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SRG Seritage Growth Properties

Filed: 30 Apr 21, 4:04pm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2021

or

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

For the transition period from _______to _______

Commission File Number 001-37420

SERITAGE GROWTH PROPERTIES

(Exact name of registrant as specified in its charter)

 

Maryland

38-3976287

(State of Incorporation)

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

 

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:

 

Title of each class

Trading Symbols

Name of each exchange on which registered

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

SRG

New York Stock Exchange

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

SRG-PA

New York Stock Exchange

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

Indicate by check mark whether the registrant has submitted electronically 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 definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

 

 

 

Emerging growth company

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

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

As of April 23, 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

42,760,970

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

 

 


 

SERITAGE GROWTH PROPERTIES

QUARTERLY REPORT ON FORM 10-Q

QUARTER ENDED MARCH 31, 2021

TABLE OF CONTENTS

 

PART I.

FINANCIAL INFORMATION

 

 

 

Page

 

 

 

Item 1.

Condensed Consolidated Financial Statements (unaudited)

3

 

Condensed Consolidated Balance Sheets as of March 31, 2021 and December 31, 2020

3

 

Condensed Consolidated Statements of Operations for the three months ended March 31, 2021 and 2020

4

 

Condensed Consolidated Statements of Equity for the three months ended March 31, 2021 and 2020

5

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2021 and 2020

6

 

Notes to Condensed Consolidated Financial Statements

8

 

 

 

Item 2.

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

26

 

 

 

Item 3.

Quantitative and Qualitative Disclosure about Market Risk

35

 

 

 

Item 4.

Controls and Procedures

35

 

 

 

PART II.

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

36

 

 

 

Item 1A.

Risk Factors

36

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

36

 

 

 

Item 3.

Defaults upon Senior Securities

36

 

 

 

Item 4.

Mine Safety Disclosures

36

 

 

 

Item 5.

Other Information

36

 

 

 

Item 6.

Exhibits

37

 

 

 

SIGNATURES

 

38

 

 

 


 

PART I.

FINANCIAL INFORMATION

Item 1.

Unaudited Condensed Consolidated Financial Statements

SERITAGE GROWTH PROPERTIES

CONDENSED CONSOLIDATED BALANCE SHEETS

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

 

 

March 31, 2021

 

 

December 31, 2020

 

ASSETS

 

 

 

 

 

 

 

 

Investment in real estate

 

 

 

 

 

 

 

 

Land

 

$

571,334

 

 

$

592,770

 

Buildings and improvements

 

 

1,100,525

 

 

 

1,107,532

 

Accumulated depreciation

 

 

(146,884

)

 

 

(142,206

)

 

 

 

1,524,975

 

 

 

1,558,096

 

Construction in progress

 

 

345,648

 

 

 

352,776

 

Net investment in real estate

 

 

1,870,623

 

 

 

1,910,872

 

Real estate held for sale

 

 

24,441

 

 

 

1,864

 

Investment in unconsolidated entities

 

 

459,576

 

 

 

457,033

 

Cash and cash equivalents

 

 

137,940

 

 

 

143,728

 

Restricted cash

 

 

6,526

 

 

 

6,526

 

Tenant and other receivables, net

 

 

33,964

 

 

 

46,570

 

Lease intangible assets, net

 

 

17,702

 

 

 

18,595

 

Prepaid expenses, deferred expenses and other assets, net

 

 

61,604

 

 

 

63,755

 

Total assets

 

$

2,612,376

 

 

$

2,648,943

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Term Loan Facility, net

 

$

1,599,015

 

 

$

1,598,909

 

Sales-leaseback financing obligations

 

 

20,582

 

 

 

20,425

 

Accounts payable, accrued expenses and other liabilities

 

 

121,379

 

 

 

146,882

 

Total liabilities

 

 

1,740,976

 

 

 

1,766,216

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 9)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders' Equity

 

 

 

 

 

 

 

 

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

   40,587,226 and 38,896,428 shares issued and outstanding

   as of March 31, 2021 and December 31, 2020, respectively

 

 

406

 

 

 

389

 

Series A preferred shares $0.01 par value; 10,000,000 shares authorized;

   2,800,000 shares issued and outstanding as of March 31, 2021

   December 31, 2020; liquidation preference of $70,000

 

 

28

 

 

 

28

 

Additional paid-in capital

 

 

1,200,874

 

 

 

1,177,260

 

Accumulated deficit

 

 

(537,582

)

 

 

(528,637

)

Total shareholders' equity

 

 

663,726

 

 

 

649,040

 

Non-controlling interests

 

 

207,674

 

 

 

233,687

 

Total equity

 

 

871,400

 

 

 

882,727

 

Total liabilities and equity

 

$

2,612,376

 

 

$

2,648,943

 

 

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

- 3 -


SERITAGE GROWTH PROPERTIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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

 

 

 

Three Months Ended March 31,

 

 

 

2021

 

 

2020

 

REVENUE

 

 

 

 

 

 

 

 

Rental income

 

$

31,146

 

 

$

33,110

 

Management and other fee income

 

 

135

 

 

 

207

 

Total revenue

 

 

31,281

 

 

 

33,317

 

EXPENSES

 

 

 

 

 

 

 

 

Property operating

 

 

10,643

 

 

 

10,301

 

Real estate taxes

 

 

10,155

 

 

 

9,225

 

Depreciation and amortization

 

 

13,142

 

 

 

34,097

 

General and administrative

 

 

11,232

 

 

 

9,420

 

Total expenses

 

 

45,172

 

 

 

63,043

 

Gain on sale of real estate, net

 

 

24,208

 

 

 

20,788

 

Impairment of real estate assets

 

 

(1,700

)

 

 

 

Equity in loss of unconsolidated entities

 

 

(1,162

)

 

 

(894

)

Interest and other income

 

 

7,624

 

 

 

333

 

Interest expense

 

 

(26,150

)

 

 

(21,513

)

Loss before taxes

 

 

(11,071

)

 

 

(31,012

)

Benefit for taxes

 

 

138

 

 

 

37

 

Net loss

 

 

(10,933

)

 

 

(30,975

)

Net loss attributable to non-controlling interests

 

 

3,213

 

 

 

10,311

 

Net loss attributable to Seritage

 

$

(7,720

)

 

$

(20,664

)

Preferred dividends

 

 

(1,225

)

 

 

(1,225

)

Net loss attributable to Seritage common shareholders

 

$

(8,945

)

 

$

(21,889

)

 

 

 

 

 

 

 

 

 

Net loss per share attributable to Seritage Class A

   and Class C common shareholders - Basic

 

$

(0.23

)

 

$

(0.59

)

Net loss per share attributable to Seritage Class A

   and Class C common shareholders - Diluted

 

$

(0.23

)

 

$

(0.59

)

Weighted average Class A and Class C common shares

   outstanding - Basic

 

 

39,477

 

 

 

37,232

 

Weighted average Class A and Class C common shares

   outstanding - Diluted

 

 

39,477

 

 

 

37,232

 

 

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

 

 

 

 

- 4 -


 

SERITAGE GROWTH PROPERTIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(Unaudited, amounts in thousands)

 

 

 

 

Class A

Common

 

 

Class B

Common

 

 

Series A

Preferred

 

 

Additional

Paid-In

 

 

Accumulated

 

 

Non-

Controlling

 

 

Total

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Interests

 

 

Equity

 

Balance at January 1, 2020

 

 

36,897

 

 

$

369

 

 

 

1,243

 

 

$

12

 

 

 

2,800

 

 

$

28

 

 

$

1,149,721

 

 

$

(418,711

)

 

$

311,951

 

 

$

1,043,370

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(20,664

)

 

 

(10,311

)

 

 

(30,975

)

Preferred dividends

   declared ($0.4375 per share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,225

)

 

 

 

 

 

(1,225

)

Vesting of restricted share units

 

 

75

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

Share-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,198

 

 

 

 

 

 

 

 

 

1,198

 

Share class surrenders (1,242,536 common shares)

 

 

 

 

 

 

 

 

(1,243

)

 

 

(12

)

 

 

 

 

 

 

 

 

12

 

 

 

 

 

 

 

 

 

 

OP Units exchanges

   (1,650,000 units)

 

 

1,650

 

 

 

16

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

26,623

 

 

 

 

 

 

(26,639

)

 

 

 

Balance at March 31, 2020

 

 

38,622

 

 

$

386

 

 

 

 

 

 

 

 

$

2,800

 

 

$

28

 

 

$

1,177,553

 

 

$

(440,600

)

 

$

275,001

 

 

$

1,012,368

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2021

 

 

38,896

 

 

$

389

 

 

 

 

 

$

 

 

 

2,800

 

 

$

28

 

 

$

1,177,260

 

 

$

(528,637

)

 

$

233,687

 

 

$

882,727

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(7,720

)

 

 

(3,213

)

 

 

(10,933

)

Preferred dividends

   declared ($0.4375 per share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,225

)

 

 

 

 

 

(1,225

)

Vesting of restricted share units

 

 

32

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

969

 

 

 

 

 

 

 

 

 

969

 

OP Unit exchanges (1,658,855 units)

