Seritage Growth Properties Reports Fourth Quarter and Full Year 2017 Operating Results

– Increased New Leasing Volume by 26% in 2017 Over Prior Year –
– Achieved 4.1x Rent Uplift on 4.5 Million SF of Re-Leased Space Since Inception –
– Completed or Commenced 78 Redevelopment Projects Totaling $1.1 Billion Since Inception –

NEW YORK--()--Seritage Growth Properties (NYSE: SRG) (the “Company”), a national owner of 253 retail properties totaling over 39 million square feet of gross leasable area (“GLA”), today reported financial and operating results for the three months and year ended December 31, 2017.

Financial Results

For the three months ended December 31, 2017:

  • Net loss attributable to common shareholders of $43.5 million, or $1.27 per diluted share
  • Total Net Operating Income (“Total NOI”) of $39.6 million
  • Funds from Operations (“FFO”) of $11.1 million, or $0.20 per diluted share
  • Company FFO of $11.5 million, or $0.21 per diluted share

For the year ended December 31, 2017:

  • Net loss attributable to common shareholders of $74.0 million, or $2.19 per diluted share
  • Total NOI of $174.8 million
  • FFO of $91.7 million, or $1.65 per diluted share
  • Company FFO of $81.8 million, or $1.47 per diluted share

Operating Highlights

During the year ended December 31, 2017, including the Company’s proportional share of its unconsolidated joint ventures:

  • Signed new leases totaling 2.6 million square feet at an average annual base rent of $17.16 PSF, including 872,000 square feet at $17.00 PSF in the fourth quarter.
  • Achieved releasing multiples of 4.0x for space currently or formerly occupied by Sears Holdings Corporation (“Sears Holdings”), with new rents averaging $17.49 PSF compared to $4.40 PSF paid by Sears Holdings across 2.5 million square feet on a same-space basis.
  • Increased annual base rent from tenants other than Sears Holdings to 52.2% of total annual base rent from 36.1% in the prior year period, including all signed leases and net of rent attributable to associated space to be recaptured.

During the year ended December 31, 2017:

  • Announced 30 new wholly-owned redevelopment projects with an estimated total cost of $632.0 million, expanded six previously announced projects with an estimated total cost of $96.5 million and substantially completed 14 projects with an estimated total cost of approximately $114.2 million. Total redevelopment program to date includes 78 projects completed or commenced representing $1.1 billion of capital investment.
  • Sold the Company’s 50% interests in 13 existing joint venture properties, and sold 50% joint venture interests in five additional properties, for aggregate gross consideration of $315.6 million.

“We ended 2017 on a very strong note with one of our most active quarters to date, including over 870,000 square feet of newly signed leases and the commencement of eight new projects totaling an investment of approximately $385 million. Since our inception, we have signed over 4.8 million square feet of new leases and achieved an average re-leasing multiple of 4.1x on space formerly occupied by Sears Holdings, with new rents averaging approximately $18.00 per square foot compared to $4.35 per square foot, on a same space basis. We have completed or commenced 78 projects representing a total capital investment of approximately $1.1 billion at returns ranging from 10-12% on an incremental unlevered basis, well in excess of capitalization rates for stabilized shopping centers. We were also pleased to commence our premier projects in Santa Monica and San Diego (La Jolla), CA and Aventura, FL, the first three in a series of premier and larger scale densification opportunities within our existing portfolio. Finally, during the quarter, we raised capital through a perpetual preferred equity offering and the extension of our existing unsecured term loan facility, resulting in a total of $530 million of gross proceeds raised during 2017 from financings, asset sales and additional joint ventures. As we enter 2018, we remain focused on unlocking the substantial value of our portfolio through intensive redevelopment and by strengthening our position as preferred partners for growing retailers, mixed-use developers and investors.”

