Market Overview

Seritage Growth Properties Reports Second Quarter 2018 Operating Results

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Seritage Growth Properties (NYSE:SRG) (the "Company"), a national owner
of 248 retail properties totaling approximately 39 million square feet
of gross leasable area ("GLA"), today reported financial and operating
results for the three and six months ended June 30, 2018.

Summary of Financial Results

For the three months ended June 30, 2018:

  • Net loss attributable to common shareholders of $8.0 million, or $0.23
    per diluted share
  • Total Net Operating Income ("Total NOI") of $36.5 million
  • Funds from Operations ("FFO") of $6.5 million, or $0.12 per diluted
    share
  • Company FFO of $8.5 million, or $0.15 per diluted share

For the six months ended June 30, 2018:

  • Net income attributable to common shareholders of $1.1 million, or
    $0.03 per diluted share
  • Total Net Operating Income ("Total NOI") of $73.3 million
  • Funds from Operations ("FFO") of $17.5 million, or $0.31 per diluted
    share
  • Company FFO of $21.0 million, or $0.38 per diluted share

"We are pleased with our strong second quarter highlighted by 853,000
square feet of newly signed leases and the commencement of five new
redevelopment projects and one expansion project for a total investment
of $58.2 million. Our annual base rent from diversified, non-Sears
tenants is now approximately $127.3 million, or 57% of total rent,
including all signed leases, and a 190% increase since our inception
three years ago," said Benjamin Schall, President and Chief Executive
Officer. "Additionally, as we continue to position Seritage as a
preferred partner for institutional capital providers, we were pleased
to form two new joint ventures with equity partners this quarter to own
and redevelop our properties in La Jolla, California and West Hartford,
Connecticut. And, subsequent to the quarter end, we announced a new $2.0
billion term loan with Berkshire Hathaway, a transformational step for
the company and one that provides our platform with enhanced liquidity
and flexibility to further capitalize on our pipeline of opportunities."

Operating Highlights

During the quarter ended June 30, 2018, including the Company's
proportional share of its unconsolidated joint ventures:

  • Signed new leases totaling 853,000 square feet at an average rent of
    $14.19 PSF. Since the Company's inception in July 2015, new leasing
    activity has totaled nearly 6.1 million square feet at an average rent
    of $17.45 PSF.
  • Achieved releasing multiples of 3.6x for space currently or formerly
    occupied by Sears Holdings Corporation ("Sears Holdings" or "Sears"),
    with new rents averaging $14.19 PSF compared to $3.96 PSF paid by
    Sears Holdings. Since inception, releasing multiples have averaged
    4.1x, with new rents at $17.58 PSF compared to $4.32 PSF paid by Sears
    Holdings.
  • Increased annual base rent from diversified, non-Sears tenants to
    56.9% of total annual base rent from 44.0% in the prior year period,
    including all signed leases and net of rent attributable to associated
    space to be recaptured. Diversified, non-Sears rental income has
    increased by over 190% since inception to $127.3 million, including
    all signed leases.
  • Annualized Total NOI was an estimated $209.1 million, including all
    signed leases and net of rent attributable to associated space to be
    recaptured.

During the quarter ended June 30, 2018:

  • Announced five new redevelopment projects and expanded one previously
    announced project representing an aggregate incremental investment of
    $58.2 million. Total redevelopment program to date includes 88
    projects completed or commenced representing over $1.3 billion of
    estimated capital investment.
  • Formed a joint venture partnership to own The Collection at UTC, the
    226,200 SF redevelopment of the former Sears store and auto center at
    Westfield UTC in La Jolla, California. The transaction valued the
    property at approximately $165.0 million, including costs remaining to
    complete the project.
  • Formed a joint venture partnership to own The Corbin Collection, the
    163,700 SF redevelopment of the former Sears store and auto center in
    West Hartford, CT. The transaction valued the property at
    approximately $52.0 million, including costs remaining to complete the
    project.

In addition, subsequent to the quarter end, the Company entered into a
new $2.0 billion term loan facility with Berkshire Hathaway Life
Insurance Company. The term loan facility, which matures on July 31,
2023, provided for an initial funding of $1.6 billion at closing and
includes a committed $400 million incremental funding facility.

Financial Results

Net Income / Net Loss

For the three months ended June 30, 2018, net loss attributable to Class
A and Class C shareholders was $8.0 million, or $0.23 per diluted share,
as compared to a net loss of $21.2 million, or $0.63 per diluted share,
for the prior year period. For the six months ended June 30, 2018, net
income attributable to Class A and Class C shareholders was $1.1
million, or $0.03 per diluted share, as compared to a net loss of $41.1
million, or $1.22 per diluted share, for the prior year period.

Total NOI

For the three months ended June 30, 2018, Total NOI, which includes the
Company's proportional share of NOI from properties owned through
investments in its unconsolidated joint ventures, was $36.5 million as
compared to $44.7 million for the prior year period. For the six months
ended June 30, 2018, Total NOI was $73.3 million as compared to $91.6
million for the prior year period.

