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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):  August 2, 2018

SERITAGE GROWTH PROPERTIES

(Exact Name of Registrant as Specified in Its Charter)

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):

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§ 230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§ 240.12b-2 of this chapter).

Emerging growth company ☐

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

On August 2, 2018, Seritage Growth Properties issued a press release regarding its financial results for the quarter ended June 30, 2018. A copy of the press release is furnished as Exhibit 99.1 to this report.

In addition, on August 2, 2018, Seritage Growth Properties published certain supplementary financial information relating to the quarter ended June 30, 2018.  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.

(d) Exhibits

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.

Date: August 2, 2018

Exhibit 99.1

Seritage Growth Properties Reports Second Quarter 2018 Operating Results

New York, NY – August 2, 2018 – Seritage Growth Properties (NYSE: SRG) (the “Company”), a national owner of 248 retail properties totaling approximately 39 million square feet of gross leasable area (“GLA”), today reported financial and operating results for the three and six months ended June 30, 2018.

Summary of Financial Results

For the three months ended June 30, 2018:

For the six months ended June 30, 2018:

“We are pleased with our strong second quarter highlighted by 853,000 square feet of newly signed leases and the commencement of five new redevelopment projects and one expansion project for a total investment of $58.2 million.  Our annual base rent from diversified, non-Sears tenants is now approximately $127.3 million, or 57% of total rent, including all signed leases, and a 190% increase since our inception three years ago,” said Benjamin Schall, President and Chief Executive Officer.  “Additionally, as we continue to position Seritage as a preferred partner for institutional capital providers, we were pleased to form two new joint ventures with equity partners this quarter to own and redevelop our properties in La Jolla, California and West Hartford, Connecticut.  And, subsequent to the quarter end, we announced a new $2.0 billion term loan with Berkshire Hathaway, a transformational step for the company and one that provides our platform with enhanced liquidity and flexibility to further capitalize on our pipeline of opportunities.”

Operating Highlights

During the quarter ended June 30, 2018, including the Company’s proportional share of its unconsolidated joint ventures:

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During the quarter ended June 30, 2018:

In addition, subsequent to the quarter end, the Company entered into a new $2.0 billion term loan facility with Berkshire Hathaway Life Insurance Company.  The term loan facility, which matures on July 31, 2023, provided for an initial funding of $1.6 billion at closing and includes a committed $400 million incremental funding facility.

Financial Results

Net Income / Net Loss

For the three months ended June 30, 2018, net loss attributable to Class A and Class C shareholders was $8.0 million, or $0.23 per diluted share, as compared to a net loss of $21.2 million, or $0.63 per diluted share, for the prior year period.  For the six months ended June 30, 2018, net income attributable to Class A and Class C shareholders was $1.1 million, or $0.03 per diluted share, as compared to a net loss of $41.1 million, or $1.22 per diluted share, for the prior year period.

Total NOI

For the three months ended June 30, 2018, Total NOI, which includes the Company’s proportional share of NOI from properties owned through investments in its unconsolidated joint ventures, was $36.5 million as compared to $44.7 million for the prior year period.  For the six months ended June 30, 2018, Total NOI was $73.3 million as compared to $91.6 million for the prior year period.

The decrease in Total NOI in both periods was driven primarily by reduced rental income under the master lease with Sears Holdings as a result of recapture and termination activity at our wholly-owned properties.  Since inception, approximately 13.3 million square feet of leased space, representing approximately $52.2 million of annual base rent, has been taken offline through recapture and termination activity.  The Company has signed new leases totaling approximately 6.1 million square feet to diversified, non-Sears tenants for an aggregate annual base rent of approximately $106.0 million.  The majority of our remaining signed but not opened (“SNO”) leases, which totaled $70.6 million as of June 30, 2018, are expected to begin paying rent over the next 6-18 months and, subject to additional recapture and termination activity, the Company expects Total NOI to increase as SNO leases convert to rent paying and as the Company signs new leases with diversified, non-Sears tenants to occupy currently unleased space.

In addition, the Company sold its interests in 13 unconsolidated joint venture properties and 50% interests in five wholly-owned properties in the second half of 2017 and sold 50% interests in three wholly-owned properties in the first half of 2018, which contributed to the decrease in Total NOI.

