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Section 1: 8-K (8-K)

srg-8k_20190228.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, 2019

 

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.)

 

 

 

 

 

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

 

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))

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.

 

 

 

 


Item 1.01.   Entry into a Material Definitive Agreement.

Holdco Master Lease

On February 28, 2019, Seritage SRC Finance LLC and Seritage KMT Finance LLC (together, the “Landlord”), each a subsidiary of Seritage Growth Properties (the “Company”), entered into a Master Lease (the “Holdco Master Lease”) with Transform SR Operations LLC and Transform KM Operations LLC (together, the “Tenant”), each a subsidiary of Transform Holdco LLC. The Holdco Master Lease comprises 51 of the Company’s wholly-owned properties that were leased under the 2015 Sears Holdings Master Lease (as described below) as of the date of the Holdco Master Lease.  A condition to the performance and obligations provided for in the Holdco Master Lease is the rejection of the Master Lease dated July 7, 2015 (as amended, the “2015 Sears Holdings Master Lease ”) between Landlord and Sears Operations LLC and Kmart Operations LLC, as tenant.  The 2015 Sears Holdings Master Lease will be rejected if either (i) the United States Bankruptcy Court for the Southern District of New York issues an order approving the rejection of the 2015 Sears Holdings Master Lease or (ii) the 2015 Sears Holdings Master Lease is deemed to be rejected pursuant to the operation of the Bankruptcy Code.  As a result of this condition there can be no assurance as to the commencement of the Landlord’s and Tenant’s performance and obligations provided for in the Holdco Master Lease and/or the timing thereof.

The Holdco Master Lease is a unitary, non-divisible lease as to all properties, pursuant to which the Tenant’s obligations as to each property are cross-defaulted with all obligations of the Tenant with respect to all other properties. The Holdco Master Lease generally is a triple net lease with respect to all space which will be leased thereunder to the Tenant, subject to proportional sharing by the Tenant for repair and maintenance charges, real property taxes, insurance and other costs and expenses which are common to both the space leased by the Tenant and other space occupied by other tenants in the same or other buildings, space which is recaptured pursuant to the Landlord recapture rights described below and all other space which is constructed on the properties. Under the Holdco Master Lease, the Tenant is required to make all expenditures reasonably necessary to maintain the premises in good appearance, repair and condition for as long as they are in occupancy.

Term and Renewals

Consistent with the 2015 Sears Holdings Master Lease, the Holdco Master Lease will expire in July 2025, and contains the same three options for five-year renewals of the term and a final option for a four-year renewal exists under the 2015 Sears Holdings Master Lease.

Rental Amounts, Rent Concession and Escalators

The Holdco Master Lease provides for an initial base rent amount of approximately $32.5 million annually payable to the Landlord.  In each of the initial term and the first two renewal terms, consistent with the 2015 Sears Holdings Master Lease, base rent under the Holdco Master Lease will be increased in August of each year by 2.0% per annum for each lease year over the rent for the immediately preceding lease year. For subsequent renewal terms, consistent with the 2015 Sears Holdings Master Lease, rent will be set at the commencement of the renewal term for the Holdco Master Lease at a fair market rent based on a customary third-party appraisal process, taking into account all the terms of the Holdco Master Lease and other relevant factors, but in no event will the renewal rent be less than the rent payable in the immediately preceding lease year.  The base rent under the Holdco Master Lease will be subject to adjustment in the form of a rent concession of up to approximately $12 million in each of the first and second years of the Holdco Master Lease, which rent concession is allocated to specific properties in the amount by which such properties are EBITDA negative on a trailing twelve-month basis. If any such EBITDA negative properties are recaptured by the Landlord or terminated by the Tenant, the base rent concession attributable to such property will no longer be applicable.  The Tenant is also responsible for all operating expenses associated with Tenant’s occupancy of the subject properties, including an amount estimated as of the date of the Holdco Master Lease to be approximately $11.5 million of annual reimbursements to Landlord in addition to certain operating expenses to be paid directly by the Tenant, in each instance with no offsetting rent concession.  

Recapture Rights

The Holdco Master Lease, consistent with the 2015 Sears Holdings Master Lease, provides the Company with the right to recapture up to approximately 50% of the space occupied by Tenant at all properties (other than the five Tenant 100% Occupancy Properties described below).  Upon exercise of any 50% recapture right, consistent with the 2015 Sears Holdings Master Lease, the Landlord will generally incur certain costs and expenses for the separation of the recaptured space from the remaining Tenant space and can reconfigure and rent the recaptured space to diversified, tenants on potentially superior terms determined by the Landlord and for its own account.

Additionally, in contrast to the 2015 Sears Holdings Master Lease, which permitted the Landlord to recapture 100% of 21 specified properties (out of the 224 properties originally leased under the 2015 Sears Holdings Master Lease) upon payment of a specified lease recapture payment, the Holdco Master Lease provides the Landlord with the right, beginning in the second year of the term of the Holdco Master Lease, to recapture 100% of the space occupied by the Tenant at any of the properties included in the Holdco Master Lease (other than the five Tenant 100% Occupancy Properties described below) without making a specified lease recapture payment


to the Tenant.  The right to recapture 100% of any property is limited to 10 properties in each year of the Holdco Master Lease term, with carry-over rights if less than 10 properties are recaptured in any year of the Holdco Master Lease Term.  In the event of a 100% recapture of a property (or termination of a property by Tenant pursuant to which Tenant pays a termination fee) and any subsequent re-development of such property for retail purposes, if the property has store space that is suitable for a 10,000 – 20,000 square foot Sears or Kmart store, Tenant will have the right of first offer to lease such space at either (x) the same per square foot rent for such property under the Holdco Master Lease if the space is delivered in a “cold dark shell” condition or (y) if Landlord provides a market tenant allowance, the lesser of (1) the market rent for such space or (2) 200% of the per square foot rent for such property under the Holdco Master Lease, with such election being at Landlord’s discretion.  If Landlord does not provide Tenant with a right of first offer on at least one-third of any such properties that are either recaptured 100% by Landlord or terminated by Tenant (with payment of a termination fee) in a given lease year, then Landlord’s right to exercise 100% recaptures is subject to payment of a recapture fee until such time as Landlord has complied with the foregoing ratio.  

