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Section 1: 8-K (8-K)

srg-8k_20170228.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 8-K

 

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

Date of Report (Date of earliest event reported):  February 28, 2017

 

SERITAGE GROWTH PROPERTIES

(Exact Name of Registrant as Specified in Its Charter)

 

 

Maryland

 

001-37420

 

38-3976287

(State or Other Jurisdiction

of Incorporation)

 

(Commission

File Number)

 

(IRS Employer

Identification No.)

 

 

 

 

 

489 Fifth Avenue, 18th Floor

New York, New York

 

10017

(Address of principal executive offices)

 

(Zip code)

 

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

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

 

 

 


Item 2.02

Results of Operations and Financial Condition.

On February 28, 2017, Seritage Growth Properties issued a press release regarding its financial results for the year ended December 31, 2016. A copy of the press release is furnished as Exhibit 99.1 to this report.

In addition, on February 28, 2017, Seritage Growth Properties published certain supplementary financial information relating to the year ended December 31, 2016.  Such information is furnished as Exhibit 99.2 to this report.

In accordance with General Instruction B.2 of Form 8-K, the information in this Current Report on Form 8-K, including Exhibit 99.1, shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liability of that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.

Item 9.01

Financial Statements and Exhibits.

(d) Exhibits

 

Exhibit No.

 

Description

 

 

 

99.1

 

Press release dated February 28, 2017, furnished pursuant to Item 2.02.

 

 

 

99.2

 

Supplementary Financial Information dated February 28, 2017, furnished pursuant to Item 2.02.

 


SIGNATURE

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 hereunto duly authorized.

 

SERITAGE GROWTH PROPERTIES 

 

By:

 

/s/ Matthew Fernand

 

 

Matthew Fernand

 

 

Executive Vice President, General

Counsel & Secretary

 

Date: February 28, 2017

 


Exhibit Index

 

Exhibit No.

 

Description

 

 

 

99.1

 

Press release dated February 28, 2017, furnished pursuant to Item 2.02.

 

 

 

99.2

 

Supplementary Financial Information dated February 28, 2017, furnished pursuant to Item 2.02.

 

(Back To Top)

Section 2: EX-99.1 (EX-99.1)

srg-ex991_7.htm

Exhibit 99.1

 

Seritage Growth Properties Reports Fourth Quarter and Full Year 2016 Operating Results

New York, NY – February 28, 2017 – Seritage Growth Properties (NYSE: SRG) (the “Company”), a national owner of 266 properties totaling over 42 million square feet of gross leasable area (“GLA”), today reported financial and operating results for the three months and year ended December 31, 2016.

Financial Results

For the three months ended December 31, 2016:

Net loss attributable to common shareholders of $15.0 million, or $0.48 per diluted share

Total Net Operating Income (“Total NOI”) of $48.7 million

Funds from Operations (“FFO”) of $34.5 million, or $0.62 per diluted share

Company FFO of $30.0 million, or $0.54 per diluted share

For the year ended December 31, 2016:

Net loss attributable to common shareholders of $51.6 million, or $1.64 per diluted share

Total NOI of $190.5 million

FFO of $106.5 million, or $1.92 per diluted share

Company FFO of $127.3 million, or $2.29 per diluted share

Operational Highlights

For the year ended December 31, 2016, including the Company’s proportional share of its unconsolidated joint ventures (“JVs”):

Increased annualized Total NOI by approximately 14.0% to an estimated $226.7 million, including all signed leases and net of rent attributable to the associated space to be recaptured, compared to an estimated $198.9 million as of December 31, 2015.

Signed new leases totaling 2.1 million square feet at an average annual base rent of $17.68 PSF, including 891,000 square feet at $16.72 PSF in the fourth quarter.

Achieved releasing spreads of 4.4x on new leases signed for space currently or formerly occupied by Sears Holdings Corporation (“Sears Holdings”), with new rents averaging $17.86 PSF compared to $4.03 PSF paid by Sears Holdings across 1.9 million square feet on a same-space basis.

Increased annual base rent attributable to third-party tenants to 36.1% compared to 24.0% as of December 31, 2015, including all signed leases and net of rent attributable to the associated space to be recaptured.

Announced 28 new redevelopment projects with a total projected cost of $335.0 million and completed six previously announced projects with a total cost of approximately $36.5 million.

