UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2020

or

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______to _______

Commission File Number 001-37420

SERITAGE GROWTH PROPERTIES

(Exact name of registrant as specified in its charter)

Maryland	38-3976287
(State of Incorporation)	(I.R.S. Employer Identification No.)

500 Fifth Avenue, Suite 1530, New York, New York	10110
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (212) 355-7800

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbols	Name of each exchange on which registered
Class A common shares of beneficial interest, par value $0.01 per share	SRG	New York Stock Exchange
7.00% Series A cumulative redeemable preferred shares of beneficial interest, par value $0.01 per share	SRG-PA	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.  See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ☐    No  ☒

As of October 30, 2020, the registrant had the following common shares outstanding:

Class	Shares Outstanding
Class A common shares of beneficial interest, par value $0.01 per share	38,644,689
Class B common shares of beneficial interest, par value $0.01 per share	0
Class C common shares of beneficial interest, par value $0.01 per share	0

SERITAGE GROWTH PROPERTIES

QUARTERLY REPORT ON FORM 10-Q

QUARTER ENDED SEPTEMBER 30, 2020

TABLE OF CONTENTS

PART I.	FINANCIAL INFORMATION
		Page
Item 1.	Condensed Consolidated Financial Statements (unaudited)	3
	Condensed Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019	3
	Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2020 and 2019	4
	Condensed Consolidated Statements of Equity for the three and nine months ended September 30, 2020 and 2019	5
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019	7
	Notes to Condensed Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34
Item 3.	Quantitative and Qualitative Disclosure about Market Risk	46
Item 4.	Controls and Procedures	46
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	47
Item 1A.	Risk Factors	47
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	49
Item 3.	Defaults upon Senior Securities	49
Item 4.	Mine Safety Disclosures	49
Item 5.	Other Information	49
Item 6.	Exhibits	50
SIGNATURES		51

PART I. FINANCIAL INFORMATION

Item 1. Unaudited Condensed Consolidated Financial Statements

SERITAGE GROWTH PROPERTIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, amounts in thousands, except share and per share amounts)

	September 30, 2020			December 31, 2019
ASSETS
Investment in real estate
Land	$	601,882		$	667,004
Buildings and improvements		1,172,848			1,112,653
Accumulated depreciation		(142,025	)		(147,696	)
		1,632,705			1,631,961
Construction in progress		363,317			338,672
Net investment in real estate		1,996,022			1,970,633
Real estate held for sale		8,190			5,275
Investment in unconsolidated entities		487,424			445,077
Cash and cash equivalents		118,227			139,260
Restricted cash		2,692			—
Tenant and other receivables, net		39,916			54,470
Lease intangible assets, net		20,756			68,153
Prepaid expenses, deferred expenses and other assets, net		69,788			67,744
Total assets	$	2,743,015		$	2,750,612
LIABILITIES AND EQUITY
Liabilities
Term Loan Facility, net	$	1,598,804		$	1,598,487
Sales-leaseback financing obligations		20,416			—
Accounts payable, accrued expenses and other liabilities		184,000			108,755
Total liabilities		1,803,220			1,707,242
Commitments and contingencies (Note 9)
Shareholders' Equity
Class A common shares $0.01 par value; 100,000,000 shares authorized;    38,644,689 and 36,897,364 shares issued and outstanding    as of September 30, 2020 and December 31, 2019, respectively		386			369
Class B common shares $0.01 par value; 5,000,000 shares authorized;    0 and 1,242,536 shares issued and outstanding    as of September 30, 2020 and December 31, 2019, respectively		—			12
Series A preferred shares $0.01 par value; 10,000,000 shares authorized;    2,800,000 shares issued and outstanding as of September 30, 2020 and    December 31, 2019; liquidation preference of $70,000		28			28
Additional paid-in capital		1,179,727			1,149,721
Accumulated deficit		(493,031	)		(418,711	)
Total shareholders' equity		687,110			731,419
Non-controlling interests		252,685			311,951
Total equity		939,795			1,043,370
Total liabilities and equity	$	2,743,015		$	2,750,612

The accompanying notes are an integral part of these condensed consolidated financial statements. 