In addition, consistent with the 2015 Sears Holdings Master Lease, the Landlord under the Holdco Master Lease will have the right to recapture any automotive care centers which are free-standing or attached as “appendages” to the properties, all outparcels or outlots and certain portions of parking areas and common areas.  

In contrast to the 2015 Sears Holdings Master Lease, the Landlord is not permitted under the Holdco Master Lease to recapture either 50% or 100% of five specified properties located in Puerto Rico and California (collectively, the “Tenant 100% Occupancy Properties”); however, Landlord is still permitted to recapture any outparcels or outlots and certain portions of parking areas and common areas at these five properties. As is the case with all properties under the Holdco Master Lease, and consistent with the terms of the 2015 Sears Holdings Master Lease, the Tenant is generally prohibited from subleasing any space demised under the Holdco Master Lease, including at the five Tenant 100% Occupancy Properties.  

Tenant Termination Rights

Under the terms of the Holdco Master Lease, the Tenant has the right, at any time, to terminate the Holdco Master Lease with respect to any property upon the payment of a termination fee equal to one year of base rent plus annual taxes and other operating expenses, without the requirement that such property is EBITDA negative as was required under the 2015 Sears Holdings Master Lease.  Additionally, unlike the 2015 Sears Holdings Master Lease, beginning in the second year of the term of the Holdco Master Lease, the Tenant has the right to terminate without payment of a termination fee: (i) up to 16 properties in the second year of the Holdco Master Lease term, (ii) up to 12 properties in the third year of the Holdco Master Lease term, (iii) up to 10 properties in the fourth year of the Holdco Master Lease term, and (iv) thereafter, the remaining properties, in each instance with carry over rights if less than the maximum permitted number of properties are terminated in any lease year.  

Other Provisions

Consistent with the 2015 Sears Holdings Master Lease, Tenant is obligated to continuously operate a Sears or Kmart store (or such store as may be re-branded and/or used for other retail uses pursuant to the Holdco Master Lease) of a minimum size specified in the Holdco Master Lease on each of the properties where such stores operate currently (except for reasonable periods required for alterations or restoration of damage), subject to the recapture and termination rights provided above. The Holdco Master Lease also contains customary provisions contained in master triple net leases governing the leasing of retail properties, including, among others, with respect to maintenance, restoration (and certain termination rights) in the event of casualty and condemnation, cross-default with respect to each property in the Holdco Master Lease, indemnification and assumption of risk of loss, alterations and insurance. The Holdco Master Lease contains customary provisions for the protection of mortgagees, including a provision requiring the parties to enter into a subordination, non-disturbance and attornment agreement.

Mr. Edward S. Lampert, the Company’s Chairman, is the sole stockholder, chief executive officer and director of ESL Investments, Inc., which controls Transform SR Operations LLC and Transform KM Operations LLC. The terms of the Holdco Master Lease were approved by the Company’s Audit Committee and the Company’s Board of Trustees (with Mr. Edward S. Lampert recusing himself).

Forward-Looking Statements

This document contains forward-looking statements within the meaning of the federal securities laws. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. In some cases, you can identify forward-looking statements by the use of forward-looking terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” or “potential” or the negative of these words and phrases or similar words or phrases that are predictions of or indicate future events or trends and that do not relate solely to historical matters. Forward-looking statements involve known and unknown risks, uncertainties, assumptions and contingencies, many of which are beyond the Company’s control, which may cause actual results to differ significantly from those expressed in any forward-looking statement. Factors that could cause or contribute to such differences include, but are not limited to: our material exposure to Sears Holdings and the effects of its previously announced bankruptcy filing; Sears Holdings’ termination and other rights under its master lease with us; competition in the real estate and retail industries; 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; failure to achieve expected occupancy and/or rent levels within the projected time frame or at all; 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 our filings with the Securities and Exchange Commission, including the risk factors relating to Sears Holdings.  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.

Item 2.02

Results of Operations and Financial Condition.

On February 28, 2019, Seritage Growth Properties issued a press release regarding its financial results for the year ended December 31, 2018. A copy of the press release is furnished as Exhibit 99.1 to this report.

In addition, on February 28, 2019, Seritage Growth Properties published certain supplementary financial information relating to the quarter ended December 31, 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.

Item 9.01

Financial Statements and Exhibits.

(d) Exhibits

 

Exhibit No.

 

Description

 

 

 

99.1

 

Press release dated February 28, 2019, furnished pursuant to Item 2.02.

 

 

 

99.2

 

Supplementary Financial Information dated February 28, 2019, 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, 2019

 

(Back To Top)

Section 2: EX-99.1 (EX-99.1)

srg-ex991_6.htm

Exhibit 99.1

 

Seritage Growth Properties Reports Fourth Quarter and Full Year 2018 Operating Results

– Signed new leases totaling 3.1 million square feet at an average re-leasing multiple of 3.9x –

– Ended year with nearly $1.0 billion of cash on hand and committed capital –

– Subsequent to year end, signed a master lease with successor to Sears Holdings for 51 locations –

New York, NY – February 28, 2019 – Seritage Growth Properties (NYSE: SRG) (the “Company”), a national owner of 232 retail and mixed-use properties totaling approximately 36.3 million square feet of gross leasable area (“GLA”), today reported financial and operating results for the quarter and year ended December 31, 2018.

