entity could cause that individual or entity or another individual or entity to own, beneficially or constructively, the Company’s shares of beneficial interest in violation of the ownership limits. In addition, because we have multiple classes of common shares, the acquisition of Class A common shares may result in a shareholder inadvertently owning, beneficially or constructively, the Company’s shares of beneficial interest in violation of the ownership limits. Our Declaration of Trust also prohibits any person from owning Class A common shares, Series A Cumulative Redeemable Preferred Shares (the “Series A Preferred Shares”), or other shares of beneficial interest that would generally result in (i) our being “closely held” under Section 856(h) of the Code or otherwise cause us to fail to qualify as a REIT, (ii) our being beneficially owned by fewer than 100 persons, (iii) any of our income that would otherwise qualify as “rents from real property” for purposes of Section 856(d) of the Code failing to qualify as such, or (iv) our failing to qualify as a “domestically controlled qualified investment entity” within the meaning of Section 897(h) of the Code. Any attempt to own or transfer Class A common shares, Series A Preferred Shares or any of our other shares of beneficial interest in violation of the restrictions on ownership or transfer in our Declaration of Trust may result in the transfer being automatically void. The Company’s Declaration of Trust also provides that if any purported transfer of Class A common shares, Series A Preferred Shares, or other such shares of beneficial interest would otherwise result in any person violating the ownership limits or any other restriction on ownership and transfer of shares of beneficial interest described above, then that number of shares (rounded up to the nearest whole share) that would cause the violation will be automatically transferred to, and held by, a trust for the exclusive benefit of a designated charitable beneficiary. Any person who acquires such shares in violation of the ownership limits or any other restriction on ownership and transfer of shares of beneficial interest described above will not be entitled to any dividends on the shares or be entitled to vote the shares or receive any proceeds from the subsequent sale of the shares in excess of the lesser of the price paid by such person for the shares (or, if such person did not give value for such shares, the market price on the day the shares were transferred to the trust) or the amount realized from the sale. We or our designee will have the right to purchase the shares from the trustee at this calculated price as well. The ownership limits and other restrictions on ownership and transfer in our Declaration of Trust may have the effect of preventing, or may be relied upon to prevent, a third party from acquiring control of us if the Board of Trustees does not grant an exemption from the ownership limits, even if our shareholders believe the change in control is in their best interests.

 

The Company’s Board of Trustees Has the Power to Cause Us to Issue Additional Shares of Beneficial Interest and Classify and Reclassify Any Unissued Class A Common Shares without Shareholder Approval. Our Declaration of Trust authorizes us to issue additional authorized but unissued common shares or preferred shares of beneficial interest. We have also issued 2,800,000 shares of Series A Preferred Shares that are senior to our common shares with respect to priority of dividend payments and rights upon liquidation, dissolution or winding up.  In addition, the Board of Trustees may, without shareholder approval, (i) amend the Declaration of Trust to increase or decrease the aggregate number of shares of beneficial interest or the number of shares of beneficial interest of any class or series that we have authority to issue and (ii) classify or reclassify any unissued common shares or preferred shares of beneficial interest and set the preferences, rights and other terms of the classified or reclassified shares. As a result, the Board of Trustees may establish a class or series of common shares or preferred shares of beneficial interest that could delay or prevent a transaction or a change in control that might involve a premium price for Class A common shares or otherwise be in the best interests of our shareholders.

 

The Board of Trustees Is Divided into Three Classes and Trustee Elections Require a Vote of Two-Thirds of the Class A Common Shares and Class B Non-Economic Common Shares Votes Cast. The Board of Trustees is divided into three classes of trustees, with each class to be as nearly equal in number as possible. As a result, approximately one-third of the Board of Trustees will be elected at each annual meeting of shareholders, with, in both contested and uncontested elections, trustees elected by the vote of two-thirds of the votes cast of the Class A common shares and Class B non-economic common shares (voting together as a single class) entitled to be cast in the election of trustees. In the event that an incumbent trustee does not receive a sufficient percentage of votes cast for election, he or she will continue to serve on the Board of Trustees until a successor is duly elected and qualifies. The classification of trustees and requirement that trustee nominees receive a vote of two-thirds of the votes cast of the Class A common shares and Class B non-economic shares (voting together as a single class) entitled to be cast in the election of trustees may have the effect of making it more difficult for shareholders to change the composition of the Board of Trustees. The requirement that trustee nominees receive a vote of two-thirds of the votes cast of the common shares entitled to be cast in the election of trustees may also have the effect of making it more difficult for shareholders to elect trustee nominees that do not receive the votes of shares of beneficial interest held by ESL, which controls approximately 6.5% of the voting power of the Company.

 

The Partnership Agreement of Operating Partnership Provides Holders of Operating Partnership Units Approval Rights over Certain Change in Control Transactions Involving the Company or Operating Partnership. Pursuant to the partnership agreement of Operating Partnership, certain transactions, including mergers, consolidations, conversions or other combinations or extraordinary transactions or transactions that constitute a “change of control” of the Company or Operating

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Partnership, as defined in the partnership agreement, will require the approval of the partners (other than the Company and entities controlled by it) holding a majority of all the outstanding Operating Partnership units held by all partners (other than the Company and entities controlled by it). These provisions could have the effect of delaying or preventing a change in control. ESL holds all of the Operating Partnership units not held by the Company and entities controlled by it.

 

Certain Provisions of Maryland Law May Limit the Ability of a Third Party to Acquire Control of Us. Certain provisions of the Maryland General Corporation Law (the “MGCL”) applicable to Maryland REITs may have the effect of inhibiting a third party from acquiring us or of impeding a change of control of the Company under circumstances that otherwise could provide Class A common shareholders with the opportunity to realize a premium over the then-prevailing market price of such shares or otherwise be in the best interest of shareholders, including:

 

o

“business combination” provisions that, subject to certain exceptions and limitations, prohibit certain business combinations between a Maryland REIT and an “interested shareholder” (defined generally as any person who beneficially owns, directly or indirectly, 10% or more of the voting power of the Company’s outstanding voting shares or an affiliate or associate of the Maryland REIT who, at any time within the two-year period immediately prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then-outstanding shares of the Company) or an affiliate of any interested shareholder and the Maryland REIT for five years after the most recent date on which the shareholder becomes an interested shareholder, and thereafter imposes two supermajority shareholder voting requirements on these combinations;

 

o

“control share” provisions that provide that, subject to certain exceptions, holders of “control shares” of our company (defined as voting shares that, if aggregated with all other shares owned or controlled by the acquirer, would entitle the acquirer to exercise one of three increasing ranges of voting power in electing trustees) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of issued and outstanding “control shares”) have no voting rights with respect to the control shares except to the extent approved by our shareholders by the affirmative vote of at least two-thirds of all of the votes entitled to be cast on the matter, excluding all interested shares; and

 

o

Additionally, Title 3, Subtitle 8 of the MGCL permits the Board of Trustees, without shareholder approval and regardless of what is currently provided in our Declaration of Trust or bylaws, to implement certain takeover defenses.

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

We may experience uninsured or underinsured losses, or insurance proceeds may not otherwise be available to us which could result in a significant loss of the capital we have invested in a property, decrease anticipated future revenues or cause us to incur unanticipated expense.

While many of our existing leases require, and new lease agreements are expected to require, that comprehensive general insurance and hazard insurance be maintained by the tenants with respect to their premises, and we have obtained casualty insurance with respect to our properties, there are certain types of losses, generally of a catastrophic nature, such as earthquakes, hurricanes and floods, that may be uninsurable or not economically insurable. Insurance coverage (net of deductibles) may not be effective or be sufficient to pay the full current market value or current replacement cost of a loss. Inflation, changes in building and zoning codes and ordinances, environmental considerations, and other factors also might make it infeasible to use insurance proceeds to restore or replace the property after such property has been damaged or destroyed. Under such circumstances, the insurance proceeds received might not be adequate to restore the economic position with respect to such property or to comply with the requirements of our mortgages and Property Restrictions. Moreover, the holders of any mortgage indebtedness may require some or all property insurance proceeds to be applied to reduce such indebtedness, rather than being made available for property restoration.

If we experience a loss that is uninsured or that exceeds our policy coverage limits, we could lose the capital invested in the damaged properties as well as the anticipated future cash flows from those properties. In addition, if the damaged properties were subject to recourse indebtedness, Property Restrictions or ground leases, we could continue to be liable for the indebtedness or subject to claims for damages even if these properties were irreparably damaged.

In addition, even if damage to our properties is covered by insurance, a disruption of our business or that of our tenants caused by a casualty event may result in the loss of business and/or tenants. The business interruption insurance we or our tenants carry may not fully compensate us for the loss of business or tenants due to an interruption caused by a casualty event. Further, if one of our tenants

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has insurance but is underinsured, that tenant may be unable to satisfy its payment obligations under its lease with us or its other payment or other obligations.

A disruption in the financial markets may make it more difficult to evaluate the stability, net assets and capitalization of insurance companies and any insurers ability to meet its claim payment obligations. A failure of an insurance company to make payments to us upon an event of loss covered by an insurance policy, losses in excess of our policy coverage limits or disruptions to our business or the business of our tenants caused by a casualty event could adversely affect our business, financial condition and results of operations.

Each unconsolidated entity may also experience uninsured or underinsured losses, and also faces other risks related to insurance that are similar to those we face, which could reduce the value of our investment in, or distributions to us by, one or more unconsolidated entities, or require that we make additional capital contributions to one or more unconsolidated entities.

Conflicts of interest may exist or could arise in the future between the interests of Seritage shareholders and the interests of holders of Operating Partnership units, and the partnership agreement of Operating Partnership grants holders of Operating Partnership units certain rights, which may harm the interests of Seritage shareholders.

Conflicts of interest may exist or could arise in the future as a result of the relationships between Seritage and its affiliates, on the one hand, and Operating Partnership or any of its partners, on the other. Seritages trustees and officers have duties to Seritage under Maryland law in connection with their oversight and management of the company. At the same time, Seritage, as general partner of Operating Partnership, will have duties and obligations to Operating Partnership and its limited partners under Delaware law, as modified by the partnership agreement of Operating Partnership in connection with the management of Operating Partnership.

For example, without the approval of the majority of the Operating Partnership units not held by Seritage and entities controlled by it, Seritage will be prohibited from taking certain extraordinary actions, including change of control transactions of Seritage or Operating Partnership.

ESL owns a substantial percentage of the Operating Partnership units, which may be exchanged for cash or, at the election of Seritage, Class A common shares, and which will result in certain transactions involving Seritage or Operating Partnership requiring the approval of ESL.

As of December 31, 2020, ESL owns approximately 30.4% of the Operating Partnership units, with the remainder of the units held by the Company. In addition, ESL will have the right to acquire additional Operating Partnership units in order to allow it to maintain its relative ownership interest in Operating Partnership if Operating Partnership issues additional units to the Company under certain circumstances, including if we issue additional equity and contribute the funds to Operating Partnership to fund acquisitions or redevelopment of properties, among other uses. In addition, ESL will have the right to require the Operating Partnership to redeem its Operating Partnership units in whole or in part in exchange for cash or, at the election of the Company, Class A common shares, except as described below. Due to the ownership limits set forth in our Declaration of Trust, ESL may dispose of some or all of the Class A common shares it beneficially owns prior to exercising its right to require Operating Partnership to redeem Operating Partnership units, and the partnership agreement of Operating Partnership will permit ESL (and only ESL) to transfer its Operating Partnership units to one or more underwriters to be exchanged for Class A common shares in connection with certain dispositions in order to achieve the same effect as would occur if ESL were to exchange a larger portion of its Operating Partnership units for Class A common shares and then dispose of those shares in an underwritten offering. Sales of a substantial number of Class A common shares in connection with or to raise cash proceeds to facilitate, such a redemption, or the perception that such sales may occur, could adversely affect the market price of the Class A common shares.

In addition, the partnership agreement of Operating Partnership requires the approval of a majority of the Operating Partnership units not held by the Company and entities controlled by it for certain transactions and other actions, including certain modifications to the partnership agreement, withdrawal or succession of the Company as general partner of Operating Partnership, limits on the right of holders of Operating Partnership units to redeem their units, tax elections and certain other matters. Because ESL currently owns a majority of the outstanding Operating Partnership units not held by the Company and entities controlled by it, ESLs approval will be required in order for the general partner to undertake such actions unless ESL no longer owns a majority of such units. If ESL refuses to approve any such action, our business could be materially adversely affected. Furthermore, ESL owns approximately 6.5% of the outstanding Class A common shares. In any of these matters, the interests of ESL may differ from or conflict with the interests of our other shareholders.

ESL exerts substantial influence over us, and its interests may differ from or conflict with the interests of our other shareholders.

ESL beneficially owns approximately 30.4% of the Operating Partnership units, and approximately 6.5% of the outstanding Class A common shares, which corresponds to 6.5% of the voting power of Seritage. Sears Holdings was, and Holdco is, an affiliate of ESL.

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In addition, Mr. Lampert, who previously served as the Chairman of the Board and Chief Executive Officer of Sears Holdings, and is the Chairman and Chief Executive Officer of ESL, serves as the Chairman of the Seritage Board of Trustees. As a result, ESL and its affiliates have substantial influence over us and Holdco. In any matter affecting us, including our relationship with Holdco, the interests of ESL may differ from or conflict with the interests of our other shareholders.

 

The businesses of each of the GGP joint ventures, the Simon joint venture, and the Macerich joint venture are similar to each other and the occurrence of risks that adversely affect one unconsolidated entity, could also adversely affect our investment in the other unconsolidated entities.

The GGP joint ventures are joint ventures that own and operate certain Unconsolidated Properties, which consist of seven properties formerly owned or leased by Sears Holdings, the Simon joint venture is a joint venture that owns and operates certain other Unconsolidated Properties, which consist of five other properties formerly owned by Sears Holdings and the Macerich joint venture is a joint venture that owns and operates certain other Unconsolidated Properties, which consist of seven other properties formerly owned by Sears Holdings.  As a result, each unconsolidated entity’s business is similar to our business, and each unconsolidated entity is subject to many of the same risks that we face.  The occurrence of risks that adversely affect us could also adversely affect one or more unconsolidated entities and reduce the value of our investment in, or distributions to us from, one or more joint ventures, or require that we make additional capital contributions to one or more unconsolidated entities.  Our influence over each unconsolidated entity may be limited by the fact that day-to-day operation of the GGP joint ventures, the Simon joint venture and the Macerich joint venture, and responsibility for leasing and redevelopment activities related to the Unconsolidated Properties owned by the GGP joint ventures, the Simon joint venture and the Macerich joint venture, as applicable, are generally delegated to GGP, Simon and Macerich, respectively, subject to certain exceptions. The Unconsolidated Properties owned by the GGP joint ventures are located at malls owned and operated by Brookfield Properties Retail (formerly GGP Inc.), the Unconsolidated Properties owned by the Simon joint venture are located at malls owned and operated by the Simon joint venture and the Unconsolidated Properties owned by the Macerich joint venture are located at malls owned and operated by the Macerich joint venture. As a result, conflicts of interest may exist or could arise in the future between the interests of GGP, Simon or Macerich and our interests as a holder of 50% interests in the GGP joint ventures, the Simon joint venture and the Macerich joint venture, respectively, including, for example, with respect to decisions as to whether to lease to third parties space at an Unconsolidated Property or other space at the mall at which such Unconsolidated Property is located.

Risks Related to Status as a REIT

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

We elected to be taxed as a REIT for U.S. federal income tax purposes commencing with our initial taxable year ended December 31, 2015 and have operated, and expect to continue to operate, to qualify as a REIT. In connection with the Company commencing operations, and the December 2017 offering of Series A Preferred Shares, we received opinions of counsel concluding that we have been organized in conformity with the requirements for qualification as a REIT and our current and/or proposed method of operation should enable us to satisfy the requirements for qualification as a REIT as of the respective dates. Investors should be aware, however, that opinions of counsel are not binding on the IRS or any court, and that each opinion was expressed as of the date it was issued and has not been updated. We believe we have continued to operate in conformity with the requirements to qualify as a REIT and that we continue to satisfy all requirements to maintain our REIT status. However, qualification as a REIT involves the application of highly technical and complex provisions of the Code, for which only a limited number of judicial and administrative interpretations exist.

If we were to fail to qualify as a REIT in any taxable year, and no available relief provision applied, we would be subject to U.S. federal income tax, including, for any taxable year ending on or before December 31, 2017, any applicable alternative minimum tax, on our taxable income at regular corporate rates (which, in the case of U.S. federal income tax, is a maximum of 35% for periods ending on or before December 31, 2017 and 21% thereafter), as well as U.S. state and local income tax, and dividends paid to our shareholders would not be deductible by us in computing our taxable income. Any resulting corporate tax liability could be substantial and would reduce the amount of cash available for distribution to our shareholders, which in turn could have an adverse impact on the value of Class A common shares. Unless we were entitled to relief under certain Code provisions, we also would be disqualified from re-electing to be taxed as a REIT for the four taxable years following the year in which we failed to qualify as a REIT.

Qualifying as a REIT involves highly technical and complex provisions of the Code.

Qualification as a REIT involves the application of highly technical and complex Code provisions for which only limited judicial and administrative authorities exist. Even a technical or inadvertent violation could jeopardize our REIT qualification. Our qualification

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as a REIT depends on the satisfaction of certain asset, income, organizational, distribution, shareholder ownership and other requirements on a continuing basis. In addition, our ability to satisfy the requirements to qualify as a REIT may depend in part on the actions of third parties over which we have no control or only limited influence, including in cases where we own an equity interest in an entity that is classified as a partnership for U.S. federal income tax purposes.

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

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

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

Dividends payable by REITs do not qualify for the reduced tax rates available for certain “qualified dividends,” but would generally qualify for a partial deduction with respect to certain taxpayers.

The maximum U.S. federal income tax rate applicable to income from qualified dividends payable by U.S. corporations to U.S. shareholders that are individuals, trusts and estates is currently 20%. Ordinary dividends payable by REITs, however, generally are not eligible for the reduced rates. Although these rules do not adversely affect the taxation of REITs, the more favorable rates applicable to regular corporate qualified dividends could cause investors who are individuals, trusts and estates to perceive investments in REITs to be relatively less attractive than investments in the shares of non-REIT corporations that pay dividends, which could adversely affect the value of the shares of REITs, including the Class A common shares. However, for taxable years beginning after December 31, 2017 and ending before January 1, 2026, a U.S. shareholder that is an individual, trust or estate would generally be entitled to deduct up to 20% of certain ordinary REIT dividends, effectively reducing the rate at which such ordinary REIT dividends are subject to tax. U.S. shareholders should consult their own tax advisors regarding all aspects of such rules and their potential application to dividends from us.

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REIT distribution requirements could adversely affect our ability to execute our business plan.

