Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Certain statements contained herein constitute forward-looking statements as such term is defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are not guarantees of future performance. They represent our intentions, plans, expectations and beliefs and are subject to numerous assumptions, risks and uncertainties. Our future results, financial condition and business may differ materially from those expressed in these forward-looking statements. You can find many of these statements by looking for words such as “approximates,” “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “projects,” “would,” “may” or other similar expressions in this Quarterly Report on Form 10-Q. Many of the factors that will determine the outcome of these and our other forward-looking statements are beyond our ability to control or predict. For further discussion of factors that could materially affect the outcome of our forward-looking statements, see “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022. For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. You are cautioned not to place undue reliance on our forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. We do not undertake any obligation to release publicly any revisions to our forward-looking statements to reflect events or circumstances occurring after the date of this Quarterly Report on Form 10-Q. The following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto included in Part 1 of this Quarterly Report.
Overview
Prior to our adoption of the Plan for Sale, we were principally engaged in the ownership, development, redevelopment, disposition, management and leasing of diversified retail and mixed-use properties throughout the United States. We will continue to actively manage each remaining location until such time as each property is sold. As of March 31, 2023, our portfolio consisted of interests in 72 properties comprised of approximately 10.2 million square feet of gross leasable area (“GLA”) or build-to-suit leased area, approximately 2.6 million square feet of which is held by unconsolidated entities (the “Unconsolidated Properties”), approximately 157 acres held for or under development and approximately 5.3 million square feet or approximately 428 acres to be disposed of.
Review of Strategic Alternatives
On March 1, 2022, the Company announced that its Board 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 the Board of Trustees (the “Special Committee”) to oversee the process. The Special Committee has retained a 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 on October 24, 2022, at which time the Plan of Sale was approved by the shareholders, following our filing of a final proxy statement with the SEC on September 14, 2022. See Note 1 – Organization of the Notes to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q 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.
Impairment of Real Estate Assets and Investments in Unconsolidated Entities
In the first quarter of 2022, we announced a Review of Strategic Alternatives and during the second quarter determined that the best plan for all assets is to pursue sales. As a result of the foregoing, the Company’s anticipated holding periods with respect to certain assets has changed. This affected our view of recoverability of the carrying value of those assets over their respective holding periods and during the year ended December 31, 2022, $126.9 million of impairment was recorded. Due to agreeing to sell an asset below its carrying value, we have recognized $2.6 million of impairment losses during the three months ended March 31, 2023, which are included in impairment on real estate assets within the condensed consolidated statements of operations. We did not recognize any other-than-temporary impairment losses to our investments in unconsolidated entities during the three months ended March 31, 2023. We continue to evaluate our portfolio, including our development plans and offers received, which may result in additional impairments in future periods on our consolidated properties and investments in unconsolidated entities.
- 26 -
REIT Election
On March 31, 2022, the Company announced that its Board of Trustees, with the recommendation of the Special Committee, approved a plan to terminate the Company's REIT status and become a taxable C Corporation, effective for the year ended December 31, 2022. As a result, the Company is no longer required to operate under REIT rules, including the requirement to distribute at least 90% of REIT taxable income to its stockholders, which provides the Company with greater flexibility to use its free cash flow. Effective January 1, 2022, the Company is subject to federal and state income taxes on its taxable income at applicable tax rates and is no longer entitled to a tax deduction for dividends paid. The Company operated as a REIT since inception and through the 2021 tax year, and existing REIT requirements and limitations, including those established by the Company’s organizational documents, remained in place until December 31, 2021. Refer to Note 7 – Income Taxes of the Notes to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Business Strategies
The Company’s primary objective is to create value for its shareholders through the monetization of the Company's assets through the Plan of Sale, which can be suspended by the Board of Trustees. Additionally, we have identified various sites that we believe have the demand and demographic profile to support other uses such as residential, biotechnology, office and others. Given our fee ownership of these properties and control over parking lots and outparcels, we believe that these sites are well positioned for such value creation opportunities. We additionally look to further lease our built retail footprint and densify any excess parking land through the addition of triple net (“NNN”) pad sites, which are standalone sites upon which a customized space can be built or leased for a tenant, to the extent that we believe these actions would be accretive to shareholder value.