Financial Results

For the three months ended December 31, 2017:

  • Net loss attributable to Class A and Class C shareholders was $43.5 million, or $1.27 per diluted share, as compared to a net loss of $15.0 million, or $0.48 per diluted share, for the prior year period.
  • Total NOI, which includes the Company’s proportional share of NOI from properties owned through investments in its unconsolidated joint ventures, was $39.5 million as compared to $48.7 million for the prior year period.
  • FFO, as calculated in accordance with the National Association of Real Estate Investment Trusts (“NAREIT”) definition, was $11.1 million, or $0.20 per diluted share, as compared to $34.5 million, or $0.62 per diluted share, for the prior year period.
  • Company FFO was $11.5 million, or $0.21 per diluted share, as compared to $30.0 million, or $0.54 per diluted share, for the prior year period. The Company makes certain adjustments to FFO, which it refers to as Company FFO, to account for certain non-cash and non-comparable items that it does not believe are representative of ongoing operating results. See “Non-GAAP Financial Measures.”

For the year ended December 31, 2017:

  • Net loss attributable to Class A and Class C shareholders was $74.0 million, or $2.19 per diluted share, as compared to a net loss of $51.6 million, or $1.64 per diluted share, for the prior year period.
  • Total NOI was $174.7 million as compared to $190.5 million for the prior year period.
  • FFO was $91.7 million, or $1.65 per diluted share, as compared to $106.5 million, or $1.92 per diluted share, for the prior year period.
  • Company FFO was $81.8 million, or $1.47 per diluted share, as compared to $127.3 million, or $2.29 per diluted share, for the prior year period.

Portfolio Summary

As of December 31, 2017, the Company’s portfolio included interests in 253 retail properties totaling over 39 million square feet of gross leasable area, including 230 wholly-owned properties and 23 properties owned through investments in unconsolidated joint ventures. The Company’s portfolio includes 120 properties attached to regional malls and 133 shopping center or freestanding properties.

The portfolio was 80.0% leased and included 51 properties leased only to third-party tenants, 85 properties leased to Sears Holdings and one or more third-party tenants, and 85 properties leased only to Sears Holdings; 32 properties in the portfolio were vacant as of December 31, 2017. Of the properties leased to Sears Holdings, 127 operated under the Sears brand and 43 operated under the Kmart brand. The unleased space as of December 31, 2017 included approximately 2.5 million SF of remaining lease-up at announced redevelopment projects, and approximately 4.9 million SF of additional leasing opportunity at properties in the Company’s redevelopment pipeline.

Development Update

Wholly-Owned Properties

During the year ended December 31, 2017, the Company commenced 30 new redevelopment projects representing an estimated total investment of $632.0 million, including eight projects representing an estimated total investment of $384.2 million in the fourth quarter. The Company also expanded six previously announced representing an estimated total investment of $96.5 million.

The table below summarizes project commencements in the Company’s wholly-owned portfolio since inception:

(in thousands)                       Estimated       Estimated
Number Project Development Project
Quarter of Projects Square Feet Costs (1) Costs (1)
Acquired (2) 15 $ 63,600 $ 63,600
2015 5 352 51,500 64,200
2016 (3) 28 2,677 353,600 370,700
2017   30   3,168   589,100   632,000
Total   78   6,197 $ 1,057,800 $ 1,130,500

____________________

(1)       Total estimated development costs exclude, and total estimated project costs include, termination fees to recapture 100% of certain properties.
(2) Projects were in various stages of development when acquired by the Company in July 2015.
(3) Includes subsequent expansions to previously announced projects.
 

As of December 31, 2017, the Company had originated 63 wholly-owned projects since the Company’s inception. These projects represent an estimated total investment of $1,066.9 million, of which an estimated $801.7 million remains to be spent, and are expected to generate an incremental yield on cost of approximately 11.0%.

The table below provides additional information regarding the Company’s wholly-owned development activity from inception through December 31, 2017:

(in thousands)                                                    
Estimated Estimated Estimated
Estimated Number Project Development Project Projected Annual Income (2) Incremental
Project Costs (1) of Projects Square Feet Costs (1) Costs (1) Total Existing Incremental Yield (3)
< $10,000 24 1,427 $ 104,900 $ 104,900 $ 19,600 $ 5,200 $ 14,400
$10,001 - $20,000 (4) 25 2,525 331,300 351,200 52,500 15,300 37,100
> $20,000   14   2,245   558,000   610,800   84,500   17,900   66,600  
Announced projects 63   6,197 $ 994,200 $ 1,066,900 $ 156,600 $ 38,400 $ 118,100 10.5 - 11.5%
Acquired projects   15   63,600   63,600
Total projects   78 $ 1,057,800 $ 1,130,500

____________________

(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.
(4) Includes Saugus, MA project which has been temporarily postponed while the Company identifies a new lead tenant. The original lead tenant was unable to obtain a use permit at the site.
 