We generally must distribute annually at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gains, in order for us to qualify to be taxed as a REIT (assuming that certain other requirements are also satisfied) so that U.S. federal corporate income tax does not apply to earnings that we distribute. To the extent that we satisfy this distribution requirement and qualify for taxation as a REIT but distribute less than 100% of our REIT taxable income, determined without regard to the dividends paid deduction and including any net capital gains, we will be subject to U.S. federal corporate income tax on our undistributed net taxable income. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we distribute to our shareholders in a calendar year is less than a minimum amount specified under U.S. federal tax laws. We declared a dividend on the Company’s Class A and Class C common shares for the first quarter of 2019 and have not declared dividends on the Company’s Class A and Class C common shares since that time, based on our Board of Trustees’ assessment of the Company’s investment opportunities and its expectations of taxable income for the remainder of 2021. We intend to, at a minimum, make distributions to our shareholders to comply with the REIT requirements of the Code, which may be satisfied by dividends on the Company’s Series A Preferred shares.

From time to time, we may generate taxable income greater than our cash flow as a result of differences in timing between the recognition of taxable income and the actual receipt of cash or the effect of nondeductible capital expenditures, the creation of reserves or required debt or amortization payments. If we do not have other funds available in these situations, we could be required to borrow funds on unfavorable terms, sell assets at disadvantageous prices or distribute amounts that would otherwise be invested in future acquisitions to make distributions sufficient to enable us to pay out enough of our taxable income to satisfy the REIT distribution requirement and to avoid corporate income tax and the 4% excise tax in a particular year; alternatively, we may distribute taxable stock dividends to our shareholders in the form of additional shares of stock. See “—We may from time to time make distributions to our shareholders in the form of taxable stock dividends, which could result in shareholders incurring tax liability without receiving sufficient cash to pay such tax. These alternatives could increase our costs or reduce our equity. Thus, compliance with the REIT requirements may hinder our ability to grow, which could adversely affect the value of Class A common shares.

Restrictions in our indebtedness, including restrictions on our ability to incur additional indebtedness or make certain distributions, could preclude us from meeting the 90% distribution requirement. Decreases in funds from operations due to unfinanced expenditures for acquisitions of properties or increases in the number of Class A common shares outstanding without commensurate increases in funds from operations each would adversely affect our ability to maintain distributions to our shareholders. Moreover, the failure of tenants to make rental payments under any applicable lease could materially impair our ability to make distributions. Consequently, we may be unable to make distributions at the anticipated distribution rate or any other rate.

We may from time to time make distributions to our shareholders in the form of taxable stock dividends, which could result in shareholders incurring tax liability without receiving sufficient cash to pay such tax.

Although we have no current intention to do so, we may in the future distribute taxable stock dividends to our shareholders in the form of additional shares of our stock. Taxable shareholders receiving such dividends will be required to include the full amount of the dividend as ordinary income to the extent of our current and accumulated earnings and profits for U.S. federal income tax purposes. As a result, shareholders may be required to pay income taxes with respect to such dividends in excess of the cash distributions received. If a U.S. shareholder sells our shares that it receives as a dividend in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of our shares at the time of the sale.  Furthermore, with respect to certain non-U.S. shareholders, we may be required to withhold U.S. federal income tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in its common stock.

Even if we remain qualified as a REIT, we may face other tax liabilities that reduce our cash flow.

Even if we remain qualified for taxation as a REIT, we may be subject to certain U.S. federal, state, local and foreign taxes on our income and assets, including taxes on any undistributed income and state, local or foreign income, property and transfer taxes. For example, in order to meet the REIT qualification requirements, we may hold some of our assets or conduct certain of our activities through one or more taxable REIT subsidiaries (TRSs) or other subsidiary corporations that will be subject to federal, state and local corporate-level income taxes as regular C corporations. For taxable years beginning after December 31, 2017, taxpayers, including TRSs, are subject to a limitation on their ability to deduct net business interest (i.e., interest paid or accrued on indebtedness allocable to a trade or business), generally up to 50% of adjusted taxable income for taxable years beginning in 2019 and 2020 pursuant to the CARES Act and 30% for prior and subsequent taxable years, subject to certain exceptions. This provision may limit the ability of our TRS to deduct interest, which could increase its taxable income and corporate income tax. Further, we may incur a 100% excise tax on transactions with a TRS if they are not conducted on an arms-length basis. Any of these taxes would decrease cash available for distribution to our shareholders.

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Complying with REIT requirements may cause us to liquidate or forgo otherwise attractive opportunities.

To qualify to be taxed as a REIT, we must ensure that, at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities and real estate assets (as defined in the Code), including certain mortgage loans and securities, REIT stock and debt instruments issued by publicly offered REITs. The remainder of our investments (other than government securities, qualified real estate assets and securities issued by a TRS) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our total assets can consist of the securities of any one issuer (other than government securities, qualified real estate assets and securities issued by a TRS), and no more than 20% of the value of our total assets can be represented by securities of one or more TRSs. If we fail to comply with these requirements at the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences. As a result, we may be required to liquidate or forgo otherwise attractive investments. These actions could have the effect of reducing our income and amounts available for distribution to our shareholders.

In addition to the asset tests set forth above, to qualify to be taxed as a REIT, we must continually satisfy tests concerning, among other things, the sources of our income, the amounts we distribute to our shareholders and the ownership of our shares of beneficial interest. We may be unable to pursue investments that would be otherwise advantageous to us in order to satisfy the source-of-income or asset-diversification requirements for qualifying as a REIT. Thus, compliance with the REIT requirements may hinder our ability to make and, in certain cases, maintain ownership of certain attractive investments.

Complying with REIT requirements may limit our ability to hedge effectively and may cause us to incur tax liabilities.

The REIT provisions of the Code substantially limit our ability to hedge our assets and liabilities. Any income from a hedging transaction that we enter into to manage the risk of interest rate changes with respect to borrowings made or to be made to acquire or carry real estate assets (or that we enter into to manage risk with respect to a prior hedge entered into in connection with property that has been disposed of or liabilities that have been extinguished) does not constitute gross income for purposes of the 75% or 95% gross income tests that apply to REITs, provided that certain identification requirements are met. To the extent that we enter into other types of hedging transactions or fail to properly identify such transaction as a hedge, the income is likely to be treated as non-qualifying income for purposes of both of the gross income tests. As a result of these rules, we may be required to limit our use of advantageous hedging techniques or implement those hedges through a TRS. This could increase the cost of our hedging activities because our TRS may be subject to tax on gains or expose us to greater risks associated with changes in interest rates than we would otherwise want to bear. In addition, losses in our TRS will generally not provide any tax benefit, except that such losses may only be carried forward and may only be deducted against 80% of future taxable income in the TRS if the losses are incurred generally after December 31, 2017, although the CARES Act temporarily removes this 80% limitation if the losses are used in taxable years beginning before January 1, 2021.

Changes in federal tax law affected the taxation of us and may affect the desirability of investing in a REIT relative to a regular non-REIT corporation.

The TCJA reduced the relative competitive advantage of operating as a REIT as compared with operating as a regular non-REIT corporation by reducing the maximum tax rate applicable to regular corporations from 35% to 21% beginning on January 1, 2018. On the other hand, the TCJA also decreased the U.S. federal income tax rate applicable to non-corporate shareholders on ordinary REIT dividends by lowering the maximum applicable individual rate from 39.6% to 37% and permitting non-corporate shareholders of REITs to deduct 20% of ordinary REIT dividends from their taxable income for the taxable years beginning after December 31, 2017 and ending before January 1, 2026 (as discussed above). The TCJA and the CARES Act also provided a new limitation on the deduction of net business interest (as discussed above). A taxpayer engaged in certain businesses relating to real property may elect out of the business interest provision; however, the requirements of this election may be onerous to implement and would require the REIT to utilize potentially disadvantageous depreciation methods on some or all of its assets, including certain qualified improvement property. We will determine whether or not to make such an election in our sole discretion and based on all the facts and circumstances. In addition, finalized U.S. Treasury regulations could limit the deduction we may claim for our proportionate share of the compensation expense attributable to the remuneration paid by the Operating Partnership to certain of our employees who are or have been highly ranked and highly compensated employees.

Legislative or other actions affecting REITs or other entities could have a negative effect on us.

The rules dealing with U.S. federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Department of the Treasury. Changes to the tax laws or interpretations thereof, with or without retroactive application, including those contemplated by the new presidential administration in the United States, could materially and adversely affect our investors or us. Individual and corporate income tax rates may increase, possibly on a retroactive basis, income deferral

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provisions such as section 1031 like-kind exchanges may be curtailed or eliminated, and certain deductions such as the 20% deduction for ordinary REIT dividends may be limited or disallowed.  We cannot predict how changes in the tax laws might affect our investors or us. New legislation, Treasury regulations, administrative interpretations or court decisions could significantly and negatively affect our ability to qualify as a REIT or the U.S. federal income tax consequences to us and our investors of such qualification.

Risks Related to Ownership of our Securities

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

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

 

actual or anticipated variations in our quarterly results of operations or distributions;

 

changes in our funds from operations or earnings estimates;

 

publication of research reports about us or the real estate or retail industries;

 

increases in market interest rates that may cause purchasers of our securities to demand a higher yield;

 

changes in market valuations of similar companies;

 

adverse market reaction to any additional debt we may incur in the future;

 

actions by ESL, or by institutional shareholders;

 

speculation in the press or investment community about our company or industry or the economy in general;

 

adverse performance or potential financial distress or bankruptcy of our major tenants, including Holdco;

 

the occurrence of any of the other risk factors presented in this filing;

 

adverse developments in the Litigation;

 

specific real estate market and real estate economic conditions; and

 

general market and economic conditions.

We have issued Series A Preferred Shares, which, along with future offerings of debt or preferred equity securities, rank senior to our common shares for purposes of distributions or upon liquidation, may adversely affect the market price of our common shares.

We have issued 2,800,000 Series A Cumulative Redeemable Preferred Shares, which are senior to our common shares for purposes of distributions or upon liquidation. The Series A Preferred Shares may limit our ability to make distributions to holders of our common shares.

In the future, we may attempt to increase our capital resources by making additional offerings of debt or preferred equity securities, including medium-term notes, trust preferred securities, senior or subordinated notes and preferred shares. Upon liquidation, holders of our debt securities, Series A Preferred Shares and any additional preferred shares and lenders with respect to other borrowings may receive distributions of our available assets prior to the holders of our common shares. Any additional equity offerings may dilute the holdings of our existing shareholders or reduce the market price of our common shares, or both. Holders of our common shares are not entitled to preemptive rights or other protections against dilution, and will have no voting rights in connection with the issuance of these securities. Our Series A Preferred Shares have, and any additional preferred shares of beneficial interest issued could have, a preference on liquidating distributions or a preference on distribution payments that could limit our ability to make a distribution to the holders of our common shares. Since our decision to issue securities in any future offering will depend in part on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, our shareholders bear the risk of our future offerings reducing the market price of our common shares and diluting their holdings in us.

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

Disputes with third parties could arise out of our historical transactions with Sears Holdings or future transactions with Holdco, and we could experience unfavorable reactions from employees, ratings agencies, regulators or other interested parties. These disputes and reactions of third parties could have a material adverse effect on our business, financial condition or results of operations. In addition, disputes between us and Sears Holdings or Holdco could arise in connection with any of our past or future agreements with those counterparties.

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On April 18, 2019, at the direction of the Restructuring Sub-Committee of the Restructuring Committee of the Board of Directors of Sears Holdings, Sears Holdings, Sears, Roebuck & Co., Sears Development Co., Kmart Corporation, and Kmart of Washington, LLC commenced the Litigation in the Bankruptcy Court against the Seritage Defendants. The Litigation is dual captioned as In re: Sears Holdings Corporation, et al., Case No. 18-23538 (RDD) and Sears Holdings Corporation et al., v. Lampert et al., Case No. 19-08250 (RDD). On November 25, 2019, acting pursuant to the Confirmation Order, the Creditors’ Committee filed the Amended Complaint alleging, among other things, that certain transactions undertaken by Sears Holdings since 2011 (including the July 2015 transactions giving rise to Seritage, the execution of the Original Master Lease with Sears Holdings, and the acquisition of real estate from Sears Holdings) constituted actual and/or constructive fraudulent transfers and/or illegal dividends by Sears Holdings and that the real estate acquired by Seritage from Sears Holdings in July 2015 was worth hundreds of millions of dollars more than the purchase price paid.  The Amended Complaint further alleges, among other things, that certain releases provided to Seritage and certain other defendants in connection with the Sears Holdings derivative litigation in the Delaware Court of Chancery in 2017 should be avoided and/or declared null and void as an actual and/or constructive fraudulent conveyance.  The Amended Complaint seeks as relief, among other things, declaratory relief, avoidance of the allegedly actual and/or constructive fraudulent transfers, disgorgement, recovery of the property fraudulently transferred or, in the alternative, compensatory damages in an unspecified amount to be determined at trial, equitable subordination and disallowance of defendants’ claims as creditors, punitive and exemplary damages for any intentional wrongdoing, and reasonable attorneys’ fees, costs, and expenses.  On February 21, 2020, the Seritage defendants filed a partial motion to dismiss seeking dismissal of the claims in the Amended Complaint relating to the release received in the Sears Holdings derivative litigation, unjust enrichment, and equitable subordination. Briefing and oral argument on the motions were completed in August 2020, and the parties are awaiting a decision.

The number of shares available for future sale could adversely affect the market price of Class A common shares.

We cannot predict whether future issuances of Class A common shares, the availability of Class A common shares for resale in the open market or the conversion of Class C non-voting common shares into Class A common shares will decrease the market price per share of Class A common shares. Sales of a substantial number of Class A common shares in the public market, or the perception that such sales might occur, could adversely affect the market price of the Class A common shares.

Our earnings and cash distributions will affect the market price of Class A common shares.

We believe that the market value of a REITs equity securities is based primarily upon market perception of the REITs growth potential and its current and potential future cash distributions, whether from operations, sales, acquisitions, development or refinancing, and is secondarily based upon the value of the underlying assets. For these reasons, Class A common shares may trade at prices that are higher or lower than the net asset value per share. To the extent we retain operating cash flow for investment purposes, working capital reserves or other purposes rather than distributing the cash flow to shareholders, these retained funds, while increasing the value of our underlying assets, may negatively impact the market price of Class A common shares. Our failure to meet market expectations with regard to future earnings and cash distributions would likely adversely affect the market price of Class A common shares.

The Series A Preferred Shares have not been rated.

The Series A Preferred Shares have not been rated, and may never be rated, by any nationally recognized statistical rating organization, which may negatively affect their market value and your ability to sell such shares. It is possible, however, that one or more rating agencies might independently determine to assign a rating to the Series A Preferred Shares or that we may elect to obtain a rating of the Series A Preferred Shares in the future. Furthermore, we may elect to issue other securities for which we may seek to obtain a rating. If any ratings are assigned to the Series A Preferred Shares in the future or if we issue other securities with a rating, such ratings, if they are lower than market expectations or are subsequently lowered or withdrawn, could adversely affect the market for or the market value of the Series A Preferred Shares. Ratings only reflect the views of the issuing rating agency or agencies, and such ratings could at any time be revised downward or withdrawn entirely at the discretion of the issuing rating agency. Any such downward revision or withdrawal of a rating could have an adverse effect on the market price of the Series A Preferred Shares. Further, a rating is not a recommendation to purchase, sell or hold any particular security, including the Series A Preferred Shares. In addition, ratings do not reflect market prices or suitability of a security for a particular investor and any future rating of the Series A Preferred Shares may not reflect all risks related to us and our business, or the structure or market value of the Series A Preferred Shares.

An active trading market may not develop for the Series A Preferred Shares or, even if it does develop, may not continue, which may negatively affect the market value of, and the ability of holders of our Series A Preferred Shares to transfer or sell, their shares.

Since the Series A Preferred Shares have no stated maturity date, investors seeking liquidity will be limited to selling their shares in the secondary market. The Series A Preferred Shares are listed on the NYSE under the symbol SRG PrA, but there can be no assurance that an active trading market on the NYSE for the Series A Preferred Shares will develop or continue, in which case the market price of the Series A Preferred Shares could be materially and adversely affected and the ability to transfer or sell Series A Preferred Shares would be limited. The market price of the shares will depend on many factors, including:

 

prevailing interest rates;

- 28 -


 

 

the market for similar securities;

 

investors’ perceptions of us;

 

our issuance of additional preferred equity or indebtedness;

 

general economic and market conditions; and

 

our financial condition, results of operations, business and prospects.

The Series A Preferred Shares are subordinate in right of payment to our existing and future debt, and the interests of the holders of Series A Preferred Shares could be diluted by the issuance of additional preferred shares, including additional Series A Preferred Shares, and by other transactions.

The Series A Preferred Shares rank junior to all of our existing and future debt and to other non-equity claims on us and our assets available to satisfy claims against us, including claims in bankruptcy, liquidation or similar proceedings. Our future debt may include restrictions on our ability to pay dividends to preferred shareholders. As of December 31, 2020, our total indebtedness was $1.6 billion. In addition, we may incur additional indebtedness in the future. Our Declaration of Trust currently authorizes the issuance of up to 10,000,000 shares of preferred shares in one or more classes or series. Our board of trustees has the power to reclassify unissued common shares and preferred shares and to amend our Declaration of Trust, without any action by our shareholders, to increase the aggregate number of shares of beneficial interest of any class or series, including preferred shares, that we are authorized to issue. The issuance of additional preferred shares on parity with or senior to the Series A Preferred Shares with respect to the payment of dividends and the distribution of assets in the event of any liquidation, dissolution or winding up would dilute the interests of the holders of the Series A Preferred Shares, and any issuance of preferred shares senior to the Series A Preferred Shares or of additional indebtedness could adversely affect our ability to pay dividends on, redeem or pay the liquidation preference on the Series A Preferred Shares. Other than the limited conversion right afforded to holders of Series A Preferred Shares that may occur in connection with a Change of Control, none of the provisions relating to the Series A Preferred Shares contain any provisions relating to or limiting our indebtedness or affording the holders of the Series A Preferred Shares protection in the event of a highly leveraged or other transaction, including a merger or the sale, lease or conveyance of all or substantially all our assets or business, that might adversely affect the holders of the Series A Preferred Shares, so long as the rights of holders of the Series A Preferred Shares are not materially and adversely affected.

Dividends on our preferred shares, including the Series A Preferred Shares, are discretionary. We cannot guarantee that we will be able to pay dividends in the future or what the actual dividends will be for any future period.

Future dividends on our preferred shares, including the Series A Preferred Shares, will be authorized by our Board of Trustees and declared by us at the discretion of our board of trustees and will depend on, among other things, our results of operations, cash flow from operations, financial condition and capital requirements, any debt service requirements and any other factors our Board of Trustees deems relevant. Accordingly, we cannot guarantee that we will be able to make cash dividends on our preferred shares or what the actual dividends will be for any future period. However, until we declare payment and pay or set apart the accrued dividends on the Series A Preferred Shares, our ability to pay dividends and make other distributions on our common shares and non-voting shares (including redemptions) will be limited by the terms of the Series A Preferred Shares.

