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Section 1: 10-Q (10-Q)

srg-10q_20180930.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 SEPTEMBER 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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  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

 

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 October 26, 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

35,667,521

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

0

 

 


SERITAGE GROWTH PROPERTIES

QUARTERLY REPORT ON FORM 10-Q

QUARTER ENDED SEPTEMBER 30, 2018

TABLE OF CONTENTS

 

PART I.

FINANCIAL INFORMATION

 

 

 

Page

 

 

 

Item 1.

Condensed Consolidated Financial Statements (unaudited)

 

 

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

3

 

Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2018 and 2017

4

 

Condensed Consolidated Statements of Equity for the nine months ended September 30, 2018 and 2017

5

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 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

35

 

 

 

Item 3.

Quantitative and Qualitative Disclosure about Market Risk

49

 

 

 

Item 4.

Controls and Procedures

49

 

 

 

PART II.

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

50

 

 

 

Item 1A.

Risk Factors

50

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

52

 

 

 

Item 3.

Defaults upon Senior Securities

52

 

 

 

Item 4.

Mine Safety Disclosures

52

 

 

 

Item 5.

Other Information

52

 

 

 

Item 6.

Exhibits

53

 

 

 

SIGNATURES

 

54

 

 

 


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)

 

 

 

September 30, 2018

 

 

December 31, 2017

 

ASSETS

 

 

 

 

 

 

 

 

Investment in real estate

 

 

 

 

 

 

 

 

Land

 

$

700,725

 

 

$

799,971

 

Buildings and improvements

 

 

883,042

 

 

 

829,168

 

Accumulated depreciation

 

 

(165,011

)

 

 

(139,483

)

 

 

 

1,418,756

 

 

 

1,489,656

 

Construction in progress

 

 

263,696

 

 

 

224,904

 

Net investment in real estate

 

 

1,682,452

 

 

 

1,714,560

 

Real estate held for sale

 

 

15,144

 

 

 

 

Investment in unconsolidated joint ventures

 

 

399,878

 

 

 

282,990

 

Cash and cash equivalents

 

 

581,621

 

 

 

241,569

 

Restricted cash

 

 

 

 

 

175,665

 

Tenant and other receivables, net

 

 

45,214

 

 

 

30,787

 

Lease intangible assets, net

 

 

207,947

 

 

 

310,098

 

Prepaid expenses, deferred expenses and other assets, net

 

 

32,780

 

 

 

20,148

 

Total assets

 

$

2,965,036

 

 

$

2,775,817

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Term Loan Facility, net

 

$

1,598,123

 

 

$

 

Mortgage loans payable, net

 

 

 

 

 

1,202,314

 

Unsecured term loan, net

 

 

 

 

 

143,210

 

Accounts payable, accrued expenses and other liabilities

 

 

115,508

 

 

 

109,433

 

Total liabilities

 

 

1,713,631

 

 

 

1,454,957

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 9)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders' Equity

 

 

 

 

 

 

 

 

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

   35,667,521 and 32,415,734 shares issued and outstanding

   as of September 30, 2018 and December 31, 2017, respectively

 

 

357

 

 

 

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 September 30, 2018 and December 31, 2017, respectively

 

 

13

 

 

 

13

 

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

   nil and 3,151,131 shares issued and outstanding

   as of September 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 September 30, 2018 and

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

 

 

28

 

 

 

28

 

Additional paid-in capital

 

 

1,124,461

 

 

 

1,116,060

 

Accumulated deficit

 

 

(279,092

)

 

 

(229,760

)

Total shareholders' equity

 

 

845,767

 

 

 

886,696

 

Non-controlling interests

 

 

405,638

 

 

 

434,164

 

Total equity

 

 

1,251,405

 

 

 

1,320,860

 

Total liabilities and equity

 

$

2,965,036

 

 

$

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 September 30,

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

REVENUE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

41,152

 

 

$

48,167

 

 

$

114,070

 

 

$

139,526

 

Tenant reimbursements

 

 

15,326

 

 

 

15,881

 

 

 

44,541

 

 

 

47,813

 

Management and other fee income

 

 

115

 

 

 

 

 

 

1,029

 

 

 

 

Total revenue

 

 

56,593

 

 

 

64,048

 

 

 

159,640

 

 

 

187,339

 

EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property operating

 

 

6,348

 

 

 

4,311

 

 

 

20,122

 

 

 

13,985

 

Real estate taxes

 

 

12,199

 

 

 

11,335

 

 

 

32,797

 

 

 

35,707

 

Depreciation and amortization

 

 

49,830

 

 

 

61,059

 

 

 

134,048

 

 

 

170,293

 

General and administrative

 

 

8,338

 

 

 

5,272

 

 

 

24,808

 

 

 

16,639

 

Provision for doubtful accounts

 

 

87

 

 

 

68

 

 

 

257

 

 

 

119

 

Total expenses

 

 

76,802

 

 

 

82,045

 

 

 

212,032

 

 

 

236,743

 

Operating loss

 

 

(20,209

)

 

 

(17,997

)

 

 

(52,392

)

 

 

(49,404

)

Equity in loss of unconsolidated

   joint ventures

 

 

(2,266

)

 

 

(3,686

)

 

 

(7,006

)

 

 

(4,226

)

Interest and other income

 

 

1,162

 

 

 

352

 

 

 

2,298

 

 

 

472

 

Interest expense

 

 

(30,723

)

 

 

(18,049

)

 

 

(65,004

)

 

 

(53,072

)

Change in fair value of interest rate cap

 

 

(16

)

 

 

(91

)

 

 

(23

)

 

 

(686

)

Loss before income taxes

 

 

