SERITAGE GROWTH PROPERTIES This section contains forward-looking statements that involve risks and uncertainties. Our actual results may vary materially from those discussed in the forward-looking statements as a result of various factors, including, without limitation, those set forth in "Risk Factors" and the other matters set forth in this Annual Report. See "Cautionary Statement Regarding Forward-Looking Statements." All references to numbered Notes are to specific footnotes to our Consolidated Financial Statements included in this Annual Report. You should read this discussion in conjunction with our Consolidated Financial Statements, the notes thereto and other financial information included elsewhere in this Annual Report. Our financial statements are prepared in accordance with accounting principles generally accepted inthe United States ("GAAP"). Capitalized terms used, but not defined, in this Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") have the same meanings as in such Notes. Overview We are principally engaged in the acquisition, ownership, development, redevelopment, management and leasing of diversified retail and mixed-use properties throughoutthe United States . As ofDecember 31, 2020 , our portfolio consisted of interests in 183 properties totaling approximately 26.5 million square feet of GLA, including 158Wholly Owned Properties totaling approximately 24.5 million square feet of GLA across 41 states andPuerto Rico , and interests in 25Unconsolidated Properties totaling approximately 1.9 million square feet of GLA across 13 states that are owned in Unconsolidated Entities. The Company's mission is to create long-term value for our shareholders by unlocking the value of our portfolio through re-leasing, redevelopment, formation of strategic partnerships or other bespoke solutions. In doing so, we target meaningful growth in NOI and diversification of our tenant base while transforming our portfolio from one with a single-tenant retail and enclosed shopping center orientation to a diversified portfolio, including residential, biotechnology, office, open-air shopping and other uses.
In order to achieve our objective, we intend to execute the following strategies:
• Maximize value of vast land holdings through retail and mixed-use accretive
densification;
• Convert single-tenant buildings into multi-tenant properties at meaningfully
higher rents
• Leverage existing and future joint venture relationships with leading real
estate and financial partners; and
• Maintain a flexible capital structure to support value creation activities.
Since inception, and excluding 17 projects that have been sold, we have completed or substantially completed 51 redevelopment projects and, as ofDecember 31, 2020 , we had an additional 15 projects in various stages of redevelopment, with the remaining commenced projects on hold due to adverse conditions resulting from the novel coronavirus ("COVID-19") pandemic. As ofDecember 31, 2020 , including our proportional share ofUnconsolidated Properties , we had 6.2 million square feet of GLA leased to diversified tenants under in-place leases, 2.4 million square feet of GLA leased to diversified tenants under signed not yet opened leases, and 17.9 million square feet of GLA available for lease and/or redevelopment. OnOctober 15, 2018 , Sears Holdings and certain of its affiliates filed voluntary petitions for relief under chapter 11 of title 11 ofthe United States Code with theBankruptcy Court . Subsequently, the Company andHoldco , an affiliate ofESL Investments, Inc. , executed the Holdco Master Lease with respect to 51Wholly Owned Properties , which became effective onMarch 12, 2019 , when theBankruptcy Court issued an order approving the rejection of the OriginalMaster Lease . As ofDecember 31, 2020 , after giving effect to the pending termination of the Holdco Master Lease at the five remaining properties, the Company does not lease any properties toHoldco under the Holdco Master Lease.
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COVID-19 Pandemic
The COVID-19 pandemic continues to have a significant impact on the real estate industry inthe United States , including our properties. As ofDecember 31, 2020 , we had collected 93% of rental income for the three months endedDecember 31, 2020 , and agreed to defer an additional 4%. As ofMarch 5, 2021 , we had also collected 95% of January andFebruary 2021 rental income, and agreed to defer an additional 2%. While we intend to enforce our contractual rights under our leases, there can be no assurance that tenants will meet their future obligations or that additional rental modification agreements will not be necessary.
We continue to maintain a cautious approach as we respond to the evolving COVID-19 pandemic with an emphasis on managing our cash resources and preserving the value of our assets and our platform. We expect to continue monetizing appropriate assets and selectively allocating capital to the assets with opportunistic risk-adjusted returns in our portfolio.
As a result of the fluidity and uncertainty surrounding the nation's response to and limitations as a result of the pandemic, we expect that conditions will change, potentially significantly, in future periods and, as such, results for the year then endedDecember 31, 2020 may not be indicative of the Company's business results for future periods. As such, we cannot reasonably estimate the impact of COVID-19 on our financial condition, results of operations or cash flows over the foreseeable future.
During the year endedDecember 31, 2020 , the Company sold 27 properties, plus additional outparcels, totaling 4.2 million square feet and generated gross proceeds of$333.4 million and also entered into an unconsolidated entity that generated an additional$27.0 million of gross proceeds. The Company also sold the 50% interests in three properties held in Unconsolidated Entities for gross proceeds of$35.9 million in gross proceeds and the Company also completed a sale-leaseback transaction for one property for gross proceeds of$21.0 million . Subsequent toDecember 31, 2020 , we sold fourWholly Owned Properties for gross proceeds of$46.9 million . As ofMarch 9, 2021 , we had assets under contract to sell for total anticipated proceeds of$66.0 million , subject to buyer diligence and closing conditions. Effects of Natural Disasters The Company assessed the impact of the natural disasters that occurred during the year endedDecember 31, 2020 and determined that natural disasters did not have a material impact on our operating results or financial position. The Company did not experience interruptions in rental payments related to natural disasters nor has it incurred material capital expenditures to repair any property damage. As a result of changes to weather patterns caused by climate change, our properties could experience increased storm intensity and other natural disasters in future periods and, as such, we cannot provide assurance that natural disasters will not have a material impact on our financial condition, results of operations or cash flows over the foreseeable future.
