# Seritage Growth Properties: Form 10-Q for the period ended Sep 30, 2023

- Company: [Seritage Growth Properties](/companies/srg.md) (CIK 1628063)
- Form: 10-Q
- Filed: 2023-11-08
- Accepted by EDGAR: Nov 8, 2023, 16:43 ET
- Period: 2023-09-30
- Accession: 0000950170-23-061211
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1628063/000095017023061211/srg-20230930.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1628063/000095017023061211/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-07-01 to 2023-09-30 | $523.0k | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2023-01-01 to 2023-09-30 | $1.2m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Interest expense | 3 months, 2023-07-01 to 2023-09-30 | $9.8m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2023-01-01 to 2023-09-30 | $37.5m | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-07-01 to 2023-09-30 | $89.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2023-01-01 to 2023-09-30 | $38.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-07-01 to 2023-09-30 | −$902.0k | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2023-01-01 to 2023-09-30 | −$158.6m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-07-01 to 2023-09-30 | −$0.04 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2023-01-01 to 2023-09-30 | −$2.89 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-07-01 to 2023-09-30 | −$0.04 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2023-01-01 to 2023-09-30 | −$2.89 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-07-01 to 2023-09-30 | 56,183,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2023-01-01 to 2023-09-30 | 56,139,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2023-01-01 to 2023-09-30 | −$42.0m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Cash and equivalents | at 2023-09-30 | $98.9m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2023-09-30 | $1.02bn | us-gaap:Assets |
| Total liabilities | at 2023-09-30 | $456.0m | us-gaap:Liabilities |
| Shareholders' equity | at 2023-09-30 | $559.2m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 42,175 characters.

*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 the adoption of the Company’s Plan of Sale (defined below), Seritage was principally engaged in the ownership, development, redevelopment, disposition, management and leasing of diversified retail and mixed-use properties throughout the United States. Seritage will continue to actively manage each remaining location until such time as each property is sold. As of September 30, 2023, the Company’s portfolio consisted of interests in 42 properties comprised of approximately 5.6 million square feet of gross leasable area (“GLA”) or build-to-suit leased area, approximately 126 acres held for or under development until time of sale and approximately 2.9 million square feet or approximately 259 acres to be disposed of in its current state. The portfolio consists of approximately 4.3 million square feet of GLA held by 33 consolidated properties (such properties, the “Consolidated Properties”) and 1.2 million square feet of GLA held by nine unconsolidated properties (such properties, the “Unconsolidated Properties”).

### 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 increasing development and construction costs, deteriorating market conditions and, in certain instances excluding Aventura, agreeing to sell below carrying value, we have recognized $107.0 million of impairment losses during the nine months ended September 30, 2023, which are included in impairment on real estate assets within the condensed consolidated statements of operations. We recognized $12.7 million of other-than-temporary impairment losses to our investments in unconsolidated entities during the nine months ended September 30, 2023. No impairment losses or other-than-temporary impairment losses in investments in unconsolidated entities were recorded during the three months ended September 30, 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.

### 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.

The Company continues to assess the best use for all sites within its portfolio, including residential, retail and converting land area to pad sites. In order to achieve its objective, the Company intends to execute the following strategies:

- *Multi-tenant Retail:* Our portfolio of seven multitenant retail assets provides positive cash flow and are primarily leased to a variety of national credit tenants. As of September 30, 2023, this portfolio was 69.8% 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 through entitlements, leasing and development. As of September 30, 2023, our full portfolio included approximately 591 acres of land, or an average of 14.1 acres per site, and our most significant geographic concentrations were in higher growth markets in California, Florida, Texas, and the Northeast.
- *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.

#### Comparison of the Three Months Ended September 30, 2023 to the Three Months Ended September 30, 2022

The following table presents selected data on comparative results from the Company’s condensed consolidated statements of operations for the three months ended September 30, 2023, as compared to the three months ended September 30, 2022 (in thousands):

| Revenue | Three Months Ended September 30, 2023 | 2022 | $ Change |
| --- | ---: | ---: | ---: |
| Rental income | $4,525 | $23,253 | $(18,728) |
| Expenses |  |  |  |
| Property operating | (4,564) | (9,700) | 5,136 |
| Real estate taxes | (1,204) | (6,483) | 5,279 |
| Depreciation and amortization | (2,913) | (9,169) | 6,256 |
| General and administrative | (8,030) | (10,811) | 2,781 |
| Litigation settlement | — | (533) | 533 |
| Gain on sale of real estate, net | 18,506 | 45,433 | (26,927) |
| Loss on sale of interest in unconsolidated entities | (916) | (139) | (777) |
| Impairment of real estate assets | — | (10,275) | 10,275 |
| Equity in income (loss) of unconsolidated entities | 993 | (2,275) | 3,268 |
| Interest and other income | 2,030 | (1,047) | 3,077 |
| Interest expense | (9,763) | (21,916) | 12,153 |

