Seritage Growth Properties Reports Fourth Quarter and Full Year 2016 Operating Results

NEW YORK--()--Seritage Growth Properties (NYSE:SRG) (the “Company”), a national owner of 266 properties totaling over 42 million square feet of gross leasable area (“GLA”), today reported financial and operating results for the three months and year ended December 31, 2016.

“Sears Holdings Terminations under the Master Lease”

Financial Results

For the three months ended December 31, 2016:

  • Net loss attributable to common shareholders of $15.0 million, or $0.48 per diluted share
  • Total Net Operating Income (“Total NOI”) of $48.7 million
  • Funds from Operations (“FFO”) of $34.5 million, or $0.62 per diluted share
  • Company FFO of $30.0 million, or $0.54 per diluted share

For the year ended December 31, 2016:

  • Net loss attributable to common shareholders of $51.6 million, or $1.64 per diluted share
  • Total NOI of $190.5 million
  • FFO of $106.5 million, or $1.92 per diluted share
  • Company FFO of $127.3 million, or $2.29 per diluted share

Operational Highlights

For the year ended December 31, 2016, including the Company’s proportional share of its unconsolidated joint ventures (“JVs”):

  • Increased annualized Total NOI by approximately 14.0% to an estimated $226.7 million, including all signed leases and net of rent attributable to the associated space to be recaptured, compared to an estimated $198.9 million as of December 31, 2015.
  • Signed new leases totaling 2.1 million square feet at an average annual base rent of $17.68 PSF, including 891,000 square feet at $16.72 PSF in the fourth quarter.
  • Achieved releasing spreads of 4.4x on new leases signed for space currently or formerly occupied by Sears Holdings Corporation (“Sears Holdings”), with new rents averaging $17.86 PSF compared to $4.03 PSF paid by Sears Holdings across 1.9 million square feet on a same-space basis.
  • Increased annual base rent attributable to third-party tenants to 36.1% compared to 24.0% as of December 31, 2015, including all signed leases and net of rent attributable to the associated space to be recaptured.
  • Announced 28 new redevelopment projects with a total projected cost of $335.0 million and completed six previously announced projects with a total cost of approximately $36.5 million.

“In just 18 months, we have established Seritage as one of the most active developers of retail real estate in the country with 48 projects, representing a total investment of over $460 million, completed or commenced,” said Benjamin Schall, President and Chief Executive Officer. “For the 33 projects we’ve initiated fully on our platform, we are expecting incremental returns in excess of 12% on an unlevered basis, and project stabilized income of almost $70 million, an increase of over 330% versus in-place income. And once completed, more than 90% of the income from these 33 projects will be derived from a diverse group of growing retailers, and less than 10% from Sears Holdings. As we look to 2017, we have a strong pipeline of leasing and redevelopment activity that we’re focused on executing, and expect to realize rental spreads and returns on capital for that pipeline that are consistent with those that we’ve achieved thus far. We continue to see strong demand for our well-located properties from a range of growing retailers, and are energized to build off our momentum as we diversify our tenant base, grow net operating income and create value for our shareholders.”

Financial Results

For the three months ended December 31, 2016, net loss attributable to Class A and Class C shareholders was $15.0 million, or $0.48 per diluted share, as compared to a net loss of $4.0 million, or $0.13 per diluted share, for the prior year period. For the year ended December 31, 2016, net loss attributable to Class A and Class C shareholders was $51.6 million, or $1.64 per diluted share.

For the three months ended December 31, 2016, Total NOI, which includes the Company’s proportional share of NOI from 31 properties owned through investments in its unconsolidated JVs, was $48.7 million as compared to $47.0 million for the prior year period. For the year ended December 31, 2016, Total NOI was $190.5 million.

For the three months ended December 31, 2016, FFO, as calculated in accordance with the National Association of Real Estate Investment Trusts (“NAREIT”) definition, was $34.5 million, or $0.62 per diluted share, as compared to $31.3 million, or $0.56 per diluted share, for the prior year period. For the year ended December 31, 2016, FFO was $106.5 million, or $1.92 per diluted share.

For the three months ended December 31, 2016, Company FFO was $30.0 million, or $0.54 per diluted share, as compared to $32.9 million, or $0.59 per diluted share, for the prior year period. For the year ended December 31, 2016, Company FFO was $127.3 million, or $2.29 per diluted share. 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 gain or loss on interest rate cap, litigation charges, acquisition-related expenses, amortization of deferred financing costs and certain up-front-hiring and personnel costs, that it does not believe are representative of ongoing operating results. The Company previously referred to this metric as Normalized FFO; the definition and calculation remain the same.

