srg-10q_20160930.htm

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

As of October 31, 2016, the registrant had the following common shares outstanding:

	September 30, 2016			December 31, 2015
ASSETS
Investment in real estate
Land	$	840,021		$	840,563
Buildings and improvements		831,269			814,652
Accumulated depreciation		(78,025	)		(29,076	)
		1,593,265			1,626,139
Construction in progress		44,172			13,136
Net investment in real estate		1,637,437			1,639,275
Investment in unconsolidated joint ventures		419,675			427,052
Cash and cash equivalents		90,029			62,867
Restricted cash		81,790			92,475
Tenant and other receivables, net		13,477			9,772
Lease intangible assets, net		505,564			578,795
Prepaid expenses, deferred expenses and other assets, net		12,466			23,123
Total assets	$	2,760,438		$	2,833,359

LIABILITIES AND EQUITY
Liabilities
Mortgage loans payable, net	$	1,165,675		$	1,142,422
Accounts payable, accrued expenses and other liabilities		130,283			120,860
Total liabilities		1,295,958			1,263,282

Commitments and contingencies (Note 10)

Shareholders' Equity
Class A shares $0.01 par value; 100,000,000 shares authorized; 25,822,201 and 24,817,842 shares issued and outstanding as of September 30, 2016 and December 31, 2015, respectively		258			248
Class B shares $0.01 par value; 5,000,000 shares authorized; 1,589,020 shares issued and outstanding as of September 30, 2016 and December 31, 2015		16			16
Class C shares $0.01 par value; 50,000,000 shares authorized; 5,775,735 and 6,773,185 shares issued and outstanding as of September 30, 2016 and December 31, 2015, respectively		58			68
Additional paid-in capital		925,296			924,508
Accumulated deficit		(98,425	)		(38,145	)
Total shareholders' equity		827,203			886,695
Non-controlling interests		637,277			683,382
Total equity		1,464,480			1,570,077
Total liabilities and equity	$	2,760,438		$	2,833,359

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

				July 7, 2015
	Three Months Ended			(date operations commenced) to			Nine Months Ended
	September 30,			September 30,			September 30,
	2016			2015			2016
REVENUE
Rental income	$	45,584		$	41,389		$	136,737
Tenant reimbursements		12,023			12,674			45,741
Total revenue		57,607			54,063			182,478
EXPENSES
Property operating		4,505			2,815			17,176
Real estate taxes		7,965			10,741			31,101
Depreciation and amortization		44,532			32,935			121,365
General and administrative		4,252			5,782			13,104
Litigation charge		19,000			-			19,000
Allowance for doubtful accounts		124			-			269
Acquisition-related expenses		-			18,340			73
Total expenses		80,378			70,613			202,088
Operating income		(22,771	)		(16,550	)		(19,610	)
Equity in income of unconsolidated joint ventures		1,497			2,720			4,495
Interest and other income		77			38			196
Interest expense		(15,931	)		(14,796	)		(47,297	)
Unrealized loss on interest rate cap		(47	)		(2,814	)		(1,898	)
Loss before income taxes		(37,175	)		(31,402	)		(64,114	)
Provision for income taxes		(72	)		(451	)		(412	)
Net loss		(37,247	)		(31,853	)		(64,526	)
Net loss attributable to non-controlling interests		16,145			13,552			27,972
Net loss attributable to common shareholders	$	(21,102	)	$	(18,301	)	$	(36,554	)

Net loss per share attributable to Class A and Class C common shareholders - Basic and diluted	$	(0.67	)	$	(0.58	)	$	(1.16	)

Weighted average Class A and Class C common shares outstanding - Basic and diluted		31,419			31,384			31,414

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

															Additional						Non-
	Class A				Class B				Class C						Paid-In			Accumulated			Controlling			Total
	Shares		Amount		Shares		Amount		Shares			Amount			Capital			Deficit			Interests			Equity
Balance at July 7, 2015 (date operations commenced)		25,584	$	246		1,589	$	16		6,790		$	68		$	923,636		$	-		$	711,991		$	1,635,957

Net loss		-		-		-		-		-			-			-			(18,301	)		(13,552	)		(31,853	)
Dividends and distributions declared ($0.00 per share and unit)		-		-		-		-		-			-			-			-			-			-
Issuance of restricted shares		217		2		-		-		-			-			(2	)		-			-			-
Vesting of restricted share units		-		-		-		-		-			-			-			-			-			-
Stock-based compensation		-		-		-		-		-			-			716			-			-			716
Share class exchanges, net (132,450 common shares)		132		1		-		-		(132	)		(1	)		-			-			-			-

Balance at September 30, 2015		25,933	$	249		1,589	$	16		6,658		$	67		$	924,350		$	(18,301	)	$	698,439		$	1,604,820


Balance at December 31, 2015		24,818	$	248		1,589	$	16		6,773		$	68		$	924,508		$	(38,145	)	$	683,382		$	1,570,077

Net loss		-		-		-		-		-			-			-			(36,554	)		(27,972	)		(64,526	)
Dividends and distributions declared ($0.75 per share and unit)		-		-		-		-		-			-			-			(23,726	)		(18,133	)		(41,859	)
Issuance of restricted shares		-		-		-		-		-			-			-			-			-			-
Vesting of restricted share units		7		0		-		-		-			-			(13	)		-			-			(13	)
Stock-based compensation		-		-		-		-		-			-			801			-			-			801
Share class exchanges, net (997,450 common shares)		997		10		-		-		(997	)		(10	)		-			-			-			-

Balance at September 30, 2016		25,822	$	258		1,589	$	16		5,776		$	58		$	925,296		$	(98,425	)	$	637,277		$	1,464,480

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

				July 7, 2015
	Nine Months Ended			(date operations commenced) to
	September 30,			September 30,
	2016			2015
CASH FLOW FROM OPERATING ACTIVITIES
Net loss	$	(64,526	)	$	(31,853	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Equity in income of unconsolidated joint ventures		(4,495	)		(2,720	)
Distributions from unconsolidated joint ventures		11,872			2,598
Unrealized loss on interest rate cap		1,898			2,814
Stock-based compensation		801			716
Depreciation and amortization		121,365			32,935
Amortization of deferred financing costs		4,021			1,324
Amortization of above and below market leases, net		(520	)		(194	)
Straight-line rent adjustment		(11,242	)		(3,923	)
Change in operating assets and liabilities
Tenants and other receivables		8,425			(662	)
Prepaid expenses, deferred expenses and other assets		8,496			(12,939	)
Restricted cash		(1,047	)		(2,856	)
Accounts payable, accrued expenses and other liabilities		24,043			22,292
Net cash provided by operating activities		99,091			7,532
CASH FLOW FROM INVESTING ACTIVITIES
Acquisition of real estate and unconsolidated joint ventures		-			(2,653,019	)
Development of real estate		(47,236	)		(3,896	)
Decrease (increase) in restricted cash		11,732			(74,830	)
Net cash used in investing activities		(35,504	)		(2,731,745	)
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from issuance of mortgage loans payable, net		-			1,161,196
Proceeds from Future Funding Facility		19,239			-
Payment of deferred financing costs		(6	)		(21,431	)
Proceeds from issuance of common stock and non-controlling interest		-			1,644,042
Offering related costs		-			(8,086	)
Common dividends paid		(31,482	)		-
Non-controlling interests distributions paid		(24,176	)		-
Net cash used by financing activities		(36,425	)		2,775,721
Net increase in cash and cash equivalents		27,162			51,508
Cash and cash equivalents, beginning of period		62,867			-
Cash and cash equivalents, end of period	$	90,029		$	51,508

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash payments for interest	$	45,495		$	11,001
Capitalized interest		2,198			-
Income taxes paid		412			451
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Development of real estate financed with accounts payable		3,442			6,214
Dividends and distribution declared and unpaid		13,954			-

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

Seritage Growth Properties (“Seritage”) was organized in Maryland on June 3, 2015 and was initially capitalized with 100 shares of Class A common shares. The Company conducts its operations through Seritage Growth Properties, L.P. (the “Operating Partnership”), a Delaware limited partnership that was formed on April 22, 2015. Unless the context otherwise requires, “Seritage” and the “Company” refer to Seritage, the Operating Partnership, and its subsidiaries.

On June 11, 2015, Sears Holdings Corporation (“Sears Holdings”) effected a rights offering (the “Rights Offering”) to Sears Holdings stockholders to purchase common shares of Seritage in order to fund, in part, the $2.7 billion acquisition of 234 of Sears Holdings’ owned properties and one of its ground leased properties (the “Wholly Owned Properties”), and its 50% interests in three joint ventures (such joint ventures, the “JVs,” and such 50% joint venture interests, the “JV Interests”) that collectively own 28 properties, ground lease one property and lease two properties (collectively, the “JV Properties”) (collectively, the “Transaction”). The Rights Offering ended on July 2, 2015, and the Company’s Class A common shares were listed on the New York Stock Exchange (“NYSE”) on July 6, 2015.

On July 7, 2015, the Company completed the Transaction with Sears Holdings and commenced operations. The Company did not have any operations prior to the completion of the Rights Offering and the Transaction.

Seritage is a fully-integrated, self-administered, self-managed real estate investment trust (“REIT”) primarily engaged in the real property business through the Company’s investment in the Operating Partnership. As of September 30, 2016, subsidiaries of the Operating Partnership lease a substantial majority of the space at all but 14 of the Wholly Owned Properties back to Sears Holdings under a master lease agreement (the “Master Lease”), with the remainder of such space leased to third-party tenants. A substantial majority of the space at the JV Properties is also leased (or subleased) by the JVs to Sears Holdings under master lease agreements (collectively, the “JV Master Leases”). The Master Lease and the JV Master Leases provide the Company and the JVs with the right to recapture certain space from Sears Holdings at each property for retenanting or redevelopment purposes.

These condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q of the Securities and Exchange Commission (“SEC”) and should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K, as amended, (the “Annual Report”), for the period from July 7, 2015 (Date Operations Commenced) to December 31, 2015. 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. Capitalized terms used, but not defined in this quarterly report, have the same meanings as set forth in our Annual Report.

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

If the Company has an interest in a VIE but it is not determined to be the primary beneficiary, the Company accounts for its interest under the equity method of accounting. Similarly, for those entities which are not VIEs and over which the Company has the ability to exercise significant influence, but does not have a controlling financial interest, the Company accounts for its interests under the equity method of accounting. The Company continually reconsiders its determination of whether an entity is a VIE and whether the Company qualifies as its primary beneficiary.

To the extent such variable interests are in entities that cannot be evaluated under the VIE model, the Company evaluates its interests using the voting interest entity model. The Company holds a 56.7% interest in the Operating Partnership and is the sole general partner which gives the Company exclusive and complete responsibility for the day-to-day management, authority to make decisions, and control of the Operating Partnership. Through consideration of new consolidation guidance effective for the Company as of January 1, 2016, it has been concluded that the Operating Partnership is a VIE as the limited partners in the Operating Partnership, although entitled to vote on certain matters, do not possess kick-out rights or substantive participating rights. Accordingly, the Company consolidates its interest in the Operating Partnership. However, as the Company holds what is deemed a majority voting interest in the Operating Partnership, it qualifies for the exemption from providing certain of the disclosure requirements associated with investments in VIEs.

The portions of consolidated entities not owned by the Company and the Operating Partnership are presented as non-controlling interests as of and during the periods presented.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The most significant assumptions and estimates relate to fair values of acquired assets and liabilities assumed for purposes of applying the acquisition method of accounting, the useful lives of tangible and intangible assets, real estate impairment assessments, and assessing the recoverability of accounts receivables. 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.