#### Rental Income

The following table presents the results for rental income for the three months ended September 30, 2023, as compared to the corresponding period in 2022 (in thousands):

|  | Three Months Ended September 30, 2023 Rental Income | % of Total Rental Income | Three Months Ended September 30, 2022 Rental Income | % of Total Rental Income | $ Change |
| --- | ---: | ---: | ---: | ---: | ---: |
| In-place retail leases | $6,022 | 133.1% | $26,129 | 112.4% | (20,107) |
| Straight-line rent (expense) | (1,503) | (33.2%) | (2,873) | -12.4% | 1,370 |
| Amortization of the above/below market leases | 6 | 0.1% | (3) | 0.0% | 9 |
| Total rental income | $4,525 | 100.0% | $23,253 | 100.0% | $(18,728) |

The decrease of $20.1 million in in-place retail lease rental income during 2023 is primarily due to property sales.

The increase of $1.4 million in straight-line rental income was primarily due to an adjustment recorded during the quarter ended September 30, 2022.

#### Property Operating Expenses and Real Estate Taxes

The decrease of $5.1 million in property operating expense for the three months ended September 30, 2023 was due primarily to asset sales and partially offset by a decrease in amounts capitalized.

The decrease of $5.3 million in real estate taxes for the three months ended September 30, 2023 was due primarily to asset sales and refunds received during the three months ended September 30, 2023.

#### Depreciation and Amortization Expenses

The decrease of $6.3 million in depreciation and amortization expenses for the three months ended September 30, 2023 was primarily due to a decrease of $6.3 million in net scheduled depreciation due to property sales.

#### General and Administrative Expenses

General and administrative expenses consist of personnel costs, including amortization of costs associated with share-based compensation awarded in prior years, professional fees, office expenses and overhead expenses.

The decrease of $2.8 million in general and administrative expenses for the three months ended September 30, 2023 was driven by a decrease in legal expenses resulting from settling the outstanding Litigation described below in 2022 as well as a decrease in compensation expenses due to a decrease in employee headcount. This was partially offset by an increase in consulting related expenses utilized to execute the plan of sale.

#### Gain on Sale of Real Estate, Net

During the three months ended September 30, 2023, the Company sold six properties for aggregate consideration of $62.9 million and recorded a gain totaling $18.5 million, which is included in gain on sale of real estate, net within the condensed consolidated statements of operations.

#### Loss on Sale of Interest in Unconsolidated Entities

During the three months ended September 30, 2023, the Company sold its interest in three unconsolidated properties and recorded a loss totaling $0.9 million, which is included in loss on sale of interest in unconsolidated entities within the consolidated statements of operations.

#### Impairment of Real Estate Assets

During the three months ended September 30, 2023, the Company recognized no impairment of real estate assets. During the three months ended September 30, 2022, the Company recognized $10.3 million of impairment losses as a result of the Company's plan to pursue the Plan of Sale, which is included within the condensed consolidated statements of operations..

#### Equity in Loss of Unconsolidated Entities

The increase of $3.3 million in income (loss) of unconsolidated entities for the three months ended September 30, 2023 was driven by a straight-line rent adjustment of $5.2 million at one unconsolidated entity, which we picked up as our share of $2.6 million compared to recording a $3.1 million other-than-temporary impairment charge against one investment during the three months ended September 30, 2022. In addition, two unconsolidated entities recorded net gains of $3.4 million during the three months ended September 30, 2022, which resulted in us picking up our share of $1.7 million in gains. This impairment arose from the Company’s impairment analysis pursuant to ASC 323, Equity Method and Joint Ventures.

#### Interest and other income

The increase of $3.1 million of interest and other income is primarily due the Company recognizing miscellaneous expense of $2.2 million in the prior year, relating to historic receivables that the Company deemed to no longer be collectable upon the finalization of the Sears litigation settlement. The Company also recognized greater interest revenue on the Company’s cash accounts.