The tables below provide brief descriptions of each of the redevelopment projects originated on the Company’s platform since its inception:

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 Substantially complete
Merrillville, IN

Termination property; redevelop existing store for At Home, Powerhouse
Gym and small shop retail

132,000 Substantially complete
Elkhart, IN Termination property; existing store has been released to Big R Stores 86,500 Substantially complete
San Antonio, TX

Recapture and repurpose auto center space for Orvis, Jared's Jeweler,
Shake Shack and small shop retail

18,900 Substantially complete
Bowie, MD Recapture and repurpose auto center space for BJ's Brewhouse 8,200 Substantially complete
Troy, MI Partial recapture; redevelop existing store for At Home 100,000 Substantially complete
Roseville, MI Partial recapture; redevelop existing store for At Home 100,400 Substantially complete
Henderson, NV

Termination property; redevelop existing store for At Home, Seafood City
and additional retail

144,400 Substantially complete
Rehoboth Beach, DE

Partial recapture; redevelop existing store for Christmas Tree Shops
andThat! and PetSmart

56,700 Substantially complete
Cullman, AL

Termination property; redevelop existing store for Bargain Hunt, Tractor
Supply and Planet Fitness

99,000 Substantially complete
Jefferson City, MO

Termination property; redevelop existing store for Orscheln Farm and
Home

96,000 Delivered to tenant
Albany, NY

Recapture and repurpose auto center space for BJ's Brewhouse and
additional small shop retail

28,000 Delivered to tenant
Hagerstown, MD

Recapture and repurpose auto center space for BJ's Brewhouse, Verizon
and additional restaurants

15,400 Delivered to tenant
Ft. Wayne, IN

Site densification; new outparcels for BJ's Brewhouse (substantially
complete) and Chick-Fil-A (project expansion)

12,000 Underway Q1 2018
Kearney, NE

Termination property; redevelop existing store for Marshall's, PetSmart
and additional junior anchors

92,500 Underway Q2 2018
Olean, NY

Partial recapture; redevelop existing store for Marshall's and additional
retail

45,000 Underway Q2 2018
Roseville, CA Recapture and repurpose auto center space for AAA Auto Repair Center 10,400 Underway Q2 2018
Guaynabo, PR Partial recapture; redevelop existing store for Planet Fitness and Capri 56,100 Underway Q3 2018
Florissant, MO Site densification; new outparcel for Chick-Fil-A 5,000 Underway Q3 2018
Dayton, OH

Recapture and repurpose auto center space for Outback Steakhouse and
additional restaurants

14,100 Underway Q4 2018
New Iberia, LA

Termination property; redevelop existing store for Rouses Supermarkets,
additional junior anchors and small shop retail

93,100 Underway Q1 2019
North Little Rock, AR

Recapture and repurpose auto center space for LongHorn Steakhouse and
additional small shop retail

17,300 Q2 2018 Q2 2019
St. Clair Shores, MI

100% recapture; demolish existing store and develop site for new Kroger
store

107,200 Q2 2018 Q2 2019
Oklahoma City, OK Site densification; new fitness center for Vasa Fitness 59,500 Q3 2018 Q3 2019
 
 
Total Project Costs $10 - $20 Million (1)
                        Total     Estimated     Estimated
Project Construction Substantial
Property Description Square Feet Start Completion
Braintree, MA

100% recapture; redevelop existing store for Nordstrom Rack, Saks OFF
5th and additional retail

90,000 Substantially complete
Honolulu, HI

100% recapture; redevelop existing store for Longs Drugs (CVS),
PetSmart and Ross Dress for Less

79,000 Substantially complete
West Jordan, UT

Partial recapture; redevelop existing store and attached auto center for
Burlington Stores and additional retail

81,400 Substantially complete
Anderson, SC

100% recapture (project expansion); redevelop existing store for
Burlington Stores, Sportsman's Warehouse, additional retail and
restaurants

111,300 Substantially complete
Madison, WI

Partial recapture; redevelop existing store for Dave & Busters, Total Wine
& More, additional retail and restaurants

75,300 Delivered to tenant
Thornton, CO

Termination property; redevelop existing store for Vasa Fitness and
additional junior anchors