Summary Financial Results

For the quarter ended December 31, 2018:

Net loss attributable to common shareholders of $56.0 million, or $1.57 per share

Total Net Operating Income (“Total NOI”) of $34.1 million

Funds from Operations (“FFO”) of $7.0 million, or $0.13 per share

Company FFO of ($4.4) million, or ($0.08) per share

For the year ended December 31, 2018:

Net loss attributable to common shareholders of $78.4 million, or $2.20 per share

Total NOI of $143.1 million

FFO of $24.1 million, or $0.43 per share

Company FFO of $15.7 million, or $0.28 per share

“We are very pleased with our fourth quarter performance, which included 878,000 square feet of new leasing at an average re-leasing multiple of 4.0x for space previously occupied by Sears.  Since inception, we have leased nearly 8.0 million square feet at an average re-leasing multiple of 4.1x, and completed or commenced 97 redevelopment projects totaling approximately $1.5 billion of total capital investment with targeted incremental yields of approximately 11% on an unlevered basis,” said Benjamin Schall, President and Chief Executive Officer.  “To fund this transformative redevelopment program, we have maintained access to multiple sources of liquidity and currently have $533 million of cash on hand and a committed $400 million incremental funding facility.  Further, having generated over $230 million in 2018 through the formation of joint ventures and divestiture of smaller market assets, we continue to recycle capital into the highest value creation opportunities in our portfolio.”

Mr. Schall continued, “We have rapidly diversified our tenant base, with over 70% of our annual base rent under lease now derived from diversified, non-Sears tenants (up from 20% at inception).  In February, we signed a new master lease with the successor to Sears Holdings that maintains 51 locations leased to Sears or Kmart, which will become effective following the rejection of the existing Master Lease with Sears Holdings.  The new lease provides Seritage with expanded rights to execute on our redevelopment initiatives. As we look forward, we expect to continue to utilize our platform and expand our relationships with growing retailers, mixed-use developers and institutional capital allocators to further unlock embedded value through our retail redevelopments and larger mixed-use pipeline.”


1


Operating Highlights

Rental Income

During the year ended December 31, 2018, the Company added $45.2 million of new diversified, non-Sears income and increased annual base rent attributable to diversified, non-Sears tenants to 70.9% of total annual base rent from 52.2% as of December 31, 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 December 31, 2018, including unconsolidated joint ventures 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)(2)

 

 

105

 

 

 

12,619

 

 

 

56.0

%

 

$

61,341

 

 

 

29.1

%

 

$

4.86

 

In-place diversified, non-Sears leases (2)

 

 

236

 

 

 

5,043

 

 

 

22.4

%

 

 

66,200

 

 

 

31.4

%

 

 

13.13

 

SNO diversified, non-Sears leases (2)(3)

 

 

170

 

 

 

4,852

 

 

 

21.6

%

 

 

83,297

 

 

 

39.5

%

 

 

17.17

 

Sub-total diversified, non-Sears leases

 

 

406

 

 

 

9,895

 

 

 

44.0

%

 

 

149,497

 

 

 

70.9

%

 

 

15.11

 

Total

 

 

511

 

 

 

22,514

 

 

 

100.0

%

 

$

210,838

 

 

 

100.0

%

 

$

9.36

 

 

(1)

Number of leases reflects number of properties subject to the 2015 Sears Holdings Master Lease and JV Master Leases.

(2)

Metrics include four properties subject to previously exercised recapture notices and five properties under contract for sale.

(3)

SNO = signed but not yet opened leases.

Leasing

In 2018, the Company signed new leases totaling 3.1 million square feet, representing a 17% increase over 2017 leasing activity, including approximately 878,000 square feet signed in the fourth quarter at an average base rent of $18.03 PSF (retail leases represented 664,000 square feet at an average base rent of $20.98 PSF).

Below is a summary of the Company’s leasing activity, including its proportional share of unconsolidated joint ventures, as of December 31, 2018:

 

(in thousands, except PSF amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Since

 

 

 

Q4 2018

 

 

FY2018

 

 

Inception

 

Leases

 

 

31

 

 

 

119

 

 

$

287

 

Square feet

 

 

878,000

 

 

 

3,055,000

 

 

 

7,885,000

 

Annual base rent

 

$

15,830

 

 

$

45,197

 

 

$

131,164

 

Annual base rent PSF (1)

 

$

20.98

 

 

$

17.30

 

 

$

17.64

 

Re-leasing multiple (1)(2)

 

 

4.0

x

 

 

3.9

x

 

 

4.1

x

 

 

(1)

Reflects retail leases only; excludes certain self storage, auto dealership, medical office and ground leases.

 

(2)

Excludes densification square footage (e.g. new outparcel developments) and backfill of vacant space not previously occupied by Sears.

 


2


Development

In 2018, the Company commenced projects totaling $382 million, including 19 new redevelopments and the expansion of seven previously announced projects. This activity included three new projects representing $65.0 million of capital investment in the fourth quarter.

Below is a summary of the Company’s announced development activity from inception through December 31, 2018, presented at 100% share and including certain assets that have been monetized through sale or joint venture:

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated

 

 

Estimated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated

 

 

Number

 

 

Project

 

 

Development

 

 

Project

 

 

Projected Annual Income (2)

 

 

Incremental

Estimated Project Costs (1)

 

of Projects

 

 

Square Feet

 

 

Costs (1)

 

 

Costs (1)

 

 

Total

 

 

Existing

 

 

Incremental

 

 

Yield (3)

< $10,000

 

 

28

 

 

 

2,182

 

 

$

125,600

 

 

$

127,900

 

 

$

23,400

 

 

$

5,700

 

 

$

17,700

 

 

 

$10,001 - $20,000 (4)

 

 

32

 

 

 

3,721

 

 

 

439,000

 

 

 

458,900

 

 

 

63,100

 

 

 

15,300

 

 

 

47,900

 

 

 

> $20,001

 

 

22

 

 

 

3,738

 

 

 

803,100

 

 

 

861,900

 

 

 

115,100

 

 

 

23,100

 

 

 

91,900

 

 

 

Announced projects

 

 

82

 

 

 

9,641

 

 

$

1,367,700

 

 

$

1,448,700

 

 

$

201,600

 

 

$

44,100

 

 

$

157,500

 

 

10.5-11.5%

Acquired projects

 

 

15

 

 

 

 

 

 

 

63,600

 

 

 

63,600

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total projects

 

 

97

 

 

 

 

 

 

$

1,431,300

 

 

$

1,512,300

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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.