Portfolio Summary

As of December 31, 2016, the Company’s portfolio included interests in 266 retail properties totaling over 42 million square feet of gross leasable area, including 235 wholly-owned properties and 31 properties owned through investments in unconsolidated JVs. Approximately 50% of the portfolio consisted of properties attached to regional malls and approximately 50% consisted of shopping center or freestanding properties.

The portfolio was 99.2% leased and included 15 properties leased only to third-party tenants, 125 properties leased to Sears Holdings and one or more third-party tenants, and 126 properties leased only to Sears Holdings. Of the properties leased to Sears Holdings, 169 operated under the Sears brand and 82 operated under the Kmart brand.

Subsequent to December 31, 2016, Sears Holdings vacated 17 Kmart stores pursuant to termination notices previously submitted to the Company (see “Sears Holdings Terminations under the Master Lease”). Including the effect of the terminations, the portfolio was 95.5% leased.

Development Update

Wholly-Owned Properties

During the year ended December 31, 2016, the Company commenced 28 projects representing an estimated total investment of $335.0 million, including eight new projects representing an estimated total investment of $112.7 million in the fourth quarter.

As of December 31, 2016, the Company’s wholly-owned development pipeline consisted primarily of 33 projects originated on the Seritage platform. These projects represent an estimated total investment of $399.1 million, of which $353.9 million remained to be spent. An additional two projects with a total investment of $5.1 million, of which $3.8 million remained to be spent, were acquired by the Company as part of the initial acquisition of its portfolio.

The table below summarizes the Company’s wholly-owned development activity from inception through December 31, 2016:

                                 
(dollars in thousands)
Aggregate Aggregate
Total Aggregate Estimated Estimated Estimated
Estimated Number Project Development Project Projected Annual Income (2) Incremental
Project Cost (1) of Projects Square Feet Costs (1) Costs (1) Total Existing Incremental Yield (3)
< $10,000 15 883,600 $ 67,200 $ 67,200 $ 14,900 $ 5,800 $ 9,100

$10,001 - $20,000

13 1,169,400 176,900 188,800 29,500 8,900 20,600
> $20,000   5   633,100   133,100   143,100   25,300   6,300   19,000  
New Projects 33   2,686,100 $ 377,200 $ 399,100 $ 69,700 $ 21,000 $ 48,700 12.0 - 13.0%
Acquired projects   15   63,600   63,600
Total   48 $ 440,800 $ 462,700

____________________

(1)   Total estimated development costs exclude, and total estimated project costs include, termination fees to recapture 100% of certain properties.
(2) Projected annual income includes assumptions on stabilized rents to be achieved for space under redevelopment. There can be no assurance that stabilized rent targets will be achieved.
(3) Projected incremental annual income divided by total estimated project costs.
 

The table below provides additional information, including a brief description, for each of the 33 new redevelopment projects originated on the Seritage platform. Notably, during the three months ended December 31, 2016, Saks OFF 5th opened at The Marketplace at Braintree, joining Nordstrom Rack and Ulta Beauty and marking the substantial completion of the first redevelopment project originated solely on the Seritage platform.

 
Total Project Costs under $10 Million
                    Total     Estimated   Estimated
Project Construction Substantial
Property Description Square Feet Start Completion
King of Prussia, PA Repurpose former auto center space for Outback Steakhouse, Yard House and small shop retail   29,100 Delivered to tenants
Ft. Wayne, IN Site densification; new outparcel for BJ's Brewhouse 7,594 Underway Q2 2017
San Antonio, TX Recapture and repurpose auto center space for Orvis, Jared's Jeweler, Shake Shack and small shop retail 18,890 Underway Q2 2017
Albany, NY Recapture and repurpose auto center space for BJ's Brewhouse and additional restaurants 27,973 Underway Q3 2017
Bowie, MD Recapture and repurpose auto center space for BJ's Brewhouse 8,202 Underway Q3 2017
Hagerstown, MD Recapture and repurpose auto center space for BJ's Brewhouse and additional restaurants 15,427 Underway Q4 2017
Merrillville, IN Termination property; redevelopment of existing store for At Home 132,000 Q1 2017 Q2 2017
Roseville, MI Partial recapture; redevelopment of existing store for At Home 100,374 Q1 2017 Q4 2017
Troy, MI Partial recapture; redevelopment of existing store for At Home 100,046 Q1 2017 Q4 2017
Warwick, RI Recapture and repurpose auto center space for BJ's Brewhouse and additional retail 27,906 Q1 2017 Q4 2017
Anderson, SC Partial recapture; redevelopment of existing building for Burlington Stores 124,331 Q2 2017 Q4 2017
Rehoboth Beach, DE Partial recapture; redevelopment of existing store to be anchored by Christmas Tree Shops and That! and PetSmart 56,691 Q2 2017 Q1 2018
Kearney, NE Sears termination property; redevelopment of existing store for PetSmart and additional junior anchors 92,451 Q2 2017 Q2 2018
Elkhart, IN Termination property; existing store has been released to Big R Stores 86,500 Q3 2017 Q2 2018
Guaynabo, PR Partial recapture; redevelopment of existing store for Planet Fitness and additional retail 56,100 Q3 2017 Q2 2018
 