Appointment of New Chief Executive Officer, President and Trustee
OnFebruary 9, 2021 , the Company announced that Ms.Andrea Olshan has been appointed Chief Executive Officer and President of the Company and will join the Company'sBoard of Trustees , each effective as ofMarch 16, 2021 . In connection withMs. Olshan's appointment, the Company and theOperating Partnership entered into an employment agreement withMs. Olshan , datedFebruary 7, 2021 .Ms. Olshan will replace the former Chief Executive Officer, President and Trustee, Mr.Benjamin W. Schall whose departure from the Company was onJanuary 22, 2021 . SinceMr. Schall's departure, the day-to-day operations of the Company have continued to be overseen by members of existing senior management who report directly to theBoard of Trustees .Matthew Fernand , a member of existing senior management and Executive Vice President, General Counsel and Secretary of the Company, is signing this Annual Report as the principal executive officer.
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.
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Comparison of the Year Ended
The following table presents selected data on comparative results from the
Company's consolidated statements of operations for the year ended
Year Ended December 31,
2020 2019 $ Change % Change
Revenue
Rental income $ 116,202 $ 167,035 $ (50,833 ) -30 %
Expenses
Property operating $ 41,164 $ 42,123 $ (959 ) -2 %
Real estate taxes 36,768 38,595 (1,827 ) -5 %
Depreciation and 95,997 104,581 (8,584 ) -8 %
amortization
General and administrative 28,849 39,156 (10,307 ) -26 %
Gain on sale of real estate 88,555 71,104 17,451 25 %
Gain on sale of interests 1,758 - 1,758 100 %
in unconsolidated entities
Impairment on real estate (64,108 ) - (64,108 ) -100 %
assets
Equity in loss of (4,712 ) (17,994 ) 13,282 -74 % unconsolidated entities Interest and other income 3,394 6,824 (3,430 ) -50 % Interest expense (91,316 ) (94,519 ) 3,203 -3 % Rental Income The following table presents the results for rental income for the year endedDecember 31, 2020 , as compared to the corresponding period in 2019 (in thousands): Year Ended December 31, 2020 2019 % of Total % of Total Rental Income Rental Income Rental Income Rental Income $ Change Sears/Kmart$ 14,693 13 %$ 51,153 31 %$ (36,460 ) Diversified tenants 104,699 90 % 99,797 60 % 4,902 Straight-line rent (4,983 ) -4 % 15,590 9 % (20,573 ) Amortization of above/below market leases 1,793 1 % 495 0 % 1,298 Total rental income$ 116,202 100 %$ 167,035 100 %$ (50,833 ) The decrease of$36.5 million in Sears or Kmart rental income during 2020 was due primarily to a reduction in the number of properties leased to Sears or Kmart under the Holdco Master Lease, as a result of termination activity. As ofDecember 31, 2020 , after giving effect to the pending termination of theHoldco Master Lease at five properties, the Company has no properties leased to Sears or Kmart. The increase of$4.9 million in diversified tenants rental income during 2020 was due primarily to newly commenced leases at locations formerly occupied by Sears or Kmart. The decrease of$20.6 million in straight-line rental income during 2020 was due primarily to (i) the accelerated amortization of straight-line rent receivables as a result of termination activity under the Holdco Master Lease and (ii) the reversal of previously recorded straight-line rent that the Company deemed was improbable of being collected. The increase of$1.3 million in amortization of above/below market leases during 2020 was due primarily to the termination of certain leases previously acquired by the Company. - 44 -
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Property Operating Expenses and Real Estate Taxes
The following table presents the comparative results for property operating
expenses and real estate taxes for the year ended
Year Ended December 31,
2020 2019 $ Change
Property operating expenses
36,768 38,595 (1,827 )
The decrease of $1.0 million in property operating expense during 2020 was due
primarily to asset sales, partially offset by an increase in utility and certain
common area maintenance expenses at properties for which Sears or Kmart paid
such expenses directly during 2019 and a decrease in amounts capitalized due to
reduced development activity.
The decrease of $1.8 million in real estate taxes during 2020 was due primarily
to asset sales and partially offset by a decrease in amounts capitalized due to
reduced development activity.
Depreciation and Amortization Expenses
The decrease of$8.6 million in depreciation and amortization expenses during 2020 was due primarily to accelerated depreciation during the year endedDecember 31, 2019 related to certain buildings that were demolished for redevelopment, lower accelerated amortization attributable to certain lease intangible assets, offset by of higher net scheduled depreciation related to assets placed in service during the periods.