FFO and Company FFO

For the three months ended June 30, 2018, FFO, as calculated in accordance with NAREIT, was $6.5 million, or $0.12 per diluted share, as compared to $23.8 million, or $0.43 per diluted share, for the prior year period.  For the six months ended June 30, 2018, FFO was $17.5 million, or $0.31 per diluted share, as compared to $54.8 million, or $0.99 per diluted share, for the prior year period.

For the three months ended, June 30, 2018, Company FFO was $8.5 million, or $0.15 per diluted share, as compared to $25.7 million, or $0.46 per diluted share, for the prior year period.  For the six months ended June 30, 2018, Company FFO was $21.0 million, or $0.38 per diluted share, as compared to $52.7 million, or $0.95 per diluted share, for the prior year period.

The decreases in FFO and Company FFO in both periods were driven by the same factors driving the decrease in Total NOI, as well as lower termination fee income, lower straight-line rent as a result of recapture and termination activity at our properties, higher G&A expenses driven by our growing platform and the outperformance of targets related to performance-based restricted stock, and dividends related to preferred equity issued in the fourth quarter of 2017.

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Portfolio Summary

As of June 30, 2018, the Company’s portfolio included interests in 248 retail properties totaling approximately 39 million square feet of gross leasable area, including 222 wholly-owned properties and 26 properties owned through investments in unconsolidated joint ventures.  The Company’s portfolio includes 119 properties attached to regional malls and 129 shopping center or freestanding properties.

The portfolio was 81.3% leased, including unconsolidated joint ventures at the Company’s proportional share, and included 58 properties leased only to diversified, non-Sears tenants, 85 properties leased to Sears Holdings and one or more diversified, non-Sears tenants, and 81 properties leased only to Sears Holdings; 24 properties in the portfolio were vacant as of June 30, 2018.  Of the properties leased to Sears Holdings, 124 operated under the Sears brand and 42 operated under the Kmart brand.

The unleased space as of June 30, 2018 included approximately 2.1 million SF of remaining lease-up at announced redevelopment projects, and approximately 4.7 million SF of additional leasing opportunity at properties in the Company’s redevelopment pipeline.

During the quarter ended June 30, 2018, the Company formed two new joint venture partnerships to own The Collection at UTC and the Corbin Collection, redevelopments of former Sears stores in La Jolla, CA and West Hartford, CT, respectively, and sold a former Sears store and redeveloped auto center in Hagerstown, MD.

Leasing Update

During the quarter ended June 30, 2018, the Company signed new leases totaling 853,000 square feet at an average annual base rent of $14.19 PSF.  On a same-space basis, new rents averaged 3.6x prior rents for space currently or formerly occupied by Sears Holdings, increasing to $14.19 PSF for new tenants compared to $3.96 PSF paid by Sears Holdings across 853,000 square feet.

The table below provides a summary of the Company’s leasing activity since inception, including unconsolidated joint ventures presented at the Company’s proportional share:

During the quarter ended June 30, 2018, the Company added $12.1 million of new diversified, non-Sears income and increased annual base rent attributable to diversified, non-Sears tenants to 56.9% of total annual base rent from 44.0% as of June 30, 2017, including all signed leases and net of rent attributable to the associated space to be recaptured.

The table below provides a summary of all the Company’s signed leases as of June 30, 2018, including unconsolidated joint ventures presented at the Company’s proportional share:

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Development Update

Wholly-Owned Properties

During the quarter ended June 30, 2018, the Company commenced five new redevelopment projects representing an estimated total investment of $53.4 million and expanded one previously announced project representing an estimated incremental and total investment of $4.8 million and $11.3 million, respectively.

The table below summarizes project commencements in the Company’s wholly-owned portfolio since inception:

As of June 30, 2018, the Company had originated 73 wholly-owned projects since the Company’s inception.  These projects represent an estimated total investment of $1,281 million ($1,179 million at share), of which an estimated $881 million ($818 million at share) remains to be spent, and are expected to generate an incremental yield on cost of approximately 11.0%.

The table below provides additional information regarding the Company’s wholly-owned development activity from inception through June 30, 2018:

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The tables below provide brief descriptions of each of the redevelopment projects originated on the Company’s platform since its inception:

5

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Balance Sheet and Liquidity

As of June 30, 2018, the Company’s total market capitalization was approximately $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 34.1% and net debt to Adjusted EBITDA was 8.2x.  The Company deducts both unrestricted and restricted cash from total debt when calculating net debt.  Reconciliations of net income attributable to common shareholders to EBITDA and Adjusted EBITDA, are provided in the tables accompanying this press release.