 

 

1,659

 

 

 

17

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

22,645

 

 

 

 

 

 

(22,800

)

 

 

(138

)

Balance at March 31, 2021

 

 

40,587

 

 

$

406

 

 

 

 

 

$

 

 

 

2,800

 

 

$

28

 

 

$

1,200,874

 

 

$

(537,582

)

 

$

207,674

 

 

$

871,400

 

 

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

 

 

 

 

 

 

 

- 5 -


 

SERITAGE GROWTH PROPERTIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, amounts in thousands)

 

 

Three Months Ended March 31,

 

 

 

2021

 

 

2020

 

CASH FLOW FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net loss

 

$

(10,933

)

 

$

(30,975

)

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

 

 

 

 

 

 

 

 

Equity in loss of unconsolidated entities

 

 

1,162

 

 

 

894

 

Distributions from unconsolidated entities

 

 

1,042

 

 

 

46

 

Gain on sale of real estate, net

 

 

(24,208

)

 

 

(20,788

)

Impairment of real estate assets

 

 

1,700

 

 

 

 

Share-based compensation

 

 

911

 

 

 

1,179

 

Depreciation and amortization

 

 

13,142

 

 

 

34,097

 

Amortization of deferred financing costs

 

 

106

 

 

 

106

 

Amortization of above and below market leases, net

 

 

(39

)

 

 

(97

)

Straight-line rent adjustment

 

 

210

 

 

 

2,701

 

Change in operating assets and liabilities

 

 

 

 

 

 

 

 

Tenants and other receivables

 

 

294

 

 

 

(2,300

)

Prepaid expenses, deferred expenses and other assets

 

 

1,151

 

 

 

(124

)

Accounts payable, accrued expenses and other liabilities

 

 

3,352

 

 

 

5,061

 

Net cash used in operating activities

 

 

(12,110

)

 

 

(10,200

)

CASH FLOW FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Investment in unconsolidated entities

 

 

(9,902

)

 

 

(16,894

)

Distributions from unconsolidated entities

 

 

 

 

 

1,150

 

Net proceeds from sale of real estate

 

 

44,234

 

 

 

58,330

 

Development of real estate

 

 

(26,804

)

 

 

(73,610

)

Net cash provided by (used in) investing activities

 

 

7,528

 

 

 

(31,024

)

CASH FLOW FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Repayment of sale-leaseback financing obligations

 

 

157

 

 

 

 

Purchase of shares related to stock grant recipients' tax withholdings

 

 

(138

)

 

 

(74

)

Preferred dividends paid

 

 

(1,225

)

 

 

(1,225

)

Net cash used in financing activities

 

 

(1,206

)

 

 

(1,299

)

Net decrease in cash and cash equivalents

 

 

(5,788

)

 

 

(42,523

)

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

 

 

150,254

 

 

 

139,260

 

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

 

$

144,466

 

 

$

96,737

 

 

- 6 -


 

SERITAGE GROWTH PROPERTIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Unaudited, amounts in thousands)

 

 

 

Three Months Ended March 31,

 

 

 

2021

 

 

2020

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

 

 

 

 

 

 

 

 

Cash payments for interest

 

$

27,999

 

 

$

28,311

 

Capitalized interest

 

 

2,954

 

 

 

7,914

 

Income taxes paid (refunded)

 

 

(138

)

 

 

5

 

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING

   ACTIVITIES

 

 

 

 

 

 

 

 

Development of real estate financed with accounts payable

 

$

8,079

 

 

$

57,644

 

Preferred dividends declared and unpaid

 

 

1,225

 

 

 

1,225

 

Transfer to real estate assets held for sale

 

 

22,577

 

 

 

(2,071

)

Recording of right of use assets

 

 

 

 

 

1,598

 

Recording of lease liabilities

 

 

 

 

 

(1,598

)

 

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

- 7 -


SERITAGE GROWTH PROPERTIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1 – Organization

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 and discretion in the management and control of the Operating Partnership.  Unless otherwise expressly stated or the context otherwise requires, the “Company” and “Seritage” 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 March 31, 2021, the Company’s portfolio consisted of interests in 179 properties totaling approximately 26.0 million square feet of gross leasable area (“GLA”), including 154 wholly owned properties totaling approximately 24.1 million square feet of 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 commenced operations on July 7, 2015, following a rights offering to the shareholders of Sears Holdings 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 3 joint ventures which were simultaneously leased back to Sears Holdings under a master lease agreement (the “Original Master Lease” and the “Original JV Master Leases”, respectively).

As of March 31, 2021, the Company did not have any remaining properties leased to Transform Holdco LLC (“Holdco”), an affiliate of ESL Investments Inc., or Sears Holdings after giving effect to the termination of the remaining 5 Wholly Owned Properties, which were completed on March 15, 2021, as further described in Note 5, Leases.

COVID-19 Pandemic

Beginning in late 2019, a novel strain of Coronavirus (“COVID-19”) began to spread throughout the world, including the United States, ultimately being declared a pandemic by the World Health Organization. The pandemic has caused and continues cause significant impacts on the real estate industry in the United States, including the Company’s properties.

As of March 31, 2021, the Company had collected 97% of rental income for the three months ended March 31, 2021 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.

As a result of the development, fluidity and uncertainty surrounding this situation, the Company expects that these conditions will change, potentially significantly, in future periods and results for the three months ended March 31, 2021 may not be indicative of the impact of the COVID-19 pandemic on the Company’s business for future periods.  As such, the Company cannot reasonably estimate the impact of COVID-19 on its financial condition, results of operations or cash flows over the foreseeable future.

Liquidity

The Company’s primary uses of cash include the payment of property operating and other expenses, including general and administrative expenses and debt service (collectively, “Obligations”), and certain development expenditures.  Property rental income, which is the Company’s primary source of operating cash flow, did not fully fund Obligations incurred during the three months ended March 31, 2021 and the Company recorded net operating cash outflows of $12.1 million.  Additionally, the Company’s asset sales during the three months ended March 31, 2021 generated investing cash inflows of $44.2 million.

Obligations are projected to continue to exceed property rental income and the Company expects to fund such costs with a combination of capital sources including, cash on hand, and sales of Wholly Owned Properties, subject to any approvals that may be required under the Company’s Term Loan Facility, as described in Note 6, Debt.  Management has determined that it is probable its plans will be effectively implemented within one year after the date the condensed consolidated financial statements are issued and that these actions will provide the necessary cash flows to fund the Company’s obligations and development expenditures.

- 8 -


Note 2 – Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

These condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q of the Securities and Exchange Commission (“SEC”) and should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K, as amended, (the “Annual Report”), for the year ended December 31, 2020.  Certain footnote disclosures which would substantially duplicate those contained in our Annual Report have been condensed or omitted from this quarterly report.  In the opinion of management, all adjustments necessary for a fair presentation (which include only normal recurring adjustments) have been included in this quarterly report.  Operating results of three months ended March 31, 2021 may not be indicative of the results that may be expected for any other interim period or for the year ending December 31, 2021.  Capitalized terms used, but not defined in this quarterly report, have the same meanings as set forth in our Annual Report.

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

Where the Company has an interest in a VIE and it is not determined to be the primary beneficiary, the Company accounts for its interest under the equity method of accounting.  Similarly, for those entities which are not VIEs and over which the Company has the ability to exercise significant influence, but does not have a controlling financial interest, the Company accounts for its interests under the equity method of accounting.  The Company continually evaluates whether it qualifies as the primary beneficiary and reconsiders its determination of whether an entity is a VIE upon reconsideration events.  As of March 31, 2021 and December 31, 2020, the Company has several unconsolidated VIEs and does not consolidate these entities because the Company is not the primary beneficiary and the nature of its involvement in the activities of these entities does not give the Company power over decisions that significantly affect these entities’ economic performance.

As of March 31, 2021, the Company holds a 72.6% interest in the Operating Partnership and is the sole general partner which gives the Company exclusive and complete responsibility for the day-to-day management, authority to make decisions, and control of the Operating Partnership.  As of April 23, 2021, the Company holds a 76.4% interest in the Operating Partnership. The Company has determined that the Operating Partnership is a VIE as the limited partners in the Operating Partnership, although entitled to vote on certain matters, do not possess kick-out rights or substantive participating rights.  Accordingly, the Company consolidates its interest in the Operating Partnership.  The assets and liabilities of the Operating Partnership are the same as those of the Company and are presented in the condensed consolidated balance sheets.

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

Use of Estimates

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

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.

- 9 -


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, including macroeconomic conditions, that the value of the real estate assets may be impaired.  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 estate asset. In estimating the fair value of an asset, various factors are considered, including expected future operating income, trends and leasing prospects and 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.  The Company recognized $1.7 million in impairment losses for the three months ended March 31, 2021 attributable to 1 property.  Such impairment losses are included within impairment of real estate assets on the condensed consolidated statements of operations.  NaN impairment losses were recognized for the three months ended March 31, 2020.

