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Section 1: 10-Q (10-Q)

srg-10q_20180630.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2018

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______to _______

Commission File Number 001-37420

SERITAGE GROWTH PROPERTIES

(Exact name of registrant as specified in its charter)

 

Maryland

38-3976287

(State of Incorporation)

(I.R.S. Employer Identification No.)

 

500 Fifth Avenue, Suite 1530, New York, New York

10110

(Address of principal executive offices)

(Zip Code)

 

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

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, a smaller reporting company or an emerging growth company.  See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 (Do not check if a smaller reporting company)

Smaller reporting company

Emerging growth company

 

 

 

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

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

As of July 27, 2018, the registrant had the following common shares outstanding:

 

Class

Shares Outstanding

Class A common shares of beneficial interest, par value $0.01 per share

35,685,933

Class B common shares of beneficial interest, par value $0.01 per share

1,322,365

Class C common shares of beneficial interest, par value $0.01 per share

850

 

 


SERITAGE GROWTH PROPERTIES

QUARTERLY REPORT ON FORM 10-Q

QUARTER ENDED JUNE 30, 2018

TABLE OF CONTENTS

 

PART I.

FINANCIAL INFORMATION

 

 

 

Page

 

 

 

Item 1.

Condensed Consolidated Financial Statements (unaudited)

 

 

Condensed Consolidated Balance Sheets as of June 30, 2018 and December 31, 2017

3

 

Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2018 and 2017

4

 

Condensed Consolidated Statements of Equity for the six months ended June 30, 2018 and 2017

5

 

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2018 and 2017

6

 

Notes to Condensed Consolidated Financial Statements

8

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

33

 

 

 

Item 3.

Quantitative and Qualitative Disclosure about Market Risk

45

 

 

 

Item 4.

Controls and Procedures

45

 

 

 

PART II.

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

46

 

 

 

Item 1A.

Risk Factors

46

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

46

 

 

 

Item 3.

Defaults upon Senior Securities

46

 

 

 

Item 4.

Mine Safety Disclosures

46

 

 

 

Item 5.

Other Information

46

 

 

 

Item 6.

Exhibits

47

 

 

 

SIGNATURES

 

48

 

 

 


PART I.

FINANCIAL INFORMATION

Item 1.

Unaudited Condensed Consolidated Financial Statements

SERITAGE GROWTH PROPERTIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, amounts in thousands, except share and per share amounts)

 

 

 

June 30, 2018

 

 

December 31, 2017

 

ASSETS

 

 

 

 

 

 

 

 

Investment in real estate

 

 

 

 

 

 

 

 

Land

 

$

711,261

 

 

$

799,971

 

Buildings and improvements

 

 

860,739

 

 

 

829,168

 

Accumulated depreciation

 

 

(157,991

)

 

 

(139,483

)

 

 

 

1,414,009

 

 

 

1,489,656

 

Construction in progress

 

 

209,237

 

 

 

224,904

 

Net investment in real estate

 

 

1,623,246

 

 

 

1,714,560

 

Real estate held for sale

 

 

15,139

 

 

 

 

Investment in unconsolidated joint ventures

 

 

392,743

 

 

 

282,990

 

Cash and cash equivalents

 

 

100,448

 

 

 

241,569

 

Restricted cash

 

 

166,458

 

 

 

175,665

 

Tenant and other receivables, net

 

 

43,911

 

 

 

30,787

 

Lease intangible assets, net

 

 

251,303

 

 

 

310,098

 

Prepaid expenses, deferred expenses and other assets, net

 

 

21,360

 

 

 

20,148

 

Total assets

 

$

2,614,608

 

 

$

2,775,817

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Mortgage loans payable, net

 

$

1,073,762

 

 

$

1,202,314

 

Unsecured term loan, net

 

 

144,111

 

 

 

143,210

 

Accounts payable, accrued expenses and other liabilities

 

 

97,541

 

 

 

109,433

 

Total liabilities

 

 

1,315,414

 

 

 

1,454,957

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 9)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders' Equity

 

 

 

 

 

 

 

 

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

   35,678,749 and 32,415,734 shares issued and outstanding as of

   June 30, 2018 and December 31, 2017, respectively

 

 

356

 

 

 

324

 

Class B common shares $0.01 par value; 5,000,000 shares authorized;

   1,322,365 and 1,328,866 shares issued and outstanding as of

   June 30, 2018 and December 31, 2017, respectively

 

 

13

 

 

 

13

 

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

   850 and 3,151,131 shares issued and outstanding as of

   June 30, 2018 and December 31, 2017, respectively

 

 

 

 

 

31

 

Series A preferred shares $0.01 par value; 10,000,000 shares authorized;