Accelerated amortization results from the recapture of space from, or
termination of space by
General and Administrative Expenses
General and administrative expenses consist of personnel costs, including share-based compensation, professional fees, office expenses and overhead expenses.
The$10.3 million decrease was primarily related to reduced share-based compensation as a result of forfeitures and reversals of the bonus accrual related to the resignation of our former chief executive officer and chief financial officer, a decrease in personnel and other expenses resulting from cost savings initiatives implemented in response to the COVID-19 pandemic, as well as lower share-based compensation related to equity awards with performance-based vesting, and partially offset by increased legal activity surrounding ongoing litigation with Sears and a decrease in capitalized personnel expenses as a result of reduced development activity.
Gain on Sale of Real Estate
During the year endedDecember 31, 2020 , the Company sold 27 properties, plus additional outparcels, for aggregate consideration of$333.4 million and recorded gains totaling$120.1 million , which are included in gain on sale of real estate within the consolidated statements of operations. These gains are partially offset by the$30.0 million loss recognized in relation to the Mark 302 unconsolidated entity revaluation to adjust a previously recorded gain from$38.8 million to$8.8 million . The Company also contributed its property located inCarson, CA to an unconsolidated entity for a contribution value of$27.0 million and recorded a loss of$1.5 million which is included in gain on sale of real estate within the consolidated statements of operations.
Impairment of Real Estate Assets
During 2020, the Company recognized$10.3 million in impairment related to real estate assets that were sold during the year and$53.8 million in impairment on vacant assets partially and stabilized assets that are leased primarily to theater and fitness tenants which have been negatively impacted by COVID-19. Interest Expense
The Company incurs interest expense on its debt net of capitalized costs.
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The decrease in interest expense is driven by incurring $5.0 million of mortgage
recording costs in 2019 as a result of the Company's lender's request for
mortgages against its assets pursuant to the springing mortgage and collateral
requirement of the Term Loan Facility and was partially offset by decreased
capitalized interest in 2020 as a result of reduced development activity.
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 the reinvestment in and redevelopment of our
properties ("development expenditures"). As a result of a decrease in occupancy
levels due to our recapture of space for redevelopment purposes and the
execution of certain termination rights by Sears Holdings under the Original
Master Lease and Holdco under the Holdco Master Lease, property rental income,
which is our primary source of operating cash flow, we did not fully fund
obligations incurred during the year ended December 31, 2020 and we had net
operating cash outflows of $47.3 million . However, our property dispositions
during the year ended December 31, 2020 drove net investing cash inflows of
$42.9 million and financing inflows of $15.4 million .
Obligations are projected to continue to exceed property rental income and the
COVID-19 pandemic has created uncertainty with respect to rent collections and
the timing of our construction projects, many of which remain on hold. While we
do not currently have the liquid funds available to satisfy our obligations and
development expenditures, 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
generated approximately
capital recycling program in
sold four
proceeds of
• Sales of interests in
had sold our interests in 15
approximately
unconsolidated entity agreements also include rights that allow us to sell our
interests in select
value;
• New Unconsolidated Entities. As of
interests in 11 properties to unconsolidated entities, which generated
approximately
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.
In response to the COVID-19 pandemic, we have taken a number of actions to manage our cash resources, including keeping many of our construction projects on hold, reducing operating and corporate expenses, and amending certain terms of our Term Loan Facility, as described below. 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. 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. Our Term Loan Facility includes a$400.0 million Incremental Funding Facility (as defined below), 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. The timing of our ability to access the Incremental Funding Facility, if at all, will be adversely impacted by the COVID-19 pandemic. The availability of liquidity from the above sources or initiatives is subject to a range of risks and uncertainties, including those discussed under "Risk Factors-Real estate investments are relatively illiquid" and "Risk Factors-We have ongoing capital needs and may not be able to obtain additional financing or other sources of funding on acceptable terms." - 46 -
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Term Loan Facility
OnJuly 31, 2018 , theOperating Partnership , as borrower, and the Company, as guarantor, entered into a Senior Secured Term Loan Agreement (the "Term Loan Agreement") providing for a$2.0 billion term loan facility (the "Term Loan Facility") withBerkshire Hathaway Life Insurance Company of Nebraska ("Berkshire Hathaway") as lender and Berkshire Hathaway as administrative agent. The Term Loan Facility provided for an initial funding of$1.6 billion at closing (the "Initial Funding") and includes a$400 million incremental funding facility (the "Incremental Funding Facility"). The Term Loan Facility matures onJuly 31, 2023 . Funded amounts under the Term Loan Facility bear interest at an annual rate of 7.0% and unfunded amounts under the Incremental Funding Facility are subject to an annual fee of 1.0% until drawn. The Company prepays the annual fee and amortizes the expense to interest expense on the consolidated statements of operations.