The decrease in Total NOI in both periods was driven primarily by
reduced rental income under the master lease with Sears Holdings as a
result of recapture and termination activity at our wholly-owned
properties. Since inception, approximately 13.3 million square feet of
leased space, representing approximately $52.2 million of annual base
rent, has been taken offline through recapture and termination activity.
The Company has signed new leases totaling approximately 6.1 million
square feet to diversified, non-Sears tenants for an aggregate annual
base rent of approximately $106.0 million. The majority of our remaining
signed but not opened ("SNO") leases, which totaled $70.6 million as of
June 30, 2018, are expected to begin paying rent over the next 6-18
months and, subject to additional recapture and termination activity,
the Company expects Total NOI to increase as SNO leases convert to rent
paying and as the Company signs new leases with diversified, non-Sears
tenants to occupy currently unleased space.

In addition, the Company sold its interests in 13 unconsolidated joint
venture properties and 50% interests in five wholly-owned properties in
the second half of 2017 and sold 50% interests in three wholly-owned
properties in the first half of 2018, which contributed to the decrease
in Total NOI.

FFO and Company FFO

For the three months ended June 30, 2018, FFO, as calculated in
accordance with NAREIT, was $6.5 million, or $0.12 per diluted share, as
compared to $23.8 million, or $0.43 per diluted share, for the prior
year period. For the six months ended June 30, 2018, FFO was $17.5
million, or $0.31 per diluted share, as compared to $54.8 million, or
$0.99 per diluted share, for the prior year period.

For the three months ended, June 30, 2018, Company FFO was $8.5 million,
or $0.15 per diluted share, as compared to $25.7 million, or $0.46 per
diluted share, for the prior year period. For the six months ended June
30, 2018, Company FFO was $21.0 million, or $0.38 per diluted share, as
compared to $52.7 million, or $0.95 per diluted share, for the prior
year period.

The decreases in FFO and Company FFO in both periods were driven by the
same factors driving the decrease in Total NOI, as well as lower
termination fee income, lower straight-line rent as a result of
recapture and termination activity at our properties, higher G&A
expenses driven by our growing platform and the outperformance of
targets related to performance-based restricted stock, and dividends
related to preferred equity issued in the fourth quarter of 2017.

Portfolio Summary

As of June 30, 2018, the Company's portfolio included interests in 248
retail properties totaling approximately 39 million square feet of gross
leasable area, including 222 wholly-owned properties and 26 properties
owned through investments in unconsolidated joint ventures. The
Company's portfolio includes 119 properties attached to regional malls
and 129 shopping center or freestanding properties.

The portfolio was 81.3% leased, including unconsolidated joint ventures
at the Company's proportional share, and included 58 properties leased
only to diversified, non-Sears tenants, 85 properties leased to Sears
Holdings and one or more diversified, non-Sears tenants, and 81
properties leased only to Sears Holdings; 24 properties in the portfolio
were vacant as of June 30, 2018. Of the properties leased to Sears
Holdings, 124 operated under the Sears brand and 42 operated under the
Kmart brand.

The unleased space as of June 30, 2018 included approximately 2.1
million SF of remaining lease-up at announced redevelopment projects,
and approximately 4.7 million SF of additional leasing opportunity at
properties in the Company's redevelopment pipeline.

During the quarter ended June 30, 2018, the Company formed two new joint
venture partnerships to own The Collection at UTC and the Corbin
Collection, redevelopments of former Sears stores in La Jolla, CA and
West Hartford, CT, respectively, and sold a former Sears store and
redeveloped auto center in Hagerstown, MD.

Leasing Update

During the quarter ended June 30, 2018, the Company signed new leases
totaling 853,000 square feet at an average annual base rent of $14.19
PSF. On a same-space basis, new rents averaged 3.6x prior rents for
space currently or formerly occupied by Sears Holdings, increasing to
$14.19 PSF for new tenants compared to $3.96 PSF paid by Sears Holdings
across 853,000 square feet.

The table below provides a summary of the Company's leasing activity
since inception, including unconsolidated joint ventures 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
Period Leases GLA Rent Rent PSF Leases GLA Rent Rent PSF Multiple
2015 9 154 $ 4,650 $ 30.28 6 130 $ 3,820 $ 29.41 4.4 x
2016 65 2,070 36,600 17.68 59 1,882 33,610 17.86 4.5 x
2017 94 2,606 44,717 17.16 86 2,476 43,299 17.49 4.0 x
Q1 2018 20 391 7,915 20.24 19 389 7,891 20.29 4.1 x
Q2 2018 43 853   12,100   14.19 43 853   12,100   14.19 3.6 x
Total 231 6,074 $ 105,982 $ 17.45 213 5,730 $ 100,720 $ 17.58 4.1 x
 

During the quarter ended June 30, 2018, the Company added $12.1 million
of new diversified, non-Sears income and increased annual base rent
attributable to diversified, non-Sears tenants to 56.9% of total annual
base rent from 44.0% as of June 30, 2017, 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, 2018, including unconsolidated joint ventures presented at
the Company's proportional share:

               
(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) 166 21,253 71.9 % $ 96,567 43.1 % $ 4.54
In-place diversified, non-Sears leases 234 4,355 14.7 % 56,778 25.4 % 13.04
SNO diversified, non-Sears leases 144 3,963 13.4 %   70,560 31.5 %   17.80
Sub-total diversified, non-Sears leases 378 8,318 28.1 %   127,338 56.9 %   15.31
Total 544 29,571 100.0 % $ 223,905 100.0 % $ 7.57

____________________

(1)   Leases reflects number of properties subject to the Master Lease and
JV Master Leases.
 