#### Interest Expense

The decrease of $12.2 million in interest expense for the three months ended September 30, 2023 was driven by the partial Term Loan Facility pay down totaling $1.2 billion as of September 30, 2023.

#### Comparison of the Nine Months Ended September 30, 2023 to the Nine Months Ended September 30, 2022

The following table presents selected data on comparative results from the Company’s condensed consolidated statements of operations for the three months ended September 30, 2023, as compared to the three months ended September 30, 2022 (in thousands):

| Revenue | Nine Months Ended September 30, 2023 | 2022 | $ Change |
| --- | ---: | ---: | ---: |
| Rental income | $10,459 | $81,755 | $(71,296) |
| Expenses |  |  |  |
| Property operating | (17,945) | (31,535) | 13,590 |
| Real estate taxes | (4,910) | (21,056) | 16,146 |
| Depreciation and amortization | (11,628) | (31,772) | 20,144 |
| General and administrative | (30,349) | (30,996) | 647 |
| Litigation settlement | — | (35,533) | 35,533 |
| Gain on sale of real estate, net | 64,386 | 112,449 | (48,063) |
| Gain (loss) on sale of interest in unconsolidated entities | 6,407 | (139) | 6,546 |
| Impairment of real estate assets | (107,043) | (120,609) | 13,566 |
| Equity in loss of unconsolidated entities | (49,077) | (69,071) | 19,994 |
| Interest and other income | 17,484 | (937) | 18,421 |
| Interest expense | (37,493) | (67,167) | 29,674 |

#### Rental Income

The following table presents the results for rental income for the nine months ended September 30, 2023, as compared to the corresponding period in 2022 (in thousands):

|  | Nine Months Ended September 30, 2023 Rental Income | % of Total Rental Income | Nine Months Ended September 30, 2022 Rental Income | % of Total Rental Income | $ Change |
| --- | ---: | ---: | ---: | ---: | ---: |
| In-place retail leases | $26,586 | 254.2% | $80,331 | 98.3% | $(53,745) |
| Straight-line rent (expense) income | (16,142) | -154.3% | 1,447 | 1.7% | (17,589) |
| Amortization of above/below market leases | 15 | 0.0% | (23) | 0.0% | 38 |
| Total rental income | $10,459 | 100.0% | $81,755 | 100.0% | $(71,296) |

The decrease of $53.7 million in in-place retail lease rental income during 2023 is primarily due to property sales.

The decrease of $17.6 million in straight-line rental income was primarily due to a reversal of $16.3 million of straight-line rent due to property sales.

#### Property Operating Expenses and Real Estate Taxes

The decrease of $13.6 million in property operating expense for the nine months ended September 30, 2023 was due primarily to asset sales and partially offset by a decrease in amounts capitalized.

The decrease of $16.1 million in real estate taxes for the nine months ended September 30, 2023 was due primarily to asset sales and refunds received during the nine months ended September 30, 2023.

#### Depreciation and Amortization Expenses

The decrease of $20.1 million in depreciation and amortization expenses for the nine months ended September 30, 2023 was primarily due to a decrease of $21.7 million in net scheduled depreciation due to property sales.

#### General and Administrative Expenses

General and administrative expenses consist of personnel costs, including amortization of costs associated with share-based compensation awarded in prior years, professional fees, office expenses and overhead expenses.

The decrease of $0.6 million in general and administrative expenses for the nine months ended September 30, 2023 was primarily driven by decreases in legal expenses primarily due to the Company settling outstanding litigation in 2022, and compensation expenses due to a decrease in employee headcount. This was partially offset by increases in consulting expenses utilized to execute the plan of sale, and employee bonus expenses to retain employees.

#### Gain on Sale of Real Estate, Net

During the nine months ended September 30, 2023, the Company sold 49 properties for aggregate consideration of $602.4 million and recorded a gain totaling $64.4 million, which is included in loss on sale of real estate, net within the condensed consolidated statements of operations.

#### Gain on Sale of Interest in Unconsolidated Entities, Net

During the nine months ended September 30, 2023, the Company sold its interest in eight unconsolidated properties, and recorded a gain totaling $6.4 million, which is included in gain on sale of interest in unconsolidated entities within the consolidated statements of operations.