As of
The Company's ability to access the Incremental Funding Facility is subject to (i) the Company achieving rental income from non-Sears Holdings tenants, on an annualized basis (after giving effect to SNO Leases expected to commence rent payment within 12 months) for the fiscal quarter ending prior to the date of incurrence of the Incremental Funding Facility, of not less than$200 million (ii) the Company's good faith projection that rental income from non-Sears Holdings tenants (after giving effect to SNO Leases expected to commence rent payment within 12 months) for the succeeding four consecutive fiscal quarters (beginning with the fiscal quarter during which the incremental facility is accessed) will be not less than$200 million , and (iii) the repayment by theOperating Partnership of any deferred interest permitted under Term Loan Amendment as further described below. The Term Loan Facility is guaranteed by the Company and, subject to certain exceptions, is required to be guaranteed by all existing and future subsidiaries of theOperating Partnership . The Term Loan Facility is secured on a first lien basis by a pledge of the capital stock of the direct subsidiaries of theOperating Partnership and the guarantors, including its joint venture interests, except as prohibited by the organizational documents of such entities or any joint venture agreements applicable to such entities. The Term Loan Facility includes certain financial metrics to govern springing collateral requirements and certain covenant exceptions set forth in the Term Loan Agreement, including: (i) a total fixed charge coverage ratio of not less than 1.00 to 1.00 for each fiscal quarter beginning with the fiscal quarter endingSeptember 30, 2018 through the fiscal quarter endingJune 30, 2021 , and not less than 1.20 to 1.00 for each fiscal quarter thereafter; (ii) an unencumbered fixed charge coverage ratio of not less than 1.05 to 1.00 for each fiscal quarter beginning with the fiscal quarter endingSeptember 30, 2018 through the fiscal quarter endingJune 30, 2021 , and not less than 1.30 to 1.00 for each fiscal quarter thereafter; (iii) a total leverage ratio of not more than 65%; (iv) an unencumbered ratio of not more than 60%; and (v) a minimum net worth of at least$1.2 billion . Any failure to satisfy any of these financial metrics limits the Company's ability to dispose of assets via sale or joint venture and triggers the springing mortgage and collateral requirements but will not result in an event of default. The Term Loan Facility also includes certain limitations relating to, among other activities, the Company's ability to: sell assets or merge, consolidate or transfer all or substantially all of its assets; incur additional debt; incur certain liens; enter into, terminate or modify certain material leases and/or the material agreements for the Company's properties; make certain investments (including limitations on joint ventures) and other restricted payments; pay distributions on or repurchase the Company's capital stock; and enter into certain transactions with affiliates. The Term Loan Facility contains customary events of default, including (subject to certain materiality thresholds and grace periods) payment default, material inaccuracy of representations or warranties, and bankruptcy or insolvency proceedings. If there is an event of default, the lenders may declare all or any portion of the outstanding indebtedness to be immediately due and payable, exercise any rights they might have under any of the Term Loan Facility documents, and require the Company to pay a default interest rate on overdue amounts equal to 2.0% in excess of the then applicable interest rate. As ofDecember 31, 2020 , the Company was not in compliance with certain of the financial metrics described above. As a result, the Company must receive the consent of Berkshire Hathaway to dispose of assets via sale or joint venture and, as ofDecember 31, 2020 , Berkshire Hathaway had provided such consent for all such transactions submitted for approval. There can be no assurance that the lender will consent to future dispositions of assets. During 2019, Berkshire Hathaway requested mortgages on a majority of the Company's portfolio which were recorded in accordance with the mortgage and collateral requirement (the "Lender Request"). There are no other changes to the terms and conditions of the Term Loan Facility, or the Company's ability to operate thereunder, as a result of providing mortgages against any of the Company's assets pursuant to the mortgage and collateral requirement. The Company accounted for the Lender Request transaction as a modification of debt as ofDecember 31, 2019 .
The Company believes it is in compliance with all other terms and conditions of the Term Loan Agreement.
The Company incurred$2.1 million of debt issuance costs related to the Term Loan Facility which are recorded as a direct deduction from the carrying amount of the Term Loan Facility and amortized over the term of the Term Loan Agreement. As ofDecember 30 , - 47 -
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2020 and
OnMay 5, 2020 , theOperating Partnership and Berkshire Hathaway entered into the Term Loan Amendment 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 Incremental Funding Facility under the Term Loan Agreement. The Company has paid all interest due under the Term Loan Agreement and has not deferred any interest as permitted under the Term Loan Amendment. 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 Facility.
Preferred Shares
As ofDecember 31, 2020 , we had 2,800,000 7.00% Series A Cumulative Redeemable Preferred Shares (the "Series A Preferred Shares") outstanding. We may not redeem the Series A Preferred Shares beforeDecember 14, 2022 , except to preserve our status as a REIT or upon the occurrence of a Change of Control, as defined in the trust agreement addendums designating the Series A Preferred Shares. On and afterDecember 14, 2022 , we may redeem any or all of the Series A Preferred Shares at$25.00 per share plus any accrued and unpaid dividends.
Dividends and Distributions
The Company'sBoard of Trustees did not declare dividends on the Company's Class A and Class C common shares during 2020. The last dividend on the Company's Class A and C common shares that theBoard of Trustees declared was onFebruary 25, 2019 , which was paid onApril 11, 2019 to shareholders of record onMarch 29, 2019 .
