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Seritage Growth Properties Reports Second Quarter 2017 Operating Results

NEW YORK--(BUSINESS WIRE)--

Seritage Growth Properties (SRG) (the “Company”), a national owner of 258 retail properties totaling over 40 million square feet of gross leasable area (“GLA”), today reported financial and operating results for the three and six months ended June 30, 2017.

Financial Results

For the three months ended June 30, 2017:

  • Net loss attributable to common shareholders of $21.2 million, or $0.63 per diluted share
  • Total Net Operating Income (“Total NOI”) of $44.9 million
  • Funds from Operations (“FFO”) of $23.8 million, or $0.43 per diluted share
  • Company FFO of $25.7 million, or $0.46 per diluted share

For the six months ended June 30, 2017:

  • Net loss attributable to common shareholders of $41.1 million, or $1.22 per diluted share
  • Total NOI of $91.8 million
  • FFO of $54.8 million, or $0.99 per diluted share
  • Company FFO of $52.7 million, or $0.95 per diluted share

Operating Highlights

During the quarter ended June 30, 2017, including the Company’s proportional share of its unconsolidated joint ventures (“JVs”):

  • Signed new leases totaling 598,000 square feet at an average of $18.95 PSF. Since the Company’s inception in July 2015, new leasing activity has totaled 3.4 million square feet at an average of $18.28 PSF.
    • Achieved releasing spreads of 3.7x for space currently or formerly occupied by Sears Holdings Corporation (“Sears Holdings”), with new rents averaging $18.99 PSF compared to $5.20 PSF paid by Sears Holdings. Since inception, releasing spreads have averaged 4.2x, with new rents at $18.29 PSF compared to $4.36 PSF paid by Sears Holdings.
    • Added $11.3 million of contractual third-party rental income. Third-party income has increased over 134% since inception to $103.0 million, including all signed leases.
  • Increased annual base rent from tenants other than Sears Holdings to 44.0% of total annual base rent from 29.3% in the prior year period, including all signed leases and net of rent attributable to associated space to be recaptured.
  • Increased annualized Total NOI by 9.2% to $228.2 million from $209.0 million in the prior year period, including all signed leases and net of rent attributable to associated space to be recaptured.
  • Commenced 12 new redevelopment projects and expanded five previously announced projects to incorporate additional recaptured space, bringing total redevelopment activity since inception to 65 projects completed or commenced for a total estimated investment of $688.4 million.
  • Initiated the recapture of 100% of the space at Sears stores in Aventura, FL, Dallas, TX (Valley View Center) and La Jolla, CA (Westfield UTC) in advance of commencing premier retail and mixed-use redevelopments at these prime locations.

Subsequent to the quarter end, the Company completed two transactions with GGP Inc. (“GGP”) for gross consideration of $247.6 million (the “GGP Transactions”). Pursuant to the GGP Transactions, the Company (i) sold to GGP the Company’s 50% interest in eight of the 12 assets in the existing joint venture between the two companies for $190.1 million; and (ii) sold to GGP a 50% joint venture interest in five additional assets for $57.5 million.

As a result of the GGP Transactions, the Company reduced amounts outstanding under its mortgage loan by $50.6 million and received approximately $171.6 million of additional cash proceeds before closing costs, which it intends to use to fund its redevelopment pipeline and for general corporate purposes.

“With an additional 600,000 square feet of leases signed this quarter at an average rent of $18.95 per square foot, we have now leased 3.4 million square feet across the portfolio at average spreads of over 4 times the previous rent. We ended the quarter with 44% of our income, including signed leases, derived from tenants other than Sears Holdings, up 15% from a year ago, and we remain on track to have this figure at or north of 50% by the end of 2017,” said Benjamin Schall, President and Chief Executive Officer. “We commenced an additional 12 redevelopment projects in the quarter, bringing our total to 65 projects with a projected spend of $690 million. We continue to deploy this capital at 10-12% unlevered yields on cost, unlocking significant value upon project execution. We were also pleased to close our transaction with GGP in early July, allowing us to harvest value from eight assets in our original joint venture and to generate incremental value on five new assets as part of the expanded joint venture. As we look ahead, strong demand for our portfolio is leading to a growing pipeline of opportunities, including a series of premier and mixed use redevelopments that we expect to generate substantial shareholder value.”

