Seritage Growth Properties Reports First Quarter 2018 Operating Results

Seritage Growth Properties (NYSE: SRG) (the “Company”), a national owner of 249 retail properties totaling approximately 39 million square feet of gross leasable area (“GLA”), today reported financial and operating results for the quarter ended March 31, 2018.

Financial Results

For the quarter ended March 31, 2018:

• Net income attributable to common shareholders of $9.1 million, or $0.26 per diluted share
• Total Net Operating Income (“Total NOI”) of $36.9 million
• Funds from Operations (“FFO”) of $11.0 million, or $0.20 per diluted share
• Company FFO of $12.4 million, or $0.22 per diluted share

Operating Highlights

During the quarter ended March 31, 2018, including the Company’s proportional share of its unconsolidated joint ventures:

• Signed new leases totaling 391,000 square feet at an average rent of $20.24 PSF. Since the Company’s inception in July 2015, new leasing activity has totaled over 5.2 million square feet at an average rent of $17.98 PSF.
• Achieved releasing multiples of 4.1x for space currently or formerly occupied by Sears Holdings Corporation (“Sears Holdings”), with new rents averaging $20.29 PSF compared to $4.95 PSF paid by Sears Holdings. Since inception, releasing multiples have averaged 4.1x, with new rents at $18.17 PSF compared to $4.39 PSF paid by Sears Holdings.
• Increased annual base rent from tenants other than Sears Holdings to 54.3% of total annual base rent from 39.7% in the prior year period, including all signed leases and net of rent attributable to associated space to be recaptured. Non-Sears rental income has increased by over 165% since inception to $117.5 million, including all signed leases.

During the quarter ended March 31, 2018:

• Announced five new redevelopment projects and expanded three previously announced projects representing an aggregate incremental investment of $156.1 million. Total redevelopment program to date includes 83 projects completed or commenced representing $1.3 billion of estimated capital investment.
• Formed a joint venture partnership to own The Mark 302, the 96,500 SF mixed-use redevelopment of the former Sears building in downtown Santa Monica, CA. The transaction valued the property at approximately $145.0 million, including costs remaining to complete the project.

In addition, subsequent to the quarter end:

• Announced an agreement with a residential developer to pursue a multi-family development on 2.5 acres of the 15-acre former Sears site owned by Seritage at Overlake Plaza in Redmond, WA. The agreement values the 2.5-acre parcel at approximately $16.0 million.
• Announced an agreement with the adjacent mall owner to pursue a multi-family development on 4.5 acres of the 10-acre Sears site owned by Seritage at NewPark Mall in Newark, CA. The agreement values the 4.5-acre parcel at approximately $20.0 million.
• Announced an agreement to sell the Sears store and parcel at Tanforan Mall in San Bruno, CA to the adjacent mall owner for gross consideration of $42.0 million.

“We are pleased with our strong start to 2018 with an additional $156 million of projects announced, bringing our cumulative total to $1.2 billion of redevelopment projects at 11% unlevered returns. Our new leasing during the quarter totaled almost 400,000 square feet at an average rent of over $20 per square foot, maintaining an average re-leasing multiple of over 4.0 times prior rents,” said Benjamin Schall, President and Chief Executive Officer. “We also announced a number of new joint ventures and asset sales this quarter, including our equity joint venture in Santa Monica and two new joint ventures to activate portions of our land holdings with multi-family development. Our platform and portfolio are in high demand from quality joint venture partners who wish to participate in our transformative retail and mixed-use projects, and we intend to continue to utilize these partnerships to enhance our platform and balance sheet while unlocking substantial value for our shareholders.”

Financial Results

For the quarter ended March 31, 2018:

• Net income attributable to Class A and Class C shareholders was $9.1 million, or $0.26 per diluted share, as compared to a net loss of $19.8 million, or $0.59 per diluted share, for the prior year period.
• Total NOI, which includes the Company’s proportional share of NOI from properties owned through investments in its unconsolidated joint ventures, was $36.9 million as compared to $46.9 million for the prior year period. The decrease in Total NOI was driven primarily by reduced rent under the master lease with Sears Holdings as a result of recapture and termination activity at our wholly-owned properties, as well as the disposition of the Company’s interests in 13 unconsolidated joint ventures in the second half of 2017.
• FFO, as calculated in accordance with the National Association of Real Estate Investment Trusts (“NAREIT”) definition, was $11.0 million, or $0.20 per diluted share, as compared to $31.0 million, or $0.56 per diluted share, for the prior year period. The decrease in FFO was driven by the same factors driving the decrease in Total NOI, as well as reduced termination income, lower GAAP net income from unconsolidated joint ventures and higher G&A expenses in the current period.
• Company FFO was $12.4 million, or $0.22 per diluted share, as compared to $27.0 million, or $0.48 per diluted share, for the prior year period. The Company makes certain adjustments to FFO, which it refers to as Company FFO, to account for certain non-cash and non-comparable items that it does not believe are representative of ongoing operating results. See “Non-GAAP Financial Measures.” The decrease in FFO was driven by the same factors driving the decrease in Total NOI, as well as lower GAAP net income from unconsolidated joint ventures and higher G&A expenses in the current period.

