SERITAGE GROWTH PROPERTIES This section contains forward-looking statements that involve risks and uncertainties. Our actual results may vary materially from those discussed in the forward-looking statements as a result of various factors, including, without limitation, those set forth in "Risk Factors" and the other matters set forth in this Annual Report. See "Cautionary Statement Regarding Forward-Looking Statements." For discussion of 2020 items and year-over-year comparisons between 2021 and 2020 that are not included in this Annual Report, refer to "Item 7. - Management Discussion and Analysis of Financial Condition and Results of Operations" found in our Annual Report for the fiscal year endedDecember 31, 2021 , that was filed with theSecurities and Exchange Commission onMarch 16, 2022 . All references to numbered Notes are to specific footnotes to our Consolidated Financial Statements included in this Annual Report. You should read this discussion in conjunction with our Consolidated Financial Statements, the notes thereto and other financial information included elsewhere in this Annual Report. Our financial statements are prepared in accordance with accounting principles generally accepted inthe United States ("GAAP"). Capitalized terms used, but not defined, in this Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") have the same meanings as in such Notes. Overview Prior to our adoption of the Plan for Sale, we were principally engaged in the ownership, development, redevelopment, management, sale and leasing of diversified retail and mixed-use properties throughoutthe United States . As ofDecember 31, 2022 , our portfolio consisted of interests in 97 properties comprised of approximately 13.5 million square feet of GLA or build-to-suit leased area, approximately 157 acres held for or under development and approximately 6.1 million square feet or approximately 498 acres to be disposed of. The portfolio consists of approximately 10.8 million square feet of GLA held by 80Consolidated Properties and 2.6 million square feet of GLA held by 17Unconsolidated Properties .
Review of Strategic Alternatives
OnMarch 1, 2022 , the Company announced that itsBoard of Trustees has commenced a process to review a broad range of strategic alternatives to enhance shareholder value.The Board of Trustees created a special committee of theBoard of Trustees (the "Special Committee") to oversee the process. The Special Committee has retained Barclays as its financial advisor. The Company sought a shareholder vote to approve a proposed plan of sale of our assets and dissolution (the "Plan of Sale") that would allow our board to sell all of our assets, distribute the net proceeds to shareholders and dissolve the Company. The 2022 Annual Meeting of Shareholders occurred onOctober 24, 2022 , at which time the Plan of Sale was approved by the shareholders, following our filing of a final proxy statement with theSEC onSeptember 14, 2022 . See Note 1 -Organization of the Notes to the consolidated financial statements included in Part IV, Item 15 of this Annual Report on Form 10-K for additional information about the Plan of Sale. The strategic review process remains ongoing as the Company executes the Plan of Sale. There can be no assurance that the review process will result in any transaction or that the Company will be successful in fully executing on the Plan of Sale. See "Item 1A. Risk Factors-Risks Related to Our Business and Operations-There can be no assurance that our review of strategic alternatives will result in any transaction or any strategic change at this time."
Impairment of real estate assets and investments in unconsolidated entities
In the first quarter of 2022, we announced a review of strategic alternatives, following which it was determined that the best course to maximize shareholder value was to seek approval for a plan of sale. As a result of the foregoing, our intent, anticipated holding periods and/or projected cash flows with respect to certain assets evolved. This triggered a recoverability analysis of the carrying value of those assets over their respective holding periods. We have recognized$126.9 million of impairment losses in the year endedDecember 31, 2022 , which are included in impairment on real estate assets within the consolidated statements of operations, in part as a result of this portfolio review. We continue to evaluate our portfolio, including our development plans and holding periods, which may result in additional impairments in future periods on ourConsolidated Properties and investments in unconsolidated entities.
OnMarch 1, 2022 , the Company announced thatMr. Lampert retired as its Chairman and resigned from theBoard of Trustees effectiveMarch 1, 2022 . OnMarch 30, 2022 , the Company elected Mr.Adam Metz to theBoard of Trustees . OnApril 26, 2022 , the Company elected Mr.Mitchell Sabshon , Ms.Talya Nevo-Hacohen and Mr.Mark Wilsmann to theBoard of Trustees and announced the resignation of Mr.David Fawer and Mr.Thomas Steinberg from theBoard of Trustees . - 41 - --------------------------------------------------------------------------------
During the year ended
As of
Effects of Natural Disasters The Company assessed the impact of the natural disasters that occurred during the year endedDecember 31, 2022 and determined that natural disasters did not have a material impact on our operating results or financial position. The Company did not experience interruptions in rental payments related to natural disasters nor has it incurred material capital expenditures to repair any property damage. As a result of changes to weather patterns caused by climate change, our properties could experience increased storm intensity and other natural disasters in future periods and, as such, we cannot provide assurance that natural disasters will not have a material impact on our financial condition, results of operations or cash flows over the foreseeable future.
COVID-19 Pandemic
The COVID-19 pandemic has caused and continues to cause significant impacts on
the real estate industry in
As a result of the development, fluidity and uncertainty surrounding this situation, the Company expects that these conditions may change, potentially significantly, in future periods and results for the year endedDecember 31, 2022 may not be indicative of the impact of the COVID-19 pandemic on the Company's business for future periods. As such, the Company cannot reasonably estimate the impact of COVID-19 on its financial condition, results of operations or cash flows over the foreseeable future. As ofDecember 31, 2022 , we had collected 99.6% of rental income for the year endedDecember 31, 2022 . While the Company intends to enforce its contractual rights under its leases, there can be no assurance that tenants will meet their future obligations or that additional rental modification agreements will not be necessary. - 42 - --------------------------------------------------------------------------------
Results of Operations
We derive substantially all of our revenue from rents received from tenants under existing leases at each of our properties. This revenue generally includes fixed base rents and recoveries of expenses that we have incurred and that we pass through to the individual tenants, in each case as provided in the respective leases. Our primary cash expenses consist of our property operating expenses, general and administrative expenses, interest expense, and construction and development related costs. Property operating expenses include: real estate taxes, repairs and maintenance, management fees, insurance, ground lease costs and utilities; general and administrative expenses include payroll, office expenses, professional fees, and other administrative expenses; and interest expense is on our term loan facility. In addition, we incur substantial non-cash charges for depreciation of our properties and amortization of intangible assets and liabilities.