Financial Results

For the three months ended June 30, 2017:

  • Net loss attributable to Class A and Class C shareholders was $21.2 million, or $0.63 per diluted share, as compared to a net loss of $7.1 million, or $0.23 per diluted share, for the prior year period
  • Total NOI, which includes the Company’s proportional share of NOI from 31 properties owned through investments in its unconsolidated JVs, was $44.9 million as compared to $47.2 million for the prior year period.
  • FFO, as calculated in accordance with the National Association of Real Estate Investment Trusts (“NAREIT”) definition, was $23.8 million, or $0.43 per diluted share, as compared to $30.2 million, or $0.54 per diluted share, for the prior year period.
  • Company FFO was $25.8 million, or $0.46 per diluted share, as compared to $32.1 million, or $0.58 per diluted share, for the prior year period.

For the six months ended June 30, 2017:

  • Net loss attributable to Class A and Class C shareholders was $41.1 million, or $1.22 per diluted share, as compared to a net loss of $15.5 million, or $0.49 per diluted share, for the prior year period
  • Total NOI was $91.8 million as compared to $93.7 million for the prior year period.
  • FFO was $54.8 million, or $0.99 per diluted share, as compared to $59.7 million, or $1.07 per diluted share, for the prior year period.
  • Company FFO was $52.7 million, or $0.95 per diluted share, as compared to $64.7 million, or $1.16 per diluted share, for the prior year period. 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 gain or loss on interest rate caps and amortization of deferred financing costs, that it does not believe are representative of ongoing operating results.

Portfolio Summary

As of June 30, 2017, the Company’s portfolio included interests in 266 retail properties totaling over 42 million square feet of gross leasable area, including 235 wholly-owned properties and 31 properties owned through investments in unconsolidated JVs. Approximately 50% of the portfolio consisted of properties attached to regional malls and approximately 50% consisted of shopping center or freestanding properties.

The portfolio was 90.7% leased and included 37 properties leased only to third-party tenants, 88 properties leased to Sears Holdings and one or more third-party tenants, and 92 properties leased only to Sears Holdings. Of the properties leased to Sears Holdings, 133 operated under the Sears brand and 47 operated under the Kmart brand.

Pro forma for the GGP Transactions, the Company owned interests in 258 properties totaling over 40 million square feet.

Development Update

Wholly-Owned Properties

During the quarter ended June 30, 2017, the Company commenced 12 new redevelopment projects representing an estimated total investment of approximately $139.7 million and expanded five previously announced projects to incorporate additional recaptured space for an estimated total investment of $27.5 million. In total, including projects initiated prior to the Company’s formation, the Company has completed or commenced 65 projects representing an estimated total investment of approximately $688.4 million as of June 30, 2017.

The table below summarizes project commencements in the Company’s wholly-owned portfolio since inception:

(in thousands)                 Estimated     Estimated
Number Project Development Project
Quarter of Projects Square Feet Costs (1) Costs (1)
Acquired (2) 15 $ 63,600 $ 63,600
Q4 2015 5 352 51,500 64,200
Q1 2016 5 273 50,000 50,000
Q2 2016 (3) 5 384 70,400 70,700
Q3 3016 (3) 10 1,046 113,600 120,700
Q4 2016 (3) 8 768 111,400 121,000
Q1 2017 5 589 58,500 58,500
Q2 2017   12   949   136,200   139,700
Total   65   4,361 $ 655,200 $ 688,400

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(1)

 

Total estimated development costs exclude, and total estimated project costs include, termination fees to recapture 100% of certain properties.

(2)

Projects were in various stages of development when acquired by the Company in July 2015.

(3)

Includes subsequent expansions to previously announced projects.

 

As of June 30, 2017, the Company had originated 50 wholly-owned projects since the Company’s inception. These projects, including the five expanded projects, represent an estimated total investment of $624.8 million, of which $518.7 million remained to be spent, and are expected to generate an incremental yield on cost of 11.0-12.0%.

The table below provides additional information regarding the Company’s wholly-owned development activity from inception through June 30, 2017:

(in thousands)                                    
Estimated Estimated Estimated
Estimated Number Project Development Project Projected Annual Income (2) Incremental
Project Costs (1) of Projects Square Feet Costs (1) Costs (1) Total Existing Incremental Yield (3)
< $10,000 22 1,270 $ 97,400 $ 97,400 $ 18,500 $ 4,800 $ 13,600
$10,001 - 20,000 20 2,006 266,200 286,100 43,500 12,700 30,800
> $20,000   8   1,101   228,000   241,300   37,700   9,000   28,600  
New Projects 50   4,377 $ 591,600 $ 624,800 $ 99,700 $ 26,500 $ 73,000 11.0 - 12.0%
Acquired projects   15   63,600   63,600
Total   65 $ 655,200 $ 688,400

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(1)

 

Total estimated development costs exclude, and total estimated project costs include, termination fees to recapture 100% of certain properties.