The Company currently operates in a single reportable segment which includes the acquisition, ownership, development, redevelopment, management, and leasing of retail properties. The Company reviews operating and financial information for each property on an individual basis, and therefore, each property represents an individual operating segment. The Company does not distinguish or group consolidated operations based on geography, size, or type. The Company aggregates all properties into one reportable segment due to their similarities with regard to the nature and economics of the properties, tenants, and operations.

Upon the acquisition of real estate, the Company assesses the fair value of acquired assets and liabilities assumed, including land, buildings, improvements and identified intangibles such as above-market and below-market leases, in-place leases and other items, as applicable, and allocates the purchase price based on these assessments. In making estimates of fair values, the Company may use a number of sources, including data provided by third parties, as well as information obtained by the Company as a result of its due diligence, including expected future cash flows of the property and various characteristics of the markets where the property is located.

The fair values of tangible assets are determined on an "if vacant" basis. The "if vacant" fair value allocated to land is generally estimated via a market or sales comparison approach with the subject site being compared to similar properties that have sold or are currently listed for sale. The comparable properties are adjusted for dissimilar characteristics such as market conditions, location, access/frontage, size, shape/topography, or intended use, including the impact of any encumbrances on such use. The "if vacant" value allocated to buildings and site improvements is generally estimated using an income approach and a cost approach that utilizes published guidelines for current replacement cost or actual construction costs for similar, recently developed properties. Assumptions used in the income approach include capitalization and discount rates, lease-up time, market rents, make-ready costs, land value, and site improvement value.

The estimated fair value of in-place tenant leases includes lease origination costs (the costs the Company would have incurred to lease the property to the current occupancy level) and the lost revenues during the period necessary to lease-up from vacant to the current occupancy level. Such estimates include the fair value of leasing commissions, legal costs and tenant coordination costs that would be incurred to lease the property to this occupancy level. Additionally, the Company evaluates the time period over which such occupancy level would be achieved and includes an estimate of the net operating costs (primarily real estate taxes, insurance and utilities) incurred during the lease-up period, which generally ranges up to one year. The fair value of acquired in-place tenant leases is included in lease intangible assets on the condensed consolidated balance sheets and amortized over the remaining lease term for each tenant.

Identifiable intangible assets and liabilities are calculated for above-market and below-market tenant and ground leases where the Company is either the lessor or the lessee. The difference between the contractual rental rates and the Company’s estimate of market rental rates is measured over a period equal to the remaining non-cancelable term of the leases, including significantly below-market renewal options for which exercise of the renewal option appears to be reasonably assured. Above-market tenant leases and below-market ground leases are included in lease intangible assets on the condensed consolidated balance sheets; below-market tenant leases and above-market ground leases are included in accounts payable, accrued expenses and other liabilities on the condensed consolidated balance sheets. The values assigned to above-market and below-market tenant leases are amortized as reductions and increases, respectively, to base rental revenue over the remaining term of the respective leases. The values assigned to below-market and above-market ground leases are amortized as increases and reductions, respectively, to property operating expenses over the remaining term of the respective leases.

The Company expenses transaction costs associated with business combinations in the period incurred. These costs are included in acquisition-related expenses within the condensed consolidated statements of operations.

Real estate assets are recorded at cost, less accumulated depreciation and amortization.

Expenditures for ordinary repairs and maintenance will be expensed as incurred. Significant renovations which improve the property or extend the useful life of the assets are capitalized. As real estate is undergoing redevelopment activities, all amounts directly associated with and attributable to the project, including planning, development and construction costs, interest costs, personnel costs of employees directly involved and other miscellaneous costs incurred during the period of redevelopment, are capitalized. The capitalization period begins when redevelopment activities are underway and ends when the project is substantially complete.

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

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.

On a periodic basis, management assesses whether there are indicators that the value of the Company’s real estate assets (including any related intangible assets or liabilities) may be impaired. If an indicator is identified, a real estate asset is considered impaired only if management’s estimate of current and projected operating cash flows (undiscounted and unleveraged), taking into account the anticipated and probability weighted holding period, are less than a real estate asset’s carrying value. Various factors are considered in the estimation process, including expected future operating income, trends and prospects and the effects of demand, competition, and other economic factors. If management determines that the carrying value of a real estate asset is impaired, a loss will be recorded for the excess of its carrying amount over its estimated fair value. No such impairment losses were recognized for the three months ended September 30, 2016 or the period from July 7, 2015 (Date Operations Commenced) to September 30, 2015. No such impairment losses were recognized for the nine months ended September 30, 2016.

The Company accounts for its investments in unconsolidated joint ventures using the equity method of accounting as the Company exercises significant influence, but does not control these entities. 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, that the value of the Company’s investments in unconsolidated joint ventures may be impaired. An investment’s value is impaired only if management’s estimate of the fair value of the Company’s investment is less than its carrying value and such difference is deemed to be other-than-temporary. To the extent impairment has occurred, the loss is measured as the excess of the carrying amount of the investment over its estimated fair value. No such impairment losses were recognized for the three months ended September 30, 2016 or the period from July 7, 2015 (Date Operations Commenced) to September 30, 2015. No such impairment losses were recognized for nine months ended September 30, 2016.

The Company considers instruments with an original maturity of three months or less to be cash and cash equivalents. Cash and cash equivalents balances may, at a limited number of banks and financial institutions, exceed insurable amounts. The Company believes it mitigates this risk by investing in or through major financial institutions and primarily in funds that are insured by the United States federal government.

Restricted cash represents cash deposited in escrow accounts which generally can only be used for the payment of real estate taxes, debt service, insurance, and future capital expenditures as required by certain loan and lease agreements, as well as legally restricted tenant security deposits. As of September 30, 2016, the Company had approximately $81.8 million of restricted cash, including $35.8 million related to future capital investments such as unfunded construction commitments, deferred maintenance and environmental reserves, $31.4 million related to basic property carrying costs such as real estate taxes, insurance and ground rent, and $14.6 million of prepaid rental income.

Accounts receivable includes unpaid amounts billed to tenants, accrued revenues for future billings to tenants for property expenses, and amounts arising from the straight-lining of rent. The Company periodically reviews its receivables for collectability, taking into consideration changes in factors such as the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates, and economic conditions in the area where the property is located. In the event that the collectability of a receivable with respect to any tenant is in doubt, a provision for uncollectible amounts will be established or a direct write-off of the specific rent receivable will be made. For accrued rental revenues related to the straight-line method of reporting rental revenue, the Company performs a periodic review of receivable balances to assess the risk of uncollectible amounts and establish appropriate provisions.

Rental income is recognized on a straight-line basis over the non-cancelable terms of the related leases. For leases that have fixed and measurable rent escalations, the difference between such rental income earned and the cash rent due under the provisions of the lease is recorded as deferred rent receivable and included as a component of tenant and other receivables on the condensed consolidated balance sheets.

In leasing tenant space, the Company may provide funding to the lessee through a tenant allowance. In accounting for a tenant allowance, the Company will determine whether the allowance represents funding for the construction of leasehold improvements and evaluate the ownership of such improvements. If the Company is considered the owner of the improvements for accounting purposes, the Company will capitalize the amount of the tenant allowance and depreciate it over the shorter of the useful life of the improvements or the related lease term. If the tenant allowance represents a payment for a purpose other than funding leasehold improvements, or in the event that the Company is not considered the owner of the improvements for accounting purposes, the allowance is considered to be a lease incentive and is recognized over the lease term as reduction of rental revenue on a straight-line basis.

The Company commences recognizing revenue based on an evaluation of a number of factors. In most cases, revenue recognition under a lease begins when the lessee takes possession of or controls the physical use of the leased asset. Generally, this occurs on the lease commencement date.

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

Seritage 100% Recapture Rights. The Company generally treats the delivery of a 100% recapture notice as a modification of the Master Lease as of the date of notice. Such a notice and lease modification result in the following accounting adjustments for the recaptured property:

A 100% recapture will generally occur in conjunction with obtaining a new tenant or a real estate development project. As such, termination fees, if any, associated with the 100% recapture notice are generally capitalized as either an initial direct cost of obtaining a new lease or a necessary cost of the real estate project and depreciated over the life of the new lease obtained or the real estate asset being constructed or improved.

Seritage 50% Recapture Rights. The Company generally treats the delivery of a 50% recapture notice as a modification of the Master Lease as of the date of notice. Such a notice and lease modification result in the following accounting adjustments for the recaptured property:

Sears Holdings Termination Rights. The Master Lease provides Sears Holdings with certain rights to terminate the Master Lease with respect to properties that cease to be profitable for operation by Sears Holdings. Such a termination would generally result in the following accounting adjustments for the terminated property:

The Company’s use of derivative instruments is limited to the management of interest rate exposure and not for speculative purposes. In connection with the issuance of the Company’s mortgage loans, the Company purchased for $5.0 million an interest rate cap with a term of four years, a notional amount of $1.26 billion and a strike rate of 3.5%. The interest rate cap is measured at fair value and included as a component of prepaid expenses, deferred expenses and other assets on the condensed consolidated balance sheets. The Company has elected not to utilize hedge accounting, and therefore, the change in fair value is included within change in fair value of interest rate cap on the consolidated statements of operations. For the three months ended September 30, 2016, the Company recorded a loss of $47 thousand related to the change in fair value of the interest rate cap compared to a loss of $2.8 million during the period from July 7, 2015 (Date Operations Commenced) to September 30, 2015. For the nine months ended September 30, 2016, the Company recorded a loss of $1.9 million related to the change in fair value of the interest rate cap.

The Company generally recognizes equity awards to employees as compensation expense and includes such expense within general and administrative expenses on the condensed consolidated statements of operations. Compensation expense for equity awards is generally based on the fair value of the common shares at the date of the grant and is recognized (i) ratably over the vesting period for awards with time-based vesting and (ii) for awards with performance-based vesting, at the date the achievement of performance criteria is deemed probable, an amount equal to that which would have been recognized ratably from the date of the grant through the date the achievement of performance criteria is deemed probable, and then ratably from the date the achievement of performance criteria is deemed probable through the remainder of the vesting period.

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. As of September 30, 2016, substantially all of the Company's real estate properties were leased to Sears Holdings, and the majority of Company’s rental revenues were derived from the Master Lease (see Note 6). Sears Holdings is a publicly traded company that is subject to the informational filing requirements of the Securities Exchange Act of 1934, as amended, and is required to file periodic reports on Form 10-K and Form 10-Q with the SEC. Refer to www.sec.gov for Sears Holdings publicly-available financial information.

Other than the Company's tenant concentration, management believes the Company's portfolio was reasonably diversified by geographical location and did not contain any other significant concentrations of credit risk. As of September 30, 2016, the Company's portfolio of 235 Wholly Owned Properties was diversified by location across 49 states and Puerto Rico.

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 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. Class B non-economic common shares are excluded from earnings per share computations as they do not have economic rights.

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

In August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,” which is intended to address diversity in practice related to how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments in ASU 2016-15 address eight specific cash flow issues as well as application of the predominance principle (dependence on predominant source or use of receipt or payment) and are effective for public business entities for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years with early adoption permitted. The Company is currently evaluating the impact this amendment will have on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,” which amends accounting for income taxes related to share-based compensation, the related classification in the statement of cash flows, and share award forfeiture accounting. The new guidance is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted. The Company is evaluating the impact of adopting this new accounting standard on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-07, “Investments - Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting,” which eliminates the requirement to retroactively adjust an investment that subsequently qualifies for equity method accounting (as a result of an increase in level of ownership interest or degree of influence) as if the equity method of accounting had been applied during all prior periods that the investment was held. The new standard requires that the investor add the cost of acquiring additional ownership interest in the investee to its current basis and prospectively adopt the equity method of accounting. Any unrealized gains or losses in an available-for-sale investment that subsequently qualifies as an equity method investment should be recognized in earnings at the date the investment qualifies as an equity method investment. The new guidance is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods and requires prospective adoption. Early adoption is permitted. The Company has evaluated the impact of this standard, and has concluded that it has no material impact on its consolidated financial statements.

