SRG Seritage Growth Properties

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

Financial Results

For the three months ended September 30, 2017:

• Net income attributable to common shareholders of $10.5 million, or $0.31 per diluted share
• Total Net Operating Income (“Total NOI”) of $43.6 million
• Funds from Operations (“FFO”) of $25.8 million, or $0.46 per diluted share
• Company FFO of $17.6 million, or $0.32 per diluted share

For the nine months ended September 30, 2017:

• Net loss attributable to common shareholders of $30.5 million, or $0.91 per diluted share
• Total NOI of $135.2 million
• FFO of $80.6 million, or $1.45 per diluted share
• Company FFO of $70.3 million, or $1.26 per diluted share

Operating Highlights

During the quarter ended September 30, 2017, including the Company’s proportional share of its unconsolidated joint ventures:

• Signed new leases totaling 601,000 square feet at an average of $16.25 PSF. Since the Company’s inception in July 2015, new leasing activity has totaled approximately 4.0 million square feet at an average of $17.97 PSF.
  • Achieved releasing multiples of 4.6x for space currently or formerly occupied by Sears Holdings Corporation (“Sears Holdings”), with new rents averaging $17.97 PSF compared to $3.90 PSF paid by Sears Holdings. Since inception, releasing multiples have averaged 4.2x, with new rents at $18.25 PSF compared to $4.30 PSF paid by Sears Holdings.
  • Added $9.8 million of new third-party rental income. Third-party rental income has increased by over 130% since inception to $101.3 million, including all signed leases and after the impact of the GGP transactions described below.
• Increased annual base rent from tenants other than Sears Holdings to 45.4% of total annual base rent from 31.4% in the prior year period, including all signed leases and net of rent attributable to associated space to be recaptured, and after the impact of the GGP transactions.
• Increased annualized Total NOI to $217.6 million from $215.6 million in the prior year period, including all signed leases and net of rent attributable to associated space to be recaptured, and after the impact of the GGP transactions.
• Commenced five new wholly-owned redevelopment projects and expanded one previously announced project, bringing total redevelopment activity since inception to 70 projects completed or commenced for a total estimated investment of $740 million.

• As previously reported, completed two transactions with GGP for gross consideration of $247.6 million whereby the Company (i) sold to GGP the Company’s 50% interest in eight of the 12 assets in the existing joint venture between the two companies for $190.1 million; and (ii) sold to GGP a 50% joint venture interest in five additional assets for $57.5 million. As a result of the transactions, the Company recorded aggregate gains of $56.8 million, reduced amounts outstanding under its mortgage loan by $50.6 million and received approximately $171.6 million of unrestricted cash proceeds before closing costs, which it intends to use to fund its redevelopment pipeline and for general corporate purposes.

In addition, subsequent to the quarter end, the Company:

• Agreed to sell to Simon Property Group (“Simon”) the Company’s 50% interest in five of the ten assets in the existing joint venture between the two companies for $68.0 million, subject to certain closing conditions. Upon closing, which is expected in the fourth quarter, the Company would realize approximately $7.0 million of value creation above its basis across the five properties and generate unrestricted cash proceeds, after closing costs and any required tax distributions, to fund its redevelopment pipeline and for general corporate purposes.

“We are pleased to announce another strong quarter of leasing and development activity. With an additional 600,000 square feet leased, we now stand at approximately four million square feet of new leases signed since inception, at an average rent multiple of 4.2 times the prior rent. We also commenced five new projects and expanded the scope of one project to bring our total completed and commenced project activity to 70 projects and $740 million of capital. We continue to deploy this capital at attractive unlevered returns of 10-12% based on the incremental income over our incremental costs,” said Benjamin Schall, President and Chief Executive Officer. “We also closed our transactions with GGP this quarter, receiving gross consideration of $247.6 million for interests in 13 assets and, subsequent to quarter end, we agreed to sell Simon our interest in five of our ten existing joint venture assets for $68 million. We expect to deploy the proceeds from these transactions into our growing pipeline of value enhancing redevelopment projects throughout the portfolio.”

