SERITAGE GROWTH PROPERTIES Certain statements contained herein constitute forward-looking statements as such term is defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are not guarantees of future performance. They represent our intentions, plans, expectations and beliefs and are subject to numerous assumptions, risks and uncertainties. Our future results, financial condition and business may differ materially from those expressed in these forward-looking statements. You can find many of these statements by looking for words such as "approximates," "believes," "expects," "anticipates," "estimates," "intends," "plans," "projects," "would," "may" or other similar expressions in this Quarterly Report on Form 10-Q. Many of the factors that will determine the outcome of these and our other forward-looking statements are beyond our ability to control or predict. For further discussion of factors that could materially affect the outcome of our forward-looking statements, see "Risk Factors" in our Annual Report on Form 10-K for the year endedDecember 31, 2021 and in Part II, Item 1A of this Quarterly Report on Form 10-Q. For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. You are cautioned not to place undue reliance on our forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. We do not undertake any obligation to release publicly any revisions to our forward-looking statements to reflect events or circumstances occurring after the date of this Quarterly Report on Form 10-Q. The following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto included in Part 1 of this Quarterly Report. Overview We are principally engaged in the ownership, development, redevelopment, disposition, management and leasing of diversified retail and mixed-use properties throughoutthe United States . As ofJune 30, 2022 , our portfolio consisted of interests in 150 properties comprised of approximately 19.5 million square feet of gross leasable area ("GLA") or build-to-suit leased area, approximately 3.9 million of which is held by unconsolidated entities (the "Unconsolidated Properties "), approximately 433 acres held for or under development and approximately 9.9 million square feet or approximately 821 acres to be disposed of. In the second quarter of 2021, we announced an organizational restructuring and in conjunction commenced a portfolio review resulting in the modification of the plan for certain assets. We continue to evaluate our strategy and at this time, we expect to reposition our portfolio into three business lines: residential developments, premier mixed-use assets, and multi-tenant retail destinations.
Review of Strategic Alternatives
OnMarch 1, 2022 , the Company announced that itsBoard of Trustees has commenced a process to review a broad range of strategic alternatives to enhance shareholder value.The Board of Trustees created a special committee of theBoard of Trustees (the "Special Committee") to oversee the process. The Special Committee has retained a financial advisor. The strategic review process remains ongoing. There can be no assurance that the review process will result in any transaction or any strategic change at this time. See "Item 1A. Risk Factors-Risks Related to Our Business and Operations-There can be no assurance that our review of strategic alternatives will result in any transaction or any strategic change at this time." OnJuly 7, 2022 , we filed our preliminary proxy materials with theSEC in connection with our 2022 Annual Meeting of Shareholders seeking a shareholder vote to approve a proposed plan of sale of our assets and dissolution (the "Plan of Sale") that will allow our board to sell all of our assets, distribute the net proceeds to shareholders and dissolve the Company. See Note 1 -Organization of the Notes to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information about the Plan of Sale.
Impairment of Real Estate Assets and Investments in Unconsolidated Entities
In the first quarter of 2022, we announced a Review of Strategic Alternatives and during the second quarter determined that the best plan for all assets is to pursue sales. As a result of the foregoing, the Company's anticipated holding periods with respect to certain assets has changed. This affected our view of recoverability of the carrying value of those assets over their respective holding periods. We have recognized$109.3 million and$110.3 million of impairment losses during the three and six months endedJune 30, 2022 , respectively, which are included in impairment on real estate assets within the condensed consolidated statements of operations. We have recognized$32.5 million of other than temporary impairment losses to our investments in unconsolidated entities during the three and six months endedJune 30, 2022 , respectively, which are included in equity in loss of unconsolidated entities within the condensed consolidated statements of operations. We continue to evaluate our portfolio, including our development plans and offers received, which may result in additional impairments in future periods on our consolidated properties and investments in unconsolidated entities. - 29 -
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REIT Election
OnMarch 31, 2022 , the Company announced that itsBoard of Trustees , with the recommendation of the Special Committee, approved a plan to terminate the Company's REIT status and become a taxableC Corporation , effective for the year endingDecember 31, 2022 . As a result, the Company is no longer required to operate under REIT rules, including the requirement to distribute at least 90% of REIT taxable income to its stockholders, which provides the Company with greater flexibility to use its free cash flow. EffectiveJanuary 1, 2022 , the Company is subject to federal and state income taxes on its taxable income at applicable tax rates and is no longer entitled to a tax deduction for dividends paid. The Company operated as a REIT for the 2021 tax year, and existing REIT requirements and limitations, including those established by the Company's organizational documents, remained in place untilDecember 31, 2021 . Refer to Note 7 - Income Taxes of the Notes to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Business Strategies
The Company's primary objective is to create value for its shareholders through either the re-leasing and redevelopment of its coreConsolidated Properties andUnconsolidated Properties , disposition certain of its non-core assets which have been identified for near term disposition, or through the monetization of assets through our strategic review process. In particular, we have identified various sites that we believe have the demand and demographic profile to support other uses such as residential, biotechnology, office and others. Given our fee ownership of these properties and control over parking lots and outparcels, we believe that these sites are well positioned for such value creation opportunities. We additionally look to further lease our built retail footprint and densify any excess parking land through the addition of triple net ("NNN") pad sites, which are standalone sites upon which a customized space can be built or leased for a tenant. We have identified 103 pad site opportunities across our portfolio.