Holders of Series A Preferred Shares will have limited voting rights.

Holders of the Series A Preferred Shares have limited voting rights. Our Class A common shares and our non-economic shares are currently the only shares of beneficial interest of our company with full voting rights. Voting rights for holders of Series A Preferred Shares exist primarily with respect to the right to elect two additional trustees to our Board of Trustees in the event that six quarterly dividends (whether or not consecutive) payable on the Series A Preferred Shares are in arrears, and with respect to voting on amendments to our Declaration of Trust or articles supplementary relating to the Series A Preferred Shares that would materially and adversely affect the rights of holders of the Series A Preferred Shares or create additional classes or series of our shares that are senior to the Series A Preferred Shares with respect to the payment of dividends and the distribution of assets in the event of any liquidation, dissolution or winding up of our affairs. Other than in limited circumstances, holders of Series A Preferred Shares will not have any voting rights.

ITEM 1B.

UNRESOLVED STAFF COMMENTS

There are no unresolved comments from the staff of the SEC as of the date of this Annual Report.

 

- 29 -


 

ITEM 2.

PROPERTIES

As of December 31, 2020, the Company’s portfolio consisted of interests in 183 properties totaling approximately 26.5 million square feet of GLA, including 158 wholly owned properties totaling approximately 24.5 million square feet of GLA across 41 states and Puerto Rico, and interests in 25 properties totaling approximately 1.9 million square feet of GLA across 13 states that are owned in unconsolidated entities. The following tables set forth certain information regarding our Wholly Owned Properties and unconsolidated entities based on signed leases as of December 31, 2020, including signed but not yet open leases (“SNO” or “SNO Leases”), and after giving effect to the pending termination:

 

 

 

 

 

 

GLA (1)

 

 

 

 

 

 

 

 

 

City

 

State

 

Total

 

 

Leased

 

 

Not

Leased

 

 

Significant Tenants (1)

 

Leased (1)

 

1

 

Anchorage

 

AK

 

 

158,500

 

 

 

134,000

 

 

 

24,500

 

 

Guitar Center, Nordstrom Rack, Planet Fitness, Safeway

 

 

84.5

%

2

 

North Little Rock

 

AR

 

 

177,100

 

 

 

13,000

 

 

 

164,100

 

 

Aspen Dental, Longhorn Steakhouse

 

 

7.3

%

3

 

Glendale

 

AZ

 

 

125,000

 

 

 

 

 

 

125,000

 

 

n/a

 

 

0.0

%

4

 

Mesa

 

AZ

 

 

121,900

 

 

 

16,800

 

 

 

105,100

 

 

Carvana

 

 

13.8

%

5

 

Peoria

 

AZ

 

 

104,400

 

 

 

104,400

 

 

 

 

 

At Home

 

 

100.0

%

6

 

Phoenix

 

AZ

 

 

144,200

 

 

 

 

 

 

144,200

 

 

n/a

 

 

0.0

%

7

 

Phoenix

 

AZ

 

 

151,200

 

 

 

151,200

 

 

 

 

 

At Home

 

 

100.0

%

8

 

Sierra Vista

 

AZ

 

 

94,700

 

 

 

 

 

 

94,700

 

 

n/a

 

 

0.0

%

9

 

Tucson

 

AZ

 

 

218,900

 

 

 

50,600

 

 

 

168,300

 

 

Round One Entertainment

 

 

23.1

%

10

 

Yuma

 

AZ

 

 

90,400

 

 

 

 

 

 

90,400

 

 

n/a

 

 

0.0

%

11

 

Big Bear Lake (2)

 

CA

 

 

80,000

 

 

 

4,000

 

 

 

76,000

 

 

Subway, Wells Fargo Bank

 

 

5.0

%

12

 

Chula Vista

 

CA

 

 

250,100

 

 

 

 

 

 

250,100

 

 

n/a

 

 

0.0

%

13

 

Citrus Heights

 

CA

 

 

289,500

 

 

 

 

 

 

289,500

 

 

n/a

 

 

0.0

%

14

 

El Cajon

 

CA

 

 

244,900

 

 

 

188,700

 

 

 

56,200

 

 

Ashley Furniture, Bob's Discount Furniture, Burlington Stores, Extra Space Storage

 

 

77.1

%

15

 

El Centro

 

CA

 

 

139,700

 

 

 

 

 

 

139,700

 

 

Hobby Lobby

 

 

0.0

%

16

 

Fairfield

 

CA

 

 

146,500

 

 

 

28,500

 

 

 

118,000

 

 

Dave & Busters

 

 

19.5

%

17

 

Florin

 

CA

 

 

329,700

 

 

 

57,000

 

 

 

272,700

 

 

n/a

 

 

17.3

%

18

 

Fresno

 

CA

 

 

216,600

 

 

 

43,400

 

 

 

173,200

 

 

Ross Dress for Less, dd's Discounts

 

 

20.0

%

19

 

McKinleyville

 

CA

 

 

94,800

 

 

 

 

 

 

94,800

 

 

n/a

 

 

0.0

%

20

 

Merced

 

CA

 

 

92,600

 

 

 

79,800

 

 

 

12,800

 

 

Burlington Stores, dd's Discounts, Five Below

 

 

86.2

%

21

 

Montclair

 

CA

 

 

174,700

 

 

 

 

 

 

174,700

 

 

n/a

 

 

0.0

%

22

 

North Hollywood

 

CA

 

 

161,900

 

 

 

74,900

 

 

 

87,000

 

 

Burlington Stores, Ross Dress for Less

 

 

46.3

%

23

 

Palm Desert

 

CA

 

 

136,500

 

 

 

 

 

 

136,500

 

 

n/a

 

 

0.0

%

24

 

Ramona

 

CA

 

 

107,500

 

 

 

14,700

 

 

 

92,800

 

 

Dollar Tree

 

 

13.7

%

25

 

Riverside

 

CA

 

 

214,200

 

 

 

12,200

 

 

 

202,000

 

 

Bank of America

 

 

5.7

%

26

 

Riverside

 

CA

 

 

132,600

 

 

 

38,100

 

 

 

94,500

 

 

Jack in the Box, Stater Brothers

 

 

28.7

%

27

 

Roseville

 

CA

 

 

125,800

 

 

 

109,500

 

 

 

16,300

 

 

AAA, Cinemark, Round One Entertainment

 

 

87.0

%

28

 

Salinas

 

CA

 

 

132,900

 

 

 

32,200

 

 

 

100,700

 

 

Burlington

 

 

24.2

%

29

 

San Bruno

 

CA

 

 

276,600

 

 

 

31,300

 

 

 

245,300

 

 

Industrious

 

 

11.3

%

30

 

San Bernardino

 

CA

 

 

264,700

 

 

 

 

 

 

264,700

 

 

n/a

 

 

0.0

%

31

 

San Jose

 

CA

 

 

262,500

 

 

 

 

 

 

262,500

 

 

n/a

 

 

0.0

%

32

 

Santa Maria

 

CA

 

 

108,600

 

 

 

 

 

 

108,600

 

 

n/a

 

 

0.0

%

33

 

Temecula

 

CA

 

 

120,100

 

 

 

112,800

 

 

 

7,300

 

 

Round One Entertainment, Dick's Sporting Goods

 

 

93.9

%

34

 

Thousand Oaks

 

CA

 

 

161,400

��

 

 

161,400

 

 

 

 

 

Dave & Busters, DSW, Nordstrom Rack

 

 

100.0

%

35

 

Ventura

 

CA

 

 

178,600

 

 

 

 

 

 

178,600

 

 

n/a

 

 

0.0

%

36

 

West Covina

 

CA

 

 

142,000

 

 

 

 

 

 

142,000

 

 

n/a

 

 

0.0

%

37

 

Westminster

 

CA

 

 

197,900

 

 

 

 

 

 

197,900

 

 

n/a

 

 

0.0

%

38

 

Lakewood

 

CO

 

 

153,000

 

 

 

 

 

 

153,000

 

 

n/a

 

 

0.0

%

39

 

Thornton

 

CO

 

 

203,000

 

 

 

61,700

 

 

 

141,300

 

 

Vasa Fitness

 

 

30.4

%

40

 

Waterford

 

CT

 

 

149,200

 

 

 

 

 

 

149,200

 

 

n/a

 

 

0.0

%

 

- 30 -


 

 

 

City

 

State

 

Total

 

 

Leased

 

 

Not

Leased

 

 

Significant Tenants (1)

 

Leased (1)

 

41

 

Rehoboth Beach

 

DE

 

 

118,300

 

 

 

75,900

 

 

 

42,400

 

 

andThat!, PetSmart, Aldi

 

 

64.2

%

42

 

Boca Raton

 

FL

 

 

178,500

 

 

 

4,200

 

 

 

174,300

 

 

Washington Mutual

 

 

2.4

%

43

 

Bradenton

 

FL

 

 

82,900

 

 

 

49,900

 

 

 

33,000

 

 

Target

 

 

60.2

%

44

 

Clearwater

 

FL

 

 

211,300

 

 

 

87,600

 

 

 

123,700

 

 

Whole Foods, Nordstrom Rack

 

 

41.5

%

45

 

Doral

 

FL

 

 

212,900

 

 

 

 

 

 

212,900

 

 

n/a

 

 

0.0

%

46

 

Ft. Myers

 

FL

 

 

146,800

 

 

 

 

 

 

146,800

 

 

n/a

 

 

0.0

%

47

 

Hialeah

 

FL

 

 

145,200

 

 

 

77,900

 

 

 

67,300

 

 

Five Below, Ulta Beauty, Panera

 

 

53.7

%

48

 

Hialeah (3)

 

FL

 

 

106,300

 

 

 

106,300

 

 

 

 

 

Aldi, Bed Bath & Beyond, Ross Dress for Less, dd’s Discounts

 

 

100.0

%

49

 

Lakeland

 

FL

 

 

156,200

 

 

 

 

 

 

156,200

 

 

n/a

 

 

0.0

%

50

 

Aventura

 

FL

 

 

215,400

 

 

 

111,500

 

 

 

103,900

 

 

Mercado del Rio, Pinstripes, Industrious

 

 

51.8

%

51

 

Miami

 

FL

 

 

170,100

 

 

 

 

 

 

170,100

 

 

n/a

 

 

0.0

%

52

 

North Miami

 

FL

 

 

125,400

 

 

 

125,400

 

 

 

 

 

Aldi, Burlington Stores, Ross Dress for Less, Michaels Stores

 

 

100.0

%

53

 

Ocala

 

FL

 

 

146,200

 

 

 

 

 

 

146,200

 

 

n/a

 

 

0.0

%

54

 

Orlando

 

FL

 

 

118,400

 

 

 

96,700

 

 

 

21,700

 

 

Floor & Décor

 

 

81.7

%

55

 

Panama City

 

FL

 

 

139,300

 

 

 

 

 

 

139,300

 

 

n/a

 

 

0.0

%

56

 

Pensacola

 

FL

 

 

106,100

 

 

 

106,100

 

 

 

 

 

BJ's Wholesale Club, Bubba's 33

 

 

100.0

%

57

 

Plantation

 

FL

 

 

184,400

 

 

 

136,100

 

 

 

48,300

 

 

GameTime, Lazy Dog, Powerhouse Gym

 

 

73.8

%

58

 

Sarasota

 

FL

 

 

212,400

 

 

 

 

 

 

212,400

 

 

n/a

 

 

0.0

%

59

 

St. Petersburg

 

FL

 

 

113,800

 

 

 

11,800

 

 

 

102,000

 

 

n/a

 

 

10.4

%

60

 

St. Petersburg

 

FL

 

 

133,800

 

 

 

133,800

 

 

 

 

 

Dick's Sporting Goods, Five Below, PetSmart

 

 

100.0

%

61

 

Savannah

 

GA

 

 

167,300

 

 

 

 

 

 

167,300

 

 

n/a

 

 

0.0

%

62

 

Honolulu

 

HI

 

 

76,100

 

 

 

76,100

 

 

 

 

 

Long's Drugs (CVS), Ross Dress for Less, PetSmart

 

 

100.0

%

63

 

Cedar Rapids

 

IA

 

 

146,000

 

 

 

 

 

 

146,000

 

 

n/a

 

 

0.0

%

64

 

Charles City

 

IA

 

��

96,600

 

 

 

 

 

 

96,600

 

 

n/a

 

 

0.0

%

65

 

Webster City

 

IA

 

 

40,800

 

 

 

 

 

 

40,800

 

 

n/a

 

 

0.0

%

66

 

Boise

 

ID

 

 

123,600

 

 

 

 

 

 

123,600

 

 

n/a

 

 

0.0

%

67

 

Chicago

 

IL

 

 

120,700

 

 

 

89,100

 

 

 

31,600

 

 

Ross Dress for Less, dd's Discounts, Five Below

 

 

73.8

%

68

 

Joliet

 

IL

 

 

204,600

 

 

 

 

 

 

204,600

 

 

n/a

 

 

0.0

%

69

 

Lombard

 

IL

 

 

139,300

 

 

 

139,300

 

 

 

 

 

The Dump

 

 

100.0

%

70

 

North Riverside

 

IL

 

 

216,400

 

 

 

95,700

 

 

 

120,700

 

 

Round One Entertainment, Aldi, Blink Fitness, Amita Health

 

 

44.2

%

71

 

Orland Park

 

IL

 

 

140,000

 

 

 

45,900

 

 

 

94,100

 

 

AMC

 

 

32.8

%

72

 

Springfield

 

IL

 

 

119,500

 

 

 

103,000

 

 

 

16,500

 

 

Binny's Beverage Depot, Burlington Stores, Marshalls

 

 

86.2

%

73

 

Steger

 

IL

 

 

87,400

 

 

 

 

 

 

87,400

 

 

n/a

 

 

0.0

%

74

 

Elkhart

 

IN

 

 

86,600

 

 

 

86,600

 

 

 

 

 

Big R

 

 

100.0

%

75

 

Ft. Wayne

 

IN

 

 

84,400

 

 

 

63,700

 

 

 

20,700

 

 

Dave & Busters, Five Below, HomeGoods

 

 

75.5

%

76

 

Merrillville

 

IN

 

 

170,900

 

 

 

161,400

 

 

 

9,500

 

 

At Home, Dollar Tree

 

 

94.4

%

77

 

Hopkinsville

 

KY

 

 

85,100

 

 

 

64,600

 

 

 

20,500

 

 

Bargain Hunt, Farmer's Furniture, Harbor Freight

 

 

75.9

%

78

 

Paducah

 

KY

 

 

97,300

 

 

 

66,800

 

 

 

30,500

 

 

Burlington Stores, Ross Dress for Less

 

 

68.7

%

79

 

Lafayette

 

LA

 

 

194,900

 

 

 

 

 

 

194,900

 

 

n/a

 

 

0.0

%

80

 

New Iberia

 

LA

 

 

4,500

 

 

 

4,500

 

 

 

 

 

Chase Bank

 

 

100.0

%

 

- 31 -


 

 

City

 

State

 

Total

 

 

Leased

 

 

Not

Leased

 

 

Significant Tenants (1)

 

Leased (1)

 

81

 

Braintree

 

MA

 

 

89,700

 

 

 

85,000

 

 

 

4,700

 

 

Nordstrom Rack, Ulta Beauty

 

 

94.8

%

82

 

Saugus

 

MA

 

 

210,700

 

 

 

100,000

 

 

 

110,700

 

 

APEX Entertainment

 

 

47.5

%

83

 

Bowie

 

MD

 

 

123,000

 

 

 

15,000

 

 

 

108,000

 

 

BJ's Brewhouse

 

 

12.2

%

84

 

Edgewater

 

MD

 

 

117,200

 

 

 

 

 

 

117,200

 

 

n/a

 

 

0.0

%

85

 

Madawaska

 

ME

 

 

49,700

 

 

 

 

 

 

49,700

 

 

n/a

 

 

0.0

%

86

 

Lincoln Park

 

MI

 

 

301,700

 

 

 

68,800

 

 

 

232,900

 

 

Bank of America, Burlington Stores, Planet Fitness

 

 

22.8

%

87

 

Manistee

 

MI

 

 

94,700

 

 

 

 

 

 

94,700

 

 

n/a

 

 

0.0

%

88

 

Roseville

 

MI

 

 

364,600

 

 

 

154,600

 

 

 

210,000

 

 

At Home, Hobby Lobby

 

 

42.4

%

89

 

Sault Ste. Marie

 

MI

 

 

92,700

 

 

 

 

 

 

92,700

 

 

n/a

 

 

0.0

%

90

 

Troy

 

MI

 

 

379,600

 

 

 

91,100

 

 

 

288,500

 

 

At Home

 

 

24.0

%

91

 

Ypsilanti

 

MI

 

 

91,700

 

 

 

91,700

 

 

 

 

 

At Home

 

 

100.0

%

92

 

Burnsville

 

MN

 

 

167,300

 

 

 

 

 

 

167,300

 

 

n/a

 

 

0.0

%

93

 

Maplewood

 

MN

 

 

175,000

 

 

 

 

 

 

175,000

 

 

n/a

 

 

0.0

%

94

 

St. Paul

 

MN

 

 

217,900

 

 

 

100

 

 

 

217,800

 

 

n/a

 

 

0.0

%

95

 

Florissant

 

MO

 

 

119,000

 

 

 

4,300

 

 

 

114,700

 

 

n/a

 

 

3.6

%

96

 

Jefferson City

 

MO

 

 

92,600

 

 

 

92,600

 

 

 

 

 

Orscheln Farm and Home

 

 

100.0

%

97

 

Springfield

 

MO

 

 

112,900

 

 

 

112,900

 

 

 

 

 

At Home

 

 

100.0

%

98

 

Columbus

 

MS

 

 

166,700

 

 

 

45,400

 

 

 

121,300

 

 

Bargain Hunt

 

 

27.2

%

99

 

Asheville

 

NC

 

 

110,600

 

 

 

 

 

 

110,600

 

 

n/a

 

 

0.0

%

100

 

Greensboro

 

NC

 

 

178,500

 

 

 

168,200

 

 

 

10,300

 

 

Floor & Décor, Gabriel Brothers

 

 

94.2

%

101

 

Kearney

 

NE

 

 

64,900

 

 

 

64,900

 

 

 

 

 

Ross Dress for Less, Five Below, Marshall's

 

 

100.0

%

102

 

Manchester

 

NH

 

 

106,600

 

 

 

80,400

 

 

 

26,200

 

 

Dick's Sporting Goods, Dave & Buster's

 

 

75.4

%

103

 

Nashua

 

NH

 

 

167,100

 

 

 

 

 

 

167,100

 

 

n/a

 

 

0.0

%

104

 

Portsmouth

 

NH

 

 

127,100

 

 

 

 

 

 

127,100

 

 

n/a

 

 

