Seritage Growth Properties 10-Q for FY2024 Q3
Seritage Growth Properties (SRG)
About this 10-Q
Seritage Growth Properties filed this 10-Q on November 12, 2024, covering the quarter ended September 30, 2024 (FY2024 Q3).
Headline figures
Quarter ended September 30, 2024, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $3.25M
- down 35.6% from $5.05M a year earlier
- Net loss
- $21.97M
- compared with a net loss of $902K a year earlier
- Diluted EPS
- -$0.41
- compared with -$0.04 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
or
For the transition period from _______to _______
Commission File Number
(Exact name of registrant as specified in its charter)
(State of Incorporation) |
(I.R.S. Employer Identification No.) |
(Address of principal executive offices) |
(Zip Code) |
Registrant’s telephone number, including area code: (
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Trading Symbols |
Name of each exchange on which registered |
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.
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).
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 |
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Non-accelerated filer |
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Smaller reporting company |
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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 November 11, 2024, the registrant had the following common shares outstanding:
Class |
Shares Outstanding |
Class A common shares of beneficial interest, par value $0.01 per share |
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Class B common shares of beneficial interest, par value $0.01 per share |
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Class C common shares of beneficial interest, par value $0.01 per share |
SERITAGE GROWTH PROPERTIES
QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2024
TABLE OF CONTENTS
PART I. |
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Item 1. |
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Condensed Consolidated Balance Sheets as of September 30, 2024 and December 31, 2023 |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
36 |
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Item 4. |
36 |
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PART II. |
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Item 1. |
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Item 1A. |
38 |
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Item 2. |
38 |
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Item 3. |
38 |
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Item 4. |
38 |
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Item 5. |
38 |
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Item 6. |
39 |
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40 |
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements
SERITAGE GROWTH PROPERTIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, amounts in thousands, except share and per share amounts)
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September 30, 2024 |
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December 31, 2023 |
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ASSETS |
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Investment in real estate |
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Land |
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$ |
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$ |
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Buildings and improvements |
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Accumulated depreciation |
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Construction in progress |
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Net investment in real estate |
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Real estate held for sale |
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Investment in unconsolidated entities |
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Cash and cash equivalents |
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Restricted cash |
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Tenant and other receivables, net |
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Lease intangible assets, net |
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Prepaid expenses, deferred expenses and other assets, net |
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Total assets (1) |
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$ |
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$ |
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LIABILITIES AND SHAREHOLDERS' EQUITY |
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Liabilities |
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Term loan facility |
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$ |
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$ |
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Accounts payable, accrued expenses and other liabilities |
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Total liabilities (1) |
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Shareholders' Equity |
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Class A common shares $ |
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Series A preferred shares $ |
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Additional paid-in capital |
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Accumulated deficit |
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Total shareholders' equity |
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Non-controlling interests |
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Total equity |
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Total liabilities and equity |
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$ |
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$ |
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(1) The Company's consolidated balance sheets include assets and liabilities of consolidated variable interest entities ("VIEs"). See Note 2. The consolidated balance sheets, as of September 30, 2024, include the following amounts related to our consolidated VIEs, excluding the Operating Partnership: $ |
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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)
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For the Three Months |
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For the Nine Months |
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2024 |
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2023 |
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2024 |
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2023 |
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REVENUE |
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Rental income |
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$ |
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$ |
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$ |
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$ |
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Total revenue |
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EXPENSES |
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Property operating |
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Abandoned project costs |
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— |
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— |
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Real estate taxes |
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Depreciation and amortization |
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General and administrative |
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Total expenses |
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Gain on sale of real estate, net |
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Gain (loss) on sale of interest in unconsolidated entities |
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— |
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( |
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— |
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Impairment of real estate assets |
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— |
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— |
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( |
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( |
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Equity in income (loss) of unconsolidated entities |
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( |
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( |
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Interest and other income (expense), net |
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Interest expense |
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( |
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Loss before income taxes |
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( |
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( |
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( |
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Provision for income taxes |
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( |
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( |
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Net loss |
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( |
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( |
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( |
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( |
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Preferred dividends |
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( |
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( |
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( |
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( |
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Net loss attributable to Seritage common |
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$ |
( |
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$ |
( |
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$ |
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$ |
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Net loss per share attributable to Seritage Class A |
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$ |
( |
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$ |
( |
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$ |
( |
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$ |
( |
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Net loss per share attributable to Seritage Class A |
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$ |
( |
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$ |
( |
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$ |
( |
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$ |
( |
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Weighted-average Class A common shares |
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Weighted-average Class A common shares |
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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, except per share amounts)
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Class A |
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Series A |
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Additional |
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Accumulated |
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Non- |
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Total |
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Shares |
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Amount |
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Shares |
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Amount |
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Capital |
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Deficit |
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Interests |
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Equity |
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Balance at January 1, 2023 |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
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$ |
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Net loss |
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— |
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— |
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— |
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— |
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— |
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( |
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— |
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( |
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Preferred dividends declared ($ |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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— |
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( |
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Vesting of restricted share units |
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— |
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— |
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( |
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— |
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— |
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— |
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Share-based compensation |
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— |
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— |
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— |
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— |
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— |
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— |
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Sale of consolidated VIEs |
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— |
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— |
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— |
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— |
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( |
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— |
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( |
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( |
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Contributions to consolidated VIEs |
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— |
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— |
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— |
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— |
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— |
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— |
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Balance at September 30, 2023 |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
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$ |
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Balance at January 1, 2024 |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
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$ |
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Net loss |
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— |
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— |
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— |
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— |
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— |
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( |
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— |
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( |
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Preferred dividends declared ($ |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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— |
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( |
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Vesting of restricted share units |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Share-based compensation |
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— |
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— |
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— |
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— |
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— |
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— |
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Contributions to consolidated VIEs |
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— |
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— |
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— |
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— |
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— |
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— |
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Balance at September 30, 2024 |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
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$ |
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Class A |
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Series A |
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Additional |
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Accumulated |
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Non- |
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Total |
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Shares |
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Amount |
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Shares |
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Amount |
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Capital |
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Deficit |
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Interests |
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Equity |
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Balance at July 1, 2023 |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
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$ |
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Net loss |
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— |
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— |
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— |
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— |
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— |
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( |
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- |
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( |
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Preferred dividends declared ($ |
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— |
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— |
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— |
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— |
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— |
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( |
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— |
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( |
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Share-based compensation |
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— |
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— |
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— |
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— |
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— |
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— |
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Contributions to consolidated VIEs |
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— |
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— |
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— |
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— |
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— |
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— |
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Balance at September 30, 2023 |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
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$ |
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Balance at July 1, 2024 |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
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$ |
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Net loss |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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— |
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( |
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Preferred dividends declared ($ |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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— |
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( |
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Share-based compensation |
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— |
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— |
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— |
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— |
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— |
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— |
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Contributions to consolidated VIEs |
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— |
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— |
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— |
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— |
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— |
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— |
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Balance at September 30, 2024 |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
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$ |
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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)
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Nine Months Ended September 30, |
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2024 |
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2023 |
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CASH FLOW FROM OPERATING ACTIVITIES |
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Net loss |
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$ |
( |
) |
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$ |
( |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
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Equity in loss of unconsolidated entities |
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Gain on sale of interest in unconsolidated entities |
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— |
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( |
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Distributions from unconsolidated entities |
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— |
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Gain on sale of real estate, net |
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( |
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( |
) |
Impairment of real estate assets |
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Share-based compensation |
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Depreciation and amortization |
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Amortization of deferred financing costs |
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— |
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Amortization of above and below market leases, net |
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Straight-line rent adjustment |
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Abandoned project costs |
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|
|
|
|
— |
|
|
Non-cash lease expenses |
|
|
|
|
|
— |
|
|
Change in operating assets and liabilities |
|
|
|
|
|
|
||
Tenants and other receivables |
|
|
|
|
|
|
||
Prepaid expenses, deferred expenses and other assets |
|
|
( |
) |
|
|
|
|
Accounts payable, accrued expenses and other liabilities |
|
|
( |
) |
|
|
( |
) |
Net cash used in operating activities |
|
|
( |
) |
|
|
( |
) |
CASH FLOW FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
||
Investment in unconsolidated entities |
|
|
( |
) |
|
|
( |
) |
Net proceeds from disposition of interests in unconsolidated entities |
|
|
— |
|
|
|
|
|
Distributions from unconsolidated entities |
|
|
|
|
|
— |
|
|
Net proceeds from sale of real estate |
|
|
|
|
|
|
||
Development of real estate |
|
|
( |
) |
|
|
( |
) |
Net cash provided by investing activities |
|
|
|
|
|
|
||
CASH FLOW FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
||
Repayment of term loan |
|
|
( |
) |
|
|
( |
) |
Preferred dividends paid |
|
|
( |
) |
|
|
( |
) |
Contributions from non-controlling member of consolidated VIEs |
|
|
|
|
|
|
||
Net cash used in financing activities |
|
|
( |
) |
|
|
( |
) |
Net decrease in cash and cash equivalents |
|
|
( |
) |
|
|
( |
) |
Cash and cash equivalents, and restricted cash, beginning of period |
|
|
|
|
|
|
||
Cash and cash equivalents, and restricted cash, end of period |
|
$ |
|
|
$ |
|
||
- 6 -
SERITAGE GROWTH PROPERTIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited, amounts in thousands)
|
|
Nine Months Ended September 30, |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
RECONCILIATION OF CASH AND CASH EQUIVALENTS AND |
|
|
|
|
|
|
||
Cash and cash equivalents at beginning of period |
|
$ |
|
|
$ |
|
||
Restricted cash at beginning of period |
|
|
|
|
|
|
||
Cash and cash equivalents and restricted cash at beginning of period |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Cash and cash equivalents at end of period |
|
$ |
|
|
$ |
|
||
Restricted cash at end of period |
|
|
|
|
|
|
||
Cash and cash equivalents and restricted cash at end of period |
|
$ |
|
|
$ |
|
||
|
|
Nine Months Ended September 30, |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION |
|
|
|
|
|
|
||
Cash payments for interest |
|
$ |
|
|
$ |
|
||
Capitalized interest |
|
|
— |
|
|
|
|
|
Income taxes paid |
|
|
|
|
|
|
||
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND |
|
|
|
|
|
|
||
Development of real estate financed with accounts payable |
|
$ |
|
|
$ |
|
||
Preferred dividends declared and unpaid |
|
|
|
|
|
|
||
Transfer to / (from) real estate assets held for sale |
|
|
|
|
|
( |
) |
|
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, operated as a fully integrated, self-administered and self-managed real estate investment trust (“REIT”) as defined under Section 856(a) of the Internal Revenue Code (the “Code”) from formation through December 31, 2021. On March 31, 2022, Seritage revoked its REIT election and became a taxable C Corporation effective January 1, 2022. Seritage’s assets are held by and its operations are primarily conducted, directly or indirectly, through Seritage Growth Properties, L.P., 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.