Real Estate Dispositions

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

The following table summarizes our gain on sale of real estate, net during the three months ended March 31, 2021 and March 31, 2020 (in millions):

 

 

Three Months Ended March 31,

 

 

 

2021

 

 

2020

 

Dispositions to third parties

 

 

 

 

 

 

 

 

    Gross proceeds

 

$

46.9

 

 

$

60.4

 

    Gain on sale of real estate, net

 

 

24.2

 

 

 

20.8

 

 

Real Estate Held for Sale

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

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

As of March 31, 2021, 3 properties were classified as held for sale with assets of $24.4 million and 0 liabilities, and, as of December 31, 2020, 1 property was classified as held for sale with assets of $1.9 million and 0 liabilities.

- 10 -


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, 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.  NaN such impairment losses were recognized for the three months ended March 31, 2021 and 2020.

Restricted Cash

As of March 31, 2021, restricted cash represents cash received as proceeds for a sale which did not meet the criteria for sale accounting at March 31, 2021, as well as cash collateral for a letter of credit.

Rental Revenue Recognition and Tenant Receivables

Rental income is comprised of base rent and reimbursements of property operating expenses. The Company commences rental revenue recognition when the lessee takes control of the physical use of the leased asset based on evaluation of several factors. Base rent is recognized on a straight-line basis over the non-cancelable terms of the related leases.  For leases that have fixed and measurable base rent escalations, the difference between such rental income earned and the cash rent due under the provisions of the lease is recorded as straight-line rent receivable and included as a component of tenant and other receivables on the condensed consolidated balance sheets. Reimbursement of property operating expenses arises from tenant leases which 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.

The Company periodically reviews its receivables for collectability, taking into consideration changes in factors such as the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area where the property is located. Tenant receivables, including receivables arising from the straight-lining of rents, are written-off directly when management deems that the collectability of substantially all future lease payments from a specified lease is not probable of collection, at which point, the Company will begin recognizing revenue on a cash basis, based on actual amounts received. Any receivables that are deemed to be uncollectable are recognized as a reduction to rental income in the Company’s condensed consolidated statements of operations. If future circumstances change such that the Company believes that it is reasonably certain that the Company will collect all rental income remaining on such leases, the Company will resume accruing rental income and recognize a cumulative catch up for previously written-off receivables. The Company also recognizes a general reserve, as a reduction to rental income, for its portfolio of operating lease receivables which are not expected to be fully collectable.

The Company recorded an increase to rental income of $0.2 million and a reduction to rental income of $0.5 million during the three months ended March 31, 2021 and 2020, respectively, as a result of the Company’s evaluation of collectability.  In addition, the Company also recorded a reversal of previously recorded straight-line rent of $1.0 million for the three months ended March 31, 2021. NaN such reversals were recorded for the three months ended March 31, 2020. During the three months ended March 31, 2021, the Company recorded an increase to rental income of $0.1 million related to the allowance for deferral agreements.

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

- 11 -


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.

Tenant and Other Receivables

Tenant and other receivables includes unpaid amounts billed to tenants, accrued revenues for future billings to tenants for property expenses, and amounts arising from the straight-lining of rent, as discussed above.  Tenant and other receivables also include management fees receivable for services performed for the benefit of certain unconsolidated entities.  In the event that the collectability of a management fee receivable is in doubt, a provision for uncollectible amounts will be established or a direct write-off of the specific receivable will be made.

Management and Other Fee Income

Management and other fee income represents property management, construction, leasing and development fees for services performed for the benefit of certain unconsolidated entities.  

Property management fee income is reported at 100% of the revenue earned from such unconsolidated properties in management and other fee income on the condensed consolidated statements of operations.  The Company’s share of management expenses incurred by the unconsolidated entities is reported in equity in income (loss) of unconsolidated entities on the condensed consolidated statements of operations and in other expenses in the combined financial data in Note 4.  

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

Management determined that property and asset management and construction and development management services each represent a series of stand-ready performance obligations satisfied over time with each day of service being a distinct performance obligation. For property and asset management services, the Company is typically compensated for its services through a monthly management fee earned based on a specified percentage of monthly rental income or rental receipts generated from the property under management.  For construction and development services, the Company is typically compensated for planning, administering and monitoring the design and construction of projects within our unconsolidated entities based on a percentage of project costs or a fixed fee.  Revenues from such management contracts are recognized over the life of the applicable contract.

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

Concentration of Credit Risk

Concentrations of credit risk arise when a number of operators, tenants, or obligors related to the Company’s investments are engaged in similar business activities, or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations, including those to the Company, to be similarly affected by changes in economic conditions.  Management believes the Company’s portfolio is reasonably diversified and does not contain any significant concentrations of credit risk.  As of March 31, 2021, the Company’s portfolio of 154 Wholly Owned Properties and 25 Unconsolidated Properties was diversified by location across 41 states and Puerto Rico.

Earnings per Share

The Company has three classes of common stock.  The rights, including the liquidation and dividend rights, of the holders of the Company’s Class A common shares and Class C non-voting common shares are identical, except with respect to voting. As the liquidation and dividend rights are identical, the undistributed earnings are allocated on a proportionate basis. The net earnings (loss) per share amounts are the same for Class A and Class C common shares because the holders of each class are legally entitled to equal

- 12 -


per share distributions whether through dividends or in liquidation.  As of August 29, 2018, all outstanding Class C common shares had been exchanged for Class A common shares and there are currently 0 Class C common shares outstanding.

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

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

Recently Issued Accounting Pronouncements

The Company has not adopted any Accounting Standards Updates (“ASU”) issued by the FASB during the three months ended March 31, 2021.

 

Note 3 – Lease Intangible Assets and Liabilities

The following tables summarize the Company’s lease intangible assets (acquired in-place leases, above-market leases and below-market ground leases) and liabilities (acquired below-market leases), net of accumulated amortization, as of March 31, 2021 and December 31, 2020 (in thousands):

 

March 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

 

Accumulated

 

 

 

 

 

Lease Intangible Assets

 

Asset

 

 

Amortization

 

 

Balance

 

In-place leases, net

 

$

35,452

 

 

$

(19,448

)

 

$

16,004

 

Above-market leases, net

 

 

3,925

 

 

 

(2,227

)

 

$

1,698

 

Total

 

$

39,377

 

 

$

(21,675

)

 

$

17,702

 

 

 

 

Gross

 

 

Accumulated

 

 

 

 

 

Lease Intangible Liabilities

 

Liability

 

 

Amortization

 

 

Balance

 

Below-market leases, net

 

$

6,626

 

 

$

(2,575

)

 

$

4,051

 

Total

 

$

6,626

 

 

$

(2,575

)

 

$

4,051

 

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

 

Accumulated

 

 

 

 

 

Lease Intangible Assets

 

Asset

 

 

Amortization

 

 

Balance

 

In-place leases, net

 

$

73,169

 

 

$

(56,369

)

 

$

16,800

 

Above-market leases, net

 

 

4,139

 

 

 

(2,344

)

 

 

1,795

 

Total

 

$

77,308

 

 

$

(58,713

)

 

$

18,595

 

 

 

 

Gross

 

 

Accumulated

 

 

 

 

 

Lease Intangible Liabilities

 

Liability

 

 

Amortization

 

 

Balance

 

Below-market leases, net

 

$

6,626

 

 

$

(2,440

)

 

$

4,186

 

Total

 

$

6,626

 

 

$

(2,440

)

 

$

4,186

 

- 13 -


 

Amortization of acquired below-market leases, net of acquired above-market leases, resulted in additional rental income of $0.1 million and $0.1 million for the three months ended March 31, 2021 and 2020, respectively. Amortization of an acquired below-market ground lease resulted in additional property expense of $0.1 million for each of the three months ended March 31, 2021 and 2020, respectively. Amortization of acquired in-place leases resulted in additional depreciation and amortization expense of $0.8 million and $21.0 million for the three months ended March 31, 2021 and 2020, respectively. Future amortization of these leases intangibles is set forth below (in thousands):

 

 

 

Below market leases, net

 

 

Below market ground lease

 

 

In-place leases

 

Remainder of 2021

 

$

10

 

 

$

152

 

 

$

2,260

 

2022

 

 

(58

)

 

 

203

 

 

 

2,787

 

2023

 

 

3

 

 

 

203

 

 

 

1,921

 

2024

 

 

27

 

 

 

203

 

 

 

1,385

 

2025

 

 

97

 

 

 

203

 

 

 

1,077

 

2026

 

 

190

 

 

 

203

 

 

 

724

 

Thereafter

 

 

2,084

 

 

 

9,433

 

 

 

5,850

 

 

 

 

Note 4 – Investments in Unconsolidated Entities

The Company conducts a portion of its property rental activities through investments in unconsolidated entities.  The Company’s partners in these unconsolidated entities are unrelated real estate entities or commercial enterprises.  The Company and its partners in these unconsolidated entities make initial and/or ongoing capital contributions to these unconsolidated entities.  The obligations to make capital contributions are governed by each unconsolidated entity’s respective operating agreement and related governing documents.

As of March 31, 2021, the Company had investments in ten unconsolidated entities as follows:

 

 

 

 

 

 

Seritage %

 

 

# of

 

Total

 

Unconsolidated Entities

 

Entity Partner(s)

 

Ownership

 

 

Properties

 

GLA

 

GS Portfolio Holdings II LLC

   ("GGP I JV")

 

Brookfield Properties Retail

   (formerly GGP Inc.)