In order to achieve its objective, the Company intends to execute the following strategies:
•
Multi-tenant Retail: Our portfolio of 38 multitenant retail assets provide positive cash flow and are primarily leased to a variety of national credit tenants. As ofJune 30, 2022 , this portfolio was 84.0% leased with a pipeline of 0.2 million square feet. A majority of our leases are effectively NNN based on the structure of our leases, providing an important inflation hedge. This portfolio also affords numerous further densification opportunities through the addition of pads on excess parking areas.
•
Densification and Redevelopment Opportunities: In particular, we have identified various sites that we believe have the demand and demographic profile to support other uses such as residential, biotechnology, office and others. Given our fee ownership of these properties and control over parking lots and outparcels, we believe that these sites are well positioned for such value creation opportunities. We additionally look to further densification by converting vacant land to pad sites.
•
Premier/Master Planned Mixed Use and Residential: As ofJune 30, 2022 , our full portfolio included approximately 2,000 acres of land, or an average of 13 acres per site, and our most significant geographic concentrations were in higher growth markets inCalifornia ,Florida ,Texas , and the Northeast. We believe these land holdings will provide meaningful opportunities to create value through entitlements, leasing and developments. Twenty sites have been identified as potential residential developments. The average acreage per site is 11.9.
•
Non-core Assets for Monetization: We continue to assess the best use for all sites within our portfolio, including residential, retail, and converting excess land area to pad sites, and will strategically dispose of non-core assets in order to fund development and deploy capital more strategically. OnMarch 1, 2022 , the Company announced that itsBoard of Trustees has commenced a process to review a broad range of strategic alternatives to enhance shareholder value. The Company will continue to evaluate its portfolio strategy and corporate structure to optimize the outcome of such review. See within "-Review of Strategic Alternatives" above. OnJuly 7, 2022 , we filed our preliminary proxy materials with theSEC in connection with our 2022 Annual Meeting of Shareholders seeking a shareholder vote to approve a proposed plan of sale of our assets and dissolution (the "Plan of Sale") that will allow our board to sell all of our assets, distribute the net proceeds to shareholders and dissolve the Company. See Note 1 -Organization of the Notes to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information about the Plan of Sale. COVID-19 Pandemic
The Coronavirus ("COVID-19") pandemic has caused and continues to cause
significant impacts on the real estate industry in
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As a result of the development, fluidity and uncertainty surrounding this
situation, the Company expects that these conditions may change, potentially
significantly, in future periods and results for the three and six months ended
June 30, 2022 may not be indicative of the impact of the COVID-19 pandemic on
the Company's business for future periods. As such, the Company cannot
reasonably estimate the impact of COVID-19 on its financial condition, results
of operations or cash flows over the foreseeable future.
As of June 30, 2022 , we had collected 99% of rental income for the three months
ended June 30, 2022 . While the Company intends to enforce its contractual rights
under its leases, there can be no assurance that tenants will meet their future
obligations or that additional rental modification agreements will not be
necessary.