“In just 18 months, we have established Seritage as one of the most active developers of retail real estate in the country with 48 projects, representing a total investment of over $460 million, completed or commenced,” said Benjamin Schall, President and Chief Executive Officer. “For the 33 projects we’ve initiated fully on our platform, we are expecting incremental returns in excess of 12% on an unlevered basis, and project stabilized income of almost $70 million, an increase of over 330% versus in-place income.  And once completed, more than 90% of the income from these 33 projects will be derived from a diverse group of growing retailers, and less than 10% from Sears Holdings. As we look to 2017, we have a strong pipeline of leasing and redevelopment activity that we’re focused on executing, and expect to realize rental spreads and returns on capital for that pipeline that are consistent with those that we’ve achieved thus far.  We continue to see strong demand for our well-located properties from a range of growing retailers, and are energized to build off our momentum as we diversify our tenant base, grow net operating income and create value for our shareholders.”


Financial Results

For the three months ended December 31, 2016, net loss attributable to Class A and Class C shareholders was $15.0 million, or $0.48 per diluted share, as compared to a net loss of $4.0 million, or $0.13 per diluted share, for the prior year period.  For the year ended December 31, 2016, net loss attributable to Class A and Class C shareholders was $51.6 million, or $1.64 per diluted share.

For the three months ended December 31, 2016, Total NOI, which includes the Company’s proportional share of NOI from 31 properties owned through investments in its unconsolidated JVs, was $48.7 million as compared to $47.0 million for the prior year period.  For the year ended December 31, 2016, Total NOI was $190.5 million.

For the three months ended December 31, 2016, FFO, as calculated in accordance with the National Association of Real Estate Investment Trusts (“NAREIT”) definition, was $34.5 million, or $0.62 per diluted share, as compared to $31.3 million, or $0.56 per diluted share, for the prior year period.  For the year ended December 31, 2016, FFO was $106.5 million, or $1.92 per diluted share.

For the three months ended December 31, 2016, Company FFO was $30.0 million, or $0.54 per diluted share, as compared to $32.9 million, or $0.59 per diluted share, for the prior year period.  For the year ended December 31, 2016, Company FFO was $127.3 million, or $2.29 per diluted share.  The Company makes certain adjustments to FFO, which it refers to as Company FFO, to account for certain non-cash and non-comparable items, such as termination fee income, unrealized gain or loss on interest rate cap, litigation charges, acquisition-related expenses, amortization of deferred financing costs and certain 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.

Portfolio Summary

As of December 31, 2016, the Company’s portfolio included interests in 266 retail properties totaling over 42 million square feet of gross leasable area, including 235 wholly-owned properties and 31 properties owned through investments in unconsolidated JVs.  Approximately 50% of the portfolio consisted of properties attached to regional malls and approximately 50% consisted of shopping center or freestanding properties.

The portfolio was 99.2% leased and included 15 properties leased only to third-party tenants, 125 properties leased to Sears Holdings and one or more third-party tenants, and 126 properties leased only to Sears Holdings.  Of the properties leased to Sears Holdings, 169 operated under the Sears brand and 82 operated under the Kmart brand.

Subsequent to December 31, 2016, Sears Holdings vacated 17 Kmart stores pursuant to termination notices previously submitted to the Company (see “Sears Holdings Terminations under the Master Lease”).  Including the effect of the terminations, the portfolio was 95.5% leased.

Development Update

Wholly-Owned Properties

During the year ended December 31, 2016, the Company commenced 28 projects representing an estimated total investment of $335.0 million, including eight new projects representing an estimated total investment of $112.7 million in the fourth quarter.

As of December 31, 2016, the Company’s wholly-owned development pipeline consisted primarily of 33 projects originated on the Seritage platform.  These projects represent an estimated total investment of $399.1 million, of which $353.9 million remained to be spent.  An additional two projects with a total investment of $5.1 million, of which $3.8 million remained to be spent, were acquired by the Company as part of the initial acquisition of its portfolio.


The table below summarizes the Company’s wholly-owned development activity from inception through December 31, 2016:

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Aggregate

 

 

Aggregate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

Aggregate

 

 

Estimated

 

 

Estimated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated

Estimated

 

Number

 

 

Project

 

 

Development

 

 

Project

 

 

Projected Annual Income (2)

 

 

Incremental

Project Cost (1)

 

of Projects

 

 

Square Feet

 

 

Costs (1)

 

 

Costs (1)

 

 

Total

 

 

Existing

 

 

Incremental

 

 

Yield (3)

< $10,000

 

 

15

 

 

 

883,600

 

 

$

67,200

 

 

$

67,200

 

 

$

14,900

 

 

$

5,800

 

 

$

9,100

 

 

 

$10,001 - $20,000

 

 

13

 

 

 

1,169,400

 

 

 

176,900

 

 

 

188,800

 

 

 

29,500

 

 

 

8,900

 

 

 

20,600

 

 

 

> $20,000

 

 

5

 

 

 

633,100

 

 

 

133,100

 

 

 

143,100

 

 

 

25,300

 

 

 

6,300

 

 

 

19,000

 

 

 

New Projects

 

 

33

 

 

 

2,686,100

 

 

$

377,200

 

 

$

399,100

 

 

$

69,700

 

 

$

21,000

 

 

$

48,700

 

 

12.0 - 13.0%

Acquired projects

 

 

15

 

 

 

 

 

 

 

63,600

 

 

 

63,600

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

48

 

 

 

 

 

 

$

440,800

 

 

$

462,700

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Total estimated development costs exclude, and total estimated project costs include, termination fees to recapture 100% of certain properties.