In order to achieve its objective, the Company intends to execute the following strategies:
•Multi-tenant Retail: Our portfolio of 13 multitenant retail assets provides positive cash flow and are primarily leased to a variety of national credit tenants. As of March 31, 2023, this portfolio was 76.0% leased with a pipeline of 0.1 million square feet. A majority of our leases are effectively NNN based on the structure of our leases, providing an important inflation hedge. This portfolio also affords numerous further densification opportunities through the addition of pads on excess parking areas. We are working to maximize value of these assets and position them for sale.
•Densification and Redevelopment Opportunities: In particular, we have identified various sites that we believe have the demand and demographic profile to support other uses such as residential, biotechnology, office and others. Given our fee ownership of these properties and control over parking lots and outparcels, we believe that these sites are well positioned for such value creation opportunities. To the extent that we believe it will be accretive to shareholder value, we will look to further densification by converting vacant land to pad sites.
•Premier/Master Planned Mixed Use and Residential: As of March 31, 2023, our full portfolio included approximately 997 acres of land, or an average of 13.8 acres per site, and our most significant geographic concentrations were in higher growth markets in California, Florida, Texas, and the Northeast. We believe these land holdings will provide meaningful opportunities to create value through entitlements, leasing and developments.
•Non-core Assets for Monetization: We continue to assess the best use for all sites within our portfolio, including residential, retail, and converting excess land area to pad sites. The non-core assets are those assets where we believe we will maximize value by selling in its current state.
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.
- 27 -
Comparison of the Three Months Ended March 31, 2023 to the Three Months Ended March 31, 2022
The following table presents selected data on comparative results from the Company’s condensed consolidated statements of operations for the three months ended March 31, 2023, as compared to the three months ended March 31, 2022 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
|
|
2023 |
|
|
2022 |
|
|
$ Change |
|
Revenue |
|
|
|
|
|
|
|
|
|
Rental income |
|
$ |
418 |
|
|
$ |
29,084 |
|
|
$ |
(28,666 |
) |
Expenses |
|
|
|
|
|
|
|
|
|
Property operating |
|
|
8,185 |
|
|
|
11,032 |
|
|
|
(2,847 |
) |
Real estate taxes |
|
|
1,537 |
|
|
|
8,150 |
|
|
|
(6,613 |
) |
Depreciation and amortization |
|
|
4,564 |
|
|
|
11,934 |
|
|
|
(7,370 |
) |
General and administrative |
|
|
12,220 |
|
|
|
9,092 |
|
|
|
3,128 |
|
(Gain) loss on sale of real estate, net |
|
|
(12,392 |
) |
|
|
1,015 |
|
|
|
(13,407 |
) |
Impairment of real estate assets |
|
|
2,576 |
|
|
|
991 |
|
|
|
1,585 |
|
Equity in loss of unconsolidated entities |
|
|
36,372 |
|
|
|
33,076 |
|
|
|
3,296 |
|
Interest and other income |
|
|
(5,585 |
) |
|
|
(11 |
) |
|
|
(5,574 |
) |
Interest expense |
|
|
15,202 |
|
|
|
22,588 |
|
|
|
(7,386 |
) |
Rental Income
The following table presents the results for rental income for the three months ended March 31, 2023, as compared to the corresponding period in 2022 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
Three Months Ended March 31, |
|
|
|
|
|
|
2023 |
|
|
2022 |
|
|
|
|
|
|
Rental Income |
|
|
% of Total
Rental Income |
|
|
Rental Income |
|
|
% of Total
Rental Income |
|
|
$ Change |
|
In-place retail leases |
|
$ |
11,259 |
|
|
|
2693.5 |
% |
|
$ |
28,378 |
|
|
|
97.6 |
% |
|
|
(17,119 |
) |
Straight-line rent (expense) |
|
|
(10,843 |
) |
|
|
-2594.0 |
% |
|
|
721 |
|
|
|
2.5 |
% |
|
|
(11,564 |
) |
Amortization of the above/below market leases |
|
|
2 |
|
|
|
0.5 |
% |
|
|
(15 |
) |
|
|
-0.1 |
% |
|
|
17 |
|
Total rental income |
|
$ |
418 |
|
|
|
100.0 |
% |
|
$ |
29,084 |
|
|
|
100.0 |
% |
|
$ |
(28,666 |
) |
The decrease of $17.1 million in in-place retail lease rental income during 2023 is primarily due to property sales.