In February 2016, the FASB issued Accounting Standards Codification (“ASC”) 842 (“ASC 842”), “Leases” which replaces the existing guidance in ASC 840, Leases. ASC 842 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. ASC 842 requires a dual approach for lessee accounting under which a lessee would account for leases as finance leases or operating leases. Both finance leases and operating leases will result in the lessee recognizing a right-of-use (ROU) asset and a corresponding lease liability. For finance leases, the lessee would recognize interest expense and amortization of the ROU asset and for operating leases, the lessee would recognize a straight-line total lease expense. The Company is currently assessing the impact that adoption of this guidance will have on its consolidated financial statements.

In February 2015, the FASB issued ASU 2015-02, “Amendments to the Consolidation Analysis,” which makes certain changes to both the variable interest model and the voting model, including changes to (1) the identification of variable interests (fees paid to a decision maker or service provider), (2) the variable interest entity characteristics for a limited partnership or similar entity and (3) the primary beneficiary determination. The Company adopted ASU 2015-02 on January 1, 2016. The adoption of this standard did not have a material impact on its consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. ASU 2014-09 states that “an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.” While ASU 2014-09 specifically references contracts with customers, it may apply to certain other transactions such as the sale of real estate or equipment. In July 2015, the FASB voted to defer the effective date of ASU 2014-09 by one year. Accordingly, ASU 2014-09 is effective for annual periods beginning after December 15, 2017, with early adoption permitted for annual periods beginning after December 15, 2016. The standard can be applied either retrospectively to each prior reporting period presented or as a cumulative-effect adjustment recognized as of the date of initial application. The FASB has also issued the following standards which clarify ASU 2014-09 and have the same effective date as the original standard: ASU 2016-12, “Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients,” and ASU 2016-10, “Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing,” and ASU 2016-08, “Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net).” The Company is evaluating the impact of adopting these new accounting standards on its consolidated financial statements.

On July 7, 2015, the Company purchased the Wholly Owned Properties and JV Interests at their fair value for $2.7 billion, with the substantial majority of such properties being leased back to Sears Holdings.

The following table summarizes the final purchase price and fair values of the net assets acquired in the Transaction (in thousands):

Proceeds from issuance of common stock and non-controlling interest			$	1,644,042
Less: Offering related costs				(8,212	)
Proceeds from issuance of mortgage loans payable				1,161,196
Less: Deferred financing costs				(21,446	)
Total sources of funds net of offering and financing costs				2,775,580

Real estate assets acquired
Land	840,563
Buildings and improvements	810,499
Lease intangibles
In-place leases	595,443
Below-market ground lease	11,766
Above-market leases	9,058
Below-market leases	(20,045	)
Investments in unconsolidated joint ventures	429,012
Total fair value of real estate assets acquired				2,676,296
Plus: Restricted cash
Environmental expenses reserve	12,034
Deferred maintenance reserve	10,575
Total restricted cash				22,609
Less: Assumed liabilities
Real estate taxes payable	(23,277	)
Environmental expenses	(12,034	)
Deferred maintenance	(10,575	)
Total assumed liabilities				(45,886	)
Net cash paid for acquisition of real estate and unconsolidated joint ventures				2,653,019

Additional (sources) / uses of cash
Prepaid rent	(26,855	)
Initial funding of unfunded construction commitments reserve (restricted cash)	42,470
Initial funding of property carry costs reserve (restricted cash)	32,482
Initial funding of interest expense reserve (restricted cash)	4,924
Acquisition related expenses	18,340
Prepaid interest expense	1,249
Total additional (sources) uses of cash, net				72,610

Remaining excess cash from transaction			$	49,951

As of September 30, 2016, lease intangible assets (acquired in-place leases, above-market leases, and below-market ground leases) and liabilities (acquired below-market leases), net of accumulated amortization, were $505.6 million and $17.4 million, respectively. The following table summarizes the Company’s lease intangible assets and liabilities as of September 30, 2016 (in thousands):

As of December 31, 2015, lease intangible assets (acquired in-place leases, above-market leases, and below-market ground leases) and liabilities (acquired below-market leases), net of accumulated amortization, were $578.8 million and $19.0 million, respectively. The following table summarizes the Company’s lease intangible assets and liabilities as of December 31, 2015 (in thousands):

Amortization of acquired below-market leases, net of acquired above-market leases, resulted in additional rental income of $0.3 million for the three months ended September 30, 2016 and $0.2 million for the period from July 7, 2015 (Date Operations Commenced) to September 30, 2015. For the nine months ended September 30, 2016, amortization of acquired below-market leases, net of acquired above-market leases, resulted in additional rental income of $0.9 million. Future amortization of these intangibles is estimated to increase rental income as set forth below (in thousands):

Amortization of acquired below-market ground leases resulted in additional property expense of $50 thousand for the three months ended September 30, 2016 and $50 thousand for the period from July 7, 2015 (Date Operations Commenced) to September 30, 2015. For the nine months ended September 30, 2016, amortization of acquired below-market ground leases resulted in additional property expense of $150 thousand. Future amortization of below-market ground leases is estimated to increase property expenses as set forth below (in thousands):

Amortization of acquired in-place leases resulted in additional depreciation and amortization expense of $27.4 million for the three months ended September 30, 2016 and $18.4 million for the period from July 7, 2015 (Date Operations Commenced) to September 30, 2015. For the nine months ended September 30, 2016, amortization of acquired in-place leases resulted in additional depreciation and amortization expense of $72.1 million. Future estimated amortization of acquired in-place leases is set forth below (in thousands):

The Company conducts a portion of its property rental activities through investments in unconsolidated joint ventures for which the Company holds less than a controlling interest. The Company’s partners in these unconsolidated joint ventures are unrelated real estate entities or commercial enterprises. The Company and its unconsolidated joint venture partners make initial and/or ongoing capital contributions to these unconsolidated joint ventures. The obligations to make capital contributions are governed by each unconsolidated joint venture’s respective operating agreement and related governing documents.

The Company currently has investments in three unconsolidated entities: GS Portfolio Holdings LLC (the “GGP JV”), a joint venture between Seritage and a subsidiary of General Growth Properties, Inc. (together with its subsidiaries, “GGP”), SPS Portfolio Holdings LLC (the “Simon JV”), a joint venture between Seritage and a subsidiary of Simon Property Group, Inc. (together with its subsidiaries, “Simon”), and MS Portfolio LLC (the “Macerich JV”), a joint venture between Seritage and a subsidiary of The Macerich Company (together with its subsidiaries, “Macerich”). A substantial majority of the space at the JV Properties is leased to Sears Holdings under the JV Master Leases which include recapture rights and termination rights with similar terms as those described under the Master Lease.

As of September 30, 2016, the GGP JV had submitted recapture notices related to Pembroke Lakes Mall in Pembroke Pines, FL, Valley Plaza Mall in Bakersfield, CA, Staten Island Mall in Staten Island, NY and Coronado Mall in Albuquerque, NM. Subsequent to September 30, 2016, the GGP JV announced plans to recapture space at five additional locations according to a specific schedule, including Oakbrook Center in Oak Brook, IL, The Mall at Columbia in Columbia, MD, Natick Collection in Natick, MA, Paramus Park in Paramus, NJ and Alderwood in Lynnwood, WA. The GGP JV will recapture 100% of the space currently occupied by Sears Holdings at Alderwood and Paramus Park, while Sears Holdings will continue to occupy a downsized space at the other locations.

No recaptures notices have been submitted related to properties in the Macerich JV or the Simon JV.

The Company’s investments in unconsolidated joint ventures at September 30, 2016, consisted of (in thousands, except for number of properties):

Each unconsolidated joint venture is obligated to maintain financial statements in accordance with GAAP. The Company shares in the profits and losses of these unconsolidated joint ventures generally in accordance with the Company’s respective equity interests. In some instances, the Company may recognize profits and losses related to investment in an unconsolidated joint venture that differ from the Company’s equity interest in the unconsolidated joint venture. This may arise from impairments that the Company recognizes related to its investment that differ from the impairments the unconsolidated joint venture recognizes with respect to its assets; differences between the Company’s basis in assets it has transferred to the unconsolidated joint venture and the unconsolidated joint venture’s basis in those assets; the Company’s deferral of the unconsolidated joint venture’s profits from land sales to the Company; or other items. There were no joint venture impairment charges during the three months ended September 30, 2016 or the period from July 7, 2015 (Date Operations Commenced) to September 30, 2015. There were no joint venture impairment charges during the nine months ended September 30, 2016.

The following table presents combined condensed financial data for all of the Company’s unconsolidated joint ventures as of September 30, 2016 and December 31, 2015 (in thousands):

	September 30, 2016			December 31, 2015
ASSETS
Investment in real estate
Land	$	214,109		$	214,726
Buildings and improvements		600,642			603,265
Accumulated depreciation		(48,256	)		(24,111	)
		766,495			793,880
Construction in progress		6,740			1,481
Net investment in real estate		773,235			795,361
Cash and cash equivalents		22,743			19,903
Tenant and other receivables, net		5,088			4,990
Other assets, net		16,019			30,506
Total assets	$	817,085		$	850,760

LIABILITIES AND EQUITY
Liabilities
Accounts payable, accrued expenses and other liabilities	$	11,761		$	13,973
Total liabilities		11,761			13,973

Equity
Additional paid in capital		796,334			823,923
Retained earnings		8,990			12,864
Total equity		805,324			836,787
Total liabilities and equity	$	817,085		$	850,760

On July 7, 2015, subsidiaries of Seritage and subsidiaries of Sears Holdings entered into the Master Lease. The Master Lease generally is a triple net lease with respect to all space which is leased thereunder to Sears Holdings, subject to proportional sharing by Sears Holdings for repair and maintenance charges, real property taxes, insurance and other costs and expenses which are common to both the space leased by Sears Holdings and other space occupied by unrelated third-party tenants in the same or other buildings pursuant to third-party leases, space which is recaptured pursuant to the Company recapture rights described below and all other space which is constructed on the properties. Under the Master Lease, Sears Holdings and/or one or more of its subsidiaries will be required to make all expenditures reasonably necessary to maintain the premises in good appearance, repair and condition for as long as they are in occupancy.

The Master Lease has an initial term of 10 years and contains three options for five-year renewals of the term and a final option for a four-year renewal. As of September 30, 2016, the annual base rent paid directly by Sears Holdings and its subsidiaries under the Master Lease was approximately $134.2 million. In each of the initial and first two renewal terms, annual base rent will be increased by 2.0% per annum for each lease year over the rent for the immediately preceding lease year. For subsequent renewal terms, rent will be set at the commencement of the renewal term at a fair market rent based on a customary third-party appraisal process, taking into account all the terms of the Master Lease and other relevant factors, but in no event will the renewal rent be less than the rent payable in the immediately preceding lease year.

Revenues from the Master Lease for the three and nine months ended September 30, 2016 are as follows (in thousands and excluding the effect of straight-line rent):

The Master Lease provides the Company with the right to recapture up to approximately 50% of the space occupied by Sears Holdings at the 224 Wholly Owned Properties initially included in the Master Lease (subject to certain exceptions). While the Company will be permitted to exercise its recapture rights all at once or in stages as to any particular property, it will not be permitted to recapture all or substantially all of the space subject to the recapture right at more than 50 Wholly Owned Properties during any lease year. In addition, Seritage has the right to recapture any automotive care centers which are free-standing or attached as “appendages” to the properties, all outparcels or outlots and certain portions of the parking areas and common areas. Upon exercise of these recapture rights, the Company will generally incur certain costs and expenses for the separation of the recaptured space from the remaining Sears Holdings space and can reconfigure and rent the recaptured space to third-party tenants.