Comparison of the Year Ended
The following table presents selected data on comparative results from the
Company's consolidated statements of operations for the year ended
Year Ended December 31,
2022 2021 $ Change % Change
Revenue
Rental income $ 104,609 $ 115,651 $ (11,042 ) -10 %
Expenses
Property operating $ 41,770 $ 45,007 $ (3,237 ) -7 %
Real estate taxes 23,950 35,256 (11,306 ) -32 %
Depreciation and amortization 41,114 51,199 (10,085 ) -20 %
General and administrative 47,634 41,949 5,685 14 %
Litigation settlement 35,533 - 35,533 100 %
Gain on sale of real estate 211,936 221,681 (9,745 ) -4 %
Loss on sale of interests in (677 ) (677 ) 100 %
unconsolidated entities -
Impairment on real estate (126,887 ) (95,826 ) (31,061 ) 32 %
assets
Equity in loss of (72,080 ) (9,226 ) (62,854 ) 681 %
unconsolidated entities
Interest and other income 37,753 9,285 28,468 307 %
Interest expense (86,730 ) (107,975 ) 21,245 -20 %
Rental Income
The following table presents the results for rental income for the year ended
December 31, 2022 , as compared to the corresponding period in 2021 (in
thousands):
Year Ended December 31,
2022 2021
% of Total % of Total
Rental Income Rental Income Rental Income Rental Income $ Change
Diversified tenants $ 103,356 99 % $ 108,845 94 % $ (5,489 )
Sears/Kmart - 0 % 4,510 4 % (4,510 )
Straight-line rent 1,271 1 % 2,269 2 % (998 )
Amortization of above/below
market leases (18 ) 0 % 27 0 % (45 )
Total rental income $ 104,609 100 % $ 115,651 100 % $ (11,042 )
The decrease of $4.5 million in Sears or Kmart rental income is due to a
reduction in the number of properties leased to Sears or Kmart under the Holdco
Master Lease , as a result of terminations. As of March 15, 2021 , Sears no longer
occupies space at any properties.
The decrease of
The decrease of
Property Operating Expenses and Real Estate Taxes
The decrease of$3.2 million in property operating expense and the decrease of$11.3 million in real estate taxes for the year endedDecember 31, 2022 was due primarily to asset sales and partially offset by a decrease in amounts capitalized. - 43 - --------------------------------------------------------------------------------
Depreciation and Amortization Expenses
The decrease of$10.1 million in depreciation and amortization expenses for the year endedDecember 31, 2022 was due primarily to a decrease of$9.1 million net scheduled depreciation due to sales.
Litigation Settlement
During the year endedDecember 31, 2022 , the Company recorded a$35.5 million litigation settlement related to the settlement of the Litigation, which the Court approved onSeptember 2, 2022 , and which Litigation was settled onOctober 18, 2022 . We paid the settlement amount described above inOctober 2022 . See Note 9 - Commitments and Contingencies.
General and Administrative Expenses
General and administrative expenses consist of personnel costs, including share-based compensation, professional fees, office expenses and overhead expenses.
The increase of$5.7 million for the year endedDecember 31, 2022 was primarily driven by an increase in third-party consultants utilized to execute the Plan of Sale and the implementation of retention bonuses in order to retain employees as a result of the Plan of Sale. This was partially offset by a decrease in other compensation expenses, resulting from a decrease in employee head count, and a decrease in restructuring costs which had been incurred in the second quarter of 2021. Gain on Sale of Real Estate During the year endedDecember 31, 2022 , the Company sold 65 properties, for aggregate consideration of$650.3 million and recorded a gain totaling$211.9 million , which is included in gain on sale of real estate within the consolidated statements of operations. During the year endedDecember 31, 2021 , the Company sold 21 properties, including outparcels, for aggregate consideration of$395.4 million and recorded gains totaling$197.0 million , which are included in gain on sale of real estate within the consolidated statements of operations. The Company also contributed its property located inAlexandria, VA to an unconsolidated entity for a contribution value of$30.0 million and recorded a gain of$22.6 million which is included in gain on sale of real estate within the consolidated statements of operations.
Loss on Sale of Interests in Unconsolidated Entities
During the year endedDecember 31, 2022 , the Company sold interests in three unconsolidated entities, and recorded a loss totaling$0.7 million , which is included in loss on sale of interests in unconsolidated entities, net within the consolidated statement of operations. There were no such transactions during the year endedDecember 31, 2021 .
Impairment of Real Estate Assets
During the year endedDecember 31, 2022 , the Company recognized$126.9 million in impairment of 42 real estate assets, which is included within the consolidated statements of operations. These impairments arose from the Company's plan to sell these properties resulting in a reduction to the holding periods of all properties, which triggered the need for an impairment analysis pursuant to ASC 360, Property, Plant and Equipment.