(2)

Projected annual income includes assumptions on stabilized rents to be achieved for space under redevelopment.  There can be no assurance that stabilized rent targets will be achieved.

(3)

Projected incremental annual income divided by total estimated project costs.

The table below provides additional information, including a brief description, for each of the 33 new redevelopment projects originated on the Seritage platform.  Notably, during the three months ended December 31, 2016, Saks OFF 5th opened at The Marketplace at Braintree, joining Nordstrom Rack and Ulta Beauty and marking the substantial completion of the first redevelopment project originated solely on the Seritage platform.

 

Total Project Costs under $10 Million

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

Estimated

 

Estimated

 

 

 

 

 

 

 

 

 

 

 

 

Project

 

 

Construction

 

Substantial

Property

 

Description

 

Square Feet

 

 

Start

 

Completion

King of Prussia, PA

 

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

 

 

29,100

 

 

Delivered to tenants

Ft. Wayne, IN

 

Site densification; new outparcel for BJ's Brewhouse

 

 

7,594

 

 

Underway

 

Q2 2017

San Antonio, TX

 

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

 

 

18,890

 

 

Underway

 

Q2 2017

Albany, NY

 

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

 

 

27,973

 

 

Underway

 

Q3 2017

Bowie, MD

 

Recapture and repurpose auto center space for BJ's Brewhouse

 

 

8,202

 

 

Underway

 

Q3 2017

Hagerstown, MD

 

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

 

 

15,427

 

 

Underway

 

Q4 2017

Merrillville, IN

 

Termination property; redevelopment of existing store for At Home

 

 

132,000

 

 

Q1 2017

 

Q2 2017

Roseville, MI

 

Partial recapture; redevelopment of existing store for At Home

 

 

100,374

 

 

Q1 2017

 

Q4 2017

Troy, MI

 

Partial recapture; redevelopment of existing store for At Home

 

 

100,046

 

 

Q1 2017

 

Q4 2017

Warwick, RI

 

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

 

 

27,906

 

 

Q1 2017

 

Q4 2017

Anderson, SC

 

Partial recapture; redevelopment of existing building for Burlington Stores

 

 

124,331

 

 

Q2 2017

 

Q4 2017

Rehoboth Beach, DE

 

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

 

 

56,691

 

 

Q2 2017

 

Q1 2018

Kearney, NE

 

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

 

 

92,451

 

 

Q2 2017

 

Q2 2018

Elkhart, IN

 

Termination property; existing store has been released to Big R Stores

 

 

86,500

 

 

Q3 2017

 

Q2 2018

Guaynabo, PR

 

Partial recapture; redevelopment of existing store for Planet Fitness and additional retail

 

 

56,100

 

 

Q3 2017

 

Q2 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


Total Project Costs $10 - $20 Million

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

Estimated

 

Estimated

 

 

 

 

 

 

 

 

 

 

 

 

Project

 

 

Construction

 

Substantial

Property

 

Description

 

Square Feet

 

 

Start

 

Completion

Braintree, MA

 

100% recapture; redevelopment of existing building for Nordstrom Rack and Saks OFF 5th

 

 

90,000

 

 

Substantially complete

Honolulu, HI

 

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

 

 

79,000

 

 

Underway

 

Q2 2017

Fairfax, VA

 

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

 

 

110,252

 

 

Q1 2017

 

Q4 2017

Madison, WI

 

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

 

 

75,300

 

 

Q1 2017

 

Q4 2017

West Jordan, UT

 

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

 

 

81,427

 

 

Q1 2017

 

Q4 2017

Charleston, SC

 

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

 

 

71,710

 

 

Q2 2017

 

Q1 2018

North Hollywood, CA

 

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

 

 

79,788

 

 

Q2 2017

 

Q1 2018

Orlando, FL

 

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

 

 

139,209

 

 

Q2 2017

 

Q2 2018

Springfield, IL

 

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

 

 

133,351

 

 

Q2 2017

 

Q2 2018

Santa Cruz, CA

 

Partial recapture; redevelopment of existing store for TJ Maxx, Homegoods and Petco

 

 

62,200

 

 

Q3 2017

 

Q1 2018

Saugus, MA

 

Partial recapture; redevelopment of existing store and detached auto center for Round 1 Entertainment and restaurants

 

 

99,000

 

 

Q3 2017

 

