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 2019 items and year-over-year comparisons between 2020 and 2019 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, 2020 , that was filed with theSecurities and Exchange Commission onMarch 15, 2021 . 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 We are principally engaged in the ownership, development, redevelopment, management, sale and leasing of diversified retail and mixed-use properties throughoutthe United States . As ofDecember 31, 2021 , our portfolio consisted of interests in 162 properties comprised of approximately 19.2 million square feet of GLA or build-to-suit leased area, approximately 600 acres held for or under development and approximately 9.4 million square feet or approximately 800 acres to be disposed of. The portfolio consists of approximately 15.4 million square feet of GLA held by 137Consolidated Properties and 3.9 million square feet of GLA held by 25Unconsolidated Properties . In the second quarter of 2021, we announced an organizational restructuring and in conjunction commenced a portfolio review resulting in the modification of the business plans for certain assets. We continue to evaluate our strategy and at this time, we expect to reposition our portfolio into three business lines: residential developments, premier mixed-use assets, and multi-tenant retail destinations.
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, 2021 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, 2021 , we had collected 97% of rental income for the year endedDecember 31, 2021 , and agreed to defer an additional 1%. 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.
OnMarch 1, 2022 , the Company announced thatMr. Lampert retired as its Chairman and resigned from theBoard of Trustees effectiveMarch 1, 2022 , and that each of Messrs.David S. Fawer andThomas M. Steinberg , members of theBoard of Trustees , notified theBoard of Trustees that he would not stand for reelection as a trustee. Messrs. Fawer's and Steinberg's terms will each end at the Company's 2022 annual meeting of shareholders.
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 to oversee the process. The Special Committee has retained a financial advisor. The Company is in the early stages of the strategic review process and its current intention is not to disclose or comment on interim developments with respect to the process. There can be no assurance that the review process will result in any transaction or any strategic change at this time. 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." - 49 - --------------------------------------------------------------------------------
During the year endedDecember 31, 2021 , the Company sold 21 properties, plus additional outparcels, and generated gross proceeds of$395.4 million and also contributed a property to an unconsolidated entity that generated an additional$30.0 million of gross proceeds.
As of
Effects of Natural Disasters The Company assessed the impact of the natural disasters that occurred during the year endedDecember 31, 2021 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.
Impairment of real estate assets and investments in unconsolidated entities
In the second quarter of 2021, we announced an organizational restructuring and in conjunction commenced a portfolio review resulting in the modification of the business plans for certain assets. 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$95.8 million of impairment losses in the year endedDecember 31, 2021 , which are included in impairment on real estate assets within the condensed 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. - 50 - --------------------------------------------------------------------------------
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,
2021 2020 $ Change % Change
Revenue
Rental income $ 115,651 $ 116,202 $ (551 ) 0 %
Expenses
Property operating $ 45,007 $ 41,164 $ 3,843 9 %
Real estate taxes 35,256 36,768 (1,512 ) -4 %
Depreciation and amortization 51,199 95,997 (44,798 ) -47 %
General and administrative 41,949 28,849 13,100 45 %
Gain on sale of real estate 221,681 88,555 133,126 150 %
Gain on sale of interests in 1,758 (1,758 ) -100 %
unconsolidated entities -
Impairment on real estate (95,826 ) (64,108 ) (31,718 ) 49 %
assets
Equity in loss of (9,226 ) (4,712 ) (4,514 ) 96 % unconsolidated entities Interest and other income 9,285 3,394 5,891 174 % Interest expense (107,975 ) (91,316 ) (16,659 ) 18 % Rental Income The following table presents the results for rental income for the year endedDecember 31, 2021 , as compared to the corresponding period in 2020 (in thousands): Year Ended December 31, 2021 2020 % of Total % of Total Rental Income Rental Income Rental Income Rental Income $ Change Sears/Kmart $ 4,510 4 %$ 14,693 13 %$ (10,183 ) Diversified tenants 108,845 94 % 104,699 90 % 4,146 Straight-line rent 2,269 2 % (4,983 ) -5 % 7,252 Amortization of above/below market leases 27 0 % 1,793 2 % (1,766 ) Total rental income$ 115,651 100 %$ 116,202 100 %$ (551 ) The decrease of$10.2 million in Sears or Kmart rental income during 2021 is due to a reduction in the number of properties leased to Sears or Kmart under the Holdco Master Lease, as a result of termination activity. As ofMarch 11, 2021 , Sears no longer occupies space at any properties.