Total Project Costs $10 - $20 Million
Total Estimated Estimated
Project Construction Substantial
Property Description Square Feet Start Completion
Braintree, MA 100% recapture; redevelopment of existing building for Nordstrom Rack and Saks OFF 5th 90,000 Substantially complete
Honolulu, HI 100% recapture; redevelopment of existing building for Longs Drugs (CVS), PetSmart and Ross Dress for Less 79,000 Underway Q2 2017
Fairfax, VA Partial recapture; redevelopment of existing store and attached auto center for Dave & Busters, additional junior anchors and restaurants 110,252 Q1 2017 Q4 2017
Madison, WI Partial recapture; redevelopment of existing store for Dave & Busters, Total Wine & More, additional junior anchors, small shop retail and restaurants 75,300 Q1 2017 Q4 2017
West Jordan, UT Partial recapture; redevelopment of existing store and attached auto center for Burlington Stores and small shop retail 81,427 Q1 2017 Q4 2017
Charleston, SC Partial recapture; redevelopment of existing store and detached auto center for Burlington Stores and additional retail 71,710 Q2 2017 Q1 2018
North Hollywood, CA Partial recapture; redevelopment of existing store for Burlington Stores and additional junior anchors 79,788 Q2 2017 Q1 2018
Orlando, FL 100% recapture; demolish and construct new buildings for Floor & Décor, Orchard Supply Hardware, small shop retail and restaurants 139,209 Q2 2017 Q2 2018
Springfield, IL Sears termination property; redevelopment of existing store for Burlington Stores, Binny's Beverage Depot, Outback Steakhouse, additional junior anchors and small shop retail 133,351 Q2 2017 Q2 2018
Santa Cruz, CA Partial recapture; redevelopment of existing store for TJ Maxx, Homegoods and Petco 62,200 Q3 2017 Q1 2018
Saugus, MA Partial recapture; redevelopment of existing store and detached auto center for Round 1 Entertainment and restaurants 99,000 Q3 2017 Q1 2018
Carson, CA Partial recapture; redevelopment of existing store for Burlington Stores and additional retail 77,000 Q3 2017 Q1 2019
Salem, NH Site densification; new theatre for Cinemark

Recapture and repurpose auto center for restaurant space

71,200 Q4 2017 Q3 2018
 
Total Project Costs over $20 Million
Total Estimated Estimated
Project Construction Substantial
Property Description Square Feet Start Completion
Memphis, TN 100% recapture; demolish and construct new buildings for LA Fitness, Nordstrom Rack, Ulta Beauty, additional junior anchors, small shop retail and restaurants 135,220 Underway Q3 2017
Wayne, NJ Partial recapture; redevelopment of existing store for Dave & Busters, additional junior anchors and restaurants 111,346 Q1 2017 Q4 2017
West Hartford, CT 100% recapture; redevelopment of existing building for REI, Saks OFF Fifth, other junior anchors, Shake Shack and additional small shop retail 147,630 Q1 2017 Q1 2018
St. Petersburg, FL 100% recapture; demolish and construct new buildings for Dick's Sporting Goods, Lucky's Market, PetSmart and additional junior anchors, small shop retail and restaurants 142,366 Q2 2017 Q2 2018
Santa Monica, CA 100% recapture; redevelopment of existing building into premier, mixed-use asset featuring unique, small-shop retail and creative office space 96,500 Q4 2017 Q4 2019
 

JV Properties

During the three months ended December 31, 2016, Primark opened at Burlington Mall in a store owned by the Company’s unconsolidated JV with Simon Property Group, Inc. (the “Simon JV”).

This opening represents the substantial completion of the third of four JV projects that were in various stages of development when they were acquired by the Company in July 2015. Earlier in 2016, Primark opened at Danbury Fair Mall and Freehold Raceway Mall in stores owned by the Company’s unconsolidated JV with The Macerich Company (the “Macerich JV”), and, at Staten Island Mall, a Primark store owned by the Company’s unconsolidated JV with GGP Inc. (the “GGP JV”), is under construction.