   2,800,000 shares issued and outstanding as of June 30, 2018

   and December 31, 2017; liquidation preference of $70,000

 

 

28

 

 

 

28

 

Additional paid-in capital

 

 

1,122,251

 

 

 

1,116,060

 

Accumulated deficit

 

 

(246,650

)

 

 

(229,760

)

Total shareholders' equity

 

 

875,998

 

 

 

886,696

 

Non-controlling interests

 

 

423,196

 

 

 

434,164

 

Total equity

 

 

1,299,194

 

 

 

1,320,860

 

Total liabilities and equity

 

$

2,614,608

 

 

$

2,775,817

 

 

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

 

 

- 3 -


SERITAGE GROWTH PROPERTIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, amounts in thousands, except per share amounts)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

REVENUE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

35,839

 

 

$

42,185

 

 

$

72,918

 

 

$

91,359

 

Tenant reimbursements

 

 

12,517

 

 

 

15,708

 

 

 

29,215

 

 

 

31,932

 

Management and other fee income

 

 

914

 

 

 

 

 

 

914

 

 

 

 

Total revenue

 

 

49,270

 

 

 

57,893

 

 

 

103,047

 

 

 

123,291

 

EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property operating

 

 

6,533

 

 

 

4,932

 

 

 

13,774

 

 

 

9,674

 

Real estate taxes

 

 

9,217

 

 

 

11,950

 

 

 

20,598

 

 

 

24,372

 

Depreciation and amortization

 

 

49,551

 

 

 

50,571

 

 

 

84,218

 

 

 

109,234

 

General and administrative

 

 

8,673

 

 

 

5,093

 

 

 

16,470

 

 

 

11,367

 

Provision for doubtful accounts

 

 

109

 

 

 

12

 

 

 

170

 

 

 

51

 

Total expenses

 

 

74,083

 

 

 

72,558

 

 

 

135,230

 

 

 

154,698

 

Operating loss

 

 

(24,813

)

 

 

(14,665

)

 

 

(32,183

)

 

 

(31,407

)

Equity in loss of unconsolidated joint

   ventures

 

 

(2,158

)

 

 

(1,542

)

 

 

(4,740

)

 

 

(540

)

Interest and other income

 

 

456

 

 

 

42

 

 

 

1,136

 

 

 

120

 

Interest expense

 

 

(17,862

)

 

 

(18,431

)

 

 

(34,281

)

 

 

(35,023

)

Unrealized loss on interest rate cap

 

 

(172

)

 

 

(124

)

 

 

(7

)

 

 

(595

)

Loss before income taxes

 

 

(44,549

)

 

 

(34,720

)

 

 

(70,075

)

 

 

(67,445

)

Provision for income taxes

 

 

(240

)

 

 

(147

)

 

 

(344

)

 

 

(266

)

Loss before gain on sale of real estate

 

 

(44,789

)

 

 

(34,867

)

 

 

(70,419

)

 

 

(67,711

)

Gain on sale of real estate

 

 

34,187

 

 

 

 

 

 

76,018

 

 

 

 

Net income (loss)

 

 

(10,602

)

 

 

(34,867

)

 

 

5,599

 

 

 

(67,711

)

Net (income) loss attributable to

   non-controlling interests

 

 

3,831

 

 

 

13,648

 

 

 

(2,042

)

 

 

26,654

 

Net income (loss) attributable to Seritage

 

$

(6,771

)

 

$

(21,219

)

 

$

3,557

 

 

$

(41,057

)

Preferred dividends

 

 

(1,225

)

 

 

 

 

 

(2,453

)

 

 

 

Net income (loss) attributable to Seritage common

   shareholders

 

$

(7,996

)

 

$

(21,219

)

 

$

1,104

 

 

$

(41,057

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share attributable to Seritage

   Class A and Class C common shareholders - Basic

 

$

(0.23

)

 

$

(0.63

)

 

$

0.03

 

 

$

(1.22

)

Net income (loss) per share attributable to Seritage

   Class A and Class C common shareholders - Diluted

 

$

(0.23

)

 

$

(0.63

)

 

$

0.03

 

 

$

(1.22

)

Weighted average Class A and Class C common

   shares outstanding - Basic

 

 

35,483

 

 

 

33,766

 

 

 

35,449

 

 

 

33,638

 

Weighted average Class A and Class C common

   shares outstanding - Diluted

 

 

35,483

 

 

 

33,766

 

 

 

35,588

 

 

 

33,638

 

 

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

 

 

 

- 4 -


SERITAGE GROWTH PROPERTIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(Unaudited, amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Non-

 

 

 

 

 

 

 

Class A Common

 

 

Class B Common

 

 

Class C Common

 

 

Series A Preferred

 

 

Paid-In

 

 

Accumulated

 