 

50.0%

 

 

4

 

 

520,400

 

GS Portfolio Holdings (2017) LLC

   ("GGP II JV")

 

Brookfield Properties Retail

   (formerly GGP Inc.)

 

50.0%

 

 

3

 

 

474,100

 

MS Portfolio LLC

   ("Macerich JV")

 

The Macerich Company

 

50.0%

 

 

7

 

 

1,266,600

 

SPS Portfolio Holdings II LLC

   ("Simon JV")

 

Simon Property Group, Inc.

 

50.0%

 

 

5

 

 

872,200

 

Mark 302 JV LLC

   ("Mark 302 JV")

 

An investment fund managed

   by Invesco Real Estate

 

50.0%

 

 

1

 

 

103,000

 

SI UTC LLC

   ("UTC JV")

 

A separate account advised by

   Invesco Real Estate

 

50.0%

 

 

1

 

 

226,200

 

SF WH Joint Venture LLC

   ("West Hartford JV")

 

An affiliate of First Washington

   Realty

 

50.0%

 

 

1

 

 

163,700

 

GGCAL SRG HV LLC

   ("Cockeysville JV")

 

An affiliate of

   Greenberg Gibbons

 

50.0%

 

 

1

 

 

160,200

 

Tech Ridge JV Holding LLC

   ("Tech Ridge JV")

 

An affiliate of

   RD Management

 

50.0%

 

 

1

 

 

 

J&J Baldwin Park LLC

   ("Carson Investment")

 

An affiliate of NewMark Merrilll Companies and other entities

 

20.0%

 

 

1

 

 

182,200

 

 

 

 

 

 

 

 

 

 

 

25

 

 

3,968,600

 

 

The Company has contributed certain properties to unconsolidated entities in exchange for equity interests in those unconsolidated entities. The contribution of property to unconsolidated entities is accounted for as a sale of real estate and the Company recognizes the gain or loss on the sale (the “Gain (Loss)”) based upon the transaction price attributed to the property at the closing of the unconsolidated entities transaction (the “Contribution Value”).  The gain or loss is included in gain on sale of real estate on the condensed consolidated statements of operations.  

- 14 -


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

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

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

 

 

 

 

 

March 31, 2021

 

Unconsolidated Entities

 

Contribution Date

 

Contribution Value

 

 

Gain (Loss)

 

2018

 

 

 

 

 

 

 

 

 

 

Mark 302 JV (1)

 

March 20, 2018

 

$

60.0

 

 

$

8.8

 

2019

 

 

 

 

 

 

 

 

 

 

Cockeysville JV (2)

 

March 29, 2019

 

$

12.5

 

 

$

3.8

 

Tech Ridge JV (3)

 

September 27, 2019

 

 

3.0

 

 

 

0.1

 

 

(1)

The Mark 302 JV is subject to a revaluation upon the earlier of the first anniversary of project stabilization or December 31, 2020. The primary inputs in determining the Contribution Value for the Mark 302 JV are property operating income based on signed leases and total project costs and the Contribution Value will be recalculated to yield a pre-determined rate of return to the investment fund managed by Invesco Real Estate.  The Contribution Value cannot be more than $105.0 million or less than $60.0 million, and the Gain (Loss) will not be more than $53.8 million or less than $8.8 million. During the year ended December 31, 2020 the Company adjusted the Contribution Value down to $60.0 million and reduced the Gain (Loss) by $30.0 million which is included in gain on sale of real estate on the consolidated statements of operations. The Company also recorded a $15.0 million reduction to the Mark 302 JV investment value and a $15.0 million payable related to the amounts due to its partner which is included in accounts payable, accrued expenses and other liabilities on the consolidated balance sheets.  In addition, 2020, the Company and its partner entered into an agreement to extend the revaluation date for the Mark 302 JV to September 30, 2021. Pursuant to the terms of this agreement, the Company will pay its partner a fee of $1.1 million and the Contribution Value cannot be more than $90.0 million or less than $60.0 million. The Company will continue to re-evaluate the expected amount on a periodic basis through the final determination date.

(2)

The Cockeysville JV is subject to revaluation if an affiliate of Greenberg Gibbons contributes another adjacent parcel of land (the “Additional Land Parcel”) to the joint venture which was conditioned on certain milestones being met with respect to entitling the Additional Land Parcel for residential use. The Additional Land Parcel has been entitled for residential use. The Company has not reflected the contribution value of the Additional Land Parcel in the value of its investment in the Cockeysville JV based on uncertainty related to a potential alternative transaction with respect to the Additional Land Parcel. The Company will record an increased investment in the Cockeysville JV and additional gain in an amount equal to 50% of the fair value of the Additional Land Parcel at the earlier of when it becomes probable that the Additional Land Parcel will be contributed or upon an alternate outcome.

(3)

The Tech Ridge JV is subject to a revaluation primarily based upon the number of residential units constructed by the Tech Ridge JV.  The Contribution Value cannot be less than $2.75 million.

 

- 15 -


 

The following tables present combined condensed financial data for the Company’s unconsolidated entities (in thousands):

 

 

 

March 31, 2021

 

 

December 31, 2020

 

ASSETS

 

 

 

 

 

 

 

 

Investment in real estate

 

 

 

 

 

 

 

 

Land

 

$

318,540

 

 

$

318,540

 

Buildings and improvements

 

 

492,335

 

 

 

492,973

 

Accumulated depreciation

 

 

(87,925

)

 

 

(81,730

)

 

 

 

722,950

 

 

 

729,783

 

Construction in progress

 

 

228,349

 

 

 

222,663

 

Net investment in real estate

 

 

951,299

 

 

 

952,446

 

Cash and cash equivalents

 

 

18,785

 

 

 

16,094

 

Tenant and other receivables, net

 

 

5,584

 

 

 

4,104

 

Other assets, net

 

 

65,620

 

 

 

62,882

 

Total assets

 

$

1,041,288

 

 

$

1,035,526

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND MEMBERS' INTERESTS

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

     Mortgage loans payable, net

 

$

34,675

 

 

$

34,672

 

Accounts payable, accrued expenses and other liabilities

 

 

42,627

 

 

 

48,405

 

Total liabilities

 

 

77,302

 

 

 

83,077

 

 

 

 

 

 

 

 

 

 

Members' Interest

 

 

 

 

 

 

 

 

Additional paid in capital

 

 

965,949

 

 

 

964,868

 

Retained earnings (accumulated deficit)

 

 

(1,963

)

 

 

(12,419

)

Total members' interest

 

 

963,986

 

 

 

952,449

 

Total liabilities and members' interest

 

$

1,041,288

 

 

$

1,035,526

 

 

 

 

Three Months Ended March 31,

 

 

 

2021

 

 

2020

 

Total revenue

 

$

7,729

 

 

$

5,341

 

Property operating expenses

 

 

(2,579

)

 

 

(2,737

)

Depreciation and amortization

 

 

(6,481

)

 

 

(3,687

)

Operating loss

 

 

(1,331

)

 

 

(1,083

)

Other expenses

 

 

(1,043

)

 

 

(489

)

Net loss

 

$

(2,374

)

 

$

(1,572

)

Equity in loss of unconsolidated

   entities (1)

 

$

(1,162

)

 

$

(786

)

 

(1)

Equity in loss of unconsolidated entities on the condensed consolidated statements of operations includes basis difference adjustments.

 

The Company shares in the profits and losses of these unconsolidated entities generally in accordance with the Company’s respective equity interests.  In some instances, the Company may recognize profits and losses related to investment in an unconsolidated entity that differ from the Company’s equity interest in the unconsolidated entity.  This may arise from impairments that the Company recognizes related to its investment that differ from the impairments the unconsolidated entity recognizes with respect to its assets, differences between the Company’s basis in assets it has transferred to the unconsolidated entity and the unconsolidated entity’s basis in those assets or other items.  There were 0 impairment charges related to the Unconsolidated Properties for the three months ended March 31, 2021 and 2020.

Unconsolidated Entity Management and Related Fees

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

- 16 -


which ended as of March 31, 2021.  The Company earned $0.1 million and $0.2 million from these services for the three months ended March 31, 2021 and 2020, respectively.

Note 5 – Leases

Lessor Disclosures

Future minimum rental receipts, excluding variable payments and tenant reimbursements of expenses, under non-cancelable operating leases executed as of March 31, 2021 are approximately as follows:

 

(in thousands)

 

March 31, 2021

 

Remainder of 2021

 

$

66,971

 

2022

 

 

87,489

 

2023

 

 

80,770

 

2024

 

 

77,428

 

2025

 

 

77,156

 

2026

 

 

72,845

 

Thereafter

 

 

351,262

 

Total

 

$

813,921

 

   

The components of lease revenues for the three months ended March 31, 2021 and 2020 were as follows:

 

(in thousands)

 

Three Months Ended March 31,

 

 

 

2021

 

 

2020

 

Fixed rental income

 

$

22,271

 

 

$

27,648

 

Variable rental income

 

 

9,046

 

 

 

8,066

 

Total rental income

 

$

31,317

 

 

$

35,714

 

 

Lessee Disclosures

The Company has 1 ground lease and multiple corporate office leases which are classified as operating leases.  As of March 31, 2021, and December 31, 2020, the outstanding amount of right-of-use, or ROU, assets were $18.6 million and $18.8 million, respectively.