During 2021, the Company recognized
Equity in Loss of Unconsolidated Entities
The increase of$62.9 million in equity in loss of unconsolidated entities for the year endedDecember 31, 2022 was driven by$65.7 million impairment charges recorded on three underlying properties, resulting in the Company picking up its share of impairment totaling$32.9 million plus other-than-temporary impairment recorded to our investments of$35.6 million . These impairments arose from the Company's plan to sell these properties resulting in a reduction to the holding periods of all its investments in unconsolidated entities, which triggered the need for an impairment analysis pursuant to ASC 323,Equity Method and Joint Ventures . This increase in equity in loss is partially offset by$2.6 million in gain on sale recorded at the unconsolidated entity level during the year for the sale of five properties during the year endedDecember 31, 2022 . There were no such impairments during the year endedDecember 31, 2021 .
Interest and Other Income
The increase of$28.5 million in interest and other income is due to the extinguishments of$13.9 million of historical Sears liabilities and$9.5 million of environmental reserve plus$12.3 million of net insurance proceeds relating to our D&O litigation during the year endedDecember 31, 2022 . This increase is partially offset by$8.0 million of insurance proceeds received during the year endedDecember 31, 2021 . - 44 - --------------------------------------------------------------------------------
Interest Expense
The decrease of$21.2 million in interest expense for the year endedDecember 31, 2022 , which was a result of the partial Term Loan pay-downs totaling$160 million during the year endedDecember 31, 2021 and$410 million during the year endedDecember 31, 2022 . Interest was further decreased due to mortgage recording costs incurred in the prior year that did not recur in the current year.
Liquidity and Capital Resources
Our primary uses of cash include the payment of property operating and other
expenses, including general and administrative expenses and debt service
(collectively, "Obligations"), and the reinvestment in and redevelopment of our
properties ("development expenditures"). Property rental income, which is the
Company's primary source of operating cash flow, did not fully fund Obligations
incurred during the year ended December 31, 2022 and the Company recorded net
operating cash outflows of $117.9 million . Additionally, the Company generated
net investing cash inflows of $586.1 million during the year ended December 31,
2022 , which were driven by asset sales and partially offset by development
expenditures and recorded financing cash outflows of $437.0 million , primarily
due to repayment of the Term Loan Facility.
Obligations are projected to continue to exceed property rental income and we
expect to fund such Obligations and any development expenditures with cash on
hand and a combination of capital sources including, but not limited to the
following, subject to any approvals that may be required under the Term Loan
Agreement.
•
Sales of interests inConsolidated Properties . As ofDecember 31, 2022 , we have sold 148Consolidated Properties , and additional outparcels at certain properties, and generated approximately$1.6 billion of gross proceeds since we began our capital recycling program inJuly 2017 ;
•
Sales of interests inUnconsolidated Properties . As ofDecember 31, 2022 , we have sold our interests in 23Unconsolidated Properties and generated approximately$362.9 million of gross proceeds sinceJuly 2017 . Certain of our unconsolidated entity agreements also include rights that allow us to sell our interests in selectUnconsolidated Properties to our partners at fair market value;
•
New unconsolidated entities. As ofDecember 31, 2022 , we have contributed interests in 12 properties to unconsolidated entities, which generated approximately$242.4 million of gross proceeds sinceJuly 2017 . In addition to generating liquidity upon closing, these entities also reduce our development expenditures in proportion to our partners' interests in the unconsolidated entities; and
•
Unconsolidated entities debt. We may incur property-level debt in new or existing unconsolidated entities, including construction financing for properties under development and longer-term mortgage debt for stabilized properties.
Subsequent toDecember 31, 2022 , we sold 18 assets for gross proceeds of$238.6 million . As ofMarch 6, 2023 , we had 17 assets under contract for sale with no due diligence contingencies for total anticipated proceeds of$326.7 million and 5 assets under contract for sale subject to customary due diligence for total anticipated proceeds of$39.6 million . All asset sales are subject to closing conditions. Additionally, we are currently negotiating the pricing on three put options that we have exercised. We anticipate proceeds from the exercise of the put options will be at least$90.0 million . As previously disclosed, onMay 5, 2020 , theOperating Partnership and Berkshire Hathaway entered into an amendment (the "Term Loan Amendment") to the Term Loan Agreement by and among theOperating Partnership and Berkshire Hathaway as initial lender and administrative agent that permits the deferral of payment of interest under the Term Loan Agreement if, as of the first day of each applicable month, (x) the amount of unrestricted and unencumbered (other than liens created under the Term Loan Agreement) cash on hand of theOperating Partnership and its subsidiaries, minus (y) the aggregate amount of anticipated necessary expenditures for such period (such sum, "Available Cash") is equal to or less than$30.0 million . In such instances, for each interest period, theOperating Partnership is obligated to make payments of interest in an amount equal to the difference between (i) Available Cash and (ii)$20.0 million (provided that such payment shall not exceed the amount of current interest otherwise due under the Term Loan Agreement). Any deferred interest shall accrue interest at 2.0% in excess of the then applicable interest rate and shall be due and payable onJuly 31, 2023 ; provided, that theOperating Partnership is required to pay any deferred interest from Available Cash in excess of$30.0 million (unless otherwise agreed to by the administrative agent under the Term Loan Agreement in its sole discretion). In addition, repayment of any outstanding deferred interest is a condition to any borrowings under the$400.0 million incremental funding facility under the Term Loan Agreement (the "Incremental Funding Facility"). Additionally, the Term Loan Amendment provides that the administrative agent and the lenders express their continued support for asset dispositions, subject to the administrative agent's right to approve the terms of individual transactions due to the occurrence of a Financial Metric Trigger Event, as such term is defined under the Term Loan Agreement. Our Term Loan Facility includes a$400.0 million