During the three months ended December 31, 2016, the GGP JV announced plans to recapture space at five locations according to a specific schedule, including Oakbrook Center in Oak Brook, IL, The Mall at Columbia in Columbia, MD, Natick Collection in Natick, MA, Paramus Park in Paramus, NJ and Alderwood in Lynnwood, WA. The GGP JV will recapture 100% of the space currently occupied by Sears Holdings at Alderwood and Paramus Park, while Sears Holdings will continue to occupy a downsized space at the other locations.

As of December 31, 2016, the GGP JV has initiated redevelopment projects at four additional properties, including Staten Island Mall in Staten Island, NY, Coronado Mall in Albuquerque, NM, Pembroke Lakes Mall in Pembroke Pines, FL, and Valley Plaza Mall in Bakersfield, CA.

Leasing Update

During the year ended December 31, 2016, the Company signed new leases totaling 2.1 million square feet at an average annual base rent of $17.68 PSF, including 891,000 square feet at $16.72 PSF in the fourth quarter. On a same-space basis, new rents were 4.4x higher than prior rents for space currently or formerly occupied by Sears Holdings, increasing to $17.86 PSF for new tenants compared to $4.03 PSF paid by Sears Holdings across 1.9 million square feet.

The table below provides a summary of the Company’s 2016 leasing activity by quarter, including unconsolidated JVs presented at the Company’s proportional share:

 
(in thousands except number of leases and PSF data)
  Total     Release of Sears Holdings Space
      Leased     Annual     Annual       Leased     Annual     Annual     Releasing
Quarter Leases GLA Rent Rent PSF Leases GLA Rent Rent PSF Spread
First 7   214 $ 6,990 $ 32.60 7   214 $ 6,990 $ 32.60   5.7 x
Second 15 422 7,240 17.15 13 363 6,440 17.75 4.7 x
Third 14 543 7,470 13.74 12 456 6,250 13.70 4.0 x
Fourth   29   891   14,900   16.72   27   849   13,930   16.41   4.1 x
Total 2016   65   2,070 $ 36,600 $ 17.68   59   1,882 $ 33,610 $ 17.86   4.4

x

 

During the year ended December 31, 2016, the Company added $36.6 million of new third-party income and increased annual base rent attributable to third-party tenants to 36.1% from 24.0% as of December 31, 2015, including all signed leases and net of rent attributable to the associated space to be recaptured.

The table below provides a summary of all of the Company’s signed leases as of December 31, 2016, including unconsolidated JVs presented at the Company’s proportional share:

                         
(in thousands except number of leases and PSF data)
Number of Leased % of Total Annual % of Total Annual
Tenant Leases GLA Leased GLA Rent Annual Rent Rent PSF
Sears Holdings (1) 251 33,663 85.9 % $ 148,167 63.9 % $ 4.40
In-Place Third-Party Leases 243 3,325 8.5 % 42,356 18.3 % 12.74
SNO Third-Party Leases   77   2,218   5.7 %   41,152   17.8 %   18.55
Sub-Total Third-Party Leases   320   5,543   14.1 %   83,508   36.1 %   15.07
Total   571   39,206   100.0 % $ 231,675   100.0 % $ 5.91

____________________

(1)   Leases reflects number of properties subject to the Master Lease and JV Master Leases.
 

Sears Holdings Terminations under the Master Lease

On January 3, 2017, pursuant to notices previously submitted to the Company and the terms of the Master Lease between subsidiaries of the Company and subsidiaries of Sears Holdings, Sears Holdings vacated 17 stores totaling 1.7 million square feet of gross leasable area. The aggregate annual base rent at these stores was approximately $6.0 million, or 2.6% of the Company's total annual base rent as of December 31, 2016, including all signed leases. In connection with the termination, Sears Holdings paid Seritage a termination fee of approximately $10.0 million, an amount equal to one year of the aggregate annual base rent and estimated operating expenses for the 17 properties.

Also on January 3, 2017, pursuant to the terms of the Master Lease between subsidiaries of the Company and subsidiaries of Sears Holdings, Sears Holdings provided notice that it intends to exercise its right to terminate the Master Lease with respect to 19 additional stores totaling 1.9 million square feet of gross leasable area. The aggregate annual base rent at these stores is approximately $5.9 million, or 2.5% of the Company's total annual base rent as of December 31, 2016, including all signed leases. Sears Holdings will continue to pay Seritage rent until it vacates the stores which is expected to occur in April 2017. Pursuant to the Master Lease, Sears Holdings will also pay Seritage a termination fee equal to one year of the aggregate annual base rent and estimated operating expenses for the 19 properties.