The Company's
Declaration Date Record Date Payment Date Preferred Share 2021 February 23 March 31 April 15 $ 0.43750 2020 December 17 December 31 January 15, 2021 $ 0.43750 September 17 September 30 October 15 0.43750 June 9 June 30 July 15 0.43750 February 18 March 31 April 15 0.43750 2019 October 23 December 31 January 15, 2020 $ 0.43750 July 23 September 30 October 15 0.43750 April 30 June 28 July 15 0.43750 February 25 March 29 April 15 0.43750 OurBoard of Trustees will continue to assess the Company's investment opportunities and its expectations of taxable income in its determination of future distributions, if any. The Company intends to, at a minimum, make distributions to shareholders to comply with the REIT requirements of the Code, which may be satisfied by dividends on the Company's Series A Preferred Shares. - 48 -
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Off-Balance Sheet Arrangements
The Company accounts for its investments in entities that it does not have a controlling interest or is not the primary beneficiary using the equity method of accounting and those investments are reflected on the consolidated balance sheets of the Company as investments in unconsolidated entities. As ofDecember 31, 2020 , andDecember 31, 2019 , we did not have any off-balance sheet financing arrangements. Contractual Obligations Our contractual obligations relate to our Term Loan Facility and non-cancelable operating leases in the form of a ground lease at two of our properties, as well as operating leases for our corporate offices. Information concerning our obligations and commitments to make future payments under contracts for these loan and lease agreements as ofDecember 31, 2020 is aggregated in the following table (in thousands): Payments due by Period Within After
Contractual Obligation Total 1 year 1 - 3 years
3 -5 years 5 years Long-term debt (1)$ 1,906,045 $ 117,556 $ 1,788,489 $ - $ - Operating leases 10,755 1,521 2,785 2,574 3,875 Total$ 1,916,800 $ 119,077 $ 1,791,274 $ 2,574 $ 3,875 (1) Includes expected interest payments. Capital Expenditures The majority of our capital expenditures, tenant improvement costs and leasing commissions are from our retenanting and redevelopment projects described under the caption "-Retenanting and Redevelopment Projects" below.
During the year ended
During the year ended
Cash Flows for the Year Ended
The following table summarizes the Company's cash flow activities for the years
ended
Year Ended December 31,
2020 2019 $ Change
Net cash (used in) provided by operating
activities $ (47,314 ) $ (57,660 ) $ 10,346
Net cash used in investing activities 42,868 (299,490 ) 342,358
Net cash (used in) provided by financing
activities 15,440 (36,447 ) 51,887
Cash Flows from Operating Activities
Significant changes in the components of net cash (used in) provided by operating activities include:
- In 2020, a decrease in rental income due primarily to a reduction in the
number of properties leased to Sears or Kmart under the Holdco Master Lease,
as a result of termination activity and an increase in tenant and other
receivables due to Rent Deferral Agreements, partially offset by an increase
in accounts payable, accrued expenses and other liabilities.
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Cash Flows from Investing Activities
Significant components of net cash used in investing activities include:
- In 2020,
two of the assets in the GGP II JV, partially offset by development of real
estate and property improvements of ($246.8) million and investments in
unconsolidated entities of ($62.9) million ; and
- In 2019, development of real estate and property improvements of (
million and investments in unconsolidated entities of
partially offset by
estate; and
Cash Flows from Financing Activities
Significant components of net cash (used in) and provided by financing activities include:
- In 2020, cash distributions to holders of Series A Preferred Shares, (
million;
- In 2020, proceeds from sale-leaseback financing obligations,
- In 2019, cash distributions to common stockholders and holders of OP Units,
- In 2019, cash distributions to holders of Series A Preferred Shares, (
million;
Litigation and Other Matters
In accordance with accounting standards regarding loss contingencies, the Company accrues an undiscounted liability for those contingencies where the incurrence of a loss is probable and the amount can be reasonably estimated, and the Company discloses the amount accrued and the amount of a reasonably possible loss in excess of the amount accrued or discloses the fact that such a range of loss cannot be estimated. The Company does 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. 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. OnApril 18, 2019 , at the direction of the Restructuring Sub-Committee of the Restructuring Committee of the Board of Directors of Sears Holdings, Sears Holdings, Sears, Roebuck & Co.,Sears Development Co. ,Kmart Corporation , andKmart of Washington, LLC filed a lawsuit (the "Litigation") in theUnited States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court ") against, among others,Edward S. Lampert ,ESL Investments, Inc. and certain of its affiliates and investors,Fairholme Capital Management, L.L.C. , certain members of the Sears Holdings board of directors, and the Company, theOperating Partnership , and certain of our affiliates and subsidiaries (the Company, theOperating Partnership , and certain of our affiliates and subsidiaries collectively, the "Seritage Defendants"). The Litigation is dual captioned as In re: Sears Holdings Corporation, et al., Case No. 18-23538 (RDD) and Sears Holdings Corporation et al., v. Lampert et al., Case No. 19-08250 (RDD). The Litigation alleges, among other things, that certain transactions undertaken by Sears Holdings since 2011 constituted actual and/or constructive fraudulent transfers and/or illegal dividends by Sears Holdings. The challenged transactions include theJuly 2015 transactions giving rise to Seritage, the execution of the OriginalMaster Lease with Sears Holdings, and the acquisition of real estate from Sears Holdings. The Litigation