Results of Operations
We derive substantially all of our revenue from rents received from tenants under existing leases at each of our properties. This revenue generally includes fixed base rents and recoveries of expenses that we have incurred and that we pass through to the individual tenants, in each case as provided in the respective leases. Our primary cash expenses consist of our property operating expenses, general and administrative expenses, interest expense, and construction and development related costs. Property operating expenses include real estate taxes, repairs and maintenance, management fees, insurance, ground lease costs and utilities; general and administrative expenses include payroll, office expenses, professional fees, and other administrative expenses; and interest expense is on our term loan facility. In addition, we incur substantial non-cash charges for depreciation of our properties and amortization of intangible assets and liabilities.
Comparison of the Three Months Ended
The following table presents selected data on comparative results from the Company's condensed consolidated statements of operations for the three months endedJune 30, 2022 , as compared to the three months endedJune 30, 2021 (in thousands): Three Months Ended June 30, 2022 2021 $ Change Revenue Rental income$ 29,418 $ 27,595 $ 1,823 Expenses Property operating 10,801 11,286 (485 ) Real estate taxes 6,425 9,061 (2,636 ) Depreciation and amortization 10,669 13,328 (2,659 ) General and administrative 11,093 11,990 (897 ) Litigation reserve 35,000 - 35,000 Gain on sale of real estate, net 68,031 18,097 49,934 Impairment of real estate assets 109,343 64,539 44,804 Equity in loss of unconsolidated entities 33,720 2,327 31,393 Interest expense 22,663 28,976 (6,313 ) Rental Income
The following table presents the results for rental income for the three months
ended
Three Months Ended June 30 , Three Months Ended June 30,
2022 2021
% of Total % of Total
Rental Income Rental Income Rental Income Rental Income $ Change In-place retail leases
$ 25,823 87.8 %$ 26,357 95.5 % (534 ) Straight-line rent 3,599 12.2 % 1,238 4.5 % 2,361 Amortization of the above/below market leases (4 ) 0.0 % - 0.0 % (4 ) Total rental income$ 29,418 100.0 %$ 27,595 100.0 %$ 1,823
The increase of
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Property Operating Expenses and Real Estate Taxes
The decrease of
The decrease of$2.6 million in real estate taxes for the three months endedJune 30, 2022 was due primarily to asset sales and was partially offset by a decrease in amounts capitalized.
Depreciation and Amortization Expenses
The decrease of$2.7 million in depreciation and amortization expenses for the three months endedJune 30, 2022 was primarily due to a decrease of$1.8 million in net scheduled depreciation due to property sales.
General and Administrative Expenses
General and administrative expenses consist of personnel costs, including share-based compensation, professional fees, office expenses and overhead expenses.
The decrease of
Litigation Reserve
During the three months endedJune 30, 2022 , the Company recorded a$35 million litigation reserve related to the Company's contribution to the proposed settlement, subject to final Court approval, of the Litigation. See Note 9 - Commitments and Contingencies.
Gain on Sale of Real Estate, Net
During the three months endedJune 30, 2022 , the Company sold 13 properties for aggregate consideration of$163.4 million and recorded a gain totaling$68.0 million , which is included in gain on sale of real estate, net within the condensed consolidated statements of operations.
Impairment of Real Estate Assets
During the three months endedJune 30, 2022 , the Company recognized$109.3 million in impairment on 32 real estate assets, which is included within the condensed consolidated statements of operations. These impairments arose from the Company's plan to sell these properties resulting in a reduction to the holding periods of all properties, which triggered the need for an impairment analysis pursuant to ASC 360, Property, Plant and Equipment.