Incremental Funding Facility (as defined below), access to which is subject to rental income from non-Sears Holdings tenants of at least$200.0 million , on an annualized basis and after giving effect to SNO leases expected to commence rent payment within 12 months, which we have not yet achieved. There is no assurance of the Company's ability to access the Incremental Funding Facility. - 45 - -------------------------------------------------------------------------------- OnNovember 24, 2021 , theOperating Partnership , the Company and Berkshire Hathaway entered into an amendment (the "Second Term Loan Amendment") to the Term Loan Agreement by and among theOperating Partnership , the Company and Berkshire Hathaway to which theOperating Partnership , the Company and Berkshire Hathaway mutually agreed that (i) the "make whole" provision in the Senior Secured Term Loan Agreement shall not be applicable to prepayments of principal; and (ii) the Senior Secured Term Loan Agreement, as amended for (i) above, may at theOperating Partnership's election be extended for two years fromJuly 31, 2023 toJuly 31, 2025 (the "Maturity Date") if its principal has been reduced to$800 million by the Maturity Date. In all other respects, the Term Loan Agreement remains unchanged. OnJune 16, 2022 , theOperating Partnership , the Company and Berkshire Hathaway entered into an amendment (the "Third Term Loan Amendment") to the Term Loan Agreement by and among theOperating Partnership , the Company and Berkshire Hathaway to which theOperating Partnership , the Company and Berkshire Hathaway mutually agreed that notwithstanding anything to the contrary in the asset sale covenant, the parent, borrower, and their respective subsidiaries will be permitted without the consent of the administrative agent to sell, transfer, or otherwise dispose of properties (including but not limited to properties or equity interests of any subsidiary) to unaffiliated third parties for no less than fair market value, provided that the borrower deposits all net proceeds received into a controlled account and the use of such net proceeds will be subject to the terms and conditions of the Term Loan Agreement, including but not limited to the restricted payments and investments/loans covenants. ThroughDecember 31, 2022 , we repaid$570.0 million against the principal of the Term Loan Facility. Our outstanding balance as ofDecember 31, 2022 , was$1.03 billion . Subsequent toDecember 31, 2022 , we made a$230.0 million prepayment on the Term Loan Facility, bringing our outstanding balance to$800 million as ofMarch 6, 2023 . Pursuant to the terms of the Term Loan Facility, by reducing our outstanding principal balance to$800 million , the maturity date for the Term Loan Facility was extended for two years toJuly 31, 2025 . In addition to the anticipated proceeds totaling$366.3 million of assets under contract referenced above, we have accepted offers and are currently negotiating definitive purchase and sale agreements on 13 assets with offers of approximately$98.0 million , and expect minimum proceeds of$90.0 million from the exercise of three put options. The availability of liquidity from the above sources or initiatives is subject to a range of risks and uncertainties, including those discussed under "Risk Factors-We have ongoing capital needs and may not be able to obtain additional financing or other sources of funding on acceptable terms."
Term Loan Facility
OnJuly 31, 2018 , theOperating Partnership , as borrower, and the Company, as guarantor, entered into a Senior Secured Term Loan Agreement (as amended, the "Term Loan Agreement") providing for a$2.0 billion term loan facility (the "Term Loan Facility") withBerkshire Hathaway Life Insurance Company of Nebraska ("Berkshire Hathaway") as lender and Berkshire Hathaway as administrative agent. The Term Loan Facility provided for an initial funding of$1.6 billion at closing (the "Initial Funding") and includes a$400 million incremental funding facility (the "Incremental Funding Facility"). The Term Loan Facility matures onJuly 31, 2023 , with the ability to extend based on meeting certain criteria. Funded amounts under the Term Loan Facility bear interest at an annual rate of 7.0% and unfunded amounts under the Incremental Funding Facility are subject to an annual fee of 1.0% until drawn. The Company prepays the annual fee and amortizes the expense to interest expense on the consolidated statements of operations. The Company's ability to access the Incremental Funding Facility is subject to (i) the Company achieving rental income from non-Sears Holdings tenants, on an annualized basis (after giving effect to SNO Leases expected to commence rent payment within 12 months) for the fiscal quarter ending prior to the date of incurrence of the Incremental Funding Facility, of not less than$200 million , (ii) the Company's good faith projection that rental income from non-Sears Holdings tenants (after giving effect to SNO Leases expected to commence rent payment within 12 months) for the succeeding four consecutive fiscal quarters (beginning with the fiscal quarter during which the incremental facility is accessed) will be not less than$200 million , and (iii) the repayment by theOperating Partnership of any deferred interest permitted under the Term Loan Amendment as further described below. As ofDecember 31, 2022 , the Company has not yet achieved the requirements to access the Incremental Funding Facility. The Term Loan Facility is guaranteed by the Company and, subject to certain exceptions, is required to be guaranteed by all existing and future subsidiaries of theOperating Partnership . The Term Loan Facility is secured on a first lien basis by a pledge of the capital stock of the direct subsidiaries of theOperating Partnership and the guarantors, including its joint venture interests, except as prohibited by the organizational documents of such entities or any joint venture agreements applicable to such entities. - 46 - -------------------------------------------------------------------------------- The Term Loan Facility includes certain financial metrics to govern springing collateral requirements and certain covenant exceptions set forth in the Term Loan Agreement, including: (i) a total fixed charge coverage ratio of not less than 1.20 to 1.00 for each fiscal quarter; (ii) an unencumbered fixed charge coverage ratio of not less than 1.30 to 1.00 for each fiscal quarter; (iii) a total leverage ratio of not more than 65%; (iv) an unencumbered ratio of not more than 60%; and (v) a minimum net worth of at least$1.2 billion . Any failure to satisfy any of these financial metrics limits the Company's ability to dispose of assets via sale or joint venture and triggers the springing mortgage and collateral requirements but will not result in an event of default. The Term Loan Facility also includes certain limitations relating to, among other activities, the Company's ability to: sell assets or merge, consolidate or transfer all or