(4)

Includes Saugus, MA project which has been temporarily postponed while the Company identifies a new lead tenant.

Transactions

In 2018, the Company contributed its assets in Santa Monica (CA), La Jolla (CA) and West Hartford (CT) into three joint ventures with institutional capital partners representing a total transaction value of $362 million, or $744 PSF, and generated $117.0 million of gross proceeds.

In 2018, the Company also sold 21 properties, primarily those in smaller markets, totaling 2.1 million square feet that generated gross proceeds of $114.3 million, or $54 PSF. These transactions included five dispositions in the fourth quarter that generated gross proceeds of $47.3 million, or $78 PSF.

Balance Sheet

On July 31, 2018, the Company entered into a new $2.0 billion term loan facility with Berkshire Hathaway Life Insurance Company (the “Term Loan Facility”).  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 (subject to certain conditions).

The Company used a portion of the proceeds from the initial funding to fully repay its outstanding mortgage loan and unsecured term loan.  The Company expects the remaining proceeds from the initial funding, as well as borrowings under the incremental funding facility, will be used to fund the Company’s redevelopment pipeline and to pay operating expenses of the Company and its subsidiaries.

As of December 31, 2018, the Company had nearly $1.0 billion of identified liquidity, including $532.9 million of cash on the balance sheet, the $400 million incremental funding facility (subject to certain conditions) and assets under contract for sale for anticipated gross proceeds of $59.8 million (assets under contract for sale are subject to customary closing conditions and there can be no assurance that such transactions will be consummated).

The Term Loan Facility includes certain financial metrics, including fixed charge coverage ratios, leverage ratios and a minimum net worth, that could be negatively impacted by a loss of revenue from Sears Holdings, including if the 2015 Sears Holdings Master Lease is rejected and the Holdco Master Lease becomes effective. A failure to satisfy any of these financial metrics will require the Company to seek lender approval to monetize assets via sale or joint venture and also provide the lender the right to request mortgages on its real estate collateral.  The failure to satisfy any of these financial metrics will not result in an event of default, mandatory amortization, cash flow sweep or any similar provision.

3


Dividends

On October 23, 2018, 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 common dividend was paid on January 10, 2019 to shareholders of record on December 31, 2018.  Holders of units in Seritage Growth Properties, L.P. (the “Operating Partnership”) were entitled to an equal distribution per each Operating Partnership unit held on December 31, 2018.  On October 23, 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 January 14, 2019 to holders of record on December 31, 2018.

On February 20, 2019, 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 common dividend will be paid on April 11, 2019 to shareholders of record on March 29, 2019.  Holders of units in the Operating Partnership are entitled to an equal distribution per each Operating Partnership unit held on March 29, 2019.  On February 20, 2019, 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 April 15, 2019 to holders of record on March 29, 2019.

The Company has announced that the Board of Trustees does not currently expect to declare additional common dividends for the remainder of 2019, based on its assessment of the Company’s investment opportunities and its expectations of taxable income for the year.  The Board of Trustees will reevaluate this position at the end of 2019, if necessary, to ensure that the Company meets its distribution requirements as a REIT.  The Company has also announced that the Board of Trustees expects that cash dividends for the Company’s preferred shares will continue to be paid each quarter.

Sears Holdings Bankruptcy and Holdco Master Lease

On October 15, 2018, Sears Holdings and certain of its affiliates filed voluntary petitions for relief under chapter 11 of title 11 of the United States Code (the “Bankruptcy Code”) with the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”). On February 11, 2019, Transform Holdco LLC (“Holdco”), an affiliate of ESL Investments, Inc., completed the acquisition of an approximately 425-store retail footprint and other assets and component businesses of Sears Holdings on a going-concern basis.

On February 28, 2019, the Company entered into a master lease with affiliates of Holdco (the “Holdco Master Lease”) comprising 51 of the Company’s wholly-owned properties that remained subject to the master lease with Sears Holdings (the “2015 Sears Holdings Master Lease”) at the time Sears Holdings filed for bankruptcy protection.

A condition to the performance and obligations provided for in the Holdco Master Lease is the rejection of the 2015 Sears Holdings Master Lease.  The 2015 Sears Holdings Master Lease will be rejected if either (i) the Bankruptcy Court issues an order approving the rejection of the 2015 Sears Holdings Master Lease or (ii) the 2015 Sears Holdings Master Lease is deemed to be rejected pursuant to the operation of the Bankruptcy Code.  As a result of this condition, there can be no assurance as to the commencement of our and Holdco’s performance and obligations provided for in the Holdco Master Lease and/or the timing thereof.

The Holdco Master Lease, as executed, contains terms that are similar to the 2015 Sears Holdings Master Lease with the addition of certain enhanced landlord recapture and tenant termination rights.  Additional information regarding the Holdco Master Lease can be found in the Form 8-K filed with the Securities and Exchange Commission on February 28, 2019.

