Seritage(SRG) - 2020 Q4 - Annual Report

Part I Item 1. Business The company is a REIT focused on redeveloping and leasing a diversified portfolio of retail and mixed-use properties Portfolio Overview as of December 31, 2020 | Portfolio Type | Number of Properties | Total GLA (million sq ft) | |---|---|---| | Wholly Owned Properties | 158 | 24.5 | | Unconsolidated Properties | 25 | 1.9 | | Total | 183 | 26.5 | - The company's primary business strategies include maximizing the value of its ~2,400 acres of land through densification, converting single-tenant buildings into multi-tenant properties at higher rents, and leveraging joint venture relationships[24][29] - Following the Sears Holdings bankruptcy, Seritage executed a new master lease with Transform Holdco LLC (Holdco), and as of March 2021, no properties remained leased to Holdco or Sears[18][19] - The COVID-19 pandemic had a significant impact, though the company collected 93% of rental income for Q4 2020 and is cautiously managing cash to preserve asset value[20][21] - As of December 31, 2020, the company had 61 full-time employees, with an organization comprised of 33% women and 23% people of color[38][40] Item 1A. Risk Factors The company faces significant risks from the COVID-19 pandemic, Sears bankruptcy litigation, and ongoing capital needs - The COVID-19 pandemic is expected to materially and adversely impact tenants' businesses, affecting the company's income, cash flow, and liquidity[52] - The company is a defendant in litigation from the Sears Holdings bankruptcy, which alleges the 2015 spin-off was a fraudulent conveyance seeking recovery of property or damages[71][74] - The company has ongoing capital needs and must obtain lender consent for asset sales due to non-compliance with certain financial metrics in its Term Loan Facility[90][91][92] - ESL Investments, Inc. exerts substantial influence, beneficially owning approximately 30.4% of Operating Partnership units and 6.5% of Class A common shares[142][144] - Failure to maintain REIT qualification would subject the company to U.S. federal income tax, which could result in a substantial tax liability and reduce cash available for distribution[146] Item 1B. Unresolved Staff Comments The company reports no unresolved comments from the staff of the SEC as of the date of this Annual Report - There are no unresolved comments from the staff of the SEC[178] Item 2. Properties The portfolio consists of 183 properties with a 32.4% lease rate, concentrated in Florida and California Portfolio Summary (at share) as of Dec 31, 2020 | Metric | Value | |---|---| | Total Properties | 183 | | Total GLA (million sq ft) | 26.5 | | Leased GLA (million sq ft) | 8.6 | | Leased Percentage | 32.4% | Top 5 States by Annual Rent | State | % of Total Annual Rent | |---|---| | Florida | 19.5% | | California | 16.2% | | New York | 7.0% | | New Jersey | 5.2% | | Texas | 4.7% | Top 5 Tenants by Annual Rent | Tenant | % of Total Annual Rent | |---|---| | Dick's Sporting Goods | 8.3% | | Dave & Buster's | 6.1% | | Round One Entertainment | 4.8% | | Burlington Stores | 4.5% | | At Home | 4.5% | - Signed-but-not-yet-open (SNO) leases represent a significant portion of future income, accounting for 36.2% of total annualized rent from signed leases[194] Item 3. Legal Proceedings The company is defending a significant lawsuit from Sears Holdings alleging fraudulent transfer of real estate assets - The primary legal proceeding is a lawsuit from Sears Holdings alleging the 2015 spin-off transaction was an actual and/or constructive fraudulent transfer[195] - The lawsuit alleges the real estate was undervalued by $649 to $749 million and seeks remedies including rescission or compensatory damages[195][197] - Seritage filed a partial motion to dismiss certain claims in February 2020 and believes the claims against it are without merit[198] - In March 2021, Seritage sued its D&O insurance providers for refusing to pay defense costs related to the Sears litigation[199] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[202] Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's stock significantly underperformed in 2020, and common share dividends have been suspended since Q1 2019 Cumulative Total Shareholder Return (2015-2020) | Index | 12/31/2015 | 12/31/2020 | % Return in 2020 | |---|---|---|---| | Seritage Growth Properties | $100 | $39 | -61% | | S&P 500 | $100 | $203 | +18.4% (calculated) | | SNL US REIT Equity | $100 | $137 | -5.5% (calculated) | - The company has not declared dividends on its Class A and Class C common shares since Q1 2019, but may satisfy REIT requirements via preferred share dividends[214] Item 6. Selected Financial Data This item is not applicable as per the report - None[217] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Declining rental income from Sears lease terminations drove a wider net loss in 2020, with liquidity dependent on asset sales Comparison