The Company also has the right to recapture 100% of the space occupied by Sears Holdings at each of 21 identified Wholly Owned Properties by making a specified lease termination payment to Sears Holdings, after which the Company can reposition and re-lease those stores. The lease termination payment is calculated as the greater of an amount specified at the time the Company entered into the Master Lease with Sears Holdings and an amount equal to 10 times the adjusted EBITDA attributable to such space within the Sears Holdings main store which is not attributable to the space subject to the separate 50% recapture right discussed above for the 12-month period ending at the end of the fiscal quarter ending immediately prior to recapturing such space.

As of September 30, 2016, the Company had exercised its recapture rights with respect to 15 properties as follows:

Subsequent to September 30, 2016, the Company submitted seven additional recapture notices as follows:

The Master Lease also provides for certain rights to Sears Holdings to terminate the Master Lease with respect to Wholly Owned Properties that cease to be profitable for operation by Sears Holdings. In order to terminate the Master Lease with respect to a certain property, Sears Holdings must make a payment to the Company of an amount equal to one year of rent (together with taxes and other expenses) with respect to such property. Sears Holdings must provide notice of not less than 90 days of their intent to exercise such termination right and such termination right will be limited so that it will not have the effect of reducing the fixed rent under the Master Lease by more than 20% per annum.

During the three months ended September 30, 2016, Sears Holdings provided notice that it intends to exercise its right to terminate the Master Lease with respect to 17 stores totaling 1.7 million square feet of gross leasable area. The aggregate annual base rent at these stores is approximately $5.9 million, or 2.7% of the Company's total annual base rent as of September 30, 2016, including all signed leases. Sears Holdings will continue to pay Seritage rent until it vacates the stores which is expected to occur in January 2017, and will also pay Seritage a termination fee equal to one year of aggregate annual base rent plus one year of estimated real estate taxes and operating expenses.

On July 7, 2015, pursuant to the Transaction, the Company entered into a mortgage and mezzanine loan agreement (collectively, the “Loan Agreements”), providing for term loans in an initial principal amount of approximately $1.16 billion (collectively, the “Mortgage Loans”) and a $100 million future funding facility (the “Future Funding Facility”), which the Company expects to be available to finance the redevelopment of properties in its portfolio from time to time, subject to satisfaction of certain conditions. As of September 30, 2016, the total principal amounts outstanding under the Mortgage Loans and the Future Funding Facility were $1,161 million and $19.3 million, respectively, and $80.7 million remained available under the Future Funding Facility for future draws by the Company.

Interest under the Mortgage Loans is due and payable on the payment dates, and all outstanding principal amounts are due when the loan matures on the payment date in July 2019, pursuant to the Loan Agreements. The Company has two one-year extension options subject to the payment of an extension fee and satisfaction of certain other conditions. Borrowings under the Mortgage Loans bear interest at the London Interbank Offered Rates (“LIBOR”) plus, as of September 30, 2016, a weighted-average spread of 465 basis points; payments are made monthly on an interest-only basis. The weighted-average interest rates for the Mortgage Loans for the three and nine months ended September 30, 2016 were 5.24% and 5.19%, respectively. The Loan Agreements contain a yield maintenance provision for the early extinguishment of the debt before January 2018.

The Mortgage Loans are secured by all of the Company’s Wholly Owned Properties and a pledge of its equity in the JVs. The Loan Agreements contain customary covenants for a real estate financing, including terms that limit the Company’s ability to grant liens on its assets, incur additional indebtedness, or transfer or sell assets, as well as those that may require the Company to obtain lender approval for certain major tenant leases or significant redevelopment projects. Such restrictions also include cash flow sweep provisions based on certain measures of the Company’s financial and operating performance, including in the case that “Debt Yield” (the ratio of net operating income for the borrowers to their debt) is less than 11.0% or if the Company fails to achieve certain thresholds for tenant diversification. If the performance of Sears Holdings at the stores subject to the Master Lease fails to meet specified thresholds and if the Company fails to satisfy additional tenant diversification tests and declines to provide a specified amount of cash collateral, then the cash flow sweep provisions of the Loan Agreements may also be triggered.

The Company and the servicer for our Mortgage Loans have reached an agreement-in-principle to resolve a disagreement regarding one of the cash flow sweep provisions in our Loan Agreements. The agreement-in-principle is expected to be reflected in an amendment to the Loan Agreements, pursuant to which (if finalized) the Company may post additional collateral to a redevelopment reserve, may extend the spread maintenance provision for the prepayment of the loan and may agree to a scheduled draw down of the Future Funding Facility. There can be no assurance that the amendment will be completed or that, if it is not, the servicer will not seek to impose a cash flow sweep.

Were a cash flow sweep to be imposed (and for so long as a cash flow sweep period is imposed), the Company potentially could be constrained in its ability to use cash generated by the Wholly Owned Properties. In addition, during the pendency of the cash flow sweep, the lender would have certain consent rights over, among other things, the Company’s annual budget and variances thereto, redevelopment budgets and variances thereto, and capital improvements requiring capital expenditures that are not consistent with the approved annual budget or an approved redevelopment plan and budget. While the imposition of a cash flow sweep potentially could limit its operational flexibility, the Company does not believe that the mere imposition of a cash flow sweep, at present, would materially disrupt its business or operations.

The Company believes it is currently in compliance with all material terms and conditions of the Loan Agreements.

All obligations under the Loan Agreements are non-recourse to the borrowers and the pledgors of the JV Interests and the guarantors thereunder, except that (i) the borrowers and the guarantors will be liable, on a joint and several basis, for losses incurred by the lenders in respect of certain matters customary for commercial real estate loans, including misappropriation of funds and certain environmental liabilities and (ii) the indebtedness under the Loan Agreements will be fully recourse to the borrowers and guarantors upon the occurrence of certain events customary for commercial real estate loans, including without limitation prohibited transfers, prohibited voluntary liens, and bankruptcy. Additionally the guarantors delivered a limited completion guaranty with respect to future redevelopments undertaken by the borrowers at the properties.

The Company incurred $21.4 million of debt issuance costs related to the Mortgage Loans which are recorded as a direct deduction from the carrying amount of the Mortgage Loans and amortized over the term of the Loan Agreements. As of September 30, 2016, the unamortized balance of the Company’s debt issuance costs was $14.8 million.

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

As a REIT, the Company generally will not be subject to federal income tax on taxable income that is distributed to its shareholders. If the Company fails to qualify as a REIT or does not distribute 100% of its taxable income in any taxable year, it will be subject to federal taxes at regular corporate rates (including any applicable alternative minimum tax) and may not be able to qualify as a REIT for four subsequent taxable years.

Even if the Company qualifies for taxation as a REIT, the Company is subject to certain state, local and Puerto Rico taxes on its income and property, and to federal income and excise taxes on its undistributed taxable income.

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

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

Financial Assets and Liabilities Measured at Fair Value on a Recurring or Non-Recurring Basis

All derivative instruments are carried at fair value and are valued using Level 2 input. The Company’s derivative instruments as of September 30, 2016 consisted of an interest rate cap. The Company utilizes an independent third party and interest rate market pricing models to assist management in determining the fair value of this instrument.

The fair value of the Company’s interest rate cap at September 30, 2016 was approximately $0.2 million and is included as a component of prepaid expenses, deferred expenses and other assets on the condensed consolidated balance sheets. The Company has elected not to utilize hedge accounting, and therefore, the change in fair value is included within change in fair value of interest rate cap on the condensed consolidated statements of operations. For the three and nine months ended September 30, 2016, the Company recorded losses of $47 thousand and $1.9 million, respectively, related to the change in fair value of the interest rate cap.

Financial assets and liabilities that are not measured at fair value on the condensed consolidated balance sheets include cash equivalents and mortgages payable. The fair value of cash equivalents is classified as Level 1 and the fair value of mortgages payable is classified as Level 2.

Cash equivalents are carried at cost, which approximates fair value. The fair value of mortgages payable 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, 2016 and September 30, 2015, the estimated fair value of the Company’s debt was $1.2 billion, which approximated the carrying value at such date as the current risk-adjusted rate approximates the stated rates on the Company’s mortgages.

The Company maintains general liability insurance and all-risk property and rental value, with sub-limits for certain perils such as floods and earthquakes on each of the Company’s properties. The Company also maintains coverage for terrorism acts as defined by Terrorism Risk Insurance Program Reauthorization Act, which expires in December 2020.

Insurance premiums are charged directly to each of the retail 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.

Under various federal, state and local laws, ordinances and regulations, the Company may be considered an owner or operator of real property or may have arranged for the disposal or treatment of hazardous or toxic substances. As a result, the Company may be liable for certain costs, including removal, remediation, government fines, and injuries to persons and property. The Company does not believe that any resulting liability from such matters will have a material effect on the consolidated financial position, results of operations, or liquidity of the Company. Under the Master Lease, Sears Holdings has indemnified the Company from certain environmental liabilities at the Wholly Owned Properties existing before, or caused by Sears Holdings during, the period in which each Wholly Owned Property is leased to Sears Holdings, including removal and remediation of all affected facilities and equipment constituting the automotive care center facilities (and each JV Master Lease includes a similar requirement of Sears Holdings). As of September 30, 2016, the Company had approximately $11.8 million of restricted cash in a lender reserve account to fund potential environmental costs that were identified during due diligence related to the Transaction.

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 disclose the fact that such a range of loss cannot be estimated. The Company does not record liabilities when the likelihood that the liability has been incurred is probable but the amount cannot be reasonably estimated, or when the liability is believed to be only reasonably possible or remote. In such cases, the Company discloses 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.

The Company is subject, from time to time, to various legal proceedings and claims that arise in the ordinary course of business. While the resolution of such matters cannot be predicted with certainty, management believes, based on currently available information, 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.

In May and June of 2015, four purported Sears Holdings shareholders filed lawsuits in the Delaware Court of Chancery challenging the Transaction, which lawsuits have since been consolidated into a single action captioned In re Sears Holdings Corporation Stockholder and Derivative Litigation, Consol. C.A. No. 11081-VCL (the “Action”). On October 15, 2015, plaintiffs filed a verified consolidated stockholder derivative complaint in the Action against the individual members of Sears Holdings’ Board of Directors, ESL Investments, Inc. (together with its affiliates, “ESL”), Sears Holdings’ CEO, Fairholme Capital Management L.L.C. (“FCM”), and Seritage. On July 12, 2016, the plaintiffs filed a verified consolidated amended stockholder derivative complaint (the “Amended Complaint”) against the same defendants and asserting substantially the same claims as set forth in the complaint filed in October 2015. The plaintiffs have brought the Action derivatively on behalf of Sears Holdings, which is named as a nominal defendant, and allege that the Sears Holdings directors, as well as ESL and Edwards S. Lampert (in their capacity as the alleged controlling stockholder of Sears Holdings), breached their fiduciary duties to Sears Holdings shareholders by selling the Wholly Owned Properties to Seritage at a price that was unfairly low and was the result of a process that allegedly was flawed. The Amended Complaint also alleges that Seritage and FCM aided and abetted these alleged fiduciary breaches. Among other forms of relief, the Amended Complaint seeks damages in unspecified amounts. In October 2016, following mediation, the parties reached an agreement-in-principle to settle the Action, subject to the negotiation and execution of settlement documentation, customary releases of defendants, final court approval, and other customary conditions. Pursuant to the settlement, the defendants and the D&O insurers for the individual members of the Sears Holdings’ Board of Directors have agreed to pay (assuming satisfaction of all conditions) $40 million, of which Seritage has agreed to pay $19 million. The defendants continue to deny the claims asserted and will enter into the settlement solely to avoid the burden, expense, distraction, and inherent risk in and of litigation. While there can be no assurance that the agreement-in-principle will result in a definitive, court-approved agreement, the Company has determined that its liability is both probable and estimable as a result of the agreement-in-principle and has recorded a litigation charge of $19.0 million for the three months ended September 30, 2016. The Company believes that the plaintiffs’ claims and allegations against the Company are legally without merit and, if the settlement is not approved, intends to contest the Action vigorously.