Prior to the adoption of the Company’s Plan of Sale (defined below), Seritage was principally engaged in the ownership, development, redevelopment, disposition, management and leasing of diversified retail and mixed-use properties throughout the United States. Seritage will continue to actively manage each remaining location until such time as each property is sold. As of September 30, 2024, the Company’s portfolio consisted of interests in
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 $
As of March 15, 2021, the Company no longer had any remaining properties leased to Transform Holdco LLC (“Holdco”), an affiliate of ESL Investments, Inc. or Sears Holdings.
On March 1, 2022, the Company announced that its Board of Trustees had commenced a process to review a broad range of strategic alternatives. The Board of Trustees created a Special Committee (the “Special Committee”) of the Company’s Board of Trustees to oversee the process. The Special Committee retained Barclays as its financial advisor. The agreement with Barclays expired in August 2023. The Company’s strategic review process remains ongoing as the Company executes sales pursuant to the Plan of Sale. The Company remains open minded to pursuing value maximizing alternatives, including a potential sale of the Company. There can be no assurance that the review process will result in any transaction or that the Company will be successful in fully executing the Plan of Sale. The Board of Trustees is currently overseeing the Plan of Sale.
As a result of the Company's revocation of its REIT election, the Company is no longer required to operate under REIT rules, including the requirement to distribute at least
As a result of the Company’s change in corporate structure to a taxable C Corporation in fiscal year 2022, the Company incurred a one-time, non-cash deferred tax benefit of approximately $
The Company sought a shareholder vote to approve a proposed plan of sale of the Company’s assets and dissolution (the “Plan of Sale”) that would allow the Board to sell all of the Company’s assets, distribute the net proceeds to shareholders and dissolve the Company. The Plan of Sale allows Seritage and potential buyers to enter into and complete value maximizing transactions without subjecting any such transaction to the delay and conditionality associated with having to seek and obtain shareholder approval. On July 6, 2022, Edward Lampert, the Company’s former Chairman, entered into a Voting and Support Agreement under which he exchanged his equity interest in the Operating Partnership for Class A common shares and agreed to vote his shares in favor of the Plan of Sale. As of September 30, 2024, Mr. Lampert owns approximately
The affirmative vote of at least s of all outstanding common shares of the Company was required to approve the Plan of Sale. The 2022 Annual Meeting of Shareholders occurred on October 24, 2022, following the Company's filing of a final proxy statement with the SEC on September 14, 2022. During the meeting, the Plan of Sale was approved by the shareholders. The strategic review
- 8 -
process remains ongoing as the Company executes the Plan of Sale, and the Company remains open minded to pursuing value maximizing alternatives, including a potential sale of the Company. There can be no assurance that the review process will result in any transaction or that the Company will be successful in fully executing on the Plan of Sale.
Liquidity
The Company’s primary uses of cash include the payment of property operating and other expenses, including general and administrative expenses and debt service (collectively, “Obligations”), and certain development expenditures. Property rental income, which is the Company’s primary source of operating cash flow, did not fully fund Obligations and certain development expenditures incurred during the nine months ended September 30, 2024 and the Company incurred net operating cash outflows of $
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, but not limited to, cash on hand, sales of Consolidated and Unconsolidated Properties and potential financing transactions. During the nine months ended September 30, 2024, the Company sold
Going Concern
In accordance with ASC 205-40, Presentation of Financial Statements - Going Concern, for each annual and interim reporting period, management evaluates whether there are conditions and events that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. As part of this evaluation, the Company takes into consideration all Obligations due within the subsequent 12 months, as well as cash on hand and expected cash receipts. The Company currently anticipates it will continue to use sales of Consolidated and Unconsolidated Properties as the primary source of capital to fund its Obligations, including the principal payments on the Term Loan Facility, while at the same time pursuing alternative financing arrangements.
As of November 12, 2024, there are
The anticipated proceeds from the sales of assets under contract and existing cash on hand, would not allow the Company to fund its Obligations because the Term Loan Facility which matures July 31, 2025 is presently a current Obligation and as of the filing date the Company has not secured alternative financing. As a result, the Company has concluded that management's plans do not alleviate substantial doubt about the Company's ability to continue as a going concern. Substantial doubt about the Company’s ability to continue as a going concern will continue until assets under contract are sufficient to increase the Company's projected cash flows or alternative financing arrangements have been made such that they exceed the Company's Obligations.
The Company has not entered into any alternative financing arrangements as of the date of the financial statements. The Company has begun to seek alternative financing arrangements, including discussions with its existing lender regarding a potential extension of the Term Loan Facility. As of the filing of this Form 10-Q, the Company does not have any actionable offers to refinance the Term Loan Facility.
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, (the “Annual Report”), for the year ended December 31, 2023. 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 for the three and nine months ended September 30, 2024 may
- 9 -
not be indicative of the results that may be expected for any other interim period or for the year ending December 31, 2024. 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 Consolidated Properties, and all other entities in which the Company has a controlling financial interest. For entities that meet the definition of a variable interest entity (“VIE”), the Company consolidates those entities when the Company is the primary beneficiary of the entity. The Company is determined to be the primary beneficiary when it possesses both the unilateral power to direct activities that most significantly impact the economic performance of the VIE and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. 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 September 30, 2024, the Company consolidates
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.
As of September 30, 2024, the Company, and its wholly owned subsidiaries, holds a
Certain prior period amounts have been reclassified to conform to the current period’s presentation.
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.
Segment Reporting
The Company currently operates in a single reportable segment which includes the ownership, development, redevelopment, management, sale and leasing of real estate properties. The Company’s chief operating decision maker, its principal executive officer, assesses and measures the operating and financial results for each property on an individual basis and does not distinguish or group properties based on geography, size, or type. The Company, therefore, aggregates all properties into
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. The Company expenses costs previously capitalized but not yet placed in service that are determined to be not recoverable. For the three and nine months ended September 30, 2024, the Company expensed $
Depreciation of real estate assets, excluding land, is recognized on a straight-line basis over their estimated useful lives which generally range between:
Buildings: |
|
Site improvements: |
|
Tenant improvements: |
shorter of the estimated useful life or non-cancelable term of lease |
- 10 -
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 did
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.
The following table summarizes our gain on sale of real estate, net during the three and nine months ended September 30, 2024 and 2023 (in millions):
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Dispositions to third parties |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Gross proceeds |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Gain on sale of real estate, net |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Real Estate Held for Sale
When a real estate asset is identified by management as held for sale, the Company ceases depreciation of the asset and estimates its fair value, net of estimated costs to sell. If the estimated fair value, net of estimated costs to sell, of an asset is less than its net carrying value, an adjustment is recorded to reflect the estimated fair value. Properties classified as real estate held for sale generally represent properties that are either under contract for sale or have been identified for sale and all requirements to sell have been satisfied and are probable to close within a year.
In evaluating whether a property meets the held for sale criteria, the Company makes a determination as to the point in time that it is probable that a sale will be consummated. Given the nature of all real estate sales contracts, it is not unusual for such contracts to allow potential buyers a period of time to evaluate the property prior to formal acceptance of the contract. In addition, certain other matters critical to the final sale, such as financing arrangements, often remain pending even upon contract acceptance. As a result, properties under contract may not close within the expected time period or at all.
As of September 30, 2024,
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.
- 11 -
The Company recorded
Restricted Cash
As of September 30, 2024 and December 31, 2023, respectively, restricted cash represents cash collateral for letters of credit, cash held in escrow and cash escrowed for development purposes.
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 uncollectible are recognized as a reduction to rental income in the Company’s condensed consolidated statements of operations. If future circumstances change such that the Company believes that it is 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 recognized rental income on a cash basis for certain tenants starting in the third quarter of 2024.
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 includes 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, leasing and development fees for services performed for the benefit of certain unconsolidated entities.
Property management fee income is reported at
Leasing and development fees are initially reported at the portion of revenue earned attributable to outside ownership of the related unconsolidated entities. The Company’s share in leasing and development fee income is recognized over the useful life of the associated development project, in the case of development fees, or lease term, in the case of leasing fees, as the associated asset is depreciated over the same term and included in equity in loss of unconsolidated entities on the condensed consolidated statements of operations and in other expenses in the combined financial data in Note 4.
- 12 -
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 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.
Share-Based Compensation
The Company generally recognizes equity awards to employees as compensation expense and includes such expense within general and administrative expenses in the condensed consolidated statements of operations. Compensation expense for equity awards is based on the grant date fair value of the awards. Compensation expense is recognized ratably over the vesting period for awards with time-based vesting and awards with market-based vesting conditions (e.g., total shareholder return). For awards with performance-based vesting determined by Company operating criteria, the Company recognizes compensation expense at the date the achievement of performance criteria is deemed probable for the amount which would have been recognized ratably from the date of the grant through the date the achievement of performance criteria is deemed probable, and then ratably from the date the achievement of performance criteria is deemed probable through the remainder of the vesting period. The Company utilized a third-party valuation firm to measure the grant date fair value of restricted stock unit awards with market-based criteria using the Monte Carlo model. Forfeitures are recorded on an actual basis.