The increase of
The decrease of$7.3 million in straight-line rental income during 2021 was due primarily to (i) the accelerated amortization of straight-line rent receivables was a result of termination activity under the Holdco Master Lease and (ii) the reversal of previously recorded straight-line rent that the Company deemed was no longer probable of being collected. The decrease of$1.8 million in amortization of above/below market leases during 2021 was due primarily to the termination of certain leases previously acquired by the Company. - 51 -
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Property Operating Expenses and Real Estate Taxes
The following table presents the comparative results for property operating
expenses and real estate taxes for the year ended
Year Ended December 31,
2021 2020 $ Change % Change
Property operating expenses $ 45,007 $ 41,164 $ 3,843 9 %
Real estate taxes 35,256 36,768 (1,512 ) -4 %
The increase of $3.8 million in property operating expense for the year ended
December 31, 2021 was due primarily to an increase in utility and certain common
area maintenance expenses at properties for which Sears or Kmart paid such
expenses directly and a decrease in amounts capitalized.
The decrease of $1.5 million in real estate taxes for the year ended December
31, 2021 was due primarily to asset sales and partially offset by a decrease in
amounts capitalized due.
Depreciation and Amortization Expenses
The decrease of$44.8 million in depreciation and amortization expenses for the year endedDecember 31, 2021 was due primarily to a decrease of$23.3 million in accelerated amortization from terminations and$21.5 million in lower net scheduled depreciation.
Accelerated amortization results from the recapture of space from, or
termination of space by
General and Administrative Expenses
General and administrative expenses consist of personnel costs, including share-based compensation, professional fees, office expenses and overhead expenses.
The$13.1 million increase was primarily related to a$5.5 million increase in severance and restructuring costs, an increase in share-based compensation as a result of forfeitures and reversals of the bonus accrual related to the resignations of our former chief executive officer and chief financial officer in 2020, and decreased capitalized wages. This was partially offset by a$1.0 million decrease in legal fees related to our litigation and reduced asset management fees.
Gain on Sale of Real Estate
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.
Impairment of Real Estate Assets
During 2021, the Company recognized
Interest Expense
The increase of$16.7 million in interest expense for the year endedDecember 31, 2021 was driven by a decrease in amounts capitalized due to a decrease in development activity and an increase of costs incurred related to one-time mortgage recording costs. - 52 -
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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, 2021 and the Company recorded net
operating cash outflows of $136.0 million . Additionally, the Company's generated
investing cash inflows of $260.7 million during the year ended December 31,
2021 , which were driven by asset sales and partially offset by development
expenditures.
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, 2021 , we have sold 90Consolidated Properties and generated approximately$986.8 million of gross proceeds since we began our capital recycling program inJuly 2017 ;
•
Sales of interests inUnconsolidated Properties . As ofDecember 31, 2021 , we have sold our interests in 15Unconsolidated Properties and generated approximately$278.1 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, 2021 , 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;
•
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; and
•
Other credit and capital markets transactions. We may raise additional capital through the public or private issuance of debt securities, common or preferred equity or other instruments convertible into or exchangeable for common or preferred equity.
As of
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. The timing of our ability to access the Incremental Funding Facility. 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-Real estate investments are relatively illiquid" and "Risk Factors-We have ongoing capital needs and may not be able to obtain additional financing or other sources of funding on acceptable terms." - 53 - --------------------------------------------------------------------------------
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.
As of
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 Term Loan Amendment as further described below. 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. 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 1.00 to 1.00 for each fiscal quarter beginning with the fiscal quarter endingSeptember 30, 2018 through the fiscal quarter endingJune 30, 2021 , and not less than 1.20 to 1.00 for each fiscal quarter thereafter; (ii) an unencumbered fixed charge coverage ratio of not less than 1.05 to 1.00 for each fiscal quarter beginning with the fiscal quarter endingSeptember 30, 2018 through the fiscal quarter endingJune 30, 2021 , and not less than 1.30 to 1.00 for each fiscal quarter thereafter; (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, 2021 , the Company was not in compliance with certain of the financial metrics described above. As a result, the Company must receive the consent of Berkshire Hathaway to dispose of assets via sale or joint venture and, as ofDecember 31, 2021 , Berkshire Hathaway had provided such consent for all such transactions submitted for approval. There can be no assurance that the lender will consent to future dispositions of assets. During 2019, Berkshire Hathaway requested mortgages on a majority of the Company's portfolio which were recorded in accordance with the mortgage and collateral requirement (the "Lender Request"). There are no other changes to the terms and conditions of the Term Loan Facility, or the Company's ability to operate thereunder, as a result of providing mortgages against any of the Company's assets pursuant to the mortgage and collateral requirement. The Company accounted for the Lender Request transaction as a modification of debt as ofDecember 31, 2019 .