As of June 30, 2018, the Company had $100.4 million of unrestricted cash and restricted cash of $166.5 million, the substantial majority of which was held in reserve accounts for redevelopment, re-leasing and operating expenses at the Company’s properties.  

During the quarter ended June 30, 2018, the Company reduced amounts outstanding under its mortgage loan by $58.4 million and added $7.1 million to its redevelopment reserve as a result of the new joint ventures in La Jolla, CA and West Hartford, CT and the disposition of its property in Hagerstown, MD.

New Term Loan Facility

Subsequent to June 30, 2018, the Company entered into a $2.0 billion term loan facility (the “Term Loan Facility”) with Berkshire Hathaway Life Insurance Company of Nebraska.  

The Term Loan Facility, which matures on July 31, 2023, provided for an initial funding of $1.6 billion at closing (the “Initial Funding”) and includes a committed $400 million incremental funding facility (the “Incremental Funding Facility”).  Funded amounts under the Term Loan Facility bear interest at a fixed annual rate of 7.00%, while amounts available under Incremental Funding Facility will be subject to a 1.00% annual fee until drawn.  

The Company used a portion of the proceeds from the Initial Funding to fully repay its outstanding mortgage loan and unsecured term loan.  Net proceeds from the Initial Funding, combined with existing balance sheet cash and the release of cash reserves held by the previous lender as of June 30, 2018, provide the Company with over $600 million of cash liquidity, in addition to access to the $400 million Incremental Funding Facility.

Dividends

The Company expects annual common dividends to adhere to REIT requirements with respect to taxable income which includes both ordinary income and capital gains from the sale of real estate.

On July 24, 2018, the Company’s Board of Trustees declared a third quarter common stock dividend of $0.25 per each Class A and Class C common share.  The common dividend will be paid on October 11, 2018 to shareholders of record on September 28, 2018.  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 September 28, 2018.  On July 24, 2018, the Company’s Board of Trustees also declared a preferred stock dividend of $0.4375 per each Series A Preferred Share.  The preferred dividend will be paid on October 15, 2018 to holders of record on September 28, 2018.

On April 24, 2018, the Company’s Board of Trustees declared a second quarter common stock dividend of $0.25 per each Class A and Class C common share.  The common dividend was paid on July 12, 2018 to shareholders of record on June 29, 2018.  Holders of units in the Operating Partnership were entitled to an equal distribution per each Operating Partnership unit held as of June 29, 2018.  On April 24, 2018, the Company’s Board of Trustees also declared a preferred stock dividend of $0.4375 per each Series A Preferred Share.  The preferred dividend was paid on July 16, 2018 to holders of record on June 29, 2018.

Supplemental Report

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

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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 variable 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 for Real Estate ("EBITDAre") and Company EBITDA

EBITDAre is calculated in accordance with 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 EBITDA.  EBITDAre is calculated as net income computed in accordance with GAAP, excluding interest expense, income tax expense, depreciation and amortization, gains (or losses) from property sales and impairment charges on depreciable real estate assets.  The Company believes EBITDAre provides useful information to investors regarding our 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 EBITDAre facilitates comparisons between us and other equity REITs and real property owners that are not REITs.

The Company makes certain adjustments to EBITDAre, which it refers to as Company EBITDA, to account for certain non-cash and non-comparable items, such as termination fee income, unrealized loss on interest rate cap, litigation charges, acquisition-related expenses 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 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 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.

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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 significant exposure to 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 relatively limited history as an operating company.  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 REIT with 222 wholly-owned properties and 26 joint venture properties totaling approximately 39 million square feet of space across 49 states and Puerto Rico.  The Company was formed to unlock the underlying real estate value of a high-quality retail portfolio it acquired from Sears Holdings in July 2015.  Pursuant to a master lease, the Company has the right to recapture certain space from Sears Holdings for retenanting or redevelopment purposes.  The Company’s mission is to create and own revitalized shopping, dining, entertainment and mixed-use destinations that provide enriched experiences for consumers and local communities, and create long-term value for our shareholders.

Contact

Seritage Growth Properties

646-277-1268

IR@Seritage.com

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Seritage Growth Properties

Consolidated Balance SheetS

(In thousands, except share and per share amounts)

(Unaudited)

11

Seritage Growth Properties

Consolidated Statements of OPERATIONS

(In thousands, except per share amounts)

(Unaudited)