Equity in Loss of Unconsolidated Entities
The increase of$31.4 million in loss of unconsolidated entities for the three months endedJune 30, 2022 was driven by a$32.5 million other-than-temporary impairment charge recorded against three investments. These impairments arose from the Company's plan to sell these properties resulting in a reduction to the holding periods of all its investments in unconsolidated entities, which triggered the need for an impairment analysis pursuant to ASC 323,Equity Method and Joint Ventures . Interest Expense The decrease of$6.3 million in interest expense for the three months endedJune 30, 2022 was driven by a decrease in interest expense incurred resulting from the partial term loan pay down of$160 million inDecember 2021 and an increase in amounts capitalized due to an increase in project development activity. - 32 -
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Comparison of the Six Months Ended
The following table presents selected data on comparative results from the Company's condensed consolidated statements of operations for the six months endedJune 30, 2022 , as compared to the six months endedJune 30, 2021 (in thousands): Six Months Ended June 30, 2022 2021 $ Change Revenue Rental income$ 58,502 $ 58,741 $ (239 ) Expenses Property operating 21,833 21,929 (96 ) Real estate taxes 14,575 19,216 (4,641 ) Depreciation and amortization 22,603 26,470 (3,867 ) General and administrative 20,185 23,222 (3,037 ) Litigation reserve 35,000 - 35,000 Gain on sale of real estate, net 67,016 42,305
24,711
Impairment of real estate assets 110,334 66,239
44,095
Equity in loss of unconsolidated entities 66,796 3,489 63,307 Interest expense 45,251 55,126 (9,875 ) Rental Income
The following table presents the results for rental income for the six months
ended
Six Months Ended June 30, Six Months Ended June 30,
2022 2021
% of Total % of Total
Rental Income Rental Income Rental Income Rental Income $ Change
Sears or Kmart $ - 0.0 % $ 4,510 7.7 % $ (4,510 )
In-place retail leases 54,202 92.6 % 53,165 90.5 % 1,037
Straight-line rent / (expense) 4,320 7.4 % 1,028 1.8 % 3,292
Amortization of above/below
market leases (20 ) 0.0 % 38 0.0 % (58 )
Total rental income $ 58,502 100.0 % $ 58,741 100.0 % $ (239 )
The decrease of $4.5 million in Sears or Kmart rental income is due to a
reduction in the number of properties leased to Sears or Kmart under the Holdco
Master Lease , as a result of terminations. As of March 15, 2021 , Sears no longer
occupied any space in the portfolio.
The increase of $1.0 million in diversified tenants rental income during 2022 is
primarily due to newly commenced leases at locations formerly occupied by Sears
or Kmart.
The increase of
The decrease of$0.1 million in amortization of above/below market leases during 2022 was due primarily to the termination of certain leases previously acquired by the Company.
Property Operating Expenses and Real Estate Taxes
The decrease of
The decrease of$4.6 million in real estate taxes for the six months endedJune 30, 2022 was due primarily to asset sales and was partially offset by a decrease in amounts capitalized. - 33 -
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Depreciation and Amortization Expenses
The decrease of$3.9 million in depreciation and amortization expenses for the six months endedJune 30, 2022 was primarily due to a$3.0 million decrease in net scheduled depreciation due to property sales.
General and Administrative Expenses
General and administrative expenses consist of personnel costs, including share-based compensation, professional fees, office expenses and overhead expenses.
The decrease of$3.0 million in general and administrative expenses for the six months endedJune 30, 2022 was driven by a decrease in compensation expenses and share based compensation resulting from a decrease in employee head count and a decrease in restructuring costs which had been incurred in the second quarter of 2021. This was partially offset by an increase in legal fees resulting from the comprehensive review of strategic alternatives.
Litigation Reserve
During the six months endedJune 30, 2022 , the Company recorded a$35 million litigation reserve related to the Company's contribution to the proposed settlement, subject to final Court approval, of the Litigation. See Note 9 - Commitments and Contingencies.
Gain on Sale of Real Estate, Net
During the six months endedJune 30, 2022 , the Company sold 14 properties for aggregate consideration of$172.3 million and recorded a gain totaling$67.0 million , which is included in gain on sale of real estate, net within the condensed consolidated statements of operations.
Impairment of Real Estate Assets
During the six months endedJune 30, 2022 , the Company recognized$110.3 million in impairment on 36 real estate assets, which is included within the condensed consolidated statements of operations. These impairments arose from the Company's plan to sell these properties resulting in a reduction to the holding periods of all properties, which triggered the need for an impairment analysis pursuant to ASC 360, Property, Plant and Equipment.
Equity in Loss of Unconsolidated Entities
The increase of$63.3 million in loss of unconsolidated entities for the six months endedJune 30, 2022 was driven by$61.1 million impairment charge recorded in one investment, resulting in the Company picking up their share of this impairment at$30.6 million plus other-than-temporary impairment recorded to our investments of$32.5 million . These impairments arose from the Company's plan to sell these properties resulting in a reduction to the holding periods of all its investments in unconsolidated entities, which triggered the need for an impairment analysis pursuant to ASC 323,Equity Method and Joint Ventures .