Development Update

Wholly-Owned Properties

During the quarter ended June 30, 2018, the Company commenced five new
redevelopment projects representing an estimated total investment of
$53.4 million and expanded one previously announced project representing
an estimated incremental and total investment of $4.8 million and $11.3
million, respectively.

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
2015 5 352 51,500 64,200
2016 (3) 28 2,677 353,600 370,700
2017 (3) 30 3,517 650,000 693,600
Q1 2018 5 822 96,900 99,300
Q2 2018 5 547   53,400   53,400
Total 88 7,915 $ 1,269,000 $ 1,344,800

____________________

(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, 2018, the Company had originated 73 wholly-owned projects
since the Company's inception. These projects represent an estimated
total investment of $1,281 million ($1,179 million at share), of which
an estimated $881 million ($818 million at share) remains to be spent,
and are expected to generate an incremental yield on cost of
approximately 11.0%.

The table below provides additional information regarding the Company's
wholly-owned development activity from inception through June 30, 2018:

                   
(in thousands)
Estimated Estimated Estimated
Number Project Development Project Projected Annual Income (2) Incremental
Estimated Project Costs (1) of Projects Square Feet Costs (1) Costs (1) Total Existing Incremental Yield (3)
< $10,000 25 1,684 $ 118,200 $ 118,200 $ 20,500 $ 4,700 $ 15,800
$10,001 - $20,000 (4) 29 3,001 380,700 400,600 57,200 15,200 41,800
> $20,001 19 3,230   706,500   762,400   104,300   21,800   82,500  
Announced projects 73 7,915 $ 1,205,400 $ 1,281,200 $ 182,000 $ 41,700 $ 140,100 10.5-11.5%
Acquired projects 15   63,600   63,600
Total projects 88 $ 1,269,000 $ 1,344,800

____________________

(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.
(4) Includes Saugus, MA project which has been temporarily postponed
while the Company identifies a new lead tenant.
 

The tables below provide brief descriptions of each of the redevelopment
projects originated on the Company's platform since its 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 Complete
Merrillville, IN Termination property; redevelop existing store for At Home and small
shop retail
132,000 Complete
Elkhart, IN Termination property; existing store has been released to Big R
Stores
86,500 Complete
San Antonio, TX Recapture and repurpose auto center space for Orvis, Jared's
Jeweler, Shake Shack and small shop retail
18,900 Complete
Bowie, MD Recapture and repurpose auto center space for BJ's Brewhouse 8,200 Complete
Troy, MI Partial recapture; redevelop existing store for At Home 100,000 Complete
Roseville, MI Partial recapture; redevelop existing store for At Home 100,400 Complete
Rehoboth Beach, DE Partial recapture; redevelop existing store for andThat! and PetSmart 56,700 Complete
Henderson, NV Termination property; redevelop existing store for At Home, Seafood
City, Blink Fitness and additional retail
144,400 Complete
Cullman, AL Termination property; redevelop existing store for Bargain Hunt,
Tractor Supply and Planet Fitness
99,000 Complete
Albany, NY Recapture and repurpose auto center space for BJ's Brewhouse, Ethan
Allen and additional small shop retail
28,000 Substantially complete
Hagerstown, MD Recapture and repurpose auto center space for BJ's Brewhouse,
Verizon and additional retail