Concentration of Credit Risk
Concentrations of credit risk arise when a number of operators, tenants, or obligors related to the Company’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 September 30, 2024, the Company has
Earnings/(Loss) per Share
The Company has three classes of common stock. The rights, including the liquidation and dividend rights, of the holders of the Company’s Class A common shares and Class C non-voting common shares are identical, except with respect to voting. As the liquidation and dividend rights are identical, the undistributed earnings are allocated on a proportionate basis. The net earnings (loss) per share amounts are the same for Class A and Class C common shares because the holders of each class are legally entitled to equal per share distributions whether through dividends or in liquidation. Since August 29, 2018, all outstanding Class C common shares had been exchanged for Class A common shares and there are currently
Class B non-economic common shares are excluded from earnings/(loss) per share computations as they do not have economic rights. Since December 31, 2020, all outstanding Class B common shares have been surrendered and there are currently
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/(loss) per share.
Income Taxes
The condensed consolidated financial statements reflect provisions for federal, state and local income taxes. The Company recognizes deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis, as well as operating loss and tax credit carryforwards. The Company measures deferred tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which those temporary differences and carryforwards are expected to be recovered or settled. The effect on deferred tax assets and liabilities as a result of a change in tax rates is recognized as income in the period that includes the enactment date. For years prior to 2022, the Company was taxed as a REIT and did not expect to pay federal, state or local income taxes at the REIT level (including its qualified REIT subsidiaries). While a REIT, the Company was required to distribute at least
- 13 -
Deferred income taxes are determined based on the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities given the provisions of enacted tax laws. Significant judgments are required to determine the consolidated provision (benefit) for income taxes. Deferred income tax provisions and benefits are based on changes to the assets or liabilities from year to year. Realization of the Company’s deferred tax assets is dependent upon many factors such as tax regulations applicable to the jurisdictions in which the Company operates, estimates of future taxable income and the character of such taxable income.
The Inflation Reduction Act of 2022 was enacted on August 16, 2022 and was effective January 1, 2023. The Inflation Reduction Act includes a
Deferred tax assets are reduced by a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized. A valuation allowance is recorded to adjust net deferred tax assets to the amount which management believes will more likely than not be recoverable. In making such determination, management considers available positive and negative evidence, including future reversals of existing taxable temporary differences, future taxable income, and the implementation of prudent tax planning strategies. In the event that the Company is able to utilize its deferred tax assets in excess of their recorded amount, the valuation allowance will be reduced with a corresponding reduction to income tax expense.
Recently Issued Accounting Pronouncements
In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”). ASU 2023-7 aims to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. ASU 2023-07 requires disclosure of significant segment expenses that are regularly provided to the chief operating decision maker and included within the segment measure of profit or loss, an amount and description of its composition for other segment items to reconcile segment profit or loss. The update also requires disclosure regarding the chief operating decision maker and expands the interim segment disclosure requirements. ASU 2023-07 will be effective for the year end December 31, 2024. The Company is currently evaluating the impact of the guidance on its consolidated financial statements.
In December 2023, the FASB issued ASU 2023-09, Improvements to Income Tax Disclosures that requires public companies to annually (1) disclose specific categories in the rate reconciliation and (2) provide additional information for reconciling items that meet a quantitative threshold (if the effect of those reconciling items is equal to or greater than five percent of the amount computed by multiplying pretax income or loss by the applicable statutory income tax rate). ASU 2023-09 will be effective for the year end December 31, 2024. The Company is currently evaluating the impact of the guidance on its consolidated financial statements.
Note 3 – Lease Intangible Assets and Liabilities
The following tables summarize the Company’s lease intangible assets (acquired in-place leases and above-market leases) and liabilities (acquired below-market leases, which is included in accounts payable, accrued expenses and other liabilities on the consolidated balance sheets), net of accumulated amortization, as of September 30, 2024 and December 31, 2023 (in thousands):
September 30, 2024 |
|
|
|
|
|
|
|
|
|
|||
|
|
Gross |
|
|
Accumulated |
|
|
|
|
|||
Lease Intangible Assets |
|
Asset |
|
|
Amortization |
|
|
Balance |
|
|||
In-place leases, net |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
Above-market leases, net |
|
|
|
|
|
( |
) |
|
|
|
||
Total |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
|
|
Gross |
|
|
Accumulated |
|
|
|
|
|||
Lease Intangible Liabilities |
|
Liability |
|
|
Amortization |
|
|
Balance |
|
|||
Below-market leases, net |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
Total |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
December 31, 2023 |
|
|
|
|
|
|
|
|
|
|||
|
|
Gross |
|
|
Accumulated |
|
|
|
|
|||
Lease Intangible Assets |
|
Asset |
|
|
Amortization |
|
|
Balance |
|
|||
In-place leases, net |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
Total |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
|
|
Gross |
|
|
Accumulated |
|
|
|
|
|||
Lease Intangible Liabilities |
|
Liability |
|
|
Amortization |
|
|
Balance |
|
|||
Below-market leases, net |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
Total |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
- 14 -
Amortization of acquired below-market leases, net of acquired above-market leases, resulted in a reduction in rental income of $
|
|
(Above) / below market leases, net |
|
|
Below market ground lease |
|
|
In-place leases |
|
|||
Remainder of 2024 |
|
$ |
|
|
$ |
|
|
$ |
|
|||
2025 |
|
|
|
|
|
|
|
|
|
|||
2026 |
|
|
|
|
|
|
|
|
|
|||
2027 |
|
|
|
|
|
|
|
|
|
|||
2028 |
|
|
|
|
|
|
|
|
|
|||
2029 |
|
|
|
|
|
|
|
|
|
|||
Thereafter |
|
|
|
|
|
|
|
|
|
|||
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 September 30, 2024, the Company had investments in
|
|
|
|
|
|
Seritage % |
|
# of |
|
Total |
|
|
Unconsolidated Entities |
|
Entity Partner(s) |
|
Ownership |
|
Properties |
|
GLA |
|
|||
GS Portfolio Holdings II LLC |
|
Brookfield Properties Retail |
|
|
|
|
|
|||||
GS Portfolio Holdings (2017) LLC |
|
Brookfield Properties Retail |
|
|
|
|
|
|||||
SPS Portfolio Holdings II LLC |
|
Simon Property Group, Inc. |
|
|
|
|
|
|||||
Mark 302 JV LLC |
|
An investment fund managed by |
|
|
|
|
|
|||||
SI UTC LLC |
|
A separate account advised by |
|
|
|
|
|
|||||
Tech Ridge JV Holding LLC |
|
An affiliate of |
|
|
|
|
— |
|
||||
Landmark Land Holdings, LLC |
|
The Howard Hughes Corporation |
|
|
|
|
— |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||
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.
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.
- 15 -
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.
|
|
|
|
September 30, 2024 |
|
|||||
Unconsolidated Entities |
|
Contribution Date |
|
Contribution Value |
|
|
Gain (Loss) |
|
||
2019 |
|
|
|
|
|
|
|
|
||
Tech Ridge JV (1) |
|
|
$ |
|
|
$ |
|
|||
Summarized Financial Information for Unconsolidated Entities
The following tables present summarized financial data for UTC JV (in thousands):
|
|
September 30, 2024 |
|
|
December 31, 2023 |
|
||
ASSETS |
|
|
|
|
|
|
||
Investment in real estate |
|
|
|
|
|
|
||
Land |
|
$ |
|
|
$ |
|
||
Buildings and improvements |
|
|
|
|
|
|
||
Accumulated depreciation |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
||
Construction in progress |
|
|
|
|
|
|
||
Net investment in real estate |
|
|
|
|
|
|
||
Cash and cash equivalents |
|
|
|
|
|
|
||
Tenant and other receivables, net |
|
|
|
|
|
|
||
Other assets, net |
|
|
|
|
|
|
||
Total assets |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
LIABILITIES AND MEMBERS' INTERESTS |
|
|
|
|
|
|
||
Accounts payable, accrued expenses and other liabilities |
|
|
|
|
|
|
||
Total liabilities |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Members' Interest |
|
|
|
|
|
|
||
Additional paid in capital |
|
|
|
|
|
|
||
Retained earnings |
|
|
|
|
|
|
||
Total members' interest |
|
|
|
|
|
|
||
Total liabilities and members' interest |
|
$ |
|
|
$ |
|
||
Carrying value of Company's investments in equity investments |
|
$ |
|
|
$ |
|
||
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Total revenue |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Property operating expenses |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Depreciation and amortization |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Operating income |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Other expenses |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Net income |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Equity in income (loss) of unconsolidated entities (1) |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
- 16 -
The following tables present combined condensed financial data for the Company’s unconsolidated entities, excluding UTC JV (in thousands):
|
|
September 30, 2024 |
|
|
December 31, 2023 |
|
||
ASSETS |
|
|
|
|
|
|
||
Investment in real estate |
|
|
|
|
|
|
||
Land |
|
$ |
|
|
$ |
|
||
Buildings and improvements |
|
|
|
|
|
|
||
Accumulated depreciation |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
||
Construction in progress |
|
|
|
|
|
|
||
Net investment in real estate |
|
|
|
|
|
|
||
Cash and cash equivalents |
|
|
|
|
|
|
||
Tenant and other receivables, net |
|
|
|
|
|
|
||
Other assets, net |
|
|
|
|
|
|
||
Total assets |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
LIABILITIES AND MEMBERS' INTERESTS |
|
|
|
|
|
|
||
Liabilities |
|
|
|
|
|
|
||
Accounts payable, accrued expenses and other liabilities |
|
|
|
|
|
|
||
Total liabilities |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Members' Interest |
|
|
|
|
|
|
||
Additional paid in capital |
|
|
|
|
|
|
||
Accumulated deficit |
|
|
( |
) |
|
|
( |
) |
Total members' interest |
|
|
|
|
|
|
||
Total liabilities and members' interest |
|
$ |
|
|
$ |
|
||
Carrying value of Company's investments in equity investments |
|
$ |
|
|
$ |
|
||
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Total revenue |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Property operating expenses |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Depreciation and amortization |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Operating loss |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Other expenses |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Gains (losses) and (impairments) |
|
|
— |
|
|
|
|
|
|
|
|
|
( |
) |
||
Net loss |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Equity in income (loss) of unconsolidated entities (1) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
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. The Company utilizes internally prepared fair value estimates as well as negotiated offers to sell the investments for the impairment analysis. As a result of the Company's analysis,
As of September 30, 2024, the Company has put rights for
- 17 -
share of these impairment charges is included in equity in income (loss) of unconsolidated entities on the condensed consolidated statements of operations.