alleges, among other things, that the real estate acquired by Seritage from Sears Holdings inJuly 2015 was worth at least$649 to$749 million more than the purchase price paid. The Litigation seeks as relief, among other things, declaratory relief, avoidance of the allegedly actual and/or constructive fraudulent transfers and either (i) rescission of the transfers of real estate from Sears Holdings to Seritage in 2015 and return of the proceeds of the transactions between Sears Holdings and Seritage, or, in the alternative, (ii) payment by Seritage to Sears Holdings of damages at least equal to the value of the transferred property. OnOctober 15, 2019 , theBankruptcy Court entered an order (the "Confirmation Order") confirming the Modified Second Amended Joint Chapter 11 Plan of Sears Holdings and its affiliated debtors (the "Chapter 11 Plan"). Pursuant to the terms of the Confirmation Order, upon the effective date of the Chapter Plan, a liquidating trust will be formed, and the Litigation will vest in the liquidating trust. The Confirmation Order further provides that, prior to the effective date of the Chapter 11 Plan and the formation of the liquidating trust, the Litigation shall be controlled by five litigation designees selected by Sears Holdings and the Unsecured Creditors' Committee (the "UCC"). For further information, refer to the Chapter 11 Plan, Confirmation Order and liquidating trust agreement, each of which has been publicly filed with theBankruptcy Court . - 50 - -------------------------------------------------------------------------------- OnFebruary 21, 2020 , the Seritage defendants filed a partial motion to dismiss seeking dismissal of the claims in the operative complaint in the Litigation relating to the release received in the Sears Holdings derivative litigation, unjust enrichment, and equitable subordination. Briefing and oral argument on the motions were completed inAugust 2020 , and the parties are awaiting a decision. The Company believes that the claims against the Seritage Defendants in the Litigation are without merit and intends to defend against them vigorously.
On
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 Company is subject, from time to time, to various legal proceedings and claims that arise in the ordinary course of business. 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 consolidated financial position, results of operations or liquidity of the Company.
Redevelopment
During the year endedDecember 31, 2020 , the Company continued work on certain suburban retail redevelopment projects. The Company had previously resumed$46 million of suburban retail development activity which was expected to generate total potential annual base rent of$13 million . As ofDecember 31, 2020 , for those projects$31 million has now been incurred and$6 million of annual base rent has commenced. The remaining potential annual base rent is expected to commence in the next twelve months, subject to tenant opening schedules. In addition, during the fourth quarter, the Company resumed$39 million of additional suburban retail development activity with total potential income of$6 million , with the majority expected to commence in the next twelve months, subject to tenant opening schedules. The Company also continued to advance its previously underway premier projects in Aventura (FL),Santa Monica (CA) andLa Jolla (CA), and its pipeline of such projects, including its two previously announced multifamily projects, in Redmond (WA) andDallas (TX), each of which represents the first phase of larger, mixed-use developments. A multifamily project inLynwood (WA) in an Unconsolidated Entity is also underway and has been scheduled for opening in the fourth quarter of 2021. A previously announced multifamily project inChicago (IL) was sold during the year endedDecember 31, 2020 . During the quarter endedDecember 31, 2020 , the Company, together withFoulger-Pratt and The Howard Hughes Corporation (NYSE: HHC), announced that it had entered into an initial agreement to advance the development of a 4.0 million-square-foot mixed-use community to include a new hospital campus at itsAlexandria (VA) property. The remainder of our previously announced redevelopment projects remain on hold due to the COVID-19 pandemic. The Company deems this approach to capital deployment prudent given the uncertainty regarding tenants' ability to construct and open new stores and the feasibility of sustaining labor levels with safe working conditions.
Critical Accounting Policies
In preparing the consolidated financial statements, we have made estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Refer to the discussion of our accounting policies included in Note 2 to the audited consolidated financial statements in Part II, Item 8 of this Annual Report.
Real Estate Investments
Real estate assets are recorded at cost, less accumulated depreciation and amortization.
Expenditures for ordinary repairs and maintenance will be expensed as
incurred. Significant renovations which improve the property or extend the
useful life of the assets are capitalized. As real estate is undergoing
redevelopment activities, all amounts directly associated with and attributable
to the project, including planning, development and construction costs, interest
costs, personnel costs of employees directly involved, and other miscellaneous
costs incurred during the period of redevelopment, are capitalized. The
capitalization period begins when redevelopment activities are underway and ends
when the project is substantially complete.
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Depreciation of real estate assets, excluding land, is recognized on a straight-line basis over their estimated useful lives as follows:
Buildings: 25 - 40 years
Site improvements: 5 - 15 years Tenant improvements: shorter of the estimated useful life or non-cancelable term of
lease
The Company amortizes identified intangibles that have finite lives over the
period they are expected to contribute directly or indirectly to the future cash
flows of the property or business acquired, generally the remaining
non-cancelable term of a related lease.