Note: property sold in Q2 2018

15,400 Substantially complete
Jefferson City, MO Termination property; redevelop existing store for Orscheln Farm and
Home
96,000 Substantially complete
Kearney, NE Termination property; redevelop existing store for Marshall's,
PetSmart and additional junior anchors
92,500 Substantially complete
Ft. Wayne, IN Site densification (project expansion); new outparcels for BJ's
Brewhouse and Chick-Fil-A
12,000 Substantially complete
Guaynabo, PR Partial recapture; redevelop existing store for Planet Fitness,
Capri and additional retail and restaurants
56,100 Underway Q3 2018
Florissant, MO Site densification; new outparcel for Chick-Fil-A 5,000 Underway Q3 2018
Dayton, OH Recapture and repurpose auto center space for Outback Steakhouse and
additional restaurants
14,100 Underway Q4 2018
New Iberia, LA Termination property; redevelop existing store for Rouses
Supermarkets, Hobby Lobby and small shop retail
93,100 Underway Q1 2019
North Little Rock, AR Recapture and repurpose auto center space for LongHorn Steakhouse
and additional small shop retail
17,300 Underway Q2 2019
St. Clair Shores, MI 100% recapture; demolish existing store and develop site for new
Kroger grocery store
107,200 Underway Q2 2019
Hopkinsville, KY Termination property; redevelop existing store for Bargain Hunt,
Farmer's Furniture and additional junior anchors and small shop
retail
87,900 Q3 2018 Q2 2019
Mt. Pleasant, PA Termination property; redevelop existing store for Aldi, Big Lots
and additional retail
86,300 Q3 2018 Q3 2019
Oklahoma City, OK Site densification; new fitness center for Vasa Fitness 59,500 Q3 2018 Q3 2019
Gainesville, FL Termination property; redevelop existing store for Florida Clinical
Practice Association / University of Florida College of Medicine
139,100 Q4 2018 Q4 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 Complete
Honolulu, HI 100% recapture; redevelop existing store for Longs Drugs (CVS),
PetSmart and Ross Dress for Less
79,000 Complete
Anderson, SC 100% recapture (project expansion); redevelop existing store for
Burlington Stores, Gold's Gym, Sportsman's Warehouse, additional
retail and restaurants
111,300 Complete
West Jordan, UT Partial recapture; redevelop existing store and attached auto center
for Burlington Stores and additional retail
81,400 Substantially complete
Madison, WI Partial recapture; redevelop existing store for Dave & Busters,
Total Wine & More, additional retail and restaurants
75,300 Substantially complete
Thornton, CO Termination property; redevelop existing store for Vasa Fitness and
additional junior anchors
191,600 Substantially complete
Springfield, IL Termination property; redevelop existing store for Burlington
Stores, Binny's Beverage Depot, Marshall's, Orangetheory Fitness,
Outback Steakhouse, CoreLife Eatery and additional small shop retail
133,400 Substantially complete
Orlando, FL 100% recapture; demolish and construct new buildings for Floor &
Décor, Orchard Supply Hardware, LongHorn Steakhouse, Mission BBQ,
Olive Garden and additional small shop retail and restaurants
139,200 Substantially complete
Cockeysville, MD Partial recapture; redevelop existing store for HomeGoods, Michael's
Stores, additional junior anchors and restaurants
83,500 Underway Q3 2018
Charleston, SC 100% recapture (project expansion); redevelop existing store and
detached auto center for Burlington Stores and additional retail
126,700 Underway Q3 2018
North Hollywood, CA Partial recapture; redevelop existing store for Burlington Stores
and Ross Dress for Less
79,800 Underway Q3 2018
Salem, NH Site densification; new theatre for Cinemark

Recapture and repurpose auto center for restaurant space

71,200 Underway Q3 2018
Paducah, KY Termination property; redevelop existing store for Burlington
Stores, Ross Dress for Less and additional retail
102,300 Underway Q3 2018
Fairfax, VA Partial recapture; redevelop existing store and attached auto center
for Dave & Busters, Seasons 52, additional junior anchors and
restaurants
110,300 Underway Q4 2018
North Miami, FL 100% recapture; redevelop existing store for Blink Fitness,
Burlington Stores, Michael's and Ross Dress for Less
124,300 Underway Q4 2018
Hialeah, FL 100% recapture; redevelop existing store for Bed, Bath & Beyond,
Ross Dress for Less and dd's Discounts to join current tenant, Aldi
88,400 Underway Q4 2018
Warwick, RI Termination property (project expansion); redevelop existing store
and detached auto center for At Home, BJ's Brewhouse, Raymour &
Flanigan and additional retail
190,700 Underway Q4 2018
Temecula, CA Partial recapture; redevelop existing store and detached auto center
for Round One, small shop retail and restaurants
65,100 Underway Q4 2018
Canton, OH Partial recapture; redevelop existing store for Dave & Busters and
restaurants
83,900 Underway Q2 2019
North Riverside, IL Partial recapture; redevelop existing store and detached auto center
for Blink Fitness, Round One and additional junior anchors, small
shop retail and restaurants
103,900 Underway Q2 2019
Olean, NY Termination property (project expansion); redevelop existing store
for Marshall's, Ollie's Bargain Basement and additional retail
125,700 Underway Q2 2019
Las Vegas, NV Partial recapture; redevelop existing store for Round One and
additional retail
78,800 Q3 2018 Q3 2019
Yorktown Heights, NY Partial recapture; redevelop existing store for 24 Hour Fitness and
additional retail
85,200 Q3 2018 Q4 2019
Santa Cruz, CA Partial recapture; redevelop existing store for TJ Maxx, HomeGoods
and additional junior anchors
62,200 Q4 2018 Q4 2019
El Paso, TX Termination property; redevelop existing store for Ross Dress for
Less, dd's Discounts and additional retail
114,700 Q4 2018 Q4 2019
Warrenton, VA Termination property; redevelop existing store for Homegoods and
additional retail
97,300 Q1 2019 Q3 2019
Pensacola, FL Termination property; redevelop existing store for Lucky's Market,
large format retail and restaurants
134,700 Q1 2019 Q1 2020
Vancouver, WA Partial recapture; redevelop existing store for Round One and
additional retail and restaurants
72,400 Q1 2019 Q2 2020
 
 
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 and additional
junior anchors, restaurants and small shop retail
135,200 Substantially complete
West Hartford, CT 100% recapture; redevelop existing store and detached auto center
for Buy Buy Baby, Cost Plus World Market, REI, Saks OFF Fifth, other
junior anchors, Shake Shack and additional small shop retail

Note: contributed to West Hartford JV in Q2 2018

147,600 Substantially complete
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, Verizon and additional
small shop retail and restaurants
142,400 Substantially complete
Wayne, NJ Partial recapture (project expansion); redevelop existing store and
detached auto center for Cinemark, Dave & Busters and additional
junior anchors and restaurants