Edward S. Lampert is Chairman and Chief Executive Officer of Sears Holdings and is the Chairman and Chief Executive Officer of ESL. As of March 21, 2016, the filing date of Sears Holdings’ most recent proxy statement, ESL beneficially owned approximately 54.6% of Sears Holdings’ outstanding common stock, including shares issuable upon the exercise of warrants held by ESL. Mr. Lampert is also the Chairman of Seritage.

For purposes of funding the purchase price for the acquisition of the Wholly Owned Properties and the JV Interests from Sears Holdings, the Company effected the Rights Offering to existing Sears Holdings shareholders, including ESL. As of September 30, 2016, ESL held an approximately 43.3% interest in Operating Partnership and approximately 3.8% and 100% of the outstanding Class A common shares and Class B non-economic common shares, respectively.

On July 7, 2015, the Operating Partnership and Sears Holdings Management Corporation (“SHMC”), a wholly owned subsidiary of Sears Holdings, entered into a transition services agreement (the “Transition Services Agreement” or “TSA”). Pursuant to the TSA, SHMC will provide certain limited services to the Operating Partnership during the period from the closing of the Transaction through the 18-month anniversary of the closing, unless the Operating Partnership terminates the agreement. During the three months ended September 30, 2016 the Company did not incur any fees under the TSA compared to fees of approximately $0.1 million during the period from July 7, 2015 (Date Operations Commenced) to September 30, 2015. During the nine months ended September 30, 2016, the services provided by SHMC were limited to specific accounting and tax services, substantially all of which were in support of the Company’s 2015 year-end activities. Fees incurred for these services were approximately $0.1 million and are included in general and administrative expenses on the condensed consolidated statements of operations. SHMC does not provide the Company with any business managerial, leasing, development or construction services or direct any of the Company’s business, financial, or strategic policies or decisions.

During the nine months ended September 31, 2016, Sears Holdings made direct payments to various utility providers with respect to utility expenses due at certain Wholly Owned Properties covered under the Master Lease. Pursuant to the Master Lease, Sears Holdings also remits monthly installment payments to the Company for the payment of certain utility expenses. As such, the amounts remitted directly to the utility providers by Sears Holdings were deemed overpayments that were to be returned to Sears Holdings. As of September 30, 2016, these amounts totaled $6.1 million and are included in accounts payable, accrued expenses and other liabilities on the consolidated balance sheet.

On July 7, 2015, Seritage and ESL entered into the agreement of limited partnership of the Operating Partnership (the “Partnership Agreement”). Pursuant to the Partnership Agreement, as the sole general partner of the Operating Partnership, Seritage exercises exclusive and complete responsibility and discretion in its day-to-day management, authority to make decisions, and control of the Operating Partnership, and may not be removed as general partner by the limited partners. As of September 30, 2016, the Company held a 56.7% interest in the Operating Partnership and ESL held a 43.3% interest. The portions of consolidated entities not owned by the Company are presented as non-controlling interest as of and during the periods presented.

On August 2, 2016, the Company declared a cash dividend of $0.25 per Class A and Class C common share for the three months ended September 30, 2016. The holders of Operating Partnership units were entitled to an equal distribution per Operating Partnership unit held on September 30, 2016. The dividends and distributions payable are recorded as liabilities on the Company's consolidated balance sheet at September 30, 2016. The dividend has been reflected as a reduction of shareholders' equity, and the distribution has been reflected as a reduction of the limited partners' non-controlling interest. These amounts were paid on October 13, 2016.

On May 3, 2016, the Company declared a cash dividend of $0.25 per Class A and Class C common share for the three months ending June 30, 2016. The holders of Operating Partnership units were entitled to an equal distribution per Operating Partnership unit held on June 30, 2016. These amounts were paid on July 14, 2016.

On March 8, 2016, the Company declared a cash dividend of $0.25 per Class A and Class C common share for the three months ended March 31, 2016. The holders of Operating Partnership units were entitled to an equal distribution per Operating Partnership unit held on March 31, 2016. These amounts were paid on April 14, 2016.

On December 17, 2015, the Company declared a cash dividend of $0.50 per Class A and Class C common share for the period from July 7, 2015 (Date Operations Commenced) through December 31, 2015. The holders of Operating Partnership units were entitled to an equal distribution per Operating Partnership unit held on December 31, 2015. These amounts were paid on January 14, 2016.

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

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

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

No adjustments were made to the numerator for the three months ended September 30, 2016, the period from July 7, 2015 (Date Operations Commenced) to September 30, 2015, or the nine months ended September 30, 2016 because the Company generated a net loss. During periods of net loss, undistributed losses are not allocated to the participating securities as they are not required to absorb losses.

No adjustments were made to the denominator for the three months ended September 30, 2016, the period from July 7, 2015 (Date Operations Commenced) to September 30, 2015, or the nine months ended September 30, 2016 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, 2016, there were 216,348 non-vested restricted shares and share units outstanding.

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

The vesting terms of these grants are specific to the individual grant and vary in that a portion of the restricted share units vest in equal annual amounts over the next three years (time-based vesting) and a portion of the restricted share units vest on the third anniversary of the grants subject to the achievement of certain performance criteria (performance-based vesting).

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

The following table summarizes restricted share activity for the nine months ended September 30, 2016:

The Company recognized $0.3 million in compensation expense related to the restricted shares for the three months ended September 30, 2015 compared to $0.7 million for the period from July 7, 2015 (Date Operations Commenced) to September 30, 2015. The Company recognized $0.8 million in compensation expense related to the restricted shares for the nine months ended September 30, 2016. Such expenses are included in general and administrative expenses on the Company's condensed consolidated statements of operations. As of September 30, 2016, there were approximately $8.5 million of total unrecognized compensation costs related to the outstanding restricted shares which are expected to be recognized over a weighted-average period of approximately 2.7 years.

The following table summarizes the significant components of accounts payable, accrued expenses and other liabilities as of September 30, 2016 and December 31, 2015 (in thousands):

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,” “will,” “would,” “may” or other similar expressions in this Quarterly Report on Form 10-Q. Many of the factors that will determine the outcome of these and our other forward-looking statements are beyond our ability to control or predict. For further discussion of factors that could materially affect the outcome of our forward-looking statements, see “Risk Factors” in our Annual Report on Form 10-K for the period from July 7, 2015 (Date Operations Commenced) to December 31, 2015. 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.

Seritage Growth Properties (NYSE: SRG), a Maryland real estate investment trust formed on June 3, 2015, is a fully integrated, self-administered and self-managed real estate investment trust (“REIT”) as defined under Section 856(c) of the Internal Revenue Code (the “Code”). Seritage’s assets are held by and its operations are primarily conducted through, directly or indirectly, the Operating Partnership. Under the partnership 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”, “we,” “us,” and “our” as used herein refer to Seritage, the Operating Partnership, and its owned and controlled subsidiaries.

We are principally engaged in the acquisition, ownership, development, redevelopment, management, and leasing of diversified retail real estate throughout the United States. As of September 30, 2016, our portfolio included approximately 42.4 million square feet of gross leasable area (“GLA”), consisting of 235 Wholly Owned Properties totaling approximately 37.0 million square feet of GLA across 49 states and Puerto Rico, and interests in 31 JV Properties totaling over 5.4 million square feet of GLA across 17 states.

As of September 30, 2016, we leased a substantial majority of the space in our portfolio at all but 14 of the Wholly Owned Properties (such 14 properties, the “Third-Party Properties”) to Sears Holdings under the Master Lease, with the remainder of such space leased to third-party tenants. The Third-Party Properties, which do not contain a Sears Holdings store or have any space leased to Sears Holdings, are leased solely to third-party tenants. A substantial majority of the space at the JV Properties is also leased to Sears Holdings under the JV Master Leases.

We generate revenues primarily by leasing our properties to tenants, including both Sears Holdings and third-party tenants, who operate retail stores (and potentially other uses) in the leased premises, a business model common to many publicly traded REITs. In addition to revenues generated under the Master Lease through rent payments from Sears Holdings, we generate revenue through leases to third-party tenants under existing and future leases for space at our properties.

The Master Lease provides us with the right to recapture up to approximately 50% of the space occupied by Sears Holdings at the 224 Wholly Owned Properties initially included in the Master Lease (subject to certain exceptions and limitations). In addition, Seritage has the right to recapture any automotive care centers which are free-standing or attached as “appendages” to the properties, and all outparcels or outlots and certain portions of parking areas and common areas. Upon exercise of this recapture right, we will generally incur certain costs and expenses for the separation of the recaptured space from the remaining Sears Holdings space and can reconfigure and rent the recaptured space to third-party tenants on potentially superior terms determined by us and for our own account. We also have the right to recapture 100% of the space occupied by Sears Holdings at each of 21 identified Wholly Owned Properties by making a specified lease termination payment to Sears Holdings, after which we expect to be able to reposition and re-lease those stores on potentially superior terms determined by us and for our own account. As of September 30, 2016, we had exercised recapture rights at 15 properties, including four properties at which we held 100% recapture rights and four properties at which we only recaptured automotive care centers.

With respect to the JV Properties, each JV Master Lease provides for similar recapture rights as the Master Lease governing the Company’s Wholly Owned Properties. As of September 30, 2016, the GGP JV had submitted recapture notices for four properties.

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 expenses, insurance, ground lease costs and utilities; general and administrative expenses include payroll, office expenses, professional fees, and other administrative expenses; and interest expense is primarily on our mortgage loans payable. In addition, we incur substantial non-cash charges for depreciation and amortization on our properties and related intangible assets and liabilities resulting from the Transaction.

We did not have any revenues or expenses until we completed the Transaction on July 7, 2015.

For the three months ended September 30, 2016, the Company recognized total rental income of $45.6 million as compared to $41.4 million for the period from July 7, 2015 (Date Operations Commenced) to September 30, 2015. The $4.2 million increase was primarily due to additional days in the reporting period, new rents from completed redevelopments and the annual increase in base rent under the Master Lease, offset by reduced base rent under the Master Lease as a result of recapture activity.

Straight-line rent for the three months ended September 30, 2016 was $3.0 million and other adjustments were approximately $0.2 million. For the period from July 7, 2015 (Date Operations Commenced) to September 30, 2015, straight-line rent was $3.9 million and other adjustments were approximately $0.2 million. The reduction in straight-line rent was primarily due to the amortization, during the three months ended September 30, 2016, of accrued rental revenues related to the straight-line method of reporting that are deemed uncollectable as result of recapture activity.

For the nine months ended September 30, 2016, the Company recognized total rental income of $136.7 million, including straight-line rent of $11.2 million and other adjustments of approximately $0.7 million.

Our earnings are primarily the result of the rental revenue generated through rent payments from Sears Holdings under the Master Lease. During the three months ended September 30, 2016, and excluding the effect of straight-line rent, the rental income attributable directly to Sears Holdings was $33.4 million, or approximately 79.0% of total rental income earned in the period. For the period from July 7, 2015 (Date Operations Commenced) to September 30, 2015, the comparable rental income attributable directly to Sears Holdings was $31.3 million, or approximately 84.0% of total rental income earned in the period.