Q1 2018

Carson, CA

 

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

 

 

77,000

 

 

Q3 2017

 

Q1 2019

Salem, NH

 

Site densification; new theatre for Cinemark

Recapture and repurpose auto center for restaurant space

 

 

71,200

 

 

Q4 2017

 

Q3 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Project Costs over $20 Million

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

Estimated

 

Estimated

 

 

 

 

 

 

 

 

 

 

 

 

Project

 

 

Construction

 

Substantial

Property

 

Description

 

Square Feet

 

 

Start

 

Completion

Memphis, TN

 

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

 

 

135,220

 

 

Underway

 

Q3 2017

Wayne, NJ

 

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

 

 

111,346

 

 

Q1 2017

 

Q4 2017

West Hartford, CT

 

100% recapture; redevelopment of existing building for REI, Saks OFF Fifth, other junior anchors, Shake Shack and additional small shop retail

 

 

147,630

 

 

Q1 2017

 

Q1 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

 

 

142,366

 

 

Q2 2017

 

Q2 2018

Santa Monica, CA

 

100% recapture; redevelopment of existing building into premier, mixed-use asset featuring unique, small-shop retail and creative office space

 

 

96,500

 

 

Q4 2017

 

Q4 2019

 

JV Properties

During the three months ended December 31, 2016, Primark opened at Burlington Mall in a store owned by the Company’s unconsolidated JV with Simon Property Group, Inc. (the “Simon JV”).

This opening represents the substantial completion of the third of four JV projects that were in various stages of development when they were acquired by the Company in July 2015.  Earlier in 2016, Primark opened at Danbury Fair Mall and Freehold Raceway Mall in stores owned by the Company’s unconsolidated JV with The Macerich Company (the “Macerich JV”), and, at Staten Island Mall, a Primark store owned by the Company’s unconsolidated JV with GGP Inc. (the “GGP JV”), is under construction.


During the three months ended December 31, 2016, the GGP JV announced plans to recapture space at five 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.

As of December 31, 2016, the GGP JV has initiated redevelopment projects at four additional properties, including Staten Island Mall in Staten Island, NY, Coronado Mall in Albuquerque, NM, Pembroke Lakes Mall in Pembroke Pines, FL, and Valley Plaza Mall in Bakersfield, CA.

Leasing Update

During the year ended December 31, 2016, the Company signed new leases totaling 2.1 million square feet at an average annual base rent of $17.68 PSF, including 891,000 square feet at $16.72 PSF in the fourth quarter.  On a same-space basis, new rents were 4.4x higher than prior rents for space currently or formerly occupied by Sears Holdings, increasing to $17.86 PSF for new tenants compared to $4.03 PSF paid by Sears Holdings across 1.9 million square feet.

The table below provides a summary of the Company’s 2016 leasing activity by quarter, including unconsolidated JVs presented at the Company’s proportional share:

 

(in thousands except number of leases and PSF data)

 

 

 

Total

 

 

Release of Sears Holdings Space

 

 

 

 

 

 

 

Leased

 

 

Annual

 

 

Annual

 

 

 

 

 

 

Leased

 

 

Annual

 

 

Annual

 

 

Releasing

 

Quarter

 

Leases

 

 

GLA

 

 

Rent

 

 

Rent PSF

 

 

Leases

 

 

GLA

 

 

Rent

 

 

Rent PSF

 

 

Spread

 

First

 

 

7

 

 

 

214

 

 

$

6,990

 

 

$

32.60

 

 

 

7

 

 

 

214

 

 

$

6,990

 

 

$

32.60

 

 

 

5.7

x

Second

 

 

15

 

 

 

422

 

 

 

7,240

 

 

 

17.15

 

 

 

13

 

 

 

363

 

 

 

6,440

 

 

 

17.75

 

 

 

4.7

x

Third

 

 

14

 

 

 

543

 

 

 

7,470

 

 

 

13.74

 

 

 

12

 

 

 

456

 

 

 

6,250

 

 

 

13.70

 

 

 

4.0

x

Fourth

 

 

29

 

 

 

891

 

 

 

14,900

 

 

 

16.72

 

 

 

27

 

 

 

849

 

 

 

13,930

 

 

 

16.41

 

 

 

4.1

x

Total 2016

 

 

65

 

 

 

2,070

 

 

$

36,600

 

 

$

17.68

 

 

 

59

 

 

 

1,882

 

 

$

33,610

 

 

$

17.86

 

 

 

4.4

x

During the year ended December 31, 2016, the Company added $36.6 million of new third-party income and increased annual base rent attributable to third-party tenants to 36.1% from 24.0% as of December 31, 2015, including all signed leases and net of rent attributable to the associated space to be recaptured.