Financial Results

For the three months ended September 30, 2017:

• Net income attributable to Class A and Class C shareholders was $10.5 million, or $0.31 per diluted share, as compared to a net loss of $21.1 million, or $0.67 per diluted share, for the prior year period. The three months ended September 30, 2017 included gains from the sale of real estate totaling $56.8 million and the prior year period included a litigation charge of $19.0 million.
• Total NOI, which includes the Company’s proportional share of NOI from properties owned through investments in its unconsolidated joint ventures, was $43.6 million as compared to $48.1 million for the prior year period.
• FFO, as calculated in accordance with the National Association of Real Estate Investment Trusts (“NAREIT”) definition, was $25.8 million, or $0.46 per diluted share, as compared to $12.3 million, or $0.22 per diluted share, for the prior year period. The prior year period included a litigation charge of $19.0 million.
• Company FFO was $17.6 million, or $0.32 per diluted share, as compared to $32.6 million, or $0.59 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.”

For the nine months ended September 30, 2017:

• Net loss attributable to Class A and Class C shareholders was $30.5 million, or $0.91 per diluted share, as compared to a net loss of $36.6 million, or $1.16 per diluted share, for the prior year period. The nine months ended September 30, 2017 included gains from the sale of real estate totaling $56.8 million and the nine months ended September 30, 2016 included a litigation charge of $19.0 million.
• Total NOI was $135.2 million as compared to $141.8 million for the prior year period.
• FFO was $80.6 million, or $1.45 per diluted share, as compared to $72.0 million, or $1.29 per diluted share, for the prior year period. The prior year period included a litigation charge of $19.0 million.
• Company FFO was $70.3 million, or $1.26 per diluted share, as compared to $97.3 million, or $1.75 per diluted share, for the prior year period.

Portfolio Summary

As of September 30, 2017, the Company’s portfolio included interests in 258 retail properties totaling over 40 million square feet of gross leasable area, including 230 wholly-owned properties and 28 properties owned through investments in unconsolidated joint ventures. The Company’s portfolio includes 125 properties attached to regional malls and 133 shopping center or freestanding properties.

The portfolio was 90.2% leased and included 41 properties leased only to third-party tenants, 97 properties leased to Sears Holdings and one or more third-party tenants, and 102 properties leased only to Sears Holdings. Of the properties leased to Sears Holdings, 154 operated under the Sears brand and 45 operated under the Kmart brand.

Subsequent to September 30, 2017, pursuant to notices previously submitted to the Company, Sears Holdings effectively vacated 20 stores totaling 3.8 million square feet of gross leasable area. The aggregate annual base rent at these stores was approximately $11.7 million, or 5.2% of the Company's total annual base rent as of September 30, 2017, including all signed leases. In connection with the termination, Sears Holdings paid Seritage a termination fee of approximately $24.2 million, an amount equal to one year of the aggregate annual base rent and estimated operating expenses for the 20 properties.

Development Update

Wholly-Owned Properties

During the quarter ended September 30, 2017, the Company commenced five new redevelopment projects representing an estimated total investment of approximately $42.9 million and expanded one previously announced for an estimated total investment of $8.3 million. In total, including projects initiated prior to the Company’s formation, the Company has completed or commenced 70 projects representing an estimated total investment of approximately $739.6 million as of September 30, 2017.

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

(in thousands)               Estimated     Estimated Number Project Development Project Quarter of Projects Square Feet Costs (1) Costs (1) Acquired (2) 15 $ 63,600 $ 63,600 Q4 2015 5 352 51,500 64,200 Q1 2016 (3) 5 319 61,900 61,900 Q2 2016 (3) 5 388 58,500 58,800 Q3 2016 (3) 10 1,202 121,800 129,000 Q4 2016 (3) 8 768 111,400 121,000 Q1 2017 5 589 58,500 58,500 Q2 2017 12 963 136,200 139,700 Q3 2017   5   367   42,900   42,900 Total   70   4,948 $ 706,300 $ 739,600

____________________

(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 September 30, 2017, the Company had originated 55 wholly-owned projects since the Company’s inception. These projects, including six expanded projects, represent an estimated total investment of $676 million, of which $520.5 million remained to be spent, and are expected to generate an incremental yield on cost of 11-12%.