The Company recorded rent expense related to leased corporate office space of $0.4 million and $0.3 million for the three months ended March 31, 2021 and 2020, respectively. Such rent expense is classified within general and administrative expenses on the condensed consolidated statements of operations.

In addition, the Company recorded ground rent expense of approximately $0.1 million for the three months ended March 31, 2021 and 2020. Such ground rent expense is classified within property operating expenses on the condensed consolidated statements of operations.  The ground lease requires the Company to make fixed annual rental payments and expires in 2073 assuming all extension options are exercised.

The following table sets forth information related to the measurement of our lease liabilities as of March 31, 2021:

 

 

 

As of March 31, 2021

 

Weighted average remaining lease term (in years)

 

 

9.69

 

Weighted average discount rate

 

 

6.99

%

Cash paid for operating leases (in thousands)

 

$

488

 

 

 

Sale-leaseback Financing Obligations

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

- 17 -


continues to be reflected as a long-lived asset and depreciated over its remaining useful life.

 

Future sale-leaseback financing obligations as of March 31, 2021 are approximately as follows:

 

(in thousands)

 

March 31, 2021

 

Remainder of 2021

 

$

1,082

 

2022

 

 

1,464

 

2023

 

 

1,486

 

2024

 

 

1,507

 

2025

 

 

1,531

 

2026

 

 

1,554

 

Thereafter

 

 

34,022

 

Interest

 

 

(22,064

)

Total

 

$

20,582

 

Original Master Lease and Holdco Master Lease

On February 28, 2019, the Company and certain affiliates of Transform Holdco LLC (“Holdco”), an affiliate of ESL Investments, Inc., executed the Holdco Master Lease (the “Holdco Master Lease”) which became effective on March 12, 2019 when the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”) issued an order approving the rejection of the Original Master Lease.  The Company analyzed this transaction under applicable accounting guidance and determined that the termination of the Original Master Lease and entering into the Holdco Master Lease should be accounted for as a modification. The Holdco Master Lease provided the Company with the right to recapture up to approximately 50% of the space occupied by the tenant at all properties (other than five specified properties) and the right to recapture any automotive care centers which are free-standing or attached as “appendages” to the properties, all outparcels or outlots and certain portions of parking areas and common areas. Under the terms of the Holdco Master Lease, Holdco had the right, at any time, to terminate the Holdco Master Lease with respect to any property upon the payment of a termination fee equal to one year of base rent plus annual taxes and other operating expenses. Sears Holdings exercised termination rights with respect to 87 properties under the Original Master Lease prior to its rejection on March 12, 2019 and Holdco exercised termination rights with respect to all remaining properties under the Holdco Master Lease during the year ended December 31, 2020, with the remaining five properties effective in March 2021.

Revenues from the Holdco Master Lease and the Original Master Lease for the three months ended March 31, 2021, and 2020 are as follows (excluding straight-line rental income for the three months ended March 31, 2021 and 2020 of $0 million and $(4.5) million, respectively).

 

(in thousands)

 

Three Months Ended March 31,

 

 

 

2021

 

 

2020

 

Fixed rental income

 

$

-

 

 

$

4,288

 

Variable rental income

 

 

4,510

 

 

 

3,839

 

Total rental income

 

$

4,510

 

 

$

8,127

 

 

Note 6 – Debt

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 and includes a $400.0 million incremental funding facility (the “Incremental Funding Facility”) subject to certain conditions described below. 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 condensed consolidated statements of operations.

As of March 31, 2021, the aggregate principal amount outstanding under the Term Loan Facility was $1.6 billion.

- 18 -


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 signed not yet open leases (“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 the amendment to the Term Loan Agreement dated May 5, 2020 (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, and contains a requirement to provide mortgages and other customary collateral upon the breach of certain financial metrics described below, the occurrence and continuation of an event of default and certain other conditions set forth in the Term Loan Agreement. During 2019, mortgages were recorded on a majority of the Company’s portfolio and subsequent to March 31, 2021, mortgages have been recorded on nearly all properties.

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 March 31, 2021, 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 March 31, 2021, 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. 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 March 31, 2021 and December 31, 2020, the unamortized balance of the Company’s debt issuance costs were $1.0 million and $1.1 million, respectively.

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

- 19 -


deferred interest is a condition to any borrowings under the $400.0 million incremental funding facility under the Term Loan Agreement.  The Company has paid all interest due under the Term Loan Agreement and has not deferred any interest as permitted under the amendment to the Term Loan Agreement.

Additionally, the amendment to the Term Loan Agreement 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.

Note 7 – Income Taxes

The Company has elected to be taxed as a REIT as defined under Section 856(c) of the Code for federal income tax purposes and expects to continue to operate to qualify as a REIT.  To qualify as a REIT, the Company must meet a number of organizational and operational requirements, including a requirement to currently distribute at least 90% of its adjusted REIT taxable income to its shareholders.

As a REIT, the Company generally will not be subject to U.S. federal income tax on taxable income that is distributed to its shareholders.  If the Company fails to qualify as a REIT or does not distribute 100% of its taxable income in any taxable year, it will be subject to U.S. federal income tax at regular corporate rates (including for any taxable year ended on or before December 31, 2017, any applicable alternative minimum tax) and any applicable state and local income taxes.  In addition, if the Company fails to qualify as a REIT, it may not be able to qualify as a REIT for four subsequent taxable years in some cases.

Even if the Company qualifies for taxation as a REIT, the Company is subject to certain U.S. state, local and Puerto Rico taxes on its income and property, and to U.S. federal income and excise taxes on its undistributed REIT taxable income. The Company’s taxable REIT subsidiaries are subject to U.S. corporate income tax.

Note 8 – Fair Value Measurements

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

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

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

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

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

 

Assets Measured at Fair Value on a Nonrecurring Basis

 

Assets measured at fair value on a nonrecurring basis on our condensed consolidated balance sheets consist of real estate assets that have been written down to estimated fair value and are classified as Level 3 within the fair value hierarchy.  The Company’s estimates of fair value are determined using discounted cash flow models, which consider, among other things, anticipated holding periods, current market conditions, potential development projects and utilize unobservable quantitative inputs, including appropriate capitalization and discount rates.  In addition, signed contracts or letters of intent from third parties are considered.

 

For the three months ended March 31, 2021 and 2020, in accordance with ASC 360-10, Property, Plant and Equipment, the Company recorded impairment losses of $1.7 million and $0 million, respectively, on real estate assets which are included in impairment on real estate assets within the condensed consolidated statements of operations.  The most significant inputs utilized in determining the fair value of these assets are capitalization rates and discount rates, which were each between 6.75% and 9.25% and market comparables for land and building.

Financial Assets and Liabilities not Measured at Fair Value

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

- 20 -


of term loan facility is classified as Level 2. Cash equivalents and restricted cash are carried at cost, which approximates fair value.  The fair value of debt obligations is calculated by discounting the future contractual cash flows of these instruments using current risk-adjusted rates available to borrowers with similar credit ratings.  As of March 31, 2021 and December 31, 2020, the estimated fair values of the Company’s debt obligations were $1.6 billion and $1.6 billion, respectively, which approximated the carrying value at such dates as the current risk-adjusted rate approximates the stated rates on the Company’s debt obligations.

 

 

Note 9 – Commitments and Contingencies

Insurance

The Company maintains general liability insurance and all-risk property and rental value, with sub-limits for certain perils such as floods and earthquakes on each of the Company’s properties.  The Company also maintains coverage for terrorism acts as defined by Terrorism Risk Insurance Program Reauthorization Act, which expires in December 2027.

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

Environmental Matters

Under various federal, state and local laws, ordinances and regulations, the Company may be considered an owner or operator of real property or may have arranged for the disposal or treatment of hazardous or toxic substances. As a result, the Company may be liable for certain costs including removal, remediation, government fines and injuries to persons and property.  

Under the Original Master Lease and the Holdco Master Lease, Holdco is required to indemnify the Company from certain environmental liabilities at the Wholly Owned Properties before or during the period in which each Wholly Owned Property was leased to Holdco, including removal and remediation of all affected facilities and equipment constituting the automotive care center.  In addition, an environmental reserve was funded at the closing of the transactions in connection with the Company commencing operations in the amount of approximately $12.0 million.  As of March 31, 2021 and December 31, 2020, the balance of the environmental reserve was approximately $9.5 million and $9.5 million, respectively, and is included in accounts payable, accrued expenses and other liabilities in the condensed consolidated balance sheets.

Litigation and Other Matters

In accordance with accounting standards regarding loss contingencies, the Company accrues an undiscounted liability for those contingencies where the incurrence of a loss is probable and the amount can be reasonably estimated, and the Company discloses the amount accrued and the amount of a reasonably possible loss in excess of the amount accrued or 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.