0.0

%

105

 

Salem

 

NH

 

 

251,600

 

 

 

123,000

 

 

 

128,600

 

 

Cinemark, Dick's Sporting Goods

 

 

48.9

%

106

 

Watchung

 

NJ

 

 

116,400

 

 

 

115,600

 

 

 

800

 

 

Cinemark, HomeGoods, Sierra Trading Post, Ulta Beauty, Chick-fil-A , City MD

 

 

99.3

%

107

 

Henderson

 

NV

 

 

133,400

 

 

 

128,500

 

 

 

4,900

 

 

At Home, Seafood City

 

 

96.3

%

108

 

Las Vegas

 

NV

 

 

130,300

 

 

 

42,500

 

 

 

87,800

 

 

Round One Entertainment

 

 

32.6

%

109

 

Reno

 

NV

 

 

162,700

 

 

 

41,300

 

 

 

121,400

 

 

Round One Entertainment

 

 

25.4

%

110

 

Albany

 

NY

 

 

277,900

 

 

 

76,700

 

 

 

201,200

 

 

Whole Foods, REI, Ethan Allen

 

 

27.6

%

111

 

Clay

 

NY

 

 

146,500

 

 

 

 

 

 

146,500

 

 

n/a

 

 

0.0

%

112

 

East Northport

 

NY

 

 

179,700

 

 

 

93,300

 

 

 

86,400

 

 

24 Hour Fitness, AMC

 

 

51.9

%

113

 

Hicksville

 

NY

 

 

284,900

 

 

 

96,600

 

 

 

188,300

 

 

Chase Bank, Chipotle

 

 

33.9

%

114

 

Olean

 

NY

 

 

120,700

 

 

 

55,400

 

 

 

65,300

 

 

Marshall's, Ollie's Bargain Hunt

 

 

45.9

%

115

 

Rochester

 

NY

 

 

128,500

 

 

 

 

 

 

128,500

 

 

n/a

 

 

0.0

%

116

 

Sidney

 

NY

 

 

94,400

 

 

 

 

 

 

94,400

 

 

n/a

 

 

0.0

%

117

 

Victor

 

NY

 

 

119,600

 

 

 

119,600

 

 

 

 

 

Dick's Sporting Goods

 

 

100.0

%

118

 

Yorktown Heights

 

NY

 

 

160,000

 

 

 

38,500

 

 

 

121,500

 

 

24 Hour Fitness

 

 

24.1

%

119

 

Canton

 

OH

 

 

190,600

 

 

 

116,300

 

 

 

74,300

 

 

Dick's Sporting Goods, Dave & Busters, Cheddar's

 

 

61.0

%

120

 

Dayton

 

OH

 

 

180,200

 

 

 

13,400

 

 

 

166,800

 

 

Outback Steakhouse

 

 

7.4

%

- 32 -


 

 

 

 

City

 

State

 

Total

 

 

Leased

 

 

Not

Leased

 

 

Significant Tenants (1)

 

Leased (1)

 

121

 

Kenton

 

OH

 

 

96,100

 

 

 

 

 

 

96,100

 

 

n/a

 

 

0.0

%

122

 

Mentor

 

OH

 

 

219,100

 

 

 

 

 

 

219,100

 

 

n/a

 

 

0.0

%

123

 

Middleburg Heights

 

OH

 

 

359,000

 

 

 

35,800

 

 

 

323,200

 

 

Carvana

 

 

10.0

%

124

 

Toledo

 

OH

 

 

218,700

 

 

 

 

 

 

218,700

 

 

n/a

 

 

0.0

%

125

 

Oklahoma City

 

OK

 

 

223,600

 

 

 

50,300

 

 

 

173,300

 

 

Vasa Fitness

 

 

22.5

%

126

 

Happy Valley

 

OR

 

 

144,300

 

 

 

45,000

 

 

 

99,300

 

 

Dick's Sporting Goods

 

 

31.2

%

127

 

King of Prussia (3)

 

PA

 

 

210,800

 

 

 

174,500

 

 

 

36,300

 

 

Dick's Sporting Goods, Primark, Outback Steakhouse, Yardhouse

 

 

82.8

%

128

 

Lebanon

 

PA

 

 

117,200

 

 

 

 

 

 

117,200

 

 

n/a

 

 

0.0

%

129

 

Walnutport

 

PA

 

 

121,200

 

 

 

 

 

 

121,200

 

 

n/a

 

 

0.0

%

130

 

Bayamon (2)

 

PR

 

 

114,600

 

 

 

 

 

 

114,600

 

 

n/a

 

 

0.0

%

131

 

Caguas (2)

 

PR

 

 

138,700

 

 

 

 

 

 

138,700

 

 

n/a

 

 

0.0

%

132

 

Carolina (2)

 

PR

 

 

198,000

 

 

 

 

 

 

198,000

 

 

n/a

 

 

0.0

%

133

 

Mayaguez (2)

 

PR

 

 

118,200

 

 

 

 

 

 

118,200

 

 

n/a

 

 

0.0

%

134

 

Ponce

 

PR

 

 

126,900

 

 

 

 

 

 

126,900

 

 

n/a

 

 

0.0

%

135

 

Warwick

 

RI

 

 

131,500

 

 

 

123,100

 

 

 

8,400

 

 

At Home, Hook & Reel, Skechers

 

 

93.6

%

136

 

Anderson

 

SC

 

 

117,100

 

 

 

117,100

 

 

 

 

 

Burlington Stores, Sportsman's Warehouse

 

 

100.0

%

137

 

Charleston

 

SC

 

 

106,400

 

 

 

52,900

 

 

 

53,500

 

 

Burlington Stores

 

 

49.7

%

138

 

Cordova

 

TN

 

 

160,900

 

 

 

 

 

 

160,900

 

 

n/a

 

 

0.0

%

139

 

Memphis

 

TN

 

 

112,700

 

 

 

100,000

 

 

 

12,700

 

 

LA Fitness, Hopdoddy, Nordstrom Rack, Ulta Beauty

 

 

88.7

%

140

 

Austin

 

TX

 

 

52,700

 

 

 

45,000

 

 

 

7,700

 

 

AMC

 

 

85.4

%

141

 

El Paso

 

TX

 

 

114,200

 

 

 

99,100

 

 

 

15,100

 

 

dd's Discount, Ross Dress for Less, Five Below, Burlington Stores

 

 

86.8

%

142

 

Friendswood

 

TX

 

 

166,000

 

 

 

 

 

 

166,000

 

 

n/a

 

 

0.0

%

143

 

Houston

 

TX

 

 

134,000

 

 

 

134,000

 

 

 

 

 

At Home

 

 

100.0

%

144

 

Houston

 

TX

 

 

201,700

 

 

 

 

 

 

201,700

 

 

n/a

 

 

0.0

%

145

 

Ingram

 

TX

 

 

168,400

 

 

 

 

 

 

168,400

 

 

n/a

 

 

0.0

%

146

 

Irving

 

TX

 

 

92,000

 

 

 

39,700

 

 

 

52,300

 

 

CareNow, Chick-fil-A

 

 

43.2

%

147

 

San Antonio

 

TX

 

 

164,200

 

 

 

157,800

 

 

 

6,400

 

 

Tru Fit, Bed Bath & Beyond

 

 

96.1

%

148

 

Valley View

 

TX

 

 

235,000

 

 

 

52,700

 

 

 

182,300

 

 

Industrious

 

 

22.4

%

149

 

Layton

 

UT

 

 

86,500

 

 

 

66,400

 

 

 

20,100

 

 

Vasa Fitness

 

 

76.8

%

150

 

West Jordan

 

UT

 

 

171,000

 

 

 

171,000

 

 

 

 

 

Burlington Stores, At Home

 

 

100.0

%

151

 

Alexandria

 

VA

 

 

262,100

 

 

 

 

 

 

262,100

 

 

n/a

 

 

0.0

%

152

 

Chesapeake

 

VA

 

 

169,700

 

 

 

 

 

 

169,700

 

 

n/a

 

 

0.0

%

153

 

Fairfax

 

VA

 

 

211,000

 

 

 

179,400

 

 

 

31,600

 

 

Dave & Busters, Dick's Sporting Goods

 

 

85.0

%

154

 

Virginia Beach

 

VA

 

 

166,200

 

 

 

79,300

 

 

 

86,900

 

 

DSW, The Fresh Market, Nordstrom Rack, Smokey Bones

 

 

47.7

%

155

 

Warrenton

 

VA

 

 

75,500

 

 

 

62,200

 

 

 

13,300

 

 

HomeGoods

 

 

82.4

%

156

 

Redmond

 

WA

 

 

230,700

 

 

 

 

 

 

230,700

 

 

n/a

 

 

0.0

%

157

 

Greendale

 

WI

 

 

187,500

 

 

 

133,700

 

 

 

53,800

 

 

Dick's Sporting Goods, Round One Entertainment

 

 

71.3

%

158

 

Madison

 

WI

 

 

118,400

 

 

 

118,400

 

 

 

 

 

Dave & Busters, Total Wine & More, Hobby Lobby

 

 

100.0

%

 

 

Total - Wholly Owned Properties

 

24,540,800

 

 

 

7,913,200

 

 

 

16,627,600

 

 

 

 

 

32.2

%

 

 

 

(1)

Based on signed leases as of December 31, 2020, including SNO Leases totaling 2.1 million GLA.

(2)

Denotes property subject to termination notices pursuant to the terms of the Holdco Master Lease.

(3)

Property subject to a ground lease.

- 33 -


 

Unconsolidated Properties

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GLA (1)

 

 

 

 

 

 

 

 

 

City

 

State

 

Joint Venture

 

Total

 

 

Leased

 

 

Not Leased

 

 

Significant Tenants (1)

 

Leased (1)

 

1

 

 

Carson

 

CA

 

Carson JV

 

 

182,200

 

 

 

109,700

 

 

 

72,500

 

 

Burlington Stores, Chipotle, Ross Dress for Less

 

 

60.2

%

2

 

 

Cockeysville

 

MD

 

Cockeysville JV

 

 

160,200

 

 

 

98,300

 

 

 

61,900

 

 

HomeGoods, Michaels Stores, OneLife Fitness

 

 

61.4

%

3

 

 

Frisco

 

TX

 

GGP I JV

 

 

162,900

 

 

 

 

 

 

162,900

 

 

n/a

 

 

0.0

%

4

 

 

Lynnwood

 

WA

 

GGP I JV

 

 

99,900

 

 

 

49,300

 

 

 

50,600

 

 

Dave & Busters, Cheesecake Factory

 

 

49.3

%

5

 

 

Natick (2)

 

MA

 

GGP I JV

 

 

190,700

 

 

 

88,500

 

 

 

102,200

 

 

Dave & Busters, Open World Entertainment

 

 

46.4

%

6

 

 

Norman (2)

 

OK

 

GGP I JV

 

 

66,900

 

 

 

 

 

 

66,900

 

 

n/a

 

 

0.0

%

7

 

 

Altamonte Springs

 

FL

 

GGP II JV

 

 

125,700

 

 

 

67,500

 

 

 

58,200

 

 

n/a

 

 

53.7

%

8

 

 

Naples

 

FL

 

GGP II JV

 

 

67,400

 

 

 

67,400

 

 

 

 

 

CMX Cinebistro, Uncle Julio’s

 

 

100.0

%

9

 

 

Wayne

 

NJ

 

GGP II JV

 

 

281,000

 

 

 

205,400

 

 

 

75,600

 

 

Cinemark, Dave & Busters, Yardhouse, BJ's Wholesale

 

 

73.1

%

10

 

 

Cerritos

 

CA

 

Macerich JV

 

 

277,600

 

 

 

 

 

 

277,600

 

 

n/a

 

 

0.0

%

11

 

 

Chandler

 

AZ

 

Macerich JV

 

 

139,500

 

 

 

74,000

 

 

 

65,500

 

 

Firestone

 

 

53.0

%

12

 

 

Danbury

 

CT

 

Macerich JV

 

 

178,500

 

 

 

70,100

 

 

 

108,400

 

 

Primark

 

 

39.3

%

13

 

 

Deptford

 

NJ

 

Macerich JV

 

 

191,700

 

 

 

149,200

 

 

 

42,500

 

 

Dick's Sporting Goods, Round One Entertainment, Crunch Fitness

 

 

77.8

%

14

 

 

Freehold

 

NJ

 

Macerich JV

 

 

138,800

 

 

 

66,600

 

 

 

72,200

 

 

Primark

 

 

48.0

%

15

 

 

Modesto

 

CA

 

Macerich JV

 

 

120,500

 

 

 

80,500

 

 

 

40,000

 

 

Dave & Busters, Dick's Sporting Goods

 

 

66.8

%

16

 

 

Portland

 

OR

 

Macerich JV

 

 

220,000

 

 

 

 

 

 

220,000

 

 

n/a

 

 

0.0

%

17

 

 

Santa Monica

 

CA

 

Mark 302 JV

 

 

103,000

 

 

 

 

 

 

103,000

 

 

n/a

 

 

0.0

%

18

 

 

Austin

 

TX

 

Tech Ridge JV

 

 

 

 

 

 

 

 

 

 

n/a

 

 

0.0

%

19

 

 

Ann Arbor

 

MI

 

Simon JV

 

 

170,600

 

 

 

 

 

 

170,600

 

 

n/a

 

 

0.0

%

20

 

 

Austin

 

TX

 

Simon JV

 

 

164,600

 

 

 

 

 

 

164,600

 

 

n/a

 

 

0.0

%

21

 

 

Nanuet

 

NY

 

Simon JV

 

 

221,400

 

 

 

 

 

 

221,400

 

 

n/a

 

 

0.0

%

22

 

 

Santa Rosa

 

CA

 

Simon JV

 

 

165,400

 

 

 

 

 

 

165,400

 

 

n/a

 

 

0.0

%

23

 

 

Tulsa

 

OK

 

Simon JV

 

 

150,200

 

 

 

 

 

 

150,200

 

 

n/a

 

 

0.0

%

24

 

 

San Diego

 

CA

 

UTC JV

 

 

226,200

 

 

 

130,300

 

 

 

95,900

 

 

Equinox, Pinstripes, CB2, Industrious

 

 

57.6

%

25

 

 

West Hartford

 

CT

 

West Hartford JV

 

 

163,700

 

 

 

112,500

 

 

 

51,200

 

 

buybuy Baby, REI, Cost Plus World Market, Shake Shack, Saks OFF 5th

 

 

68.7

%

 

 

 

 

Total - Unconsolidated Properties

 

 

 

 

 

 

3,968,600

 

 

 

1,369,300

 

 

 

2,599,300

 

 

 

 

 

34.5

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)     Based on signed leases as of December 31, 2020, including SNO Leases totaling 0.6 million (0.3 million at share) GLA.

 

 

 

 

(2)     Property subject to a ground lease.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

183

 

 

Grand Total - All Properties

 

 

28,509,400

 

 

 

9,282,500

 

 

 

19,226,900

 

 

 

 

 

32.6

%

 

183

 

 

Grand Total - All Properties (at share)

 

 

26,470,400

 

 

 

8,564,900

 

 

 

17,905,500

 

 

 

 

 

32.4

%

 

 

- 34 -


 

The following table sets forth information regarding the geographic diversification of the portfolio based on signed leases as of December 31, 2020, including Unconsolidated Entities presented at the Company’s proportional share and after giving effect to the pending termination:

 

State

 

Number of

Properties

 

 

Annual

Rent

 

 

% of Total

Annual Rent

 

 

Rent

PSF

 

Florida

 

 

21

 

 

$

29,321

 

 

 

19.5

%

 

$

26.30

 

California

 

 

33

 

 

 

24,325

 

 

 

16.2

%

 

 

21.80

 

New York

 

 

10

 

 

 

10,525

 

 

 

7.0

%

 

 

21.92

 

New Jersey

 

 

4

 

 

 

7,889

 

 

 

5.2

%

 

 

24.19

 

Texas

 

 

12

 

 

 

7,069

 

 

 

4.7

%

 

 

13.38

 

Illinois

 

 

7

 

 

 

6,992

 

 

 

4.6

%

 

 

14.78

 

Virginia

 

 

5

 

 

 

6,838

 

 

 

4.5

%

 

 

21.30

 

Massachusetts

 

 

3

 

 

 

4,764

 

 

 

3.2

%

 

 

20.78

 

Pennsylvania

 

 

3

 

 

 

4,638

 

 

 

3.1

%

 

 

26.58

 

Wisconsin

 

 

2

 

 

 

4,083

 

 

 

2.7

%

 

 

16.20

 

Total Top 10

 

 

100

 

 

$

106,444

 

 

 

70.7

%

 

$

21.22

 

Other (1)

 

 

83

 

 

 

44,159

 

 

 

29.3

%

 

 

12.44

 

Total

 

 

183

 

 

$

150,603

 

 

 

100.0

%

 

$

17.58

 

(1)

Includes 32 states.

Tenant Overview

The following table provides a summary of annual base rent for the portfolio based on signed leases as of December 31, 2020, including Unconsolidated Entities presented at the Company’s proportional share and after giving effect to the pending termination:

 

(in thousands except number of leases and PSF data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of

 

 

Leased

 

 

% of Total

 

 

Annual

 

 

% of Total

 

 

Annual

 

Tenant

 

 

 

Leases

 

 

GLA

 

 

Leased GLA

 

 

Rent

 

 

Annual Rent

 

 

Rent PSF

 

In-place diversified leases

 

 

251

 

 

 

6,196

 

 

 

72.3

%

 

$

96,065

 

 

 

63.8

%

 

$

15.50

 

SNO diversified leases

 

 

125

 

 

 

2,369

 

 

 

27.7

%

 

 

54,538

 

 

 

36.2

%

 

 

23.02

 

Total

 

 

376

 

 

 

8,565

 

 

 

100.0

%

 

$

150,603

 

 

 

100.0

%

 

$

17.58

 

 

During the year ended December 31, 2020, the majority of the $23.5 million of SNO leases that were sold, contributed to unconsolidated entities or terminated were comprised of leases terminated with fitness, entertainment and food & beverage tenants for which the Company had not yet deployed significant amounts of capital. The Company continues to evaluate and prioritize its SNO leases based upon tenant health, asset quality, risk-adjusted returns and near-term income opportunities.