The table below provides a summary of all of the Company’s signed leases as of December 31, 2016, including unconsolidated JVs presented at the Company’s proportional share:

 

(in thousands except number of leases and PSF data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of

 

 

Leased

 

 

% of Total

 

 

Annual

 

 

% of Total

 

 

Annual

 

Tenant

 

Leases

 

 

GLA

 

 

Leased GLA

 

 

Rent

 

 

Annual Rent

 

 

Rent PSF

 

Sears Holdings (1)

 

 

251

 

 

 

33,663

 

 

 

85.9

%

 

$

148,167

 

 

 

63.9

%

 

$

4.40

 

In-Place Third-Party Leases

 

 

243

 

 

 

3,325

 

 

 

8.5

%

 

 

42,356

 

 

 

18.3

%

 

 

12.74

 

SNO Third-Party Leases

 

 

77

 

 

 

2,218

 

 

 

5.7

%

 

 

41,152

 

 

 

17.8

%

 

 

18.55

 

Sub-Total Third-Party Leases

 

 

320

 

 

 

5,543

 

 

 

14.1

%

 

 

83,508

 

 

 

36.1

%

 

 

15.07

 

Total

 

 

571

 

 

 

39,206

 

 

 

100.0

%

 

$

231,675

 

 

 

100.0

%

 

$

5.91

 

 

(1)

Leases reflects number of properties subject to the Master Lease and JV Master Leases.

Sears Holdings Terminations under the Master Lease

On January 3, 2017, pursuant to notices previously submitted to the Company and the terms of the Master Lease between subsidiaries of the Company and subsidiaries of Sears Holdings, Sears Holdings vacated 17 stores totaling 1.7 million square feet of gross leasable area.  The aggregate annual base rent at these stores was approximately $6.0 million, or 2.6% of the Company's total annual base rent as of December 31, 2016, including all signed leases.  In connection with the termination, Sears Holdings paid Seritage a termination fee of approximately $10.0 million, an amount equal to one year of the aggregate annual base rent and estimated operating expenses for the 17 properties.


Also on January 3, 2017, pursuant to the terms of the Master Lease between subsidiaries of the Company and subsidiaries of Sears Holdings, Sears Holdings provided notice that it intends to exercise its right to terminate the Master Lease with respect to 19 additional stores totaling 1.9 million square feet of gross leasable area.  The aggregate annual base rent at these stores is approximately $5.9 million, or 2.5% of the Company's total annual base rent as of December 31, 2016, including all signed leases.  Sears Holdings will continue to pay Seritage rent until it vacates the stores which is expected to occur in April 2017.  Pursuant to the Master Lease, Sears Holdings will also pay Seritage a termination fee equal to one year of the aggregate annual base rent and estimated operating expenses for the 19 properties.

Balance Sheet and Liquidity

As of December 31, 2016, the Company’s total market capitalization was $3.6 billion.  Total market capitalization is calculated as the sum of total debt and the market value of the Company's outstanding shares of common stock, assuming conversion of operating partnership units.

Total debt to total market capitalization was 33.1% and net debt to Adjusted EBITDA was 5.6x.  The Company deducts both unrestricted and restricted cash from total debt when calculating net debt.  Reconciliations of net loss attributable to common shareholders to EBITDA, and EBITDA to Adjusted EBITDA, are provided in the tables accompanying this press release.

As of December 31, 2016, the Company had $52.0 million of unrestricted cash and restricted cash of $87.6 million, the substantial majority of which is held in reserve accounts for redevelopment, re-leasing and operating expenses at the Company’s properties.  The Company also had approximately $80.0 million of investment capital available through its $100.0 million future funding facility, of which approximately $20.0 million was drawn as of December 31, 2016.

Mortgage Loan Amendment

In November 2016, the Company and the servicer for its existing mortgage loan facility entered into an amendment to resolve a disagreement regarding one of the cash flow sweep provisions in the loan agreements. The principal terms of the amendment are that the Company has (i) posted $30.0 million, and will post $3.3 million on a monthly basis, to a redevelopment reserve account, which amounts may be used by the Company to fund redevelopment projects and (ii) extended the spread maintenance provision for prepayment of the loan by two months through March 9, 2018 (with the spread maintenance premium for the second month at a reduced amount).  As a result of this amendment and the resolution of the related disagreement, no cash flow sweep was imposed.

Unsecured Term Loan Facility

In February 2017, the Company entered into a $200.0 million senior unsecured delayed draw term loan facility (the “Facility”) with entities controlled by ESL Investments, Inc.  Edward S. Lampert, the Company’s Chairman, is the sole stockholder, chief executive officer and director of ESL Investments, Inc.  The Company expects to use the proceeds of the Facility to fund redevelopment projects and for general corporate purposes.