Balance Sheet and Liquidity

As of December 31, 2016, the Company’s total market capitalization was $3.6 billion. Total market capitalization is calculated as the sum of total debt and the market value of the Company's outstanding shares of common stock, assuming conversion of operating partnership units.

Total debt to total market capitalization was 33.1% and net debt to Adjusted EBITDA was 5.6x. The Company deducts both unrestricted and restricted cash from total debt when calculating net debt. Reconciliations of net loss attributable to common shareholders to EBITDA, and EBITDA to Adjusted EBITDA, are provided in the tables accompanying this press release.

As of December 31, 2016, the Company had $52.0 million of unrestricted cash and restricted cash of $87.6 million, the substantial majority of which is held in reserve accounts for redevelopment, re-leasing and operating expenses at the Company’s properties. The Company also had approximately $80.0 million of investment capital available through its $100.0 million future funding facility, of which approximately $20.0 million was drawn as of December 31, 2016.

Mortgage Loan Amendment

In November 2016, the Company and the servicer for its existing mortgage loan facility entered into an amendment to resolve a disagreement regarding one of the cash flow sweep provisions in the loan agreements. The principal terms of the amendment are that the Company has (i) posted $30.0 million, and will post $3.3 million on a monthly basis, to a redevelopment reserve account, which amounts may be used by the Company to fund redevelopment projects and (ii) extended the spread maintenance provision for prepayment of the loan by two months through March 9, 2018 (with the spread maintenance premium for the second month at a reduced amount). As a result of this amendment and the resolution of the related disagreement, no cash flow sweep was imposed.

Unsecured Term Loan Facility

In February 2017, the Company entered into a $200.0 million senior unsecured delayed draw term loan facility (the “Facility”) with entities controlled by ESL Investments, Inc. Edward S. Lampert, the Company’s Chairman, is the sole stockholder, chief executive officer and director of ESL Investments, Inc. The Company expects to use the proceeds of the Facility to fund redevelopment projects and for general corporate purposes.

The total commitments under the Facility are $200.0 million, provided that the maximum draw amount under the Facility through April 30, 2017 is $100.0 million, which amount increases to $150.0 million on May 1, 2017 and $200.0 million on September 1, 2017, in each instance so long as no cash flow sweep period (as defined in the Company’s existing mortgage loan facility on file with the Securities Exchange Commission) is then in effect and continuing as of such date. Amounts drawn under the Facility and repaid may not be redrawn.

The Facility will mature the earlier of (i) December 31, 2017 and (ii) the date on which the outstanding indebtedness under the Company’s existing mortgage and mezzanine facilities are repaid in full. The Facility may be prepaid at any time in whole or in part, without any penalty or premium.

The principal amount of loans outstanding under the Facility will bear a base annual interest rate of 6.50%. If a cash flow sweep period were to occur and be continuing under the Company’s existing mortgage loan indebtedness (i) the interest rate on any outstanding advances would increase from and after such date by 1.50% per annum above the base interest rate and (ii) the interest rate on any advances made after such date would increase by 3.50% per annum above the base interest rate, in each case, for so long as the cash flow sweep is continuing. Accrued and unpaid interest will be payable in cash, except that during the continuance of a cash flow sweep period under the Company’s existing mortgage loan facility, the Company may defer the payment of interest which deferred amount would be added to the outstanding principal balance of the loans and on which interest would be payable from and after the date of such deferral.

Dividend

On February 28, 2017, the Company’s Board of Trustees declared a first quarter common stock dividend of $0.25 per each Class A and Class C common share. The dividend will be paid on April 13, 2017 to shareholders of record on March 31, 2017. Holders of units in Seritage Growth Properties, L.P. (the “Operating Partnership”) are entitled to an equal distribution per each Operating Partnership unit held as of March 31, 2017.

On November 1, 2016, the Company’s Board of Trustees declared a fourth quarter common stock dividend of $0.25 per each Class A and Class C common share. The dividend was paid on January 12, 2017 to shareholders of record on December 31, 2016. Holders of units in Seritage Growth Properties, L.P. (the “Operating Partnership”) were entitled to an equal distribution per each Operating Partnership unit held as of December 31, 2016.

Supplemental Report

A Supplemental Report will be available in the Investors section of the Company’s website, www.seritage.com.

Non-GAAP Financial Measures

The Company makes reference to NOI, Total NOI, EBITDA, Adjusted EBITDA, FFO and Company FFO which are financial measures that include adjustments to accounting principles generally accepted in the United States (“GAAP”).