- 35 -


Top Tenants

The following table lists the top tenants in our portfolio based on signed leases as of December 31, 2020, including Unconsolidated Properties presented at the Company’s proportional share and giving effect to the pending termination:

 

Tenant (1)

 

Number of

Leases

 

 

Annual

Rent

 

 

% of Total

Annual Rent

 

 

Concepts/Brands

 

 

 

 

 

 

Dick's Sporting Goods

 

 

12

 

 

$

12,437

 

 

 

8.3

%

 

 

Dave & Buster's

 

 

11

 

 

 

9,212

 

 

 

6.1

%

 

 

Round One Entertainment

 

 

8

 

 

 

7,225

 

 

 

4.8

%

 

 

 

 

 

 

 

 

Burlington Stores

 

 

13

 

 

 

6,799

 

 

 

4.5

%

 

 

 

 

 

 

 

 

At Home

 

 

11

 

 

 

6,786

 

 

 

4.5

%

 

 

Ross Dress For Less

 

 

16

 

 

 

5,430

 

 

 

3.6

%

 

Ross Dress for Less, dd's Discounts

Cinemark

 

 

4

 

 

 

4,899

 

 

 

3.3

%

 

 

 

 

 

 

 

 

Nordstrom Rack

 

 

6

 

 

 

4,614

 

 

 

3.1

%

 

 

 

 

 

 

 

 

AMC

 

 

3

 

 

 

4,202

 

 

 

2.8

%

 

 

Primark

 

 

3

 

 

 

3,002

 

 

 

2.0

%

 

 

Bed Bath & Beyond

 

 

6

 

 

 

2,489

 

 

 

1.7

%

 

Bed Bath & Beyond, buybuyBaby, Cost Plus World Market, andThat!

BJ's Wholesale Club

 

 

2

 

 

 

2,422

 

 

 

1.6

%

 

 

TJX

 

 

9

 

 

 

2,356

 

 

 

1.6

%

 

TJ Maxx, Marshalls, HomeGoods, HomeSense, Sierra Trading Post

Equinox Fitness

 

 

7

 

 

 

2,283

 

 

 

1.5

%

 

Equinox, Blink Fitness

Pinstripes

 

 

2

 

 

 

2,035

 

 

 

1.4

%

 

 

 

 

 

 

 

 

Floor & Décor

 

 

2

 

 

 

2,032

 

 

 

1.3

%

 

 

PetSmart

 

 

4

 

 

 

2,012

 

 

 

1.3

%

 

 

Vasa Fitness

 

 

3

 

 

 

1,862

 

 

 

1.2

%

 

 

24 Hour Fitness

 

 

2

 

 

 

1,791

 

 

 

1.2

%

 

 

 

 

 

 

 

 

Ulta Salon

 

 

6

 

 

 

1,685

 

 

 

1.1

%

 

 

 

 

 

 

 

 

 

(1)    The Company has signed eight leases with Industrious to occupy 278,000 SF under revenue-sharing agreements that are expected to place Industrious among the Company’s top tenants.

Lease Expirations

The following table sets forth a summary schedule of lease expirations for signed leases, including SNO leases, as of December 31, 2020, including Unconsolidated Properties presented at the Company’s proportional share and giving effect to the pending termination.  The information set forth in the table assumes that no other tenants exercise renewal options or early termination rights: 

 

(in thousands except number of leases)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year

 

Number of

Leases (1)

 

 

Leased

GLA

 

 

% of Total

Leased GLA

 

 

Annual

Rent

 

 

% of Total

Annual Rent

 

Month-to-Month

 

 

9

 

 

 

66

 

 

 

0.7

%

 

$

639

 

 

 

0.4

%

2021

 

 

6

 

 

 

29

 

 

 

0.3

%

 

 

479

 

 

 

0.3

%

2022

 

 

13

 

 

 

300

 

 

 

3.5

%

 

 

2,848

 

 

 

1.9

%

2023

 

 

14

 

 

 

446

 

 

 

5.2

%

 

 

7,411

 

 

 

4.9

%

2024

 

 

14

 

 

 

291

 

 

 

3.4

%

 

 

2,146

 

 

 

1.4

%

2025

 

 

11

 

 

 

278

 

 

 

3.3

%

 

 

3,990

 

 

 

2.7

%

2026

 

 

17

 

 

 

450

 

 

 

5.3

%

 

 

6,822

 

 

 

4.5

%

2027

 

 

13

 

 

 

596

 

 

 

7.0

%

 

 

5,171

 

 

 

3.5

%

2028

 

 

30

 

 

 

738

 

 

 

8.6

%

 

 

11,765

 

 

 

7.8

%

2029

 

 

54

 

 

 

1,262

 

 

 

14.7

%

 

 

21,246

 

 

 

14.1

%

2030

 

 

23

 

 

 

386

 

 

 

4.5

%

 

 

5,943

 

 

 

4.0

%

Thereafter

 

 

47

 

 

 

1,354

 

 

 

15.8

%

 

 

27,605

 

 

 

18.3

%

SNO Leases

 

 

125

 

 

 

2,369

 

 

 

27.7

%

 

 

54,538

 

 

 

36.2

%

Total

 

 

376

 

 

 

8,565

 

 

 

100.0

%

 

$

150,603

 

 

 

100.0

%

 

- 36 -


ITEM 3.

On April 18, 2019, at the direction of the Restructuring Sub-Committee of the Restructuring Committee of the Board of Directors of Sears Holdings, Sears Holdings, Sears, Roebuck & Co., Sears Development Co., Kmart Corporation, and Kmart of Washington, LLC filed a lawsuit (the “Litigation”) in the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”) against, among others, Edward S. Lampert, ESL Investments, Inc. and certain of its affiliates and investors, Fairholme Capital Management, L.L.C., certain members of the Sears Holdings board of directors, and the Company, the Operating Partnership, and certain of our affiliates and subsidiaries (the Company, the Operating Partnership, and certain of our affiliates and subsidiaries collectively, the “Seritage Defendants”).  The Litigation is dual captioned as In re: Sears Holdings Corporation, et al., Case No. 18-23538 (RDD) and Sears Holdings Corporation et al., v. Lampert et al., Case No. 19-08250 (RDD).  The Litigation alleges, among other things, that certain transactions undertaken by Sears Holdings since 2011 constituted actual and/or constructive fraudulent transfers and/or illegal dividends by Sears Holdings.  The challenged transactions include the July 2015 transactions giving rise to Seritage, the execution of the Original Master Lease with Sears Holdings, and the acquisition of real estate from Sears Holdings. The Litigation alleges, among other things, that the real estate acquired by Seritage from Sears Holdings in July 2015 was worth at least $649 to $749 million more than the purchase price paid.  The Litigation seeks as relief, among other things, declaratory relief, avoidance of the allegedly actual and/or constructive fraudulent transfers and either (i) rescission of the transfers of real estate from Sears Holdings to Seritage in 2015 and return of the proceeds of the transactions between Sears Holdings and Seritage, or, in the alternative, (ii) payment by Seritage to Sears Holdings of damages at least equal to the value of the transferred property.  

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

On November 25, 2019, the Creditors’ Committee filed a first amended complaint (the “Amended Complaint”) in the Bankruptcy Court naming us and certain of our affiliates, as well as affiliates of ESL and Sears Holdings, and certain other third parties, as defendants. The Amended Complaint alleges, among other things, that certain transactions undertaken by Sears Holdings since 2011 (including the July 2015 transactions giving rise to Seritage, the execution of the Master Lease with Sears Holdings (the “Original Master Lease”), and the acquisition of real estate from Sears Holdings) constituted actual and/or constructive fraudulent transfers and/or illegal dividends by Sears Holdings and that the real estate acquired by Seritage from Sears Holdings in July 2015 was worth hundreds of millions of dollars more than the purchase price paid.  The Amended Complaint further alleges that certain releases provided to Seritage and certain other defendants in connection with the Sears Holdings derivative litigation in the Delaware Court of Chancery in 2017 should be avoided and/or declared null and void as an actual and/or constructive fraudulent conveyance.  The Amended Complaint seeks as relief, among other things, declaratory relief, avoidance of the allegedly actual and/or constructive fraudulent transfers, disgorgement, recovery of the property fraudulently transferred or, in the alternative, compensatory damages in an unspecified amount to be determined at trial, equitable subordination and disallowance of defendants’ claims as creditors, punitive and exemplary damages for any intentional wrongdoing, and reasonable attorneys’ fees, costs, and expenses.

On February 21, 2020, the Seritage defendants filed a partial motion to dismiss seeking dismissal of the claims in the operative complaint in the Litigation relating to the release received in the Sears Holdings derivative litigation, unjust enrichment, and equitable subordination. Briefing and oral argument on the motions were completed in August 2020, and the parties are awaiting a decision.  The Company believes that the claims against the Seritage Defendants in the Litigation are without merit and intends to defend against them vigorously.

On March 2, 2021, the Company brought a lawsuit in Delaware state court against QBE Insurance Corporation, Endurance American

Insurance Company, Allianz Global Risks US Insurance Company and Continental Casualty Company, each of which are D&O

insurance providers of the Company (the “D&O Insurers”). The Company’s lawsuit is seeking, among other things, declaratory relief

and money damages as a result of certain of the D&O Insurers refusal to pay certain costs and expenses related to the defense of the

Litigation discussed above.

In addition to the litigation described above, the Company is subject, from time to time, to various legal proceedings and claims that arise in the ordinary course of business 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 consolidated financial position, results of operations, cash flows or liquidity of the Company.  As of December 31, 2020, and December 31, 2019, the Company did not record any amounts for litigation or other matters.

- 37 -


ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.

- 38 -


PART II

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The Company’s Class A common stock is listed and traded on the New York Stock Exchange (“NYSE”) under the symbol “SRG”.  

The following graph provides a comparison, from December 31, 2015 through December 31, 2020, of the cumulative total shareholder return (assuming reinvestment of dividends) on $100 invested in each of Class A shares of the Company, the Standard & Poor's ("S&P") 500 Index and the SNL US REIT Index, an industry index of publicly-traded REITs (including the Company).

Data for the S&P 500 Index and the SNL US REIT Index were provided by SNL Financial LLC.

 

 

Index

 

 

12/31/2015

 

12/31/2016

 

12/31/2017

 

12/31/2018

 

12/31/2019

 

12/31/2020

 

 

Seritage Growth Properties

Cum $

 

 

100

 

 

108

 

 

105

 

 

86

 

 

107

 

 

39

 

 

 

Return %

 

 

 

 

 

8

 

 

5

 

 

(14

)

 

7

 

 

(61

)

 

S&P 500

Cum $

 

 

100

 

 

112

 

 

136

 

 

130

 

 

171

 

 

203

 

 

 

Return %

 

 

 

 

 

12

 

 

36

 

 

30

 

 

71

 

 

103

 

 

SNL US REIT Equity

Cum $

 

 

100

 

 

109

 

 

118

 

 

112

 

 

145

 

 

137

 

 

 

Return %

 

 

 

 

 

9

 

 

18

 

 

12

 

 

45

 

 

37

 

 

 

Common Shares and Operating Partnership Units

On March 3, 2021, the reported closing sale price per share of our Class A common stock on the NYSE was $20.99.

As of March 3, 2021, there were 38,903,146 Class A common shares issued and outstanding which were held by approximately 138 shareholders of record.  The number of shareholders of record does not reflect persons or entities that held their shares in nominee or “street” name.

In addition, as of March 3, 2021, there were no Class B non-economic common shares issued and outstanding and 17,002,906 outstanding Operating Partnership units (“OP Units”) held by limited partners other than the Company.  As of March 3, 2021, there are no Class B non-economic common shares outstanding and there are no Class C non-voting common shares outstanding.

The Class B non-economic common shares have voting rights, but do not have economic rights and, as such, do not receive dividends and are not included in earnings per share computations.

- 39 -


Class C non-voting common shares have economic rights, but do not have voting rights.  Upon any transfer of a Class C non-voting common share to any person other than an affiliate of the holder of such share, such share shall automatically convert into one Class A common share.

The OP Units are generally exchangeable into shares of Class A common stock on a one-for-one basis.

Share-Based Compensation

The following table provides information with respect to the Company’s equity compensation plan at December 31, 2020:

 

 

 

Number of securities to

be issued upon exercise

of outstanding options,

warrants and rights

 

 

Weighted-average

exercise price of

outstanding options,

warrants and rights

 

 

Number of securities

remaining available for

future issuance under

equity compensation

plans (excluding

securities reflected in

column (a))

 

 

Plan Category

 

(a)

 

 

(b)

 

 

(c)

 

 

Equity compensation plans approved

   by security holders

 

 

159,581

 

(1)

n/a

 

(2)

 

2,728,012

 

(3)

Equity compensation plans not

   approved by security holders

 

 

 

 

 

 

 

 

 

 

Total

 

 

159,581

 

 

 

 

 

 

2,728,012

 

 

 

(1)

Represents restricted stock awards and units previously granted and that remain unvested as of December 31, 2020.

(2)

Weighted average exercise price does not apply to restricted stock units (“RSU”).

(3)

Shares remaining available for future issuance under the Seritage Growth Properties 2015 Share Plan, taking into account 79,516 shares of restricted stock previously granted and 442,472 shares subject to grants of RSUs previously granted (including those that remain unvested reported in column (a)).

Dividends and Distributions

The timing, amount and composition of all distributions will be made by the Company at the discretion of its Board of Trustees.  Such distributions will depend on the financial position, results of operations, cash flows, capital requirements, debt covenants, applicable law and other factors as the Board of Trustees of Seritage deems relevant.

The Company declared a dividend on the Company’s Class A and Class C common shares for the first quarter of 2019 and has not declared dividends on the Company’s Class A and Class C common shares since that time, based on our Board of Trustees’ assessment of the Company’s investment opportunities and its expectations of taxable income for the remainder of 2021.  The Company intends to, at a minimum, make distributions to our shareholders to comply with the REIT requirements of the Code, which may be satisfied by dividends on the Company’s preferred shares.

REIT Election

We have elected to be treated as a REIT for U.S. federal income tax and intend to maintain this status in future periods.  To qualify as a REIT, the Company must meet a number of organizational and operational requirements, including requirements to distribute at least 90% of its ordinary taxable income and to either distribute capital gains to shareholders, or pay corporate income tax on the undistributed capital gains. A REIT will generally not pay U.S. federal income tax if it distributes 100% of its capital gains and ordinary income.

- 40 -


ITEM 6. SELECTED FINANCIAL DATA

None.

- 41 -


ITEM 7.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This section contains forward-looking statements that involve risks and uncertainties.  Our actual results may vary materially from those discussed in the forward-looking statements as a result of various factors, including, without limitation, those set forth in "Risk Factors" and the other matters set forth in this Annual Report.  See "Cautionary Statement Regarding Forward-Looking Statements."

All references to numbered Notes are to specific footnotes to our Consolidated Financial Statements included in this Annual Report.  You should read this discussion in conjunction with our Consolidated Financial Statements, the notes thereto and other financial information included elsewhere in this Annual Report.  Our financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”).  Capitalized terms used, but not defined, in this Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") have the same meanings as in such Notes.

Overview

We are principally engaged in the acquisition, ownership, development, redevelopment, management and leasing of diversified retail and mixed-use properties throughout the United States.  As of December 31, 2020, our portfolio consisted of interests in 183 properties totaling approximately 26.5 million square feet of GLA, including 158 Wholly Owned Properties totaling approximately 24.5 million square feet of GLA across 41 states and Puerto Rico, and interests in 25 Unconsolidated Properties totaling approximately 1.9 million square feet of GLA across 13 states that are owned in Unconsolidated Entities.

The Company’s mission is to create long-term value for our shareholders by unlocking the value of our portfolio through re-leasing, redevelopment, formation of strategic partnerships or other bespoke solutions.  In doing so, we target meaningful growth in NOI and diversification of our tenant base while transforming our portfolio from one with a single-tenant retail and enclosed shopping center orientation to a diversified portfolio, including residential, biotechnology, office, open-air shopping and other uses.

In order to achieve our objective, we intend to execute the following strategies:

 

Maximize value of vast land holdings through retail and mixed-use accretive densification;

 

Convert single-tenant buildings into multi-tenant properties at meaningfully higher rents

 

Leverage existing and future joint venture relationships with leading real estate and financial partners; and

 

Maintain a flexible capital structure to support value creation activities.

Since inception, and excluding 17 projects that have been sold, we have completed or substantially completed 51 redevelopment projects and, as of December 31, 2020, we had an additional 15 projects in various stages of redevelopment, with the remaining commenced projects on hold due to adverse conditions resulting from the novel coronavirus (“COVID-19”) pandemic.  As of December 31, 2020, including our proportional share of Unconsolidated Properties, we had 6.2 million square feet of GLA leased to diversified tenants under in-place leases, 2.4 million square feet of GLA leased to diversified tenants under signed not yet opened leases, and 17.9 million square feet of GLA available for lease and/or redevelopment.

On October 15, 2018, Sears Holdings and certain of its affiliates filed voluntary petitions for relief under chapter 11 of title 11 of the United States Code with the Bankruptcy Court.  Subsequently, the Company and Holdco, an affiliate of ESL Investments, Inc., executed the Holdco Master Lease with respect to 51 Wholly Owned Properties, which became effective on March 12, 2019, when the Bankruptcy Court issued an order approving the rejection of the Original Master Lease.

As of December 31, 2020, after giving effect to the pending termination of the Holdco Master Lease at the five remaining properties, the Company does not lease any properties to Holdco under the Holdco Master Lease.

Edward S. Lampert is the Chairman and Chief Executive Officer of ESL Investments, Inc., which owns Holdco.  Mr. Lampert is also the Chairman of Seritage and controls each of the tenant entities that is a party to the Holdco Master Lease.

 

 

 

- 42 -


 

COVID-19 Pandemic

The COVID-19 pandemic continues to have a significant impact on the real estate industry in the United States, including our properties.  As of December 31, 2020, we had collected 93% of rental income for the three months ended December 31, 2020, and agreed to defer an additional 4%.  As of March 5, 2021, we had also collected 95% of January and February 2021 rental income, and agreed to defer an additional 2%.  While we intend to enforce our contractual rights under our leases, there can be no assurance that tenants will meet their future obligations or that additional rental modification agreements will not be necessary.

We continue to maintain a cautious approach as we respond to the evolving COVID-19 pandemic with an emphasis on managing our cash resources and preserving the value of our assets and our platform.  We expect to continue monetizing appropriate assets and selectively allocating capital to the assets with opportunistic risk-adjusted returns in our portfolio.

As a result of the fluidity and uncertainty surrounding the nation’s response to and limitations as a result of the pandemic, we expect that conditions will change, potentially significantly, in future periods and, as such, results for the year then ended December 31, 2020 may not be indicative of the Company’s business results for future periods.  As such, we cannot reasonably estimate the impact of COVID-19 on our financial condition, results of operations or cash flows over the foreseeable future.

Asset Sales and Joint Ventures

During the year ended December 31, 2020, the Company sold 27 properties, plus additional outparcels, totaling 4.2 million square feet and generated gross proceeds of $333.4 million and also entered into an unconsolidated entity that generated an additional $27.0 million of gross proceeds. The Company also sold the 50% interests in three properties held in Unconsolidated Entities for gross proceeds of $35.9 million in gross proceeds and the Company also completed a sale-leaseback transaction for one property for gross proceeds of $21.0 million.

Subsequent to December 31, 2020, we sold four Wholly Owned Properties for gross proceeds of $46.9 million.  As of March 9, 2021, we had assets under contract to sell for total anticipated proceeds of $66.0 million, subject to buyer diligence and closing conditions.

