Study of SRG
11/09/2020 – SRG’s is a very solid company from valueplays
SRG’s portfolio is performing very well in comparison to other mall REITs out there . A unique feature for SRG is their move into mixed-use developments which buffers them from downturns like this. Rather than just being a mall lessor, they are also building office space and multi-family housing around their centers. This both helps them absorb a retail downturn from their overall results and does provide those entities with a built-in customer base that inhabits the building around the retail. I like it…
Let’s not forget they are still developing Sears/Kmart spaces and releasing at 4.2X the previous rent.
The Release:
New York, NY – November 5, 2020 – Seritage Growth Properties (NYSE: SRG) (the “Company”), a national owner of 195 retail and mixed-use properties totaling approximately 30.4 million square feet of gross leasable area (“GLA”), today reported financial and operating results for the three and nine months ended September 30, 2020, and provided a business update in light of the ongoing COVID-19 pandemic.
Summary Financial Results
For the three months ended September 30, 2020:
• Net loss attributable to common shareholders of $51.3 million, or $1.33 per share
• Total Net Operating Income (“Total NOI”) of $6.0 million
• Funds from Operations (“FFO”) of ($19.9) million, or ($0.36) per share
• Company FFO of ($25.1) million, or ($0.45) per share For the nine months ended September 30, 2020:
• Net loss attributable to common shareholders of $74.3 million, or $1.95 per share
• Total NOI of $29.1 million
• FFO of ($64.8) million, or ($1.16) per share
• Company FFO of ($70.7) million, or ($1.27) per share COVID-19 Business Update
• Rental income collections were:
– Q2 2020: collected 70% and agreed to defer an additional 25%;
– Q3 2020: collected 86% and agreed to defer an additional 10%;
– October 2020: collected 86% and agreed to defer an additional 8% ;
• Generated $284.4 million of gross proceeds through monetization activity year to date, including $113.6 million during the three months ended September 30, 2020 and $11.8 million subsequent to the end of the third quarter; and
• Had asset sales under contract for anticipated gross proceeds of $62.5 million, subject to buyer diligence and closing conditions. “We continue to benefit from the breadth of our asset base including the diversity of our tenant roster and our geographic diversity. Our tenants are now 95% open, with rent collections in the third quarter of 96%, including 86% collected in cash and 10% addressed per signed deferral agreements. We made strong progress on monetizing assets with proceeds of $113.6 million generated from transactions in the third quarter. Year to date, we have monetized assets totaling $284 million, of which $166.7 million were income producing assets sold at an average cap rate of 5.9%. Since inception, we have reduced the portfolio to a more focused group of 195 assets from 266 assets and raised approximately $985 million in proceeds from asset monetization activity, allowing us to focus our human and capital resources on our top redevelopment opportunities,” said Benjamin Schall, President and Chief Executive Officer.
Mr. Schall continued, “We continue to be prudent with respect to development capital expenditures, with a prioritization on continuing projects where we can generate near-term income from stronger national tenants. We are also advancing master planning, entitlement and site infrastructure on our multi-family portfolio, having partnered with well-established apartment developers on over 5,500 apartment units. These partners share our view on the significant value creation opportunities to convert our land parcels into differentiated residential communities, with an emphasis on walkability, services, amenities and greenspace. These priorities are consistent with our efforts to work through this period of disruption and uncertainty while preserving the value of our platform and portfolio over the medium and long term.”
Portfolio Update (as of September 30, 2020)
Premier and Larger Scale
Includes 34 assets totaling 6.5 million square feet (5.7 million at share) of existing retail space that the Company believes can be expanded and densified by integrating retail, residential, office and other uses. Allowing for the risk and extended timeframes inherent in the entitlement process, the Company believes that the density on these sites could ultimately evolve to include a total of 6,500 to 7,500 residential units and over 5.0 million square feet of mixed-use commercial space.