191,600 Underway Q1 2018
Fairfax, VA

Partial recapture; redevelop existing store and attached auto center for
Dave & Busters, Seasons 52, additional junior anchors and restaurants

110,300 Underway Q1 2018
Orlando, FL

100% recapture; demolish and construct new buildings for Floor & Décor,
Orchard Supply Hardware, LongHorn Steakhouse, Olive Garden,
additional small shop retail and restaurants

139,200 Underway Q2 2018
Springfield, IL

Termination property; redevelop existing store for Burlington Stores,
Binny's Beverage Depot, Orangetheory Fitness, Outback Steakhouse,
CoreLife Eatery, additional junior anchors and small shop retail

133,400 Underway Q2 2018
North Miami, FL

100% recapture; redevelop existing store for Michael's, PetSmart and Ross
Dress for Less

124,300 Underway Q2 2018
Hialeah, FL

100% recapture; redevelop existing store for Bed, Bath & Beyond, Ross
Dress for Less and additional junior anchors to join current tenant, Aldi

88,400 Underway Q2 2018
Cockeysville, MD

Partial recapture; redevelop existing store for HomeGoods, Michael's
Stores, additional junior anchors and restaurants

83,500 Underway Q2 2018
North Hollywood, CA

Partial recapture; redevelop existing store for Burlington Stores and
additional junior anchors

79,800 Underway Q3 2018
Salem, NH

Site densification; new theatre for Cinemark

Recapture and repurpose auto center for restaurant space

71,200 Underway Q3 2018
Charleston, SC

100% recapture (project expansion); redevelop existing store and detached
auto center for Burlington Stores and additional retail

126,700 Underway Q3 2018
Paducah, KY

Termination property; redevelop existing store for Burlington Stores and
additional retail

102,300 Underway Q3 2018
Warwick, RI

Termination property; repurpose auto center space for BJ's Brewhouse and
additional retail Redevelop existing store for At Home and Raymour &
Flanigan (project expansion)

190,700 Underway Q4 2018
Temecula, CA

Partial recapture; redevelop existing store and detached auto center for
Round One, small shop retail and restaurants

65,100 Underway Q4 2018
Canton, OH

Partial recapture; redevelop existing store for Dave & Busters and
restaurants

83,900 Underway Q2 2019
North Riverside, IL

Partial recapture; redevelop existing store and detached auto center for
Round One, additional junior anchors, small shop retail and restaurants

103,900 Underway Q2 2019
Santa Cruz, CA

Partial recapture; redevelop existing store for TJ Maxx, HomeGoods and
additional junior anchors

62,200 Q1 2018 Q4 2018
Las Vegas, NV

Partial recapture; redevelop existing store for Round One Entertainment
and additional retail

78,800 Q3 2018 Q3 2019
Yorktown Heights, NY

Partial recapture; redevelop existing store for 24 Hour Fitness and
additional retail

85,200 Q3 2018 Q4 2019
Fairfield, CA

Partial recapture; redevelop existing store for Dave & Busters and
additional junior anchors

68,400 Q3 2018 Q4 2019

____________________

(1)       Excludes Saugus, MA project which has been temporarily postponed while the Company identifies a new lead tenant. The original lead tenant was unable to obtain a use permit at the site.
 
 
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, Hopdoddy Burger Bar, additional junior
anchors, restaurants and small shop retail

135,200 Substantially complete
West Hartford, CT

100% recapture; redevelop existing store and detached auto center for Buy
Buy Baby, Cost Plus World Market, REI, Saks OFF Fifth, other junior
anchors, Shake Shack and additional small shop retail

147,600 Underway Q1 2018
St. Petersburg, FL

100% recapture; demolish and construct new buildings for Dick's Sporting
Goods, Lucky's Market, PetSmart, Five Below, Chili's Grill & Bar, Pollo
Tropical, LongHorn Steakhouse and additional small shop retail and
restaurants

142,400 Underway Q2 2018
Wayne, NJ

Partial recapture; redevelop existing store for Dave & Busters, additional
junior anchors and restaurants

Recapture and repurpose detached auto center for Cinemark (project
expansion)

