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
As of November 3, 2023, the registrant had the following common shares outstanding:
Class |
Shares Outstanding |
Class A common shares of beneficial interest, par value $0.01 per share |
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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, 2023
TABLE OF CONTENTS
PART I. |
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Page |
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Item 1. |
3 |
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Condensed Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022 |
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4 |
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5 |
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6 |
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8 |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
26 |
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Item 3. |
37 |
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Item 4. |
37 |
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PART II. |
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Item 1. |
38 |
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Item 1A. |
38 |
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Item 2. |
Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities |
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. |
40 |
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41 |
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, 2023 |
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December 31, 2022 |
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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, net |
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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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( |
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( |
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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, 2023, 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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Three Months Ended |
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Nine Months Ended |
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2023 |
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2022 |
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2023 |
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2022 |
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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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Real estate taxes |
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Depreciation and amortization |
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General and administrative |
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Litigation settlement |
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— |
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— |
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Total expenses |
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Gain on sale of real estate, net |
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(Loss) gain 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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( |
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Interest and other income |
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( |
) |
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( |
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Interest expense |
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( |
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( |
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( |
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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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( |
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Provision for income taxes |
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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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Net loss attributable to non-controlling interests |
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— |
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— |
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Net loss attributable to Seritage |
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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 shareholders |
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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, 2022 |
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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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OP Units exchanges ( |
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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, 2022 |
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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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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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( |
) |
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 joint venture |
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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 joint ventures |
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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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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, 2022 |
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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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( |
) |
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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— |
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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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OP Units exchanges ( |
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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, 2022 |
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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, 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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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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( |
) |
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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( |
) |
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 joint ventures |
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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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|
$ |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
- 5 -
SERITAGE GROWTH PROPERTIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, amounts in thousands)
|
|
Nine Months Ended September 30, |
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|||||
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|
2023 |
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|
2022 |
|
||
CASH FLOW FROM OPERATING ACTIVITIES |
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Net loss |
|
$ |
( |
) |
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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) loss on sale of interest in 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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Amortization of above and below market leases, net |
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Straight-line rent adjustment |
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( |
) |
|
Interest on sale-leaseback financing obligations |
|
|
— |
|
|
|
|
|
Litigation settlement |
|
|
— |
|
|
|
|
|
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 |
|
|
( |
) |
|
|
( |
) |
Distributions from unconsolidated entities |
|
|
— |
|
|
|
|
|
Net proceeds from sale of real estate |
|
|
|
|
|
|
||
Net proceeds from disposition of interest in unconsolidated entities |
|
|
|
|
|
|
||
Development of real estate |
|
|
( |
) |
|
|
( |
) |
Net cash provided by investing activities |
|
|
|
|
|
|
||
CASH FLOW FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
||
Repayment of term loan |
|
|
( |
) |
|
|
( |
) |
Repayment of sales-leaseback financing obligations |
|
|
— |
|
|
|
( |
) |
Preferred dividends paid |
|
|
( |
) |
|
|
( |
) |
Contributions from noncontrolling interests in to consolidated VIEs |
|
|
|
|
|
— |
|
|
Net cash used in financing activities |
|
|
( |
) |
|
|
( |
) |
Net (decrease) and increase 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, |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
RECONCILIATION OF CASH AND CASH EQUIVALENTS AND RESTRICTED CASH |
|
|
|
|
|
|
||
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, |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
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, 2023, 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. There can be no assurance that the review process will result in any transaction or that the Company will be successful in fully executing the Plan of Sale.
On March 31, 2022, the Company announced that its Board of Trustees, with the recommendation of the Special Committee, approved a plan to terminate the Company’s REIT status and become a taxable C Corporation, effective for the year ended December 31, 2022. As a result, the Company is no longer required to operate under REIT rules, including the requirement to distribute at least
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, 2023, Mr. Lampert owns approximately
- 8 -
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 process remains ongoing as the Company executes the Plan of Sale. There can be no assurance that the review process will result in any transaction or that the Company will be successful in fully executing on the Plan of Sale.
Liquidity
The Company’s primary uses of cash include the payment of property operating and other expenses, including general and administrative expenses and debt service (collectively, “Obligations”), and certain development expenditures. Property rental income, which is the 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, 2023 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, cash on hand, and sales of Consolidated and Unconsolidated Properties. During the nine months ended September 30, 2023, 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. Management has determined that it is probable its plans, as described under Liquidity, will be effectively implemented within one year after the date the financial statements are issued and that these actions will provide the necessary cash flows to fund the Company’s obligations and development expenditures for the one-year period.
As the outstanding balance of the Term Loan Facility is not due within the 12 month period subsequent to the date that the financial statements are issued, the Company’s Term Loan Facility is not factored into the Company’s analysis as a current obligation.
The anticipated proceeds from the sales of assets under contract of $
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, 2022. Certain footnote disclosures which would substantially duplicate those contained in our Annual Report have been condensed or omitted from this quarterly report. In the opinion of management, all adjustments necessary for a fair presentation (which include only normal recurring adjustments) have been included in this quarterly report. Operating results for the three and nine months ended September 30, 2023 may not be indicative of the results that may be expected for any other interim period or for the year ending December 31, 2023. Capitalized terms used, but not defined in this quarterly report, have the same meanings as set forth in our Annual Report.
The accompanying condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The condensed consolidated financial statements include the accounts of the Company, the Operating Partnership, each of their 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, 2023, the Company consolidates
- 9 -
and December 31, 2022, the Company has several investments in unconsolidated VIEs and does not consolidate these entities because the Company is not the primary beneficiary. All intercompany accounts and transactions have been eliminated.
To the extent such variable interests are in entities that are not evaluated under the VIE model, the Company evaluates its interests using the voting interest entity model.
As of September 30, 2023, the Company, and its wholly owned subsidiaries, holds a
Certain prior period amounts, if any, 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.
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 |
The Company amortizes identified intangibles that have finite lives over the period they are expected to contribute directly or indirectly to the future cash flows of the property or business acquired, generally the remaining non-cancelable term of a related lease.