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

(in thousands)                                   Estimated Estimated Estimated Estimated Number Project Development Project Projected Annual Income (2) Incremental Project Costs (1) of Projects Square Feet Costs (1) Costs (1) Total Existing Incremental Yield (3) < $10,000 24 1,426 $ 104,800 $ 104,900 $ 19,700 $ 5,200 $ 14,400 $10,001 - $20,000 23 2,373 309,900 329,800 47,800 13,600 34,300 > $20,000   8   1,149   228,000   241,300   37,700   9,000   28,600   New Projects 55   4,948 $ 642,700 $ 676,000 $ 105,200 $ 27,800 $ 77,300 11.0 - 12.0% Acquired projects   15   63,600   63,600 Total   70 $ 706,300 $ 739,600

____________________

(1)   Total estimated development costs exclude, and total estimated project costs include, termination fees to recapture 100% of certain properties. (2) Projected annual income includes assumptions on stabilized rents to be achieved for space under redevelopment. There can be no assurance that stabilized rent targets will be achieved. (3) Projected incremental annual income divided by total estimated project costs.

The table below provides a brief description of each of the 55 redevelopment projects originated since the Company’s inception:

Total Project Costs under $10 Million                     Total     Estimated   Estimated Project Construction Substantial Property Description Square Feet   Start Completion King of Prussia, PA Repurpose former auto center space for Outback Steakhouse, Yard House and small shop retail   29,100 Substantially complete Merrillville, IN Termination property; redevelop existing store for At Home, Powerhouse Gym and small shop retail 132,000 Substantially complete Elkhart, IN Termination property; existing store has been released to Big R Stores 86,500 Substantially complete San Antonio, TX Recapture and repurpose auto center space for Orvis, Jared's Jeweler, Shake Shack and small shop retail 18,900 Substantially complete Bowie, MD Recapture and repurpose auto center space for BJ's Brewhouse 8,200 Delivered to tenant Albany, NY Recapture and repurpose auto center space for BJ's Brewhouse and additional small shop retail 28,000 Underway Q4 2017 Hagerstown, MD Recapture and repurpose auto center space for BJ's Brewhouse, Verizon and additional restaurants 15,400 Underway Q4 2017 Roseville, MI Partial recapture; redevelop existing store for At Home 100,400 Underway Q4 2017 Troy, MI Partial recapture; redevelop existing store for At Home 100,000 Underway Q4 2017 Henderson, NV Termination property; redevelop existing store for At Home, Seafood City and additional retail 144,400 Underway Q4 2017 Rehoboth Beach, DE Partial recapture; redevelop existing store for Christmas Tree Shops andThat! and PetSmart 56,700 Underway Q1 2018 Ft. Wayne, IN Site densification; new outparcels for BJ's Brewhouse (substantially complete) and Chick-Fil-A (project expansion) 12,000 Underway Q1 2018 Kearney, NE Termination property; redevelop existing store for Marshall's, PetSmart and additional junior anchors 92,500 Underway Q2 2018 Jefferson City, MO Termination property; redevelop existing store for Orscheln Farm and Home 96,000 Underway Q2 2018 Olean, NY Partial recapture; redevelop existing store for Marshall's and additional retail 45,000 Underway Q2 2018 Cullman, AL Termination property; redevelop existing store for Bargain Hunt, Tractor Supply and Planet Fitness 99,000 Underway Q3 2018 Guaynabo, PR Partial recapture; redevelop existing store for Planet Fitness and Capri 56,100 Underway Q3 2018 Roseville, CA Recapture and repurpose auto center space for AAA 10,400 Q4 2017 Q2 2018 Dayton, OH Recapture and repurpose auto center space for Outback Steakhouse and additional restaurants 14,100 Q4 2017 Q4 2018 Florissant, MO Site densification; new outparcel for Chick-Fil-A 5,000 Q1 2018 Q3 2018 New Iberia, LA Termination property; redevelop existing store for Rouses Supermarkets, additional junior anchors and small shop retail 93,100 Q1 2018 Q1 2019