Note: contributed to GGP II JV in Q3 2017

156,700 Underway Q3 2018
Carson, CA 100% recapture (project expansion); redevelop existing store for
Burlington Stores, Ross Dress for Less, Gold's Gym and additional
retail
163,800 Underway Q1 2019
Watchung, NJ 100% recapture; demolish full-line store and detached auto center
and construct new buildings for Cinemark, HomeSense, Sierra Trading
Post, Ulta Beauty and small shop retail and restaurants
126,700 Underway Q2 2019
Santa Monica, CA 100% recapture; redevelop existing building into premier, mixed-use
asset featuring unique, small-shop retail and creative office space

Note: contributed to Mark 302 JV in Q1 2018

96,500 Underway Q4 2019
Aventura, FL 100% recapture; demolish existing store and construct new,
multi-level open air retail destination featuring a leading
collection of experiential shopping, dining and entertainment
concepts alongside a treelined esplanade and activated plazas
216,600 Underway Q4 2019
San Diego, CA 100% recapture; redevelop existing store into two highly-visible,
multi-level buildings with exterior facing retail space leased to
Equinox Fitness and a premier mix of experiential shopping, dining,
and entertainment concepts

Note: contributed to UTC JV in Q2 2018

206,000 Underway Q4 2019
Roseville, CA Termination property (project expansion): redevelop existing store
and auto center for Cinemark, Round One, AAA Auto Repair Center and
restaurants
147,400 Underway Q2 2020
Austin, TX 100% recapture (project expansion); redevelop existing store for AMC
Theatres, additional junior anchors and restaurants
177,400 Underway Q3 2019
Greendale, WI Termination property; redevelop existing store and attached auto
center for Dick's Sporting Goods, Round One and additional junior
anchors and restaurants
223,800 Underway Q4 2019
East Northport, NY Termination property; redevelop existing store and attached auto
center for AMC Theatres, 24 Hour Fitness, Floor & Decor and small
shop retail
179,700 Underway Q4 2019
Anchorage, AK 100% recapture; redevelop existing store for Guitar Center, Safeway,
Planet Fitness and additional retail to join current tenant,
Nordstrom Rack
142,500 Q3 2018 Q4 2019
El Cajon, CA 100% recapture; redevelop existing store and auto center for Ashley
Furniture, Bob's Discount Furniture, Burlington Stores and
additional retail and restaurants
242,700 Q3 2018 Q3 2019
Tucson, AZ 100% recapture; redevelop existing store and auto center for Round
One and additional retail
224,300 Q3 2018 Q4 2019
Reno, NV 100% recapture; redevelop existing store and auto center for Round
One and additional retail
169,800 Q3 2018 Q4 2019
Fairfield, CA 100% recapture (project expansion); redevelop existing store and
auto center for Dave & Busters, AAA Auto Repair Center and
additional retail
146,500 Q3 2018 Q1 2020
Plantation, FL 100% recapture (project expansion); redevelop existing store and
auto center for GameTime, Powerhouse Gym, additional retail and
restaurants
184,400 Q4 2018 Q1 2020
 

Balance Sheet and Liquidity

As of June 30, 2018, the Company's total market capitalization was
approximately $3.6 billion. Total market capitalization is calculated as
the sum of total debt and the market value of the Company's outstanding
shares of common stock, assuming conversion of operating partnership
units.

Total debt to total market capitalization was 34.1% and net debt to
Adjusted EBITDA was 8.2x. The Company deducts both unrestricted and
restricted cash from total debt when calculating net debt.
Reconciliations of net income attributable to common shareholders to
EBITDA and Adjusted EBITDA, are provided in the tables accompanying this
press release.

As of June 30, 2018, the Company had $100.4 million of unrestricted cash
and restricted cash of $166.5 million, the substantial majority of which
was held in reserve accounts for redevelopment, re-leasing and operating
expenses at the Company's properties.

During the quarter ended June 30, 2018, the Company reduced amounts
outstanding under its mortgage loan by $58.4 million and added $7.1
million to its redevelopment reserve as a result of the new joint
ventures in La Jolla, CA and West Hartford, CT and the disposition of
its property in Hagerstown, MD.

New Term Loan Facility

Subsequent to June 30, 2018, the Company entered into a $2.0 billion
term loan facility (the "Term Loan Facility") with Berkshire Hathaway
Life Insurance Company of Nebraska.

The Term Loan Facility, which matures on July 31, 2023, provided for an
initial funding of $1.6 billion at closing (the "Initial Funding") and
includes a committed $400 million incremental funding facility (the
"Incremental Funding Facility"). Funded amounts under the Term Loan
Facility bear interest at a fixed annual rate of 7.00%, while amounts
available under Incremental Funding Facility will be subject to a 1.00%
annual fee until drawn.

The Company used a portion of the proceeds from the Initial Funding to
fully repay its outstanding mortgage loan and unsecured term loan. Net
proceeds from the Initial Funding, combined with existing balance sheet
cash and the release of cash reserves held by the previous lender as of
June 30, 2018, provide the Company with over $600 million of cash
liquidity, in addition to access to the $400 million Incremental Funding
Facility.

Dividends

The Company expects annual common dividends to adhere to REIT
requirements with respect to taxable income which includes both ordinary
income and capital gains from the sale of real estate.