The Company, on a periodic basis, assesses whether there are indicators, including macroeconomic conditions, that the value of the real estate assets may be impaired. If an indicator is identified, management will estimate the real estate asset recoverability based on projected operating cash flows (undiscounted and unleveraged), taking into account the anticipated holding period and capitalization rates, to determine if the undiscounted cash flows are less than a real estate asset’s carrying value. If the carrying value of an asset exceeds the undiscounted cash flows, an analysis is performed to determine the estimated fair value of the real estate asset. In estimating the fair value of an asset, various factors are considered, including expected future operating income, trends and leasing prospects and the effects of demand, competition, and other economic factors such as discount rates and market comparables. Changes in any estimates and/or assumptions, including the anticipated holding period, could have a material impact on the projected operating cash flows. If management determines that the carrying value of a real estate asset is impaired, a loss will be recorded for the excess of its carrying amount over its estimated fair value. The Company recognized
- 10 -
Real Estate Dispositions
When the Company disposes of all or a portion of a real estate asset, it recognizes a gain or loss on sale of real estate as the difference between the carrying value and consideration received. Consideration consists of cash proceeds received.
The following table summarizes our gain on sale of real estate, net during the three and nine months ended September 30, 2023 and 2022 (in millions):
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
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, 2023,
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.
The Company recorded
Restricted Cash
As of September 30, 2023 and December 31, 2022, respectively, restricted cash represents cash collateral for letters of credit 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
- 11 -
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 recorded an increase to rental income of $
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, construction, 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 -
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, 2023, 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 is 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
The Company has not adopted any Accounting Standards Updates (“ASUs”) issued by the FASB during the three and nine months ended September 30, 2023. Any other recently issued accounting standards or pronouncements not disclosed have been excluded as they either are not applicable to the Company, or they are not expected to have a material effect on the condensed consolidated financial statements of the Company.
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, 2023 and December 31, 2022 (in thousands):
September 30, 2023 |
|
|
|
|
|
|
|
|
|
|||
|
|
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, 2022 |
|
|
|
|
|
|
|
|
|
|||
|
|
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 |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
- 14 -
Amortization of acquired below-market leases, net of acquired above-market leases, resulted in additional rental income of $
|
|
(Above) / below market leases, net |
|
|
Below market ground lease |
|
|
In-place leases |
|
|||
Remainder of 2023 |
|
$ |
|
|
$ |
|
|
$ |
|
|||
2024 |
|
|
|
|
|
|
|
|
|
|||
2025 |
|
|
|
|
|
|
|
|
|
|||
2026 |
|
|
|
|
|
|
|
|
|
|||
2027 |
|
|
|
|
|
|
|
|
|
|||
2028 |
|
|
|
|
|
|
|
|
|
|||
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, 2023, 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 |
|
|
|
|
|
|||||
SI UTC LLC |
|
A separate account advised by |
|
|
|
|
|
|||||
Tech Ridge JV Holding LLC |
|
An affiliate of |
|
|
|
|
— |
|
||||
Landmark Land Holdings, LLC |
|
The Howard Hughes Corporation and Foulger-Pratt |
|
|
|
|
— |
|
||||
|
|
|
|
|
|
|
|
|
|
|
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.
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.
- 15 -
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, 2023 |
|
|||||
Unconsolidated Entities |
|
Contribution Date |
|
Contribution Value |
|
|
Gain (Loss) |
|
||
2019 |
|
|
|
|
|
|
|
|
||
Tech Ridge JV (1) |
|
|
$ |
|
|
$ |
|
The following tables present combined condensed financial data for the Company’s unconsolidated entities (in thousands):
|
|
September 30, 2023 |
|
|
December 31, 2022 |
|
||
ASSETS |
|
|
|
|
|
|
||
Investment in real estate |
|
|
|
|
|
|
||
Land |
|
$ |
|
|
$ |
|
||
Buildings and improvements |
|
|
|
|
|
|
||
Accumulated depreciation |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
||
Construction in progress |
|
|
|
|
|
|
||
Net investment in real estate |
|
|
|
|
|
|
||
Cash and cash equivalents |
|
|
|
|
|
|
||
Investment in unconsolidated entities |
|
|
- |
|
|
|
|
|
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 (accumulated deficit) |
|
|
( |
) |
|
|
( |
) |
Total members' interest |
|
|
|
|
|
|
||
Total liabilities and members' interest |
|
$ |
|
|
$ |
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
Total revenue |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Property operating expenses |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Depreciation and amortization |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Operating loss |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Other expenses |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Gains (losses) and (impairments) |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Net loss |
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
Equity in loss of unconsolidated |
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
- 16 -
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. In conjunction with the Plan of Sale, the Company recognized a change in plan to reduce the holding periods of all its investments in unconsolidated entities, which triggered the need for a quarterly impairment analysis pursuant to ASC 323, Equity Method and Joint Ventures. The Company utilizes appraisals and third-party prepared fair value estimates as well as negotiated offers to sell the investments for the impairment analysis. As a result of the Company’s analysis, other-than-temporary impairment of $
During the three and nine months ended September 30, 2023, the Company sold its interest in
During the three months ended September 30, 2023, the Company did
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, 2023 and 2022, the Company recorded management and related fees of $
Note 5 – Leases
Lessor Disclosures
Future minimum rental receipts, excluding variable payments and tenant reimbursements of expenses, under non-cancelable operating leases executed as of September 30, 2023 are approximately as follows:
(in thousands) |
|
September 30, 2023 |
|
|
Remainder of 2023 |
|
$ |
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
2027 |
|
|
|
|
2028 |
|
|
|
|
Thereafter |
|
|
|
|
|
$ |
|
- 17 -
The components of lease revenues for the three and nine months ended September 30, 2023 and 2022 were as follows:
(in thousands) |
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
Fixed rental income |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Variable rental income |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
Lessee Disclosures
The Company has
The Company recorded rent expense related to leased corporate office space of $
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, 2023:
|
|
September 30, 2023 |
|
|
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 $
- 18 -
Partnership of any deferred interest permitted under the amendment to the Term Loan Amendment as further described below. As of September 30, 2023, the Company has not yet achieved the requirements to access the Incremental Funding Facility.
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 three locations.
The Term Loan Facility includes certain financial metrics to govern springing collateral requirements and certain covenant exceptions set forth in the Term Loan Agreement, including: (i) a total fixed charge coverage ratio of not less than
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, 2023, the Company was not in compliance with certain of the financial metrics described above. As a result, the Company was previously required to receive the consent of Berkshire Hathaway to dispose of assets via sale or joint venture. The Third Term Loan Amendment (defined below) executed on June 16, 2022 provides exceptions to this requirement and allows the Company to dispose of assets without Berkshire Hathaway's consent as further detailed below. There are no other impacts from non-compliance with financial metrics.
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.
- 19 -
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, 2023, the Company has paid down a total of $
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 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, 2023. The Company will evaluate this position each quarter as verifiable positive evidence becomes available, such as the execution of asset sales, to support the future utilization of the deferred tax assets.