Interest Expense
The decrease of$9.9 million in interest expense for the six months endedJune 30, 2022 was driven by a decrease in interest expense incurred resulting from the partial term loan pay down of$160 million inDecember 2021 , and an increase in amounts capitalized due to an increase in project development activity. Interest was decreased due to mortgage recording costs incurred in the prior year.
Liquidity and Capital Resources
Our primary uses of cash include the payment of property operating and other expenses, including general and administrative expenses and debt service (collectively, "Obligations"), and certain development expenditures. Property rental income, which is the Company's primary source of operating cash flow, did not fully fund obligations incurred during the six months endedJune 30, 2022 and the Company recorded net operating cash outflows of$54.5 million . Additionally, the Company's generated investing cash inflows of$99.9 million during the six months endedJune 30, 2022 , which were driven by asset sales and partially offset by development expenditures. Obligations are projected to continue to exceed property rental income and we expect to fund such obligations and any development expenditures with cash on hand and a combination of capital sources including, but not limited to the following, subject to any approvals that may be required under the Term Loan Agreement:
•
Sales of
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•
Sales of interests inUnconsolidated Properties . As ofJune 30, 2022 , we had sold our interests in 15Unconsolidated Properties and generated approximately$278.1 million of gross proceeds sinceJuly 2017 . Certain of our unconsolidated entity agreements also include rights that allow us to sell our interests in selectUnconsolidated Properties to our partners at fair market value. During the six months endedJune 30, 2022 , the Company exercised such rights to put four properties to two of our partners, two of which closed subsequent toJune 30, 2022 and generated approximately$23.8 million of gross proceeds. Additionally, subsequent toJune 30, 2022 , we exercised two additional put rights and we closed on the sale of our interest in one Unconsolidated Entity for gross proceeds of$3.3 million ;
•
Unconsolidated Properties . As ofJune 30, 2022 , we had contributed interests in 12 properties to unconsolidated entities, which generated approximately$242.4 million of gross proceeds sinceJuly 2017 . In addition to generating liquidity upon closing, these entities also reduce our development expenditures by the amount of our partners' interests in the unconsolidated entities;
•
Unconsolidated entities debt. We may incur property-level debt in new or existing unconsolidated entities, including construction financing for properties under development and longer-term mortgage debt for stabilized properties; and
•
Other credit and capital markets transactions. We may raise additional capital through the public or private issuance of debt securities, common or preferred equity or other instruments convertible into or exchangeable for common or preferred equity. As ofAugust 8, 2022 , we had nine assets under contract for sale with no contingencies for total anticipated proceeds of$83.5 million . We had 11 assets under contract for sale for total anticipated proceeds of$177.3 million , subject to customary due diligence and closing conditions. We are currently negotiating sales, evaluating bona fide offers received and marketing, or about to bring to market for sale, assets with an estimated fair value over$1.2 billion . In addition, we exercised the put rights that we have on fourUnconsolidated Properties . Subsequent toJune 30, 2022 , we sold 10 assets for gross proceeds of$75.3 million , closed on the sale of two previously exercised puts ofUnconsolidated Properties for gross proceeds of$23.8 million and sold our interest in one Unconsolidated Entity for gross proceeds of$3.3 million . As previously disclosed, onMay 5, 2020 , theOperating Partnership and Berkshire Hathaway entered into an amendment (the "Term Loan Amendment") to the Term Loan Agreement by and among theOperating Partnership and Berkshire Hathaway as initial lender and administrative agent that permits the deferral of payment of interest under the Term Loan Agreement if, as of the first day of each applicable month, (x) the amount of unrestricted and unencumbered (other than liens created under the Term Loan Agreement) cash on hand of theOperating Partnership and its subsidiaries, minus (y) the aggregate amount of anticipated necessary expenditures for such period (such sum, "Available Cash") is equal to or less than$30.0 million . In such instances, for each interest period, theOperating Partnership is obligated to make payments of interest in an amount equal to the difference between (i) Available