Seritage(SRG) - 2021 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Condensed Consolidated Financial Statements (unaudited) Seritage Growth Properties' unaudited condensed consolidated financial statements and notes for the periods ended September 30, 2021, are presented Condensed Consolidated Balance Sheets As of September 30, 2021, total assets decreased to $2.49 billion, liabilities slightly to $1.74 billion, and equity significantly to $751.7 million Condensed Consolidated Balance Sheets (in thousands) | | September 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Total assets | $2,494,706 | $2,648,943 | | Net investment in real estate | $1,746,927 | $1,910,872 | | Cash and cash equivalents | $153,378 | $143,728 | | Total liabilities | $1,743,017 | $1,766,216 | | Term Loan Facility, net | $1,599,226 | $1,598,909 | | Total equity | $751,689 | $882,727 | Condensed Consolidated Statements of Operations Total revenue for Q3 2021 decreased to $29.0 million, with net loss narrowing to $21.8 million, while the nine-month net loss widened to $104.8 million Condensed Consolidated Statements of Operations (in thousands, except per share amounts) | | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Total revenue | $29,003 | $33,707 | $88,158 | $88,843 | | Gain / (loss) on sale of real estate, net | $22,774 | $(14,706) | $65,079 | $59,959 | | Impairment of real estate assets | $(3,814) | $(14,594) | $(70,053) | $(16,407) | | Net loss | $(26,349) | $(72,401) | $(132,586) | $(103,272) | | Net loss attributable to Seritage common shareholders | $(21,759) | $(51,278) | $(104,769) | $(74,320) | | Net loss per share - Basic & Diluted | $(0.50) | $(1.33) | $(2.50) | $(1.95) | Condensed Consolidated Statements of Equity Total equity decreased from $882.7 million to $751.7 million as of September 30, 2021, primarily due to a $132.6 million net loss Changes in Total Equity (in thousands) | | Nine Months Ended Sep 30, 2021 | | :--- | :--- | | Balance at January 1, 2021 | $882,727 | | Net loss | $(132,586) | | Preferred dividends declared | $(3,675) | | Balance at September 30, 2021 | $751,689 | Condensed Consolidated Statements of Cash Flows Net cash used in operating activities increased to $85.6 million, while investing activities provided $95.8 million, primarily from real estate sales, for the nine months ended September 30, 2021 Condensed Consolidated Statements of Cash Flows (in thousands) | | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | | Net cash (used in) operating activities | $(85,566) | $(25,300) | | Net cash provided by (used in) investing activities | $95,820 | $(9,697) | | Net proceeds from sale of real estate | $195,183 | $234,777 | | Development of real estate | $(77,554) | $(194,964) | | Net cash provided by financing activities | $20 | $16,656 | | Net increase / (decrease) in cash | $10,274 | $(18,341) | Notes to Condensed Consolidated Financial Statements Notes detail the company's organization, accounting policies, debt, leases, and contingencies, including Sears lease termination, asset sales for liquidity, term loan non-compliance, and a Sears Holdings lawsuit - As of September 30, 2021, the company's portfolio consisted of interests in 170 properties with approximately 10.0 million square feet of GLA[24] - The company's obligations are projected to exceed rental income, and it plans to fund these costs with cash on hand and sales of properties; management believes this plan is probable to be effectively implemented[31] - The company is a defendant in a lawsuit filed by Sears Holdings, which alleges the 2015 spin-off transaction was a fraudulent transfer and real estate was undervalued by at least $649 to $749 million; the company believes the claims are without merit[116][117][120] - As of September 30, 2021, the company was not in compliance with certain financial metrics of its $1.6 billion Term Loan Facility, requiring it to obtain consent from the lender (Berkshire Hathaway) for asset sales[98] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance, highlighting the impact of COVID-19, restructuring, and portfolio review, noting declining rental income, significant impairment charges, and reliance on asset sales for liquidity - The company is repositioning its portfolio into three business lines: residential developments, premier mixed-use assets, and multi-tenant retail destinations[150] - A portfolio review led to a modification of plans for certain assets, resulting in $70.1 million of impairment losses in the nine months ended September 30, 2021[154][181] - The company's primary source of operating cash flow, property rental income, did not fully fund its obligations during the first nine months of 2021, resulting in net operating cash outflows of $85.6 million[183] - The company plans to fund its obligations and development expenditures with cash on hand and capital from sources like sales of consolidated properties, sales of interests in unconsolidated properties, and creating new joint ventures[184] Results of Operations Rental