substantially all of its assets; incur additional debt; incur certain liens; enter into, terminate or modify certain material leases and/or the material agreements for the Company's properties; make certain investments (including limitations on joint ventures) and other restricted payments; pay distributions on or repurchase the Company's capital stock; and enter into certain transactions with affiliates. The Term Loan Facility contains customary events of default, including (subject to certain materiality thresholds and grace periods) payment default, material inaccuracy of representations or warranties, and bankruptcy or insolvency proceedings. If there is an event of default, the lenders may declare all or any portion of the outstanding indebtedness to be immediately due and payable, exercise any rights they might have under any of the Term Loan Facility documents, and require the Company to pay a default interest rate on overdue amounts equal to 2.0% in excess of the then applicable interest rate. As ofDecember 31, 2022 , the Company was not in compliance with certain of the financial metrics described above. As a result, the Company was previously required to receive the consent of Berkshire Hathaway to dispose of assets via sale or contribution to another entity and, as ofJune 16, 2022 , Berkshire Hathaway had provided such consent for all such transactions submitted for approval. The Third Term Loan Amendment (defined below) executed onJune 16, 2022 eliminates this requirement. The Company believes it is in compliance with all other terms and conditions of the Term Loan Agreement. The Company incurred$2.1 million of debt issuance costs related to the Term Loan Facility which are recorded as a direct deduction from the carrying amount of the Term Loan Facility and amortized over the term of the Term Loan Agreement. As ofDecember 31, 2022 and 2021, the unamortized balance of the Company's debt issuance costs were$0.2 million and$0.7 million , respectively. OnMay 5, 2020 , theOperating Partnership and Berkshire Hathaway entered into an amendment (the "Term Loan Amendment") to the Term Loan Agreement by and among theOperating Partnership and Berkshire Hathaway as initial lender and administrative agent that permits the deferral of payment of interest under the Term Loan Agreement if, as of the first day of each applicable month, (x) the amount of unrestricted and unencumbered (other than liens created under the Term Loan Agreement) cash on hand of theOperating Partnership and its subsidiaries, minus (y) the aggregate amount of anticipated necessary expenditures for such period (such sum, "Available Cash") is equal to or less than$30.0 million . In such instances, for each interest period, theOperating Partnership is obligated to make payments of interest in an amount equal to the difference between (i) Available Cash and (ii)$20.0 million (provided that such payment shall not exceed the amount of current interest otherwise due under the Term Loan Agreement). Any deferred interest shall accrue interest at 2.0% in excess of the then applicable interest rate and shall be due and payable onJuly 31, 2023 ; provided, that theOperating Partnership is required to pay any deferred interest from Available Cash in excess of$30.0 million (unless otherwise agreed to by the administrative agent under the Term Loan Agreement in its sole discretion). In addition, repayment of any outstanding deferred interest is a condition to any borrowings under the$400 million incremental funding facility under the Term Loan Agreement. The Company has paid all interest due under the Term Loan Agreement and has not deferred any interest as permitted under the Term Loan Amendment. Additionally, the Term Loan Amendment provides that the administrative agent and the lenders express their continued support for asset dispositions, subject to the administrative agent's right to approve the terms of individual transactions due to the occurrence of a Financial Metric Trigger Event, as such term is defined under the Term Loan Agreement. OnNovember 24, 2021 , theOperating Partnership , the Company and Berkshire Hathaway entered into an amendment (the "Second Term Loan Amendment") to the Term Loan Agreement by and among theOperating Partnership , the Company and Berkshire Hathaway to which theOperating Partnership , the Company and Berkshire Hathaway mutually agreed that (i) the "make whole" provision in the Senior Secured Term Loan Agreement shall not be applicable to prepayments of principal ; and (ii) the Senior Secured Term Loan Agreement, as amended for (i) above, may at theOperating Partnership's election be extended for two years fromJuly 31, 2023 toJuly 31, 2025 (the "Maturity Date") if its principal has been reduced to$800 million by the Maturity Date. In all other respects, the Senior Secured Term Loan Agreement remains unchanged. OnJune 16, 2022 , theOperating Partnership , the Company and Berkshire Hathaway entered into an amendment (the "Third Term Loan Amendment") to the Term Loan Agreement by and among theOperating Partnership , the Company and Berkshire Hathaway to which theOperating Partnership , the Company and Berkshire Hathaway mutually agreed that notwithstanding anything to the contrary in the asset sale covenant, the parent, borrower, and their respective subsidiaries will be permitted without the consent of the administrative agent to sell, transfer, or otherwise dispose of properties (including but not limited to properties or equity interests of any subsidiary) to unaffiliated third parties for no less than fair market value, provided that the borrower deposits all net proceeds received into a controlled account and the use of such net proceeds will be subject to the terms and conditions of the Term Loan Agreement, including but not limited to the restricted payments and investments/loans covenants. - 47 - -------------------------------------------------------------------------------- As ofDecember 31, 2022 , the Company has paid down$570 million towards the Term Loan's unpaid principal balance. The aggregate principal amount outstanding under the Term Loan Facility as ofDecember 31, 2022 was$1.03 billion . Subsequent toDecember 31, 2022 , the Company paid down an additional$230.0 million on the Term Loan Facility, reducing the unpaid principal balance to$800 million . Pursuant to the terms of the Term Loan Facility, by reducing our outstanding principal balance to$800 million , the maturity date for the Term Loan Facility was extended for two years toJuly 31, 2025 . The Company currently anticipates it will continue to use sales ofConsolidated Properties as the primary source of capital to repay principal on the Term Loan and its obligations. Preferred Shares As ofDecember 31, 2022 , we had 2,800,000 7.00% Series A Cumulative Redeemable Preferred Shares (the "Series A Preferred Shares") outstanding. As ofDecember 14, 2022 , we may redeem any or all of the Series A Preferred Shares at$25.00 per share plus any accrued and unpaid dividends.