(52,052

)

 

 

(39,471

)

 

 

(122,127

)

 

 

(106,916

)

Provision for income taxes

 

 

(93

)

 

 

 

 

 

(437

)

 

 

(266

)

Loss before gain on sale of real estate

 

 

(52,145

)

 

 

(39,471

)

 

 

(122,564

)

 

 

(107,182

)

Gain on sale of real estate

 

 

17,401

 

 

 

13,018

 

 

 

93,419

 

 

 

13,018

 

Gain on sale of interests in unconsolidated

   joint ventures

 

 

 

 

 

43,729

 

 

 

 

 

 

43,729

 

Net (loss) income

 

 

(34,744

)

 

 

17,276

 

 

 

(29,145

)

 

 

(50,435

)

Net loss (income) attributable to

   non-controlling interests

 

 

12,528

 

 

 

(6,762

)

 

 

10,486

 

 

 

19,892

 

Net (loss) income attributable to Seritage

 

$

(22,216

)

 

$

10,514

 

 

$

(18,659

)

 

$

(30,543

)

Preferred dividends

 

 

(1,225

)

 

 

 

 

 

(3,678

)

 

 

 

Net (loss) income attributable to Seritage common

   shareholders

 

$

(23,441

)

 

$

10,514

 

 

$

(22,337

)

 

$

(30,543

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income per share attributable to Seritage

   Class A and Class C common shareholders - Basic

 

$

(0.66

)

 

$

0.31

 

 

$

(0.63

)

 

$

(0.91

)

Net (loss) income per share attributable to Seritage

   Class A and Class C common shareholders - Diluted

 

$

(0.66

)

 

$

0.31

 

 

$

(0.63

)

 

$

(0.91

)

Weighted average Class A and Class C common

   shares outstanding - Basic

 

 

35,598

 

 

 

33,774

 

 

 

35,535

 

 

 

33,685

 

Weighted average Class A and Class C common

   shares outstanding - Diluted

 

 

35,598

 

 

 

33,841

 

 

 

35,535

 

 

 

33,685

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(30,543

)

 

 

(19,892

)

 

 

(50,435

)

Common dividends and

   distributions declared

   ($0.75 per share and unit)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(25,513

)

 

 

(16,394

)

 

 

(41,907

)

Vesting of restricted share units

 

 

11

 

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(13

)

 

 

 

 

 

 

 

 

(13

)

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,166

 

 

 

 

 

 

 

 

 

1,166

 

Share class exchanges, net

   (197,176 common shares)

 

 

(197

)

 

 

(1

)

 

 

 

 

 

 

 

 

197

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 September 30, 2017

 

 

28,001

 

 

$

280

 

 

 

1,435

 

 

$

14

 

 

 

5,952

 

 

$

59

 

 

 

 

 

$

 

 

$

996,047

 

 

$

(177,394

)

 

$

514,116

 

 

$

1,333,122

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(18,659

)

 

 

(10,486

)

 

 

(29,145

)

Common dividends and

   distributions declared

   ($0.75 per share and unit)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(26,995

)

 

 

(15,114

)

 

 

(42,109

)

Preferred dividends

   declared ($1.3125 per share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,678

)

 

 

 

 

 

(3,678

)

Vesting of restricted share units

 

 

2

 

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(0

)

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,589

 

 

 

 

 

 

 

 

 

5,589

 

Preferred stock offering costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(113

)

 

 

 

 

 

 

 

 

(113

)

Share class exchanges, net

   (3,151,131 common shares)

 

 

3,151

 

 

 

32

 

 

 

 

 

 

 

 

 

(3,151

)

 

 

(31

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

 

Share class surrenders

   (6,501 common shares)

 

 

 

 

 

 

 

 

(7

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OP Unit exchanges

   (98,923 units)

 

 

99

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,925

 

 

 

 

 

 

(2,926

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2018

 

 

35,668

 

 

$

357

 

 

 

1,322

 

 

$

13

 

 

 

 

 

 

 

 

 

2,800

 

 

$

28

 

 

$

1,124,461

 

 

$

(279,092

)

 

$

405,638

 

 

$

1,251,405

 

 

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

 

 

- 5 -


SERITAGE GROWTH PROPERTIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, amounts in thousands)

 

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

CASH FLOW FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net loss

 

$

(29,145

)

 

$

(50,435

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Equity in loss of unconsolidated joint ventures

 

 

7,006

 

 

 

4,226

 

Gain on sale of real estate

 

 

(93,419

)

 

 

(13,018

)

Gain on sale of interest in unconsolidated joint venture

 

 

 

 

 

(43,729

)

Loss on interest rate cap

 

 

23

 

 

 

686

 

Stock-based compensation

 

 

5,589

 

 

 

1,167

 

Depreciation and amortization

 

 

134,048

 

 

 

170,293

 

Amortization of deferred financing costs

 

 

10,221

 

 

 

6,390

 

Amortization of above and below market leases, net

 

 

(590

)

 

 

(581

)

Straight-line rent adjustment

 

 

(1,750

)

 

 

(2,364

)

Change in operating assets and liabilities

 

 

 

 

 

 

 

 

Tenants and other receivables

 

 

(2,262

)

 

 

(3,444

)

Prepaid expenses, deferred expenses and other assets

 

 

(14,092

)

 

 

(7,300

)

Accounts payable, accrued expenses and other liabilities

 

 

(1,333

)

 

 

(15,657

)

Net cash provided by operating activities

 

 

14,296

 

 

 

46,234

 

CASH FLOW FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Investment in unconsolidated joint ventures

 

 

(19,522

)

 

 

(36,038

)

Distributions from unconsolidated joint ventures