None of Total NOI, EBITDA, Adjusted EBITDA, FFO or 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 have been provided in the tables accompanying this press release.

Net Operating Income ("NOI”), Total NOI and Annualized Total NOI

NOI is defined as income from property operations less property operating expenses. 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. This form of presentation offers insights into the financial performance and condition of the Company as a whole given the Company’s ownership of unconsolidated properties that are accounted for under GAAP using the equity method. The Company also considers Total NOI to be a helpful supplemental measure of its operating performance because it excludes from NOI non-recurring items such as termination fee income, as well as non-cash items such as straight-line rent and amortization of lease intangibles.

Annualized Total NOI is an estimate, as of the end of the reporting period, of the annual Total NOI to be generated by the Company’s portfolio including all signed leases and modifications to the Company’s master lease with Sears Holdings with respect to recaptured space. We calculate Annualized Total NOI by adding or subtracting current period adjustments for leases that commenced or expired during the period to Total NOI (as defined) for the period and annualizing, and then adding estimated annual Total NOI attributable to SNO leases and subtracting estimated annual Total NOI attributable to Sears Holdings’ space to be recaptured.

Annualized Total NOI is a forward-looking non-GAAP measure for which the Company does not believe it can provide reconciling information to a corresponding forward-looking GAAP measure without unreasonable effort.

Earnings Before Interest Expense, Income Tax, Depreciation, and Amortization ("EBITDA") and Adjusted EBITDA

EBITDA is defined as net income less depreciation, amortization, interest expense and provision for income and other taxes. EBITDA is a commonly used measure of performance in many industries, but may not be comparable to measures calculated by other companies. The Company believes EBITDA provides useful information to investors regarding its results of operations because it removes the impact of the Company’s capital structure (primarily interest expense) and its asset base (primarily depreciation and amortization). Management also believes the use of EBITDA facilitates comparisons between the Company and other equity REITs, retail property owners who are not REITs, and other capital-intensive companies.

The Company makes certain adjustments to EBITDA, which it refers to as Adjusted EBITDA, to account for certain non-cash and non-comparable items, such as termination fee income, unrealized gain or loss on interest rate cap, litigation charges, acquisition-related expenses, and certain up-front-hiring and personnel costs, that it does not believe are representative of ongoing operating results.

Funds From Operations ("FFO") and Company FFO

FFO is calculated in accordance with the National Association of Real Estate Investment Trusts ("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 gain or loss on interest rate cap, litigation charges, acquisition-related expenses, amortization of deferred financing costs and certain up-front-hiring and personnel costs, that it does not believe are representative of ongoing operating results. The Company previously referred to this metric as Normalized FFO; the definition and calculation remain the same.

Forward-Looking Statements

This document contains forward-looking statements, which are based on the current beliefs and expectations of management and are subject to significant risks, assumptions and uncertainties that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to: competition in the real estate and retail industries; our substantial dependence on Sears Holdings; Sears Holdings’ termination and other rights under its master lease with us; risks relating to our recapture and redevelopment activities; contingencies to the commencement of rent under leases; the terms of our indebtedness; restrictions with which we are required to comply in order to maintain REIT status and other legal requirements to which we are subject; and our limited operating history. For additional discussion of these and other applicable risks, assumptions and uncertainties, see the “Risk Factors” and forward-looking statement disclosure contained in filings with the Securities and Exchange Commission. While we believe that our forecasts and assumptions are reasonable, we caution that actual results may differ materially. We intend the forward-looking statements to speak only as of the time made and do not undertake to update or revise them as more information becomes available, except as required by law.

About Seritage Growth Properties

Seritage Growth Properties is a publicly-traded, self-administered and self-managed retail REIT with 235 wholly-owned properties and 31 JV properties totaling over 42 million square feet of space across 49 states and Puerto Rico. Pursuant to a master lease, 203 of the Company’s wholly-owned properties are leased to Sears Holdings and are operated under either the Sears or Kmart brand. The master lease provides the Company with the right to recapture certain space from Sears Holdings at each property for retenanting or redevelopment purposes. At several properties, third-party tenants under direct leases occupy a portion of leasable space alongside Sears and Kmart, and 20 properties are leased only to third parties. The Company also owns 50% interests in 31 properties through JV investments with General Growth Properties, Inc., Simon Property Group, Inc., and The Macerich Company. A substantial majority of the space at the Company’s JV properties is also leased to Sears Holdings under master lease agreements that provide for similar recapture rights as the master lease governing the Company’s wholly-owned properties.