Includes 136 assets totaling 21.2 million square feet (19.5 million at share) of existing space that the Company has redeveloped, or believes can be redeveloped, into first-class, multi-tenant retail centers or repurposed for alternate, non-retail uses.
Smaller Market
Includes 25 assets totaling 2.8 million square feet of existing space that the Company will continue to market for sale, subject to achieving appropriate value relative to any potential redevelopment opportunities.
Operating Results
During the three months ended September 30, 2020, the Company monetized six properties and nine outparcels totaling 1.4 million square feet and generated $113.6 million of gross proceeds, including one new joint venture and one sale-leaseback transaction.
Total monetization activity for the nine months ended September 30, 2020 consisted of 19 properties and 12 outparcels totaling 3.1 million square feet and $272.5 million of gross proceeds.
• $166.7 million of the gross proceeds were from income-producing properties sold at a blended cap rate of 5.9%.
• An additional $57.8 million of gross proceeds were from vacant assets sold at $37 PSF. These vacant assets also incurred $3.7 million of annual carry costs.
• The remaining $48.0 million of gross proceeds were from the joint venture and sale leaseback transactions. Subsequent to September 30, 2020, the Company sold two properties and one outparcel for aggregate gross proceeds of $11.8 million and, as of October 30, 2020, the Company had assets under contract for sale representing anticipated gross proceeds of $62.5 million, subject to buyer diligence and closing conditions.
Since it began its capital recycling program in July 2017, the Company has raised over $985 million of gross cash proceeds from the sale or joint venture of interests in 86 properties, plus outparcels at several properties.
Leasing
During the three months ended September 30, 2020, the Company signed new leases totaling 51,000 square feet at an average base rent of $17.71 PSF. On a same-space basis, new rents averaged 4.2x prior rents for space formerly occupied by Sears or Kmart, increasing to $20.91 PSF for new tenants compared to $4.93 PSF paid by Sears or Kmart across 19,000 square feet.
The table below provides a summary of the Company’s leasing activity, including its proportional share of unconsolidated entities, for the three and nine months ended September 30, 2020 and since the Company’s inception in July 2015:
(in thousands, except PSF amounts) Since Q3 2020 FY2020 Inception Leases 6 24 426 Square feet 51,000 272,000 10,699,000 Annual base rent ($000s) $ 903 $ 5,461 $ 185,229 Annual base rent PSF (1) $ 17.71 $ 20.08 $ 18.34 Re-leasing multiple (1)(2) 4.2 x 3.6 x 4.0 x
(1) Excludes certain self storage, medical office, auto-related and ground leases.
(2) Excludes densification square footage (e.g. new outparcel developments) and backfill of vacant space not previously occupied by Sears or Kmart. The table below provides a summary of all signed leases as of September 30, 2020, including unconsolidated entities at the Company’s proportional share:
(in thousands except number of leases and PSF data) Number of Leased % of Total Annual Base % of Tenant Leases GLA Leased GLA Rent (“ABR”) Total ABR ABR PSF In-place diversified leases 278 6,416 63.7 % $ 96,393 58.3 % $ 15.02 SNO diversified leases (1) 138 2,927 29.1 % 63,858 38.6 % 21.82 Total diversified leases 416 9,343 92.8 % $ 160,251 96.9 % $ 17.15 Sears or Kmart (2) 7 729 7.2 % 5,219 3.1 % 7.16 Total 423 10,072 100.0 % $ 165,470 100.0 % $ 16.43
(1) SNO = signed not yet opened leases.