North Little Rock, AR

Recapture and repurpose auto center space for LongHorn Steakhouse and additional small shop retail 17,300 Q2 2018 Q2 2019 St. Clair Shores, MI 100% recapture; demolish existing store and develop site for new Kroger store 107,200 Q2 2018 Q2 2019 Oklahoma City, OK Site densification; new fitness center for Vasa Fitness 59,500 Q3 2018 Q3 2019   Total Project Costs $10 - $20 Million Total Estimated Estimated Project Construction Substantial Property Description Square Feet   Start Completion Braintree, MA 100% recapture; redevelop existing store for Nordstrom Rack, Saks OFF 5th and additional retail 90,000 Substantially complete Honolulu, HI 100% recapture; redevelop existing store for Longs Drugs (CVS), PetSmart and Ross Dress for Less 79,000 Substantially complete Madison, WI Partial recapture; redevelop existing store for Dave & Busters, Total Wine & More, additional retail and restaurants 75,300 Underway Q4 2017 West Jordan, UT Partial recapture; redevelop existing store and attached auto center for Burlington Stores and additional retail 81,400 Underway Q4 2017 Anderson, SC 100% recapture (project expansion); redevelop existing store for Burlington Stores, Sportsman's Warehouse, additional retail and restaurants 111,300 Underway Q4 2017 Fairfax, VA Partial recapture; redevelop existing store and attached auto center for Dave & Busters, Seasons 52, additional junior anchors and restaurants 110,300 Underway Q1 2018

North Hollywood, CA

Partial recapture; redevelop existing store for Burlington Stores and additional junior anchors 79,800 Underway Q1 2018 Saugus, MA Partial recapture; redevelop existing store and detached auto center for Round One and restaurants 99,000 Underway Q1 2018 Thornton, CO Termination property; redevelop existing store for Vasa Fitness and additional junior anchors 191,600 Underway Q1 2018 Orlando, FL 100% recapture; demolish and construct new buildings for Floor & Décor, Orchard Supply Hardware, LongHorn Steakhouse, Olive Garden, additional small shop retail and restaurants 139,200 Underway Q2 2018 Springfield, IL Termination property; redevelop existing store for Burlington Stores, Binny's Beverage Depot, Orange Theory Fitness, Outback Steakhouse, CoreLife Eatery, additional junior anchors and small shop retail 133,400 Underway Q2 2018 North Miami, FL 100% recapture; redevelop existing store for Michael's, PetSmart and Ross Dress for Less 124,300 Underway Q2 2018 Hialeah, FL 100% recapture; redevelop existing store for Bed, Bath & Beyond, Ross Dress for Less and additional junior anchors to join current tenant, Aldi 88,400 Underway Q2 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 Warwick, RI Termination property; repurpose auto center space for BJ's Brewhouse and additional retail

Redevelop existing store for At Home and Raymour & Flanigan (project expansion)

190,700 Underway Q4 2018 Cockeysville, MD Partial recapture; redevelop existing store for HomeGoods, Michael's Stores, additional junior anchors and restaurants 83,500 Q4 2017 Q2 2018 Salem, NH Site densification; new theatre for Cinemark

Recapture and repurpose auto center for restaurant space.

71,200 Q4 2017 Q3 2018 Paducah, KY Termination property; redevelop existing store for Burlington Stores and additional retail 102,300 Q1 2018 Q3 2018 Santa Cruz, CA Partial recapture; redevelop existing store for TJ Maxx, HomeGoods and Petco 62,200 Q1 2018 Q4 2018 Temecula, CA Partial recapture; redevelop existing store and detached auto center for Round One, small shop retail and restaurants 65,100 Q1 2018 Q4 2018 Canton, OH Partial recapture; redevelop existing store for Dave & Busters and restaurants 83,900 Q1 2018 Q2 2019 North Riverside, IL Partial recapture; redevelop existing store and detached auto center for Round One, additional junior anchors, small shop retail and restaurants 103,900 Q1 2018 Q3 2019 Austin, TX Partial recapture; redevelop existing store for AMC Theatres, additional retail and restaurants 80,500 Q2 2018 Q3 2019   Total Project Costs over $20 Million Total Estimated Estimated Project Construction Substantial Property Description Square Feet   Start Completion Memphis, TN 100% recapture; demolish and construct new buildings for LA Fitness, Nordstrom Rack, Ulta Beauty, Hopdoddy Burger Bar, additional junior anchors, restaurants and small shop retail 135,200 Delivered to tenants 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 147,600 Underway Q1 2018 St. Petersburg, FL 100% recapture; demolish and construct new buildings for Dick's Sporting Goods, Lucky's Market, PetSmart, Five Below, Chili's Grill & Bar, Pollo Tropical, LongHorn Steakhouse and additional small shop retail and restaurants 142,400 Underway Q2 2018 Wayne, NJ Partial recapture; redevelop existing store for Dave & Busters, additional junior anchors and restaurants