Unconsolidated Entity Management and Related Fees
The Company acts as the operating partner and day-to-day manager for the Mark 302 JV, the UTC JV, and Tech Ridge JV. The Company is entitled to receive certain fees for providing management, leasing, and construction supervision services to certain of its unconsolidated entities. During the three months ended September 30, 2024 and 2023, the Company recorded management and related fees of $
Note 5 – Leases
Lessor Disclosures
Future contractual minimum rental receipts, excluding variable payments and tenant reimbursements of expenses, under non-cancelable operating leases executed as of September 30, 2024 are approximately as follows:
(in thousands) |
|
September 30, 2024 |
|
|
Remainder of 2024 |
|
$ |
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
2027 |
|
|
|
|
2028 |
|
|
|
|
2029 |
|
|
|
|
Thereafter |
|
|
|
|
|
$ |
|
||
The components of lease revenues for the three and nine months ended September 30, 2024 and 2023 were as follows:
(in thousands) |
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Fixed rental income |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Variable rental income |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
Total rental income for three and nine months ended September 30, 2024, the Company recognized rental income on a cash basis for certain tenants that are negotiating rent relief.
Lessee Disclosures
The Company has
The Company recorded rent expense related to leased corporate office space of $
On May 1, 2024, the Company exercised its early termination right provision of the corporate office lease. This reduced the lease term by
- 18 -
termination right, the Company paid a $
In addition, the Company recorded ground rent expense of approximately $
The Company expects to make cash payments on operating leases of $
The following table sets forth information related to the measurement of our lease liabilities as of September 30, 2024:
|
|
September 30, 2024 |
|
|
Weighted-average remaining lease term (in years) |
|
|
|
|
Weighted-average discount rate |
|
|
% |
|
Cash paid for operating leases (in thousands) |
|
$ |
|
|
Note 6 – Debt
Term Loan Facility
On
Funded amounts under the Term Loan Facility bear interest at an annual rate of
The Company’s ability to access the Incremental Funding Facility is subject to (i) the Company achieving rental income from non-Sears Holdings tenants, on an annualized basis (after giving effect to SNO Leases expected to commence rent payment within 12 months) for the fiscal quarter ending prior to the date of incurrence of the Incremental Funding Facility, of not less than $
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 during the year ended December 31, 2021, mortgages were recorded on the remaining unmortgaged properties in all but two locations.
The Term Loan Facility includes certain financial metrics to govern springing collateral requirements and certain covenant exceptions set forth in the Term Loan Agreement, including: (i) a total fixed charge coverage ratio of not less than
- 19 -
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
As of September 30, 2024, the Company was not in compliance with certain of the financial metrics described above. As a result, the Company was previously required to receive the consent of Berkshire Hathaway to dispose of assets via sale or contribution to another entity and as of June 16, 2022, Berkshire Hathaway had provided such consent for all such transactions submitted for approval. The Third Term Loan Amendment (defined below), which was executed on June 16, 2022, eliminated this requirement. There are no other impacts under the Term Loan Facility from non-compliance with the financial metrics described above.
The Company incurred $
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
Additionally, the First Term Loan Amendment provides that the administrative agent and the lenders express their continued support for asset dispositions, subject to the administrative agent’s right to approve the terms of individual transactions due to the occurrence of a Financial Metric Trigger Event, as such term is defined under the Term Loan Agreement.
On November 24, 2021, the Operating Partnership, the Company and Berkshire Hathaway entered into an amendment (the “Second Term Loan Amendment”) to the Term Loan Agreement by and among the Operating Partnership, the Company and Berkshire Hathaway to which the Operating Partnership, the Company and Berkshire Hathaway mutually agreed that (i) the “make whole” provision in the Senior Secured Term Loan Agreement shall not be applicable to prepayments of principal; and (ii) the Senior Secured Term Loan Agreement, as amended for (i) above, may at the Operating Partnership's election be extended for
On June 16, 2022, the Operating Partnership, the Company and Berkshire Hathaway entered into an amendment (the “Third Term Loan Amendment”) to the Term Loan Agreement by and among the Operating Partnership, the Company and Berkshire Hathaway to which the Operating Partnership, the Company and Berkshire Hathaway mutually agreed that notwithstanding anything to the contrary in the asset sale covenant, the parent, borrower, and their respective subsidiaries will be permitted without the consent of the administrative agent to sell, transfer, or otherwise dispose of properties (including but not limited to properties or equity interests of any subsidiary) to unaffiliated third parties for no less than fair market value, provided that the borrower deposits all net proceeds received into a controlled account and the use of such net proceeds will be subject to the terms and conditions of the Term Loan Agreement, including but not limited to the restricted payments and investments/loans covenants.
As of September 30, 2024, the Company has paid down a total of $
- 20 -
Note 7 – Income Taxes
The Company had previously elected to be taxed as a REIT as defined under Section 856(a) of the Code for federal income tax purposes upon formation and through December 31, 2021. On March 31, 2022, the Company announced that its Board of Trustees unanimously approved a plan to terminate the Company’s REIT status and become a taxable C Corporation, effective for the year ended December 31, 2022. As a result, the Company is no longer required to operate under REIT rules, including the requirement to distribute at least
As a result of the Company’s revocation of its REIT status in fiscal year 2022, the Company incurred a one-time, non-cash deferred tax benefit of approximately $
The Company’s effective federal tax rate of
The significant components of the Company’s deferred tax assets of $
Valuation allowances are recorded related to deferred tax assets based on the “more likely than not” criteria. ASC 740 states that deferred tax assets shall be reduced by a valuation allowance if there is insufficient objectively verifiable evidence to support that it is more likely than not that they will be realized. This evaluation requires significant judgment which should be weighted commensurate with the extent to which the evidence can be objectively verified. Additionally, under ASC 740, forming a conclusion that a valuation allowance is not needed is difficult when there is negative evidence such as cumulative losses in recent years. Given the Company’s history of cumulative losses combined with the fact that the Company’s utilization of deferred tax assets is highly dependent on the outcome of the review of a broad range of strategic alternatives announced by its Board of Trustees and the uncertainty in timing and volume of future property sales, we have deemed that their realization, at this time, cannot be objectively verified. The Company has therefore recorded a full valuation allowance against the Company’s deferred tax assets as of September 30, 2024. The Company will evaluate this position each quarter as verifiable positive evidence becomes available, such as the execution of asset sales, to support the future utilization of the deferred tax assets.
Note 8 – Fair Value Measurements
ASC 820, Fair Value Measurement, defines fair value and establishes a framework for measuring fair value. The objective of fair value is to determine the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (the “exit price”). ASC 820 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three levels:
Level 1 - quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities
Level 2 - observable prices based on inputs not quoted in active markets, but corroborated by market data
Level 3 - unobservable inputs used when little or no market data is available
The fair value hierarchy gives the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs. In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company also considers counterparty credit risk in its assessment of fair value.
- 21 -
Assets Measured at Fair Value on a Nonrecurring Basis
The following tables present the Company's assets measured at fair value on a non-recurring basis as of September 30, 2024 and December 31, 2023 (in thousands), aggregated by the level in the fair value hierarchy within which those measurements fall:
|
|
Balance |
|
|
Fair Value Measurements Using |
|
||||||||||
Description |
|
September 30, 2024 |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
||||
Impaired real estate assets |
|
$ |
|
|
$ |
|
|
$ |
- |
|
|
$ |
|
|||
|
|
Balance |
|
|
Fair Value Measurements Using |
|
||||||||||
Description |
|
December 31, 2023 |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
||||
Impaired real estate assets |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Impaired right-of-use assets |
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
||
Other-than-temporary impaired investments |
|
|
|
|
|
- |
|
|
|
|
|
|
- |
|
||
In accordance with ASC 323, Equity Method and Joint Ventures, the Company reviews the carrying value in its investments in unconsolidated entities at each reporting period. The Company recorded
For the nine months ended September 30, 2024, the Company estimated fair value of certain assets based on a discounted cash flow analysis using a discount rate
Financial Assets and Liabilities not Measured at Fair Value
Financial assets and liabilities that are not measured at fair value on the condensed consolidated balance sheets include cash equivalents, restricted cash and the term loan facility. The fair value of cash equivalents and restricted cash are classified as Level 1 and the fair value 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 September 30, 2024 and December 31, 2023, respectively, the estimated fair values of the Company’s debt obligations were $
Note 9 – Commitments and Contingencies
Insurance
The Company maintains general liability insurance and all-risk property and rental value, with sub-limits for certain perils such as floods and earthquakes on each of the Company’s properties. The Company also maintains coverage for terrorism acts as defined by the Terrorism Risk Insurance Program Reauthorization Act, which expires in December 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.
- 22 -
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.
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 July 1, 2024, a purported shareholder of the Company filed a class action lawsuit in the U.S. District Court for the Southern District of New York, captioned Zhengxu He, Trustee of the He & Fang 2005 Revocable Living Trust v. Seritage Growth Properties, Case No. 1:24:CV:05007, alleging that the Company, the Company’s Chief Executive Officer, and the Company’s Chief Financial Officer violated the federal securities laws. The complaint seeks to bring a class action on behalf of all persons and entities that purchased or otherwise acquired Company securities between July 7, 2022 and May 10, 2024. The complaint alleges that the defendants violated federal securities laws by issuing false, misleading, and/or omissive disclosures concerning the Company’s alleged lack of effective internal controls regarding the identification and review of impairment indicators for investments in real estate and the Company’s value and projected gross proceeds of certain real estate assets. The complaint seeks compensatory damages in an unspecified amount to be proven at trial, an award of reasonable costs and expenses to the plaintiff and class counsel, and such other and further relief as the court may deem just and proper. The Company intends to vigorously defend itself against the allegations.