The decrease of $11.6 million in straight-line rental income was primarily due to a reversal of $10.8 million of straight-line rent due to property sales.
Property Operating Expenses and Real Estate Taxes
The decrease of $2.8 million in property operating expense for the three months ended March 31, 2023 was due primarily to asset sales and partially offset by a decrease in amounts capitalized.
The decrease of $6.6 million in real estate taxes for the three months ended March 31, 2023 was due primarily to asset sales and refunds received during the three months ended March 31, 2023.
Depreciation and Amortization Expenses
The decrease of $7.4 million in depreciation and amortization expenses for the three months ended March 31, 2023 was primarily due to a decrease of $7.2 million in net scheduled depreciation due to property sales.
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 $3.1 million in general and administrative expenses for the three months ended March 31, 2023 was driven by an increase in legal and consulting related expenses resulting from the comprehensive review of strategic alternatives. This was partially offset by a decrease in compensation expense, resulting from a decrease in head count.
- 28 -
Gain on Sale of Real Estate, Net
During the three months ended March 31, 2023, the Company sold 24 properties for aggregate consideration of $290.8 million and recorded a gain totaling $12.4 million, which is included in gain on sale of real estate, net within the condensed consolidated statements of operations.
Impairment of Real Estate Assets
During the three months ended March 31, 2023, the Company recognized $2.6 million in impairment on one real estate asset, which is included within the condensed consolidated statements of operations. This impairment arose from the Company’s plan to sell this property for sale below carrying value, which triggered the need for an impairment analysis pursuant to ASC 360, Property, Plant and Equipment.
Equity in Loss of Unconsolidated Entities
The increase of $3.3 million in loss in the unconsolidated entities for the three months ended March 31, 2023 was driven by $70.8 million impairment charge recorded in one investment during the three months ended March 31, 2023, resulting in the Company picking up their share of this impairment at $35.4 million. During the three months ended March 31, 2022, one investment recorded impairment of $61.1 million, resulting in the Company picking up their share of this impairment at $30.6 million.
Interest and other income
The increase of $5.6 million of interest and other income is primarily due to the receipt of $3.8 million relating to the settlement with the D&O Insurers.
Interest Expense
The decrease of $7.4 million in interest expense for the three months ended March 31, 2023 was driven by the partial Term Loan Facility pay down totaling $800 million as of March 31, 2023.
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 certain development expenditures. Property rental income, which is the Company’s primary source of operating cash flow, did not fully fund obligations incurred during the three months ended March 31, 2023 and the Company recorded net operating cash outflows of $22.0 million. Additionally, the Company’s generated investing cash inflows of $240.3 million during the three months ended March 31, 2023, 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 Consolidated Properties. As of March 31, 2023, we had sold 172 Consolidated Properties, and additional outparcels at certain properties, and generated approximately $1.9 billion of gross proceeds since we began our capital recycling program in July 2017.
•Sales of interests in Unconsolidated Properties. As of March 31, 2023, we had sold our interests in 23 Unconsolidated Properties and generated approximately $362.9 million of gross proceeds since July 2017. Certain of our unconsolidated entity agreements also include rights that allow us to sell our interests in select Unconsolidated Properties to our partners at fair market value;
•Unconsolidated Properties. As of March 31, 2023, we had contributed interests in 12 properties to unconsolidated entities, which generated approximately $242.4 million of gross proceeds since July 2017. In addition to generating liquidity upon closing, these entities also reduce our development expenditures by the amount of 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.
- 29 -
As previously disclosed, on May 5, 2020, the Operating Partnership and Berkshire Hathaway entered into an amendment (the “Term Loan Amendment”) to the Term Loan Agreement by and among the Operating 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 the Operating 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, the Operating 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 on July 31, 2023; provided, that the Operating 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. The Third Term Loan Amendment (as defined in Note 6 – Debt of the Notes to the condensed consolidated financial statements included in Part I, Item I of this Quarterly Report on Form 10-Q) executed on June 16, 2022 eliminated this right.