#### Impairment of Real Estate Assets

During the nine months ended September 30, 2023, the Company recognized $107.0 million in impairment of real estate assets, which is included within the condensed consolidated statements of operations. This impairment arose primarily from recognizing $101.5 million of impairment on the Company's development property in Aventura, FL due to continued increasing development and construction costs and deteriorating market conditions, which triggered the need for an impairment analysis pursuant to ASC 360, *Property, Plant and Equipment*. The Company determined the fair value of this property by applying a discount to projected cash flows. During the nine months ended September 30, 2022, the Company recognized $120.6 million of impairment losses as a result of the Company's plan to pursue the Plan of Sale.

#### Equity in Loss of Unconsolidated Entities

The decrease of $20.0 million in loss in the unconsolidated entities for the nine months ended September 30, 2023 was driven by a $70.8 million impairment charge recorded in one investment resulting in the Company picking up their share of this impairment at $35.4 million and a $12.7 million other-than-temporary impairment charge recorded against two investments compared to a $61.1 million impairment charge recorded in two underlying properties, resulting in the Company picking up its share of impairment totaling $30.6 million plus other-than-temporary impairment recorded to our investments of $35.6 million during the nine months ended September 30, 2022. These impairments arose from the Company’s impairment analysis pursuant to ASC 323, Equity Method and Joint Ventures.

#### Interest and other income

The increase of $18.4 million of interest and other income is primarily due to the receipt of $11.6 million relating to the settlement with the D&O Insurers, greater interest received on the Company's cash accounts and the Company recognizing miscellaneous expense of $2.2 million in the prior year, relating to historic receivables that the Company deemed to no longer be collectable upon the finalization of the Sears litigation settlement.

#### Interest Expense

The decrease of $29.7 million in interest expense for the nine months ended September 30, 2023 was driven by the partial Term Loan Facility pay down totaling $1.2 billion as of September 30, 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 nine months ended September 30, 2023 and the Company recorded net operating cash outflows of $42.0 million. Additionally, the Company generated investing cash inflows of $645.6 million during the nine months ended September 30, 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. We began our capital recycling program in July 2017 and have been monetizing assets since. In March of 2022, we elected to terminate our REIT status effective January 1, 2022 in order to remove any restrictions around asset sales. On October 24, 2022, we received shareholder approval of the Plan of Sale.
- We sold 90 Consolidated Properties, and additional outparcels at certain properties, and generated approximately $986.8 million of gross proceeds from the beginning of our capital recycling program in July 2017 through the date our REIT status terminated on December 31, 2021;
- We sold 40 Consolidated Properties, and additional outparcels at certain properties, and generated approximately $438.1 million of gross proceeds from December 31, 2021, the date we terminated our REIT status, through the approval of the Plan of Sale on October 24, 2022;
- From the approval of the Plan of Sale on October 24, 2022 through September 30, 2023, we sold 65 Consolidated Properties, and additional outparcels at certain properties, and generated approximately $756.9 million of gross proceeds.
- Sales of interests in Unconsolidated Properties. 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;
- We sold our interests in 15 Unconsolidated Properties and generated approximately $278.1 million of gross proceeds from the beginning of our capital recycling program in July 2017 through the date our REIT status terminated on December 31, 2021;
- We sold our interests in 8 Unconsolidated Properties and generated approximately $84.8 million of gross proceeds since we terminated our REIT status on December 31, 2021, through the approval of the Plan of Sale on October 24, 2022;
- From the approval of the Plan of Sale on October 24, 2022 through September 30, 2023, we sold our interests in eight Unconsolidated Properties and generated approximately $140.7 million of gross proceeds.
- Unconsolidated Properties. As of September 30, 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;

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 provided exceptions to 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 nine months ended September 30, 2023, we have repaid $630 million against the principal of the Term Loan Facility. Our outstanding balance as of September 30, 2023, is $400 million. Subsequent to September 30, 2023, the Company made an additional $40 million principal prepayment reducing the balance of the Term Loan Facility to $360 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 Nine Months Ended September 30, 2023 Compared to the Nine Months Ended September 30, 2022

The following table summarizes the Company’s cash flow activities for the nine months ended September 30, 2023 and 2022, respectively (in thousands):

|  | Nine Months Ended September 30, 2023 | 2022 | $ Change |
| --- | ---: | ---: | ---: |
| Net cash used in operating activities | $(42,021) | $(73,547) | $31,526 |
| Net cash provided by investing activities | 645,564 | 296,127 | 349,437 |
| Net cash used in financing activities | (633,634) | (195,745) | (437,889) |

