Seritage(SRG) - 2021 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements (unaudited) The unaudited condensed consolidated financial statements detail the company's financial position, operations, and cash flows, showing decreased assets, a significant net loss, and negative operating cash flow funded by asset sales Condensed Consolidated Balance Sheets Total assets decreased to $2.50 billion by June 30, 2021, from $2.65 billion at year-end 2020, driven by reduced real estate investment, while equity declined due to net loss Condensed Consolidated Balance Sheet Summary (in thousands) | Account | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Total Assets | $2,502,533 | $2,648,943 | | Net investment in real estate | $1,745,572 | $1,910,872 | | Cash and cash equivalents | $140,058 | $143,728 | | Total Liabilities | $1,727,644 | $1,766,216 | | Term Loan Facility, net | $1,599,121 | $1,598,909 | | Total Equity | $774,889 | $882,727 | Condensed Consolidated Statements of Operations The company reported a net loss of $95.3 million for Q2 2021, primarily due to a $64.5 million impairment charge, with a $106.2 million loss for the six-month period Statement of Operations Highlights (in thousands, except per share amounts) | Metric | Q2 2021 | Q2 2020 | Six Months 2021 | Six Months 2020 | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $27,874 | $21,819 | $59,155 | $55,136 | | Gain on sale of real estate, net | $18,097 | $53,877 | $42,305 | $74,665 | | Impairment of real estate assets | $(64,539) | $(1,813) | $(66,239) | $(1,813) | | Net Income / (Loss) | $(95,304) | $104 | $(106,237) | $(30,871) | | Net Loss Attributable to Seritage | $(72,840) | $72 | $(80,560) | $(20,592) | | Net Loss Per Share - Diluted | $(1.73) | $(0.03) | $(2.02) | $(0.61) | Condensed Consolidated Statements of Cash Flows Net cash used in operating activities significantly increased to $56.6 million for the first half of 2021, offset by $56.1 million from investing activities, primarily real estate sales Cash Flow Summary for the Six Months Ended June 30 (in thousands) | Cash Flow Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net cash used in operating activities | $(56,616) | $(18,345) | | Net cash provided by (used in) investing activities | $56,099 | $(36,705) | | Net cash used in financing activities | $(2,529) | $(2,535) | | Net decrease in cash | $(3,046) | $(57,585) | Notes to Condensed Consolidated Financial Statements Detailed notes disclose the company's organization, accounting policies, liquidity challenges, reliance on asset sales, significant debt, and ongoing litigation with Sears Holdings - As of June 30, 2021, the company's portfolio consisted of interests in 172 properties totaling approximately 24.9 million square feet of GLA[24] - The company's primary source of operating cash flow, property rental income, did not fully fund its obligations during the first six months of 2021, resulting in a net operating cash outflow of $56.6 million[30][31] - The company recorded significant impairment losses of $64.5 million for Q2 2021 and $66.2 million for the first six months of 2021, triggered by organizational restructuring and a modified strategic plan for certain assets[107] - Seritage is a defendant in a lawsuit filed by Sears Holdings, alleging the 2015 transaction creating Seritage was a fraudulent transfer, claiming the real estate was undervalued by at least $649 million to $749 million and seeking rescission or damages[116][117] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance, liquidity, and strategy, highlighting increased net losses from impairment charges and reliance on asset sales to fund operating shortfalls Results of Operations Q2 2021 saw increased rental income offset by a $62.7 million rise in impairment charges and decreased real estate sale gains, leading to higher net losses Key Changes in Operations - Q2 2021 vs Q2 2020 (in thousands) | Account | $ Change | | :--- | :--- | | Rental income | $5,947 | | Depreciation and amortization | $(10,374) | | General and administrative | $3,346 | | Gain on sale of real estate, net | $(35,780) | | Impairment of real estate assets | $(62,726) | - The increase in General and Administrative expenses in Q2 2021 was driven by severance, restructuring costs, D&O insurance, and salary expenses[162] - The decrease in depreciation and amortization for both the three and six-month periods was primarily due to accelerated expenses recorded in 2020 related to Holdco lease terminations and lower expense from property sales[160][172] Liquidity and Capital Resources Rental income is insufficient to cover obligations, leading to a $56.6 million operating cash outflow, with liquidity heavily reliant on asset sales and an undrawn $400 million facility contingent on unmet targets - The company's obligations are projected to continue to exceed property rental income, requiring funding from cash on hand and capital sources like asset sales[179] - Access to the $400.0 million Incremental Funding Facility is contingent on achieving at least $200.0 million in annualized rental income from non-Sears tenants, a target which has not yet been achieved[182] Capital Recycling Program Proceeds (Since July 2017, in millions) | Source | Gross Proceeds | | :--- | :--- | | Sales of Wholly Owned Properties | ~$718.3 | | Sales of interests in Unconsolidated Properties | ~$278.1 | | Contributions to new Unconsolidated Entities | ~$212.4 | Non-GAAP Financial Measures Reconciliations for non-GAAP measures show Total NOI at $7.6 million for Q2 2021 and a Company FFO loss of $29.3 million for the same period Non-GAAP Performance Summary (in thousands) | Metric | Q2 2021 | Q2 2020 | Six Months 2021 | Six Months 2020 | | :--- | :--- | :--- | :--- | :--- | | NOI | $6,112 | $6,222 | $14,020 | $21,420 | | Total NOI | $7,553 | $7,285 | $16,986 | $23,132 | | FFO | $(33,911) | $(27,387) | $(52,655) | $(44,944) | | Company FFO | $(29,305) | $(27,150) | $(51,296) | $(45,591) | Item 3. Quantitative and Qualitative Disclosure about Market Risk No material changes were reported in the company's quantitative and qualitative disclosures regarding market risk compared to the 2020 Annual Report - No material changes in Quantitative and Qualitative Disclosures about Market Risk were reported for the period[215] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of June 30, 2021, with no material changes to internal control over financial reporting - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the reporting period[216] - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, internal controls[217] PART II. OTHER INFORMATION Item 1. Legal Proceedings Legal proceedings, primarily concerning significant litigation with Sears Holdings, are incorporated by reference from Note 9 of the financial statements - Information regarding legal proceedings is incorporated by reference from Note 9 of the condensed consolidated financial statements[219] Item 1A. Risk Factors No material changes were reported from the risk factors previously disclosed in the company's 2020 Annual Report on Form 10-K - No material changes from the risk factors disclosed in the 2020 Annual Report on Form 10-K were reported[220] Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including CEO and CFO certifications and Inline XBRL data files - The report includes CEO and CFO certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002, as well as Inline XBRL documents[226]