Our Term Loan Facility includes a $400.0 million Incremental Funding Facility, 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, as disclosed in Note 6. There is no assurance of the Company’s ability to access the Incremental Funding Facility.
During the three months ended March 31, 2023, we have repaid $230.0 million against the principal of the Term Loan Facility. Our outstanding balance as of March 31, 2023, is $800 million.
See Note 1 – Organization of the Notes to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for a discussion of liquidity and going concern.
Cash Flows for the Three Months Ended March 31, 2023 Compared to the Three Months Ended March 31, 2022
The following table summarizes the Company’s cash flow activities for the three months ended March 31, 2023 and 2022, respectively (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
|
|
2023 |
|
|
2022 |
|
|
$ Change |
|
Net cash used in operating activities |
|
$ |
(21,952 |
) |
|
$ |
(30,048 |
) |
|
$ |
8,096 |
|
Net cash provided by investing activities |
|
|
240,290 |
|
|
|
(21,521 |
) |
|
|
261,811 |
|
Net cash (used in) provided by financing activities |
|
|
(231,225 |
) |
|
|
(1,225 |
) |
|
|
(230,000 |
) |
Cash Flows from Operating Activities
Significant components of net cash used in operating activities include:
In 2023, a decrease in rental income and a decrease to accounts payable, accrued expenses and other liabilities, partially offset by a decrease to tenant and other receivables.
Cash Flows from Investing Activities
Significant components of net cash provided by investing activities include:
−In 2023, $280.0 million of net proceeds from the sale of real estate offset by development of real estate of ($32.0) million and investments in unconsolidated entities of ($7.7) million; and
−In 2022, $8.5 million of net proceeds from the sale of real estate offset by development of real estate of ($22.5) million and investments in unconsolidated entities of ($7.6) million.
Cash Flows from Financing Activities
Significant components of net cash used in financing activities include:
−In 2023, ($230.0) million cash repayment of Term Loan Facility principal and cash payments of preferred dividends, ($1.2) million; and
−In 2022, cash payments of preferred dividends, ($1.2) million.
- 30 -
Dividends and Distributions
The Company’s Board of Trustees did not declared dividends on the Company’s Class A common shares during the three months ended March 31, 2023 and 2022, respectively.
The Company’s Board of Trustees declared the following dividends on preferred shares during 2023 and 2022:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A |
|
Declaration Date |
|
Record Date |
|
Payment Date |
|
Preferred Share |
|
2023 |
|
|
|
|
|
|
|
April 27 |
|
June 30 |
|
July 14 |
|
$ |
0.43750 |
|
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 |
|
The Board of Trustees will determine future distributions following the pay down of the Term Loan Facility.
Off-Balance Sheet Arrangements
The Company accounts for its investments in entities that it does not have a controlling interest in or is not the primary beneficiary using the equity method of accounting and those investments are reflected on the condensed consolidated balance sheets of the Company as investments in unconsolidated entities. As of March 31, 2023 and December 31, 2022, we did not have any off-balance sheet financing arrangements.
Contractual Obligations
There have been no significant changes in the contractual obligations disclosed in our Form 10-K for the year ended December 31, 2022.
Capital Expenditures
During the three months ended March 31, 2023, the Company invested $32.0 million in our consolidated development and operating properties and an additional $7.7 million into our unconsolidated joint ventures, as we continue to advance our business plans, including our previously announced projects.
During the three months ended March 31, 2023 and 2022, respectively, we incurred no maintenance capital expenditures that were not associated with re-tenanting and redevelopment projects.
Litigation and Other Matters
In accordance with accounting standards regarding loss contingencies, we accrue an undiscounted liability for those contingencies where the incurrence of a loss is probable and the amount can be reasonably estimated, and we disclose the amount accrued and the amount of a reasonably possible loss in excess of the amount accrued or disclose the fact that such a range of loss cannot be estimated. 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, the Official 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 the Holdco Acquisition by the Bankruptcy Court expressly preserved claims relating to the 2015 transactions between us and Sears Holdings.
On February 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.