The total commitments under the Facility are $200.0 million, provided that the maximum draw amount under the Facility through April 30, 2017 is $100.0 million, which amount increases to $150.0 million on May 1, 2017 and $200.0 million on September 1, 2017, in each instance so long as no cash flow sweep period (as defined in the Company’s existing mortgage loan facility on file with the Securities Exchange Commission) is then in effect and continuing as of such date.  Amounts drawn under the Facility and repaid may not be redrawn.  

The Facility will mature the earlier of (i) December 31, 2017 and (ii) the date on which the outstanding indebtedness under the Company’s existing mortgage and mezzanine facilities are repaid in full.  The Facility may be prepaid at any time in whole or in part, without any penalty or premium.    

The principal amount of loans outstanding under the Facility will bear a base annual interest rate of 6.50%.  If a cash flow sweep period were to occur and be continuing under the Company’s existing mortgage loan indebtedness (i) the interest rate on any outstanding advances would increase from and after such date by 1.50% per annum above the base interest rate and (ii) the interest rate on any advances made after such date would increase by 3.50% per annum above the base interest rate, in each case, for so long as the cash flow sweep is continuing.  Accrued and unpaid interest will be payable in cash, except that during the continuance of a cash flow sweep period under the Company’s existing mortgage loan facility, the Company may defer the payment of interest which deferred amount would be added to the outstanding principal balance of the loans and on which interest would be payable from and after the date of such deferral.


Dividend

On February 28, 2017, the Company’s Board of Trustees declared a first quarter common stock dividend of $0.25 per each Class A and Class C common share.  The dividend will be paid on April 13, 2017 to shareholders of record on March 31, 2017.  Holders of units in Seritage Growth Properties, L.P. (the “Operating Partnership”) are entitled to an equal distribution per each Operating Partnership unit held as of March 31, 2017.

On November 1, 2016, the Company’s Board of Trustees declared a fourth quarter common stock dividend of $0.25 per each Class A and Class C common share.  The dividend was paid on January 12, 2017 to shareholders of record on December 31, 2016.  Holders of units in Seritage Growth Properties, L.P. (the “Operating Partnership”) were entitled to an equal distribution per each Operating Partnership unit held as of December 31, 2016.

Supplemental Report

A Supplemental Report will be available in the Investors section of the Company’s website, www.seritage.com.

Non-GAAP Financial Measures

The Company makes reference to NOI, Total NOI, EBITDA, Adjusted EBITDA, FFO and Company FFO which are financial measures that include adjustments to accounting principles generally accepted in the United States (“GAAP”).

None of Total NOI, EBITDA, Adjusted EBITDA, FFO or 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 have been provided in the tables accompanying this press release.

Net Operating Income ("NOI”), Total NOI and Annualized Total NOI

NOI is defined as income from property operations less property operating expenses.  The Company believes NOI provides useful information regarding Seritage, its financial condition, and results of operations because it reflects only those income and expense items that are incurred at the property level.

The Company also uses Total NOI, which includes its proportional share of unconsolidated properties.  This form of presentation offers insights into the financial performance and condition of the Company as a whole given the Company’s ownership of unconsolidated properties that are accounted for under GAAP using the equity method.  The Company also considers Total NOI to be a helpful supplemental measure of its operating performance because it excludes from NOI non-recurring items such as termination fee income, as well as non-cash items such as straight-line rent and amortization of lease intangibles.

Annualized Total NOI is an estimate, as of the end of the reporting period, of the annual Total NOI to be generated by the Company’s portfolio including all signed leases and modifications to the Company’s master lease with Sears Holdings with respect to recaptured space.   We calculate Annualized Total NOI by adding or subtracting current period adjustments for leases that commenced or expired during the period to Total NOI (as defined) for the period and annualizing, and then adding estimated annual Total NOI attributable to SNO leases and subtracting estimated annual Total NOI attributable to Sears Holdings’ space to be recaptured.

Annualized Total NOI is a forward-looking non-GAAP measure for which the Company does not believe it can provide reconciling information to a corresponding forward-looking GAAP measure without unreasonable effort.

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

EBITDA is defined 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.  The Company believes EBITDA provides useful information to investors regarding its results of operations because it removes the impact of the Company’s capital structure (primarily interest expense) and its asset base (primarily depreciation and amortization).  Management also believes the use of EBITDA facilitates comparisons between the Company 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 termination fee income, unrealized gain or loss on interest rate cap, litigation charges, acquisition-related expenses, and certain up-front-hiring and personnel costs, that it does not believe are representative of ongoing operating results.


Funds From Operations ("FFO") and Company FFO

FFO is calculated in accordance with the National Association of Real Estate Investment Trusts ("NAREIT"), which defines FFO as net income computed in accordance with GAAP, excluding gains (or losses) from property sales, real estate related depreciation and amortization, and impairment charges on depreciable real estate assets.  The Company considers FFO a helpful supplemental measure of the operating performance for equity REITs and a complement to GAAP measures because it is a recognized measure of performance by the real estate industry.  