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

NOTE: contributed to GGP II JV in July 2017

156,700 Underway Q3 2018 Carson, CA 100% recapture (project expansion); redevelop existing store for Burlington Stores, Ross Dress for Less and additional retail 163,800 Underway Q1 2019 Santa Monica, CA 100% recapture; redevelop existing building into premier, mixed-use asset featuring unique, small-shop retail and creative office space 96,500 Q4 2017 Q4 2019 Watchung, NJ 100% recapture; demolish full-line store and construct new buildings for HomeSense, Sierra Trading Post, Ulta Beauty and additional small shop retail and restaurants

Demolish detached auto center and construct a freestanding Cinemark theater

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

Joint Venture Properties

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

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

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

During the quarter, the GGP joint ventures commenced redevelopment projects at the Natick Collection, anchored by Dave & Buster’s, and at Northridge Fashion Center, anchored by Dick’s Sporting Goods.

Subsequent to the quarter end, the Company agreed to sell to Simon the Company’s 50% interest in five of the ten assets in the existing joint venture between the two companies for $68.0 million, subject to certain closing conditions. The table below presents the properties agreed to be sold in the transaction and the properties that would remain in the Company’s joint venture with Simon:

Five Existing JV Assets to be Sold to Simon   Five Remaining Assets in JV with Simon Retail Center   Location Retail Center   Location Brea Mall Brea, CA Barton Creek Square Austin, TX Burlington Mall Burlington, MA Briarwood Mall Ann Arbor, MI Midland Park Mall Midland, TX Santa Rosa Plaza Santa Rosa, CA Ross Park Mall Pittsburgh, PA The Shops at Nanuet Nanuet, NY Ocean County Mall Toms River, NJ Woodland Hills Mall Tulsa, OK

The Company continues to own 50% interests in nine assets in an unconsolidated joint venture with The Macerich Company.

Leasing Update

During the quarter ended September 30, 2017, the Company signed new leases totaling 601,000 square feet at an average annual base rent of $16.25 PSF. On a same-space basis, new rents averaged 4.6x prior rents for space currently or formerly occupied by Sears Holdings, increasing to $17.97 PSF for new tenants compared to $3.90 PSF paid by Sears Holdings across 486,000 square feet.

Since inception in July 2015, the Company has signed new leases totaling approximately 4.0 million square feet at an average annual base rent of $17.97 PSF. On a same-space basis, new rents averaged 4.2x prior rents for space currently or formerly occupied by Sears Holdings, increasing to $18.25 PSF for new tenants compared to $4.30 PSF paid by Sears Holdings across approximately 3.6 million 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 Quarter Leases GLA Rent Rent PSF Leases GLA Rent Rent PSF Multiple Q4 2015 9 154 $ 4,650 $ 30.28 6 130 $ 3,820 $ 29.41 4.4 x Q1 2016 7 214 6,990 32.60 7 214 6,990 32.60 5.7 x Q2 2016 15 422 7,240 17.15 13 363 6,440 17.75 4.7 x Q3 3016 14 543 7,470 13.74 12 456 6,250 13.70 4.0 x Q4 2016 29 891 14,900 16.72 27 849 13,930 16.41 4.1 x Q1 2017 22 535 8,780 16.41 21 530 8,660 16.34 4.0 x Q2 2017 28 598 11,340 18.95 26 592 11,240 18.99 3.7 x Q3 2017   21   601   9,770   16.25   18   486   8,730   17.97   4.6 x Total   145   3,958 $ 71,140 $ 17.97   130   3,620 $ 66,060 $ 18.25   4.2 x

During the quarter ended September 30, 2017, the Company added $9.8 million of new third-party income and increased annual base rent attributable to third-party tenants to 45.4% of total annual base rent from 31.4% as of September 30, 2016, including all signed leases and net of rent attributable to the associated space to be recaptured.