#### 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, $719.1 million of net proceeds from the sale of real estate and interests in unconsolidated entities, offset by development of real estate of ($61.6) million and investments in unconsolidated entities of ($11.9) million; and

−In 2022, $329.1 million of net proceeds from the sale of real estate and $67.6 million of net proceeds and distributions from the disposition of interests in unconsolidated entities offset by development of real estate of ($78.1) million and investments in unconsolidated entities of ($22.4) million.

#### Cash Flows from Financing Activities

Significant components of net cash used in financing activities include:

−In 2023, ($630.0) million cash repayment of Term Loan Facility principal and cash payments of preferred dividends, ($3.7) million; and

−In 2022, ($170.0) million cash repayment of Term Loan Facility principal, ($22.1) million cash repayment to terminate sale-leaseback financing obligation, and cash payments of preferred dividends, ($3.7) million.

#### Dividends and Distributions

The Company’s Board of Trustees did not declare dividends on the Company’s Class A common shares during the nine months ended September 30, 2023 and 2022, respectively.

The Company’s Board of Trustees declared the following dividends on preferred shares during 2023 and 2022:

| Declaration Date 2023 | Record Date | Payment Date | Series A Preferred Share |
| --- | --- | --- | ---: |
| October 30 | December 29 | January 16, 2024 | $0.43750 |
| July 25 | September 29 | October 13 | 0.43750 |
| 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 September 30, 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 and nine months ended September 30, 2023, the Company invested $11.7 million and $61.6 million, respectively, in our consolidated development and operating properties and an additional $0.8 million and $11.9 million, respectively, into our unconsolidated joint ventures, as we continue to advance our business plans, including our previously announced projects.

During the three and nine months ended September 30, 2022, the Company invested $25.0 million and $78.1 million, respectively, in our consolidated development and operating properties and an additional $7.0 million and $22.4 million, respectively, into our unconsolidated joint ventures.

During the three and nine months ended September 30, 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.

Beginning in 2019, the Company had been engaged in litigation related to the bankruptcy of Sears Holding (the “Litigation”). On September 2, 2022, the United States Bankruptcy Court for the Southern District of New York entered an order approving a settlement amongst the parties to the Litigation and, on October 18, 2022, the Litigation was dismissed.

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 Litigation. 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 nine months ended September 30, 2023, we reached settlement agreements with the other two D&O Insurers for gross proceeds of $11.6 million. We received $11.6 million during the nine months ended September 30, 2023, which is recorded in interest and other income in the consolidated statements of operations.

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 Litigation and related matters.

### 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 nine months ended September 30, 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 and nine months ended September 30, 2023 and 2022 (in thousands):

| NOI and Total NOI | Three Months Ended September 30, 2023 | 2022 | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Net loss | $(902) | $(3,481) | $(158,595) | $(212,551) |
| Termination fee income | — | — | — | (369) |
| Management and other fee income | (523) | (248) | (1,152) | (2,355) |
| Depreciation and amortization | 2,913 | 9,169 | 11,628 | 31,772 |
| General and administrative expenses | 8,030 | 10,811 | 30,349 | 30,996 |
| Litigation settlement | — | 533 | — | 35,533 |
| Equity in loss of unconsolidated entities | (993) | 2,275 | 49,077 | 69,071 |
| Loss (gain) on sale of interest in unconsolidated entities | 916 | 139 | (6,407) | 139 |
| Gain on sale of real estate, net | (18,506) | (45,433) | (64,386) | (112,449) |
| Impairment of real estate assets | — | 10,275 | 107,043 | 120,609 |
| Interest and other income | (2,030) | 1,047 | (17,484) | 937 |
| Interest expense | 9,763 | 21,916 | 37,493 | 67,167 |
| (Benefit) provision for income taxes | 89 | 67 | 38 | 295 |
| Straight-line rent | 1,504 | 2,873 | 16,142 | (1,447) |
| Above/below market rental expense | 45 | 54 | 138 | 175 |
| NOI | $306 | $9,997 | $3,884 | $27,523 |
| Unconsolidated entities |  |  |  |  |
| Net operating income of unconsolidated entities | 3,445 | 2,450 | 6,404 | 6,563 |
| Straight-line rent | (2,629) | (305) | (3,069) | (860) |
| Above/below market rental expense | (3) | 8 | (1) | 19 |
| Total NOI | $1,119 | $12,150 | $7,218 | $33,245 |

- 36 -

## Market risk

As filed, 146 characters.