The Company on a periodic basis, assesses whether there are indicators that the
value of the real estate assets may be impaired. These indicators include
macroeconomic conditions, such as the expected impact of the current COVID-19
pandemic. If an indicator is identified, management will estimate the real
estate asset recoverability based on projected operating cash flows
(undiscounted and unleveraged), taking into account the anticipated holding
period and capitalization rates, to determine if the undiscounted cash flows are
less than a real estate asset's carrying value. If the carrying value of an
asset exceeds the undiscounted cash flows, an analysis is performed to determine
the estimated fair value of the real asset. In estimating the fair value of an
asset, various factors are considered, including expected future operating
income, trends and leasing prospects including the effects of demand,
competition, and other economic factors such as discount rates and market
comparables. Changes in any estimates and/or assumptions, including the
anticipated holding period, could have a material impact on the projected
operating cash flows. If management determines that the carrying value of a real
estate asset is impaired, a loss will be recorded for the excess of its carrying
amount over its estimated fair value. Subsequent tests for impairment may
result in future impairment charges if the COVID-19 pandemic causes economic and
market conditions to deteriorate further. The Company recognized $64.1 million
in impairment losses for years ended December 31, 2020 and no impairment losses
on real estate assets were recognized for the years ended December 31, 2019 , and
2018.
Approximately $10.3 million of impairment losses were attributable to a change
in holding period for two properties that were sold during the year ended
December 31, 2020 at values that were less than the Company's carrying values at
the time of sale. In addition, the Company recorded impairment losses of $53.8
million during the year ended December 31, 2020 as a result of estimated fair
values that were less than the Company's carrying values for 23 assets. Such
impairment losses are included within impairment on real estate assets on the
consolidated statements of operations. No impairment losses were recognized for
the years ended December 31, 2019 and 2018.
Investments in Unconsolidated Entities
The Company accounts for its investments in unconsolidated entities using the equity method of accounting as the Company exercises significant influence but does not have a controlling financial interest. These investments are initially recorded at cost and are subsequently adjusted for cash contributions, cash distributions, and earnings which are recognized in accordance with the terms of the applicable agreement. On a periodic basis, management assesses whether there are indicators, including the operating performance of the underlying real estate and general market conditions (which include macroeconomic conditions such as the expected impact of the COVID-19 pandemic), that the value of the Company's investments in unconsolidated entities may be impaired. An investment's value is impaired if management's estimate of the fair value of the Company's investment is less than its carrying value and such difference is deemed to be other-than-temporary. To the extent impairment has occurred, the loss is measured as the excess of the carrying amount of the investment over its estimated fair value. If the COVID-19 pandemic causes economic and market conditions to deteriorate further, subsequent tests for impairment may result in future impairment charges. No such impairment losses were recognized for the years endedDecember 31, 2020 , 2019 or 2018. Revenue Recognition Rental income is comprised of base rent and reimbursements of property operating expenses. Base rent is recognized on a straight-line basis over the non-cancelable terms of the related leases. For leases that have fixed and measurable base rent escalations, the difference between such rental income earned and the cash rent due under the provisions of the lease is recorded as deferred rent receivable and included as a component of tenant and other receivables on the consolidated balance sheets. In leasing tenant space, the Company may provide funding to the lessee through a tenant allowance. In accounting for a tenant allowance, the Company will determine whether the allowance represents funding for the construction of leasehold improvements and evaluate the ownership of such improvements. If the Company is considered the owner of the improvements for accounting purposes, the Company will capitalize the amount of the tenant allowance and depreciate it over the shorter of the useful life of the improvements or the related lease term. If the tenant allowance represents a payment for a purpose other than funding leasehold improvements, or in the event the Company is not considered the owner of the improvements for accounting purposes, the allowance is considered a lease incentive and is recognized over the lease term as a reduction of rental revenue on a straight-line basis. - 52 -
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The Company commences recognizing revenue based on an evaluation of several factors. Revenue recognition under a lease begins when the lessee takes control of the physical use of the leased asset.
As discussed further below in "-Recently Issued Accounting Pronouncements", the Company has elected to avail itself of the relief provided in the Lease Modification Question and Answer Document (the "Lease Modification Q&A") issued by theFinancial Accounting Standards Board (the "FASB") inApril 2020 and elected to not account for the Rent Deferral Agreements on a lease by lease basis as modifications because the overall amount and term of the modified leases are significantly unchanged. As a result, the Company has not adjusted accrued rental revenues or the portion of accrued rental revenues related to the straight-line method for the portion which has been deferred. When the Deferred Rent is repaid, the Company will relieve the accrual in tenant and other receivables. Reimbursement of property operating expenses arises from tenant leases which provide for the recovery of all or a portion of the operating expenses and real estate taxes of the respective property. This revenue is accrued in the same periods as the expenses are incurred.
Accounting for Recapture and Termination Activity Pursuant to the Original
Seritage Recapture Rights. The Company generally treated the delivery of a recapture notice as a modification of the lease as of the date of notice.