Dividends and Distributions
The Company'sBoard of Trustees did not declare dividends on the Company's Class A common shares during 2022. The last dividend on the Company's Class A and C common shares that theBoard of Trustees declared was onFebruary 25, 2019 , which was paid onApril 11, 2019 to shareholders of record onMarch 29, 2019 .
The Company's
Declaration Date Record Date Payment Date Preferred Share 2023 February 15 March 31 April 17 $ 0.43750 2022 November 1 December 30 January 16, 2023 $ 0.43750 July 26 September 30 October 17 0.43750 April 26 June 30 July 15 0.43750 February 16 March 31 April 15 0.43750 2021 October 26 December 31 January 14, 2022 $ 0.43750 July 27 September 30 October 15 0.43750 April 27 June 30 July 15 0.43750 February 23 March 31 April 15 0.43750
Our
Minimum Cash Requirements Our contractual obligations relate to our Term Loan Facility and non-cancelable operating leases in the form of a ground lease at one of our properties, as well as an operating lease for our corporate office. Information concerning our obligations and commitments to make future payments under contracts for these loan and lease agreements as ofDecember 31, 2022 is aggregated in the following table (in thousands): Payments due by Period Within After Minimum Cash Requirements Total 1 year 1 - 3 years 3 -5 years 5 years Long-term debt (1)(2)$ 1,075,745 $ 1,075,745 $ - $ - $ - Operating leases 8,687 1,089 3,518 2,100 1,980 Total$ 1,084,432 $ 1,076,834 $ 3,518 $ 2,100 $ 1,980 (1) Includes expected interest payments. (1) Due to the reduction of the Term Loan Facility to$800 million as ofFebruary 2, 2023 , the maturity date was extended toJuly 31, 2025 . - 48 -
--------------------------------------------------------------------------------
Capital Expenditures
During the year endedDecember 31, 2022 the Company invested$99.3 million in our consolidated development and operating properties and an additional$25.5 million into our unconsolidated joint ventures. The Company also continued to advance its previously underway premier projects inAventura, FL ,Santa Monica, CA , andLa Jolla, CA , and its pipeline of such projects, including its two previously announced multifamily projects, inRedmond, WA , andDallas, TX , each of which represents the first phase of larger, mixed-use developments. A premier mixed use project inSan Diego, CA and a multifamily project inLynwood , WA, both in unconsolidated entities, opened in the fourth quarter of 2021. During the year endedDecember 31, 2022 , we incurred no maintenance capital expenditures and approximately$2.6 million during the year endedDecember 31, 2021 that were not associated with retenanting and redevelopment projects.
Cash Flows for the Year Ended
The following table summarizes the Company's cash flow activities for the years
ended
Year Ended December 31,
2022 2021 $ Change
Net cash used in operating activities $ (117,923 ) $ (135,996 ) $ 18,073
Net cash provided by investing activities 586,079 260,707 325,372
Net cash used in financing activities (436,970 ) (161,212 )
(275,758 )
Cash Flows from Operating Activities
Significant components of net cash used in operating activities include:
-
In 2022, a decrease in rental income and a decrease in accounts payable, accrued expenses and other liabilities; and
- In 2021, a decrease in rental income and a decrease in accounts payable, accrued expenses and other liabilities, partially offset by a decrease in tenant and other receivables.
Cash Flows from Investing Activities
Significant components of net cash provided by investing activities include:
- In 2022,$643.3 million of net proceeds from the sale of real estate and$67.6 million of distributions and proceeds from the disposition of interests in unconsolidated entities offset by development of real estate of($99.3) million and investments in unconsolidated entities of($25.5) million ; and - In 2021,$381.4 million of net proceeds from the sale of real estate offset by development of real estate of($105.7) million and investments in unconsolidated entities of($38.6) million .
Cash Flows from Financing Activities
Significant components of net cash used in financing activities include:
-
In 2022,
- In 2021,($160.0) million cash repayment of Term Loan Facility principal, and($4.9) million cash payment of preferred dividends, partially offset by$4.0 million contributions from noncontrolling interest in other partnerships.