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 30, 2021 and 2020, the unamortized balance of the Company's debt issuance costs were$0.7 million and$1.1 million , respectively. - 54 - -------------------------------------------------------------------------------- OnMay 5, 2020 , theOperating Partnership and Berkshire Hathaway entered into the Term Loan Amendment 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 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 Facility. 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. If it has not been reduced to this limit by the Maturity Date, the loan will be due and payable on that date. In all other respects, the Senior Secured Term Loan Agreement remains unchanged. 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, 2021 , we had 2,800,000 7.00% Series A Cumulative Redeemable Preferred Shares (the "Series A Preferred Shares") outstanding. We may not redeem the Series A Preferred Shares beforeDecember 14, 2022 , except to preserve our status as a REIT or upon the occurrence of a Change of Control, as defined in the trust agreement addendums designating the Series A Preferred Shares. On and afterDecember 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 2021. 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 2022 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 2020 December 17 December 31 January 15, 2021 $ 0.43750 September 17 September 30 October 15 0.43750 June 9 June 30 July 15 0.43750 February 18 March 31 April 15 0.43750
Our
- 55 -
--------------------------------------------------------------------------------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, 2021 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)$ 1,610,538 $ 106,698 $ 1,503,840 $ - $ - Operating leases 9,731 1,044 3,412 3,250 2,025 Total$ 1,620,269 $ 107,742 $ 1,507,252 $ 3,250 $ 2,025 (1) Includes expected interest payments. Capital Expenditures During the year endedDecember 31, 2021 the Company invested$105.7 million in our consolidated development and operating properties and an additional$38.6 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, 2021 , the Company, together withFoulger-Pratt and The Howard Hughes Corporation (NYSE: HHC), announced that it had entered into an agreement to advance the development of a 4.0 million-square-foot mixed-use community to include a new hospital campus at itsAlexandria, VA property.
During the years ended
Cash Flows for the Year Ended
The following table summarizes the Company's cash flow activities for the years
ended
Year Ended December 31,
2021 2020 $ Change
Net cash (used in) operating activities $ (135,996 ) $ (47,314 ) $ (88,682 )
Net cash provided by investing activities 260,707 42,868 217,839
Net cash (used in) provided by financing
activities (161,212 ) 15,440 (176,652 )
Cash Flows from Operating Activities
Significant components of net cash used in operating activities include:
- 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. - In 2020, a decrease in rental income due primarily to a reduction in the number of properties leased to Sears or Kmart under the Holdco Master Lease, as a result of termination activity and an increase in tenant and other receivables due to Rent Deferral Agreements, partially offset by an increase in accounts payable, accrued expenses and other liabilities.
Cash Flows from Investing Activities
Significant components of net cash provided by (used in) investing activities include:
- 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 ; and - In 2020, development of real estate and property improvements of($246.8) million and investments in unconsolidated entities of$(62.9) million , partially offset by$331.9 million of net proceeds from the sale of real estate and$13.1 million of net proceeds from the sale of members' interests in two unconsolidated entities. - 56 - --------------------------------------------------------------------------------
Cash Flows from Financing Activities
Significant components of net cash provided by financing activities include:
- 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; -
In 2020,
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. We do 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. 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 alleges, 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 alleges, 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 seeks 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 will be formed, and the Litigation will 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 shall 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. Briefing and oral argument on the motions were completed inAugust 2020 , and the parties are awaiting a decision. The Company believes that the claims against the Seritage Defendants in the Litigation are without merit and intends to defend against them vigorously. - 57 - -------------------------------------------------------------------------------- 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. We believe that the claims against the Seritage Defendants in the Litigation are without merit and intend to defend against them vigorously. OnMarch 2, 2021 , the Company brought a lawsuit inDelaware state court againstQBE Insurance Corporation ,Endurance American Insurance Company ,Allianz Global Risks US Insurance Company andContinental Casualty Company , each of which are D&O insurance providers of the Company (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. 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$95.8 million and$64.1 million in impairment losses for the years endedDecember 31, 2021 and 2020. - 58 -
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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. No such impairment losses were recognized for the years endedDecember 31, 2021 or 2020.