(2) Includes five properties subject to a master lease (the “Holdco Master Lease”) between the Company and affiliates of Transform Holdco LLC (“Holdco”), an affiliate of ESL Investments, Inc., and two leases between the Company’s unconsolidated entities and Holdco. The table below provides a reconciliation of SNO leases from December 31, 2019 to September 30, 2020, including unconsolidated entities at the Company’s proportional share:
(in thousands except number of leases and PSF data) Number of Annual Annual SNO Leases GLA Rent Rent PSF As of December 31, 2019 174 4,204 $ 84,348 $ 20.06 Opened (1) (23 ) (576 ) (9,943 ) 17.26 Sold / contributed / terminated (34 ) (968 ) (15,803 ) 16.33 Signed (1) 21 267 5,256 19.69 As of September 30, 2020 138 2,927 $ 63,858 $ 21.82
(1) “Opened” includes, and “Signed” excludes, three leases that were both signed and opened during the nine months ended September 30, 2020. During the nine months ended September 30, 2020, the majority of the $15.8 million of SNO leases that were sold, contributed to unconsolidated entities or terminated was comprised of leases terminated with fitness, entertainment and food & beverage tenants at projects at which the Company had not yet deployed significant amounts of capital.
Development
During the three months ended September 30, 2020, the Company continued work on components of certain suburban retail redevelopment projects, including those it had restarted during the three months ended June 30, 2020 and certain spaces that had been previously delivered to tenants. This project activity represents a total investment of approximately $45.8 million, of which approximately $15.5 million was incurred during the three months ended September 30, 2020, and potential annual rental income of approximately $13.5 million, of which $1.3million commenced during the three months ended September 30, 2020. The balance of the rental income is expected to commence over the next 12 months, subject to tenant opening schedules.
The Company also continues to perform limited non-tenant construction activity at select properties, including its previously underway premier projects in Aventura (FL), Santa Monica (CA) and La Jolla (CA). The Company continues to work with tenants to preserve signed leases and modify schedules for project completion and initial store openings.
Additionally, the Company continues to work with its development partners to obtain project financing and reassess construction schedules for two previously announced multifamily projects, in Redmond (WA) and Dallas (TX), each of which represents the first phase of larger, mixed-use developments. A third previously announced multifamily project in Chicago (IL) was sold during the three months ended September 30, 2020.
The remainder of the Company’s previously announced redevelopment projects remain on hold due to the COVID-19 pandemic and the direct impacts on the Company’s business.
Balance Sheet and Liquidity
As of September 30, 2020, the Company had cash on hand of $120.9 million, including $2.7 million of restricted cash, and, as of October 30, 2020, the Company had closed asset sales totaling $11.8 million during the fourth quarter and had additional asset sales under contract for anticipated gross proceeds of $62.5 million, subject to buyer diligence and closing conditions. The Company expects to use these sources of liquidity, together with a combination of future sales of wholly-owned assets and interests in unconsolidated entities and/or potential credit and capital markets transactions to fund its operations and select development activity.
The availability of funding from sales of assets and credit or capital markets transactions is subject to various conditions, including the consent of the Company’s lender under its $2.0 billion term loan facility (the “Term Loan Facility”), and there can be no assurance that such transactions will be consummated.
In addition, as previously disclosed, on May 5, 2020, the Company and Berkshire Hathaway, the administrative agent and the lender under the Term Loan Facility, entered into an amendment (the “Amendment”) to the agreement governing the Term Loan Facility that permits the deferral of interest payments based on the amount of Available Cash (as defined in the Amendment) for each period. Additionally, the 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. As of September 30, 2020, the Company has not deferred any interest and had paid all interest due under the Term Loan Facility.
The Term Loan Facility includes a $400 million Incremental Funding Facility, access to which is subject to rental income from non-Sears Holdings tenants of at least $200 million, on an annualized basis and after giving effect to SNO leases expected to commence rent payment within 12 months, which the Company has not yet achieved. The timing of the Company’s ability to access the Incremental Funding Facility, if at all, will be adversely impacted by the COVID-19 pandemic.
Dividends
On September 17, 2020, the Company’s Board of Trustees declared a preferred stock dividend of $0.4375 per each Series A Preferred Share. The preferred dividend was paid on October 15, 2020 to holders of record on September 30, 2020.
The Company’s Board of Trustees does not expect to declare dividends on its common shares in 2020 unless required to do so to maintain REIT status.