       
SERITAGE GROWTH PROPERTIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)
 
December 31, 2016 December 31, 2015

ASSETS

Investment in real estate
Land $ 840,021 $ 840,563
Buildings and improvements 839,663 814,652
Accumulated depreciation   (89,940 )   (29,076 )
1,589,744 1,626,139
Construction in progress   55,208   13,136
Net investment in real estate 1,644,952 1,639,275
Investment in unconsolidated joint ventures 425,020 427,052
Cash and cash equivalents 52,026 62,867
Restricted cash 87,616 92,475
Tenant and other receivables, net 23,172 9,772
Lease intangible assets, net 464,399 578,795
Prepaid expenses, deferred expenses and other assets, net   15,052   23,123
Total assets $ 2,712,237 $ 2,833,359
 

LIABILITIES AND EQUITY

Liabilities
Mortgage loans payable, net $ 1,166,871 $ 1,142,422
Accounts payable, accrued expenses and other liabilities   121,055   120,860
Total liabilities   1,287,926   1,263,282
 
Commitments and contingencies (Note 10)
 
Shareholders' Equity
Class A shares $0.01 par value; 100,000,000 shares authorized;

25,843,251 and 24,817,842 shares issued and outstanding as of

December 31, 2016 and December 31, 2015, respectively

258 248
Class B shares $0.01 par value; 5,000,000 shares authorized; 1,589,020

shares issued and outstanding as of December 31, 2016 and

December 31, 2015

16 16
Class C shares $0.01 par value; 50,000,000 shares authorized;

5,754,685 and 6,773,185 shares issued and outstanding as of

December 31, 2016 and December 31, 2015, respectively

58 68
Additional paid-in capital 925,563 924,508
Accumulated deficit   (121,338 )   (38,145 )
Total shareholders' equity 804,557 886,695
Non-controlling interests   619,754   683,382
Total equity   1,424,311   1,570,077
Total liabilities and equity $ 2,712,237 $ 2,833,359
 
           
SERITAGE GROWTH PROPERTIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
 
July 7, 2015
Three Months Ended Year Ended (date operations

commenced) to

December 31, 2016 December 31, 2015 December 31, 2016 December 31, 2015

REVENUE

Rental income $ 49,684 $ 45,256 $ 186,421 $ 86,645
Tenant reimbursements   16,512   14,252   62,253   26,926
Total revenue   66,196   59,508   248,674   113,571

EXPENSES

Property operating 4,334 3,514 21,510 6,329
Real estate taxes 12,580 11,614 43,681 22,355
Depreciation and amortization 55,754 32,972 177,119 65,907
General and administrative 4,365 4,174 17,469 9,956
Litigation charge 19,000

Provision for doubtful accounts 269
Acquisition-related expenses     57   73   18,397
Total expenses   77,033   52,331   279,121   122,944
Operating loss (10,837 ) 7,177 (30,447 ) (9,373 )
Equity in income of unconsolidated joint ventures 151 2,052 4,646 4,772
Interest and other income 70 98 266 136
Interest expense (16,294 ) (15,665 ) (63,591 ) (30,461 )
Unrealized loss on interest rate cap   520   (119 )   (1,378 )   (2,933 )
Loss before income taxes (26,390 ) (6,457 ) (90,504 ) (37,859 )
Provision for income taxes   (93 )   (493 )   (505 )   (944 )
Net loss (26,483 ) (6,950 ) (91,009 ) (38,803 )
Net loss attributable to non-controlling interests   11,479   2,913   39,451   16,465
Net loss attributable to common shareholders $ (15,004 ) $ (4,037 ) $ (51,558 ) $ (22,338 )
 
Net loss per share attributable to Class A and Class C

common shareholders - Basic and diluted

$ (0.48 ) $ (0.13 ) $ (1.64 ) $ (0.71 )
 
Weighted average Class A and Class C

common shares outstanding - Basic and diluted

  31,418   31,391   31,416   31,386
 
           

Reconciliation of Net Loss to NOI and Total NOI

 
July 7, 2015
Three Months Ended Year Ended (date operations

commenced) to

NOI       December 31, 2016 December 31, 2015 December 31, 2016 December 31, 2015
Net loss $ (26,483 ) $ (6,950 ) $ (91,009 ) $ (38,803 )
Termination fee income (5,288 ) (5,288 )
Depreciation and amortization 55,754 32,972 177,119 65,907
General and administrative 4,365 4,174 17,469 9,956
Litigation charge 19,000
Acquisition-related expenses 57 73 18,397
Equity in income of unconsolidated joint ventures (151 ) (2,052 ) (4,646 ) (4,772 )
Interest and other income (70 ) (98 ) (266 ) (136 )
Interest expense 16,294 15,665 63,591 30,461
Unrealized loss on interest rate cap (520 ) 119 1,378 2,933
Provision for income taxes   93   493   505   944
NOI $ 43,994 $ 44,380 $ 177,926 $ 84,887
 