Cash and (ii)$20.0 million (provided that such payment shall not exceed the amount of current interest otherwise due under the Term Loan Agreement). Any deferred interest shall accrue interest at 2.0% in excess of the then applicable interest rate and shall be due and payable onJuly 31, 2023 ; provided, that theOperating Partnership is required to pay any deferred interest from Available Cash in excess of$30.0 million (unless otherwise agreed to by the administrative agent under the Term Loan Agreement in its sole discretion). In addition, repayment of any outstanding deferred interest is a condition to any borrowings under the$400.0 million incremental funding facility under the Term Loan Agreement (the "Incremental Funding Facility"). Additionally, the Term Loan Amendment provides that the administrative agent and the lenders express their continued support for asset dispositions, subject to the administrative agent's right to approve the terms of individual transactions due to the occurrence of a Financial Metric Trigger Event, as such term is defined under the Term Loan Agreement. The Third Term Loan Amendment (defined below) executed onJune 16, 2022 eliminated this right. Our Term Loan Facility includes a$400.0 million Incremental Funding Facility, access to which is subject to rental income from non-Sears Holdings tenants of at least$200.0 million , on an annualized basis and after giving effect to SNO leases expected to commence rent payment within 12 months, which we have not yet achieved, as disclosed in Note 6. There is no assurance of the Company's ability to access the Incremental Funding Facility. OnNovember 24, 2021 , theOperating Partnership , the Company and Berkshire Hathaway entered into an amendment (the "Second Term Loan Amendment") to the Term Loan Agreement by and among theOperating Partnership , the Company and Berkshire Hathaway to which theOperating Partnership , the Company and Berkshire Hathaway mutually agreed that (i) the "make whole" provision in the Senior Secured Term Loan Agreement shall not be applicable to prepayments of principal; and (ii) the Senior Secured Term Loan Agreement, as amended for (i) above, may at theOperating Partnership's election be extended for two years fromJuly 31, 2023 toJuly 31, 2025 (the "Maturity Date") if its principal has been reduced to$800 million by the Maturity Date. If it has not been reduced to this limit by the Maturity Date, the loan will be due and payable on that date. In all other respects, the Term Loan Agreement remains unchanged. - 35 - -------------------------------------------------------------------------------- OnJune 16, 2022 , theOperating Partnership , the Company and Berkshire Hathaway entered into an amendment (the "Third Term Loan Amendment") to the Term Loan Agreement by and among theOperating Partnership , the Company and Berkshire Hathaway to which theOperating Partnership , the Company and Berkshire Hathaway mutually agreed that notwithstanding anything to the contrary in the asset sale covenant, the parent, borrower, and their respective subsidiaries will be permitted without the consent of the administrative agent to sell, transfer, or otherwise dispose of properties (including but not limited to properties or equity interests of any subsidiary) to unaffiliated third parties for no less than fair market value, provided that the borrower deposits all net proceeds received into a controlled account and the use of such net proceeds will be subject to the terms and conditions of the Term Loan Agreement, including but not limited to the restricted payments and investments/loans covenants. During the year endedDecember 31, 2021 , we repaid$160.0 million against the principal of the Term Loan Facility. Our outstanding balance as ofJune 30, 2022 , is$1.44 billion . Subsequent toJune 30, 2022 , we made a$100.0 million repayment against the principal, bringing our outstanding balance to$1.34 billion as ofAugust 8, 2022 . In addition to the$260.8 million of assets referenced above under contract, the Company is currently negotiating sales, evaluating received bona fide offers received and marketing, or about to bring to market for sale, assets with an estimated fair value over$1.2 billion , which would, if sold, allow the Company to meet the$540 million Term Loan Facility principal pay down required to extend the facility. While these assets are intended for sale, and the Company believes that they will close before the maturity, there is no assurance that these assets will be under contract within the one year timeframe in which the Term Loan Facility principal will need to be factored into the going concern analysis, which raises substantial doubt about its ability to continue as a going concern. See Note 1 - Going Concern of the Notes to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for a discussion of the going concern.