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SERITAGE GROWTH PROPERTIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, amounts in thousands, except per share amounts)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2020			2019			2020			2019
REVENUE
Rental income	$	33,966		$	46,833		$	88,724		$	129,108
Management and other fee income		(259	)		795			119			2,891
Total revenue		33,707			47,628			88,843			131,999
EXPENSES
Property operating		11,154			11,462			30,152			31,001
Real estate taxes		9,487			9,164			28,096			29,515
Depreciation and amortization		23,647			21,593			81,446			68,003
General and administrative		11,203			8,130			29,267			26,186
Total expenses		55,491			50,349			168,961			154,705
(Loss) Gain on sale of real estate, net		(14,706	)		12,445			59,959			45,318
Impairment of real estate assets		(14,594	)		—			(16,407	)		—
Equity in loss of unconsolidated entities		(335	)		(5,616	)		(2,551	)		(14,338	)
Interest and other income		1,986			1,416			2,460			6,189
Interest expense		(22,742	)		(22,046	)		(66,400	)		(67,641	)
Loss before taxes		(72,175	)		(16,522	)		(103,057	)		(53,178	)
Provision for taxes		(226	)		40			(215	)		(83	)
Net loss		(72,401	)		(16,482	)		(103,272	)		(53,261	)
Net loss attributable to non-controlling interests		22,348			5,604			32,627			18,513
Net loss attributable to Seritage	$	(50,053	)	$	(10,878	)	$	(70,645	)	$	(34,748	)
Preferred dividends		(1,225	)		(1,225	)		(3,675	)		(3,675	)
Net loss attributable to Seritage common shareholders	$	(51,278	)	$	(12,103	)	$	(74,320	)	$	(38,423	)
Net loss per share attributable to Seritage Class A    and Class C common shareholders - Basic	$	(1.33	)	$	(0.33	)	$	(1.95	)	$	(1.06	)
Net loss per share attributable to Seritage Class A    and Class C common shareholders - Diluted	$	(1.33	)	$	(0.33	)	$	(1.95	)	$	(1.06	)
Weighted average Class A and Class C common shares    outstanding - Basic		38,645			36,829			38,172			36,268
Weighted average Class A and Class C common shares    outstanding - Diluted		38,645			36,829			38,172			36,268

The accompanying notes are an integral part of these condensed consolidated financial statements.

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SERITAGE GROWTH PROPERTIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(Unaudited, amounts in thousands)

	Class A Common				Class B Common						Class C Common				Series A Preferred				Additional Paid-In			Accumulated			Non- Controlling			Total
	Shares		Amount		Shares			Amount			Shares		Amount		Shares		Amount		Capital			Deficit			Interests			Equity
Balance at January 1, 2019		35,668	$	357		1,322		$	13			—	$	—		2,800	$	28	$	1,124,504		$	(344,132	)	$	369,688			1,150,458
Net loss		—		—		—			—			—		—		—		—		—			(34,748	)		(18,513	)		(53,261	)
Cumulative effect of accounting    change (see Note 2)		—		—		—			—			—		—		—		—		—			(1,286	)		—			(1,286	)
Common dividends and    distributions declared    ($0.25 per share and unit)		—		—		—			—			—		—		—		—		—			(8,996	)		(5,030	)		(14,026	)
Preferred dividends    declared ($1.3125 per share)		—		—		—			—			—		—		—		—		—			(3,675	)					(3,675	)
Vesting of restricted share units		15		—		—			—			—		—		—		—		(3,523	)		—			—			(3,523	)
Share-based compensation		—		—		—			—			—		—		—		—		4,522			—			—			4,522
Share class surrenders		—		—		(75	)		(1	)		—		—		—		—		1			—			—			—
OP Unit exchanges    (1,145,735 units)		1,146		11		—			—			—		—		—		—		20,350			—			(20,361	)		—
Balance at September 30, 2019		36,829	$	368		1,247		$	12			—	$	—	$	2,800	$	28	$	1,145,854		$	(392,837	)	$	325,784		$	1,079,209
Balance at January 1, 2020		36,897	$	369		1,243		$	12			—	$	—		2,800	$	28	$	1,149,721		$	(418,711	)	$	311,951			1,043,370
Net loss		—		—		—			—			—		—		—		—		—			(70,645	)		(32,627	)		(103,272	)
Preferred dividends    declared ($1.3125 per share)		—		—		—			—			—		—		—		—		—			(3,675	)		—			(3,675	)
Vesting of restricted share    units		98		1		—			—			—		—		—		—		(1	)		—			—			—
Share-based compensation		—		—		—			—			—		—		—		—		3,372			—			—			3,372
Share class surrenders (1,242,536 common shares)		—		—		(1,243	)		(12	)		—		—		—		—		12			—			—			—
OP Units exchanges    (1,650,000 units)		1,650		16		—			—			—		—		—		—		26,623			—			(26,639	)		—
Balance at September 30, 2020		38,645	$	386