(2)

Projected annual income includes assumptions on stabilized rents to be achieved for space under redevelopment. There can be no assurance that stabilized rent targets will be achieved.

(3)

Projected incremental annual income divided by total estimated project costs.

 

The table below provides a brief description of each of the 50 redevelopment projects originated since the Company’s inception:

Total Project Costs under $10 Million
                        Total     Estimated     Estimated
Project Construction Substantial
Property Description Square Feet   Start Completion
King of Prussia, PA

Repurpose former auto center space for Outback Steakhouse, Yard House and small shop retail

  29,100 Substantially complete
Merrillville, IN Termination property; redevelop existing store for At Home and small shop retail 132,000 Substantially complete
Elkhart, IN Termination property; existing store has been released to Big R Stores 86,500 Substantially complete
San Antonio, TX Recapture and repurpose auto center space for Orvis, Jared's Jeweler, Shake Shack and small shop retail 18,900 Substantially complete
Bowie, MD Recapture and repurpose auto center space for BJ's Brewhouse 8,200 Delivered to tenant
Albany, NY Recapture and repurpose auto center space for BJ's Brewhouse and additional small shop retail 28,000 Underway Q4 2017
Hagerstown, MD Recapture and repurpose auto center space for BJ's Brewhouse, Verizon and additional restaurants 15,400 Underway Q4 2017
Roseville, MI Partial recapture; redevelop existing store for At Home 100,400 Underway Q4 2017
Troy, MI Partial recapture; redevelop existing store for At Home 100,000 Underway Q4 2017
Warwick, RI Recapture and repurpose auto center space for BJ's Brewhouse and additional retail 27,900 Underway Q4 2017
Henderson, NV Termination property; redevelop existing store for At Home, Seafood City and additional retail 144,400 Underway Q4 2017
Rehoboth Beach, DE Partial recapture; redevelop existing store for Christmas Tree Shops and That! and PetSmart 56,700 Underway Q1 2018
Ft. Wayne, IN Site densification; new outparcels for BJ's Brewhouse (substantially complete) and Chick-Fil-A (project expansion) 12,000 Underway Q1 2018
Kearney, NE Termination property; redevelop existing store for Marshall's, PetSmart and additional junior anchors 92,500 Q3 2017 Q2 2018
Guaynabo, PR Partial recapture; redevelop existing store for Planet Fitness and Capri 56,100 Q3 2017 Q2 2018
Jefferson City, MO Termination property; redevelop existing store for Orscheln Farm and Home 96,000 Q3 2017 Q2 2018
Olean, NY Partial recapture; redevelop existing store for Marshall's and additional retail 45,000 Q3 2017 Q2 2018
Cullman, AL Termination property; redevelop existing store for Bargain Hunt and additional junior anchors 99,000 Q3 2017 Q3 2018
Roseville, CA Recapture and repurpose auto center space for AAA auto care 10,400 Q4 2017 Q2 2018
Dayton, OH Recapture and repurpose auto center space for Outback Steakhouse and additional restaurants 14,100 Q4 2017 Q4 2018
Florissant, MO Site densification; new outparcel for Chick-Fil-A 5,000 Q1 2018 Q3 2018
New Iberia, LA Termination property; redevelop existing store for Rouses Supermarkets, additional junior anchors and small shop retail 93,100 Q1 2018 Q1 2019
 