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, the impact of COVID-19 on tenants' businesses, 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.
Non-GAAP Supplemental Financial Measures and Definitions
The Company makes reference to NOI, Total NOI, FFO and Company FFO 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 REITs may use different methodologies for calculating NOI, and accordingly, the Company's depiction of NOI may not be comparable to other REITs. 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.
Funds from Operations ("FFO") and Company FFO
FFO is calculated in accordance withNational Association of REITs ("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 costs, that it does not believe are representative of ongoing operating results.
Due to the adjustments noted, FFO and Company FFO should only be used as an alternative measure of the Company's financial performance.
- 59 -
--------------------------------------------------------------------------------Reconciliation of Non-GAAP Financial Measures to GAAP Financial Measures
None of NOI, Total NOI, FFO and 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 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 2021 2020 2019
Net loss $ (38,985 ) $ (152,964 ) $ (90,603 )
Termination fee income (3,378 ) (7,604 ) (5,545 )
Management and other fee income (1,032 ) (293 ) (1,598 )
Depreciation and amortization 51,199 95,997 104,581
General and administrative expenses 41,949 28,849 39,156
Equity in loss of Unconsolidated
Properties 9,226 4,712 17,994
Gain on sale of interests in
Unconsolidated Properties - (1,758 ) -
Gain on sale of real estate (221,681 ) (88,555 ) (71,104 )
Impairment on real estate assets 95,826 64,108 -
Interest and other income (9,285 ) (3,394 ) (6,824 )
Interest expense 107,975 91,316 94,519
Provision for income taxes 196 252 196
Straight-line rent adjustment (2,269 ) 4,983 (15,590 )
Above/below market rental
income/expense 176 (1,793 ) (495 )
NOI $ 29,917 $ 33,856 $ 64,687
Unconsolidated entities (1)
NOI of Unconsolidated Properties (2) 6,942 6,122 9,851
Straight-line rent (885 ) (681 ) (152 )
Above/below market rental
income/expense 131 (713 ) (1,719 )
Termination fee income (588 ) (827 ) -
Total NOI $ 35,517 $
37,757
(1) Activity represents the Company's proportionate share of unconsolidated entity activity. (2) NOI ofUnconsolidated Properties excludes depreciation and amortization, gains, losses and impairments and management and administrative costs. - 60 - --------------------------------------------------------------------------------
The following table reconciles FFO and Company FFO to GAAP net loss the years
ended
Year Ended December 31,
FFO and Company FFO 2021 2020 2019
Net loss $ (38,985 ) $ (152,964 ) $ (90,603 )
Real estate depreciation and
amortization 49,758 93,963 102,439
Real estate depreciation and amortization (Unconsolidated Properties) 13,771 9,108
30,375
Gain on sale of interests in Unconsolidated Properties - (1,758 ) - Gain on sale of real estate (221,681 ) (88,555 ) (71,104 ) Impairment on real estate assets 95,826 64,108 - Gains, losses and impairments of real estate (Unconsolidated Properties) 544 - - Dividends on preferred shares (4,900 ) (4,900 ) (4,900 ) FFO attributable to common shareholders and unitholders$ (105,667 ) $ (80,998 ) $ (33,793 ) Termination fee income (3,378 ) (7,604 ) (5,545 ) Unconsolidated Property termination fee income (588 ) (827 ) - Amortization of deferred financing costs 422 421 434 Mortgage recording costs 2,383 - 5,008 Severance costs 3,506 425 - Restructuring costs 2,009 - -
Company FFO attributable to common
shareholders and unitholders
FFO per diluted common share and unit$ (1.89 ) $ (1.45 ) $ (0.61 ) Company FFO per diluted common share and unit$ (1.81 ) $ (1.59 )
Weighted Average Common Shares and Units Outstanding Weighted average common shares outstanding 42,393 38,298
36,413
Weighted average OP Units outstanding 13,566 17,576
19,387
Weighted average common shares and
units outstanding 55,959 55,874 55,800
- 61 ---------------------------------------------------------------------------------
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