The table below provides a summary of all the Company’s signed leases as of September 30, 2017, 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)   199   27,483   80.3 % $ 122,015   54.6 % $ 4.44 In-Place Third-Party Leases 238 3,723 10.9 % 47,430 21.2 % 12.74 SNO Third-Party Leases   104   3,017   8.8 %   53,868   24.2 %   17.85 Sub-Total Third-Party Leases   342   6,740   19.7 %   101,298   45.4 %   15.03 Total   541   34,223   100.0 % $ 223,313   100.0 % $ 6.53  

____________________

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

Balance Sheet and Liquidity

As of September 30, 2017, the Company’s total market capitalization was approximately $3.9 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 33.5% and net debt to Adjusted EBITDA was 7.3x. The Company deducts both unrestricted and restricted cash from total debt when calculating net debt. Reconciliations of net loss attributable to common shareholders to EBITDA, and EBITDA to Adjusted EBITDA, are provided in the tables accompanying this press release.

As of September 30, 2017, the Company had $104.2 million of unrestricted cash and restricted cash of $202.5 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 $115.0 million of borrowing capacity under its $200.0 million unsecured term loan facility due December 31, 2017.

On July 12, 2017, as a result of the two transactions with GGP, the Company reduced amounts outstanding under its mortgage loan by $50.6 million and received approximately $171.6 million of unrestricted cash proceeds before closing costs.

Subsequent to September 30, 2017, and subject to certain closing conditions, the Company agreed to sell interests in certain joint venture properties to Simon. The transaction would generate unrestricted cash proceeds, after closing costs and any required tax distributions, to fund the Company’s redevelopment pipeline and general corporate purposes.

With respect to the December 31, 2017 maturity of the Company’s $200 million unsecured term loan facility, the Company may repay the $85.0 million total principal amount outstanding as of September 30, 2017 with cash on hand, seek an extension of the maturity date, or raise additional capital through a refinancing transaction or from the proceeds of asset sales or new joint ventures.

Dividends

On October 24, 2017, the Company’s Board of Trustees declared a fourth quarter common stock dividend of $0.25 per each Class A and Class C common share. The dividend will be paid on January 11, 2017 to shareholders of record on December 29, 2017. 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 December 29, 2017.

On July 25, 2017, 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 dividend was paid on October 12, 2017 to shareholders of record on September 29, 2017. Holders of units in the Operating Partnership were entitled to an equal distribution per each Operating Partnership unit held as of September 29, 2017.

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 ("EBITDA") and Adjusted EBITDA

EBITDA is defined as net income less depreciation, amortization, interest expense and provision for income and other taxes. EBITDA is a commonly used measure of performance in many industries, but may not be comparable to measures calculated by other companies. The Company believes EBITDA provides useful information to investors regarding its 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 EBITDA facilitates comparisons between the Company and other equity REITs, retail property owners who are not REITs, and other capital-intensive companies.

The Company makes certain adjustments to EBITDA, which it refers to as Adjusted 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, certain up-front-hiring and personnel costs and gains (or losses) from property sales, that it does not believe are representative of ongoing operating results.

Funds From Operations ("FFO") and Company FFO

FFO is calculated in accordance with the National Association of Real Estate Investment Trusts ("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 substantial dependence on 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 limited operating history. 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 230 wholly-owned properties and 28 joint venture properties totaling over 40 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 experience 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)

    September 30, 2017 December 31, 2016 ASSETS Investment in real estate Land $ 799,971 $ 840,021 Buildings and improvements 859,782 839,663 Accumulated depreciation   (126,712 )   (89,940 ) 1,533,041 1,589,744 Construction in progress   175,516   55,208 Net investment in real estate 1,708,557 1,644,952 Investment in unconsolidated joint ventures 338,326 425,020 Cash and cash equivalents 104,153 52,026 Restricted cash 202,513 87,616 Tenant and other receivables, net 28,166 23,172 Lease intangible assets, net 327,229 464,399 Prepaid expenses, deferred expenses and other assets, net   20,284   15,052 Total assets $ 2,729,228 $ 2,712,237   LIABILITIES AND EQUITY Liabilities Mortgage loans payable, net $ 1,200,615 $ 1,166,871 Unsecured term loan, net 84,009 — Accounts payable, accrued expenses and other liabilities   111,482   121,055 Total liabilities   1,396,106   1,287,926   Commitments and contingencies   Shareholders' Equity