During the nine months ended September 30, 2016, and excluding the effect of straight-line rent, the rental income attributable directly to Sears Holdings was $99.8 million, or approximately 80.0% of total rental income earned in the period.

In addition to revenue generated under the Master Lease through rent payments from Sears Holdings, we generate revenue through direct leases to third-party tenants for space at our properties. During the three months ended September 30, 2016, and excluding the effect of straight-line rent, the rental income attributable to third-party tenants was $9.0 million, or approximately 21.0% of total rental income earned in the period. For the period from July 7, 2015 (Date Operations Commenced) to September 30, 2015, the comparable rental income attributable to third-party tenants was $5.9 million, or approximately 16.0% of total rental income earned in the period.

During the nine months ended September 30, 2016, and excluding the effect of straight-line rent, the rental income attributable to third-party tenants was $25.0 million, or approximately 20.0% of total rental income earned in the period.

On an annual basis, and taking into account all signed leases, including those which have not yet commenced rental payments, rental income attributable to third-party tenants would have represented approximately 31.4% of total annual base rental income as of September 30, 2016.

Pursuant to the provisions of the Master Lease and many third-party leases, the Company is entitled to be reimbursed for certain property related expenses. For the three months ended September 30, 2016, the Company recorded tenant reimbursement income of $12.0 million, compared to property operating expenses and real estate tax expense aggregating $12.5 million. For the period from July 7, 2015 (Date Operations Commenced) to September 30, 2015, the Company recorded tenant reimbursement income of $12.7 million, compared to property operating expenses and real estate tax expense aggregating $13.6 million. The reductions in both tenant reimbursement income and property operating expenses were primarily due to adjustments resulting from the reconciliation, during the three months ended September 30, 2016, of certain expenses and reimbursement payments made by Sears Holdings pursuant to the Master Lease.

For the nine months ended September 30, 2016, the Company recorded tenant reimbursement income of $45.7 million, compared to property operating expenses and real estate tax expense aggregating $48.3 million.

Depreciation and amortization expenses consist of depreciation of real property, depreciation of furniture, fixtures and equipment, and amortization of certain lease intangible assets. For the three months ended September 30, 2016, the Company incurred depreciation and amortization expense of $44.5 million as compared to depreciation and amortization expense of $32.9 million for the period from July 7, 2015 (Date Operations Commenced) to September 30, 2015. The increase of $11.6 million was primarily due to additional days in the reporting period and the accelerated amortization, during the three months ended September 30, 2016, of certain lease intangible assets as result of recapture activity.

For the nine months ended September 30, 2016, the Company incurred depreciation and amortization expense of $121.4 million.

For the three and nine months ended September 30, 2016, approximately $9.0 million and $17.7 million, respectively, of amortization expense was attributable to the recapture of space from Sears Holdings. Such recaptures are deemed lease modifications and require related lease intangibles to be amortized over the shorter of the shortened lease term or the remaining useful life of the asset.

General and administrative expenses consist of personnel costs, including stock-based compensation, professional fees, office expenses and overhead expenses. For the three months ended September 30, 2016, the Company incurred general and administrative expenses of $4.2 million compared to general and administrative expenses of $5.8 million for the period from July 7, 2015 (Date Operations Commenced) to September 30, 2015. The period from July 7, 2015 (Date Operations Commenced) to September 30, 2015 included $1.8 million of up-front personnel costs related to the hiring of certain executives.

For the nine months ended September 30, 2016, the Company incurred general and administrative expenses of $13.1 million, of which approximately $0.3 million consisted of up-front personnel costs related to the hiring of certain employees.

In October 2016, an agreement-in-principle was reached to settle a legal action to which we were a party, subject to the negotiation and execution of settlement documentation, customary releases of defendants, final court approval, and other customary conditions (see Note 10). The defendants, including the Company, continue to deny the claims asserted and will enter into the settlement solely to avoid the burden, expense, distraction, and inherent risk in and of litigation. While there can be no assurance that the agreement-in-principle will result in a definitive, court-approved agreement, we have determined that the Company’s liability is both probable and estimable as a result of the agreement-in-principle. Accordingly, we have recorded a charge of $19.0 million, representing the Company’s share of the settlement as contemplated, for the three months ended September 30, 2016.

The Company did not incur any acquisition-related expenses during the three months ended September 30, 2016 as compared to acquisition-related expenses of $18.3 million for the period from July 7, 2015 (Date Operations Commenced) to September 30, 2015. For the nine months ended September 30, 2016, the Company recorded less than $0.1 million of remaining legal costs related to the Transaction. These costs are included in acquisition-related expenses on the condensed consolidated statements of operations.

For the three months ended September 30, 2016, the Company incurred $15.9 million of interest expense related to the Mortgage Loans as compared to interest expense of $14.8 million for the period from July 7, 2015 (Date Operations Commenced) to September 30, 2015. Both periods included amortization of debt issuance costs of approximately $1.3 million. For the nine months ended September 30, 2016, the Company incurred $47.3 million of interest expense related to the Mortgage Loans, including amortization of debt issuance costs in the amount of $4.0 million.

For the three months ended September 30, 2016, the Company recorded an unrealized loss of $47 thousand related to the change in fair value of the interest rate cap associated with its Mortgage Loan as compared to a loss of $2.8 million for the period from July 7, 2015 (Date Operations Commenced) to September 30, 2015. For the nine months ended September 30, 2016, the Company recorded an unrealized loss of $1.9 million. As of September 30, 2016, the interest rate cap had a fair value of approximately $0.2 million as compared to $2.2 million on September 30, 2015.

Property rental income is our primary source of cash and is dependent on a number of factors, including occupancy levels and rental rates, as well as our tenants’ ability to pay rent. Our primary uses of cash include payment of operating expenses, debt service, reinvestment in and redevelopment of properties, and distributions to shareholders and unitholders. We believe that we currently have sufficient liquidity to satisfy all of our commitments in the form of $90.0 million of unrestricted cash, $81.8 million of restricted cash, and $80.7 million of borrowing capacity under our Future Funding Facility as of September 30, 2016. We may also raise capital through public or private issuances of debt securities, common or preferred equity or other instruments convertible into or exchangeable for common or preferred equity, as well as other capital raising activities such as asset sales or joint ventures.

Pursuant to the Loan Agreements, all of the rent and other revenue that the Company collects from the Wholly Owned Properties are transferred into an account that the Company owns (but that is controlled by its lenders), known as the “cash management account.” The funds placed in the cash management account are disbursed on each monthly payment date by the servicer to fund specified reserves (for items such as taxes, insurance, and capital expenditures) and to pay debt service and servicing fees. In the absence of a cash flow sweep, all remaining funds from the cash management account are then disbursed to the Company. During a cash flow sweep, only budgeted operating expenses are disbursed to the Company and any remaining excess funds are deposited into a redevelopment reserve and/or a cash flow sweep reserve, each of which are controlled by the lender. Amounts in the redevelopment reserve are available for disbursement to fund approved redevelopment costs and amounts in the cash flow sweep reserve are credited against the Company’s liquidity requirements and can, in certain instances, be used in part to meet its dividend requirements.

The Company believes it is currently in compliance with all material terms and conditions of the Loan Agreements. While the imposition of a cash flow sweep potentially could limit its operational flexibility, the Company does not believe that the mere imposition of a cash flow sweep, at present, would materially disrupt its business or operations.

Net cash provided by operating activities for the nine months ended September 30, 2016 was $99.1 million and included (i) $59.2 million of cash from operating income and (ii) a $39.9 million net increase in cash due to the timing of cash receipts and payments related to changes in operating assets and liabilities. Net cash provided by operating activities for the period from July 7, 2015 (Date Operations Commenced) to September 30, 2015 was $7.5 million and included (i) $1.7 million of cash from operating income (net of acquisition-related expenses of $18.3 million) and (ii) a $5.8 million net increase in cash due to timing of cash receipts and payments related to changes in operating assets and liabilities.

Net cash used in investing activities for the nine months ended September 30, 2016 was $35.5 million which reflected property redevelopment activity, including that which was funded with capital held in a reserve account for certain redevelopment projects. The reserve account is included in restricted cash on the Company’s condensed consolidated balance sheets. Net cash used in investing activities for the period from July 7, 2015 (Date Operations Commenced) to September 30, 2015 was $2.7 billion which was primarily a result of the Transaction.

Net cash used in financing activities for the nine months ended September 30, 2016 was $36.4 million which was primarily due to $19.2 million of borrowings under the Company’s Future Funding Facility and $55.6 million of dividends and distributions paid during this time period. Net cash provided by financing activities for the period from July 7, 2015 (Date Operations Commenced) to September 30, 2015 was $2.8 billion and included (i) $1.6 billion of gross cash proceeds from the issuance of common stock and non-controlling interests; (ii) $1.2 billion of gross cash proceeds from the issuance of the Mortgage Loans; and (iii) $29.5 million of offering and financing costs.

On November 1, 2016, the Company declared a cash dividend of $0.25 per Class A and Class C common share for the three months ending December 31, 2016. The holders of Operating Partnership units are entitled to an equal distribution per Operating Partnership unit held on December 31, 2016. The dividends and distributions payable are recorded as liabilities on the Company's condensed consolidated balance sheet at September 30, 2016. The dividend has been reflected as a reduction of shareholders' equity and the distribution has been reflected as a reduction of the limited partners' non-controlling interest. These amounts will be paid on January 12, 2017.

On May 3, 2016, the Company declared a cash dividend of $0.25 per Class A and Class C common share for the three months ended June 30, 2016. The holders of Operating Partnership units were entitled to an equal distribution per Operating Partnership unit held on June 30, 2016. These amounts were paid on July 14, 2016.

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

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 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.

In May and June of 2015, four purported Sears Holdings shareholders filed lawsuits in the Delaware Court of Chancery challenging the Transaction, which lawsuits have since been consolidated into a single action captioned In re Sears Holdings Corporation Stockholder and Derivative Litigation, Consol. C.A. No. 11081-VCL (the “Action”). On October 15, 2015, plaintiffs filed a verified consolidated stockholder derivative complaint in the Action against the individual members of Sears Holdings’ Board of Directors, ESL Investments, Inc. (together with its affiliates, “ESL”), Sears Holdings’ CEO, Fairholme Capital Management L.L.C. (“FCM”), and Seritage. On July 12, 2016, the plaintiffs filed a verified consolidated amended stockholder derivative complaint (the “Amended Complaint”) against the same defendants and asserting substantially the same claims as set forth in the complaint filed in October 2015. The plaintiffs have brought the Action derivatively on behalf of Sears Holdings, which is named as a nominal defendant, and allege that the Sears Holdings directors, as well as ESL and Edward S. Lampert (in their capacity as the alleged controlling stockholder of Sears Holdings), breached their fiduciary duties to Sears Holdings shareholders by selling the Wholly Owned Properties to Seritage at a price that was unfairly low and was the result of a process that allegedly was flawed. The Amended Complaint also alleges that Seritage and FCM aided and abetted these alleged fiduciary breaches. Among other forms of relief, the Amended Complaint seeks damages in unspecified amounts. In October 2016, following mediation, the parties reached an agreement-in-principle to settle the Action, subject to the negotiation and execution of settlement documentation, customary releases of defendants, final court approval, and other customary conditions. Pursuant to the settlement, the defendants and the D&O insurers for the individual members of the Sears Holdings’ Board of Directors have agreed to pay (assuming satisfaction of all conditions) $40 million, of which Seritage has agreed to pay $19 million. The defendants continue to deny the claims asserted and will enter into the settlement solely to avoid the burden, expense, distraction, and inherent risk in and of litigation. While there can be no assurance that the agreement-in-principle will result in a definitive, court-approved agreement, the Company has determined that its liability is both probable and estimable as a result of the agreement-in-principle and has recorded a litigation charge of $19.0 million for the three months ended September 30, 2016. The Company believes that the plaintiffs’ claims and allegations against the Company are legally without merit and, if the settlement is not approved, intends to contest these lawsuits vigorously.