Financial Results

Below is a summary of the Company’s financial results for the quarter and year ended December 31, 2018 and December 31, 2017:

 

(in thousands except per share amounts)

 

Quarter Ended December 31,

 

 

Year Ended December 31,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net loss attributable to common shareholders

 

$

(56,038

)

 

$

(43,456

)

 

$

(78,375

)

 

$

(73,999

)

Net loss per share attributable to common shareholders

 

 

(1.57

)

 

 

(1.27

)

 

 

(2.20

)

 

 

(2.19

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total NOI

 

 

34,055

 

 

 

39,560

 

 

 

143,107

 

 

 

174,758

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FFO

 

 

7,009

 

 

 

11,131

 

 

 

24,111

 

 

 

91,690

 

FFO per share

 

 

0.13

 

 

 

0.20

 

 

 

0.43

 

 

 

1.65

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company FFO

 

 

(4,438

)

 

 

11,522

 

 

 

15,746

 

 

 

81,797

 

Company FFO per share

 

 

(0.08

)

 

 

0.21

 

 

 

0.28

 

 

 

1.47

 


4


Net Loss

Net loss for both the quarter and year ended December 31, 2018 include significant depreciation and amortization expense related to the accelerated amortization of certain lease intangibles as a result of the recapture of space from, or the termination of space by, Sears Holdings, and the demolition of certain buildings for redevelopment.  The quarter and year ended December 31, 2018 also included additional accelerated amortization of certain lease intangibles as a result of Sears Holdings’ bankruptcy filing.

Total NOI

The decrease in Total NOI for both the quarter and year ended December 31, 2018 was driven primarily by reduced rental income under the 2015 Sears Holdings Master Lease as a result of recapture and termination activity at our properties.  In addition, the Company sold 21 wholly-owned properties and 50% interests in three wholly-owned properties in 2018, which contributed to the decrease in Total NOI.

Since inception, nearly 20.0 million square feet of leased space, representing approximately $80.0 million of annual base rent, has been, or will be, taken offline through recapture and termination activity. To date, the Company has signed new leases with diversified, non-Sears tenants for an aggregate annual base rent of $131.2 million across 7.9 million square feet of space. A majority of these newly signed leases are categorized as SNO leases and are expected to begin paying rent throughout the next 24 months.

FFO and Company FFO

The decrease in FFO and Company FFO for both the quarter and year ended December 31, 2018 were driven by the same factors driving the decrease in Total NOI, as well (i) lower straight-line rent as a result of recapture and termination activity at our properties, (ii) the write-off of certain straight-line rent receivables as a result of Sears Holdings’ bankruptcy filing, (iii) higher interest expense resulting from our debt refinancing in the third quarter of 2018, and (iv) dividends related to the $70 million preferred equity raise that was completed late in the fourth quarter of 2017.  In addition, FFO for the quarter ended December 31, 2018 included higher termination fee income which partially offset the other factors driving the decrease in FFO, and both FFO and Company FFO for the year ended December 31, 2018 were impacted by higher G&A expenses, including personnel costs related to our growing platform and certain legal and advisory costs related to Sears Holdings’ bankruptcy filing.

Portfolio Summary

Below is a summary of the Company’s portfolio as December 31, 2018:

 

 

 

Wholly Owned

 

 

Unconsolidated

 

 

 

 

 

 

 

Portfolio

 

 

Joint Ventures

 

 

Total

 

Properties

 

 

206

 

 

 

26

 

 

 

232

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Malls

 

 

94

 

 

 

24

 

 

 

118

 

Strip centers and freestanding

 

 

112

 

 

 

2

 

 

 

114

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GLA (at share) (000s)

 

 

31,602

 

 

 

2,348

 

 

 

33,950

 

% leased

 

 

65.6

%

 

 

76.4

%

 

 

66.3

%

The unleased space as of December 31, 2018 included approximately 2.5 million SF of remaining lease-up at announced redevelopment projects, and approximately 8.9 million SF of additional leasing opportunity at properties throughout the Company’s portfolio.


5


Announced Development Projects

As of December 31, 2018, the Company had originated 82 redevelopment projects since the Company’s inception.  These projects represent an estimated total investment of $1.45 billion ($1.37 billion at share), of which an estimated $907 million ($849 million at share) remains to be spent, and are expected to generate an incremental yield on cost of approximately 11.0%.

The tables below provide brief descriptions of each of the redevelopment projects originated on the Company’s platform since its inception, including certain assets that have been monetized through sale or joint venture:

 

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

 

 

Complete

Merrillville, IN

 

Termination property; redevelop existing store for At Home and small shop retail

 

 

132,000

 

 

Complete

Elkhart, IN

 

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

 

 

86,500

 

 

Complete

Bowie, MD

 

Recapture and repurpose auto center space for BJ's Brewhouse

 

 

8,200

 

 

Complete

Troy, MI

 

Partial recapture; redevelop existing store for At Home

 

 

100,000

 

 

Complete

Rehoboth Beach, DE

 

Partial recapture; redevelop existing store for andThat! and PetSmart

 

 

56,700

 

 

Complete

Henderson, NV

 

Termination property; redevelop existing store for At Home, Seafood City, Blink Fitness and additional retail

 

 

144,400

 

 

Complete

Cullman, AL

 

Termination property; redevelop existing store for Bargain Hunt, Tractor Supply and Planet Fitness

 

 

99,000

 

 

Complete

Jefferson City, MO

 

Termination property; redevelop existing store for Orscheln Farm and Home

 

 

96,000

 

 

Complete

Guaynabo, PR

 

Partial recapture; redevelop existing store for Planet Fitness, Capri and additional retail and restaurants

 

 

56,100

 

 

Complete

Ft. Wayne, IN

 

Site densification (project expansion); new outparcels for BJ's Brewhouse and Chick-Fil-A

 

 

12,000

 

 

Complete

Westwood, TX

 

Termination property; site has been leased to Sonic Automotive and will be repurposed as an auto dealership

 

 

213,600

 

 

Complete

Albany, NY

 

Recapture and repurpose auto center space for BJ's Brewhouse, Ethan Allen and additional small shop retail

 

 

28,000

 

 

Substantially complete

Kearney, NE

 

Termination property; redevelop existing store for Marshall's, PetSmart, Ross Dress for Less and Five Below