Litigation and Other Matters
In accordance with accounting standards regarding loss contingencies, the Company accrues an undiscounted liability for those contingencies where the incurrence of a loss is probable and the amount can be reasonably estimated, and the Company discloses the amount accrued and the amount of a reasonably possible loss in excess of the amount accrued or discloses the fact that such a range of loss cannot be estimated. The Company does not record liabilities when the likelihood that the liability has been incurred is probable but the amount cannot be reasonably estimated, or when the liability is believed to be only reasonably possible or remote. In such cases, we disclose the nature of the contingency, and an estimate of the possible loss, range of loss, or disclose the fact that an estimate cannot be made. During the Sears Holdings bankruptcy proceedings, theOfficial Committee of Unsecured Creditors of Sears Holdings (the "UCC") and others, including the Restructuring Subcommittee of the Board of Directors of Sears Holdings, alleged that the 2015 Transactions between us and Sears Holdings constituted a fraudulent conveyance, and indicated an intent to pursue litigation challenging the 2015 Transactions on that and other grounds. The approval of theHoldco Acquisition by theBankruptcy Court expressly preserved claims relating to the 2015 Transactions between us and Sears Holdings. - 49 - -------------------------------------------------------------------------------- OnApril 18, 2019 , at the direction of the Restructuring Sub-Committee of the Restructuring Committee of the Board of Directors of Sears Holdings, Sears Holdings, Sears, Roebuck & Co.,Sears Development Co. ,Kmart Corporation , andKmart of Washington, LLC filed a lawsuit (the "Litigation") in theUnited States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court ") against, among others,Edward S. Lampert ,ESL Investments, Inc. and certain of its affiliates and investors,Fairholme Capital Management, L.L.C. , certain members of the Sears Holdings board of directors, and the Company, theOperating Partnership , and certain of our affiliates and subsidiaries (the Company, theOperating Partnership , and certain of our affiliates and subsidiaries collectively, the "Seritage Defendants"). The Litigation is dual captioned as In re: Sears Holdings Corporation, et al., Case No. 18-23538 (RDD) and Sears Holdings Corporation et al., v. Lampert et al., Case No. 19-08250 (RDD). The Litigation alleged, among other things, that certain transactions undertaken by Sears Holdings since 2011 constituted actual and/or constructive fraudulent transfers and/or illegal dividends by Sears Holdings. The challenged transactions include theJuly 2015 transactions giving rise to Seritage, the execution of the OriginalMaster Lease with Sears Holdings, and the acquisition of real estate from Sears Holdings. The Litigation alleged, among other things, that the real estate acquired by Seritage from Sears Holdings inJuly 2015 was worth at least$649 to$749 million more than the purchase price paid. The Litigation sought as relief, among other things, declaratory relief, avoidance of the allegedly actual and/or constructive fraudulent transfers and either (i) rescission of the transfers of real estate from Sears Holdings to Seritage in 2015 and return of the proceeds of the transactions between Sears Holdings and Seritage, or, in the alternative, (ii) payment by Seritage to Sears Holdings of damages at least equal to the value of the transferred property. OnOctober 15, 2019 , theBankruptcy Court entered an order (the "Confirmation Order") confirming the Modified Second Amended Joint Chapter 11 Plan of Sears Holdings and its affiliated debtors (the "Chapter 11 Plan"). Pursuant to the terms of the Confirmation Order, upon the effective date of the Chapter Plan, a liquidating trust would be formed, and the Litigation would vest in the liquidating trust. The Confirmation Order further provides that, prior to the effective date of the Chapter 11 Plan and the formation of the liquidating trust, the Litigation would be controlled by five litigation designees selected by Sears Holdings and the Unsecured Creditors' Committee (the "UCC"). For further information, refer to the Chapter 11 Plan, Confirmation Order and liquidating trust agreement, each of which has been publicly filed with theBankruptcy Court . OnFebruary 21, 2020 , the Seritage defendants filed a partial motion to dismiss seeking dismissal of the claims in the operative complaint in the Litigation relating to the release received in the Sears Holdings derivative litigation, unjust enrichment, and equitable subordination. OnMarch 15, 2021 , the Court consolidated the Litigation with a case captionedSears Holding Corp. et al. v.Andrew H. Tisch , et al., Case No. 20-07007 (RDD) (the "Shareholder Litigation," and, together with the Litigation, the "Consolidated Litigation"). The Shareholder Litigation was brought by the UCC, Sears Holdings Corporation, and Sears, Roebuck and Co., against certain shareholders of Sears Holdings or its related companies. Seritage was not named as a defendant in the Shareholder Litigation, which alleges, among other things, that certain transactions undertaken by Sears Holdings since 2014 (including theJuly 2015 transactions giving rise to Seritage, the execution of the OriginalMaster Lease with Sears Holdings, and the acquisition of real estate from Sears Holdings) constituted actual and/or constructive fraudulent transfers and/or illegal dividends.
On
OnAugust 9, 2022 , following the mediation, all of the parties to the Litigation and certain of the parties to the Shareholder Litigation (to which Seritage is not a defendant) entered into a settlement agreement pursuant to which the defendants paid to the Sears estate$175 million (of which the Seritage Defendants contributed approximately$35.0 million ) in exchange for dismissal of the Consolidated Litigation and for the full and final satisfaction and release of all claims in the Consolidated Litigation (including, in the case of the Seritage Defendants, any and all claims between the Seritage Defendants and the Sears estate in the Sears bankruptcy proceeding). OnSeptember 2, 2022 , theUnited States Bankruptcy Court for the Southern District of New York entered an order approving the settlement and, onOctober 18, 2022 , the Litigation was dismissed. While the Company believes that the claims against the Seritage Defendants in the Litigation were without merit, the Company entered into the settlement, without admitting any fault or wrongdoing, in order to avoid the continued imposition of legal defense costs, distraction, and the uncertainty and risk inherent in any litigation. The Company made a settlement payment of$35.5 million based on the Company's contributions to the settlement of the Litigation. This payment is recorded as litigation settlement in the consolidated statement of operations during the year endedDecember 31, 2022 . - 50 -
-------------------------------------------------------------------------------- OnMarch 2, 2021 , the Company brought a lawsuit inDelaware state court against the D&O Insurers. The Company's lawsuit is seeking, among other things, declaratory relief and money damages as a result of certain of the D&O Insurers refusal to pay certain costs and expenses related to the defense of the Litigation discussed above. Any amounts received from the insurers will offset the Seritage Defendants' contribution. The Company reached settlement agreements with two of the D&O Insurers for gross proceeds of$12.7 million . Subsequent toDecember 31, 2022 , the Company reached a settlement agreement with the other two D&O Insurers for gross proceeds of$11.6 million . The Company is subject, from time to time, to various legal proceedings and claims that arise in the ordinary course of business. While the resolution of such matters cannot be predicted with certainty, management believes, based on currently available information, the final outcome of such ordinary course legal proceedings and claims will not have a material effect on the consolidated financial position, results of operations or liquidity of the Company.