- 20 -
Note 8 – Fair Value Measurements
ASC 820, Fair Value Measurement, defines fair value and establishes a framework for measuring fair value. The objective of fair value is to determine the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (the “exit price”). ASC 820 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three levels:
Level 1 - quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities
Level 2 - observable prices based on inputs not quoted in active markets, but corroborated by market data
Level 3 - unobservable inputs used when little or no market data is available
The fair value hierarchy gives the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs. In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company also considers counterparty credit risk in its assessment of fair value.
Assets Measured at Fair Value on a Nonrecurring Basis
The following tables present the Company's assets measured at fair value on a non-recurring basis as of September 30, 2023 and December 31, 2022, aggregated by the level in the fair value hierarchy within which those measurements fall:
|
|
Balance |
|
|
Fair Value Measurements Using |
|
||||||||||
Description (1) |
|
September 30, 2023 |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
||||
Impaired real estate assets |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Impaired right-of-use assets |
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
||
Other-than-temporary impaired investments in unconsolidated entities |
|
|
|
|
|
|
|
|
|
|
|
- |
|
(1)
|
|
Balance |
|
|
Fair Value Measurements Using |
|
||||||||||
Description (1) |
|
December 31, 2022 |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
||||
Impaired real estate assets |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Other-than-temporary impaired investments in unconsolidated entities |
|
|
|
|
|
|
|
|
|
|
|
|
(1)
In accordance with ASC 360-10, Property, Plant and Equipment, the Company reviews the carrying value of its real estate assets at each reporting period. The Company did
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 did
The fair value estimates used to determine the impairment charges for consolidated and unconsolidated properties were determined primarily by discounted cash flow analyses, market comparable data, third-party appraisals/valuations and/or offers received, as applicable. The cash flows utilized in such analyses are comprised of unobservable inputs which include, among other things, estimated revenue and expense growth rates, discount rates and capitalization rates based upon market conditions and future expectations. The most significant unobservable inputs utilized in determining the fair value of these assets are capitalization rates and discount rates which were between
- 21 -
fair value hierarchy. We consider fair values based upon the agreed-upon contract sales price to be classified within Level 1 of the fair value hierarchy.
Financial Assets and Liabilities not Measured at Fair Value
Financial assets and liabilities that are not measured at fair value on the condensed consolidated balance sheets include cash equivalents, restricted cash and 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, 2023 and December 31, 2022, 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.
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.
Beginning in 2019, the Company had been in litigation related to the bankruptcy of Sears Holdings (the “Litigation”). On September 2, 2022, the United States Bankruptcy Court for the Southern District of New York entered an order approving a settlement amongst the parties to the Litigation and, on October 18, 2022, the Litigation was dismissed.
The Company made a settlement payment of $
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. 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.
- 22 -
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 $
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.
In addition, as of September 30, 2023 and December 31, 2022, respectively, the Company had incurred
The Company has certain put rights on properties held by the Unconsolidated Entities, which may require the Company’s partner to buy out the Company’s investment in such properties. During the nine months ended September 30, 2023, the Company exercised its 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, 2023,
Class B Non-Economic Common Shares
As of September 30, 2023, there were
Series A Preferred Shares
In December 2017, the Company issued
- 23 -
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 2023 or 2022. 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.
The Company’s Board of Trustees declared the following dividends on preferred shares during 2023 and 2022:
|
|
|
|
|
|
Series A |
|
|
Declaration Date |
|
Record Date |
|
Payment Date |
|
Preferred Share |
|
|
2023 |
|
|
|
|
|
|
|
|
|
|
16, 2024 |
|
$ |
|
|||
|
|
|
|
|
||||
|
|
|
|
|
||||
|
|
|
|
|
||||
2022 |
|
|
|
|
|
|
|
|
|
|
|
$ |
|
||||
|
|
|
|
|
||||
|
|
|
|
|
||||
|
|
|
|
|
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 September 30, |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
Numerator - Basic and Diluted |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net loss |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Net loss attributable to non-controlling interests |
|
|
— |
|
|
|
|
|
|
- |
|
|
|
|
||
Preferred dividends |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Net loss attributable to common shareholders - Basic |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
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 |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
- 24 -
No adjustments were made to the numerator for the three and nine months ended September 30, 2023 and 2022, respectively, because the Company generated a net loss. During periods of net loss, undistributed losses are not allocated to the participating securities as they are not required to absorb losses.
No adjustments were made to the denominator for the three and nine months ended September 30, 2023 and 2022, respectively, because (i) the inclusion of outstanding non-vested restricted shares would have had an anti-dilutive effect and (ii) including the non-controlling interest in the Operating Partnership would also require that the share of the Operating Partnership loss attributable to such interests be added back to net loss, therefore, resulting in no effect on earnings per share.
As of September 30, 2023 and December 31, 2022, there were
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, 2023:
|
|
|
|
|
|
|
||
|
|
Nine Months Ended September 30, 2023 |
|
|||||
|
|
|
|
|
Weighted- |
|
||
|
|
|
|
|
Average Grant |
|
||
|
|
Shares |
|
|
Date Fair Value |
|
||
Unvested restricted shares at beginning of period |
|
|
|
|
$ |
|
||
Restricted shares vested |
|
|
( |
) |
|
|
|
|
Restricted shares forfeited |
|
|
( |
) |
|
|
|
|
Unvested restricted shares at end of period |
|
|
|
|
$ |
|
The Company recognized $
As of September 30, 2023, there were approximately $
- 25 -
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Certain statements contained herein constitute forward-looking statements as such term is defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are not guarantees of future performance. They represent our intentions, plans, expectations and beliefs and are subject to numerous assumptions, risks and uncertainties. Our future results, financial condition and business may differ materially from those expressed in these forward-looking statements. You can find many of these statements by looking for words such as “approximates,” “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “projects,” “would,” “may” or other similar expressions in this Quarterly Report on Form 10-Q. Many of the factors that will determine the outcome of these and our other forward-looking statements are beyond our ability to control or predict. For further discussion of factors that could materially affect the outcome of our forward-looking statements, see “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022. For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. You are cautioned not to place undue reliance on our forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. We do not undertake any obligation to release publicly any revisions to our forward-looking statements to reflect events or circumstances occurring after the date of this Quarterly Report on Form 10-Q. The following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto included in Part 1 of this Quarterly Report.