On July 24, 2018, the Company's Board of Trustees declared a third
quarter common stock dividend of $0.25 per each Class A and Class C
common share. The common dividend will be paid on October 11, 2018 to
shareholders of record on September 28, 2018. Holders of units in
Seritage Growth Properties, L.P. (the "Operating Partnership") are
entitled to an equal distribution per each Operating Partnership unit
held as of September 28, 2018. On July 24, 2018, the Company's Board of
Trustees also declared a preferred stock dividend of $0.4375 per each
Series A Preferred Share. The preferred dividend will be paid on October
15, 2018 to holders of record on September 28, 2018.

On April 24, 2018, the Company's Board of Trustees declared a second
quarter common stock dividend of $0.25 per each Class A and Class C
common share. The common dividend was paid on July 12, 2018 to
shareholders of record on June 29, 2018. Holders of units in the
Operating Partnership were entitled to an equal distribution per each
Operating Partnership unit held as of June 29, 2018. On April 24, 2018,
the Company's Board of Trustees also declared a preferred stock dividend
of $0.4375 per each Series A Preferred Share. The preferred dividend was
paid on July 16, 2018 to holders of record on June 29, 2018.

Supplemental Report

A Supplemental Report will be available in the Investors section of the
Company's website, www.seritage.com.

Non-GAAP Financial Measures

The Company makes reference to NOI, Total NOI, EBITDA, Adjusted EBITDA,
FFO and Company FFO which are financial measures that include
adjustments to accounting principles generally accepted in the United
States ("GAAP").

None of Total NOI, EBITDA, Adjusted EBITDA, FFO or Company FFO, 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 have been provided in the tables accompanying this
press release.

Net Operating Income ("NOI"), Total NOI and
Annualized Total NOI

NOI is defined as income from property operations less property
operating expenses. 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. This form of presentation offers insights
into the financial performance and condition of the Company as a whole
given the Company's ownership of unconsolidated properties that are
accounted for under GAAP using the equity method. The Company also
considers 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.

Annualized Total NOI is an estimate, as of the end of the reporting
period, of the annual Total NOI to be generated by the Company's
portfolio including all signed leases and modifications to the Company's
master lease with Sears Holdings with respect to recaptured space. We
calculate Annualized Total NOI by adding or subtracting current period
adjustments for leases that commenced or expired during the period to
Total NOI (as defined) for the period and annualizing, and then adding
estimated annual Total NOI attributable to SNO leases and subtracting
estimated annual Total NOI attributable to Sears Holdings' space to be
recaptured.

Annualized Total NOI is a forward-looking non-GAAP measure for which the
Company does not believe it can provide reconciling information to a
corresponding forward-looking GAAP measure without unreasonable effort.

Earnings before Interest Expense, Income Tax,
Depreciation, and Amortization for Real Estate ("EBITDAre") and Company
EBITDA

EBITDAre is calculated in accordance with the definition set
forth by the National Association of Real Estate Investment Trusts
("NAREIT"), which may not be comparable to measures calculated by other
companies who do not use the NAREIT definition of EBITDA. EBITDAre
is calculated as net income computed in accordance with GAAP, excluding
interest expense, income tax expense, depreciation and amortization,
gains (or losses) from property sales and impairment charges on
depreciable real estate assets. The Company believes EBITDAre
provides useful information to investors regarding our results of
operations because it removes the impact of the Company's capital
structure (primarily interest expense) and its asset base (primarily
depreciation and amortization). Management also believes the use of
EBITDAre facilitates comparisons between us and other equity
REITs and real property owners that are not REITs.

The Company makes certain adjustments to EBITDAre, which it
refers to as Company EBITDA, to account for certain non-cash and
non-comparable items, such as termination fee income, unrealized loss on
interest rate cap, litigation charges, acquisition-related expenses and
certain up-front-hiring and personnel costs that it does not believe are
representative of ongoing operating results.

Funds from Operations ("FFO") and Company FFO

FFO is calculated in accordance with NAREIT which defines FFO as net
income computed in accordance with GAAP, excluding gains (or losses)
from property sales, real estate related depreciation and amortization,
and impairment charges on depreciable real estate assets. The Company
considers FFO a helpful supplemental measure of the operating
performance for equity REITs and a complement to GAAP measures because
it is a recognized measure of performance by the real estate industry.

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 loss on interest rate cap,
litigation charges, acquisition-related expenses, amortization of
deferred financing costs and certain up-front-hiring and personnel
costs, that it does not believe are representative of ongoing operating
results. The Company previously referred to this metric as Normalized
FFO; the definition and calculation remain the same.

Forward-Looking Statements

This document contains forward-looking statements, which are based on
the current beliefs and expectations of management and are subject to
significant risks, assumptions and uncertainties that may cause our
actual results, performance or achievements to be materially different
from any future results, performance or achievements expressed or
implied by these forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to:
competition in the real estate and retail industries; our significant
exposure to Sears Holdings; Sears Holdings' termination and other rights
under its master lease with us; risks relating to our recapture and
redevelopment activities; contingencies to the commencement of rent
under leases; the terms of our indebtedness; restrictions with which we
are required to comply in order to maintain REIT status and other legal
requirements to which we are subject; and our relatively limited history
as an operating company. For additional discussion of these and other
applicable risks, assumptions and uncertainties, see the "Risk Factors"
and forward-looking statement disclosure contained in filings with the
Securities and Exchange Commission. While we believe that our forecasts
and assumptions are reasonable, we caution that actual results may
differ materially. We intend the forward-looking statements to speak
only as of the time made and do not undertake to update or revise them
as more information becomes available, except as required by law.