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 sought, among other things, declaratory relief and money damages as a result of certain of the D&O Insurers refusal to pay certain costs and expenses related to the defense of the litigation related to the bankruptcy of Sears Holdings (the “Litigation”). The Litigation was settled in 2022 and the Litigation was dismissed. During the year ended December 31, 2022, the Company reached settlement agreements with two of the D&O Insurers and received gross proceeds of $
In addition to the litigation described above, the Company is subject, from time to time, to various legal proceedings and claims that arise in the ordinary course of business and due to the current environment. While the resolution of such matters cannot be predicted with certainty, management believes, based on currently available information, that the final outcome of such matters will not have a material effect on the consolidated financial position, results of operations, cash flows or liquidity of the Company.
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 was also the Chairman of Seritage prior to his retirement effective March 1, 2022.
On July 6, 2022, Mr. Lampert converted all Operating Partnership Units (“OP Units”) to Class A common shares. As a result, he owns
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.
Winthrop Capital Advisors
On December 29, 2021, the Company entered into a Services Agreement with Winthrop Capital Advisors LLC to provide additional staffing to the Company. On January 7, 2022, the Company announced that John Garilli, an employee of Winthrop, has been appointed interim chief financial officer on a full-time basis, effective January 14, 2022. The Company pays Winthrop a monthly fee for services and reimbursement for certain employees. The Company paid Winthrop $
- 23 -
September 30, 2024 and 2023, respectively. The Company paid Winthrop $
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 significant accounting policies.
At September 30, 2024 and December 31, 2023, there was $
The Company has certain put rights on
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 and further amended and restated on January 4, 2023. 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.
On July 6, 2022, ESL converted all Operating Partnership Units to Class A common shares. As a result, the Company, and its wholly owned subsidiaries, holds a
Note 12 – Shareholders’ Equity
Class A Common Shares
As of September 30, 2024,
Class B Non-Economic Common Shares
As of September 30, 2024, there were
Series A Preferred Shares
In December 2017, the Company issued
As of December 14, 2022, the Company may redeem any or all of the Series A Preferred Shares at $
Dividends and Distributions
The Company’s Board of Trustees has not declared dividends on the Company’s Class A common shares during 2024 or 2023. The last dividend on the Company’s Class A and C common shares that the Board of Trustees declared was on February 25, 2019, which was paid on April 11, 2019 to shareholders of record on March 29, 2019.
The Board of Trustees will determine future distributions following the pay down of the Term Loan Facility.
- 24 -
The Company’s Board of Trustees declared the following dividends on preferred shares during 2024 and 2023:
|
|
|
|
|
|
Series A |
|
|
Declaration Date |
|
Record Date |
|
Payment Date |
|
Preferred Share |
|
|
2024 |
|
|
|
|
|
|
|
|
|
|
|
$ |
|
||||
|
|
|
|
|
||||
|
|
|
|
|
||||
|
|
|
|
|
||||
2023 |
|
|
|
|
|
|
|
|
|
|
|
$ |
|
||||
|
|
|
|
|
||||
|
|
|
|
|
||||
|
|
|
|
|
||||
Note 13 – Earnings per Share
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.
(in thousands except per share amounts) |
|
Three Months Ended September 30, |
|
|
Nine Months Ended |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Numerator - Basic and Diluted |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net loss |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Preferred dividends |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Net loss attributable to common shareholders - Basic and Diluted |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Denominator - Basic and Diluted |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Weighted-average Class A common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Weighted-average Class A common shares |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Weighted-average Class A common shares |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Loss per share attributable to Class A |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Loss per share attributable to Class A |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
No adjustments were made to the numerator for the three and nine months ended September 30, 2024 and 2023, respectively, because the Company generated a net loss. During periods of net loss, undistributed losses are not allocated to the participating securities as they are not required to absorb losses.
No adjustments were made to the denominator for the three and nine months ended September 30, 2024 and 2023, respectively, because the inclusion of outstanding non-vested restricted shares would have had an anti-dilutive effect.
As of September 30, 2024 and December 31, 2023, there were
- 25 -
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
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
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 nine months ended September 30, 2024:
|
|
Nine Months Ended September 30, 2024 |
|
|||||
|
|
|
|
|
Weighted-Average |
|
||
|
|
|
|
|
Grant Date |
|
||
|
|
Shares |
|
|
Fair Value |
|
||
Unvested restricted shares at beginning of period |
|
|
|
|
$ |
|
||
Restricted shares vested |
|
|
( |
) |
|
|
|
|
Unvested restricted shares at end of period |
|
|
|
|
$ |
|
||
The Company recognized $
As of September 30, 2024, there were approximately $
- 26 -
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,” “will,” “continue to,” “pro forma” or the opposite of these words and phrases or other similar words or phrases which are predictions of or indicate future events or trends and which do not relate solely to historical matters 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, 2023. 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
Prior to the adoption of the Company’s Plan of Sale (defined below), Seritage was principally engaged in the ownership, development, redevelopment, disposition, management and leasing of diversified retail and mixed-use properties throughout the United States. Seritage will continue to actively manage each remaining location until such time as each property is sold. As of September 30, 2024, the Company’s portfolio consisted of interests in 21 properties comprised of approximately 2.7 million square feet of gross leasable area (“GLA”) or build-to-suit leased area, and 342 acres of land. The portfolio consists of approximately 1.5 million square feet of GLA and 208 acres held by 12 consolidated properties (such properties, the “Consolidated Properties”) and 1.2 million square feet of GLA and 134 acres held by nine unconsolidated properties (such properties, the “Unconsolidated Properties”).
Review of Strategic Alternatives
On March 1, 2022, the Company announced that its Board of Trustees commenced a process to review a broad range of strategic alternatives to enhance shareholder value. The Board of Trustees created a special committee of the Board of Trustees (the “Special Committee”) to oversee the process. The Special Committee retained Barclays Capital, Inc. as its financial advisor from March 2022 through August 2023 to assist with the strategic review. The Company sought a shareholder vote to approve a proposed plan of sale of our assets and dissolution (the “Plan of Sale”) that would allow our board to sell all of our assets, distribute the net proceeds to shareholders and dissolve the Company. The Plan of Sale can be suspended by the Board of Trustees.
The 2022 Annual Meeting of Shareholders occurred on October 24, 2022, at which time the Plan of Sale was approved by the shareholders, following our filing of a final proxy statement with the SEC on September 14, 2022. See Note 1 – Organization of the Notes to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information about the Plan of Sale. The strategic review process remains ongoing as the Company executes the Plan of Sale, and the Company remains open minded to pursuing value maximizing alternatives, including a potential sale of the Company. There can be no assurance that the review process will result in any transaction or that the Company will be successful in fully executing on the Plan of Sale. The Board of Trustees is currently overseeing the Plan of Sale.
Impairment of Real Estate Assets and Investments in Unconsolidated Entities
There were no impairments recorded during the three months ended September 30, 2024. Due to negotiations for rent relief with existing tenants that began during the second quarter of 2024 which triggered the need for an impairment analysis pursuant to ASC 360, Property, Plant and Equipment, and, in certain circumstances excluding Aventura, agreeing to sell below carrying value, we recorded impairment losses of $87.5 million for the nine months ended September 30, 2024 primarily due to changes in discount rates and residual capitalization rates between June 2023 and June 2024. We did not recognize any other-than-temporary impairment losses on our investments in unconsolidated entities during the three and nine months ended September 30, 2024. We continue to evaluate our portfolio, including our development plans, hold periods and, if applicable, offers received, which may result in additional impairments in future periods on our consolidated properties and investments in unconsolidated entities.
- 27 -
REIT Election
On March 31, 2022, the Company announced that its Board of Trustees, with the recommendation of the Special Committee, approved a plan to terminate the Company's REIT status and become a taxable C Corporation, effective for the year ended December 31, 2022. As a result, the Company is no longer required to operate under REIT rules, including the requirement to distribute at least 90% of REIT taxable income to its stockholders, which provides the Company with greater flexibility to use its free cash flow. Effective January 1, 2022, the Company is subject to federal and state income taxes on its taxable income at applicable tax rates and is no longer entitled to a tax deduction for dividends paid. The Company operated as a REIT since inception and through the 2021 tax year, and existing REIT requirements and limitations, including those established by the Company’s organizational documents, remained in place until December 31, 2021. Refer to Note 7 – Income Taxes of the Notes to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Business Strategies
The Company’s primary objective is to create value for its shareholders through the monetization of the Company's assets through the Plan of Sale, which can be suspended by the Board of Trustees. We look to enhance sale value through leasing our built footprint, densification of our sites, achievement of entitlements and modification of agreements that govern our properties. We continue to position all remaining assets for sale.
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.