Overview
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, 2023, the Company’s portfolio consisted of interests in 42 properties comprised of approximately 5.6 million square feet of gross leasable area (“GLA”) or build-to-suit leased area, approximately 126 acres held for or under development until time of sale and approximately 2.9 million square feet or approximately 259 acres to be disposed of in its current state. The portfolio consists of approximately 4.3 million square feet of GLA held by 33 consolidated properties (such properties, the “Consolidated Properties”) and 1.2 million square feet of GLA 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 has commenced a process to review a broad range of strategic alternatives to enhance shareholder value. The Board of Trustees created a special committee of the Board of Trustees (the “Special Committee”) to oversee the process. The Special Committee has retained a financial advisor. The Company sought a shareholder vote to approve a proposed plan of sale of our assets and dissolution (the “Plan of Sale”) that would allow our board to sell all of our assets, distribute the net proceeds to shareholders and dissolve the Company.
The 2022 Annual Meeting of Shareholders occurred on October 24, 2022, at which time the Plan of Sale was approved by the shareholders, following our filing of a final proxy statement with the SEC on September 14, 2022. See Note 1 – Organization of the Notes to the 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. There can be no assurance that the review process will result in any transaction or that the Company will be successful in fully executing on the Plan of Sale.
Impairment of Real Estate Assets and Investments in Unconsolidated Entities
In the first quarter of 2022, we announced a Review of Strategic Alternatives and during the second quarter determined that the best plan for all assets is to pursue sales. As a result of the foregoing, the Company’s anticipated holding periods with respect to certain assets has changed. This affected our view of recoverability of the carrying value of those assets over their respective holding periods and during the year ended December 31, 2022, $126.9 million of impairment was recorded. Due to increasing development and construction costs, deteriorating market conditions and, in certain instances excluding Aventura, agreeing to sell below carrying value, we have recognized $107.0 million of impairment losses during the nine months ended September 30, 2023, which are included in impairment on real estate assets within the condensed consolidated statements of operations. We recognized $12.7 million of other-than-temporary impairment losses to our investments in unconsolidated entities during the nine months ended September 30, 2023. No impairment losses or other-than-temporary impairment losses in investments in unconsolidated entities were recorded during the three months ended September 30, 2023. We continue to evaluate our portfolio, including our development plans and offers received, which may result in additional impairments in future periods on our consolidated properties and investments in unconsolidated entities.
- 26 -
REIT Election
On March 31, 2022, the 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. Additionally, we have identified various sites that we believe have the demand and demographic profile to support other uses such as residential, biotechnology, office and others. Given our fee ownership of these properties and control over parking lots and outparcels, we believe that these sites are well positioned for such value creation opportunities. We additionally look to further lease our built retail footprint and densify any excess parking land through the addition of triple net (“NNN”) pad sites, which are standalone sites upon which a customized space can be built or leased for a tenant, to the extent that we believe these actions would be accretive to shareholder value.
The Company continues to assess the best use for all sites within its portfolio, including residential, retail and converting land area to pad sites. In order to achieve its objective, the Company intends to execute the following strategies:
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.
- 27 -
Comparison of the Three Months Ended September 30, 2023 to the Three Months Ended September 30, 2022
The following table presents selected data on comparative results from the Company’s condensed consolidated statements of operations for the three months ended September 30, 2023, as compared to the three months ended September 30, 2022 (in thousands):
|
|
Three Months Ended September 30, |
|
|
|
|
||||||
|
|
2023 |
|
|
2022 |
|
|
$ Change |
|
|||
Revenue |
|
|
|
|
|
|
|
|
|
|||
Rental income |
|
$ |
4,525 |
|
|
$ |
23,253 |
|
|
$ |
(18,728 |
) |
Expenses |
|
|
|
|
|
|
|
|
|
|||
Property operating |
|
|
(4,564 |
) |
|
|
(9,700 |
) |
|
|
5,136 |
|
Real estate taxes |
|
|
(1,204 |
) |
|
|
(6,483 |
) |
|
|
5,279 |
|
Depreciation and amortization |
|
|
(2,913 |
) |
|
|
(9,169 |
) |
|
|
6,256 |
|
General and administrative |
|
|
(8,030 |
) |
|
|
(10,811 |
) |
|
|
2,781 |
|
Litigation settlement |
|
|
— |
|
|
|
(533 |
) |
|
|
533 |
|
Gain on sale of real estate, net |
|
|
18,506 |
|
|
|
45,433 |
|
|
|
(26,927 |
) |
Loss on sale of interest in unconsolidated entities |
|
|
(916 |
) |
|
|
(139 |
) |
|
|
(777 |
) |
Impairment of real estate assets |
|
|
— |
|
|
|
(10,275 |
) |
|
|
10,275 |
|
Equity in income (loss) of unconsolidated entities |
|
|
993 |
|
|
|
(2,275 |
) |
|
|
3,268 |
|
Interest and other income |
|
|
2,030 |
|
|
|
(1,047 |
) |
|
|
3,077 |
|
Interest expense |
|
|
(9,763 |
) |
|
|
(21,916 |
) |
|
|
12,153 |
|
Rental Income
The following table presents the results for rental income for the three months ended September 30, 2023, as compared to the corresponding period in 2022 (in thousands):
|
|
Three Months Ended September 30, |
|
|
Three Months Ended September 30, |
|
|
|
|
|||||||||||
|
|
2023 |
|
|
2022 |
|
|
|
|
|||||||||||
|
|
Rental Income |
|
|
% of Total |
|
|
Rental Income |
|
|
% of Total |
|
|
$ Change |
|
|||||
In-place retail leases |
|
$ |
6,022 |
|
|
|
133.1 |
% |
|
$ |
26,129 |
|
|
|
112.4 |
% |
|
|
(20,107 |
) |
Straight-line rent (expense) |
|
|
(1,503 |
) |
|
|
(33.2 |
%) |
|
|
(2,873 |
) |
|
|
-12.4 |
% |
|
|
1,370 |
|
Amortization of the above/below market leases |
|
|
6 |
|
|
|
0.1 |
% |
|
|
(3 |
) |
|
|
0.0 |
% |
|
|
9 |
|
Total rental income |
|
$ |
4,525 |
|
|
|
100.0 |
% |
|
$ |
23,253 |
|
|
|
100.0 |
% |
|
$ |
(18,728 |
) |
The decrease of $20.1 million in in-place retail lease rental income during 2023 is primarily due to property sales.
The increase of $1.4 million in straight-line rental income was primarily due to an adjustment recorded during the quarter ended September 30, 2022.
Property Operating Expenses and Real Estate Taxes
The decrease of $5.1 million in property operating expense for the three months ended September 30, 2023 was due primarily to asset sales and partially offset by a decrease in amounts capitalized.
The decrease of $5.3 million in real estate taxes for the three months ended September 30, 2023 was due primarily to asset sales and refunds received during the three months ended September 30, 2023.