The Company makes certain adjustments to FFO, which it refers to as Company FFO, to account for certain non-cash and non-comparable items, such as termination fee income, unrealized gain or loss on interest rate cap, litigation charges, acquisition-related expenses, amortization of deferred financing costs and certain 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.

Forward-Looking Statements

This document contains forward-looking statements, which are based on the current beliefs and expectations of management and are subject to significant risks, assumptions and uncertainties that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements.  Factors that could cause or contribute to such differences include, but are not limited to:  competition in the real estate and retail industries; our substantial dependence on Sears Holdings; Sears Holdings’ termination and other rights under its master lease with us; risks relating to our recapture and redevelopment activities; contingencies to the commencement of rent under leases; the terms of our indebtedness; restrictions with which we are required to comply in order to maintain REIT status and other legal requirements to which we are subject; and our limited operating history.  For additional discussion of these and other applicable risks, assumptions and uncertainties, see the “Risk Factors” and forward-looking statement disclosure contained in filings with the Securities and Exchange Commission.  While we believe that our forecasts and assumptions are reasonable, we caution that actual results may differ materially.  We intend the forward-looking statements to speak only as of the time made and do not undertake to update or revise them as more information becomes available, except as required by law.

About Seritage Growth Properties

Seritage Growth Properties is a publicly-traded, self-administered and self-managed retail REIT with 235 wholly-owned properties and 31 JV properties totaling over 42 million square feet of space across 49 states and Puerto Rico.  Pursuant to a master lease, 203 of the Company’s wholly-owned properties are leased to Sears Holdings and are operated under either the Sears or Kmart brand.  The master lease provides the Company with the right to recapture certain space from Sears Holdings at each property for retenanting or redevelopment purposes.  At several properties, third-party tenants under direct leases occupy a portion of leasable space alongside Sears and Kmart, and 20 properties are leased only to third parties.  The Company also owns 50% interests in 31 properties through JV investments with General Growth Properties, Inc., Simon Property Group, Inc., and The Macerich Company.  A substantial majority of the space at the Company’s JV properties is also leased to Sears Holdings under master lease agreements that provide for similar recapture rights as the master lease governing the Company’s wholly-owned properties.

Contact

Seritage Growth Properties

646-277-1268

IR@Seritage.com


Seritage Growth Properties

Consolidated Balance SheetS

(In thousands, except share and per share amounts)

(Unaudited)

 

 

December 31, 2016

 

 

December 31, 2015

 

ASSETS

 

 

 

 

 

 

 

 

Investment in real estate

 

 

 

 

 

 

 

 

Land

 

$

840,021

 

 

$

840,563

 

Buildings and improvements

 

 

839,663

 

 

 

814,652

 

Accumulated depreciation

 

 

(89,940

)

 

 

(29,076

)

 

 

 

1,589,744

 

 

 

1,626,139

 

Construction in progress

 

 

55,208

 

 

 

13,136

 

Net investment in real estate

 

 

1,644,952

 

 

 

1,639,275

 

Investment in unconsolidated joint ventures

 

 

425,020

 

 

 

427,052

 

Cash and cash equivalents

 

 

52,026

 

 

 

62,867

 

Restricted cash

 

 

87,616

 

 

 

92,475

 

Tenant and other receivables, net

 

 

23,172

 

 

 

9,772

 

Lease intangible assets, net

 

 

464,399

 

 

 

578,795

 

Prepaid expenses, deferred expenses and other assets, net

 

 

15,052

 

 

 

23,123

 

Total assets

 

$

2,712,237

 

 

$

2,833,359

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Mortgage loans payable, net

 

$

1,166,871

 

 

$

1,142,422

 

Accounts payable, accrued expenses and other liabilities

 

 

121,055

 

 

 

120,860

 

Total liabilities

 

 

1,287,926

 

 

 

1,263,282

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 10)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders' Equity

 

 

 

 

 

 

 

 

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

   25,843,251 and 24,817,842 shares issued and outstanding as of

   December 31, 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 December 31, 2016 and

   December 31, 2015

 

 

16

 

 

 

16

 

Class C shares $0.01 par value; 50,000,000 shares authorized;

   5,754,685 and 6,773,185 shares issued and outstanding as of

   December 31, 2016 and December 31, 2015, respectively

 

 

58

 

 

 

68

 

Additional paid-in capital

 

 

925,563

 

 

 

924,508

 

Accumulated deficit

 

 

(121,338

)

 

 

(38,145

)

Total shareholders' equity

 

 

804,557

 

 

 

886,695

 