Effects of Natural Disasters

The Company assessed the impact of the natural disasters that occurred during the year ended December 31, 2020 and determined that natural disasters did not have a material impact on our operating results or financial position.  The Company did not experience interruptions in rental payments related to natural disasters nor has it incurred material capital expenditures to repair any property damage. As a result of changes to weather patterns caused by climate change, our properties could experience increased storm intensity and other natural disasters in future periods and, as such, we cannot provide assurance that natural disasters will not have a material impact on our financial condition, results of operations or cash flows over the foreseeable future.

Appointment of New Chief Executive Officer, President and Trustee

 

On February 9, 2021, the Company announced that Ms. Andrea Olshan has been appointed Chief Executive Officer and President of the Company and will join the Company’s Board of Trustees, each effective as of March 16, 2021. In connection with Ms. Olshan’s appointment, the Company and the Operating Partnership entered into an employment agreement with Ms. Olshan, dated February 7, 2021. Ms. Olshan will replace the former Chief Executive Officer, President and Trustee, Mr. Benjamin W. Schall whose departure from the Company was on January 22, 2021. Since Mr. Schall’s departure, the day-to-day operations of the Company have continued to be overseen by members of existing senior management who report directly to the Board of Trustees. Matthew Fernand, a member of existing senior management and Executive Vice President, General Counsel and Secretary of the Company, is signing this Annual Report as the principal executive officer.

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: real estate taxes, repairs and maintenance, management 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 on our term loan facility.  In addition, we incur substantial non-cash charges for depreciation of our properties and amortization of intangible assets and liabilities.

- 43 -


Comparison of the Year Ended December 31, 2020 to the Year Ended December 31, 2019

The following table presents selected data on comparative results from the Company’s consolidated statements of operations for the year ended December 31, 2020, as compared to the year ended December 31, 2019 (in thousands):

 

 

 

Year Ended December 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

2019

 

 

$ Change

 

 

 

% Change

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

 

116,202

 

 

$

 

167,035

 

 

$

 

(50,833

)

 

 

 

 

-30

%

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property operating

 

$

 

41,164

 

 

$

 

42,123

 

 

$

 

(959

)

 

 

 

 

-2

%

Real estate taxes

 

 

 

36,768

 

 

 

 

38,595

 

 

 

 

(1,827

)

 

 

 

 

-5

%

Depreciation and amortization

 

 

 

95,997

 

 

 

 

104,581

 

 

 

 

(8,584

)

 

 

 

 

-8

%

General and administrative

 

 

 

28,849

 

 

 

 

39,156

 

 

 

 

(10,307

)

 

 

 

 

-26

%

Gain on sale of real estate

 

 

 

88,555

 

 

 

 

71,104

 

 

 

 

17,451

 

 

 

 

 

25

%

Gain on sale of interests in unconsolidated entities

 

 

 

1,758

 

 

 

 

 

 

 

 

1,758

 

 

 

 

 

100

%

Impairment on real estate assets

 

 

 

(64,108

)

 

 

 

 

 

 

 

(64,108

)

 

 

 

 

-100

%

Equity in loss of unconsolidated entities

 

 

 

(4,712

)

 

 

 

(17,994

)

 

 

 

13,282

 

 

 

 

 

-74

%

Interest and other income

 

 

 

3,394

 

 

 

 

6,824

 

 

 

 

(3,430

)

 

 

 

 

-50

%

Interest expense

 

 

 

(91,316

)

 

 

 

(94,519

)

 

 

 

3,203

 

 

 

 

 

-3

%

Rental Income

The following table presents the results for rental income for the year ended December 31, 2020, as compared to the corresponding period in 2019 (in thousands):

 

 

 

Year Ended December 31,

 

 

 

 

 

 

 

2020

 

 

2019

 

 

 

 

 

 

 

Rental Income

 

 

% of Total

Rental Income

 

 

Rental Income

 

 

% of Total

Rental Income

 

 

$ Change

 

Sears/Kmart

 

$

14,693

 

 

 

13

%

 

$

51,153

 

 

 

31

%

 

$

(36,460

)

Diversified tenants

 

 

104,699

 

 

 

90

%

 

 

99,797

 

 

 

60

%

 

 

4,902

 

Straight-line rent

 

 

(4,983

)

 

 

-4

%

 

 

15,590

 

 

 

9

%

 

 

(20,573

)

Amortization of above/below market leases

 

 

1,793

 

 

 

1

%

 

 

495

 

 

 

0

%

 

 

1,298

 

Total rental income

 

$

116,202

 

 

 

100

%

 

$

167,035

 

 

 

100

%

 

$

(50,833

)

The decrease of $36.5 million in Sears or Kmart rental income during 2020 was due primarily to a reduction in the number of properties leased to Sears or Kmart under the Holdco Master Lease, as a result of termination activity. As of December 31, 2020, after giving effect to the pending termination of the Holdco Master Lease at five properties, the Company has no properties leased to Sears or Kmart.

The increase of $4.9 million in diversified tenants rental income during 2020 was due primarily to newly commenced leases at locations formerly occupied by Sears or Kmart.

The decrease of $20.6 million in straight-line rental income during 2020 was due primarily to (i) the accelerated amortization of straight-line rent receivables as a result of termination activity under the Holdco Master Lease and (ii) the reversal of previously recorded straight-line rent that the Company deemed was improbable of being collected.

The increase of $1.3 million in amortization of above/below market leases during 2020 was due primarily to the termination of certain leases previously acquired by the Company.

- 44 -


Property Operating Expenses and Real Estate Taxes

The following table presents the comparative results for property operating expenses and real estate taxes for the year ended December 31, 2020, as compared to the corresponding period in 2019 (in thousands):

 

 

 

 

Year Ended December 31,

 

 

 

 

 

 

 

 

2020

 

 

 

2019

 

 

$ Change

 

Property operating expenses

 

 

$

41,164

 

 

 

$

42,123

 

 

$

(959

)

Real estate taxes

 

 

 

36,768

 

 

 

 

38,595

 

 

 

(1,827

)

The decrease of $1.0 million in property operating expense during 2020 was due primarily to asset sales, partially offset by an increase in utility and certain common area maintenance expenses at properties for which Sears or Kmart paid such expenses directly during 2019 and a decrease in amounts capitalized due to reduced development activity.

 

The decrease of $1.8 million in real estate taxes during 2020 was due primarily to asset sales and partially offset by a decrease in amounts capitalized due to reduced development activity.

Depreciation and Amortization Expenses

The decrease of $8.6 million in depreciation and amortization expenses during 2020 was due primarily to accelerated depreciation during the year ended December 31, 2019 related to certain buildings that were demolished for redevelopment, lower accelerated amortization attributable to certain lease intangible assets, offset by of higher net scheduled depreciation related to assets placed in service during the periods.

Accelerated amortization results from the recapture of space from, or termination of space by Holdco.  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 share-based compensation, professional fees, office expenses and overhead expenses.

The $10.3 million decrease was primarily related to reduced share-based compensation as a result of forfeitures and reversals of the bonus accrual related to the resignation of our former chief executive officer and chief financial officer, a decrease in personnel and other expenses resulting from cost savings initiatives implemented in response to the COVID-19 pandemic, as well as lower share-based compensation related to equity awards with performance-based vesting, and partially offset by increased legal activity surrounding ongoing litigation with Sears and a decrease in capitalized personnel expenses as a result of reduced development activity.

Gain on Sale of Real Estate

During the year ended December 31, 2020, the Company sold 27 properties, plus additional outparcels, for aggregate consideration of $333.4 million and recorded gains totaling $120.1 million, which are included in gain on sale of real estate within the consolidated statements of operations.  These gains are partially offset by the $30.0 million loss recognized in relation to the Mark 302 unconsolidated entity revaluation to adjust a previously recorded gain from $38.8 million to $8.8 million. The Company also contributed its property located in Carson, CA to an unconsolidated entity for a contribution value of $27.0 million and recorded a loss of $1.5 million which is included in gain on sale of real estate within the consolidated statements of operations. 

Impairment of Real Estate Assets

During 2020, the Company recognized $10.3 million in impairment related to real estate assets that were sold during the year and $53.8 million in impairment on vacant assets partially and stabilized assets that are leased primarily to theater and fitness tenants which have been negatively impacted by COVID-19.

 

Interest Expense

The Company incurs interest expense on its debt net of capitalized costs.

- 45 -


The decrease in interest expense is driven by incurring $5.0 million of mortgage recording costs in 2019 as a result of the Company’s lender’s request for mortgages against its assets pursuant to the springing mortgage and collateral requirement of the Term Loan Facility and was partially offset by decreased capitalized interest in 2020 as a result of reduced development activity.

Liquidity and Capital Resources

Our primary uses of cash include the payment of property operating and other expenses, including general and administrative expenses and debt service (collectively, “obligations”), and the reinvestment in and redevelopment of our properties (“development expenditures”).  As a result of a decrease in occupancy levels due to our recapture of space for redevelopment purposes and the execution of certain termination rights by Sears Holdings under the Original Master Lease and Holdco under the Holdco Master Lease, property rental income, which is our primary source of operating cash flow, we did not fully fund obligations incurred during the year ended December 31, 2020 and we had net operating cash outflows of $47.3 million.  However, our property dispositions during the year ended December 31, 2020 drove net investing cash inflows of $42.9 million and financing inflows of $15.4 million.

Obligations are projected to continue to exceed property rental income and the COVID-19 pandemic has created uncertainty with respect to rent collections and the timing of our construction projects, many of which remain on hold. While we do not currently have the liquid funds available to satisfy our obligations and development expenditures, we expect to fund such obligations and any development expenditures with cash on hand and a combination of capital sources including, but not limited to the following, subject to any approvals that may be required under the Term Loan Agreement:

Sales of Wholly Owned Properties.  As of December 31, 2020, we had sold 69 Wholly Owned Properties, and additional outparcels at certain properties, and generated approximately $591.4 million of gross proceeds since we began our capital recycling program in July 2017.  Subsequent to December 31, 2020, we sold four Wholly Owned Properties for gross proceeds of $46.9 million.  As of March 9, 2021, we had assets under contract to sell for total anticipated proceeds of $66.0 million, subject to buyer diligence and closing conditions;

Sales of interests in Unconsolidated Properties.  As of December 31, 2020, we had sold our interests in 15 Unconsolidated Properties and generated approximately $278.1 million of gross proceeds since July 2017.  Certain of our unconsolidated entity agreements also include rights that allow us to sell our interests in select Unconsolidated Properties to our partners at fair market value;

New Unconsolidated Entities.  As of December 31, 2020, we had contributed interests in 11 properties to unconsolidated entities, which generated approximately $212.4 million of gross proceeds since July 2017.  In addition to generating liquidity upon closing, these entities also reduce our development expenditures by the amount of our partners’ interests in the unconsolidated entities;

Unconsolidated Entities Debt.  We may incur property-level debt in new or existing unconsolidated entities, including construction financing for properties under development and longer-term mortgage debt for stabilized properties; and

Other Credit and Capital Markets Transactions.  We may raise additional capital through the public or private issuance of debt securities, common or preferred equity or other instruments convertible into or exchangeable for common or preferred equity.

In response to the COVID-19 pandemic, we have taken a number of actions to manage our cash resources, including keeping many of our construction projects on hold, reducing operating and corporate expenses, and amending certain terms of our Term Loan Facility, as described below.

As previously disclosed, 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.

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.

Our Term Loan Facility includes a $400.0 million Incremental Funding Facility (as defined below), 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. The timing of our ability to access the Incremental Funding Facility, if at all, will be adversely impacted by the COVID-19 pandemic.

The availability of liquidity from the above sources or initiatives is subject to a range of risks and uncertainties, including those discussed under “Risk Factors—Real estate investments are relatively illiquid” and “Risk Factors—We have ongoing capital needs and may not be able to obtain additional financing or other sources of funding on acceptable terms.”

- 46 -


Term Loan Facility

On July 31, 2018, the Operating Partnership, as borrower, and the Company, as guarantor, entered into a Senior Secured Term Loan Agreement (the “Term Loan Agreement”) providing for a $2.0 billion term loan facility (the “Term Loan Facility”) with Berkshire Hathaway Life Insurance Company of Nebraska (“Berkshire Hathaway”) as lender and Berkshire Hathaway as administrative agent.  The Term Loan Facility provided for an initial funding of $1.6 billion at closing (the “Initial Funding”) and includes a $400 million incremental funding facility (the “Incremental Funding Facility”). The Term Loan Facility matures on July 31, 2023.

Funded amounts under the Term Loan Facility 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 consolidated statements of operations. 

As of December 31, 2020, the aggregate principal amount outstanding under the Term Loan Facility was $1.6 billion.

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 not less than $200 million, and (iii) the repayment by the Operating Partnership of any deferred interest permitted under Term Loan Amendment as further described below.

The Term Loan Facility is guaranteed by the Company and, subject to certain exceptions, is required to be guaranteed by all existing and future subsidiaries of the Operating Partnership.  The Term Loan Facility is secured on a first lien basis by a pledge of the capital stock of the direct subsidiaries of the Operating Partnership and the guarantors, including its joint venture interests, except as prohibited by the organizational documents of such entities or any joint venture agreements applicable to such entities.

The Term Loan Facility includes certain financial metrics to govern springing collateral requirements and certain covenant exceptions set forth in the Term Loan Agreement, including: (i) a total fixed charge coverage ratio of not less than 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, 2021, 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, 2021, 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 satisfy any of these financial metrics limits the Company’s ability to dispose of assets via sale or joint venture and triggers the springing mortgage and collateral requirements but will not result in an event of default.  The Term Loan Facility also includes certain 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 other restricted payments; pay distributions on or repurchase the Company’s capital stock; and enter into certain transactions with affiliates.

The Term Loan Facility contains customary events of default, including (subject to certain materiality thresholds and grace periods) payment default, material inaccuracy of representations or warranties, and bankruptcy or insolvency proceedings.  If there is an event of default, the lenders 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 Term Loan Facility documents, and require the Company to pay a default interest rate on overdue amounts equal to 2.0% in excess of the then applicable interest rate.

As of December 31, 2020, the Company was not in compliance with certain of the financial metrics described above.  As a result, the Company must receive the consent of Berkshire Hathaway to dispose of assets via sale or joint venture and, as of December 31, 2020, Berkshire Hathaway had provided such consent for all such transactions submitted for approval. There can be no assurance that the lender will consent to future dispositions of assets.  During 2019, Berkshire Hathaway requested mortgages on a majority of the Company’s portfolio which were recorded in accordance with the mortgage and collateral requirement (the “Lender Request”).  There are no other changes to the terms and conditions of the Term Loan Facility, or the Company’s ability to operate thereunder, as a result of providing mortgages against any of the Company’s assets pursuant to the mortgage and collateral requirement.  The Company accounted for the Lender Request transaction as a modification of debt as of December 31, 2019.

The Company believes it is in compliance with all other terms and conditions of the Term Loan Agreement.

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 December 30,

- 47 -


2020 and December 31, 2019, the unamortized balance of the Company’s debt issuance costs were $1.1 million and $1.5 million, respectively.

On May 5, 2020, the Operating Partnership and Berkshire Hathaway entered into the Term Loan Amendment by and among the Operating Partnership and Berkshire Hathaway as initial lender and administrative agent that permits the deferral of payment of interest under the Term Loan Agreement if, as of the first day of each applicable month, (x) the amount of unrestricted and unencumbered (other than liens created under the Term Loan Agreement) cash on hand of the Operating Partnership and its subsidiaries, minus (y) the aggregate amount of anticipated necessary expenditures for such period (such sum, “Available Cash”) is equal to or less than $30.0 million.  In such instances, for each interest period, the 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 Incremental Funding Facility under the Term Loan Agreement.  The Company has paid all interest due under the Term Loan Agreement and has not deferred any interest as permitted under the Term Loan Amendment.  

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 Facility.

Preferred Shares

As of December 31, 2020, we had 2,800,000 7.00% Series A Cumulative Redeemable Preferred Shares (the “Series A Preferred Shares”) outstanding.  We may not redeem the Series A Preferred Shares before December 14, 2022, except to preserve our status as a REIT or upon the occurrence of a Change of Control, as defined in the trust agreement addendums designating the Series A Preferred Shares.  On and after December 14, 2022, we may redeem any or all of the Series A Preferred Shares at $25.00 per share plus any accrued and unpaid dividends.

Dividends and Distributions

The Company’s Board of Trustees did not declare dividends on the Company’s Class A and Class C common shares during 2020. The last dividend on the Company’s Class A and C common shares 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 Company’s Board of Trustees also declared the following dividends on Company’s Series A Preferred Shares during 2021, 2020 and 2019:

Declaration Date

 

Record Date

 

Payment Date

 

Preferred Share

 

2021

 

 

 

 

 

 

 

 

February 23

 

March 31

 

April 15

 

$

0.43750

 

2020

 

 

 

 

 

 

 

 

December 17

 

December 31

 

January 15, 2021

 

$

0.43750

 

September 17

 

September 30

 

October 15

 

 

0.43750

 

June 9

 

June 30

 

July 15

 

 

0.43750

 

February 18

 

March 31

 

April 15

 

 

0.43750

 

2019

 

 

 

 

 

 

 

 

October 23

 

December 31

 

January 15, 2020

 

$

0.43750

 

July 23

 

September 30

 

October 15

 

 

0.43750

 

April 30

 

June 28

 

July 15

 

 

0.43750

 

February 25

 

March 29

 

April 15

 

 

0.43750

 

Our Board of Trustees will continue to assess the Company’s investment opportunities and its expectations of taxable income in its determination of future distributions, if any.  The Company intends to, at a minimum, make distributions to shareholders to comply with the REIT requirements of the Code, which may be satisfied by dividends on the Company’s Series A Preferred Shares.

- 48 -


Off-Balance Sheet Arrangements

The Company accounts for its investments in entities that it does not have a controlling interest or is not the primary beneficiary using the equity method of accounting and those investments are reflected on the consolidated balance sheets of the Company as investments in unconsolidated entities.  As of December 31, 2020, and December 31, 2019, we did not have any off-balance sheet financing arrangements.

Contractual Obligations

Our contractual obligations relate to our Term Loan Facility and non-cancelable operating leases in the form of a ground lease at two of our properties, as well as operating leases for our corporate offices.

Information concerning our obligations and commitments to make future payments under contracts for these loan and lease agreements as of December 31, 2020 is aggregated in the following table (in thousands):

 

 

 

 

 

 

 

Payments due by Period

 

 

 

 

 

 

 

Within

 

 

 

 

 

 

 

 

 

 

After

 

Contractual Obligation

 

Total

 

 

1 year

 

 

1 - 3 years

 

 

3 -5 years

 

 

5 years

 

Long-term debt (1)

 

$

1,906,045

 

 

$

117,556

 

 

$

1,788,489

 

 

$

 

 

$

 

Operating leases

 

 

10,755

 

 

 

1,521

 

 

 

2,785

 

 

 

2,574

 

 

 

3,875

 

Total

 

$

1,916,800

 

 

$

119,077

 

 

$

1,791,274

 

 

$

2,574

 

 

$

3,875

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)  Includes expected interest payments.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital Expenditures

The majority of our capital expenditures, tenant improvement costs and leasing commissions are from our retenanting and redevelopment projects described under the caption “—Retenanting and Redevelopment Projects” below.