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

- 21 -


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 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 have been completed, and the parties are awaiting a decision.  

On March 15, 2021, the Court consolidated the Litigation with a case captioned Sears Holding Corp. et al. v. Andrew H. Tish, et al., Case No. 20-07007 (RDD) (the “Shareholder Litigation,” and, together with the Litigation, the “Consolidated Litigation”). The Shareholder Litigation was brought by the UCC, Sears Holdings Corporation, and Sears, Roebuck and Co., against certain shareholders of Sears Holdings or its related companies. Seritage was not named as a defendant in the Shareholder Litigation, which alleges, among other things, that certain transactions undertaken by Sears Holdings since 2014 (including the July 2015 transactions giving rise to Seritage, the execution of the Original Master Lease with Sears Holdings, and the acquisition of real estate from Sears Holdings) constituted actual and/or constructive fraudulent transfers and/or illegal dividends. The Company believes that the claims against the Seritage Defendants in the Consolidated Litigation are without merit and intends to defend against them vigorously.

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 condensed consolidated financial position, results of operations, cash flows or liquidity of the Company.  As of March 31, 2021, and December 31, 2020, the Company did not record any amounts for litigation or other matters.

Note 10 – Related Party Disclosure

Edward S. Lampert

Edward S. Lampert is the Chairman and Chief Executive Officer of ESL, which owns Holdco, and was Chairman of Sears Holdings.  Mr. Lampert is also the Chairman of Seritage.

As of March 31, 2021, Mr. Lampert beneficially owned a 27.4% interest in the Operating Partnership and approximately 4.2% of the outstanding Class A common shares.

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

Unconsolidated Entities

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

In addition, as of March 31, 2021, the Company had incurred $0.2 million of development expenditures at properties owned by certain unconsolidated entities for which the Company will be repaid by the respective unconsolidated entities.  These amounts are included in tenant and other receivables, net on the Company’s condensed consolidated balance sheets.  As of December 31, 2020, the Company had incurred $5.0 million of such development expenditures.

Note 11 – Non-Controlling Interests

Partnership Agreement

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

As of March 31, 2021, the Company held a 72.6% interest in the Operating Partnership and ESL held a 27.4% interest.  The portions of consolidated entities not owned by the Company are presented as non-controlling interest as of and during the periods presented.

 

 

- 22 -


 

Note 12 – Shareholders’ Equity

Class A Common Shares

As of March 31, 2021, 40,587,226 Class A common shares were issued and outstanding. Class A shares have a par value of $0.01 per share. During the three months ended March 31, 2021, 1,658,855 Operating Partnership Units (“OP Units”) were issued and exchanged for an equal number of Class A shares.

Class B Non-Economic Common Shares

As of March 31, 2021, there were 0 Class B non-economic common shares issued and outstanding.

Class C Non-Voting Common Shares

As of March 31, 2021, there were 0 Class C non-voting common shares issued or outstanding.

Series A Preferred Shares

In December 2017, the Company issued 2,800,000 7.00% Series A Cumulative Redeemable Preferred Shares (the “Series A Preferred Shares”) in a public offering at $25.00 per share.  The Company received net proceeds from the offering of approximately $66.4 million, after deducting payment of the underwriting discount and offering expenses.

The Company may not redeem the Series A Preferred Shares before December 14, 2022 except to preserve its status as a REIT or upon the occurrence of a Change of Control, as defined in the trust agreement addendum designating the Series A Preferred Shares.  On and after December 14, 2022, the Company may redeem any or all of the Series A Preferred Shares at $25.00 per share plus any accrued and unpaid dividends. In addition, upon the occurrence of a Change of Control, the Company may redeem any or all of the Series A Preferred Shares for cash within 120 days after the first date on which such Change of Control occurred at $25.00 per share plus any accrued and unpaid dividends. The Series A Preferred Shares have no stated maturity, are not subject to any sinking fund or mandatory redemption and will remain outstanding indefinitely unless the Company redeems or otherwise repurchases them or they are converted.

Dividends and Distributions

The Company’s Board of Trustees has not declared dividends on the Company’s Class A and Class C common shares during 2020 or 2021.

 

The Company’s Board of Trustees declared the following dividends on preferred shares during 2021 and 2020:

 

 

 

 

 

 

 

Series A

 

Declaration Date

 

Record Date

 

Payment Date

 

Preferred Share

 

2021

 

 

 

 

 

 

 

 

April 27

 

June 30

 

July 15

 

$

0.43750

 

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

 

 

As previously disclosed, 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 its shareholders to comply with the REIT requirements of the Code, which may be satisfied by dividends on the Company’s Series A Preferred Shares.

- 23 -


Note 13 – Earnings per Share

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

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

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

 

(in thousands except per share amounts)

 

Three Months Ended March 31,

 

 

 

2021

 

 

2020

 

Numerator - Basic and Diluted

 

 

 

 

 

 

 

 

Net loss

 

 

(10,933

)

 

 

(30,975

)

Net income attributable to non-controlling interests

 

 

3,213

 

 

 

10,311

 

Preferred dividends

 

 

(1,225

)

 

 

(1,225

)

Net loss attributable to common shareholders - Basic

   and diluted

 

$

(8,945

)

 

$

(21,889

)

 

 

 

 

 

 

 

 

 

Denominator - Basic and Diluted

 

 

 

 

 

 

 

 

Weighted average Class A common shares outstanding

 

 

39,477

 

 

 

37,232

 

Weighted average Class C common shares outstanding

 

 

 

 

 

 

Weighted average Class A and Class C common shares

   outstanding - Basic

 

 

39,477

 

 

 

37,232

 

Restricted shares and share units

 

 

 

 

 

 

Weighted average Class A and Class C common shares

   outstanding - Diluted

 

 

39,477

 

 

 

37,232

 

 

 

 

 

 

 

 

 

 

Net loss per share attributable to Class A and Class C

   common shareholders - Basic

 

$

(0.23

)

 

$

(0.59

)

Net loss per share attributable to Class A and Class C

   common shareholders - Diluted

 

$

(0.23

)

 

$

(0.59

)

 

No adjustments were made to the numerator for the three months ended March 31, 2021 or 2020 because the Company generated a net loss.  During periods of net loss, undistributed losses are not allocated to the participating securities as they are not required to absorb losses.

No adjustments were made to the denominator for the three months ended March 31, 2021 or 2020 because (i) the inclusion of outstanding non-vested restricted shares would have had an anti-dilutive effect and (ii) including the non-controlling interest in the Operating Partnership would also require that the share of the Operating Partnership loss attributable to such interests be added back to net loss, therefore, resulting in no effect on earnings per share.

As of March 31, 2021 and December 31, 2020, there were 216,179 and 157,465 shares, respectively, of non-vested restricted shares outstanding.

- 24 -


Note 14 – Share-Based Compensation

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

Restricted Shares and Share Units

Pursuant to the Plan, the Company has periodically made grants of restricted shares or share units. The vesting terms of these grants are specific to the individual grant and vary in that a portion of the restricted shares and share units vest in equal annual amounts over the subsequent three years (time-based vesting) and a portion of the restricted shares and share units vest on the third, and in some instances, the fourth anniversary of the grants subject to the achievement of certain performance criteria (performance-based and market-based vesting).

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

The following table summarizes restricted share activity for the three months ended March 31, 2021:

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2021

 

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

Average Grant

 

 

 

Shares

 

 

Date Fair Value

 

Unvested restricted shares at beginning of period

 

 

157,465

 

 

$

38.73

 

Share units granted

 

 

157,390

 

 

 

21.86

 

Restricted shares vested

 

 

(90,195

)

 

 

33.70

 

Restricted shares forfeited

 

 

(8,481

)

 

 

36.75

 

Unvested restricted shares at end of period

 

 

216,179

 

 

 

28.62

 

 

The Company recognized $0.9 million and $1.2 million in compensation expense related to the restricted shares for the three months ended March 31, 2021 and 2020, respectively. Compensation expenses related to the restricted shares are included in general and administrative expenses on the Company’s condensed consolidated statements of operations.  

 

As of March 31, 2021, there were approximately $4.3 million of total unrecognized compensation costs related to the outstanding restricted shares which are expected to be recognized over a weighted-average period of approximately 2.5 years. As of March 31, 2020, there were approximately $9.2 million of total unrecognized compensation costs related to the outstanding restricted shares which were expected to be recognized over a weighted-average period of approximately 1.9 years.

 

- 25 -


 

Item 2.

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

Certain statements contained herein constitute forward-looking statements as such term is defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are not guarantees of future performance. They represent our intentions, plans, expectations and beliefs and are subject to numerous assumptions, risks and uncertainties. Our future results, financial condition and business may differ materially from those expressed in these forward-looking statements. You can find many of these statements by looking for words such as “approximates,” “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “projects,” “would,” “may” or other similar expressions in this Quarterly Report on Form 10-Q.  Many of the factors that will determine the outcome of these and our other forward-looking statements are beyond our ability to control or predict. For further discussion of factors that could materially affect the outcome of our forward-looking statements, see “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019 and in Part II, Item 1A of this Quarterly Report on Form 10-Q.  For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. You are cautioned not to place undue reliance on our forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q.  All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section.  We do not undertake any obligation to release publicly any revisions to our forward-looking statements to reflect events or circumstances occurring after the date of this Quarterly Report on Form 10-Q.  The following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto included in Part 1 of this Quarterly Report.