The Company accounts for its investments in joint ventures that it does not have a controlling interest or is not the primary beneficiary using the equity method of accounting and those investments are reflected on the condensed consolidated balance sheets of the Company as investments in unconsolidated joint ventures. As of September 30, 2016 and December 31, 2015, we did not have any off-balance sheet financing arrangements.

We are currently retenanting or redeveloping several properties primarily to convert single-tenant buildings occupied by Sears Holdings into multi-tenant properties occupied by a diversity of retailers and related concepts. The table below summarizes the Company’s current redevelopment pipeline:

(dollars in thousands)

Total

Estimated

Total Project

Development

Project

Construction

Substantial

Property

Description

Square Feet

Cost (1)

Start

Completion

King of Prussia, PA

Repurpose former auto center space for Outback Steakhouse, Yard House and small shop retail

29,100

3,900

Underway

Q4 2016

Braintree, MA

100% recapture; redevelopment of existing building to be anchored by Nordstrom Rack and Saks OFF 5th

90,000

11,700

12,100

Underway

Q4 2016

Honolulu, HI

100% recapture; redevelopment of existing building for Longs Drugs (CVS), PetSmart and Ross Dress for Less

79,000

8,500

19,700

Underway

Q2 2017

San Antonio, TX

Recapture and repurpose auto center space for Orvis, Jared's Jeweler and small shop retail

18,900

3,300

Underway

Q2 2017

Memphis, TN

100% recapture; demolish and construct new buildings for Nordstrom Rack, Ulta Beauty, additional junior anchors, small shop retail and restaurants

135,200

24,100

25,200

Underway

Q3 2017

Ft. Wayne, IN

Site densification; new outparcel for BJ's Brewhouse

7,600

1,100

Q4 2016

Q2 2017

Albany, NY

Recapture and repurpose auto center space for BJ's Brewhouse and additional restaurants

28,000

5,700

Q4 2016

Q3 2017

Bowie, MD

Recapture and repurpose auto center space for BJ's Brewhouse

8,200

1,900

Q4 2016

Q3 2017

Hagerstown, MD

Recapture and repurpose auto center space for BJ's Brewhouse and additional restaurants

15,400

2,700

Q4 2016

Q4 2017

Wayne, NJ

Partial recapture; redevelopment of existing store for Dave & Busters, additional junior anchors and restaurants

111,300

21,100

Q1 2017

Q4 2017

Fairfax, VA

Partial recapture; redevelopment of existing store and attached auto center for Dave & Busters, additional junior anchors and restaurants

110,300

18,600

Q1 2017

Q4 2017

Madison, WI

Partial recapture; redevelopment of existing store for Dave & Busters, additional junior anchors, small shop retail and restaurants

75,300

14,200

Q1 2017

Q4 2017

West Jordan, UT

Partial recapture; redevelopment of existing store and attached auto center for Burlington Stores and small shop retail

81,400

10,800

Q1 2017

Q4 2017

Warwick, RI

Recapture and repurpose auto center space for BJ's Brewhouse and additional retail

27,900

4,500

Q1 2017

Q4 2017

Roseville, MI

Partial recapture; redevelopment of existing store for At Home

100,400

5,400

Q1 2017

Q4 2017

Troy, MI

Partial recapture; redevelopment of existing store for At Home

100,000

5,500

Q1 2017

Q4 2017

West Hartford, CT

100% recapture; redevelopment of existing building for REI and other junior anchors

147,600

26,500

27,200

Q1 2017

Q1 2018

Anderson, SC

Partial recapture; redevelopment of existing building for Burlington Stores

124,300

7,600

Q2 2017

Q4 2017

North Hollywood, CA

Partial recapture; redevelopment of existing store for Burlington Stores and additional junior anchors

79,800

12,300

Q2 2017

Q1 2018

(dollars in thousands)

Total

Estimated

Total Project

Development

Project

Construction

Substantial

Property

Description

Square Feet

Cost (1)

Start

Completion

Charleston, SC

Partial recapture; redevelopment of existing store and detached auto center for Burlington Stores and additional retail

71,700

11,000

Q2 2017

Q1 2018

Rehoboth Beach, DE

Partial recapture; redevelopment of existing store to be anchored by Christmas Tree Shops and That! and PetSmart

56,700

8,600

Q2 2017

Q1 2018

Orlando, FL

100% recapture; demolish and construct new buildings for Floor & Décor, Orchard Supply Hardware, small shop retail and restaurants

139,200

19,600

19,900

Q2 2017

Q2 2018

Springfield, IL

Sears termination property; redevelopment of existing store for Burlington Stores, Outback Steakhouse, additional junior anchors and small shop retail

133,400

13,900

Q2 2017

Q2 2018

St. Petersburg, FL

100% recapture; demolish and construct new buildings for Dick's Sporting Goods, Lucky's Market, PetSmart and additional junior anchors, small shop retail and restaurants

142,400

21,300

22,900

Q2 2017

Q2 2018

Kearney, NE

Sears termination property; redevelopment of existing store for PetSmart and additional junior anchors

92,500

7,400

Q2 2017

Q2 2018

Total

2,005,600

271,200

286,500

We plan to fund these projects with available cash balances, cash flow from operations, draws against the Future Funding Facility, and other potential capital raising activities.

The Company also acquired 15 retenanting or redevelopment projects that were in various stages of development at the closing of the Transaction. Of the 15 projects acquired by the Company, eleven have been completed and delivered to tenants as of September 30, 2016. The remaining four projects, representing a total Company investment of approximately $8.6 million, are in process and have approximately $5.7 million remaining to be deployed as of September 30, 2016. Capital for these projects is held in a reserve account put in place at the closing of the Company’s formation transaction and is included in restricted cash on the Company’s condensed consolidated balance sheets.

The Company makes reference to NOI, Total NOI, FFO, Company FFO, EBITDA and Adjusted EBITDA.

We define NOI as income from property operations less property operating expenses. Other REITs may use different methodologies for calculating NOI, and accordingly, the Company's depiction of NOI may not be comparable to other REITs. We believe NOI provides useful information regarding the Company, its financial condition, and results of operations because it reflects only those income and expense items that are incurred at the property level.

The Company also uses Total NOI, which includes its proportional share of unconsolidated properties. We believe this form of presentation offers insights into the financial performance and condition of the Company as a whole given our ownership of unconsolidated properties that are accounted for under GAAP using the equity method. We also consider Total NOI to be a helpful supplemental measure of our operating performance because it excludes from NOI items such as straight-line rent, and amortization of intangibles resulting from acquisition accounting.

Due to the adjustments noted, NOI and Total NOI should only be used as an alternative measure of the Company's financial performance.

Earnings Before Interest Expense, Income Tax, Depreciation, and Amortization ("EBITDA") and Adjusted EBITDA

We define EBITDA as net income less depreciation, amortization, interest expense and provision for income and other taxes. EBITDA is a commonly used measure of performance in many industries, but may not be comparable to measures calculated by other companies. We believe EBITDA provides useful information to investors regarding our results of operations because it removes the impact of our capital structure (primarily interest expense) and our asset base (primarily depreciation and amortization). Management also believes the use of EBITDA facilitates comparisons between us and other equity REITs, retail property owners who are not REITs, and other capital-intensive companies.

The Company makes certain adjustments to EBITDA, which it refers to as Adjusted EBITDA, to account for certain non-cash and non-comparable items, such as loss on interest rate cap, litigation charges, acquisition-related expenses, and up-front-hiring and personnel costs, that it does not believe are representative of ongoing operating results.

Due to the adjustments noted, EBITDA and Adjusted EBITDA should only be used as an alternative measure of the Company's financial performance

We define FFO using the definition set forth by the National Association of Real Estate Investment Trusts ("NAREIT"), which may not be comparable to measures calculated by other companies who do not use the NAREIT definition of FFO. FFO is calculated as net income computed in accordance with GAAP, excluding gains (or losses) from property sales, real estate related depreciation and amortization, and impairment charges on depreciable real estate assets.

We consider FFO a helpful supplemental measure of the operating performance for equity REITs and a complement to GAAP measures because it is a recognized measure of performance by the real estate industry. FFO facilitates an understanding of the operating performance of our properties between periods because it does not give effect to real estate depreciation and amortization which are calculated to allocate the cost of a property over its useful life. Since values for well-maintained real estate assets have historically increased or decreased based upon prevailing market conditions, the Company believes that FFO provides investors with a clearer view of the Company's operating performance.

The Company makes certain adjustments to FFO, which it refers to as Company FFO, to account for certain non-cash and non-comparable items, such as loss on interest rate cap, litigations charges, acquisition-related expenses, and up-front-hiring and personnel costs, that it does not believe are representative of ongoing operating results. The Company previously referred to this metric as Normalized FFO; the definition and calculation remain the same.

Due to the adjustments noted, FFO and Company FFO should only be used as an alternative measure of the Company's financial performance.

None of NOI, Total NOI, EBITDA, Adjusted EBITDA, FFO and Company FFO are measures that (i) represent cash flow from operations as defined by GAAP; (ii) are indicative of cash available to fund all cash flow needs, including the ability to make distributions; (iii) are alternatives to cash flow as a measure of liquidity; or (iv) should be considered alternatives to net income (which is determined in accordance with GAAP) for purposes of evaluating the Company’s operating performance. Reconciliations of these measures to the respective GAAP measures we deem most comparable are presented below on a comparative basis for all periods.

The following table reconciles NOI and Total NOI to GAAP net loss for the three and nine months ended September 30, 2016 (in thousands):

				July 7, 2015
	Three Months Ended			(date operations commenced) to			Nine Months Ended
	September 30,			September 30,			September 30,
NOI	2016			2015			2016
Net loss	$	(37,247	)	$	(31,853	)	$	(64,526	)
Depreciation and amortization		44,532			32,935			121,365
General and administrative		4,252			5,782			13,104
Litigation charge		19,000			-			19,000
Acquisition-related expenses		-			18,340			73
Equity in income of unconsolidated joint ventures		(1,497	)		(2,720	)		(4,495	)
Interest and other income		(77	)		(38	)		(196	)
Interest expense		15,931			14,796			47,297
Unrealized loss on interest rate cap		47			2,814			1,898
Provision for income taxes		72			451			412
NOI	$	45,013		$	40,507		$	133,932

Total NOI
NOI		45,013			40,507			133,932
NOI of unconsolidated joint ventures		6,431			6,286			20,057
Straight-line rent adjustment (1)		(3,100	)		(4,124	)		(11,526	)
Above/below market rental income/expense (1)		(257	)		(207	)		(681	)
Total NOI	$	48,087		$	42,462		$	141,782

The following table reconciles EBITDA and Adjusted EBITDA to GAAP net loss for the three and nine months ended September 30, 2016 (in thousands):

				July 7, 2015
	Three Months Ended			(date operations commenced) to			Nine Months Ended
	September 30,			September 30,			September 30,
EBITDA	2016			2015			2016
Net loss	$	(37,247	)	$	(31,853	)	$	(64,526	)
Depreciation and amortization		44,532			32,935			121,365
Depreciation and amortization (unconsolidated joint ventures)		5,191			3,688			15,653
Interest expense		15,931			14,796			47,297
Provision for income and other taxes		72			451			412
EBITDA	$	28,479		$	20,017		$	120,201

Adjusted EBITDA
EBITDA	$	28,479		$	20,017		$	120,201
Unrealized loss on interest rate cap		47			2,814			1,898
Litigation charge		19,000			-			19,000
Acquisition-related expenses		-			18,340			73
Up-front hiring and personnel costs		-			1,795			328
Adjusted EBITDA	$	47,526		$	42,966		$	141,500