 

Controlling

 

 

Total

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Interests

 

 

Equity

 

Balance at January 1, 2017

 

 

25,843

 

 

$

258

 

 

 

1,589

 

 

$

16

 

 

 

5,755

 

 

$

58

 

 

 

 

 

$

 

 

$

925,563

 

 

$

(121,338

)

 

$

619,754

 

 

$

1,424,311

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(41,057

)

 

 

(26,654

)

 

 

(67,711

)

Dividends and

   distributions declared

   ($0.50 per share and unit)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(17,002

)

 

 

(10,936

)

 

 

(27,938

)

Vesting of restricted share units

 

 

4

 

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(0

)

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

779

 

 

 

 

 

 

 

 

 

779

 

Share class exchanges, net

   (267,300 common shares)

 

 

(267

)

 

 

(2

)

 

 

 

 

 

 

 

 

267

 

 

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share class surrenders

   (154,098 common shares)

 

 

 

 

 

 

 

 

(154

)

 

 

(2

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2

 

 

 

 

 

 

 

 

 

 

OP Unit exchanges

   (2,344,589 units)

 

 

2,344

 

 

 

23

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

69,329

 

 

 

 

 

 

(69,352

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2017

 

 

27,924

 

 

$

279

 

 

 

1,435

 

 

$

14

 

 

 

6,022

 

 

$

60

 

 

 

 

 

$

 

 

$

995,673

 

 

$

(179,397

)

 

$

512,812

 

 

$

1,329,441

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2018

 

 

32,416

 

 

$

324

 

 

 

1,329

 

 

$

13

 

 

 

3,151

 

 

$

31

 

 

 

2,800

 

 

$

28

 

 

$

1,116,060

 

 

$

(229,760

)

 

$

434,164

 

 

$

1,320,860

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,557

 

 

 

2,042

 

 

 

5,599

 

Common dividends and

   distributions declared

   ($0.50 per share and unit)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(17,994

)

 

 

(10,084

)

 

 

(28,078

)

Preferred dividends

   declared ($0.8750 per share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,453

)

 

 

 

 

 

(2,453

)

Vesting of restricted share units

 

 

14

 

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(0

)

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,379

 

 

 

 

 

 

 

 

 

3,379

 

Preferred stock offering costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(113

)

 

 

 

 

 

 

 

 

(113

)

Share class exchanges, net

   (3,150,281 common shares)

 

 

3,150

 

 

 

31

 

 

 

 

 

 

 

 

 

(3,150

)

 

 

(31

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share class surrenders

   (6,501 common shares)

 

 

 

 

 

 

 

 

(7

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OP Unit exchanges

   (98,923 units)

 

 

99

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,925

 

 

 

 

 

 

(2,926

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2018

 

 

35,679

 

 

$

356

 

 

 

1,322

 

 

$

13

 

 

 

1

 

 

 

 

 

 

2,800

 

 

$

28

 

 

$

1,122,251

 

 

$

(246,650

)

 

$

423,196

 

 

$

1,299,194

 

 

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

 

 

- 5 -


SERITAGE GROWTH PROPERTIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, amounts in thousands)

 

 

 

Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

CASH FLOW FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net income (loss)

 

$

5,599

 

 

$

(67,711

)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Equity in loss of unconsolidated joint ventures

 

 

4,740

 

 

 

540

 

Gain on sale of real estate

 

 

(76,018

)

 

 

 

Unrealized loss on interest rate cap

 

 

7

 

 

 

595

 

Stock-based compensation

 

 

3,379

 

 

 

779

 

Depreciation and amortization

 

 

84,218

 

 

 

109,234

 

Amortization of deferred financing costs

 

 

3,590

 

 

 

4,061

 

Amortization of above and below market leases, net

 

 

(414

)

 

 

(594

)

Straight-line rent adjustment

 

 

(2,832

)

 

 

(3,479

)

Change in operating assets and liabilities

 

 

 

 

 

 

 

 

Tenants and other receivables

 

 

(3,076

)

 

 

265

 

Prepaid expenses, deferred expenses and other assets

 

 

(2,968

)

 

 

461

 

Accounts payable, accrued expenses and other liabilities

 

 

(20

)

 

 

(22,451

)

Net cash provided by operating activities

 

 

16,205

 

 

 

21,700

 

CASH FLOW FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Investment in unconsolidated joint ventures

 

 

(6,160

)

 

 

(15,047

)

Distributions from unconsolidated joint ventures

 

 

8,505

 

 

 

7,515

 

Net proceeds from sale of real estate

 

 

134,599

 

 

 

 

Development of real estate

 

 

(142,003

)

 

 

(106,075

)

Net cash used in investing activities

 

 

(5,059

)

 

 

(113,607