About Seritage Growth Properties

Seritage Growth Properties is a publicly-traded, self-administered and
self-managed REIT with 222 wholly-owned properties and 26 joint venture
properties totaling approximately 39 million square feet of space across
49 states and Puerto Rico. The Company was formed to unlock the
underlying real estate value of a high-quality retail portfolio it
acquired from Sears Holdings in July 2015. Pursuant to a master lease,
the Company has the right to recapture certain space from Sears Holdings
for retenanting or redevelopment purposes. The Company's mission is to
create and own revitalized shopping, dining, entertainment and mixed-use
destinations that provide enriched experiences for consumers and local
communities, and create long-term value for our shareholders.

       
SERITAGE GROWTH PROPERTIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)
 
June 30, 2018 December 31, 2017
ASSETS

 

Investment in real estate
Land $ 711,261 $ 799,971
Buildings and improvements 860,739 829,168
Accumulated depreciation   (157,991 )   (139,483 )
1,414,009 1,489,656
Construction in progress   209,237   224,904
Net investment in real estate 1,623,246 1,714,560
Real estate held for sale 15,139
Investment in unconsolidated joint ventures 392,743 282,990
Cash and cash equivalents 100,448 241,569
Restricted cash 166,458 175,665
Tenant and other receivables, net 43,911 30,787
Lease intangible assets, net 251,303 310,098
Prepaid expenses, deferred expenses and other assets, net   21,360   20,148
Total assets $ 2,614,608 $ 2,775,817
 
LIABILITIES AND EQUITY
Liabilities
Mortgage loans payable, net $ 1,073,762 $ 1,202,314
Unsecured term loan, net 144,111 143,210
Accounts payable, accrued expenses and other liabilities   97,541   109,433
Total liabilities   1,315,414   1,454,957
 
Commitments and contingencies
 
Shareholders' Equity
Class A common shares $0.01 par value; 100,000,000 shares

authorized; 35,678,749 and 32,415,734 shares issued and

outstanding as of June 30, 2018 and December 31, 2017,

respectively

356 324
Class B common shares $0.01 par value; 5,000,000 shares

authorized; 1,322,365 and 1,328,866 shares issued and

outstanding as of June 30, 2018 and December 31, 2017,

respectively

13 13
Class C common shares $0.01 par value; 50,000,000 shares

authorized; 850 and 3,151,131 shares issued and

outstanding as of June 30, 2018 and December 31, 2017,

respectively

31
Series A preferred shares $0.01 par value; 10,000,000 shares

authorized; 2,800,000 shares issued and outstanding as of

June 30, 2018 and December 31, 2017; liquidation

preference of $70,000

28 28
Additional paid-in capital 1,122,251 1,116,060
Accumulated deficit   (246,650 )   (229,760 )
Total shareholders' equity 875,998 886,696
Non-controlling interests   423,196   434,164
Total equity   1,299,194   1,320,860
Total liabilities and equity $ 2,614,608 $ 2,775,817
 
       
SERITAGE GROWTH PROPERTIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
 
Three Months Ended June 30, Six Months Ended June 30,
2018   2017 2018   2017
REVENUE
Rental income $ 35,839 $ 42,185 $ 72,918 $ 91,359
Tenant reimbursements 12,517 15,708 29,215 31,932
Management and other fee income   914     914  
Total revenue   49,270   57,893   103,047   123,291
EXPENSES
Property operating 6,533 4,932 13,774 9,674
Real estate taxes 9,217 11,950 20,598 24,372
Depreciation and amortization 49,551 50,571 84,218 109,234
General and administrative 8,673 5,093 16,470 11,367
Provision for doubtful accounts   109   12   170   51
Total expenses   74,083   72,558   135,230   154,698
Operating loss (24,813 ) (14,665 ) (32,183 ) (31,407 )
Equity in loss of unconsolidated joint

ventures

(2,158 ) (1,542 ) (4,740 ) (540 )
Interest and other income 456 42 1,136 120
Interest expense (17,862 ) (18,431 ) (34,281 ) (35,023 )
Unrealized loss on interest rate cap   (172 )   (124 )   (7 )   (595 )
Loss before income taxes (44,549 ) (34,720 ) (70,075 ) (67,445 )
Provision for income taxes   (240 )   (147 )   (344 )   (266 )
Loss before gain on sale of real estate (44,789 ) (34,867 ) (70,419 ) (67,711 )
Gain on sale of real estate   34,187     76,018  
Net income (loss) (10,602 ) (34,867 ) 5,599 (67,711 )
Net (income) loss attributable to

non-controlling interests

  3,831   13,648   (2,042 )   26,654
Net income (loss) attributable to Seritage $ (6,771 ) $ (21,219 ) $ 3,557 $ (41,057 )
Preferred dividends   (1,225 )     (2,453 )  
Net income (loss) attributable to Seritage common

shareholders

$ (7,996 ) $ (21,219 ) $ 1,104 $ (41,057 )
 