Cash Flows for the Six Months Ended
The following table summarizes the Company's cash flow activities for the six
months ended
Six Months Ended June 30,
2022 2021 $ Change
Net cash used in operating activities
Net cash provided by investing activities 99,882 67,085
32,797
Net cash used in financing activities (2,450 ) (2,529
) 79
Cash Flows from Operating Activities
Significant components of net cash used in operating activities include:
In 2022, a decrease in rental income and a decrease in accounts payable, accrued expenses and other liabilities, partially offset by a decrease in tenant and other receivables.
Cash Flows from Investing Activities
Significant components of net cash provided by (used in) investing activities include:
- In 2022,$168.2 million of net proceeds from the sale of real estate offset by development of real estate of($53.0) million and investments in unconsolidated entities of ($15.4 ); and - In 2021,$122.3 million of net proceeds from the sale of real estate offset by development of real estate of($44.9) million and investments in unconsolidated entities of($21.3) million .
Cash Flows from Financing Activities
Significant components of net cash used in financing activities include:
-
In 2022, cash payments of preferred dividends,
-
In 2021, cash payments of preferred dividends,
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Dividends and Distributions
The Company's
The Company's
Series A
Declaration Date Record Date Payment Date Preferred Share
2022
July 26 September 30 October 17 $ 0.43750
April 26 June 30 July 15 0.43750
February 16 March 31 April 15 0.43750
2021
October 26 December 31 January 14, 2022 $ 0.43750
July 27 September 30 October 15 0.43750
April 27 June 30 July 15 0.43750
February 23 March 31 April 15 0.43750
Our
Off-Balance Sheet Arrangements
The Company accounts for its investments in entities that it does not have a
controlling interest in or is not the primary beneficiary using the equity
method of accounting and those investments are reflected on the condensed
consolidated balance sheets of the Company as investments in unconsolidated
entities. As of
Contractual Obligations
There have been no significant changes in the contractual obligations disclosed
in our Form 10-K for the year ended
Capital Expenditures
During the three and six months endedJune 30, 2022 the Company invested$30.6 million and$53.0 million , respectively, in our consolidated development and operating properties and an additional$7.8 million and$15.4 million , respectively, into our unconsolidated joint ventures, as we continue to advance our business plans, including our previously announced projects. During the three and six months endedJune 30, 2021 the Company invested$18.1 million and$44.9 million , respectively, in our consolidated development and operating properties and an additional$11.4 million and$21.3 million , respectively, into our unconsolidated joint ventures.
During the three and six months ended
During the three and six months ended
Litigation and Other Matters
In accordance with accounting standards regarding loss contingencies, we accrue
an undiscounted liability for those contingencies where the incurrence of a loss
is probable and the amount can be reasonably estimated, and we disclose the
amount accrued and the amount of a reasonably possible loss in excess of the
amount accrued or disclose the fact that such a range of loss cannot be
estimated. We do not record liabilities when the likelihood that the liability
has been incurred is probable but the amount cannot be reasonably estimated, or
when the liability is believed to be only reasonably possible or remote. In such
cases, we disclose the nature of the contingency, and an estimate of the
possible loss, range of loss, or disclose the fact that an estimate cannot be
made.
- 37 --------------------------------------------------------------------------------- During the Sears Holdings bankruptcy proceedings, theOfficial Committee of Unsecured Creditors of Sears Holdings (the "UCC") and others, including the Restructuring Subcommittee of the Board of Directors of Sears Holdings, alleged that the 2015 transactions between us and Sears Holdings constituted a fraudulent conveyance, and indicated an intent to pursue litigation challenging the 2015 transactions on that and other grounds. The approval of theHoldco Acquisition by theBankruptcy Court expressly preserved claims relating to the 2015 transactions between us and Sears Holdings.