Depreciation and Amortization Expenses
The decrease of $6.3 million in depreciation and amortization expenses for the three months ended September 30, 2023 was primarily due to a decrease of $6.3 million in net scheduled depreciation due to property sales.
- 28 -
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 $2.8 million in general and administrative expenses for the three months ended September 30, 2023 was driven by a decrease in legal expenses resulting from settling the outstanding Litigation described below in 2022 as well as a decrease in compensation expenses due to a decrease in employee headcount. This was partially offset by an increase in consulting related expenses utilized to execute the plan of sale.
Gain on Sale of Real Estate, Net
During the three months ended September 30, 2023, the Company sold six properties for aggregate consideration of $62.9 million and recorded a gain totaling $18.5 million, which is included in gain on sale of real estate, net within the condensed consolidated statements of operations.
Loss on Sale of Interest in Unconsolidated Entities
During the three months ended September 30, 2023, the Company sold its interest in three unconsolidated properties and recorded a loss totaling $0.9 million, which is included in loss on sale of interest in unconsolidated entities within the consolidated statements of operations.
Impairment of Real Estate Assets
During the three months ended September 30, 2023, the Company recognized no impairment of real estate assets. During the three months ended September 30, 2022, the Company recognized $10.3 million of impairment losses as a result of the Company's plan to pursue the Plan of Sale, which is included within the condensed consolidated statements of operations..
Equity in Loss of Unconsolidated Entities
The increase of $3.3 million in income (loss) of unconsolidated entities for the three months ended September 30, 2023 was driven by a straight-line rent adjustment of $5.2 million at one unconsolidated entity, which we picked up as our share of $2.6 million compared to recording a $3.1 million other-than-temporary impairment charge against one investment during the three months ended September 30, 2022. In addition, two unconsolidated entities recorded net gains of $3.4 million during the three months ended September 30, 2022, which resulted in us picking up our share of $1.7 million in gains. This impairment arose from the Company’s impairment analysis pursuant to ASC 323, Equity Method and Joint Ventures.
Interest and other income
The increase of $3.1 million of interest and other income is primarily due the Company recognizing miscellaneous expense of $2.2 million in the prior year, relating to historic receivables that the Company deemed to no longer be collectable upon the finalization of the Sears litigation settlement. The Company also recognized greater interest revenue on the Company’s cash accounts.
Interest Expense
The decrease of $12.2 million in interest expense for the three months ended September 30, 2023 was driven by the partial Term Loan Facility pay down totaling $1.2 billion as of September 30, 2023.
- 29 -
Comparison of the Nine Months Ended September 30, 2023 to the Nine Months Ended September 30, 2022
The following table presents selected data on comparative results from the Company’s condensed consolidated statements of operations for the three months ended September 30, 2023, as compared to the three months ended September 30, 2022 (in thousands):
|
|
Nine Months Ended September 30, |
|
|
|
|
||||||
|
|
2023 |
|
|
2022 |
|
|
$ Change |
|
|||
|
|
|
|
|
|
|
|
|
|
|||
Revenue |
|
|
|
|
|
|
|
|
|
|||
Rental income |
|
$ |
10,459 |
|
|
$ |
81,755 |
|
|
$ |
(71,296 |
) |
Expenses |
|
|
|
|
|
|
|
|
|
|||
Property operating |
|
|
(17,945 |
) |
|
|
(31,535 |
) |
|
|
13,590 |
|
Real estate taxes |
|
|
(4,910 |
) |
|
|
(21,056 |
) |
|
|
16,146 |
|
Depreciation and amortization |
|
|
(11,628 |
) |
|
|
(31,772 |
) |
|
|
20,144 |
|
General and administrative |
|
|
(30,349 |
) |
|
|
(30,996 |
) |
|
|
647 |
|
Litigation settlement |
|
|
— |
|
|
|
(35,533 |
) |
|
|
35,533 |
|
Gain on sale of real estate, net |
|
|
64,386 |
|
|
|
112,449 |
|
|
|
(48,063 |
) |
Gain (loss) on sale of interest in unconsolidated entities |
|
|
6,407 |
|
|
|
(139 |
) |
|
|
6,546 |
|
Impairment of real estate assets |
|
|
(107,043 |
) |
|
|
(120,609 |
) |
|
|
13,566 |
|
Equity in loss of unconsolidated entities |
|
|
(49,077 |
) |
|
|
(69,071 |
) |
|
|
19,994 |
|
Interest and other income |
|
|
17,484 |
|
|
|
(937 |
) |
|
|
18,421 |
|
Interest expense |
|
|
(37,493 |
) |
|
|
(67,167 |
) |
|
|
29,674 |
|
Rental Income
The following table presents the results for rental income for the nine months ended September 30, 2023, as compared to the corresponding period in 2022 (in thousands):
|
|
Nine Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
|
|||||||||||
|
|
2023 |
|
|
2022 |
|
|
|
|
|||||||||||
|
|
Rental Income |
|
|
% of Total |
|
|
Rental Income |
|
|
% of Total |
|
|
$ Change |
|
|||||
In-place retail leases |
|
$ |
26,586 |
|
|
|
254.2 |
% |
|
$ |
80,331 |
|
|
|
98.3 |
% |
|
$ |
(53,745 |
) |
Straight-line rent (expense) income |
|
|
(16,142 |
) |
|
|
-154.3 |
% |
|
|
1,447 |
|
|
|
1.7 |
% |
|
|
(17,589 |
) |
Amortization of above/below market leases |
|
|
15 |
|
|
|
0.0 |
% |
|
|
(23 |
) |
|
|
0.0 |
% |
|
|
38 |
|
Total rental income |
|
$ |
10,459 |
|
|
|
100.0 |
% |
|
$ |
81,755 |
|
|
|
100.0 |
% |
|
$ |
(71,296 |
) |
The decrease of $53.7 million in in-place retail lease rental income during 2023 is primarily due to property sales.
The decrease of $17.6 million in straight-line rental income was primarily due to a reversal of $16.3 million of straight-line rent due to property sales.
Property Operating Expenses and Real Estate Taxes
The decrease of $13.6 million in property operating expense for the nine months ended September 30, 2023 was due primarily to asset sales and partially offset by a decrease in amounts capitalized.
The decrease of $16.1 million in real estate taxes for the nine months ended September 30, 2023 was due primarily to asset sales and refunds received during the nine months ended September 30, 2023.
Depreciation and Amortization Expenses
The decrease of $20.1 million in depreciation and amortization expenses for the nine months ended September 30, 2023 was primarily due to a decrease of $21.7 million in net scheduled depreciation due to property sales.