Comparison of the Three Months Ended September 30, 2024 to the Three Months Ended September 30, 2023
The following table presents selected data on comparative results from the Company’s condensed consolidated statements of operations for the three months ended September 30, 2024, as compared to the three months ended September 30, 2023 (in thousands):
|
|
Three Months Ended September 30, |
|
|
|
|
||||||
|
|
2024 |
|
|
2023 |
|
|
$ Change |
|
|||
Revenue |
|
|
|
|
|
|
|
|
|
|||
Rental income |
|
$ |
2,899 |
|
|
$ |
4,525 |
|
|
$ |
(1,626 |
) |
Expenses |
|
|
|
|
|
|
|
|
|
|||
Property operating |
|
|
(4,258 |
) |
|
|
(4,564 |
) |
|
|
306 |
|
Abandoned project costs |
|
|
(5,732 |
) |
|
|
- |
|
|
|
(5,732 |
) |
Real estate taxes |
|
|
(971 |
) |
|
|
(1,204 |
) |
|
|
233 |
|
Depreciation and amortization |
|
|
(4,377 |
) |
|
|
(2,913 |
) |
|
|
(1,464 |
) |
General and administrative |
|
|
(7,178 |
) |
|
|
(8,030 |
) |
|
|
852 |
|
Gain on sale of real estate, net |
|
|
4,184 |
|
|
|
18,506 |
|
|
|
(14,322 |
) |
Loss on sale of interest in unconsolidated entities |
|
|
— |
|
|
|
(916 |
) |
|
|
916 |
|
Equity in income of unconsolidated entities |
|
|
118 |
|
|
|
993 |
|
|
|
(875 |
) |
Interest and other income (expense), net |
|
|
(872 |
) |
|
|
2,030 |
|
|
|
(2,902 |
) |
Interest expense |
|
|
(6,051 |
) |
|
|
(9,763 |
) |
|
|
3,712 |
|
- 28 -
Rental Income
The following table presents the results for rental income for the three months ended September 30, 2024, as compared to the corresponding period in 2023 (in thousands):
|
|
Three Months Ended September 30, |
|
|
Three Months Ended September 30, |
|
|
|
|
|||||||||||
|
|
2024 |
|
|
2023 |
|
|
|
|
|||||||||||
|
|
Rental Income |
|
|
% of Total |
|
|
Rental Income |
|
|
% of Total |
|
|
$ Change |
|
|||||
In-place retail leases |
|
$ |
2,923 |
|
|
|
100.8 |
% |
|
$ |
6,022 |
|
|
|
133.1 |
% |
|
$ |
(3,099 |
) |
Straight-line rent (expense) |
|
|
(5 |
) |
|
|
-0.2 |
% |
|
|
(1,503 |
) |
|
|
-33.2 |
% |
|
|
1,498 |
|
Amortization of the above/below market leases |
|
|
(19 |
) |
|
|
-0.7 |
% |
|
|
6 |
|
|
|
0.1 |
% |
|
|
(25 |
) |
Total rental income |
|
$ |
2,899 |
|
|
|
100.0 |
% |
|
$ |
4,525 |
|
|
|
100.0 |
% |
|
$ |
(1,626 |
) |
The Company recognized rental income on a cash basis for certain tenants at Aventura that are negotiating rent relief resulting in a decrease of revenue of $1.7 million in 2024. The decrease in revenue in 2024 is also driven by the sale of properties since September 30, 2023.
The decrease of $1.5 million in straight-line rental expense for the three months ended September 30, 2024 compared to the three months ended September 30, 2023 was primarily due to write off of deferred rents related to property sales during the three months ended September 30, 2023.
Abandoned project costs
During the three months ended September 30, 2024, the Company expensed costs that were previously capitalized in construction in progress on account of a tenant that defaulted on its lease prior to opening and predevelopment costs on a property which the Company is not currently pursuing entitlements.
General and Administrative Expenses
General and administrative expenses consist of personnel costs, including the amortization of costs associated with share-based compensation awarded in prior years, consulting expenses, professional fees, office expenses and overhead expenses.
The decrease of $0.9 million in general administrative expenses is driven by decreased compensation due to decrease in employee headcount as well as a decrease in consulting related expenses utilized to execute the plan of sale.
Gain on Sale of Real Estate, Net
During the three months ended September 30, 2024, the Company sold one property resulting in a gain of $4.2 million, which is included in gain on sale of real estate, net within the condensed consolidated statements of operations.
Interest and Other Income (Expense), Net
The decrease of $2.9 million of interest and other income (expense), net for the three months ended September 30, 2024 is driven by the recognition of $1.8 million of settlement expense to a subcontractor at one of the Company’s properties in 2024. In addition, during the three months ended September 30, 2023, $0.5 million of previously escrowed funds related to a sold property were received.
Interest Expense
The decrease of $3.7 million in interest expense for the three months ended September 30, 2024 was driven by partial Term Loan Facility pay downs.
- 29 -
Comparison of the Nine Months Ended September 30, 2024 to the Nine Months Ended September 30, 2023
The following table presents selected data on comparative results from the Company's condensed consolidated statements of operations for the nine months ended September 30, 2024, as compared to the nine months ended September 30, 2023 (in thousands):
|
|
Nine Months Ended September 30, |
|
|
|
|
||||||
|
|
2024 |
|
|
2023 |
|
|
$ Change |
|
|||
Revenue |
|
|
|
|
|
|
|
|
|
|||
Rental income |
|
$ |
12,790 |
|
|
$ |
10,459 |
|
|
$ |
2,331 |
|
Expenses |
|
|
|
|
|
|
|
|
|
|||
Property operating |
|
|
(12,091 |
) |
|
|
(17,945 |
) |
|
|
5,854 |
|
Abandoned project costs |
|
|
(5,732 |
) |
|
|
- |
|
|
|
(5,732 |
) |
Real estate taxes |
|
|
(3,602 |
) |
|
|
(4,910 |
) |
|
|
1,308 |
|
Depreciation and amortization |
|
|
(10,860 |
) |
|
|
(11,628 |
) |
|
|
768 |
|
General and administrative |
|
|
(23,244 |
) |
|
|
(30,349 |
) |
|
|
7,105 |
|
Gain on sale of real estate, net |
|
|
7,357 |
|
|
|
64,386 |
|
|
|
(57,029 |
) |
Gain on sale of interest in unconsolidated entities |
|
|
— |
|
|
|
6,407 |
|
|
|
(6,407 |
) |
Impairment of real estate assets |
|
|
(87,536 |
) |
|
|
(107,043 |
) |
|
|
19,507 |
|
Equity in loss of unconsolidated entities |
|
|
(69 |
) |
|
|
(49,077 |
) |
|
|
49,008 |
|
Interest and other income (expense), net |
|
|
1,268 |
|
|
|
17,484 |
|
|
|
(16,216 |
) |
Interest expense |
|
|
(19,344 |
) |
|
|
(37,493 |
) |
|
|
18,149 |
|
Rental Income
The following table presents the results for rental income for the nine months ended September 30, 2024, as compared to the corresponding period in 2023 (in thousands):
|
|
Nine Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
|
|||||||||||
|
|
2024 |
|
|
2023 |
|
|
|
|
|||||||||||
|
|
Rental Income |
|
|
% of Total |
|
|
Rental Income |
|
|
% of Total |
|
|
$ Change |
|
|||||
In-place retail leases |
|
$ |
13,034 |
|
|
|
101.9 |
% |
|
$ |
26,586 |
|
|
|
254.2 |
% |
|
$ |
(13,552 |
) |
Straight-line rent expense |
|
|
(251 |
) |
|
|
-2.0 |
% |
|
|
(16,142 |
) |
|
|
-154.3 |
% |
|
|
15,891 |
|
Amortization of above/below market leases |
|
|
7 |
|
|
|
0.1 |
% |
|
|
15 |
|
|
|
0.1 |
% |
|
|
(8 |
) |
Total rental income |
|
$ |
12,790 |
|
|
|
100.0 |
% |
|
$ |
10,459 |
|
|
|
100.0 |
% |
|
$ |
2,331 |
|
The decrease for in-place retail leases is primarily driven by the sale of multi-tenant properties in 2023. For the nine months ended September 30, 2024, the Company recognized rental income on a cash basis for certain tenants at Aventura resulting in a decrease of revenue of $1.7 million.
The decrease of $15.9 million in straight-line rental expense for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 was primarily due to write off of deferred rents related to property sales during the nine months ended September 30, 2023.
Property Operating Expenses
The decrease of $5.9 million in property operating expense for the nine months ended September 30, 2024 was due primarily to asset sales offset by insurance refunds for sold properties that were less than the estimated receivables.
Abandoned project costs
During the nine months ended September 30, 2024, the Company expensed costs that were previously capitalized in construction in progress on account of a tenant that defaulted on its lease prior to opening and predevelopment costs on a property which the Company is not currently pursuing entitlements.
- 30 -
Real Estate Taxes
The decrease in real estate taxes of $1.3 million is primarily driven by property sales and is offset by the increased assessment for the Aventura property.
General and Administrative Expenses
General and administrative expenses consist of personnel costs, including amortization of costs associated with share-based compensation awarded in prior years, professional fees, office expenses and overhead expenses.
The decrease of $7.1 million in general and administrative expenses for the nine months ended September 30, 2024 was driven by a decrease in employee compensation due to reduced headcount and a reduction in consulting services.
Gain on Sale of Real Estate, Net
During the nine months ended September 30, 2024, the Company sold 10 properties for aggregate consideration of $111.7 million and recorded a gain totaling $7.4 million, which is included in gain on sale of real estate, net within the condensed consolidated statements of operations.
Gain on Sale of Interest in Unconsolidated Entities, Net
During the nine months ended September 2023, the Company sold its interest in eight unconsolidated properties, and recorded a gain totaling $6.4 million, which was included in the gain on sale of unconsolidated entities within the consolidated statements of operations.
Impairment of Real Estate Assets
During the nine months ended September 30, 2024, the Company recognized $1.7 million impairment of real estate assets as a result of the Company accepting offers below book value on three properties and an $85.8 million impairment of real estate assets on the Company's development property in Aventura, FL due to negotiations for rent relief with existing tenants that began during the second quarter of 2024 which triggered the need for an impairment analysis pursuant to ASC 360, Property, Plant and Equipment. The Company determined the fair value of this property by applying a discount to projected cash flows over the estimated hold period. During the nine months ended September 30, 2023, the Company recognized $107.0 million of impairment losses as a result of recognizing an impairment on the Company's development property in Aventura, FL, which is included within the condensed consolidated statements of operations.
Equity in Loss of Unconsolidated Entities
The decrease of $49.0 million in loss of unconsolidated entities for the nine months ended September 30, 2024 was driven by a $70.8 million impairment charge recorded by one unconsolidated entity during the nine months ended September 30, 2023. The Company's share of the impairment was $35.4 million and was included in the equity in loss of consolidated entities on the consolidated statements of operations. An other-than-temporary loss of $12.7 million was also recorded for the nine months ended September 30, 2023.