Net income (loss) per share attributable to Seritage

Class A and Class C common shareholders - Basic

$ (0.23 ) $ (0.63 ) $ 0.03 $ (1.22 )
Net income (loss) per share attributable to Seritage

Class A and Class C common shareholders - Diluted

$ (0.23 ) $ (0.63 ) $ 0.03 $ (1.22 )
Weighted average Class A and Class C common

shares outstanding - Basic

  35,483   33,766   35,449   33,638
Weighted average Class A and Class C common

shares outstanding - Diluted

  35,483   33,766   35,588   33,638
 
       

Reconciliation of Net Loss to NOI and Total NOI (in thousands)

 
Three Months Ended June 30, Six Months Ended June 30,
NOI and Total NOI   2018   2017 2018   2017
Net income (loss) $ (10,602 ) $ (34,867 ) $ 5,599 $ (67,711 )
Termination fee income (628 ) (174 ) (6,764 )
Management and other fee income (914 ) (914 )
Depreciation and amortization 49,551 50,571 84,218 109,234
General and administrative expenses 8,673 5,093 16,470 11,367
Equity in loss (income) of unconsolidated

joint ventures

2,158 1,542 4,740 540
Gain on sale of real estate (34,187 ) (76,018 )
Interest and other income (456 ) (42 ) (1,136 ) (120 )
Interest expense 17,862 18,431 34,281 35,023
Unrealized loss on interest rate cap 172 124 7 595
Provision for income taxes   240   147   344   266
NOI $ 32,497 $ 40,371 $ 67,417 $ 82,430
NOI of unconsolidated joint ventures 5,007 6,987 9,765 13,498
Straight-line rent adjustment (1) (606 ) (2,177 ) (3,174 ) (3,626 )
Above/below market rental income/expense (1)   (438 )   (459 )   (669 )   (690 )
Total NOI $ 36,460 $ 44,722 $ 73,339 $ 91,612

____________________

(1)   Includes adjustments for unconsolidated joint ventures.
 
     

Computation of Annualized Total NOI (in thousands)

 
As of June 30,
Annualized Total NOI 2018   2017
Total NOI (per above) $ 36,460 $ 44,722
Period adjustments (1)   189   11
Adjusted Total NOI 36,649 44,733
Annualize   x 4   x 4
Adjusted Total NOI annualized 146,596 178,932
Plus: estimated annual Total NOI from SNO leases 68,870 54,147
Less: estimated annual Total NOI from associated

space to be recaptured from Sears

  (6,370 )   (4,839 )
Annualized Total NOI $ 209,096 $ 228,240

____________________

(1)   Includes adjustments to account for leases not in place for the full
period.
 
       

Reconciliation of Net Loss to EBITDAre and Company
EBITDA (in thousands)

 
Three Months Ended June 30, Six Months Ended June 30,
EBITDAre and Company EBITDA 2018   2017 2018   2017
Net income (loss) $ (10,602 ) $ (34,867 ) $ 5,599 $ (67,711 )
Interest expense 17,862 18,431 34,281 35,023
Provision for income and other taxes 240 147 344 266
Depreciation and amortization 49,551 50,571 84,218 109,234
Depreciation and amortization (unconsolidated

joint ventures)

3,516 8,363 7,309 13,828
Gain on sale of real estate   (34,187 )     (76,018 )  
EBITDAre $ 26,380 $ 42,645 $ 55,733 $ 90,640
Termination fee income (628 ) (174 ) (6,764 )
Unrealized loss on interest rate cap   172   124   7   595
Company EBITDA $ 26,552 $ 42,141 $ 55,566 $ 84,471
 
       

Reconciliation of Net Loss to FFO and Company FFO (in thousands)

 
Three Months Ended June 30, Six Months Ended June 30,
FFO and Company FFO 2018   2017 2018   2017
Net income (loss) $ (10,602 ) $ (34,867 ) $ 5,599 $ (67,711 )
Real estate depreciation and amortization

(consolidated properties)

48,985 50,271 83,098 108,675
Real estate depreciation and amortization

(unconsolidated joint ventures)

3,516 8,363 7,309 13,828
Gain on sale of real estate (34,187 ) (76,018 )
Dividends on preferred shares   (1,225 )     (2,453 )  
FFO attributable to common shareholders

and unitholders

$ 6,487 $ 23,767 $ 17,535 $ 54,792
Termination fee income (628 ) (174 ) (6,764 )
Unrealized loss on interest rate cap 172 124 7 595
Amortization of deferred financing costs   1,870   2,479   3,590   4,061
Company FFO attributable to common

shareholders and unitholders

$ 8,529 $ 25,742 $ 20,958 $ 52,684
               
FFO per diluted common share and unit $ 0.12 $ 0.43 $ 0.31 $ 0.99
Company FFO per diluted common share and unit $ 0.15 $ 0.46 $ 0.38 $ 0.95
 
Weighted Average Common Shares and Units Outstanding
Weighted average common shares outstanding 35,483 33,766 35,588 33,638
Weighted average OP units outstanding   20,158   21,833   20,188   21,959
Weighted average common shares and

units outstanding

  55,641   55,599   55,776   55,597

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