During the year ended December 31, 2020, we incurred maintenance capital expenditures of approximately $2.6 million that were not associated with retenanting and redevelopment projects.

During the year ended December 31, 2019, we incurred maintenance capital expenditures of approximately $6.6 million that were not associated with retenanting and redevelopment projects.

Cash Flows for the Year Ended December 31, 2020 Compared to December 31, 2019

The following table summarizes the Company’s cash flow activities for the years ended December 31, 2020 and 2019 (in thousands):

 

 

Year Ended December 31,

 

 

 

 

 

 

 

2020

 

 

2019

 

 

$ Change

 

Net cash (used in) provided by operating activities

 

$

(47,314

)

 

$

(57,660

)

 

$

10,346

 

Net cash used in investing activities

 

 

42,868

 

 

 

(299,490

)

 

 

342,358

 

Net cash (used in) provided by financing activities

 

 

15,440

 

 

 

(36,447

)

 

 

51,887

 

Cash Flows from Operating Activities

Significant changes in the components of net cash (used in) provided by operating activities include:

 

-

In 2020, a decrease in rental income due primarily to a reduction in the number of properties leased to Sears or Kmart under the Holdco Master Lease, as a result of termination activity and an increase in tenant and other receivables due to Rent Deferral Agreements, partially offset by an increase in accounts payable, accrued expenses and other liabilities.  

 

 

 

- 49 -


 

Cash Flows from Investing Activities

Significant components of net cash used in investing activities include:

In 2020, $331.9 million of net proceeds from the sale of real estate and $13.1 million of net proceeds from the sale of 50% membership interests in two of the assets in the GGP II JV, partially offset by development of real estate and property improvements of ($246.8) million and investments in unconsolidated entities of ($62.9) million; and

In 2019, development of real estate and property improvements of ($387.7) million and investments in unconsolidated entities of ($54.2) million, partially offset by $140.1 million of net proceeds from the sale of real estate; and

Cash Flows from Financing Activities

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

In 2020, cash distributions to holders of Series A Preferred Shares, ($4.9) million;

In 2020, proceeds from sale-leaseback financing obligations, $20.4 million;

In 2019, cash distributions to common stockholders and holders of OP Units, ($28.0) million;

In 2019, cash distributions to holders of Series A Preferred Shares, ($4.9) million;

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 discloses 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.

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

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

The Litigation alleges, among other things, that certain transactions undertaken by Sears Holdings since 2011 constituted actual and/or constructive fraudulent transfers and/or illegal dividends by Sears Holdings.  The challenged transactions include the July 2015 transactions giving rise to Seritage, the execution of the Original Master Lease with Sears Holdings, and the acquisition of real estate from Sears Holdings. The Litigation alleges, among other things, that the real estate acquired by Seritage from Sears Holdings in July 2015 was worth at least $649 to $749 million more than the purchase price paid.  The Litigation seeks as relief, among other things, declaratory relief, avoidance of the allegedly actual and/or constructive fraudulent transfers and either (i) rescission of the transfers of real estate from Sears Holdings to Seritage in 2015 and return of the proceeds of the transactions between Sears Holdings and Seritage, or, in the alternative, (ii) payment by Seritage to Sears Holdings of damages at least equal to the value of the transferred property.  

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

- 50 -


On February 21, 2020, the Seritage defendants filed a partial motion to dismiss seeking dismissal of the claims in the operative complaint in the Litigation relating to the release received in the Sears Holdings derivative litigation, unjust enrichment, and equitable subordination. Briefing and oral argument on the motions were completed in August 2020, and the parties are awaiting a decision.  The Company believes that the claims against the Seritage Defendants in the Litigation are without merit and intends to defend against them vigorously.

On March 2, 2021, the Company brought a lawsuit in Delaware state court against QBE Insurance Corporation, Endurance American

Insurance Company, Allianz Global Risks US Insurance Company and Continental Casualty Company, each of which are D&O

insurance providers of the Company (the “D&O Insurers”). The Company’s lawsuit is seeking, among other things, declaratory relief

and money damages as a result of certain of the D&O Insurers refusal to pay certain costs and expenses related to the defense of the

Litigation discussed above.

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

Redevelopment

During the year ended December 31, 2020, the Company continued work on certain suburban retail redevelopment projects. The Company had previously resumed $46 million of suburban retail development activity which was expected to generate total potential annual base rent of $13 million. As of December 31, 2020, for those projects $31 million has now been incurred and $6 million of annual base rent has commenced. The remaining potential annual base rent is expected to commence in the next twelve months, subject to tenant opening schedules.  In addition, during the fourth quarter, the Company resumed $39 million of additional suburban retail development activity with total potential income of $6 million, with the majority expected to commence in the next twelve months, subject to tenant opening schedules.

The Company also continued to advance its previously underway premier projects in Aventura (FL), Santa Monica (CA) and La Jolla (CA), and its pipeline of such projects, including its two previously announced multifamily projects, in Redmond (WA) and Dallas (TX), each of which represents the first phase of larger, mixed-use developments. ��A multifamily project in Lynwood (WA) in an Unconsolidated Entity is also underway and has been scheduled for opening in the fourth quarter of 2021. A previously announced multifamily project in Chicago (IL) was sold during the year ended December 31, 2020.

During the quarter ended December 31, 2020, the Company, together with Foulger-Pratt and The Howard Hughes Corporation (NYSE: HHC), announced that it had entered into an initial agreement to advance the development of a 4.0 million-square-foot mixed-use community to include a new hospital campus at its Alexandria (VA) property.

The remainder of our previously announced redevelopment projects remain on hold due to the COVID-19 pandemic.  The Company deems this approach to capital deployment prudent given the uncertainty regarding tenants’ ability to construct and open new stores and the feasibility of sustaining labor levels with safe working conditions.  

 

Critical Accounting Policies

In preparing the consolidated financial statements, we have made estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.  Refer to the discussion of our accounting policies included in Note 2 to the audited consolidated financial statements in Part II, Item 8 of this Annual Report.

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.

 

 

- 51 -


 

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

 

Buildings:

25 – 40 years

Site improvements:

5 – 15 years

Tenant improvements:

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

 

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

The Company on a periodic basis, assesses whether there are indicators that the value of the real estate assets may be impaired. These indicators include macroeconomic conditions, such as the expected impact of the current COVID-19 pandemic.  If an indicator is identified, management will estimate the real estate asset recoverability based on projected operating cash flows (undiscounted and unleveraged), taking into account the anticipated holding period and capitalization rates, to determine if the undiscounted cash flows are less than a real estate asset’s carrying value.  If the carrying value of an asset exceeds the undiscounted cash flows, an analysis is performed to determine the estimated fair value of the real asset. In estimating the fair value of an asset, various factors are considered, including expected future operating income, trends and leasing prospects including the effects of demand, competition, and other economic 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.   Subsequent tests for impairment may result in future impairment charges if the COVID-19 pandemic causes economic and market conditions to deteriorate further.  The Company recognized $64.1 million in impairment losses for years ended December 31, 2020 and no impairment losses on real estate assets were recognized for the years ended December 31, 2019, and 2018.

Approximately $10.3 million of impairment losses were attributable to a change in holding period for two properties that were sold during the year ended December 31, 2020 at values that were less than the Company’s carrying values at the time of sale.  In addition, the Company recorded impairment losses of $53.8 million during the year ended December 31, 2020 as a result of estimated fair values that were less than the Company’s carrying values for 23 assets.  Such impairment losses are included within impairment on real estate assets on the consolidated statements of operations.  No impairment losses were recognized for the years ended December 31, 2019 and 2018.

Investments in Unconsolidated Entities

The Company accounts for its investments in unconsolidated entities using the equity method of accounting as the Company exercises significant influence but does not 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.

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 such as the expected impact of the COVID-19 pandemic), that the value of the Company’s investments in unconsolidated entities may be impaired.  An investment’s value is impaired 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.  If the COVID-19 pandemic causes economic and market conditions to deteriorate further, subsequent tests for impairment may result in future impairment charges. No such impairment losses were recognized for the years ended December 31, 2020, 2019 or 2018.

Revenue Recognition

Rental income is comprised of base rent and reimbursements of property operating expenses.  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 deferred rent receivable and included as a component of tenant and other receivables on the 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 a lease incentive and is recognized over the lease term as a reduction of rental revenue on a straight-line basis.

- 52 -


The Company commences recognizing revenue based on an evaluation of several factors. Revenue recognition under a lease begins when the lessee takes control of the physical use of the leased asset.

As discussed further below in “—Recently Issued Accounting Pronouncements, the Company has elected to avail itself of the relief provided in the Lease Modification Question and Answer Document (the “Lease Modification Q&A”) issued by the Financial Accounting Standards Board (the “FASB”) in April 2020 and elected to not account for the Rent Deferral Agreements on a lease by lease basis as modifications because the overall amount and term of the modified leases are significantly unchanged. As a result, the Company has not adjusted accrued rental revenues or the portion of accrued rental revenues related to the straight-line method for the portion which has been deferred.  When the Deferred Rent is repaid, the Company will relieve the accrual in tenant and other receivables.

Reimbursement of property operating expenses arises from tenant leases which provide for the recovery of all or a portion of the operating expenses and real estate taxes of the respective property.  This revenue is accrued in the same periods as the expenses are incurred.    

Accounting for Recapture and Termination Activity Pursuant to the Original Master Lease and Holdco Master Lease (see Note 5)

Seritage Recapture Rights. The Company generally treated the delivery of a recapture notice as a modification of the lease as of the date of notice.  

When a recapture notice was delivered, the portion of accrued rental revenues related to the straight-line method that were subject to the lease modification were amortized over the remaining shortened life of the lease from the date of notice to the date of vacancy.  

In addition, the portion of intangible lease assets and liabilities that was deemed to be impacted by the lease modification was amortized over the shorter of the shortened lease term from the date of notice to the date of vacancy or the remaining useful life of the asset or liability.  

A recapture typically occurred in conjunction with obtaining a new tenant or a real estate development project.  As such, termination fees, if any, associated with the recapture notice were 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.

Termination Rights.  The Original Master Lease provided, and the Holdco Master Lease provides the tenant with certain rights to terminate their lease.  

The Company accounted for the termination by amortizing the accrued rental revenues related to the straight-line method that were subject to the termination over the remaining shortened life of the lease from the date of notice to the date of vacancy. In addition, intangible lease assets and liabilities that are deemed to be impacted by the termination were amortized over the shorter of the shortened lease term from the date of notice to the date of vacancy or the remaining useful life of the asset or liability.

If the Company received a termination fee, the portion of the termination fee attributable to the base rent of the subject property 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.

Recent Accounting Pronouncements

Refer to Note 2 of the consolidated financial statements for recently issued accounting pronouncements.

- 53 -


Non-GAAP Supplemental Financial Measures and Definitions

The Company makes reference to NOI, Total NOI, FFO and Company FFO which are financial measures that include adjustments to GAAP.

Net Operating Income ("NOI") and Total NOI

NOI is defined as income from property operations less property operating expenses.  Other REITs may use different methodologies for calculating NOI, and accordingly, the Company's depiction of NOI may not be comparable to other REITs.  The Company believes NOI provides useful information regarding 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.  The 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.  

The Company also considers NOI and Total NOI to be a helpful supplemental measure of its 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's financial performance.

Funds from Operations ("FFO") and Company FFO

FFO is calculated in accordance with Nareit which defines FFO 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.  The Company considers 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.  

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, litigation charges, acquisition-related expenses, amortization of deferred financing costs and certain up-front-hiring costs, that it does not believe are representative of ongoing operating results.

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 of NOI, Total NOI, 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.

- 54 -


The following table reconciles NOI and Total NOI to GAAP net loss for the years ended December 31, 2020, 2019 and 2018 (in thousands):

 

 

Year Ended December 31,

 

NOI and Total NOI

 

2020

 

 

2019

 

 

2018

 

Net loss

 

$

(152,964

)

 

$

(90,603

)

 

$

(114,878

)

Termination fee income

 

 

(7,604

)

 

 

(5,545

)

 

 

(18,711

)

Management and other fee income

 

 

(293

)

 

 

(1,598

)

 

 

(1,196

)

Depreciation and amortization

 

 

95,997

 

 

 

104,581

 

 

 

226,675

 

General and administrative expenses

 

 

28,849

 

 

 

39,156

 

 

 

34,788

 

Equity in loss of unconsolidated entities

 

 

4,712

 

 

 

17,994

 

 

 

10,448

 

Gain on sale of interests in unconsolidated entities

 

 

(1,758

)

 

 

 

 

 

 

Gain on sale of real estate

 

 

(88,555

)

 

 

(71,104

)

 

 

(96,165

)

Impairment on real estate assets

 

 

64,108

 

 

 

 

 

 

 

Interest and other income

 

 

(3,394

)

 

 

(6,824

)

 

 

(7,886

)

Interest expense

 

 

91,316

 

 

 

94,519

 

 

 

90,020

 

Change in fair value of interest rate cap

 

 

 

 

 

 

 

 

23

 

Provision for income taxes

 

 

252

 

 

 

196

 

 

 

321

 

Straight-line rent adjustment

 

 

4,983

 

 

 

(15,590

)

 

 

2,825

 

Above/below market rental income/expense

 

 

(1,793

)

 

 

(495

)

 

 

(883

)

NOI

 

$

33,856

 

 

$

64,687

 

 

$

125,381

 

Unconsolidated entities

 

 

 

 

 

 

 

 

 

 

 

 

NOI of unconsolidated entities

 

 

6,122

 

 

 

9,851

 

 

 

19,138

 

Straight-line rent

 

 

(681

)

 

 

(152

)

 

 

(655

)

Above/below market rental income/expense

 

 

(713

)

 

 

(1,719

)

 

 

(757

)

Termination fee income

 

 

(827

)

 

 

 

 

 

 

Total NOI

 

$

37,757

 

 

$

72,667

 

 

$

143,107

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

- 55 -


 

The following table reconciles FFO and Company FFO to GAAP net loss the years ended December 31, 2020, 2019, and 2018 (in thousands):

 

 

Year Ended December 31,

 

FFO and Company FFO

 

2020

 

 

2019

 

 

2018

 

Net loss

 

$

(152,964

)

 

$

(90,603

)

 

$

(114,878

)

Real estate depreciation and amortization

   (consolidated properties)

 

 

93,963

 

 

 

102,439

 

 

 

224,217

 

Real estate depreciation and amortization

   (unconsolidated entities)

 

 

9,108

 

 

 

30,375

 

 

 

15,840

 

Gain on sale of interests in unconsolidated entities

 

 

(1,758

)

 

 

 

 

 

 

Gain on sale of real estate

 

 

(88,555

)

 

 

(71,104

)

 

 

(96,165

)

Impairment on real estate assets

 

 

64,108

 

 

 

 

 

 

 

Dividends on preferred shares

 

 

(4,900

)

 

 

(4,900

)

 

 

(4,903

)

FFO attributable to common shareholders

   and unitholders

 

$

(80,998

)

 

$

(33,793

)

 

$

24,111

 

Termination fee income

 

 

(7,604

)

 

 

(5,545

)

 

 

(18,711

)

Unconsolidated entity termination fee income

 

 

(827

)

 

 

 

 

 

 

Change in fair value of interest rate cap

 

 

 

 

 

 

 

 

23

 

Amortization of deferred financing costs

 

 

421

 

 

 

434

 

 

 

10,323

 

Mortgage recording costs

 

 

 

 

 

5,008

 

 

 

 

Severance costs

 

 

425

 

 

 

 

 

 

 

Company FFO attributable to common

   shareholders and unitholders

 

$

(88,583

)

 

$

(33,896

)

 

$

15,746

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FFO per diluted common share and unit

 

$

(1.45

)

 

$

(0.61

)

 

$

0.43

 

Company FFO per diluted common share and unit

 

$

(1.59

)

 

$

(0.61

)

 

$

0.28

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted Average Common Shares and Units Outstanding

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

38,298

 

 

 

36,413

 

 

 

35,560

 

Weighted average OP Units outstanding

 

 

17,576

 

 

 

19,387

 

 

 

20,153

 

Weighted average common shares and

   units outstanding

 

 

55,874

 

 

 

55,800

 

 

 

55,713

 

- 56 -


 

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As of December 31, 2020, we had $1.6 billion of consolidated debt, all of which is borrowed under our fixed-rate Term Loan Facility and an additional $20.4 million of sales-leaseback financing which is based on a fixed term and imputed interest rate and therefore; neither are subject to interest rate fluctuations.

As of December 31, 2020, the estimated fair value of our consolidated debt was $1.6 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 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Reference is made to the Consolidated Financial Statements and Consolidated Financial Statement Schedule beginning on page F-1 for the required information.

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) under the Exchange Act) that are designed to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosures. Because of inherent limitations, disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of disclosure controls and procedures are met.

Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our internal control over financial reporting is a process designed under the supervision of our principal executive officer and principal financial officer to provide reasonable assurance regarding the reliability of financial reporting and preparation of our financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States of America.

As of December 31, 2020, we conducted an assessment of the effectiveness of our internal control over financial reporting based on the framework utilizing the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in "Internal Control—Integrated Framework (2013)." Based on this assessment, management believes that, as of December 31, 2020, the Company maintained effective internal controls over financial reporting. Deloitte & Touche LLP, the independent registered public accounting firm who audited our consolidated financial statements contained in this Form 10-K, has issued a report on our internal control over financial reporting, which is included herein.

Changes in Internal Controls over Financial Reporting

There were no changes in internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during quarter ended December 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

- 57 -


ITEM 9B.

OTHER INFORMATION

None.

PART III

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE

The information required by Item 10 is hereby incorporated by reference to our definitive proxy statement with respect to our 2021 Annual Meeting of Shareholders, to be filed with the SEC within 120 days following the end of our fiscal year.

ITEM 11.

EXECUTIVE COMPENSATION

The information required by Item 11 is hereby incorporated by reference to our definitive proxy statement with respect to our 2021 Annual Meeting of Shareholders, to be filed with the SEC within 120 days following the end of our fiscal year.

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by Item 12 is hereby incorporated by reference to our definitive proxy statement with respect to our 2021 Annual Meeting of Shareholders, to be filed with the SEC within 120 days following the end of our fiscal year.

ITEM 13.

The information required by Item 13 is hereby incorporated by reference to our definitive proxy statement with respect to our 2021 Annual Meeting of Shareholders, to be filed with the SEC within 120 days following the end of our fiscal year.