income decreased in Q3 2021 due to Sears lease termination, while nine-month rental income saw a smaller decline; impairment charges significantly increased to $70.1 million Rental Income Breakdown (in thousands) | | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | $ Change | | :--- | :--- | :--- | :--- | | Sears/Kmart | $0 | $5,997 | $(5,997) | | In-place diversified, non-Sears leases | $27,812 | $24,654 | $3,158 | | Total rental income | $28,819 | $33,966 | $(5,147) | Key Expense Changes (Nine Months Ended Sep 30, $ in thousands) | Expense Item | 2021 | 2020 | $ Change | | :--- | :--- | :--- | :--- | | Depreciation and amortization | $39,629 | $81,446 | $(41,817) | | Impairment of real estate assets | $70,053 | $16,407 | $53,646 | | Interest expense | $81,847 | $66,400 | $15,447 | Liquidity and Capital Resources Operating cash flow was negative $85.6 million, with liquidity primarily managed through $195.2 million in asset sales, while development expenditures totaled $77.6 million on consolidated properties and $31.7 million in joint ventures Cash Flow Summary (Nine Months Ended Sep 30, $ in thousands) | | 2021 | 2020 | $ Change | | :--- | :--- | :--- | :--- | | Net cash (used in) operating activities | $(85,566) | $(25,300) | $(60,266) | | Net cash provided by (used in) investing activities | $95,820 | $(9,697) | $105,517 | - During the nine months ended September 30, 2021, the company invested $77.6 million in its consolidated development and operating properties and an additional $31.7 million into its unconsolidated joint ventures[194] Non-GAAP Supplemental Financial Measures and Definitions The company uses non-GAAP measures like NOI and FFO; Q3 2021 Company FFO was negative $24.9 million, and Total NOI was $8.1 million Reconciliation of Net Loss to Company FFO (in thousands) | | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | | :--- | :--- | :--- | | Net loss | $(26,349) | $(72,401) | | FFO attributable to common shareholders | $(27,696) | $(19,898) | | Company FFO attributable to common shareholders | $(24,909) | $(25,093) | Reconciliation of Net Loss to Total NOI (in thousands) | | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | | :--- | :--- | :--- | | Net loss | $(26,349) | $(72,401) | | NOI | $7,356 | $4,710 | | Total NOI | $8,075 | $5,979 | Quantitative and Qualitative Disclosure about Market Risk The company states that there were no material changes in its market risk disclosures from those set forth in its 2020 Annual Report on Form 10-K - There were no material changes in the Quantitative and Qualitative Disclosures about Market Risk set forth in the 2020 Annual Report on Form 10-K[217] Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of September 30, 2021; no material changes to internal control over financial reporting occurred during the quarter - Based on an evaluation conducted by management, the Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of the end of the period[218] - There were no changes in internal control over financial reporting during the quarter that have materially affected, or are reasonably likely to materially affect, internal controls[219] PART II. OTHER INFORMATION Legal Proceedings This section incorporates by reference the information on legal proceedings detailed in Note 9 of the condensed consolidated financial statements; the key legal matter is the ongoing litigation with Sears Holdings - Information regarding legal proceedings is incorporated by reference from Note 9 of the condensed consolidated financial statements[221] Risk Factors No material changes from 2020 Annual Report risk factors, but updates include potential adverse effects of inflation, rising interest rates, and increased costs and delays for construction projects due to supply chain disruptions - The U.S. economy is experiencing higher inflation, which may increase interest expenses, general and administrative costs, and could adversely affect tenant leases and consumer spending[224] - The company faces increased risks from volatility in commodity and labor prices, as well as supply chain disruptions, which may adversely affect construction projects[226] - Significant price increases for construction materials like steel, lumber, and copper, along with major supply chain backlogs at U.S. ports, could result in project delays and increased costs[228][229] Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities during the period - None[230] Defaults upon Senior Securities The company reported no defaults upon senior securities - None[231] Mine Safety Disclosures This item is not applicable to the company - Not applicable[232] Other Information The company reported no other information required to be disclosed under this item - None[233] Exhibits This section lists the exhibits filed with the Form 10-Q, including CEO and CFO certifications under the Sarbanes-Oxley Act and Inline XBRL data files - Exhibits filed include CEO and CFO certifications (31.1, 31.2, 32.1, 32.2) and Inline XBRL documents (101 series)[235] Signatures