- 31 -
On March 15, 2021, the Court consolidated the Litigation with a case captioned Sears 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 the July 2015 transactions giving rise to Seritage, the execution of the Original Master 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 Consolidated Litigation are without merit.
On April 6, 2022, the Court entered an order in the Consolidated Litigation, upon the agreement of the parties thereto, providing for a mediation of the litigation. The parties and the Court extended the mediation several times, through August, and up until the settlement described below was reached.
On August 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 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).
On September 2, 2022, the United States Bankruptcy Court for the Southern District of New York entered an order approving the settlement and, on October 18, 2022, the Litigation was dismissed. While we believe that the claims against the Seritage Defendants in the Litigation were without merit, we 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.
We made a settlement payment of $35.5 million based on our contributions to the settlement of the Litigation. This payment is recorded as litigation settlement in the consolidated statements of operations during the year ended December 31, 2022.
On March 2, 2021, we brought a lawsuit in Delaware state court against QBE Insurance Corporation, Endurance American Insurance Company, Allianz Global Risks US Insurance Company and Continental Casualty Company, each of which are D&O insurance providers of the Company (the “D&O Insurers”). Our lawsuit sought, 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 Sears Bankruptcy. Any amounts received from the insurers will offset the Seritage Defendants’ contribution. We reached settlement agreements with two of the D&O Insurers for gross proceeds of $12.7 million which is recorded in interest and other income in the consolidated statements of operations during the year ended December 31, 2022. During the three months ended March 31, 2023, we reached settlement agreements with the other two D&O Insurers for gross proceeds of $11.6 million. We received $3.8 million during the three months ended March 31, 2023, which is recorded in interest and other income in the consolidated statements of operations and received $7.8 million subsequent to March 31, 2023.
We are subject, from time to time, to various legal proceedings and claims that arise in the ordinary course of business and due to the current environment. 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 condensed consolidated financial position, results of operations or liquidity of the Company.
See Note 9 – Commitments and Contingencies Litigation and Other Matters of the Notes to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for a discussion of the Consolidated Litigation in respect of the Sears Holdings bankruptcy and related matters.
- 32 -
Critical Accounting Policies
A summary of our critical accounting policies is included in our Annual Report on Form 10-K for the year ended December 31, 2022 in Management’s Discussion and Analysis of Financial Condition and Results of Operations. For the three months ended March 31, 2023, there were no material changes to these policies.
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 of unconsolidated 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 of unconsolidated 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 three months ended March 31, 2023 and 2022 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
NOI and Total NOI |
|
2023 |
|
|
2022 |
|
Net loss |
|
$ |
(61,986 |
) |
|
$ |
(66,987 |
) |
Termination fee income |
|
|
— |
|
|
|
(277 |
) |
Management and other fee income |
|
|
(262 |
) |
|
|
(1,821 |
) |
Depreciation and amortization |
|
|
4,564 |
|
|
|
11,934 |
|
General and administrative expenses |
|
|
12,220 |
|
|
|
9,092 |
|
Equity in loss of unconsolidated entities |
|
|
36,372 |
|
|
|
33,076 |
|
(Gain) loss on sale of real estate, net |
|
|
(12,392 |
) |
|
|
1,015 |
|
Impairment of real estate assets |
|
|
2,576 |
|
|
|
991 |
|
Interest and other income |
|
|
(5,585 |
) |
|
|
(11 |
) |
Interest expense |
|
|
15,202 |
|
|
|
22,588 |
|
(Benefit) provision for income taxes |
|
|
(13 |
) |
|
|
25 |
|
Straight-line rent |
|
|
10,843 |
|
|
|
(721 |
) |
Above/below market rental expense |
|
|
48 |
|
|
|
65 |
|
NOI |
|
$ |
1,587 |
|
|
$ |
8,969 |
|
Unconsolidated entities |
|
|
|
|
|
|
Net operating income of unconsolidated entities |
|
|
1,659 |
|
|
|
1,846 |
|
Straight-line rent |
|
|
(147 |
) |
|
|
(328 |
) |
Above/below market rental expense |
|
|
5 |
|
|
|
6 |
|
Total NOI |
|
$ |
3,104 |
|
|
$ |
10,493 |
|
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