When a recapture notice was delivered, the portion of accrued rental revenues related to the straight-line method that were subject to the lease modification were amortized over the remaining shortened life of the lease from the date of notice to the date of vacancy. In addition, the portion of intangible lease assets and liabilities that was deemed to be impacted by the lease modification was amortized over the shorter of the shortened lease term from the date of notice to the date of vacancy or the remaining useful life of the asset or liability. A recapture typically occurred in conjunction with obtaining a new tenant or a real estate development project. As such, termination fees, if any, associated with the recapture notice were generally capitalized as either an initial direct cost of obtaining a new lease or a necessary cost of the real estate project and depreciated over the life of the new lease obtained or the real estate asset being constructed or improved.
Termination Rights. The Original
The Company accounted for the termination by amortizing the accrued rental revenues related to the straight-line method that were subject to the termination over the remaining shortened life of the lease from the date of notice to the date of vacancy. In addition, intangible lease assets and liabilities that are deemed to be impacted by the termination were amortized over the shorter of the shortened lease term from the date of notice to the date of vacancy or the remaining useful life of the asset or liability.
If the Company received a termination fee, the portion of the termination fee attributable to the base rent of the subject property is recognized on a straight-line basis over the shortened life of the lease from the date the termination fee becomes legally binding to the date of vacancy.
For the portion of the termination fee attributable to estimated real estate taxes and property operating expenses for the subject property, prepaid rental income is recorded in the period such fee is received and recognized as tenant reimbursement revenue in the same periods as the expenses are incurred.
Recent Accounting Pronouncements
Refer to Note 2 of the consolidated financial statements for recently issued accounting pronouncements.
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Non-GAAP Supplemental Financial Measures and Definitions
The Company makes reference to NOI, Total NOI, FFO and Company FFO 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 REITs may use different methodologies for calculating NOI, and accordingly, the Company's depiction of NOI may not be comparable to other REITs. 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 ofUnconsolidated 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 ofUnconsolidated 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.
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 costs, that it does not believe are representative of ongoing operating results.
Due to the adjustments noted, FFO and Company FFO should only be used as an alternative measure of the Company's financial performance.
Reconciliation of Non-GAAP Financial Measures to GAAP Financial Measures
None of NOI, Total NOI, FFO and 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 are presented below on a comparative basis for all
periods.
- 54 ---------------------------------------------------------------------------------
The following table reconciles NOI and Total NOI to GAAP net loss for the years
ended
Year Ended December 31,
NOI and Total NOI 2020 2019 2018
Net loss $ (152,964 ) $ (90,603 ) $ (114,878 )
Termination fee income (7,604 ) (5,545 ) (18,711 )
Management and other fee income (293 ) (1,598 ) (1,196 )
Depreciation and amortization 95,997 104,581 226,675
General and administrative expenses 28,849 39,156
34,788
Equity in loss of unconsolidated entities 4,712 17,994 10,448 Gain on sale of interests in unconsolidated entities (1,758 ) - - Gain on sale of real estate (88,555 ) (71,104 ) (96,165 ) Impairment on real estate assets 64,108 - - Interest and other income (3,394 ) (6,824 ) (7,886 ) Interest expense 91,316 94,519 90,020 Change in fair value of interest rate cap - - 23 Provision for income taxes 252 196 321 Straight-line rent adjustment 4,983 (15,590 ) 2,825 Above/below market rental income/expense (1,793 ) (495 ) (883 ) NOI$ 33,856 $ 64,687 $ 125,381 Unconsolidated entities NOI of unconsolidated entities 6,122 9,851 19,138 Straight-line rent (681 ) (152 ) (655 ) Above/below market rental income/expense (713 ) (1,719 ) (757 ) Termination fee income (827 ) - - Total NOI$ 37,757 $ 72,667 $ 143,107 - 55 -
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The following table reconciles FFO and Company FFO to GAAP net loss the years
ended
Year Ended December 31,
FFO and Company FFO 2020 2019 2018
Net loss $ (152,964 ) $ (90,603 ) $ (114,878 )
Real estate depreciation and
amortization
(consolidated properties) 93,963 102,439 224,217
Real estate depreciation and
amortization
(unconsolidated entities) 9,108 30,375 15,840
Gain on sale of interests in
unconsolidated entities (1,758 ) - -
Gain on sale of real estate (88,555 ) (71,104 ) (96,165 )
Impairment on real estate assets 64,108 - -
Dividends on preferred shares (4,900 ) (4,900 ) (4,903 )
FFO attributable to common
shareholders
and unitholders $ (80,998 ) $ (33,793 ) $ 24,111
Termination fee income (7,604 ) (5,545 ) (18,711 )
Unconsolidated entity termination fee
income (827 ) - -
Change in fair value of interest rate
cap - - 23
Amortization of deferred financing
costs 421 434 10,323
Mortgage recording costs - 5,008 -
Severance costs 425 - -Company FFO attributable to common
shareholders and unitholders$ (88,583 ) $ (33,896 )
FFO per diluted common share and unit
$ 0.43 Company FFO per diluted common share and unit$ (1.59 ) $ (0.61 )
Weighted Average Common Shares and Units Outstanding Weighted average common shares outstanding 38,298 36,413
35,560
Weighted average OP Units outstanding 17,576 19,387
20,153
Weighted average common shares and
units outstanding 55,874 55,800 55,713
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