Class A shares $0.01 par value; 100,000,000 shares authorized; 28,001,411 and 25,843,251 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively

280 258

Class B shares $0.01 par value; 5,000,000 shares authorized; 1,434,922 and 1,589,020 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively

14 16

Class C shares $0.01 par value; 50,000,000 shares authorized; 5,951,861 and 5,754,685 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively

59 58 Additional paid-in capital 996,047 925,563 Accumulated deficit   (177,394 )   (121,338 ) Total shareholders' equity 819,006 804,557 Non-controlling interests   514,116   619,754 Total equity   1,333,122   1,424,311 Total liabilities and equity $ 2,729,228 $ 2,712,237  

SERITAGE GROWTH PROPERTIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

      Three Months Ended September 30, Nine Months Ended September 30, 2017   2016 2017   2016 REVENUE Rental income $ 48,167 $ 45,584 $ 139,526 $ 136,737 Tenant reimbursements   15,881   12,023   47,813   45,741 Total revenue   64,048   57,607   187,339   182,478 EXPENSES Property operating 4,311 4,505 13,985 17,176 Real estate taxes 11,335 7,965 35,707 31,101 Depreciation and amortization 61,059 44,532 170,293 121,365 General and administrative 5,272 4,252 16,639 13,104 Litigation charge — 19,000 — 19,000 Provision for doubtful accounts 68 124 119 269 Acquisition-related expenses   —   —   —   73 Total expenses   82,045   80,378   236,743   202,088 Operating loss (17,997 ) (22,771 ) (49,404 ) (19,610 )

Equity in (loss) income of unconsolidated joint ventures

(3,686 ) 1,497 (4,226 ) 4,495

Gain on sale of interest in unconsolidated joint venture

43,729 — 43,729 — Gain on sale of real estate 13,018 — 13,018 — Interest and other income 352 77 472 196 Interest expense (18,049 ) (15,931 ) (53,072 ) (47,297 ) Unrealized loss on interest rate cap   (91 )   (47 )   (686 )   (1,898 ) Income (loss) before income taxes 17,276 (37,175 ) (50,169 ) (64,114 ) Provision for income taxes   —   (72 )   (266 )   (412 ) Net income (loss) 17,276 (37,247 ) (50,435 ) (64,526 )

Net (income) loss attributable to non-controlling interests

  (6,762 )   16,145   19,892   27,972

Net income (loss) attributable to common shareholders

$ 10,514 $ (21,102 ) $ (30,543 ) $ (36,554 )  

Net income (loss) per share attributable to Class A and Class C common shareholders - Basic

$ 0.31 $ (0.67 ) $ (0.91 ) $ (1.16 )

Net income (loss) per share attributable to Class A and Class C common shareholders - Diluted

$ 0.31 $ (0.67 ) $ (0.91 ) $ (1.16 )

Weighted average Class A and Class C common shares outstanding - Basic

  33,774   31,419   33,685   31,414

Weighted average Class A and Class C common shares outstanding - Diluted

  33,841   31,419   33,685   31,414  

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

      Three Months Ended September 30, Nine Months Ended September 30, NOI 2017   2016 2017   2016 Net income (loss) $ 17,276 $ (37,247 ) $ (50,435 ) $ (64,526 ) Termination fee income (10,596 ) — (17,360 ) — Depreciation and amortization 61,059 44,532

170,293

121,365 General and administrative 5,272 4,252 16,639 13,104 Litigation charge — 19,000 — 19,000 Acquisition-related expenses — — — 73

Equity in loss (income) of unconsolidated joint ventures

3,686 (1,497 ) 4,226 (4,495 )

Gain on sale of interest in unconsolidated joint venture

(43,729 ) — (43,729 ) — Gain on sale of real estate (13,018 ) — (13,018 ) — Interest and other income (352 ) (77 ) (472 ) (196 ) Interest expense 18,049 15,931 53,072 47,297 Unrealized loss on interest rate cap 91 47 686 1,898 Provision for income taxes   —   72   266   412 NOI $ 37,738 $ 45,013 $ 120,168 $ 133,932   Total NOI NOI 37,738 45,013 120,168 133,932 NOI of unconsolidated joint ventures 4,830 6,431 18,328 20,057 Straight-line rent adjustment (1) 1,230 (3,100 ) (2,396 ) (11,526 ) Above/below market rental income/expense (1)   (212 )   (257 )   (902 )   (681 ) Total NOI $ 43,586 $ 48,087 $ 135,198 $ 141,782  

____________________

(1) Includes adjustments for unconsolidated joint ventures.