Total NOI

NOI 43,994 44,380 177,926 84,887
NOI of unconsolidated joint ventures 6,554 8,170 26,611 14,456
Straight-line rent adjustment (1) (1,642 ) (5,229 ) (13,168 ) (9,353 )
Above/below market rental income/expense (1)   (196 )   (290 )   (877 )   (497 )
Total NOI $ 48,710 $ 47,031 $ 190,492 $ 89,493
____________________
(1)   Includes adjustments for unconsolidated joint ventures.
 
       

Computation of Annualized Total NOI

 
As of As of

Annualized Total NOI

  December 31, 2016 December 31, 2015
Total NOI (per above) $ 48,710 $ 47,031
Current period adjustments (1)   (199 )   424
Adjusted Total NOI 48,512 47,455
Annualize   x 4   x 4
Adjusted Total NOI annualized 194,046 189,818
Plus: estimated annual Total NOI - SNO leases 39,217 9,985
Less: estimated annual Total NOI - recaptured Sears space   (6,586 )   (863 )
Annualized Total NOI $ 226,677 $ 198,940
____________________
(1)   Includes adjustments primarily to account for leases not in place for the full period.
 
           

Reconciliation of Net Loss to EBITDA and Adjusted EBITDA

 
July 7, 2015
Three Months Ended Year Ended (date operations

commenced) to

EBITDA       December 31, 2016 December 31, 2015 December 31, 2016 December 31, 2015
Net loss $ (26,483 ) $ (6,950 ) $ (91,009 ) $ (38,803 )
Depreciation and amortization 55,754 32,972 177,119 65,907
Depreciation and amortization (unconsolidated

joint ventures)

5,465 5,299 21,118 8,987
Interest expense 16,294 15,665 63,591 30,461
Provision for income and other taxes   93   493   505   944
EBITDA $ 51,123 $ 47,479 $ 171,324 $ 67,496
 

Adjusted EBITDA

EBITDA $ 51,123 $ 47,479 $ 171,324 $ 67,496
Termination fee income (5,288 ) (5,288 )
Unrealized loss on interest rate cap (520 ) 119 1,378 2,933
Litigation charge 19,000
Acquisition-related expenses 57 73 18,397
Up-front hiring and personnel costs     111   328   1,906
Adjusted EBITDA $ 45,315 $ 47,766 $ 186,815 $ 90,732
 
           

Reconciliation of Net Loss to FFO and Company FFO

 
July 7, 2015
Three Months Ended Year Ended (date operations

commenced) to

Funds from Operations       December 31, 2016 December 31, 2015 December 31, 2016 December 31, 2015
Net loss $ (26,483 ) $ (6,950 ) $ (91,009 ) $ (38,803 )
Real estate depreciation and amortization

(consolidated properties)

55,521 32,942 176,366 65,877
Real estate depreciation and amortization

(unconsolidated joint ventures)

  5,465   5,299   21,118   8,987
FFO attributable to common shareholders

and unitholders

$ 34,503 $ 31,291 $ 106,475 $ 36,061
               
FFO per diluted common share and unit $ 0.62 $ 0.56 $ 1.92 $ 0.65
 

Company Funds from Operations

Funds from Operations attributable to Seritage

Growth Properties

$ 34,503 $ 31,291 $ 106,475 $ 36,061
Termination fee income (5,288 ) (5,288 )
Unrealized loss on interest rate cap (520 ) 119 1,378 2,933
Amortization of deferred financing costs 1,340 1,333 5,360 2,657
Litigation charge 19,000
Acquisition-related expenses 57 73 18,397
Up-front hiring and personnel costs     111   328   1,906
Company FFO attributable to common

shareholders and unitholders

$ 30,035 $ 32,911 $ 127,326 $ 61,954
               
Company FFO per diluted common share and unit $ 0.54 $ 0.59 $ 2.29 $ 1.12
 

Weighted Average Common Shares and

Units Outstanding

Weighted average common shares outstanding 31,418 31,391 31,416 31,386
Weighted average OP units outstanding   24,176   24,176   24,176   24,176
Weighted average common shares and

units outstanding

  55,594   55,567   55,592   55,562

Contacts

Seritage Growth Properties
646-277-1268
IR@Seritage.com

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