8-K: Seritage Growth Properties Reports First Quarter 2024 Results Amidst Strategic Asset Sales

Seritage Growth Properties continues its plan of sale, generating $80 million in asset sales year-to-date and repaying an equal amount of debt.

Summary

• Seritage Growth Properties reported its financial and operating results for the first quarter of 2024, ending March 31.
• The company generated $48.8 million in gross proceeds from asset sales during the quarter, including $34 million from a multi-tenant retail asset and $14.8 million from non-core assets.
• Subsequent to the quarter end, an additional $31.8 million in gross proceeds were generated from sales.
• As of May 7, 2024, the company had $102.4 million in cash on hand, including $11.7 million of restricted cash.
• The company reported a net loss attributable to common shareholders of $20.2 million, or $0.36 per share.
• Total Net Operating Income (NOI) was $2.1 million for the quarter.
• The company made $30 million in principal repayments on its term loan facility during the quarter, reducing the balance to $330 million as of March 31, 2024.
• An additional $50 million in principal payments were made after the quarter end, reducing the balance to $280 million as of May 7, 2024.
• The company signed one lease for 1.6 thousand square feet at a projected annual net rent of $110.25 per square foot.
• Five tenants opened during the quarter, totaling approximately 53.5 thousand square feet at an average net rent of $53.98 per square foot.
• The company is adjusting pricing projections for some assets due to market conditions.
• The company has four assets under contract for anticipated gross proceeds of $30.1 million as of May 7, 2024.
• The company has accepted offers on four assets for total gross proceeds of approximately $79.1 million.

Sentiment

Score: 5

Explanation: The sentiment is neutral to slightly negative. While the company is making progress on its strategic plan of asset sales and debt reduction, it is still experiencing losses and downward pricing pressure on its assets. The company is also facing challenging market conditions.

Positives

• The company has successfully sold $80 million of assets year-to-date, which has allowed for an equal amount of debt repayment.
• The company is actively executing its plan of sale, with significant asset sales and debt reduction.
• The company is seeing some investors returning to the development market.
• The company has a leasing pipeline of over 100 thousand square feet.
• The company is making progress on its premier mixed-use projects, particularly in Aventura, FL.

Negatives

• The company reported a net loss of $20.2 million for the quarter.
• Total NOI decreased to $2.1 million compared to $3.1 million in the same quarter last year.
• The company is experiencing downward pricing pressure on its assets due to challenging market conditions.
• The company is adjusting its pricing projections for some assets.
• The company's strategic review process remains ongoing with no guarantee of success.
• The company's board does not expect to declare dividends on its common shares until the term loan facility is repaid in full.

Risks

• The company faces risks related to declines in retail, real estate, and general economic conditions.
• Redevelopment activities carry inherent risks.
• There are risks associated with achieving expected occupancy and rent levels.
• The company's ability to fund operations and development is impacted by ongoing negative operating cash flow.
• The company's ability to access sufficient financing is not guaranteed.
• Environmental, health, safety, and land use laws and regulations pose risks.
• The company is exposed to risks from acts of war, terrorist activity, and cybersecurity incidents.
• The company's strategic review process may not be successful.

Future Outlook

The company expects to use its cash on hand and future asset sales to pay its financing obligations and fund its operations and development activity, but there is no assurance that such transactions will be consummated. The company is adjusting pricing projections for some assets due to market conditions. The company will consider various factors when deciding whether and when to transact on each of its remaining assets.

Management Comments

• Andrea L. Olshan, Chief Executive Officer and President, stated that the company is continuing to advance its Plan of Sale, having sold $80 million of assets year to date and repaid an equal amount of debt.
• Andrea L. Olshan noted that assets previously underwritten for life sciences or tech office are now frequently being reconsidered for other uses.
• Andrea L. Olshan mentioned that investors are focusing on less risky debt or cash flowing equity investments.
• Andrea L. Olshan stated that with more stability in interest rates and inflation, buyers are able to underwrite deals more confidently, albeit at lower valuations.

Industry Context

The company's results reflect broader challenges in the commercial real estate market, including downward pricing pressure on assets and a shift in investor preferences towards less risky investments. The company is adapting to these conditions by adjusting its pricing projections and focusing on asset sales to reduce debt.

Comparison to Industry Standards

• The reported capitalization rates of 7.6% and 5.3% on multi-tenant retail asset sales are within the range of industry benchmarks for similar properties, but the lower rate of 5.3% may indicate a more competitive market or a higher quality asset.
• The sale of non-core assets at $28.56 PSF and $55.18 PSF is within the range of industry standards for similar properties, but the higher price of $55.18 PSF may indicate a more desirable location or higher quality asset.
• The company's net loss of $20.2 million is worse than some of its peers, but this is likely due to the company's strategic plan of asset sales and debt reduction.
• The company's total NOI of $2.1 million is lower than some of its peers, but this is likely due to the company's strategic plan of asset sales and debt reduction.
• The company's leasing activity is in line with industry standards, with a leasing pipeline of over 100 thousand square feet.

Stakeholder Impact

• Shareholders are impacted by the company's net loss and the lack of common stock dividends.
• Shareholders are impacted by the company's strategic plan of asset sales and debt reduction.
• Employees are impacted by the company's strategic plan of asset sales and debt reduction.
• Customers are impacted by the company's strategic plan of asset sales and debt reduction.
• Suppliers are impacted by the company's strategic plan of asset sales and debt reduction.
• Creditors are impacted by the company's strategic plan of asset sales and debt reduction.

Next Steps

• The company will continue to execute its Plan of Sale.
• The company will continue to market assets for sale.
• The company will continue to negotiate definitive purchase and sale agreements.
• The company will continue to advance leasing at its premier mixed-use projects.
• The company will continue to monitor market conditions and adjust its strategies as needed.

Key Dates

Keywords

asset sales, real estate, debt repayment, strategic review, net operating income, leasing, development, retail, mixed-use, capitalization rate