NOTE: contributed to GGP II JV in July 2017

156,700 Underway Q3 2018
Carson, CA

100% recapture (project expansion); redevelop existing store for
Burlington Stores, Ross Dress for Less and additional retail

163,800 Underway Q1 2019
Watchung, NJ

100% recapture; demolish full-line store and construct new buildings for
HomeSense, Sierra Trading Post, Ulta Beauty and additional small shop
retail and restaurants

Demolish detached auto center and construct a freestanding Cinemark
theater

126,700 Underway Q2 2019
Santa Monica, CA

100% recapture; redevelop existing building into premier, mixed-use asset
featuring unique, small-shop retail and creative office space

96,500 Underway Q4 2019
Aventura, FL

100% recapture; demolish existing store and construct new, multi-level
open air retail destination featuring a leading collection of experiential
shopping, dining and entertainment concepts alongside a treelined
esplanade and activated plazas

216,600 Underway Q4 2019
San Diego, CA

100% recapture; redevelop existing store into two highly-visible, multi-
level buildings with exterior facing retail representing a premier mix of
experiential shopping, dining, and entertainment concepts

206,000 Underway Q4 2019
Austin, TX

100% recapture (project expansion); redevelop existing store for AMC
Theatres, additional junior anchors and restaurants

177,400 Q2 2018 Q3 2019
Greendale, WI

Termination property; redevelop existing store and attached auto center for
Dick's Sporting Goods, Round One Entertainment, additional junior
anchors and restaurants

223,800 Q2 2018 Q4 2019
Anchorage, AK

100% recapture; redevelop existing store for Guitar Center, Safeway and
additional junior anchors to join current tenant, Nordstrom Rack

142,500 Q2 2018 Q4 2019
East Northport, NY

Termination property; redevelop existing store and attached auto center for
AMC Theatres, 24 Hour Fitness, additional junior anchors and small shop
retail

179,700 Q2 2018 Q4 2019
Plantation, FL

Partial recapture; redevelop existing store for GameTime, additional retail
and restaurants

130,500 Q3 2018 Q4 2019
 

Joint Venture Properties

During the fourth quarter, the Company sold to Simon Property Group (“Simon”) the Company’s 50% interest in five of the ten assets in the existing joint venture between the two companies for gross consideration of $68.0 million.

Also in 2017, the Company completed two transactions with GGP Inc. (“GGP”) for gross consideration of $247.6 million whereby the Company (i) sold to GGP the Company’s 50% interest in eight of the twelve assets in the existing joint venture between the two companies for $190.1 million; and (ii) sold to GGP a 50% joint venture interest in five additional assets for $57.5 million.

The Company continues to own 50% interests in nine assets in an unconsolidated joint venture with The Macerich Company.

Leasing Update

During the year ended December 31, 2017, the Company signed new leases totaling 2.6 million square feet at an average annual base rent of $17.16 PSF, including 872,000 square feet at $17.00 in the fourth quarter. On a same-space basis, new rents averaged 4.0x prior rents for space currently or formerly occupied by Sears Holdings, increasing to $17.49 PSF for new tenants compared to $4.40 PSF paid by Sears Holdings across 2.5 million square feet.

The table below provides a summary of the Company’s leasing activity since inception, including unconsolidated joint ventures 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
Period Leases GLA Rent Rent PSF Leases GLA Rent Rent PSF Multiple
2015 9   154 $ 4,650 $ 30.28 6   130 $ 3,820 $ 29.41   4.4 x
2016 65 2,070 36,600 17.68 59 1,882 33,610 17.86 4.5 x
2017   94   2,606   44,717   17.16   86   2,476   43,299   17.49   4.0 x
Total   168   4,830 $ 85,967 $ 17.80   151   4,488 $ 80,729 $ 17.99   4.1 x
 

During the year ended December 31, 2017, the Company added $44.7 million of new third-party income and increased annual base rent attributable to third-party tenants to 52.2% of total annual base rent from 36.1% as of December 31, 2016, including all signed leases and net of rent attributable to the associated space to be recaptured.