 

 

92,500

 

 

Substantially complete

Dayton, OH

 

Recapture and repurpose auto center space for Outback Steakhouse and additional restaurants

 

 

14,100

 

 

Substantially complete

Florissant, MO

 

Site densification; new outparcel for Chick-Fil-A

 

 

5,000

 

 

Delivered to tenant

St. Clair Shores, MI

 

100% recapture; demolish existing store and develop site for new Kroger grocery store

 

 

107,200

 

 

Delivered to tenant

Hagerstown, MD

 

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

 

 

15,400

 

 

Sold

New Iberia, LA

 

Termination property; redevelop existing store for Ross Dress for Less, Rouses Supermarkets, Hobby Lobby and small shop retail

 

 

93,100

 

 

Underway

 

Q1 2019

North Little Rock, AR

 

Recapture and repurpose auto center space for LongHorn Steakhouse and additional small shop retail

 

 

17,300

 

 

Underway

 

Q2 2019

Hopkinsville, KY

 

Termination property; redevelop existing store for Bargain Hunt, Farmer's Furniture, Harbor Freight Tools and small shop retail

 

 

87,900

 

 

Underway

 

Q2 2019

Mt. Pleasant, PA

 

Termination property; redevelop existing store for Aldi, Big Lots and additional retail

 

 

86,300

 

 

Underway

 

Q3 2019

Oklahoma City, OK

 

Site densification; new fitness center for Vasa Fitness

 

 

59,500

 

 

Underway

 

Q3 2019

Gainesville, FL

 

Termination property; repurpose existing store as office space for Florida Clinical Practice Association / University of Florida College of Medicine

 

 

139,100

 

 

Underway

 

Q4 2019

Layton, UT

 

Termination property; a portion of the space has been leased to Extra Space Storage and will be repurposed as self storage; existing tenants include Vasa Fitness and small shop retail

 

 

172,100

 

 

Q1 2019

 

Q2 2019

Hampton, VA

 

Site densification; new outparcel for  Chick-fil-A

 

 

2,200

 

 

Sold

Houston, TX

 

100% recapture; entered into ground lease with adjacent mall with potential to participate in future redevelopment

 

 

214,400

 

 

Q1 2019

 

Q2 2019

Hialeah, FL

 

Recapture and repurpose auto center space for restaurants and small shop retail

 

 

14,000

 

 

Q2 2019

 

Q1 2020

6


 

Total Project Costs $10 - $20 Million

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

Estimated

 

Estimated

 

 

 

 

 

 

 

 

 

 

 

 

Project

 

 

Construction

 

Substantial

Property

 

Description

 

Square Feet

 

 

Start

 

Completion

Braintree, MA

 

100% recapture; redevelop existing store for Nordstrom Rack, Saks OFF 5th and additional retail

 

 

90,000

 

 

Complete

Honolulu, HI

 

100% recapture; redevelop existing store for Longs Drugs (CVS), PetSmart and Ross Dress for Less

 

 

79,000

 

 

Complete

Anderson, SC

 

100% recapture (project expansion); redevelop existing store for Burlington Stores, Gold's Gym, Sportsman's Warehouse, additional retail and restaurants

 

 

111,300

 

 

Complete

Madison, WI

 

Partial recapture; redevelop existing store for Dave & Busters, Total Wine & More, additional retail and restaurants

 

 

75,300

 

 

Substantially complete

Orlando, FL

 

100% recapture; demolish and construct new buildings for Floor & Decor, Orchard Supply Hardware, LongHorn Steakhouse, Mission BBQ, Olive Garden and additional small shop retail and restaurants

 

 

139,200

 

 

Substantially complete

Paducah, KY

 

Termination property; redevelop existing store for Burlington Stores, Ross Dress for Less and additional retail

 

 

102,300

 

 

Substantially complete

Springfield, IL

 

Termination property; redevelop existing store for Burlington Stores, Binny's Beverage Depot, Marshall's, Orangetheory Fitness, Outback Steakhouse, CoreLife Eatery and additional small shop retail

 

 

133,400

 

 

Substantially complete

Thornton, CO

 

Termination property; redevelop existing store for Vasa Fitness and additional junior anchors

 

 

191,600

 

 

Substantially complete

Cockeysville, MD

 

Partial recapture; redevelop existing store for HomeGoods, Michael's Stores, additional junior anchors and restaurants

 

 

83,500

 

 

Substantially complete

Warwick, RI

 

Termination property (project expansion); redevelop existing store and detached auto center for At Home, BJ's Brewhouse, Raymour & Flanigan, additional retail and restaurants

 

 

190,700

 

 

Substantially complete

Salem, NH

 

Densify site with new theatre for Cinemark and recapture and repurpose auto center for restaurant space to join existing tenant Dick's Sporting Goods

 

 

71,200

 

 

Delivered to tenants

Fairfax, VA

 

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

 

 

110,300

 

 

Delivered to tenants

Temecula, CA

 

Partial recapture; redevelop existing store and detached auto center for Round One, small shop retail and restaurants

 

 

65,100

 

 

Delivered to tenant

Hialeah, FL

 

100% recapture; redevelop existing store for Bed, Bath & Beyond, Ross Dress for Less and dd's Discounts to join current tenant, Aldi

 

 

88,400

 

 

Delivered to tenants

Santa Cruz, CA

 

Partial recapture; redevelop existing store for TJ Maxx, HomeGoods and additional junior anchors

 

 

62,200

 

 

Sold

North Hollywood, CA

 

Partial recapture; redevelop existing store for Burlington Stores and Ross Dress for Less

 

 

79,800

 

 

Underway

 

Q1 2019

North Miami, FL

 

100% recapture; redevelop existing store for Blink Fitness, Burlington Stores, Michael's and Ross Dress for Less

 

 

124,300

 

 

Underway

 

Q2 2019

Canton, OH

 