Portfolio Summary

As of March 31, 2018, the Company’s portfolio included interests in 249 retail properties totaling approximately 39 million square feet of gross leasable area, including 225 wholly-owned properties and 24 properties owned through investments in unconsolidated joint ventures. The Company’s portfolio includes 120 properties attached to regional malls and 129 shopping center or freestanding properties.

The portfolio was 80.3% leased, including unconsolidated joint ventures at the Company’s proportional share, and included 55 properties leased only to third-party tenants, 77 properties leased to Sears Holdings and one or more third-party tenants, and 90 properties leased only to Sears Holdings; 27 properties in the portfolio were vacant as of March 31, 2018. Of the properties leased to Sears Holdings, 125 operated under the Sears brand and 42 operated under the Kmart brand.

The unleased space as of March 31, 2018 included approximately 2.9 million SF of remaining lease-up at announced redevelopment projects, and approximately 4.3 million SF of additional leasing opportunity at properties in the Company’s redevelopment pipeline.

During the quarter ended March 31, 2018, the Company formed a new joint venture partnership to own The Mark 302, a mixed-use redevelopment in downtown Santa Monica, CA, and disposed of four former Kmart properties in Harlingen, TX, Houma, LA, Sierra Vista, AZ and Yakima, WA.

Development Update

Wholly-Owned Properties

During the quarter ended March 31, 2018, the Company commenced five new redevelopment projects representing an estimated total investment of $99.3 million and expanded three previously announced projects representing estimated incremental and total investments of $56.8 million and $102.3 million, respectively.

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

As of March 31, 2018, the Company had originated 68 wholly-owned projects since the Company’s inception. These projects represent an estimated total investment of $1,223 million ($1,183 million at share), of which an estimated $895 million ($882 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 March 31, 2018:

The tables below provide brief descriptions of each of the redevelopment projects originated on the Company’s platform since its inception:

Leasing Update

During the quarter ended March 31, 2018, the Company signed new leases totaling 391,000 square feet at an average annual base rent of $20.24 PSF. On a same-space basis, new rents averaged 4.1x prior rents for space currently or formerly occupied by Sears Holdings, increasing to $20.29 PSF for new tenants compared to $4.95 PSF paid by Sears Holdings across 389,000 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:

During the quarter ended March 31, 2018, the Company added $7.9 million of new third-party income and increased annual base rent attributable to third-party tenants to 54.3% of total annual base rent from 39.7% as of March 31, 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 March 31, 2018, including unconsolidated joint ventures presented at the Company’s proportional share:

Balance Sheet and Liquidity

As of March 31, 2018, the Company’s total market capitalization was approximately $3.3 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 39.3% and net debt to Adjusted EBITDA was 7.4x. 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 March 31, 2018, the Company had $135.1 million of unrestricted cash and restricted cash of $177.4 million, the substantial majority of which was held in reserve accounts for redevelopment, re-leasing and operating expenses at the Company’s properties. The Company also had $55.0 million of permitted, but uncommitted, borrowing capacity under its $200.0 million unsecured term loan facility due December 31, 2018.

During the quarter ended March 31, 2018, the Company reduced amounts outstanding under its mortgage loan by $73.0 million and added $3.6 million to its redevelopment reserve as a result of the new joint venture in Santa Monica and the disposition of four former Kmart properties in Harlingen, TX, Houma, LA, Sierra Vista, AZ and Yakima, WA.

Dividends

On April 24, 2018, the Company’s Board of Trustees declared a first quarter common stock dividend of $0.25 per each Class A and Class C common share. The dividend will be paid on July 12, 2018 to shareholders of record on June 29, 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 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 dividend will be paid on July 16, 2018 to holders of record on June 29, 2018.

On February 20, 2018, the Company’s Board of Trustees declared a first quarter common stock dividend of $0.25 per each Class A and Class C common share. The dividend was paid on April 12, 2018 to shareholders of record on March 30, 2018. Holders of units in the Operating Partnership were entitled to an equal distribution per each Operating Partnership unit held as of March 30, 2018.

On February 20, 2018, the Company’s Board of Trustees also declared a preferred stock dividend of $0.593056 per each Series A Preferred Share. The dividend covered the period from, and including, December 14, 2017 to, but excluding, April 15, 2018. The dividend was paid on April 16, 2018 to holders of record on March 30, 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 225 wholly-owned properties and 24 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.

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

Computation of Annualized Total NOI (in thousands)

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

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

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