Overview

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 March 31, 2021, our portfolio consisted of interests in 179 properties totaling approximately 26.0 million square feet of gross leasable area (“GLA”), including 154 wholly owned properties totaling approximately 24.1 million square feet of 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”).

As of March 31, 2021, after giving effect to the 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.

COVID-19 Pandemic

Beginning in late 2019, a novel strain of Coronavirus (“COVID-19”) began to spread throughout the world, including the United States, ultimately being declared a pandemic by the World Health Organization. The pandemic has caused and continues cause significant impacts on the real estate industry in the United States, including the Company’s properties.

As of March 31, 2021, we had collected 97% of rental income for the three months ended March 31, 2021, 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.

As a result of the development, fluidity and uncertainty surrounding this situation, we expect that conditions will change, potentially significantly, in future periods and results for the three months ended March 31, 2021 may not be indicative of the impact of the COVID-19 pandemic on 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.

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.

- 26 -


Comparison of the Three Months Ended March 31, 2021 to the Three Months Ended March 31, 2020

The following table presents selected data on comparative results from the Company’s condensed consolidated statements of operations for the three months ended March 31, 2021, as compared to the three months ended March 31, 2020 (in thousands):

 

 

Three Months Ended March 31,

 

 

 

 

 

 

 

2021

 

 

2020

 

 

$ Change

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

31,146

 

 

$

33,110

 

 

$

(1,964

)

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

Property operating

 

 

10,643

 

 

 

10,301

 

 

 

342

 

Real estate taxes

 

 

10,155

 

 

 

9,225

 

 

 

930

 

Depreciation and amortization

 

 

13,142

 

 

 

34,097

 

 

 

(20,955

)

General and administrative

 

 

11,232

 

 

 

9,420

 

 

 

1,812

 

Gain on sale of real estate, net

 

 

24,208

 

 

 

20,788

 

 

 

3,420

 

Impairment of real estate assets

 

 

(1,700

)

 

 

 

 

 

(1,700

)

Interest expense

 

 

26,150

 

 

 

21,513

 

 

 

4,637

 

Rental Income

The following table presents the results for rental income for the three months ended March 31, 2021, as compared to the corresponding period in 2020 (in thousands):

 

 

Three Months Ended March 31,

 

 

 

 

 

 

 

2021

 

 

2020

 

 

 

 

 

 

 

Rental Income

 

 

% of Total

Rental Income

 

 

Rental Income

 

 

% of Total

Rental Income

 

 

$ Change

 

Sears or Kmart

 

$

4,510

 

 

 

14.5

%

 

$

7,725

 

 

 

23.3

%

 

$

(3,215

)

Diversified tenants

 

 

26,807

 

 

 

86.1

%

 

 

27,989

 

 

 

84.5

%

 

 

(1,182

)

Straight-line rent

 

 

(210

)

 

 

-0.7

%

 

 

(2,701

)

 

 

-8.2

%

 

 

2,491

 

Amortization of above/below market leases

 

 

39

 

 

 

0.1

%

 

 

97

 

 

 

0.3

%

 

 

(58

)

Total rental income

 

$

31,146

 

 

 

100.0

%

 

$

33,110

 

 

 

100.0

%

 

$

(1,964

)

The decrease of $3.2 million in Sears or Kmart rental income for the three months ended March 31, 2021 was due to a reduction in the number of properties leased to Sears or Kmart under the Holdco Master Lease, as a result of terminations. For the quarter ended March 31, 2021, $4.5 million Sears or Kmart rental income relates to termination income and agreed-upon reimbursements. Sears no longer occupies space as of March 31, 2021.

The decrease of $1.2 million in diversified tenants rental income for the three months ended March 31, 2021 was due primarily to sold properties.

The increase of $2.5 million in straight-line rental income for the three months ended March 31, 2021 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 decrease of $0.1 million in amortization of above/below market leases for the three months ended March 31, 2021 was due primarily to the termination of certain leases previously acquired by the Company.

Property Operating Expenses and Real Estate Taxes

The increase of $0.3 million in property operating expense for the three months ended March 31, 2021 was due primarily to an increase in utility and certain common area maintenance expenses at properties for which Sears or Kmart paid such expenses directly, also a decrease in amounts capitalized due to reduced development activity, partially offset by asset sales.

 

The increase of $0.9 million in real estate taxes for the three months ended March 31, 2021 was due primarily to an increase in assessed real estate taxes and a decrease in amounts capitalized due to reduced development activity, partially offset by asset sales.

- 27 -


Depreciation and Amortization Expenses

The decrease of $21 million in depreciation and amortization expenses for the three months ended March 31, 2021 was due primarily to $19.1 million of accelerated depreciation during the three months ended March 31, 2020 resulting from non-Sears terminations and $3.9 million due to properties sold over the past 12 months.

General and Administrative Expenses

The increase of $1.8 million in general and administrative expenses for the three months ended March 31, 2021 was driven by an increase in legal and other expenses related to the Litigation (as described in Litigation and Other Matters below) and an increase in fees related to the annual financial statement audit.

Gain on Sale of Real Estate, Net

During the three months ended March 31, 2021, the Company sold four properties for aggregate consideration of $46.9 million and recorded gains totaling $24.2 million, which are included in gain on sale of real estate, net within the condensed consolidated statements of operations. 

Impairment of Real Estate Assets

During the three months ended March 31, 2021, the Company recognized $1.7 million in impairment of one real estate asset that the Company continues to hold which is included within the condensed consolidated statements of operations.

Interest Expense

The increase of $4.6 million in interest expense for the three months ended March 31, 2021 was driven by a decrease in amounts capitalized due to a decrease in project 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 certain development expenditures.  Property rental income, which is the Company’s primary source of operating cash flow, did not fully fund Obligations incurred during the three months ended March 31, 2021 and the Company recorded net operating cash outflows of $12.1 million.  Additionally, the Company’s asset sales during the three months ended March 31, 2021 generated investing cash inflows of $44.2 million.

Obligations are projected to continue to exceed property rental income and 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:

- 28 -


 

Sales of Wholly Owned Properties.  As of March 31, 2021, we had sold 73 Wholly Owned Properties, and additional outparcels at certain properties, and generated approximately $638.3 million of gross proceeds since we began our capital recycling program in July 2017.  Subsequent to March 31, 2021, we sold two Wholly Owned Properties for gross proceeds of $16.3 million and, as of April 30, 2021, had entered into contracts to sell additional assets for anticipated gross proceeds of $90.2 million, subject to buyer due diligence and closing conditions;

 

Sales of interests in Unconsolidated Properties.  As of March 31, 2021, 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 March 31, 2021, 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.

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 if, as of the first day of each applicable month, (x) the amount of unrestricted and unencumbered (other than liens created under the Term Loan Agreement) cash on hand of the Operating Partnership and its subsidiaries, minus (y) the aggregate amount of anticipated necessary expenditures for such period (such sum, “Available Cash”) is equal to or less than $30.0 million.  In such instances, for each interest period, the Operating Partnership is obligated to make payments of interest in an amount equal to the difference between (i) Available Cash and (ii) $20.0 million (provided that such payment shall not exceed the amount of current interest otherwise due under the Term Loan Agreement).  Any deferred interest shall accrue interest at 2.0% in excess of the then applicable interest rate and shall be due and payable on July 31, 2023; provided, that the Operating Partnership is required to pay any deferred interest from Available Cash in excess of $30.0 million (unless otherwise agreed to by the administrative agent under the Term Loan Agreement in its sole discretion). In addition, repayment of any outstanding deferred interest is a condition to any borrowings under the $400.0 million incremental funding facility under the Term Loan Agreement (the “Incremental Funding Facility”).

Additionally, the Term Loan Amendment provides that the administrative agent and the lenders express their continued support for asset dispositions, subject to the administrative agent’s right to approve the terms of individual transactions due to the occurrence of a Financial Metric Trigger Event, as such term is defined under the Term Loan Agreement.

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

Cash Flows for the Three Months Ended March 31, 2021 Compared to the Three Months Ended March 31, 2020

The following table summarizes the Company’s cash flow activities for the three months ended March 31, 2021 and 2020 (in thousands):

 

Three Months Ended March 31,

 

 

 

 

 

 

 

2021

 

 

2020

 

 

$ Change

 

Net cash used in operating activities

 

$

(12,110

)

 

$

(10,200

)

 

$

(1,910

)

Net cash provided by (used in) investing activities

 

 

7,528

 

 

 

(31,024

)

 

 

38,552

 

Net cash used in financing activities

 

 

(1,206

)

 

 

(1,299

)

 

 

93

 

Cash Flows from Operating Activities

Significant components of net cash used in operating activities include:

In 2021, a decrease in rental income and a decrease in accounts payable, accrued expenses and other liabilities.