- 30 -
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 $0.6 million in general and administrative expenses for the nine months ended September 30, 2023 was primarily driven by decreases in legal expenses primarily due to the Company settling outstanding litigation in 2022, and compensation expenses due to a decrease in employee headcount. This was partially offset by increases in consulting expenses utilized to execute the plan of sale, and employee bonus expenses to retain employees.
Gain on Sale of Real Estate, Net
During the nine months ended September 30, 2023, the Company sold 49 properties for aggregate consideration of $602.4 million and recorded a gain totaling $64.4 million, which is included in loss 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 30, 2023, the Company sold its interest in eight unconsolidated properties, and recorded a gain totaling $6.4 million, which is included in gain on sale of interest in unconsolidated entities within the consolidated statements of operations.
Impairment of Real Estate Assets
During the nine months ended September 30, 2023, the Company recognized $107.0 million in impairment of real estate assets, which is included within the condensed consolidated statements of operations. This impairment arose primarily from recognizing $101.5 million of impairment on the Company's development property in Aventura, FL due to continued increasing development and construction costs and deteriorating market conditions, which triggered the need for an impairment analysis pursuant to ASC 360, Property, Plant and Equipment. The Company determined the fair value of this property by applying a discount to projected cash flows. During the nine months ended September 30, 2022, the Company recognized $120.6 million of impairment losses as a result of the Company's plan to pursue the Plan of Sale.
Equity in Loss of Unconsolidated Entities
The decrease of $20.0 million in loss in the unconsolidated entities for the nine months ended September 30, 2023 was driven by a $70.8 million impairment charge recorded in one investment resulting in the Company picking up their share of this impairment at $35.4 million and a $12.7 million other-than-temporary impairment charge recorded against two investments compared to a $61.1 million impairment charge recorded in two underlying properties, resulting in the Company picking up its share of impairment totaling $30.6 million plus other-than-temporary impairment recorded to our investments of $35.6 million during the nine months ended September 30, 2022. These impairments arose from the Company’s impairment analysis pursuant to ASC 323, Equity Method and Joint Ventures.
Interest and other income
The increase of $18.4 million of interest and other income is primarily due to the receipt of $11.6 million relating to the settlement with the D&O Insurers, greater interest received on the Company's cash accounts and the Company recognizing miscellaneous expense of $2.2 million in the prior year, relating to historic receivables that the Company deemed to no longer be collectable upon the finalization of the Sears litigation settlement.
Interest Expense
The decrease of $29.7 million in interest expense for the nine months ended September 30, 2023 was driven by the partial Term Loan Facility pay down totaling $1.2 billion as of September 30, 2023.
Liquidity and Capital Resources
Our primary uses of cash include the payment of property operating and other expenses, including general and administrative expenses and debt service (collectively, “Obligations”), and certain development expenditures. Property rental income, which is the Company’s primary source of operating cash flow, did not fully fund obligations incurred during the nine months ended September 30, 2023 and the Company recorded net operating cash outflows of $42.0 million. Additionally, the Company generated investing cash inflows of $645.6 million during the nine months ended September 30, 2023, which were driven by asset sales and partially offset by development expenditures.
- 31 -
Obligations are projected to continue to exceed property rental income and we expect to fund such obligations and any development expenditures with cash on hand and a combination of capital sources including, but not limited to the following, subject to any approvals that may be required under the Term Loan Agreement:
As previously disclosed, on May 5, 2020, the Operating Partnership and Berkshire Hathaway entered into an amendment (the “Term Loan Amendment”) to the Term Loan Agreement by and among the Operating Partnership and Berkshire Hathaway as initial lender and administrative agent that permits the deferral of payment of interest under the Term Loan Agreement if, as of the first day of each applicable month, (x) the amount of unrestricted and unencumbered (other than liens created under the Term Loan Agreement) cash on hand of the Operating Partnership and its subsidiaries, minus (y) the aggregate amount of anticipated necessary expenditures for such period (such sum, “Available Cash”) is equal to or less than $30.0 million. In such instances, for each interest period, the Operating Partnership is obligated to make payments of interest in an amount equal to the difference between (i) Available Cash and (ii) $20.0 million (provided that such payment shall not exceed the amount of current interest otherwise due under the Term Loan Agreement). Any deferred interest shall accrue interest at 2.0% in excess of the then applicable interest rate and shall be due and payable on July 31, 2023; provided, that the Operating Partnership is required to pay any deferred interest from Available Cash in excess of $30.0 million (unless otherwise agreed to by the administrative agent under the Term Loan Agreement in its sole discretion). In addition, repayment of any outstanding deferred interest is a condition to any borrowings under the $400.0 million incremental funding facility under the Term Loan Agreement (the “Incremental Funding Facility”).
Additionally, the Term Loan Amendment provides that the administrative agent and the lenders express their continued support for asset dispositions, subject to the administrative agent’s right to approve the terms of individual transactions due to the occurrence of a Financial Metric Trigger Event, as such term is defined under the Term Loan Agreement. 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.
- 32 -
During the nine months ended September 30, 2023, we have repaid $630 million against the principal of the Term Loan Facility. Our outstanding balance as of September 30, 2023, is $400 million. Subsequent to September 30, 2023, the Company made an additional $40 million principal prepayment reducing the balance of the Term Loan Facility to $360 million.
See Note 1 – Organization of the Notes to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for a discussion of liquidity and going concern.
Cash Flows for the Nine Months Ended September 30, 2023 Compared to the Nine Months Ended September 30, 2022
The following table summarizes the Company’s cash flow activities for the nine months ended September 30, 2023 and 2022, respectively (in thousands):
|
|
Nine Months Ended September 30, |
|
|
|
|
||||||
|
|
2023 |
|
|
2022 |
|
|
$ Change |
|
|||
Net cash used in operating activities |
|
$ |
(42,021 |
) |
|
$ |
(73,547 |
) |
|
$ |
31,526 |
|
Net cash provided by investing activities |
|
|
645,564 |
|
|
|
296,127 |
|
|
|
349,437 |
|
Net cash used in financing activities |
|
|
(633,634 |
) |
|
|
(195,745 |
) |
|
|
(437,889 |
) |
Cash Flows from Operating Activities
Significant components of net cash used in operating activities include:
In 2023, a decrease in rental income and a decrease to accounts payable, accrued expenses and other liabilities, partially offset by a decrease to tenant and other receivables.
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:
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, 2023 and 2022, respectively.