The table below provides a summary of all the Company’s signed leases as of December 31, 2017, including unconsolidated joint ventures 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)   170   22,471   75.4 % $ 102,645   47.8 % $ 4.57
In-Place Third-Party Leases 225 3,819 12.8 % 48,624 22.6 % 12.73
SNO Third-Party Leases   114   3,534   11.8 %   63,407   29.6 %   17.94
Sub-Total Third-Party Leases   339   7,353   24.6 %   112,031   52.2 %   15.24
Total   509   29,824   100.0 % $ 214,676   100.0 % $ 7.20

____________________

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

Balance Sheet and Liquidity

As of December 31, 2017, the Company’s total market capitalization was approximately $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 37.5% and net debt to Adjusted EBITDA was 6.5x. 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 Adjusted EBITDA, are provided in the tables accompanying this press release.

As of December 31, 2017, the Company had $241.6 million of unrestricted cash and restricted cash of $175.7 million, the substantial majority of which was held in reserve accounts for redevelopment, re-leasing and operating expenses at the Company’s properties. The Company also had $55.0 million of permitted, but uncommitted, borrowing capacity under its $200.0 million unsecured term loan facility due December 31, 2018.

Series A Preferred Shares

During the fourth quarter, the Company issued 2,800,000 7.00% Series A Cumulative Redeemable Preferred Shares (the “Series A Preferred Shares”) in a public offering at $25.00 per share. The Company received net proceeds from the offering of approximately $66.7 million after deducting payment of the underwriting discount and offering expenses.

Unsecured Term Loan

During the fourth quarter, The Company refinanced its existing $200 million unsecured term loan facility with a new $200 million unsecured term loan facility (the “Unsecured Term Loan”). The previous facility was a delayed draw facility with a maturity of December 31, 2017, against which the Company had drawn $85 million against the total capacity of $200 million.

The lenders under the previous facility, which are entities controlled by ESL Investments, Inc., have maintained their funding of $85 million in the Unsecured Term Loan, and new, non-affiliated lender committed and funded an additional $60 million for a total of $145 million committed and funded at closing. Maximum total commitments under the Unsecured Term Loan are $200 million and the Company has the right to syndicate the remaining $55 million with existing or new lenders. Existing lenders are not obligated to make all or any portion of the incremental loans.

Dividends

On February 20, 2018, 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 12, 2018 to shareholders of record on March 30, 2018. 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 30, 2018.

On February 20, 2018, the Company’s Board of Trustees also declared a preferred stock dividend of $0.593056 per each Series A Preferred Share. The dividend covers the period from, and including, December 14, 2017 to, but excluding, April 15, 2018. The dividend will be paid on April 16, 2018 to holders of record on March 30, 2018.

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 variable 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 loss on interest rate cap, litigation charges, acquisition-related expenses, certain up-front-hiring and personnel costs and gains (or losses) from property sales, 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 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 REIT with 230 wholly-owned properties and 23 joint venture properties totaling over 39 million square feet of space across 49 states and Puerto Rico. The Company was formed to unlock the underlying real estate value of a high-quality retail portfolio it acquired from Sears Holdings in July 2015. Pursuant to a master lease, the Company has the right to recapture certain space from Sears Holdings for retenanting or redevelopment purposes. The Company’s mission is to create and own revitalized shopping, dining, entertainment and mixed-use destinations that provide enriched experiences for consumers and local communities, and create long-term value for our shareholders.

SERITAGE GROWTH PROPERTIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

(Unaudited)

 
      December 31, 2017     December 31, 2016
ASSETS
Investment in real estate
Land $ 799,971 $ 840,021
Buildings and improvements 829,168 839,663
Accumulated depreciation   (139,483 )   (89,940 )
1,489,656 1,589,744
Construction in progress   224,904   55,208
Net investment in real estate 1,714,560 1,644,952
Investment in unconsolidated joint ventures 282,990 425,020
Cash and cash equivalents 241,569 52,026
Restricted cash 175,665 87,616
Tenant and other receivables, net 30,787 23,172
Lease intangible assets, net 310,098 464,399
Prepaid expenses, deferred expenses and other assets, net   20,148   15,052
Total assets $ 2,775,817 $ 2,712,237
 
LIABILITIES AND EQUITY
Liabilities
Mortgage loans payable, net $ 1,202,314 $ 1,166,871
Unsecured term loan, net 143,210
Accounts payable, accrued expenses and other liabilities   109,433   121,055
Total liabilities   1,454,957   1,287,926
 
Commitments and contingencies
 
Shareholders' Equity

Class A common shares $0.01 par value; 100,000,000 shares authorized;