The following table reconciles FFO and Company FFO to GAAP net loss for the three and nine months ended September 30, 2016 (in thousands):

				July 7, 2015
	Three Months Ended			(date operations commenced) to			Nine Months Ended
	September 30,			September 30,			September 30,
Funds from Operations	2016			2015			2016
Net loss	$	(37,247	)	$	(31,853	)	$	(64,526	)
Real estate depreciation and amortization (consolidated properties)		44,307			32,935			120,845
Real estate depreciation and amortization (unconsolidated joint ventures)		5,191			3,688			15,653
FFO attributable to common shareholders and unitholders	$	12,251		$	4,770		$	71,972

FFO per diluted common share and unit	$	0.22		$	0.09		$	1.29

Company Funds from Operations
Funds from Operations attributable to Seritage Growth Properties	$	12,251		$	4,770		$	71,972
Unrealized loss on interest rate cap		47			2,814			1,898
Amortization of deferred financing costs		1,340			1,324			4,020
Litigation charge		19,000			-			19,000
Acquisition-related expenses		-			18,340			73
Up-front hiring and personnel costs		-			1,795			328
Company FFO attributable to common shareholders and unitholders	$	32,638		$	29,043		$	97,291

Company FFO per diluted common share and unit	$	0.59		$	0.52		$	1.75

Weighted Average Common Shares and Units Outstanding
Weighted average common shares outstanding		31,419			31,384			31,414
Weighted average OP units outstanding		24,176			24,176			24,176
Weighted average common shares and units outstanding		55,595			55,560			55,590

Except as discussed below, there were no material changes in the Quantitative and Qualitative Disclosures about Market Risk set forth in our 2015 Annual Report on Form 10-K.

As of September 30, 2016, we had $1.2 billion of Mortgage Loans Payable. The interest rate on the loans is the 30-day LIBOR rate plus a weighted average spread of 465 basis points. We have purchased a LIBOR interest rate cap that has a LIBOR strike rate of 3.5% and a term of four years. We are subject to market risk with respect to changes in the LIBOR rate. An immediate 100 basis point change in interest rates would have affected annual pretax funding costs by approximately $11.8 million.

The estimated fair value of our consolidated debt is calculated based on current market prices and discounted cash flows at the current rate at which similar loans would be made to borrowers with similar credit ratings for the remaining term of such debt. As of September 30, 2016, the estimated fair value of our consolidated debt was $1.2 billion.

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

There were no changes in our internal control over financial reporting that occurred during the period ended September 30, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

The information required by this Item is incorporated by reference to Note 10 of the condensed consolidated financial statements included herein.

Information regarding risk factors appears in our 2015 Annual Report on Form 10-K in Part I, Item 1A. Risk Factors. Other than as noted, there have been no material changes from the risk factors previously disclosed in our 2015 Annual Report on Form 10-K.

Covenants in our debt agreements may limit our operational flexibility, and a covenant breach or default could materially adversely affect our business and financial condition.

The agreements governing our indebtedness contain customary covenants for a real estate financing, including restrictions on the ability of the borrowers under the agreements governing our existing indebtedness to grant liens on their assets (including the Wholly Owned Properties and JV Interests, which comprise substantially all of our assets as of the closing of the Transaction), incur additional indebtedness, or transfer or sell assets. Such restrictions also include cash flow sweep provisions based on certain measures of our financial and operating performance, including in the case that “Debt Yield” (the ratio of net operating income for the borrowers to their debt) is less than 11.0% or if we fail to achieve certain thresholds for tenant diversification. If the performance of Sears Holdings at the stores subject to the Master Lease fails to meet specified thresholds and if the Company fails to satisfy additional tenant diversification tests and declines to provide a specified amount of cash collateral, then the cash flow sweep provisions of the Loan Agreements may also be triggered.

The Company and the servicer for our Mortgage Loans have reached an agreement-in-principle to resolve a disagreement regarding one of the cash flow sweep provisions in our Loan Agreements. The agreement-in-principle is expected to be reflected in an amendment to the loan agreements, pursuant to which (if finalized) the Company may post additional collateral to a redevelopment reserve, may extend the spread maintenance provision for the prepayment of the loan and may agree to a scheduled draw down of the future funding facility. There can be no assurance that the amendment will be completed or that, if it is not, the servicer will not seek to impose a cash flow sweep.

Were a cash flow sweep to be imposed (and for so long as a cash flow sweep period is imposed), we potentially could be constrained in our ability to use cash generated by the Wholly Owned Properties. In addition, during the pendency of the cash flow sweep, the lender would have certain consent rights over, among other things, our annual budget and variances thereto, redevelopment budgets and variances thereto, and capital improvements requiring capital expenditures that are not consistent with the approved annual budget or an approved redevelopment plan and budget. These enhanced consent rights potentially could limit our operational flexibility.

The covenants in our Loan Agreements also require Seritage to maintain a minimum consolidated liquidity and minimum consolidated net worth. Covenants that limit our operational flexibility as well as defaults under our debt instruments could have a material adverse effect on our business and financial condition.

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.


Maryland	38-3976287
(State of Incorporation)	(I.R.S. Employer Identification No.)


489 Fifth Avenue, 18th Floor, New York, New York	10017
(Address of principal executive offices)	(Zip Code)

Large accelerated filer	☐		Accelerated filer	☐
Non-accelerated filer	☒	(Do not check if a smaller reporting company)	Smaller reporting company	☐

Class	Shares Outstanding
Class A common shares of beneficial interest, par value $0.01 per share	25,825,651
Class B common shares of beneficial interest, par value $0.01 per share	1,589,020
Class C common shares of beneficial interest, par value $0.01 per share	5,772,285

PART I.	FINANCIAL INFORMATION
		Page

Item 1.	Condensed Consolidated Financial Statements (unaudited)
	Condensed Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015	3
	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2016 and the Period from July 7, 2015 (Date Operations Commenced) to September 30, 2015	4
	Condensed Consolidated Statements of Equity for the Nine Months Ended September 30, 2016 and the Period from July 7, 2015 (Date Operations Commenced) to September 30, 2015	5
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2016 and the Period from July 7, 2015 (Date Operations Commenced) to September 30, 2015	6
	Notes to Condensed Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26

Item 3.	Quantitative and Qualitative Disclosure about Market Risk	38

Item 4.	Controls and Procedures	38

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	39

Item 1A.	Risk Factors	39

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	40

Item 3.	Defaults upon Senior Securities	40

Item 4.	Mine Safety Disclosures	40

Item 5.	Other Information	40

Item 6.	Exhibits	41

SIGNATURES		42

Building:	25 – 40 years
Site improvements:	5 – 15 years
Tenant improvements:	shorter of the estimated useful life or non-cancelable term of lease

	Gross		Accumulated
Lease Intangible Assets	Asset		Amortization			Balance
In-place leases, net	$	595,350	$	(108,614	)	$	486,736
Below-market ground leases, net		11,766		(254	)		11,512
Above-market leases, net		8,964		(1,648	)		7,316
Total	$	616,080	$	(110,516	)	$	505,564

	Gross		Accumulated
Lease Intangible Liabilities	Liability		Amortization			Balance
Below-market leases, net	$	20,045	$	(2,687	)	$	17,358
Total	$	20,045	$	(2,687	)	$	17,358

Remainder of 2016	$	(248	)
2017		(991	)
2018		(991	)
2019		(964	)
2020		(830	)
2021		(817	)

Remainder of 2016	$	37,422
2017		69,997
2018		68,021
2019		65,617
2020		63,290
2021		55,697

	# of		Total		Initial		Seritage %
Joint Venture	Properties		GLA		Investment		Ownership
GGP JV		12		2,162	$	165,000		50%
Macerich JV		9		1,574		150,000		50%
Simon JV		10		1,714		114,012		50%
Total		31		5,450	$	429,012

Property	Recapture Type		Notice Date
Braintree, MA		100%	November 2015
Honolulu, HI		100%	December 2015
Memphis, TN		100%	December 2015
San Antonio, TX	Auto center		March 2016
Bowie, MD	Auto center		May 2016
Hagerstown, MD	Auto center		May 2016
Albany, NY	Auto center		May 2016
Fairfax, VA	Partial + auto center		May 2016
Wayne, NJ	Partial		May 2016
Ft. Wayne, IN	Out parcel		July 2016
Orlando, FL		100%	July 2016
Anderson, SC	Partial		July 2016
West Jordan, UT	Partial		July 2016
Madison, WI	Partial + auto center		July 2016
North Hollywood, CA	Partial		July 2016

Property	Square Feet
Cullman, AL		98,500
Sierra Vista, AZ		86,100
Thornton, CO		190,200
Chicago, IL		118,800
Springfield, IL		84,200
Elkhart, IN		86,500
Merrillville, IN		108,300
Houma, LA		96,700
New Iberia, LA		91,700
Alpena, MI		118,200
Manistee, MI		87,800
Sault Sainte Marie, MI		92,700
Kearney, NE		86,500
Deming, NM		96,600
Harlingen, TX		91,700
Yakima, WA		97,300
Riverton, WY		94,800
Total square feet		1,726,600

(in thousands except per share amounts)				July 7, 2015
	Three Months Ended			(date operations commenced) to			Nine Months Ended
	September 30,			September 30,			September 30,
	2016			2015			2016
Numerator - Basic and Diluted
Net loss	$	(37,247	)	$	(31,853	)	$	(64,526	)
Net loss attributable to non-controlling interests		16,145			13,552			27,972
Net loss attributable to common shareholders	$	(21,102	)	$	(18,301	)	$	(36,554	)

Denominator - Basic and Diluted
Weighted average Class A common shares outstanding		25,671			24,699			25,443
Weighted average Class C common shares outstanding		5,748			6,685			5,971
Weighted average Class A and Class C common shares outstanding		31,419			31,384			31,414

Net loss per share attributable to Class A and Class C common shareholders	$	(0.67	)	$	(0.58	)	$	(1.16	)

	Nine Months Ended September 30, 2016
				Weighted-
				Average Grant
	Shares			Date Fair Value
Unvested restricted shares at beginning of period		221,484		$	37.18

Restricted shares granted		23,324			46.48
Restricted shares vested		(28,460	)		31.18
Restricted shares forfeited		-			-

Unvested restricted shares at end of period		216,348		$	38.98

	September 30, 2016		December 31, 2015
Accrued real estate taxes	$	25,407	$	25,333
Litigation reserve		19,000		-
Below-market leases		17,358		18,986
Dividends payable		14,659		27,894
Prepaid rental income		13,558		1,331
Accounts payable and accrued expenses		12,893		13,793
Environmental reserve		11,596		11,824
Deferred maintenance		7,001		10,281
Accrued interest		2,727		2,748
Sears Holdings payable		6,084		8,670
Total accounts payable, accrued expenses and other liabilities	$	130,283	$	120,860

Exhibit No.	Description	SEC Document Reference

31.1	Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed herewith.

31.2	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed herewith.

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

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

101.INS	XBRL Instance Document	Filed herewith.

101.SCH	XBRL Taxonomy Extension Schema Document	Filed herewith.

101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document	Filed herewith.

101.DEF	XBRL Taxonomy Extension Definition Linkbase Document	Filed herewith.

101.LAB	XBRL Taxonomy Extension Label Linkbase Document	Filed herewith.

101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document	Filed herewith.

	SERITAGE GROWTH PROPERTIES

Dated: November 4, 2016	/s/ Benjamin Schall
	By:	Benjamin Schall
	President and Chief Executive Officer

Dated: November 4, 2016	/s/ Brian Dickman
	By:	Brian Dickman
	Executive Vice President and Chief Financial Officer