The Company’s Board of Trustees declared the following dividends on preferred shares during 2023 and 2022:
|
|
|
|
|
|
Series A |
|
|
Declaration Date |
|
Record Date |
|
Payment Date |
|
Preferred Share |
|
|
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 |
|
2022 |
|
|
|
|
|
|
|
|
November 1 |
|
December 30 |
|
January 16, 2023 |
|
$ |
0.43750 |
|
July 26 |
|
September 30 |
|
October 17 |
|
|
0.43750 |
|
April 26 |
|
June 30 |
|
July 15 |
|
|
0.43750 |
|
February 16 |
|
March 31 |
|
April 15 |
|
|
0.43750 |
|
The Board of Trustees will determine future distributions following the pay down of the Term Loan Facility.
- 33 -
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, 2023 and December 31, 2022, 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, 2022.
Capital Expenditures
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, as we continue to advance our business plans, including our previously announced projects.
During the three and nine months ended September 30, 2022, the Company invested $25.0 million and $78.1 million, respectively, in our consolidated development and operating properties and an additional $7.0 million and $22.4 million, respectively, into our unconsolidated joint ventures.
During the three and nine months ended September 30, 2023 and 2022, respectively, we incurred no maintenance capital expenditures that were not associated with re-tenanting and redevelopment projects.
Litigation and Other Matters
In accordance with accounting standards regarding loss contingencies, 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.
Beginning in 2019, the Company had been engaged in litigation related to the bankruptcy of Sears Holding (the “Litigation”). On September 2, 2022, the United States Bankruptcy Court for the Southern District of New York entered an order approving a settlement amongst the parties to the Litigation and, on October 18, 2022, the Litigation was dismissed.
We made a settlement payment of $35.5 million based on our contributions to the settlement of the Litigation. This payment is recorded as litigation settlement in the consolidated statements of operations during the year ended December 31, 2022.
On March 2, 2021, we brought a lawsuit in Delaware state court against QBE Insurance Corporation, Endurance American Insurance Company, Allianz Global Risks US Insurance Company and Continental Casualty Company, each of which are D&O insurance providers of the Company (the “D&O Insurers”). Our lawsuit sought, among other things, declaratory relief and money damages as a result of certain of the D&O Insurers refusal to pay certain costs and expenses related to the defense of the Litigation. Any amounts received from the insurers will offset the Seritage Defendants’ contribution. We reached settlement agreements with two of the D&O Insurers for gross proceeds of $12.7 million which is recorded in interest and other income in the consolidated statements of operations during the year ended December 31, 2022. During the nine months ended September 30, 2023, we reached settlement agreements with the other two D&O Insurers for gross proceeds of $11.6 million. We received $11.6 million during the nine months ended September 30, 2023, which is recorded in interest and other income in the consolidated statements of operations.
We are subject, from time to time, to various legal proceedings and claims that arise in the ordinary course of business 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.
- 34 -
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, 2022 in Management’s Discussion and Analysis of Financial Condition and Results of Operations. For the nine months ended September 30, 2023, there were no material changes to these policies.
Non-GAAP Supplemental Financial Measures and Definitions
The Company makes reference to NOI and Total NOI which are financial measures that include adjustments to GAAP.
Net Operating Income (“NOI”) and Total NOI
NOI is defined as income from property operations less property operating expenses. Other real estate companies may use different methodologies for calculating NOI, and accordingly the Company’s depiction of NOI may not be comparable to other real estate companies. The Company believes NOI provides useful information regarding Seritage, its financial condition, and results of operations because it reflects only those income and expense items that are incurred at the property level.
The Company also uses Total NOI, which includes its proportional share of unconsolidated properties. The Company believes this form of presentation offers insights into the financial performance and condition of the Company as a whole given our ownership of unconsolidated properties that are accounted for under GAAP using the equity method.
The Company also considers NOI and Total NOI to be a helpful supplemental measure of its operating performance because it excludes from NOI variable items such as termination fee income, as well as non-cash items such as straight-line rent and amortization of lease intangibles.
Due to the adjustments noted, NOI and Total NOI should only be used as an alternative measure of the Company’s financial performance.
- 35 -
Reconciliation of Non-GAAP Financial Measures to GAAP Financial Measures
Neither NOI nor Total NOI are measures that (i) represent cash flow from operations as defined by GAAP; (ii) are indicative of cash available to fund all cash flow needs, including the ability to make distributions; (iii) are alternatives to cash flow as a measure of liquidity; or (iv) should be considered alternatives to net income (which is determined in accordance with GAAP) for purposes of evaluating the Company’s operating performance. Reconciliations of these measures to the respective GAAP measures we deem most comparable are presented below on a comparative basis for all periods.
The following table reconciles NOI and Total NOI to GAAP net loss for the three and nine months ended September 30, 2023 and 2022 (in thousands):
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
NOI and Total NOI |
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
Net loss |
|
$ |
(902 |
) |
|
$ |
(3,481 |
) |
|
$ |
(158,595 |
) |
|
$ |
(212,551 |
) |
Termination fee income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(369 |
) |
Management and other fee income |
|
|
(523 |
) |
|
|
(248 |
) |
|
|
(1,152 |
) |
|
|
(2,355 |
) |
Depreciation and amortization |
|
|
2,913 |
|
|
|
9,169 |
|
|
|
11,628 |
|
|
|
31,772 |
|
General and administrative expenses |
|
|
8,030 |
|
|
|
10,811 |
|
|
|
30,349 |
|
|
|
30,996 |
|
Litigation settlement |
|
|
— |
|
|
|
533 |
|
|
|
— |
|
|
|
35,533 |
|
Equity in loss of unconsolidated entities |
|
|
(993 |
) |
|
|
2,275 |
|
|
|
49,077 |
|
|
|
69,071 |
|
Loss (gain) on sale of interest in unconsolidated entities |
|
|
916 |
|
|
|
139 |
|
|
|
(6,407 |
) |
|
|
139 |
|
Gain on sale of real estate, net |
|
|
(18,506 |
) |
|
|
(45,433 |
) |
|
|
(64,386 |
) |
|
|
(112,449 |
) |
Impairment of real estate assets |
|
|
— |
|
|
|
10,275 |
|
|
|
107,043 |
|
|
|
120,609 |
|
Interest and other income |
|
|
(2,030 |
) |
|
|
1,047 |
|
|
|
(17,484 |
) |
|
|
937 |
|
Interest expense |
|
|
9,763 |
|
|
|
21,916 |
|
|
|
37,493 |
|
|
|
67,167 |
|
(Benefit) provision for income taxes |
|
|
89 |
|
|
|
67 |
|
|
|
38 |
|
|
|
295 |
|
Straight-line rent |
|
|
1,504 |
|
|
|
2,873 |
|
|
|
16,142 |
|
|
|
(1,447 |
) |
Above/below market rental expense |
|
|
45 |
|
|
|
54 |
|
|
|
138 |
|
|
|
175 |
|
NOI |
|
$ |
306 |
|
|
$ |
9,997 |
|
|
$ |
3,884 |
|
|
$ |
27,523 |
|
Unconsolidated entities |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net operating income of unconsolidated entities |
|
|
3,445 |
|
|
|
2,450 |
|
|
|
6,404 |
|
|
|
6,563 |
|
Straight-line rent |
|
|
(2,629 |
) |
|
|
(305 |
) |
|
|
(3,069 |
) |
|
|
(860 |
) |
Above/below market rental expense |
|
|
(3 |
) |
|
|
8 |
|
|
|
(1 |
) |
|
|
19 |
|
Total NOI |
|
$ |
1,119 |
|
|
$ |
12,150 |
|
|
$ |
7,218 |
|
|
$ |
33,245 |
|
- 36 -
Item 3. Quantitative and Qualitative Disclosure about Market Risk
There were no material changes in the Quantitative and Qualitative Disclosures about Market Risk set forth in our 2022 Annual Report on Form 10-K.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures.