32,415,734 and 25,843,251 shares issued and outstanding as of

December 31, 2017 and December 31, 2016, respectively

324 258

Class B common shares $0.01 par value; 5,000,000 shares authorized;

1,328,866 and 1,589,020 shares issued and outstanding as of

December 31, 2017 and December 31, 2016, respectively

13 16

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

3,151,131 and 5,754,685 shares issued and outstanding as of

December 31, 2017 and December 31, 2016, respectively

31 58

Series A preferred shares $0.01 par value; 10,000,000 shares authorized;

2,800,000 shares issued and outstanding as of December 31, 2017;

liquidation preference of $70,000

28
Additional paid-in capital 1,116,060 925,563
Accumulated deficit   (229,760 )   (121,338 )
Total shareholders' equity 886,696 804,557
Non-controlling interests   434,164   619,754
Total equity   1,320,860   1,424,311
Total liabilities and equity $ 2,775,817 $ 2,712,237
 
 

SERITAGE GROWTH PROPERTIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

 
      Three Months Ended December 31,     Year Ended December 31,
2017     2016 2017     2016
REVENUE
Rental income $ 38,966 $ 49,684 $ 178,492 $ 186,421
Tenant reimbursements   14,712   16,512   62,525   62,253
Total revenue   53,678   66,196   241,017   248,674
EXPENSES
Property operating 5,715 4,334 19,700 21,510
Real estate taxes 9,946 12,580 45,653 43,681
Depreciation and amortization 91,878 55,754 262,171 177,119
General and administrative 11,263 4,365 27,902 17,469
Litigation charge 19,000
Provision for doubtful accounts 39 158 269
Acquisition-related expenses         73
Total expenses   118,841   77,033   355,584   279,121
Operating loss (65,163 ) (10,837 ) (114,567 ) (30,447 )

Equity in (loss) income of unconsolidated joint

ventures

(3,562 ) 151 (7,788 ) 4,646

Gain on sale of interests in unconsolidated

joint ventures

16,573 60,302
Gain on sale of real estate (1,571 ) 11,447
Interest and other income 405 70 877 266
Interest expense (17,040 ) (16,294 ) (70,112 ) (63,591 )
Unrealized (loss) gain on interest rate cap   (15 )   520   (701 )   (1,378 )
Loss before income taxes (70,373 ) (26,390 ) (120,542 ) (90,504 )
Provision for income taxes   (5 )   (93 )   (271 )   (505 )
Net loss (70,378 ) (26,483 ) (120,813 ) (91,009 )

Net loss attributable to non-controlling

interests

  27,167   11,479   47,059   39,451
Net loss attributable to Seritage $ (43,211 ) $ (15,004 ) $ (73,754 ) $ (51,558 )
Preferred dividends   (245 )     (245 )  
Net loss attributable to Seritage common shareholders $ (43,456 ) $ (15,004 ) $ (73,999 ) $ (51,558 )
 

Net loss per share attributable to Class A and

Class C common shareholders - Basic and diluted

$ (1.27 ) $ (0.48 ) $ (2.19 ) $ (1.64 )

Weighted average Class A and Class C common shares

outstanding - Basic and diluted

  34,094   31,418   33,804   31,416
 
 

Reconciliation of Net Loss to NOI and Total NOI (in thousands)

 
      Three Months Ended December 31,     Year Ended December 31,
NOI and Total NOI 2017     2016 2017     2016
Net loss $ (70,378 ) $ (26,483 ) $ (120,813 ) $ (91,009 )
Termination fee income (1,954 ) (5,288 ) (19,314 ) (5,288 )
Depreciation and amortization 91,878 55,754 262,171 177,119
General and administrative expenses 11,263 4,365 27,902 17,469
Litigation charge 19,000
Acquisition-related expenses 73

Equity in loss (income) of unconsolidated joint

ventures

3,562 (151 ) 7,788 (4,646 )

Gain on sale of interests in unconsolidated

joint ventures

(16,573 ) (60,302 )
Gain on sale of real estate 1,571 (11,447 )
Interest and other income (405 ) (70 ) (877 ) (266 )
Interest expense 17,040 16,294 70,112 63,591
Unrealized loss (gain) on interest rate cap 15 (520 ) 701 1,378
Provision for income taxes   5   93   271   505
NOI $ 36,024 $ 43,994 $ 156,192 $ 177,926
NOI of unconsolidated joint ventures 5,219 6,554 23,547 26,611
Straight-line rent adjustment (1) (1,522 ) (1,642 ) (3,918 ) (13,168 )
Above/below market rental income/expense (1)   (161 )   (196 )   (1,063 )   (877 )
Total NOI $ 39,560 $ 48,710 $ 174,758 $ 190,492

____________________

(1)       Includes adjustments for unconsolidated joint ventures.
 