There were no material changes in the Quantitative and Qualitative Disclosures about Market Risk set forth in our 2022 Annual Report on Form 10-K.

## Controls and procedures

As filed, 2,992 characters.

### Evaluation of Disclosure Controls and Procedures.

Under the supervision and with the participation of our management, including the principal executive officer and the principal financial officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on this evaluation, our principal executive officer and our principal financial officer concluded that, as of the end of the reporting period covered by this report, our disclosure controls and procedures were not effective due to the material weakness described below.

Notwithstanding the material weaknesses in our internal control over financial reporting, our principal executive officer and principal financial officer have concluded that the unaudited condensed consolidated financial statements included in this Form 10-Q fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States of America.

### Material Weakness

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. In the course of preparing our financial statements for the interim period ended June 30, 2023, management identified a material weakness in our internal control over financial reporting that existed due to a deficiency in the design of our control over the identification of impairment indicators for investments in real estate and documentation of evidence of review. The deficiency relates to the failure to identify potential indicators of impairment related to development projects in a timely manner. This deficiency contributed to the potential for there to be material errors in our financial statements.

### Remediation Plan

Management is enhancing its internal control over the identification of impairment indicators for investments in real estate to include specific indicators related to development assets. In addition, management is enhancing the documentation of evidence reviewed as part of the control.

The material weakness cannot be considered completely remediated until the applicable control has operated for a sufficient period of time and management has concluded, through testing, that the control is operating effectively.

### Changes in Internal Controls.

Other than the remediation efforts described above, there were no other changes in our internal control over financial reporting that occurred during the three months ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 3,551 characters.

Please refer to Item 1A—Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2022 for a description of certain material risks and uncertainties to which our business, financial condition and results of operations are subject. There have been no material changes to the risk factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2022, except as set forth below.

***We have identified a material weakness in our internal control over financial reporting, and our management has concluded that our internal control over financial reporting and disclosure controls and procedures were not effective as of the end of the period covered by this report. While we are working to remediate the identified material weakness, we cannot assure you that additional material weaknesses or significant deficiencies will not occur in the future. If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud. As a result, our stockholders could lose confidence in our financial reporting, which could harm our business and the trading price of our common stock***

The Sarbanes-Oxley Act of 2002 requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. As disclosed in this Quarterly Report on Form 10-Q, in the course of preparing our interim financial statements for the quarter ended June 30, 2023, we identified a material weakness in our internal control over financial reporting. The material weakness was due to a deficiency in the design of our control over the identification of impairment indicators for investments in real estate and documentation of evidence of review. The deficiency relates to the failure to identify potential indicators related to development projects in a timely manner, as described in more detail under the heading Part I—Item 4. Controls and Procedures in this Quarterly Report on Form 10-Q. We have commenced efforts to remediate the material weakness as described in more detail under the heading Part I—Item 4. Controls and Procedures in this Quarterly Report on Form 10-Q. The material weakness in our internal control over financial reporting will not be considered remediated until the controls operate for a sufficient period of time and management has concluded, through testing, that these controls operate effectively. If we do not successfully remediate the material weakness, or if other material weaknesses or other deficiencies arise in the future, we may be unable to accurately report our financial results, which could cause our financial results to be materially misstated and require restatement. In such case, we may be unable to maintain compliance with securities law requirements regarding timely filing of periodic reports in addition to applicable stock exchange listing requirements, investors may lose confidence in our financial reporting and our stock price may decline as a result. We cannot assure you that the measures we have taken to date, or any measures we may take in the future, will be sufficient to remediate the control deficiencies that led to a material weakness in our internal control over financial reporting or that they will prevent or avoid potential future material weaknesses. In addition, the Company will continue to evaluate its portfolio, including its development plans and holdings periods, which may result in additional impairments in future periods.

Filed Nov 8, 2023.
Source: SEC EDGAR, the filing index for accession 0000950170-23-061211. Last ingested by Listed: Oct 27, 2026, 16:53 ET. No prices; not investment advice.