Under the supervision and with the participation of our management, including the principal executive officer and the principal financial officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on this evaluation, our principal executive officer and our principal financial officer concluded that, as of the end of the reporting period covered by this report, our disclosure controls and procedures were not effective due to the material weakness described below.
Notwithstanding the material weaknesses in our internal control over financial reporting, our principal executive officer and principal financial officer have concluded that the unaudited condensed consolidated financial statements included in this Form 10-Q fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States of America.
Material Weakness
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. In the course of preparing our financial statements for the interim period ended June 30, 2023, management identified a material weakness in our internal control over financial reporting that existed due to a deficiency in the design of our control over the identification of impairment indicators for investments in real estate and documentation of evidence of review. The deficiency relates to the failure to identify potential indicators of impairment related to development projects in a timely manner. This deficiency contributed to the potential for there to be material errors in our financial statements.
Remediation Plan
Management is enhancing its internal control over the identification of impairment indicators for investments in real estate to include specific indicators related to development assets. In addition, management is enhancing the documentation of evidence reviewed as part of the control.
The material weakness cannot be considered completely remediated until the applicable control has operated for a sufficient period of time and management has concluded, through testing, that the control is operating effectively.
Changes in Internal Controls.
Other than the remediation efforts described above, there were no other changes in our internal control over financial reporting that occurred during the three months ended September 30, 2023 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.
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, 2022 for a description of certain material risks and uncertainties to which our business, financial condition and results of operations are subject. There have been no material changes to the risk factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2022, except as set forth below.
We have identified a material weakness in our internal control over financial reporting, and our management has concluded that our internal control over financial reporting and disclosure controls and procedures were not effective as of the end of the period covered by this report. While we are working to remediate the identified material weakness, we cannot assure you that additional material weaknesses or significant deficiencies will not occur in the future. If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud. As a result, our stockholders could lose confidence in our financial reporting, which could harm our business and the trading price of our common stock
The Sarbanes-Oxley Act of 2002 requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. As disclosed in this Quarterly Report on Form 10-Q, in the course of preparing our interim financial statements for the quarter ended June 30, 2023, we identified a material weakness in our internal control over financial reporting. The material weakness was due to a deficiency in the design of our control over the identification of impairment indicators for investments in real estate and documentation of evidence of review. The deficiency relates to the failure to identify potential indicators related to development projects in a timely manner, as described in more detail under the heading Part I—Item 4. Controls and Procedures in this Quarterly Report on Form 10-Q. We have commenced efforts to remediate the material weakness as described in more detail under the heading Part I—Item 4. Controls and Procedures in this Quarterly Report on Form 10-Q. The material weakness in our internal control over financial reporting will not be considered remediated until the controls operate for a sufficient period of time and management has concluded, through testing, that these controls operate effectively. If we do not successfully remediate the material weakness, or if other material weaknesses or other deficiencies arise in the future, we may be unable to accurately report our financial results, which could cause our financial results to be materially misstated and require restatement. In such case, we may be unable to maintain compliance with securities law requirements regarding timely filing of periodic reports in addition to applicable stock exchange listing requirements, investors may lose confidence in our financial reporting and our stock price may decline as a result. We cannot assure you that the measures we have taken to date, or any measures we may take in the future, will be sufficient to remediate the control deficiencies that led to a material weakness in our internal control over financial reporting or that they will prevent or avoid potential future material weaknesses. In addition, the Company will continue to evaluate its portfolio, including its development plans and holdings periods, which may result in additional impairments in future periods.
Item 2. Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
- 38 -
- 39 -
Item 6. Exhibits
Exhibit No. |
|
Description |
|
SEC Document Reference |
|||
|
|
|
|
|
|||
10.35 |
|
|
Filed herewith. |
||||
|
|
|
|
|
|||
10.36 |
|
|
Filed herewith. |
||||
|
|
|
|
|
|||
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. |
|
Filed herewith. |
|||
|
|
|
|
|
|||
101.SCH |
|
Inline XBRL Taxonomy Extension Schema Document |
|
Filed herewith. |
|||
|
|
|
|
|
|||
101.CAL |
|
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
|
Filed herewith. |
|||
|
|
|
|
|
|||
101.DEF |
|
Inline XBRL Taxonomy Extension Definition Linkbase Document |
|
Filed herewith. |
|||
|
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|
|||
101.LAB |
|
Inline XBRL Taxonomy Extension Label Linkbase Document |
|
Filed herewith. |
|||
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|
|||
101.PRE |
|
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
|
Filed herewith. |
|||
|
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|
|
|
|||
104 |
|
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
|
Filed herewith. |
Management contract or compensatory plan or arrangement.
- 40 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
SERITAGE GROWTH PROPERTIES |
||
|
|
|
||||
Dated: November 8, 2023 |
|
|
|
/s/ Andrea Olshan |
||
|
|
|
|
By: |
|
Andrea Olshan |
|
|
|
|
President and Chief Executive Officer (Principal Executive Officer) |
||
|
|
|
|
|
||
Dated: November 8, 2023 |
|
|
|
/s/ John Garilli |
||
|
|
|
|
By: |
|
John Garilli |
|
|
|
|
Interim Chief Financial Officer (Principal Financial and Accounting Officer) |
- 41 -