Critical Accounting Estimates
In preparing the consolidated financial statements, we have made estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Refer to the discussion of our accounting policies included in Note 2 to the audited consolidated financial statements in Part II, Item 8 of this Annual Report.
Real Estate Investments
The Company on a periodic basis, assesses whether there are indicators, including macroeconomic conditions, that the value of the real estate assets may be impaired. If an indicator is identified, management will estimate the real estate asset recoverability based on projected operating cash flows (undiscounted and unleveraged), taking into account the anticipated holding period and capitalization rates, to determine if the undiscounted cash flows are less than a real estate asset's carrying value. If the carrying value of an asset exceeds the undiscounted cash flows, an analysis is performed to determine the estimated fair value of the real asset. In estimating the fair value of an asset, various factors are considered, including expected future operating income, trends and leasing prospects including the effects of demand, competition, and other economic factors such as discount rates and market comparables. Changes in any estimates and/or assumptions, including the anticipated holding period, could have a material impact on the projected operating cash flows. If management determines that the carrying value of a real estate asset is impaired, a loss will be recorded for the excess of its carrying amount over its estimated fair value. The Company recognized$126.9 million and$95.8 million in impairment losses for the years endedDecember 31, 2022 and 2021.
Investments in Unconsolidated Entities
On a periodic basis, management assesses whether there are indicators, including the operating performance of the underlying real estate and general market conditions which include macroeconomic conditions that the value of the Company's investments in unconsolidated entities may be impaired. An investment's value is impaired if management's estimate of the fair value of the Company's investment is less than its carrying value and such difference is deemed to be other-than-temporary. To the extent impairment has occurred, the loss is measured as the excess of the carrying amount of the investment over its estimated fair value. The Company recorded$35.6 million in other-than-temporary impairment losses in investments in unconsolidated entities for the year endedDecember 31, 2022 . No such impairment losses were recognized for the year endedDecember 31, 2021 . Revenue Recognition We evaluate on an individual lease basis whether it is probable that we will collect substantially all amounts due from our tenants and recognize changes in the collectability assessment of our operating leases as adjustments to rental revenue. Management exercises judgment in assessing collectability of tenant receivables and considers payment history, current credit status, publicly available information about the financial condition of the tenant, and other factors. Our assessment of the collectability of tenant receivables can have a significant impact on the rental revenue recognized in our consolidated statements of income.
Recent Accounting Pronouncements
Refer to Note 2 of the consolidated financial statements for recently issued accounting pronouncements.
- 51 -
--------------------------------------------------------------------------------Non-GAAP Supplemental Financial Measures and Definitions
The Company makes reference to NOI and Total NOI which are financial measures that include adjustments to GAAP.
Net Operating Income ("NOI") and Total NOI
NOI is defined as income from property operations less property operating expenses. Other real estate companies may use different methodologies for calculating NOI, and accordingly, the Company's depiction of NOI may not be comparable to other real estate companies. 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 ofUnconsolidated Properties . The Company believes this form of presentation offers insights into the financial performance and condition of the Company as a whole given our ownership ofUnconsolidated Properties that are accounted for under GAAP using the equity method. The Company also considers NOI and 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.
Due to the adjustments noted, NOI and Total NOI should only be used as an alternative measure of the Company's financial performance.
Reconciliation of Non-GAAP Financial Measures to GAAP Financial Measures
Neither NOI nor Total NOI 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 are presented below on a comparative basis for all periods.
The following table reconciles NOI and Total NOI to GAAP net loss for the years
ended
Year Ended December 31,
NOI and Total NOI 2022 2021 2020
Net loss $ (120,097 ) $ (38,985 ) $ (152,964 )
Termination fee income (369 ) (3,378 ) (7,604 )
Management and other fee income (2,446 ) (1,032 ) (293 )
Depreciation and amortization 41,114 51,199 95,997
General and administrative expenses 47,634 41,949 28,849
Litigation settlement 35,533 - -
Equity in loss of Unconsolidated
Properties 72,080 9,226 4,712
Loss (gain) on sale of interests in
Unconsolidated Properties 677 - (1,758 )
Gain on sale of real estate (211,936 ) (221,681 ) (88,555 )
Impairment of real estate assets 126,887 95,826 64,108
Interest and other income (37,753 ) (9,285 ) (3,394 )
Interest expense 86,730 107,975 91,316
Income taxes 466 196 252
Straight-line rent adjustment (1,271 ) (2,269 ) 4,983
Above/below market rental
income/expense 223 176 (1,793 )
NOI $ 37,472 $ 29,917 $ 33,856
Unconsolidated entities (1)
NOI of Unconsolidated Properties (2) 7,785 6,942 6,122
Straight-line rent (1,017 ) (885 ) (681 )
Above/below market rental
income/expense 24 131 (713 )
Termination fee income (787 ) (588 ) (827 )
Total NOI $ 43,477 $ 35,517 $ 37,757
(1) Activity represents the Company's proportionate share of unconsolidated entity activity.
(2) NOI of Unconsolidated Properties excludes depreciation and amortization, gains, losses and
impairments and management and administrative costs.
- 52 ---------------------------------------------------------------------------------
© Edgar Online, source