Total Project Costs $10 - $20 Million
Total Estimated Estimated
Project Construction Substantial
Property Description Square Feet   Start Completion
Braintree, MA 100% recapture; redevelop existing store for Nordstrom Rack, Saks OFF 5th and additional retail 90,000 Substantially complete
Honolulu, HI 100% recapture; redevelop existing store for Longs Drugs (CVS), PetSmart and Ross Dress for Less 79,000 Substantially complete
Madison, WI Partial recapture; redevelop existing store for Dave & Busters, Total Wine & More, additional retail and restaurants 75,300 Underway Q4 2017
West Jordan, UT Partial recapture; redevelop existing store and attached auto center for Burlington Stores and additional retail 81,400 Underway Q4 2017
Anderson, SC 100% recapture (project expansion); redevelop existing store for Burlington Stores, Sportsman's Warehouse, additional retail and restaurants 111,300 Underway Q4 2017
Fairfax, VA Partial recapture; redevelop existing store and attached auto center for Dave & Busters, additional junior anchors and restaurants 110,300 Underway Q1 2018
Charleston, SC 100% recapture (project expansion); redevelop existing store and detached auto center for Burlington Stores and additional retail 133,500 Underway Q1 2018
North Hollywood, CA Partial recapture; redevelop existing store for Burlington Stores and additional junior anchors 79,800 Underway Q1 2018
Orlando, FL 100% recapture; demolish and construct new buildings for Floor & Décor, Orchard Supply Hardware, Longhorn Steakhouse, small shop retail and restaurants 139,200 Underway Q2 2018
Springfield, IL Termination property; redevelop existing store for Burlington Stores, Binny's Beverage Depot, Orange Theory Fitness, Outback Steakhouse, additional junior anchors and small shop retail 133,400 Underway Q2 2018
Santa Cruz, CA Partial recapture; redevelop existing store for TJ Maxx, HomeGoods and Petco 62,200 Q3 2017 Q1 2018
Saugus, MA Partial recapture; redevelop existing store and detached auto center for Round One and restaurants 99,000 Q3 2017 Q1 2018
Thornton, CO Termination property; redevelop existing store for Vasa Fitness and additional junior anchors 191,600 Q3 2017 Q1 2018
North Miami, FL 100% recapture; redevelop existing store for Michael's, PetSmart and Ross Dress for Less 124,300 Q3 2017 Q2 2018
Hialeah, FL 100% recapture; redevelop existing store for Bed, Bath & Beyond and additional junior anchors to join current tenant, Aldi 88,400 Q3 2017 Q2 2018
Cockeysville, MD Partial recapture; redevelop existing store for HomeGoods, Michael's Stores, additional junior anchors and restaurants 83,500 Q4 2017 Q2 2018
Salem, NH Site densification; new theatre for Cinemark

Recapture and repurpose auto center for restaurant space.

71,200 Q4 2017 Q3 2018
Temecula, CA Partial recapture; redevelop existing store and detached auto center for Round One, small shop retail and restaurants 65,100 Q1 2018 Q4 2018
Canton, OH Partial recapture; redevelop existing store for Dave & Busters and restaurants 83,900 Q1 2018 Q2 2019
North Riverside, IL Partial recapture; redevelop existing store and detached auto center for Round One, additional junior anchors, small shop retail and restaurants 103,900 Q1 2018 Q3 2019
 
Total Project Costs over $20 Million
Total Estimated Estimated
Project Construction Substantial
Property Description Square Feet   Start Completion
Memphis, TN

100% recapture; demolish and construct new buildings for LA Fitness, Nordstrom Rack, Ulta Beauty, Hopdoddy Burger Bar, additional junior anchors, restaurants and small shop retail

135,200 Underway Q3 2017
Wayne, NJ Partial recapture; redevelop existing store for Dave & Busters, additional junior anchors and restaurants

Recapture and repurpose detached auto center for Cinemark (project expansion)

108,800 Underway Q4 2017
West Hartford, CT 100% recapture; redevelop existing store and detached auto center for BuyBuy Baby, Cost Plus World Market, REI, Saks OFF Fifth, other junior anchors, Shake Shack and additional small shop retail 147,600 Underway Q1 2018
St. Petersburg, FL 100% recapture; demolish and construct new buildings for Dick's Sporting Goods, Lucky's Market, PetSmart, Five Below, Chili's Grill & Bar, Pollo Tropical, Longhorn Steakhouse and additional small shop retail and restaurants 142,400 Underway Q2 2018
Carson, CA 100% recapture (project expansion); redevelop existing store for Burlington Stores, Ross Dress for Less and additional retail 163,800 Q3 2017 Q1 2019
Santa Monica, CA 100% recapture; redevelop existing building into premier, mixed-use asset featuring unique, small-shop retail and creative office space 96,500 Q4 2017 Q4 2019
Watchung, NJ 100% recapture; demolish full-line store and construct new buildings for HomeSense, Sierra Trading Post, Ulta Beauty and additional small shop retail and restaurants

Demolish detached auto center and construct a freestanding Cinemark theater

126,700 Q1 2018 Q2 2019
East Northport, NY Termination property (notice period); redevelop existing store and attached auto center for AMC Theatres, 24 Hour Fitness, additional junior anchors and small shop retail 179,700 Q2 2018 Q4 2019
 

JV Properties

On July 12, 2017, the Company completed the GGP Transactions for gross consideration of $247.6 million. Pursuant to the GGP Transactions, the Company (i) sold to GGP the Company’s 50% interest in eight of the 12 assets in the existing joint venture between the two companies for $190.1 million; and (ii) sold to GGP a 50% joint venture interest in five additional assets for $57.5 million.