Non-controlling interests

 

 

619,754

 

 

 

683,382

 

Total equity

 

 

1,424,311

 

 

 

1,570,077

 

Total liabilities and equity

 

$

2,712,237

 

 

$

2,833,359

 

 


Seritage Growth Properties

Consolidated Statements of OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

July 7, 2015

 

 

 

Three Months Ended

 

 

Year Ended

 

 

(date operations

commenced) to

 

 

 

December 31, 2016

 

 

December 31, 2015

 

 

December 31, 2016

 

 

December 31, 2015

 

REVENUE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

49,684

 

 

$

45,256

 

 

$

186,421

 

 

$

86,645

 

Tenant reimbursements

 

 

16,512

 

 

 

14,252

 

 

 

62,253

 

 

 

26,926

 

Total revenue

 

 

66,196

 

 

 

59,508

 

 

 

248,674

 

 

 

113,571

 

EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property operating

 

 

4,334

 

 

 

3,514

 

 

 

21,510

 

 

 

6,329

 

Real estate taxes

 

 

12,580

 

 

 

11,614

 

 

 

43,681

 

 

 

22,355

 

Depreciation and amortization

 

 

55,754

 

 

 

32,972

 

 

 

177,119

 

 

 

65,907

 

General and administrative

 

 

4,365

 

 

 

4,174

 

 

 

17,469

 

 

 

9,956

 

Litigation charge

 

 

 

 

 

 

 

 

19,000

 

 

 

 

Provision for doubtful accounts

 

 

 

 

 

 

 

 

269

 

 

 

 

Acquisition-related expenses

 

 

 

 

 

57

 

 

 

73

 

 

 

18,397

 

Total expenses

 

 

77,033

 

 

 

52,331

 

 

 

279,121

 

 

 

122,944

 

Operating loss

 

 

(10,837

)

 

 

7,177

 

 

 

(30,447

)

 

 

(9,373

)

Equity in income of unconsolidated joint ventures

 

 

151

 

 

 

2,052

 

 

 

4,646

 

 

 

4,772

 

Interest and other income

 

 

70

 

 

 

98

 

 

 

266

 

 

 

136

 

Interest expense

 

 

(16,294

)

 

 

(15,665

)

 

 

(63,591

)

 

 

(30,461

)

Unrealized loss on interest rate cap

 

 

520

 

 

 

(119

)

 

 

(1,378

)

 

 

(2,933

)

Loss before income taxes

 

 

(26,390

)

 

 

(6,457

)

 

 

(90,504

)

 

 

(37,859

)

Provision for income taxes

 

 

(93

)

 

 

(493

)

 

 

(505

)

 

 

(944

)

Net loss

 

 

(26,483

)

 

 

(6,950

)

 

 

(91,009

)

 

 

(38,803

)

Net loss attributable to non-controlling interests

 

 

11,479

 

 

 

2,913

 

 

 

39,451

 

 

 

16,465

 

Net loss attributable to common shareholders

 

$

(15,004

)

 

$

(4,037

)

 

$

(51,558

)

 

$

(22,338

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share attributable to Class A and Class C

   common shareholders - Basic and diluted

 

$

(0.48

)

 

$

(0.13

)

 

$

(1.64

)

 

$

(0.71

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average Class A and Class C

   common shares outstanding - Basic and diluted

 

 

31,418

 

 

 

31,391

 

 

 

31,416

 

 

 

31,386

 

 


Reconciliation of Net Loss to NOI and Total NOI

 

 

 

 

 

 

 

 

 

 

 

 

 

 

July 7, 2015

 

 

 

Three Months Ended

 

 

Year Ended

 

 

(date operations

commenced) to

 

NOI

 

December 31, 2016

 

 

December 31, 2015

 

 

December 31, 2016

 

 

December 31, 2015

 

Net loss

 

$

(26,483

)

 

$

(6,950

)

 

$

(91,009

)

 

$

(38,803

)

Termination fee income

 

 

(5,288

)

 

 

 

 

 

(5,288

)

 

 

 

Depreciation and amortization

 

 

55,754

 

 

 

32,972

 

 

 

177,119

 

 

 

65,907

 

General and administrative

 

 

4,365

 

 

 

4,174

 

 

 

17,469

 

 

 

9,956

 

Litigation charge

 

 

 

 

 

 

 

 

19,000

 

 

 

 

Acquisition-related expenses

 

 

 

 

 

57

 

 

 

73

 

 

 

18,397

 

Equity in income of unconsolidated joint ventures

 

 

(151

)

 

 

(2,052

)

 

 

(4,646

)

 

 

(4,772

)

Interest and other income

 

 

(70

)

 

 

(98

)

 

 

(266

)

 

 

(136

)

Interest expense

 

 

16,294