- 29 -


Cash Flows from Investing Activities

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

In 2021, $44.2 million of net proceeds from the sale of real estate offset by development of real estate of ($26.8) million and investments in unconsolidated entities of ($9.9) million; and

In 2020, development of real estate and property improvements of ($73.6) million and investments in unconsolidated entities of $(16.9) million, partially offset by $58.3 million of net proceeds from the sale of real estate.

Cash Flows from Financing Activities

Significant components of net cash used in by financing activities include:

In 2021, cash payments of preferred dividends, ($1.2) million;

In 2020, cash payments of preferred dividends, ($1.2) million.

Dividends and Distributions

The Company’s Board of Trustees has not declared dividends on the Company’s Class A and Class C common shares during the three months ended March 31, 2021.  

 

The Company’s Board of Trustees declared the following dividends on preferred shares during 2021 and 2020:

 

 

 

 

 

 

Series A

 

Declaration Date

 

Record Date

 

Payment Date

 

Preferred Share

 

2021

 

 

 

 

 

 

 

 

April 27

 

June 30

 

July 15

 

$

0.43750

 

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

 

 

As previously disclosed, 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 Series A Preferred shares.

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 condensed consolidated balance sheets of the Company as investments in unconsolidated entities.  As of March 31, 2021 and December 31, 2020, we did not have any off-balance sheet financing arrangements.

Contractual Obligations

There have been no significant changes in the contractual obligations disclosed in our Form 10-K for the year ended December 31, 2020.

Capital Expenditures

During the three months ended March 31, 2021 the Company invested $26.8 million in our consolidated development and operating properties and an additional $9.9 million into our unconsolidated joint ventures.

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.

- 30 -


During the three months ended March 31, 2021, we incurred maintenance capital expenditures of approximately $0.6 million that were not associated with retenanting and redevelopment projects.

During the three months ended March 31, 2020, we incurred maintenance capital expenditures of approximately $1.8 million that were not associated with retenanting and redevelopment projects.

Litigation and Other Matters

In accordance with accounting standards regarding loss contingencies, we accrue an undiscounted liability for those contingencies where the incurrence of a loss is probable and the amount can be reasonably estimated, and we disclose the amount accrued and the amount of a reasonably possible loss in excess of the amount accrued or disclose the fact that such a range of loss cannot be estimated.  We do not record liabilities when the likelihood that the liability has been incurred is probable but the amount cannot be reasonably estimated, or when the liability is believed to be only reasonably possible or remote. In such cases, we disclose the nature of the contingency, and an estimate of the possible loss, range of loss, or disclose the fact that an estimate cannot be made.

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 Corporation, 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, 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 master lease agreement (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, return of the proceeds of the transactions between Sears Holdings and Seritage, or (ii) in the alternative, 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 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 have been completed, and the parties are awaiting a decision.  

On March 15, 2021, the Court consolidated the Litigation with a case captioned Sears Holding Corp. et al. v. Andrew H. Tish, et al., Case No. 20-07007 (RDD) (the “Shareholder Litigation,” and, together with the Litigation, the “Consolidated Litigation”). The Shareholder Litigation was brought by the UCC, Sears Holdings Corporation, and Sears, Roebuck and Co., against certain shareholders of Sears Holdings or its related companies. Seritage was not named as a defendant in the Shareholder Litigation, which alleges, among other things, that certain transactions undertaken by Sears Holdings since 2014 (including the July 2015 transactions giving rise to Seritage, the execution of the Original Master Lease with Sears Holdings, and the acquisition of real estate from Sears Holdings) constituted actual and/or constructive fraudulent transfers and/or illegal dividends. We believe that the claims against the Seritage Defendants in the Litigation are without merit and intend to defend against them vigorously.

- 31 -


 

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.

We are 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, the final outcome of such ordinary course legal proceedings and claims will not have a material effect on the condensed consolidated financial position, results of operations or liquidity of the Company.

Critical Accounting Policies

A summary of our critical accounting policies is included in our Annual Report on Form 10-K for the year ended December 31, 2020 in Management’s Discussion and Analysis of Financial Condition and Results of Operations. For the three months ended March 31, 2021, there were no material changes to these policies.

 

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 National Association of REITs 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.

- 32 -


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.

The following table reconciles NOI and Total NOI to GAAP net loss for the three months ended March 31, 2021 and 2020 (in thousands):

 

 

Three Months Ended March 31,

 

NOI and Total NOI

 

2021

 

 

2020

 

Net loss

 

$

(10,933

)

 

$

(30,975

)

Termination fee income

 

 

(2,611

)

 

 

(990

)

Management and other fee income

 

 

(135

)

 

 

(207

)

Depreciation and amortization

 

 

13,142

 

 

 

34,097

 

General and administrative expenses

 

 

11,232

 

 

 

9,420

 

Equity in loss of unconsolidated entities

 

 

1,162

 

 

 

894

 

Gain on sale of real estate

 

 

(24,208

)

 

 

(20,788

)

Impairment of real estate assets

 

 

1,700

 

 

 

 

Interest and other income

 

 

(7,624

)

 

 

(333

)

Interest expense

 

 

26,150

 

 

 

21,513

 

Benefit for income taxes

 

 

(138

)

 

 

(37

)

Straight-line rent

 

 

210

 

 

 

2,701

 

Above/below market rental income/expense

 

 

(39

)

 

 

(97

)

NOI

 

$

7,908

 

 

$

15,198

 

Unconsolidated entities

 

 

 

 

 

 

 

 

NOI of unconsolidated entities

 

 

2,437

 

 

 

1,302

 

Straight-line rent

 

 

(137

)

 

 

(171

)

Above/below market rental income/expense

 

 

(33

)

 

 

(482

)

Termination fee income

 

 

(742

)

 

 

 

Total NOI

 

$

9,433

 

 

$

15,847

 

- 33 -


 

 

The following table reconciles FFO and Company FFO to GAAP net loss for the three months ended March 31, 2021 and 2020 (in thousands):

 

Three Months Ended March 31,

 

FFO and Company FFO

 

2021

 

 

2020

 

Net loss

 

$

(10,933

)

 

$

(30,975

)

Real estate depreciation and amortization

   (consolidated properties)

 

 

12,756

 

 

 

33,587

 

Real estate depreciation and amortization

   (unconsolidated entities)

 

 

3,165

 

 

 

1,844

 

Gain on sale of real estate

 

 

(24,208

)

 

 

(20,788

)

Impairment of real estate assets

 

 

1,700

 

 

 

 

Dividends on preferred shares

 

 

(1,225

)

 

 

(1,225

)

FFO attributable to common shareholders

   and unitholders

 

$

(18,745

)

 

$

(17,557

)

Termination fee income

 

 

(2,611

)

 

 

(990

)

Termination fee income

   (unconsolidated entities)

 

 

(742

)

 

 

 

Amortization of deferred financing costs

 

 

106

 

 

 

106

 

Company FFO attributable to common

   shareholders and unitholders

 

$

(21,992

)

 

$

(18,441

)

 

 

 

 

 

 

 

 

 

FFO per diluted common share and unit

 

$

(0.34

)

 

$

(0.31

)

Company FFO per diluted common share and unit

 

$

(0.39

)

 

$

(0.33

)

 

 

 

 

 

 

 

 

 

Weighted Average Common Shares and Units Outstanding

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

39,477

 

 

 

37,232

 

Weighted average OP units outstanding

 

 

16,432

 

 

 

18,578

 

Weighted average common shares and

   units outstanding

 

 

55,909

 

 

 

55,810

 

 

- 34 -


 

Item 3.

Quantitative and Qualitative Disclosure about Market Risk

There were no material changes in the Quantitative and Qualitative Disclosures about Market Risk set forth in our 2020 Annual Report on Form 10-K.

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures.

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

Changes in Internal Controls.

There were no changes in our internal control over financial reporting that occurred during the period ended March 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

- 35 -


PART II.

OTHER INFORMATION

Item 1.

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

Item 1A.

Risk Factors

Information regarding risk factors appears in our 2020 Annual Report on Form 10-K in Part I, Item 1A. Risk Factors.  There have been no material changes from the risk factors previously disclosed in our 2020 Annual Report on Form 10-K.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.

Defaults Upon Senior Securities

None.

 

Item 4.

Mine Safety Disclosures

Not applicable.

 

Item 5.

Other Information

None.

- 36 -


Item 6.

Exhibits

 

Exhibit No.

 

Description

 

SEC Document Reference

 

 

 

 

 

  31.1

 

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

 

Filed herewith.

 

 

 

 

 

  31.2

 

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

 

Filed herewith.

 

 

 

 

 

  32.1

 

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

 

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.

 

- 37 -


 

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: April 30, 2021

 

 

 

/s/ Andrea Olshan

 

 

 

 

By:

 

Andrea Olshan

 

 

 

 

President and Chief Executive Officer

(Principal Executive Officer)

 

 

 

 

 

Dated: April 30, 2021

 

 

 

/s/ Amanda Lombard

 

 

 

 

By:

 

Amanda Lombard

 

 

 

 

Chief Financial Officer

(Principal Financial and Accounting Officer)

 

- 38 -