 

Computation of Annualized Total NOI (in thousands)

      As of As of Annualized Total NOI September 30, 2017 September 30, 2016 Total NOI (per above) $ 43,586 $ 48,087 Current period adjustments (1)   (1,292 )   203 Adjusted Total NOI 42,294 48,290 Annualize   x 4   x 4 Adjusted Total NOI annualized 169,176 193,160 Plus: estimated annual Total NOI from SNO leases 52,868 28,815

Less: estimated annual Total NOI from associated space to be recaptured from Sears

  (4,402 )   (6,378 ) Annualized Total NOI $ 217,642 $ 215,597  

____________________

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

 

Reconciliation of Net Loss to EBITDA and Adjusted EBITDA (in thousands)

      Three Months Ended September 30, Nine Months Ended September 30, EBITDA 2017   2016 2017   2016 Net income (loss) $ 17,276 $ (37,247 ) $ (50,435 ) $ (64,526 ) Depreciation and amortization 61,059 44,532 170,293 121,365 Depreciation and amortization (unconsolidated

joint ventures)

4,755 5,191 18,583 15,653 Interest expense 18,049 15,931 53,072 47,297 Provision for income and other taxes   —   72   266   412 EBITDA $ 101,139 $ 28,479 $ 191,779 $ 120,201   Adjusted EBITDA EBITDA $ 101,139 $ 28,479 $ 191,779 $ 120,201 Termination fee income (10,596 ) — (17,360 ) — Unrealized loss on interest rate cap 91 47 686 1,898 Litigation charge — 19,000 — 19,000 Acquisition-related expenses — — — 73 Up-front hiring and personnel costs — — — 328

Gain on sale of interest in unconsolidated joint venture

(43,729 ) — (43,729 ) — Gain on sale of real estate   (13,018 )   —   (13,018 )   — Adjusted EBITDA $ 33,887 $ 47,526 $ 118,358 $ 141,500  

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

        Three Months Ended September 30, Nine Months Ended September 30, Funds from Operations 2017   2016 2017   2016 Net income (loss) $ 17,276 $ (37,247 ) $ (50,435 ) $ (64,526 )

Real estate depreciation and amortization (consolidated properties)

60,483 44,307 169,158 120,845

Real estate depreciation and amortization (unconsolidated joint ventures)

4,755 5,191 18,583 15,653

Gain on sale of interest in unconsolidated joint venture

(43,729 ) — (43,729 ) —

Gain on sale of real estate

  (13,018 )   —   (13,018 )   —

FFO attributable to common shareholders and unitholders

$ 25,767 $ 12,251 $ 80,559 $ 71,972                 FFO per diluted common share and unit $ 0.46 $ 0.22 $ 1.45 $ 1.29   Company Funds from Operations

Funds from Operations attributable to Seritage Growth Properties

$ 25,767 $ 12,251 $ 80,559 $ 71,972 Termination fee income (10,596 ) — (17,360 ) — Unrealized loss on interest rate cap 91 47 686 1,898 Amortization of deferred financing costs 2,329 1,340 6,390 4,020 Litigation charge — 19,000 — 19,000 Acquisition-related expenses — — — 73 Up-front hiring and personnel costs   —   —   —   328

Company FFO attributable to common shareholders and unitholders

$ 17,591 $ 32,638 $ 70,275 $ 97,291                 Company FFO per diluted common share and unit $ 0.32 $ 0.59 $ 1.26 $ 1.75  

Weighted Average Common Shares and Units Outstanding

Weighted average common shares outstanding 33,841 31,419 33,685 31,414

Weighted average OP units outstanding

  21,832   24,176   21,916   24,176

Weighted average common shares and units outstanding

  55,673   55,595   55,601   55,590

View source version on businesswire.com: http://www.businesswire.com/news/home/20171102006784/en/

Seritage Growth Properties646-277-1268IR@Seritage.com