Seritage Growth Properties, a national owner and developer of retail, residential, and mixed-use properties, has been navigating a strategic shift aimed at maximizing value for its shareholders. The company's journey has been marked by a series of strategic decisions, asset sales, and debt reduction efforts that have reshaped its portfolio and financial position.
Business Overview
Seritage was formed in June 2015 as a real estate investment trust (REIT), acquiring a portfolio of 235 Sears and Kmart stores and 31 wholly-owned Sears properties in a $2.7 billion transaction. This acquisition was funded through a rights offering to Sears Holdings shareholders. In its early years, Seritage focused on redeveloping and re-tenanting these properties, aiming to replace Sears with a diversified mix of retail, restaurant, and other commercial tenants. This process proved challenging, particularly as Sears struggled financially and ultimately filed for bankruptcy in 2018.
To strengthen its financial position, Seritage initiated a strategic capital recycling program in 2017, selling properties and interests in joint ventures. By the end of 2021, the company had sold 90 consolidated properties and 15 unconsolidated properties, generating approximately $986 million and $278 million in gross proceeds, respectively. This asset sale strategy continued into 2022, with the company selling an additional 40 consolidated properties and 8 unconsolidated properties, generating $438 million and $85 million in gross proceeds, respectively, through October 2022.
In March 2022, Seritage made a pivotal decision to terminate its REIT status and transition to a taxable C-corporation, effective January 1, 2022. This strategic move provided Seritage with greater flexibility in managing its asset portfolio and enhancing its financial position. Since the announcement of this transition, the company has executed a comprehensive plan of asset sales, generating approximately $1.7 billion in gross proceeds and using the funds to repay over $1.2 billion in debt.
As of September 30, 2024, Seritage's portfolio consisted of interests in 21 properties, comprising approximately 2.7 million square feet of gross leasable area (GLA) or build-to-suit leased area, and 342 acres of land. This includes approximately 1.5 million square feet of GLA and 208 acres held by 12 consolidated properties, and 1.2 million square feet of GLA and 134 acres held by 9 unconsolidated properties. The portfolio is diversified across 8 different states in the United States.
In March 2021, the Company filed a lawsuit against several of its D&O insurance providers related to the Sears Holdings bankruptcy litigation, which was settled in 2022 and 2023 for a total of $24.3 million. Additionally, on July 1, 2024, a purported shareholder filed a class action lawsuit against the Company, the CEO, and the CFO, alleging violations of federal securities laws related to the Company's internal controls over impairment assessments and disclosures about real estate assets. The Company intends to vigorously defend against these allegations.
Financial Snapshot
As of the company's most recent reporting period, Seritage had $130.8 million in cash on hand, including $15.9 million in restricted cash. For the first quarter of 2024, the company reported a net loss of $20.2 million, or $0.36 per share. This loss, however, was accompanied by a total net operating income (NOI) of $2.1 million, highlighting the ongoing efforts to optimize the company's operational performance.
Financials
During the first quarter, Seritage generated $48.8 million from asset sales, including $34.0 million from a multi-tenant retail asset. The company also made $30.0 million in principal repayments on its term loan facility, further reducing its debt burden. Looking ahead, Seritage has assets under contract expected to generate an additional $30.1 million in gross proceeds.
For the fiscal year 2023, Seritage reported annual revenue of $107.1 million, with a net loss of $74.0 million. The company's annual operating cash flow and free cash flow both stood at -$117.9 million.
In the most recent quarter (Q3 2024), Seritage reported revenue of $3.3 million and a net loss of $22.0 million. The decrease in revenue compared to the prior year quarter was primarily driven by the Company recognizing rental income on a cash basis for certain tenants at Aventura that are negotiating rent relief, as well as the sale of properties since Q3 2023. The decrease in net income was primarily due to $5.7 million in abandoned project costs expensed during the quarter.
For the three months ended September 30, 2024, the company reported total rental income of $2.9 million, which included $2.9 million from in-place retail leases, offset by a $5,000 negative impact from straight-line rent adjustments. During the nine months ended September 30, 2024, Seritage recognized $12.8 million in total rental income, with $13.0 million from in-place retail leases, partially offset by a $251,000 negative impact from straight-line rent adjustments.
The company also reported gains on the sale of real estate of $4.2 million and $7.4 million for the three and nine month periods ended September 30, 2024, respectively.
Liquidity
As of September 30, 2024, Seritage maintained a cash position of $85.6 million in cash and cash equivalents and $12.6 million in restricted cash. This liquidity provides the company with a financial buffer as it continues to execute its strategic initiatives and navigate market challenges.
The company's debt-to-equity ratio stands at 0.67, while its current ratio and quick ratio are both 0.44. Seritage also has a $400 million incremental funding facility under its $1.6 billion term loan agreement, which it has not yet accessed as it has not met the requirements.
Navigating Challenges and Opportunities
Seritage's strategic transition has not been without its challenges. The company has had to navigate a complex economic environment, including inflationary pressures, rising interest rates, and evolving consumer preferences. These factors have influenced the company's asset sales, development projects, and tenant negotiations.
Despite these headwinds, Seritage has demonstrated resilience and adaptability. The company's focus on streamlining its portfolio and strengthening its balance sheet has positioned it to capitalize on emerging opportunities. As the retail and real estate landscape continues to evolve, Seritage is well-poised to identify and execute on value-enhancing initiatives.
Shareholder Value Creation
Seritage's unwavering commitment to enhancing shareholder value is evident in its strategic actions. The asset sales and debt reduction initiatives have improved the company's financial flexibility, allowing it to explore a range of options to further optimize its capital structure and unlock value.
In March 2022, the Company's Board of Trustees commenced a strategic review process to enhance shareholder value. In October 2022, shareholders approved a plan of sale to allow the Board to sell all of the Company's assets, distribute the net proceeds to shareholders, and dissolve the Company. This decision underscores Seritage's commitment to maximizing returns for its investors.
Looking ahead, Seritage remains dedicated to executing its plan of sale, while simultaneously evaluating potential refinancing or extension of its term loan facility. The company's prudent management of its asset portfolio and financial resources has instilled confidence in its ability to navigate the current market environment and capitalize on emerging opportunities.
Conclusion
Seritage Growth Properties has embarked on a transformative journey, transitioning from a REIT to a C-corporation and executing a comprehensive plan of asset sales and debt reduction. The company's focus on streamlining its portfolio and strengthening its balance sheet has positioned it to navigate the evolving real estate landscape and create value for its shareholders. As Seritage continues to navigate the challenges and seize the opportunities that lie ahead, investors will be closely monitoring the company's progress and its ability to enhance long-term shareholder value.