The table below presents the properties included in each transaction, as well as the 4 properties remaining in the Company’s original JV with GGP:

Eight Existing JV Assets Sold to GGP     Four Remaining Assets in Original JV with GGP     Five Assets Contributed to New JV with GGP
Retail Center     Location Retail Center     Location Retail Center     Location
Coronado Center Albuquerque, NM Alderwood Lynwood, WA Altamonte Mall Altamonte Springs, FL
The Mall in Columbia Columbia, MD Natick Collection Natick, MA Cumberland Mall Atlanta, GA
Oakbrook Center Oakbrook, IL Sooner Mall Norman, OK Coastland Center Naples, FL
Paramus Park Paramus, NJ Stonebriar Center Frisco, TX Northridge Fashion Center Northridge, CA
Pembroke Lakes Pembroke Pines, FL Willowbrook Mall Wayne, NJ
Ridgedale Center Minnetonka, MN
Staten Island Mall Staten Island, NY
Valley Plaza Bakersfield, CA
 

The Company continues to own 50% interests in 10 assets in an unconsolidated JV with Simon Property Group, Inc. (the “Simon JV”) and 50% interest in nine assets in an unconsolidated JV with The Macerich Company (the “Macerich JV”).

Leasing Update

During the quarter ended June 30, 2017, the Company signed new leases totaling 598,000 square feet at an average annual base rent of $18.95 PSF. On a same-space basis, new rents averaged 3.7x prior rents for space currently or formerly occupied by Sears Holdings, increasing to $18.99 PSF for new tenants compared to $5.20 PSF paid by Sears Holdings across 592,000 square feet.

Since inception in July 2015, the Company has signed new leases totaling nearly 3.4 million square feet at an average annual base rent of $18.28 PSF. On a same-space basis, new rents averaged 4.2x prior rents for space currently or formerly occupied by Sears Holdings, increasing to $18.29 PSF for new tenants compared to $4.36 PSF paid by Sears Holdings across over 3.1 million square feet.

The table below provides a summary of the Company’s leasing activity since inception, including unconsolidated JVs presented at the Company’s proportional share:

                         
(in thousands except number of leases and PSF data)
                 
Total Release of Sears Holdings Space
Leased Annual Annual Leased Annual Annual Releasing
Quarter Leases GLA Rent Rent PSF Leases GLA Rent Rent PSF Spread
Q4 2015 9 154 $ 4,650 $ 30.28 6 130 $ 3,820 $ 29.41 4.4 x
Q1 2016 7 214 6,990 32.60 7 214 6,990 32.60 5.7 x
Q2 2016 15 422 7,240 17.15 13 363 6,440 17.75 4.7 x
Q3 3016 14 543 7,470 13.74 12 456 6,250 13.70 4.0 x
Q4 2016 29 891 14,900 16.72 27 849 13,930 16.41 4.1 x
Q1 2017 22 535 8,780 16.41 21 530 8,660 16.34 4.0 x
Q2 2017   28   598   11,340   18.95   26   592   11,240   18.99   3.7 x
Total   124   3,357 $ 61,370 $ 18.28   112   3,134 $ 57,330 $ 18.29   4.2 x
 

During the quarter ended June 30, 2017, the Company added $11.3 million of new third-party income and increased annual base rent attributable to third-party tenants to 43.9% of total annual base rent from 29.3% as of June 30, 2016, including all signed leases and net of rent attributable to the associated space to be recaptured.

The table below provides a summary of all the Company’s signed leases as of June 30, 2017, including unconsolidated JVs presented at the Company’s proportional share:

null
(in thousands except number of leases and PSF data)
                     
Number of Leased % of Total Annual % of Total Annual
Tenant Leases GLA Leased GLA Rent Annual Rent Rent PSF
Sears Holdings (1)   211   29,126   81.6 % $ 131,490   56.1 % $ 4.51
In-Place Third-Party Leases 248 3,639 10.2 % 47,232 20.1 % 12.98
SNO Third-Party Leases   108   2,937   8.2 %   55,762   23.8 %   18.98
Sub-Total Third-Party Leases   356   6,576   18.4 %   102,994   43.9 %   15.66
Total   567   35,702   100.0 % $ 234,484   100.0 % $ 6.57

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