On
OnAugust 9, 2022 , following the mediation, all of the parties to the Litigation and certain of the parties to the Shareholder Litigation (to which Seritage is not a defendant) entered into a settlement agreement pursuant to which, pending final Court approval, the defendants will pay to the Sears estate$175 million (of which the Seritage Defendants will contribute approximately$35 million ) in exchange for dismissal of the Consolidated Litigation and for the full and final satisfaction and release of all claims in the Consolidated Litigation (including, in the case of the Seritage Defendants, any and all claims between the Seritage Defendants and the Sears estate in the Sears bankruptcy proceeding). The settlement is subject to final Court approval, following notice and an opportunity for objections (if any) at a hearing currently scheduled forAugust 31, 2022 . As previously disclosed, the Company remains in active litigation with its D&O insurers concerning potential coverage for the Litigation, and any amounts received from the insurers will offset the Seritage Defendants' approximately$35 million contribution. See Note 9 - Commitments and Contingencies Litigation and Other Matters of the Notes to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for a discussion of the Consolidated Litigation in respect of the Sears Holdings bankruptcy and related matters. OnMarch 2, 2021 , the Company brought a lawsuit inDelaware state court againstQBE Insurance Corporation ,Endurance American Insurance Company ,Allianz Global Risks US Insurance Company andContinental Casualty Company , each of which are D&O insurance providers of the Company (the "D&O Insurers"). The Company's lawsuit is seeking, among other things, declaratory relief and money damages as a result of certain of the D&O Insurers refusal to pay certain costs and expenses related to the defense of the Litigation discussed above. The parties to the Company's lawsuit have cross-moved for summary judgment, and those motions currently are pending. We are subject, from time to time, to various legal proceedings and claims that arise in the ordinary course of business and due to the current environment. While the resolution of such matters cannot be predicted with certainty, management believes, based on currently available information, the final outcome of such ordinary course legal proceedings and claims will not have a material effect on the condensed consolidated financial position, results of operations or liquidity of the Company. Critical Accounting Policies A summary of our critical accounting policies is included in our Annual Report on Form 10-K for the year endedDecember 31, 2021 in Management's Discussion and Analysis of Financial Condition and Results of Operations. For the six months endedJune 30, 2022 , there were no material changes to these policies aside from changes resulting from our decision to terminate the Company's REIT status and become a taxableC Corporation , effective for the year endingDecember 31, 2022 .
Non-GAAP Supplemental Financial Measures and Definitions
The Company makes reference to NOI and Total NOI which are financial measures that include adjustments to GAAP.
Net Operating Income ("NOI") and Total NOI
NOI is defined as income from property operations less property operating expenses. Other real estate companies may use different methodologies for calculating NOI, and accordingly the Company's depiction of NOI may not be comparable to other real estate companies. 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. The Company believes this form of presentation offers insights into the financial performance and condition of the Company as a whole given our ownership of unconsolidated properties that are accounted for under GAAP using the equity method. The Company also considers NOI and 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.
Due to the adjustments noted, NOI and Total NOI should only be used as an alternative measure of the Company's financial performance.
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Reconciliation of Non-GAAP Financial Measures to GAAP Financial Measures
Neither NOI nor Total NOI 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 are presented below on a comparative basis for all periods.
The following table reconciles NOI and Total NOI to GAAP net loss for the three
and six months ended
Three Months Ended June 30, Six Months Ended June 30,
NOI and Total NOI 2022 2021 2022 2021
Net loss $ (142,083 ) $ (95,304 ) $ (209,070 ) $ (106,237 )
Termination fee income (92 ) - (369 ) (2,611 )
Management and other fee
(income) (286 ) (279 ) (2,107 ) (414 )
Depreciation and amortization 10,669 13,328 22,603 26,470
General and administrative
expenses 11,093 11,990 20,185 23,222
Litigation reserve 35,000 - 35,000 -
Equity in loss of
unconsolidated entities 33,720 2,327 66,796 3,489
Gain on sale of real estate,
net (68,031 ) (18,097 ) (67,016 ) (42,305 )
Impairment of real estate
assets 109,343 64,539 110,334 66,239
Interest and other income (99 ) (530 ) (110 ) (8,154 )
Interest expense 22,663 28,976 45,251 55,126
Provision for income taxes 203 298 228 160
Straight-line rent (3,599 ) (1,238 ) (4,320 ) (1,028 )
Above/below market rental
expense 56 102 121 63
NOI $ 8,557 $ 6,112 $ 17,526 $ 14,020
Unconsolidated entities
Net operating income of
unconsolidated entities 2,267 1,646 4,113 4,083
Straight-line rent (228 ) (168 ) (556 ) (304 )
Above/below market rental
(income)/expense 6 (29 ) 12 (62 )
Termination fee income - (9 ) - (751 )
Total NOI $ 10,602 $ 7,552 $
21,095 $ 16,986
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