Partial recapture; redevelop existing store for Dave & Busters and restaurants

 

 

83,900

 

 

Underway

 

Q2 2019

North Riverside, IL

 

Partial recapture; redevelop existing store and detached auto center for Blink Fitness, Round One, additional junior anchors, small shop retail and restaurants

 

 

103,900

 

 

Underway

 

Q2 2019

Olean, NY

 

Termination property (project expansion); redevelop existing store for Marshall's, Ollie's Bargain Basement and additional retail

 

 

125,700

 

 

Underway

 

Q2 2019

West Jordan, UT

 

Termination property (project expansion); redevelop existing store and attached auto center for At Home, Burlington Stores and additional retail

 

 

190,300

 

 

Underway

 

Q2 2019

Las Vegas, NV

 

Partial recapture; redevelop existing store for Round One and additional retail

 

 

78,800

 

 

Underway

 

Q3 2019

Roseville, MI

 

Termination property (project expansion); redevelop existing store for At Home, Hobby Lobby, Chick-fil-A and additional retail

 

 

369,800

 

 

Underway

 

Q3 2019

Yorktown Heights, NY

 

Partial recapture; redevelop existing store for 24 Hour Fitness and retail uses

 

 

85,200

 

 

Underway

 

Q4 2019

Charleston, SC

 

100% recapture (project expansion); redevelop existing store and detached auto center for Burlington Stores and additional retail

 

 

126,700

 

 

Underway

 

Q4 2019

Chicago, IL (Kedzie)

 

Termination property; redevelop existing store for Ross Dress for Less, dd's Discounts, Blink Fitness and additional retail

 

 

123,300

 

 

Underway

 

Q4 2019

El Paso, TX

 

Termination property; redevelop existing store for Ross Dress for Less, dd's Discounts and additional retail

 

 

114,700

 

 

Underway

 

Q4 2019

Warrenton, VA

 

Termination property; redevelop existing store for HomeGoods and additional retail

 

 

97,300

 

 

Q1 2019

 

Q3 2019

Pensacola, FL

 

Termination property; redevelop existing store for BJ's Wholesale, additional retail and restaurants

 

 

134,700

 

 

Q1 2019

 

Q1 2020

Vancouver, WA

 

Partial recapture; redevelop existing store for Round One, Hobby Lobby and additional retail and restaurants

 

 

72,400

 

 

Q1 2019

 

Q2 2020

Manchester, NH

 

Termination property; redevelop existing store for Dick's Sporting Goods, Dave & Busters, additional retail and restaurants

 

 

117,700

 

 

Q3 2019

 

Q3 2020

Saugus, MA

 

Partial recapture; redevelop existing store and detached auto center (note: temporarily postponed while the Company identifies a new lead tenant)

 

 

99,000

 

 

To be determined

7


 

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, Hopdoddy Burger Bar and additional junior anchors, restaurants and small shop retail

 

 

135,200

 

 

Complete

St. Petersburg, FL

 

100% recapture; demolish and construct new buildings for Dick's Sporting Goods, Lucky's Market, PetSmart, Five Below, Chili's Grill & Bar, Pollo Tropical, LongHorn Steakhouse, Verizon and additional small shop retail and restaurants

 

 

142,400

 

 

Complete

West Hartford, CT

 

100% recapture; redevelop existing store and detached auto center for buybuyBaby, Cost Plus World Market, REI, Saks OFF Fifth, other junior anchors, Shake Shack and additional small shop retail (note: contributed to West Hartford JV in Q2 2018)

 

 

147,600

 

 

Substantially complete

Wayne, NJ

 

Partial recapture (project expansion); redevelop existing store and detached auto center for Cinemark, Dave & Busters and additional junior anchors and restaurants (note: contributed to GGP II JV in Q3 2017)

 

 

156,700

 

 

Delivered to tenant

Carson, CA

 

100% recapture (project expansion); redevelop existing store for Burlington Stores, Ross Dress for Less, Gold's Gym and additional retail

 

 

163,800

 

 

Underway

 

Q1 2019

Watchung, NJ

 

100% recapture; demolish full-line store and detached auto center and construct new buildings for Cinemark, HomeSense, Sierra Trading Post, Ulta Beauty, Chick-fil-A, small shop retail and additional restaurants

 

 

126,700

 

 

Underway

 

Q2 2019

Austin, TX

 

100% recapture (project expansion); redevelop existing store for AMC Theatres, additional junior anchors and restaurants

 

 

177,400

 

 

Underway

 

Q3 2019

El Cajon, CA

 

100% recapture; redevelop existing store and auto center for Ashley Furniture, Bob's Discount Furniture, Burlington Stores and additional retail and restaurants; a portion of the space has been leased to Extra Space Storage and will be repurposed as self storage

 

 

242,700

 

 

Underway

 

Q3 2019

Anchorage, AK

 

100% recapture; redevelop existing store for Guitar Center, Safeway, Planet Fitness and additional retail to join current tenant, Nordstrom Rack

 

 

142,500

 

 

Underway

 

Q4 2019

Aventura, FL

 

100% recapture; demolish existing store and construct new, multi-level open air retail destination featuring a leading collection of experiential shopping, dining and entertainment concepts alongside a treelined esplanade and activated plazas

 

 

216,600

 

 

Underway

 

Q4 2019

East Northport, NY

 

Termination property; redevelop existing store and attached auto center for AMC Theatres, 24 Hour Fitness, Floor & Decor and small shop retail

 

 

179,700

 

 

Underway

 

Q4 2019

Greendale, WI

 

Termination property; redevelop existing store and attached auto center for Dick's Sporting Goods, Round One, TJ Maxx, additional retail and restaurants

 

 

223,800

 

 

Underway

 

Q4 2019

Reno, NV

 

100% recapture; redevelop existing store and auto center for Round One and additional retail

 

 

169,800

 

 

Underway

 