of Operations (Year Ended Dec 31) | (in thousands) | 2020 | 2019 | |---|---|---| | Rental Income | $116,202 | $167,035 | | Gain on sale of real estate | $88,555 | $71,104 | | Impairment on real estate assets | $(64,108) | $0 | | Net Loss | $(152,964) | $(90,603) | - The $50.8 million decrease in rental income was driven by a $36.5 million reduction in rent from Sears/Kmart due to lease terminations[237][238] - The company's primary source of liquidity is asset sales, generating gross proceeds of $333.4 million in 2020[229][230] Cash Flow Summary (Year Ended Dec 31) | (in thousands) | 2020 | 2019 | |---|---|---| | Net cash used in operating activities | $(47,314) | $(57,660) | | Net cash provided by (used in) investing activities | $42,868 | $(299,490) | | Net cash provided by (used in) financing activities | $15,440 | $(36,447) | Non-GAAP Performance Measures (Year Ended Dec 31) | (in thousands) | 2020 | 2019 | |---|---|---| | Total NOI | $37,757 | $72,667 | | Company FFO | $(88,583) | $(33,896) | Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company's market risk is minimal as its entire $1.6 billion of consolidated debt is at a fixed interest rate - The company's $1.6 billion of consolidated debt is fixed-rate, therefore it is not subject to interest rate fluctuations[333] Item 8. Financial Statements and Supplementary Data This section refers to the detailed consolidated financial statements and schedules beginning on page F-1 of the report Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reported no changes in or disagreements with its accountants on accounting and financial disclosure - None[336] Item 9A. Controls and Procedures Management concluded that disclosure controls and procedures were effective, and the auditor issued an unqualified opinion - Management concluded that disclosure controls and procedures were effective as of December 31, 2020[338] - The independent registered public accounting firm, Deloitte & Touche LLP, issued an unqualified opinion on the company's internal control over financial reporting[340] Item 9B. Other Information The company reported no other information for this item - None[342] Part III Item 10. Directors, Executive Officers, and Corporate Governance Required information is incorporated by reference from the company's 2021 Annual Meeting proxy statement Item 11. Executive Compensation Required information is incorporated by reference from the company's 2021 Annual Meeting proxy statement Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Required information is incorporated by reference from the company's 2021 Annual Meeting proxy statement Item 13. Certain Relationships and Related Transactions, and Director Independence Required information is incorporated by reference from the company's 2021 Annual Meeting proxy statement Item 14. Principal Accounting Fees and Services Required information is incorporated by reference from the company's 2021 Annual Meeting proxy statement Part IV Item 15. Exhibits and Financial Statement Schedule This section lists all financial statements, schedules, and exhibits filed as part of the Annual Report on Form 10-K Financial Statements and Supplementary Data Consolidated Financial Statements The company's net loss widened to $153.0 million in 2020, with total assets declining to $2.65 billion Consolidated Balance Sheet Data (as of Dec 31) | (in thousands) | 2020 | 2019 | |---|---|---| | Net investment in real estate | $1,910,872 | $1,970,633 | | Total Assets | $2,648,943 | $2,750,612 | | Term loan facility, net | $1,598,909 | $1,598,487 | | Total Liabilities | $1,766,216 | $1,707,242 | | Total Equity | $882,727 | $1,043,370 | Consolidated Statement of Operations Data (Year Ended Dec 31) | (in thousands) | 2020 | 2019 | |---|---|---| | Total Revenue | $116,495 | $168,633 | | Total Expenses | $202,778 | $224,455 | | Gain on sale of real estate | $88,555 | $71,104 | | Impairment of real estate assets | $(64,108) | $0 | | Net Loss | $(152,964) | $(90,603) | Notes to Consolidated Financial Statements Notes detail liquidity challenges, reliance on asset sales, debt covenants, and significant litigation and impairments - Management has determined it is probable that its plans to fund obligations through cash on hand and asset sales will be effectively implemented[418] - A real estate impairment loss of $64.1 million was recognized in 2020, primarily related to vacant properties and assets leased to struggling theater and fitness tenants[428][429] Sears/Holdco Master Lease Termination Activity Summary | Year of Notice | Number of Properties Terminated | |---|---| | 2020 | 17 | | 2019 | 29 | | 2018 | 22 | | 2017 | 39 | | 2016 | 17 | | Total | 124 (excluding 9 rejected in bankruptcy) | - The company's $1.6 billion Term Loan Facility with Berkshire Hathaway has a fixed 7.0% interest rate, but access to an additional $400 million is contingent on a performance threshold not yet met[507][509][512]