Interest and Other Income (Expense), Net
The decrease of $16.2 million of interest and other income (expense), net for the nine months ended September 30, 2024 is driven by the recognition of $11.6 million of income related to the settlement with the D&O insurers for the nine months ended September 30, 2023. In addition, during the nine months ended September 30, 2024, a settlement expense of $1.8 million to a subcontractor at one of the Company’s properties was recorded.
Interest Expense
The decrease of $18.1 million in interest expense for the nine months ended September 30, 2024 was driven by partial Term Loan Facility pay downs.
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
- 31 -
primary source of operating cash flow, did not fully fund obligations incurred during the nine months ended September 30, 2024 and the Company recorded net operating cash outflows of $39.6 million. Additionally, the Company generated investing cash inflows of $71.7 million during the nine months ended September 30, 2024, which were driven by asset sales and partially offset by development expenditures.
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, sales of Consolidated Properties, sale of interests in Unconsolidated Properties and alternative financing transactions, subject to any approvals that may be required under the Term Loan Agreement. Below is our sales activity since we began our capital recycling program:
As of November 12, 2024, we had two assets under contract for sale with no due diligence contingencies for total anticipated proceeds of $33.7 million and three assets under contract for sale subject to customary due diligence for total anticipated proceeds of $54.2 million at share. All five assets are subject to closing conditions.
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
- 32 -
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. The Third Term Loan Amendment (as defined in Note 6 – Debt of the Notes to the condensed consolidated financial statements included in Part I, Item I of this Quarterly Report on Form 10-Q) executed on June 16, 2022 provided exceptions to this right.
Our Term Loan Facility includes a $400.0 million Incremental Funding Facility, access to which is subject to rental income from non-Sears Holdings tenants of at least $200.0 million, on an annualized basis and after giving effect to SNO leases expected to commence rent payment within 12 months, which we have not yet achieved, as disclosed in Note 6. There is no assurance of the Company’s ability to access the Incremental Funding Facility.
During the nine months ended September 30, 2024, we have repaid $80.0 million against the principal of the Term Loan Facility. Our outstanding balance as of September 30, 2024, is $280.0 million. Subsequent to September 30, 2024, the Company made an additional principal payment of $25.0 million, reducing the balance of the Term Loan Facility to $255.0 million as of November 12, 2024.
See Note 1 – Organization of the Notes to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for a discussion of liquidity and the substantial doubt about the Company's ability to continue as a going concern.
Cash Flows for the Nine Months Ended September 30, 2024 Compared to the Nine Months Ended September 30, 2023
The following table summarizes the Company’s cash flow activities for the nine months ended September 30, 2024 and 2023, respectively (in thousands):
|
|
Nine Months Ended September 30, |
|
|
|
|
||||||
|
|
2024 |
|
|
2023 |
|
|
$ Change |
|
|||
Net cash used in operating activities |
|
$ |
(39,621 |
) |
|
$ |
(42,021 |
) |
|
$ |
2,400 |
|
Net cash provided by investing activities |
|
|
71,724 |
|
|
|
645,564 |
|
|
|
(573,840 |
) |
Net cash used in financing activities |
|
|
(83,591 |
) |
|
|
(633,634 |
) |
|
|
550,043 |
|
Cash Flows from Operating Activities
Significant components of net cash used in operating activities include:
Cash Flows from Investing Activities
Significant components of net cash provided by investing activities include:
Cash Flows from Financing Activities
Significant components of net cash used in financing activities include:
- 33 -
Dividends and Distributions
The Company’s Board of Trustees did not declare dividends on the Company’s Class A common shares during the nine months ended September 30, 2024 and 2023, respectively.
The Company’s Board of Trustees declared the following dividends on preferred shares during 2024 and 2023:
|
|
|
|
|
|
Series A |
|
|
Declaration Date |
|
Record Date |
|
Payment Date |
|
Preferred Share |
|
|
2024 |
|
|
|
|
|
|
|
|
October 28 |
|
December 31 |
|
January 15, 2025 |
|
$ |
0.43750 |
|
July 31 |
|
September 30 |
|
October 15 |
|
|
0.43750 |
|
May 2 |
|
June 28 |
|
July 15 |
|
|
0.43750 |
|
February 29 |
|
March 29 |
|
April 15 |
|
|
0.43750 |
|
2023 |
|
|
|
|
|
|
|
|
October 30 |
|
December 29 |
|
January 16, 2024 |
|
$ |
0.43750 |
|
July 25 |
|
September 29 |
|
October 13 |
|
|
0.43750 |
|
April 27 |
|
June 30 |
|
July 14 |
|
|
0.43750 |
|
February 15 |
|
March 31 |
|
April 17 |
|
|
0.43750 |
|
The Board of Trustees will determine future distributions on the Company's common shares following the pay down of the Term Loan Facility.
Off-Balance Sheet Arrangements
The Company accounts for its investments in entities that it does not have a controlling interest in or is not the primary beneficiary using the equity method of accounting and those investments are reflected on the condensed consolidated balance sheets of the Company as investments in unconsolidated entities. As of September 30, 2024 and December 31, 2023, 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, 2023.
Capital Expenditures
During the three and nine months ended September 30, 2024, the Company invested $3.3 million and $25.7 million, respectively in our consolidated development and operating properties and an additional $5.8 million and $9.0 million, respectively into our unconsolidated joint ventures, as we continue to advance our business plans, including our previously announced projects.
During the three and nine months ended September 30, 2023, the Company invested $11.7 million and $61.6 million, respectively in our consolidated development and operating properties and an additional $0.8 million and $11.9 million, respectively into our unconsolidated joint ventures.
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.
On July 1, 2024, a purported shareholder of the Company filed a class action lawsuit in the U.S. District Court for the Southern District of New York, captioned Zhengxu He, Trustee of the He & Fang 2005 Revocable Living Trust v. Seritage Growth Properties, Case No. 1:24:CV:05007, alleging that the Company, the Company’s Chief Executive Officer, and the Company’s Chief Financial Officer violated the federal securities laws. The complaint seeks to bring a class action on behalf of all persons and entities that purchased or otherwise acquired Company securities between July 7, 2022 and May 10, 2024. The complaint alleges that the defendants violated federal securities laws by issuing false, misleading, and/or omissive disclosures concerning the Company’s alleged lack of effective internal controls regarding the identification and review of impairment indicators for investments in real estate and the Company’s value and projected gross proceeds of certain real estate assets. The complaint seeks compensatory damages in an unspecified amount to be
- 34 -
proven at trial, an award of reasonable costs and expenses to the plaintiff and class counsel, and such other and further relief as the court may deem just and proper. The Company intends to vigorously defend itself against the allegations.
On March 2, 2021, we brought a lawsuit in Delaware state court against QBE Insurance Corporation, Endurance American Insurance Company, Allianz Global Risks US Insurance Company and Continental Casualty Company, each of which are D&O insurance providers of the Company (the “D&O Insurers”). Our lawsuit sought, among other things, declaratory relief and money damages as a result of certain of the D&O Insurers refusal to pay certain costs and expenses related to the defense of the litigation related to the bankruptcy of Sears Holdings (the “Litigation”). The Litigation was settled in 2022 and the Litigation was dismissed. Any amounts received from the insurers will offset the Seritage Defendants’ contribution. We reached settlement agreements with two of the D&O Insurers for gross proceeds of $12.7 million which is recorded in interest and other income (expense), net in the consolidated statements of operations during the year ended December 31, 2022. In 2023, we reached settlement agreements with the other two D&O Insurers for gross proceeds of $11.6 million. We received $11.6 million during the nine months ended September 30, 2023, which is recorded in interest and other income (expense), net in the consolidated statements of operations.
We are subject, from time to time, to various legal proceedings and claims that arise in the ordinary course of business 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.
See Note 9 – Commitments and Contingencies Litigation and Other Matters of the Notes to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for a discussion of the Litigation and related matters.
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, 2023 in Management’s Discussion and Analysis of Financial Condition and Results of Operations. For the nine months ended September 30, 2024, there were no material changes to these policies.
Non-GAAP Supplemental Financial Measures and Definitions
The Company makes reference to NOI-cash basis and NOI-cash basis at share which are financial measures that include adjustments to GAAP.
Net Operating Income (Loss)-cash basis (“NOI”-cash basis) and Net Operating Income (Loss)-cash basis at share (“NOI-cash basis at share”)
NOI - cash basis is defined as income from property operations less property operating expenses, adjusted for variable items such as termination fee income, as well as non-cash items such as straight-line rent and amortization of lease intangibles. Other real estate companies may use different methodologies for calculating NOI-cash basis, and accordingly the Company’s depiction of NOI-cash basis may not be comparable to other real estate companies. The Company believes NOI-cash basis 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 NOI-cash basis at share, which includes its proportional share of Unconsolidated Properties. The Company does not control any of the joint ventures constituting such properties and NOI-cash basis at share does not reflect our legal claim with respect to the economic activity of such joint ventures. We have included this adjustment because 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 operating agreements of the Unconsolidated Properties generally allow each investor to receive cash distributions to the extent there is available cash from operations. The amount of cash each investor receives is based upon specific provisions of each operating agreement and varies depending on certain factors including the amount of capital contributed by each investor and whether any investors are entitled to preferential distributions.
The Company also considers NOI-cash basis and NOI-cash basis at share 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-cash basis and NOI-cash basis at share should only be used as an alternative measure of the Company’s financial performance.