Q4 2019

San Diego, CA

 

100% recapture; redevelop existing store into two highly-visible, multi-level buildings with exterior facing retail space leased to Equinox Fitness and a premier mix of experiential shopping, dining, and entertainment concepts (note: contributed to UTC JV in Q2 2018)

 

 

206,000

 

 

Underway

 

Q4 2019

Santa Monica, CA

 

100% recapture; redevelop existing building into premier, mixed-use asset featuring unique, small-shop retail and creative office space (note: contributed to Mark 302 JV in Q1 2018)

 

 

96,500

 

 

Underway

 

Q4 2019

Tucson, AZ

 

100% recapture; redevelop existing store and auto center for Round One and additional retail

 

 

224,300

 

 

Underway

 

Q4 2019

Fairfield, CA

 

100% recapture (project expansion); redevelop existing store and auto center for Dave & Busters, AAA Auto Repair Center and additional retail

 

 

146,500

 

 

Underway

 

Q1 2020

Roseville, CA

 

Termination property (project expansion): redevelop existing store and auto center for Cinemark, Round One, AAA Auto Repair Center, additional retail and restaurants

 

 

147,400

 

 

Underway

 

Q2 2020

Plantation, FL

 

100% recapture (project expansion); redevelop existing store and auto center for GameTime, Powerhouse Gym, additional retail and restaurants

 

 

184,400

 

 

Underway

 

Q1 2020

San Antonio, TX

 

Termination property (project expansion); redevelop existing store for Bed Bath & Beyond, buybuyBaby, Tru Fit and additional retail to complement repurposed auto center occupied by Orvis, Jared's Jeweler and Shake Shack

 

 

215,900

 

 

Q1 2019

 

Q2 2020

Asheville, NC

 

100% recapture; redevelop existing store and auto center for Alamo Drafthouse, restaurants and small shop retail

 

 

110,600

 

 

Q1 2019

 

Q3 2020

Orland Park, IL

 

100% recapture; redevelop existing store for AMC Theatres, 24 Hour Fitness, additional retail and restaurants

 

 

181,900

 

 

Q3 2019

 

Q4 2020

 

 

8


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, FFO and Company FFO which are financial measures that include adjustments to accounting principles generally accepted in the United States (“GAAP”).

None of NOI, Total NOI, 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.

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.

9


Forward-Looking Statements

This document contains forward-looking statements within the meaning of the federal securities laws. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. In some cases, you can identify forward-looking statements by the use of forward-looking terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” or “potential” or the negative of these words and phrases or similar words or phrases that are predictions of or indicate future events or trends and that do not relate solely to historical matters. Forward-looking statements involve known and unknown risks, uncertainties, assumptions and contingencies, many of which are beyond the company’s control, which may cause actual results to differ significantly from those expressed in any forward-looking statement. Factors that could cause or contribute to such differences include, but are not limited to: our material exposure to Sears Holdings and the effects of its previously announced bankruptcy filing; Sears Holdings’ termination and other rights under its master lease with us; competition in the real estate and retail industries; 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 our filings with the Securities and Exchange Commission, including the risk factors relating to Sears Holdings.  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 206 wholly-owned properties and 26 joint venture properties totaling approximately 36.3 million square feet of space across 48 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

10


Seritage Growth Properties

Consolidated Balance SheetS

(In thousands, except share and per share amounts)

(Unaudited)

 

 

 

December 31, 2018

 

 

December 31, 2017

 

ASSETS

 

 

 

 

 

 

 

 

Investment in real estate

 

 

 

 

 

 

 

 

Land

 

$

696,792

 

 

$

799,971

 

Buildings and improvements

 

 

900,173

 

 

 

829,168

 

Accumulated depreciation

 

 

(137,947

)

 

 

(139,483

)

 

 

 

1,459,018

 

 

 

1,489,656

 

Construction in progress

 

 

292,049

 

 

 

224,904

 

Net investment in real estate

 

 

1,751,067

 

 

 

1,714,560

 

Real estate held for sale

 

 

3,094

 

 

 

 

Investment in unconsolidated joint ventures

 

 

398,577

 

 

 

282,990

 

Cash and cash equivalents

 

 

532,857

 

 

 

241,569

 

Restricted cash

 

 

 

 

 

175,665

 

Tenant and other receivables, net

 

 

36,926

 

 

 

30,787

 

Lease intangible assets, net

 

 

123,656

 

 

 

310,098

 

Prepaid expenses, deferred expenses and other assets, net

 

 

29,899

 

 

 

20,148

 

Total assets

 

$

2,876,076

 

 

$

2,775,817

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Term loan facility, net

 

$

1,598,053

 

 

$

 

Mortgage loans payable, net

 

 

 

 

 

1,202,314

 

Unsecured term loan, net

 

 

 

 

 

143,210

 

Accounts payable, accrued expenses and other liabilities

 

 

127,565

 

 

 

109,433

 

Total liabilities

 

 

1,725,618

 

 

 

1,454,957

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 December 31, 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 December 31, 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 December 31, 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 December 31, 2018 and

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

 

 

28

 

 

 

28

 

Additional paid-in capital

 

 

1,124,504

 

 

 

1,116,060

 

Accumulated deficit

 

 

(344,132

)

 

 

(229,760

)

Total shareholders' equity

 

 

780,770

 

 

 

886,696

 

Non-controlling interests

 

 

369,688

 

 

 

434,164

 

Total equity

 

 

1,150,458

 

 

 

1,320,860

 

Total liabilities and equity

 

$

2,876,076

 

 

$

2,775,817

 

 

11


Seritage Growth Properties

Consolidated Statements of OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

 

 

 

Quarter Ended December 31,

 

 

Year Ended December 31,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

REVENUE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

41,985

 

 

$

38,966

 

 

$

156,055

 

 

$

178,492

 

Tenant reimbursements

 

 

12,962