 

Computation of Annualized Total NOI (in thousands)

 
      As of December 31,
Annualized Total NOI 2017     2016
Total NOI (per above) $ 39,560 $ 48,710
Period adjustments (1)   (698 )   (199 )
Adjusted Total NOI 38,862 48,512
Annualize   x 4   x 4
Adjusted Total NOI annualized 155,448 194,046
Plus: estimated annual Total NOI from SNO leases 62,376 39,217

Less: estimated annual Total NOI from associated

space to be recaptured from Sears

  (4,994 )   (6,586 )
Annualized Total NOI $ 212,830 $ 226,677

____________________

(1)       Includes adjustments to account for leases not in place for the full period.
 
 

Reconciliation of Net Loss to EBITDA and Adjusted EBITDA (in thousands)

 
      Three Months Ended December 31,     Year Ended December 31,
EBITDA and Adjusted EBITDA 2017     2016 2017     2016
Net loss $ (70,378 ) $ (26,483 ) $ (120,813 ) $ (91,009 )
Depreciation and amortization 91,878 55,754 262,171 177,119

Depreciation and amortization (unconsolidated

joint ventures)

5,371 5,465 23,954 21,118
Interest expense 17,040 16,294 70,112 63,591
Provision for income and other taxes   5   93   271   505
EBITDA $ 43,916 $ 51,123 $ 235,695 $ 171,324
Termination fee income (1,954 ) (5,288 ) (19,314 ) (5,288 )
Unrealized loss (gain) on interest rate cap 15 (520 ) 701 1,378
Litigation charge 19,000
Acquisition-related expenses 73
Up-front hiring and personnel costs 328

Gain on sale of interests in unconsolidated

joint ventures

(16,573 ) (60,302 )
Gain on sale of real estate   1,571     (11,447 )  
Adjusted EBITDA $ 26,975 $ 45,315 $ 145,333 $ 186,815
 
 

Reconciliation of Net Loss to FFO and Company FFO (in thousands)

 
      Three Months Ended December 31,     Year Ended December 31,
FFO and Company FFO 2017     2016 2017     2016
Net loss $ (70,378 ) $ (26,483 ) $ (120,813 ) $ (91,009 )

Real estate depreciation and amortization

(consolidated properties)

91,385 55,521 260,543 176,366

Real estate depreciation and amortization

(unconsolidated joint ventures)

5,371 5,465 23,954 21,118

Gain on sale of interests in unconsolidated

joint ventures

(16,573 ) (60,302 )
Gain on sale of real estate 1,571 (11,447 )

Dividends on preferred shares

  (245 )     (245 )  

FFO attributable to common shareholders

and unitholders

$ 11,131 $ 34,503 $ 91,690 $ 106,475
Termination fee income (1,954 ) (5,288 ) (19,314 ) (5,288 )
Unrealized loss (gain) on interest rate cap 15 (520 ) 701 1,378
Amortization of deferred financing costs 2,330 1,340 8,720 5,360
Litigation charge 19,000
Acquisition-related expenses 73
Up-front hiring and personnel costs         328

Company FFO attributable to common

shareholders and unitholders

$ 11,522 $ 30,035 $ 81,797 $ 127,326
               
FFO per diluted common share and unit $ 0.20 $ 0.62 $ 1.65 $ 1.92
Company FFO per diluted common share and unit $ 0.21 $ 0.54 $ 1.47 $ 2.29
 
Weighted Average Common Shares and Units Outstanding
Weighted average common shares outstanding 34,094 31,418 33,804 31,416
Weighted average OP units outstanding   21,820   24,176   21,820   24,176

Weighted average common shares and

units outstanding

  55,914   55,594   55,624   55,592

Contacts

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

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