- 35 -
Reconciliation of Non-GAAP Financial Measures to GAAP Financial Measures
Neither NOI-cash basis nor NOI-cash basis at share 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-cash basis and NOI-cash basis at share to GAAP net loss for the three and nine months ended September 30, 2024 and 2023 (in thousands):
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
NOI-cash basis and NOI-cash basis at share |
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Net loss |
|
$ |
(21,973 |
) |
|
$ |
(902 |
) |
|
$ |
(142,185 |
) |
|
$ |
(158,595 |
) |
Management and other fee income |
|
|
(352 |
) |
|
|
(523 |
) |
|
|
(450 |
) |
|
|
(1,152 |
) |
Abandoned project costs |
|
|
5,732 |
|
|
|
— |
|
|
|
5,732 |
|
|
|
— |
|
Depreciation and amortization |
|
|
4,377 |
|
|
|
2,913 |
|
|
|
10,860 |
|
|
|
11,628 |
|
General and administrative expenses |
|
|
7,178 |
|
|
|
8,030 |
|
|
|
23,244 |
|
|
|
30,349 |
|
Equity in income (loss) of unconsolidated entities |
|
|
(118 |
) |
|
|
(993 |
) |
|
|
69 |
|
|
|
49,077 |
|
Gain on sale of interest in unconsolidated entities |
|
|
— |
|
|
|
916 |
|
|
|
— |
|
|
|
(6,407 |
) |
Gain on sale of real estate, net |
|
|
(4,184 |
) |
|
|
(18,506 |
) |
|
|
(7,357 |
) |
|
|
(64,386 |
) |
Impairment of real estate assets |
|
|
— |
|
|
|
— |
|
|
|
87,536 |
|
|
|
107,043 |
|
Interest and other income (expense), net |
|
|
872 |
|
|
|
(2,030 |
) |
|
|
(1,268 |
) |
|
|
(17,484 |
) |
Interest expense |
|
|
6,051 |
|
|
|
9,763 |
|
|
|
19,344 |
|
|
|
37,493 |
|
Provision (Benefit) for income taxes |
|
|
87 |
|
|
|
89 |
|
|
|
1,572 |
|
|
|
38 |
|
Straight-line rent |
|
|
5 |
|
|
|
1,504 |
|
|
|
251 |
|
|
|
16,142 |
|
Above/below market rental expense |
|
|
69 |
|
|
|
45 |
|
|
|
145 |
|
|
|
138 |
|
NOI-cash basis |
|
$ |
(2,256 |
) |
|
$ |
306 |
|
|
$ |
(2,507 |
) |
|
$ |
3,884 |
|
Unconsolidated entities |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net operating income of unconsolidated entities |
|
|
1,461 |
|
|
|
3,445 |
|
|
|
4,012 |
|
|
|
6,404 |
|
Straight-line rent |
|
|
(130 |
) |
|
|
(2,629 |
) |
|
|
(451 |
) |
|
|
(3,069 |
) |
Above/below market rental expense |
|
|
(9 |
) |
|
|
(3 |
) |
|
|
(27 |
) |
|
|
(1 |
) |
NOI-cash basis at share |
|
$ |
(934 |
) |
|
$ |
1,119 |
|
|
$ |
1,027 |
|
|
$ |
7,218 |
|
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There were no material changes in the Quantitative and Qualitative Disclosures about Market Risk set forth in our 2023 Annual Report on Form 10-K.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d – 15(e) under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”)). Because of inherent limitations, disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of disclosure controls and procedures are met.
Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were not effective due to the material weaknesses described below.
Notwithstanding the material weaknesses in our internal control over financial reporting, our principal executive officer and principal financial officer have concluded that the unaudited condensed consolidated financial statements included in this Form 10-Q fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States of America.
- 36 -
Material Weaknesses
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.
As previously reported, management identified material weaknesses due to deficiencies in the design and operating effectiveness of our controls over the impairment of investments in real estate and other-than-temporary impairment of equity method investments. The deficiencies related to the identification of impairment indicators. Additionally, as management determined that it had not maintained adequate evidence of the review of information used in the impairment indicator analysis and the fair value of investments in real estate and equity method investments. As further reported, management had identified a deficiency in the operating effectiveness in our review over the calculation of other-than-temporary impairments. These deficiencies contributed to the potential for there to be material errors in our financial statements.
Additionally, as previously reported, management identified a material weakness due to a deficiency in the design of our controls over the accounting for certain non-routine transactions, particularly related to accounting for transactions with joint ventures and certain consulting contracts. For these transactions, Management did not possess the adequate technical capabilities to appropriately assess these non-routine transactions to ensure compliance with accounting principles generally accepted in the United States. This deficiency contributed to the potential for there to be material errors in our financial statements.
Update on Remediation Plan
As previously reported, in response to the material weaknesses, management, with oversight of the Audit Committee began to implement steps to remediate the material weaknesses. While the Company has made progress with the remediation of these material weaknesses, the remediation efforts are ongoing, because additional time is needed to complete the remediation and allow for the internal controls to be tested by management.
However, the material weaknesses discussed above cannot be considered completely remediated until the applicable controls are fully implemented, have operated for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. Accordingly, we will continue to monitor and evaluate the effectiveness of our internal control over financial reporting.
Changes in Internal Controls over Financial Reporting
Other than described above, there were no other changes in internal control over financial reporting that occurred during the quarter ended September 30, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
- 37 -
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The information required by this Item is incorporated by reference to Note 9 of the condensed consolidated financial statements included herein.
On July 1, 2024, a purported shareholder of the Company filed a class action lawsuit in the U.S. District Court for the Southern District of New York, captioned Zhengxu He, Trustee of the He & Fang 2005 Revocable Living Trust v. Seritage Growth Properties, Case No. 1:24:CV:05007, alleging that the Company, the Company’s Chief Executive Officer, and the Company’s Chief Financial Officer violated the federal securities laws. The complaint seeks to bring a class action on behalf of all persons and entities that purchased or otherwise acquired Company securities between July 7, 2022 and May 10, 2024. The complaint alleges that the defendants violated federal securities laws by issuing false, misleading, and/or omissive disclosures concerning the Company’s alleged lack of effective internal controls regarding the identification and review of impairment indicators for investments in real estate and the Company’s value and projected gross proceeds of certain real estate assets. The complaint seeks compensatory damages in an unspecified amount to be proven at trial, an award of reasonable costs and expenses to the plaintiff and class counsel, and such other and further relief as the court may deem just and proper. The Company intends to vigorously defend itself against the allegations.
Item 1A. Risk Factors
Please refer to Item 1A—Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2023 for a description of certain material risks and uncertainties to which our business, financial condition and results of operations are subject. Except as set forth below, there have been no material changes to the risk factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2023.
We have been, and in the future may be, subject to securities class action and other litigation, which may harm our business and results of operations.
We are involved in legal proceedings related to various matters, including securities litigation, and may become involved in other legal proceedings that arise from time to time in the future. For example, as discussed further in Note 9 – Commitments and Contingencies to our unaudited interim condensed consolidated financial statements contained in Part I, Item I, on July 1, 2024, a purported shareholder of the Company filed a class action lawsuit alleging that the Company, the Company’s Chief Executive Officer, and the Company’s Chief Financial Officer violated the federal securities laws by issuing false, misleading, and/or omissive disclosures concerning the Company’s alleged lack of effective internal controls regarding the identification and review of impairment indicators for investments in real estate and the Company’s value and projected gross proceeds of certain real estate assets. The complaint seeks compensatory damages in an unspecified amount to be proven at trial, an award of reasonable costs and expenses to the plaintiff and class counsel, and such other and further relief as the court may deem just and proper. The Company intends to vigorously defend itself against the allegations but there can be no assurance as of outcome. An unfavorable outcome in this litigation and other legal proceedings may have a material effect on the consolidated financial position, results of operations, cash flows or liquidity of the Company.
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
- 38 -
Item 6. Exhibits
Exhibit No. |
|
Description |
|
SEC Document Reference |
|
|
|
|
|
31.1 |
|
|
Filed herewith. |
|
|
|
|
|
|
31.2 |
|
|
Filed herewith. |
|
|
|
|
|
|
32.1 |
|
|
Furnished herewith. |
|
|
|
|
|
|
32.2 |
|
|
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. |
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Filed herewith. |
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101.SCH |
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Inline XBRL Taxonomy Extension Schema With Embedded Linkbase Documents |
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Filed herewith. |
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104 |
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Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
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Filed herewith. |
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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.
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SERITAGE GROWTH PROPERTIES |
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Dated: November 12, 2024 |
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/s/ Andrea Olshan |
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By: |
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Andrea Olshan |
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President and Chief Executive Officer (Principal Executive Officer) |
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Dated: November 12, 2024 |
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/s/ John Garilli |
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By: |
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John Garilli |
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Interim Chief Financial Officer (Principal Financial and Accounting Officer) |
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Exhibit 31.1
CERTIFICATION
I, Andrea Olshan, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Seritage Growth Properties;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
/s/ Andrea Olshan |
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Date: November 12, 2024 |
Andrea Olshan |
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President and Chief Executive Officer (Principal Executive Officer) |
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Exhibit 31.2
CERTIFICATION
I, John Garilli, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Seritage Growth Properties;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
/s/ John Garilli |
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Date: November 12, 2024 |
John Garilli |
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Interim Chief Financial Officer (Principal Financial and Accounting Officer) |
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Exhibit 32.1
CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)
In connection with the Quarterly Report of Seritage Growth Properties, a Maryland real estate investment trust (the “Company”), on Form 10-Q for the quarter ended September 30, 2024 as filed with the Securities and Exchange Commission (the “Report”), I, Andrea Olshan, President and Chief Executive Officer of the Company, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Andrea Olshan |
Andrea Olshan President and Chief Executive Officer (Principal Executive Officer) November 12, 2024 |
A signed original of this written statement required by Section 906 has been provided to Seritage Growth Properties and will be retained by Seritage Growth Properties and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 32.2
CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)
In connection with the Quarterly Report of Seritage Growth Properties, a Maryland real estate investment trust (the “Company”), on Form 10-Q for the quarter ended September 30, 2024 as filed with the Securities and Exchange Commission (the “Report”), I, John Garilli, Interim Chief Financial Officer of the Company, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ John Garilli |
John Garilli Interim Chief Financial Officer (Principal Financial and Accounting Officer) November 12, 2024 |
A signed original of this written statement required by Section 906 has been provided to Seritage Growth Properties and will be retained by Seritage Growth Properties and furnished to the Securities and Exchange Commission or its staff upon request.