ITEM 14.

PRINCIPAL ACCOUNTING FEES AND SERVICES

The information required by Item 14 is hereby incorporated by reference to our definitive proxy statement with respect to our 2021 Annual Meeting of Shareholders, to be filed with the SEC within 120 days following the end of our fiscal year.

 

- 58 -


 

PART IV

ITEM 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULE

(a)

Consolidated Financial Statements and Consolidated Financial Statement Schedule.

The consolidated financial statements and consolidated financial statement schedule listed in the accompanying Index to Consolidated Financial Statements and Consolidated Financial Statement Schedule are filed as part of this Annual Report.

(b)

Exhibits.

 

Exhibit No.

 

Description

 

SEC Document Reference

 

 

 

 

 

    2.1

 

Subscription, Distribution and Purchase and Sale Agreement, dated as of June 8, 2015, by and between Seritage Growth Properties and Sears Holdings Corporation

 

Incorporated by reference to Exhibit 2.1 to our Registration Statement on Form S-11, filed on June 9, 2015.

 

 

 

 

 

    3.1

 

Articles of Amendment and Restatement

 

Incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K, filed on July 10, 2015.

 

 

 

 

 

3.2

 

Articles Supplementary Establishing and Fixing the Rights and Preferences of 7.00% Series A Cumulative Redeemable Preferred Shares of Beneficial Interest, par value $0.01 per share

 

Incorporated by reference to Exhibit 3.1 to our Registration Statement on Form 8-A, filed on December 14, 2017.

 

 

 

 

 

    3.3

 

Amended and Restated Bylaws

 

Incorporated by reference to Exhibit 3.2 to our Quarterly Report on Form 10-Q, filed on May 3, 2019.

 

 

 

 

 

    4.1

 

Registration Rights Agreement by and among Seritage Growth Properties, ESL Investments, Inc., and Seritage Growth Properties, L.P., dated as of July 7, 2015

 

Incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K, filed on July 10, 2015.

 

 

 

 

 

4.2

 

Form of specimen certificate evidencing the 7.00% Series A Cumulative Redeemable Preferred Shares of Beneficial Interest, par value $0.01 per share

 

Incorporated by reference to Exhibit 4.1 to our Registration Statement on Form 8-A, filed on December 14, 2017.

 

 

 

 

 

    4.3

 

Description of Capital Stock of Seritage Growth Properties Registered Pursuant to Section 12 of the Securities Exchange Act of 1934

 

Incorporated by reference to Exhibit 4.3 to our Annual Report on Form 10-K, filed on March 2, 2020.

 

 

 

 

 

  10.1

 

Transition Services Agreement by and between Sears Holdings Management Corporation and Seritage Growth Properties, L.P., dated as of July 7, 2015

 

Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K, filed on July 10, 2015.

 

 

 

 

 

10.2

 

Amended and Restated Agreement of Limited Partnership of Seritage Growth Properties, L.P., dated as of December 14, 2017

 

Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K, filed on December 14, 2017.

 

 

 

 

 

  10.3*

 

Holdco Master Lease by and among Seritage SRC Finance LLC, Seritage KMT Finance LLC, Transform SR Operations LLC and Transform KM Operations LLC, dated as of February 28, 2019

 

Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K, filed on March 15, 2019.

 

 

 

 

 

  10.4*

 

Side Letter to Holdco Master Lease, by and among Seritage KMT Finance LLC, Seritage SRC Finance LLC, Transform SR Operations LLC and Transform KM Operations LLC, dated as of February 28, 2019

 

Incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K, filed on March 15, 2019.

 

 

 

 

 

  10.5

 

Mortgage Loan Agreement by and among Seritage SRC Finance LLC, Seritage KMT Finance LLC, certain other subsidiaries of Operating Partnership, JPMorgan Chase Bank, National Association and H/2 SO III Funding LLC, dated as of July 7, 2015

 

Incorporated by reference to Exhibit 10.4 to our Current Report on Form 8-K, filed on July 10, 2015.

 

 

 

 

 

- 59 -


Exhibit No.

 

Description

 

SEC Document Reference

  10.6

 

Omnibus Amendment to the Mortgage Loan Agreement, dated as of September 28, 2015, by and among Seritage SRC Finance LLC, Seritage KMT Finance LLC, certain other subsidiaries of Operating Partnership, Seritage Growth Properties, Seritage Growth Properties L.P., JPMorgan Chase Bank, National Association and H/2 SO III Funding LLC

 

Incorporated by reference to Exhibit 10.6 to our Annual Report on Form 10-K, filed on March 1, 2017.

 

 

 

 

 

  10.7

 

Second Amendment to Mortgage Loan Agreement, dated as of November 8, 2016, by and among Seritage SRC Finance LLC, Seritage KMT Finance LLC, certain other subsidiaries of Operating Partnership, Seritage Growth Properties, Seritage Growth Properties L.P. and Wells Fargo Bank, National Association

 

Incorporated by reference to Exhibit 10.7 to our Annual Report on Form 10-K, filed on March 1, 2017.

 

 

 

 

 

  10.8

 

Mezzanine Loan Agreement by and among Seritage SRC Mezzanine Finance LLC, Seritage KMT Mezzanine Finance LLC, JPMorgan Chase Bank, National Association and H/2 Special Opportunities III Corp., dated as of July 7, 2015

 

Incorporated by reference to Exhibit 10.5 to our Current Report on Form 8-K, filed on July 10, 2015.

 

 

 

 

 

  10.9

 

Omnibus Amendment to Mezzanine Loan Agreement, dated as of September 28, 2015, by and among Seritage SRC Mezzanine Finance LLC, Seritage KMT Mezzanine Finance LLC, Seritage Growth Properties, Seritage Growth Properties L.P., JPMorgan Chase Bank, National Association and H/2 Special Opportunities III Corp.

 

Incorporated by reference to Exhibit 10.9 to our Annual Report on Form 10-K, filed on March 1, 2017.

 

 

 

 

 

  10.10

 

Second Amendment to Mezzanine Loan Agreement, dated as of November 8, 2016, by and among Seritage SRC Mezzanine Finance LLC, Seritage KMT Mezzanine Finance LLC, Seritage Growth Properties, Seritage Growth Properties, L.P. and Wells Fargo Bank, National Association

 

Incorporated by reference to Exhibit 10.10 to our Annual Report on Form 10-K, filed on March 1, 2017.

 

 

 

 

 

  10.11

 

Third Amendment to Mezzanine Loan Agreement, entered into as of November 8, 2017 and effective as of June 30, 2017, by and among Seritage SRC Mezzanine Finance LLC, Seritage KMT Mezzanine Finance LLC, Seritage Growth Properties, Seritage Growth Properties, L.P. and Wells Fargo Bank, National Association

 

Incorporated by reference to Exhibit 10.11 to our Annual Report on Form 10-K, filed on February 28, 2018.

 

 

 

 

 

10.12

 

Term Loan Facility by and among Seritage Growth Properties, L.P., Seritage Growth Properties, JPP, LLC and JPP II, LLC, dated as of February 23, 2017

 

Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K, filed on February 24, 2017.

 

 

 

 

 

  10.13

 

Senior Unsecured Term Loan Agreement, dated as of December 27, 2017, among Seritage Growth Properties, L.P., Seritage Growth Properties, JPP, LLC, JPP II, LLC and Empyrean Investments, LLC, as lenders, and JPP, LLC, as administrative agent

 

Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K, filed on December 28, 2017.

 

 

 

 

 

  10.14

 

Form of Seritage Growth Properties 2015 Share Plan

 

Incorporated by reference to Exhibit 10.6 to our Registration Statement on Form S-11, filed on May 11, 2015.

 

 

 

 

 

  10.15

 

Seritage Growth Properties Restricted Share Agreement

 

Incorporated by reference to Exhibit 10.6 to our Current Report on Form 8-K, filed on July 10, 2015.

 

 

 

 

 

  10.16

 

Form of Seritage Growth Properties Restricted Share Agreement

 

Incorporated by reference to Exhibit 10.14 to our Annual Report on Form 10-K, filed on March 1, 2017.

 

 

 

 

 

  10.17

 

Form of Seritage Growth Properties Sign-On P-RSU Restricted Share Agreement

 

Incorporated by reference to Exhibit 10.7 to our Current Report on Form 8-K, filed on July 10, 2015.

 

 

 

 

 

- 60 -


Exhibit No.

 

Description

 

SEC Document Reference

  10.18

 

Form of Seritage Growth Properties Time-Vesting Restricted Share Unit Agreement

 

Incorporated by reference to Exhibit 10.8 to our Current Report on Form 8-K, filed on July 10, 2015.

 

 

 

 

 

  10.19

 

Form of Seritage Growth Properties Annual P-RSU Restricted Share Agreement

 

Incorporated by reference to Exhibit 10.9 to our Current Report on Form 8-K, filed on July 10, 2015.

  10.20

 

Employment Agreement with Brian Dickman, dated as of July 6, 2015

 

Incorporated by reference to Exhibit 10.10 to our Current Report on Form 8-K, filed on July 10, 2015.

 

 

 

 

 

  10.21

 

Employment Agreement with Mary Rottler, dated as of June 2, 2015

 

Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K, filed on June 19, 2015.

 

 

 

 

 

  10.22

 

Employment Agreement, dated April 17, 2015, between Benjamin Schall and Seritage Growth Properties

 

Incorporated by reference to Exhibit 10.8 to our Registration Statement on Form S-11, filed on May 26, 2015.

 

 

 

 

 

  10.23

 

Letter Agreement, dated April 30, 2015, among Seritage Growth Properties, Seritage Growth Properties, L.P. and Benjamin Schall

 

Incorporated by reference to Exhibit 10.9 to our Registration Statement on Form S-11, filed on May 26, 2015.

 

 

 

 

 

  10.24

 

Letter Agreement, dated May 15, 2015, between Matthew Fernand and Seritage Growth Properties

 

Incorporated by reference to Exhibit 10.10 to our Registration Statement on Form S-11, filed on May 26, 2015.

 

 

 

 

 

  10.25

 

Letter Agreement, dated May 13, 2015, between James Bry and Seritage Growth Properties

 

Incorporated by reference to Exhibit 10.11 to our Registration Statement on Form S-11, filed on May 26, 2015.

 

 

 

 

 

  10.26

 

Exchange Agreement by and among Seritage Growth Properties, Seritage Growth Properties, L.P., ESL Partners, L.P., and Edward S. Lampert, dated as of June 26, 2015

 

Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K, filed on July 2, 2015.

 

 

 

 

 

  10.27

 

Exchange Agreement by and among Seritage Growth Properties and Fairholme Capital Management, L.L.C., dated as of June 30, 2015

 

Incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K, filed on July 2, 2015.

 

 

 

 

 

  10.28

 

Senior Secured Term Loan Agreement, dated July 31, 2018, among Seritage Growth Properties, Seritage Growth Properties, L.P. and Berkshire Hathaway Life Insurance Company of Nebraska

 

Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K, filed on July 31, 2018.

 

 

 

 

 

  10.29

 

Employment Agreement, dated May 2, 2018, among Seritage Growth Properties, Seritage Growth Properties, L.P. and Benjamin Schall

 

Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on May 7, 2018.

 

 

 

 

 

  10.30

 

Employment Agreement, dated May 16, 2018, among Seritage Growth Properties, Seritage Growth Properties, L.P. and Kenneth Lombard

 

Incorporated by reference to Exhibit 10.3 to our Quarterly Report on Form 10-Q, filed on August 3, 2018.

 

 

 

 

 

  10.31

 

Form of Seritage Growth Properties Time-Vesting Restricted Share Unit Agreement – 2018 Incentive RSUs

 

Incorporated by reference to Exhibit 10.4 to our Quarterly Report on Form 10-Q, filed on August 3, 2018.

 

 

 

 

 

  10.32

 

Form of Seritage Growth Properties Performance-Vesting Restricted Share Unit Agreement – 2018 Incentive P-RSUs

 

Incorporated by reference to Exhibit 10.5 to our Quarterly Report on Form 10-Q, filed on August 3, 2018.

 

 

 

 

 

  10.33

 

First Amendment to the Master Lease, effective as of October 29, 2019, by and among Seritage SRC Finance LLC and Seritage KMT Finance LLC

 

Incorporated by reference to Exhibit 10.33 to our Annual Report on Form 10-K, filed on March 2, 2020.

 

 

 

 

 

  10.34

 

Amendment No. 1 to Senior Secured Term Loan Agreement, dated May 5, 2020, among Seritage Growth Properties, L.P. and Berkshire Hathaway Life Insurance Company of Nebraska

 

Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K, filed on May 8, 2020.

 

 

 

 

 

- 61 -


Exhibit No.

 

Description

 

SEC Document Reference

  10.35

 

Master Lease Modification and Settlement Agreement, dated as of June 3, 2020, by and among Seritage SRC Finance LLC, Seritage KMT Finance LLC, Transform SR Operations LLC and Transform KM Operations LLC

 

Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K, filed on June 4, 2020.

 

 

 

 

 

  10.36

 

Second Master Lease Modification and Settlement Agreement, dated December 02, 2020, by and among Seritage SRC Finance LLC, Seritage KMT Finance LLC, Transform SR Operations LLC and Transform KM Operations LLC

 

Filed herewith.

 

 

 

 

 

 

  10.37

 

Employment Agreement, dated February 7, 2021, among Seritage Growth Properties, Seritage Growth Properties, L.P. and Andrea Olshan

 

Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K, filed on February 9, 2021.

 

 

 

 

 

   21.1

 

List of subsidiaries

 

Filed herewith.

 

 

 

 

 

    23.1

 

Consent of Deloitte & Touche LLP, Independent Registered Public Accounting Firm

 

Filed herewith.

 

 

 

 

 

    31.1

 

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

 

Filed herewith.

 

 

 

 

 

    31.2

 

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

 

Filed herewith.

 

 

 

 

 

    32.1

 

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

 

Furnished herewith.

 

 

 

 

 

    32.2

 

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

 

Furnished herewith.

 

 

 

 

 

101.INS

 

Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

 

Filed herewith.

 

 

 

 

 

101.SCH

 

Inline XBRL Taxonomy Extension Schema Document

 

Filed herewith.

 

 

 

 

 

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document

 

Filed herewith.

 

 

 

 

 

101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase Document

 

Filed herewith.

 

 

 

 

 

101.LAB

 

Inline XBRL Taxonomy Extension Label Linkbase Document

 

Filed herewith.

 

 

 

 

 

101.PRE

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document

 

Filed herewith.

 

 

 

 

 

104

 

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

 

Filed herewith.

 

*

Portions of this exhibit have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment.

†    Management contract or compensatory plan or arrangement.

- 62 -


SIGNATURES

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: March 15, 2021

 

/s/ Matthew Fernand

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Signature

 

Title

 

Date

 

 

 

 

 

/s/ Edward S. Lampert

 

Chairman of the Board of Trustees

 

March 15, 2021

Edward S. Lampert

 

 

 

 

 

 

 

 

 

/s/ Matthew Fernand

 

Executive Vice President, General Counsel & Secretary (principal executive officer)

 

March 15, 2021

Matthew Fernand

 

 

 

 

 

 

 

 

/s/ Amanda Lombard

 

Executive Vice President, Chief Financial Officer

(principal financial and accounting officer)

 

March 15, 2021

Amanda Lombard

 

 

 

 

 

 

 

 

/s/ David S. Fawer

 

Trustee

 

March 15, 2021

David S. Fawer

 

 

 

 

 

 

 

 

 

/s/ John T. McClain

 

Trustee

 

March 15, 2021

John T. McClain

 

 

 

 

 

 

 

 

 

/s/ Sharon Osberg

 

Trustee

 

March 15, 2021

Sharon Osberg

 

 

 

 

 

 

 

 

 

/s/ Thomas M. Steinberg

 

Trustee

 

March 15, 2021

Thomas M. Steinberg

 

 

 

 

 

 

 

 

 

/s/ Allison Thrush

 

Trustee

 

March 15, 2021

Allison Thrush

 

 

 

 

 

 

- 63 -


 

SERITAGE GROWTH PROPERTIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

AND CONSOLIDATED FINANCIAL STATEMENT SCHEDULE

Financial Statements

 

 

All other schedules are omitted since the required information is either not present in any amounts, is not present in amounts sufficient to require submission of the schedule or because the information required is included in the consolidated financial statements and related notes.

F-1


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Trustees and Shareholders of Seritage Growth Properties

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Seritage Growth Properties and subsidiaries (the "Company") as of December 31, 2020 and 2019, the related consolidated statements of operations, equity, and cash flows, for each of the three years in the period ended December 31, 2020, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 15, 2021, expressed an unqualified opinion on the Company's internal control over financial reporting.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

 

The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

 

Liquidity — Refer to Note 1 to the financial statements

 

Critical Audit Matter Description

 

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, on a selective basis given the current environment,  the reinvestment in and redevelopment of its properties (“development expenditures”).  As a result of a decrease in occupancy levels due to the Company’s recapture of space for redevelopment purposes and the execution of certain termination rights by Sears Holdings under the Original Master Lease and Holdco under the Holdco Master Lease, property rental income, which is the Company’s primary source of operating cash flow, did not fully fund obligations incurred during the year ended December 31, 2020. Obligations are projected to continue to exceed property rental income until such time as additional tenants commence paying rent and the Company plans to incur additional development expenditures as it continues to invest in the redevelopment of its portfolio.

The Company expects to fund its obligations and any development expenditures with cash on hand and sales of wholly owned properties, subject to any approvals that may be required under the Company’s term Loan facility.

F-2


We identified the Company’s liquidity disclosure as a critical audit matter because of the significant judgments in management’s plans to fund its obligations and development expenditures. This required a high degree of auditor judgment and an increased extent of effort when performing audit procedures to evaluate management’s conclusion that it is probable the Company’s plans will be effectively implemented within one year after the date the financial statements are issued and will provide the necessary cash flows to fund the Company’s obligations and development expenditures.

 

How the Critical Audit Matter Was Addressed in the Audit

 

Our audit procedures related to the Company’s liquidity disclosure included the following, among others:

 

We tested the effectiveness of the controls over management’s plan and related disclosures.

 

We tested management’s key assumptions, including projected rental income and property operating costs by comparing such assumptions to underlying lease agreements and historical operating costs.

 

We evaluated management’s estimates relating to redevelopment costs by comparing to underlying development plans and costs spent to date.

 

We evaluated the timing and likelihood of potential asset sales by comparing expected proceeds to comparable market information and historical transactions executed by the Company.

 

We engaged in discussions with management regarding the Company’s intent and ability to generate the planned capital through sales of wholly owned properties.

 

We evaluated management’s plans in the context of other audit evidence and analyzed external filings and press releases to determine whether it supported or contradicted the conclusion reached by management.

 

Real Estate Investments – Impairment — Refer to Note 2 to the financial statements

 

Critical Audit Matter Description

The Company on a periodic basis, assesses whether there are indicators