UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
or
For the transition period from _______to _______
Commission File Number
(Exact name of registrant as specified in its charter)
(State of Incorporation) |
(I.R.S. Employer Identification No.) |
(Address of principal executive offices) |
(Zip Code) |
Registrant’s telephone number, including area code: (
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Trading Symbols |
Name of each exchange on which registered |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
As of August 13, 2024, the registrant had the following common shares outstanding:
Class |
Shares Outstanding |
Class A common shares of beneficial interest, par value $0.01 per share |
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Class B common shares of beneficial interest, par value $0.01 per share |
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Class C common shares of beneficial interest, par value $0.01 per share |
SERITAGE GROWTH PROPERTIES
QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED June 30, 2024
TABLE OF CONTENTS
PART I. |
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Page |
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Item 1. |
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Condensed Consolidated Balance Sheets as of June 30, 2024 and December 31, 2023 |
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4 |
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5 |
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Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2024 and 2023 |
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8 |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
27 |
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Item 3. |
37 |
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Item 4. |
37 |
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PART II. |
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Item 1. |
38 |
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Item 1A. |
38 |
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Item 2. |
38 |
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Item 3. |
38 |
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Item 4. |
38 |
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Item 5. |
38 |
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Item 6. |
40 |
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41 |
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements
SERITAGE GROWTH PROPERTIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, amounts in thousands, except share and per share amounts)
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June 30, 2024 |
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December 31, 2023 |
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ASSETS |
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Investment in real estate |
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Land |
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$ |
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$ |
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Buildings and improvements |
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Accumulated depreciation |
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Construction in progress |
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Net investment in real estate |
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Real estate held for sale |
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Investment in unconsolidated entities |
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Cash and cash equivalents |
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Restricted cash |
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Tenant and other receivables, net |
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Lease intangible assets, net |
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Prepaid expenses, deferred expenses and other assets, net |
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Total assets (1) |
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$ |
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$ |
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LIABILITIES AND SHAREHOLDERS' EQUITY |
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Liabilities |
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Term loan facility |
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$ |
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$ |
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Accounts payable, accrued expenses and other liabilities |
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Total liabilities (1) |
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Shareholders' Equity |
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Class A common shares $ |
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Series A preferred shares $ |
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Additional paid-in capital |
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Accumulated deficit |
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( |
) |
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( |
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Total shareholders' equity |
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Non-controlling interests |
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Total equity |
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Total liabilities and equity |
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$ |
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$ |
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(1) The Company's consolidated balance sheets include assets and liabilities of consolidated variable interest entities ("VIEs"). See Note 2. The consolidated balance sheets, as of June 30, 2024, include the following amounts related to our consolidated VIEs, excluding the Operating Partnership: $ |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
- 3 -
SERITAGE GROWTH PROPERTIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, amounts in thousands, except per share amounts)
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Three Months Ended |
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Six Months Ended |
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2024 |
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2023 |
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2024 |
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2023 |
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REVENUE |
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Rental income |
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$ |
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$ |
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$ |
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$ |
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Total revenue |
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EXPENSES |
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Property operating |
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Real estate taxes |
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Depreciation and amortization |
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General and administrative |
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Total expenses |
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Gain on sale of real estate, net |
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Gain on sale of interest in unconsolidated entities |
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- |
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- |
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Impairment of real estate assets |
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( |
) |
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( |
) |
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( |
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( |
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Equity in loss of unconsolidated entities |
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( |
) |
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( |
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( |
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( |
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Interest and other income, net |
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Interest expense |
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( |
) |
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( |
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( |
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( |
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Loss before income taxes |
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( |
) |
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( |
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( |
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( |
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(Provision) benefit for income taxes |
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( |
) |
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( |
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Net loss |
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( |
) |
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( |
) |
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( |
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( |
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Preferred dividends |
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( |
) |
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( |
) |
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( |
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( |
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Net loss attributable to Seritage common shareholders |
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$ |
( |
) |
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$ |
( |
) |
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$ |
( |
) |
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$ |
( |
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Net loss per share attributable to Seritage Class A |
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$ |
( |
) |
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$ |
( |
) |
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$ |
( |
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$ |
( |
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Net loss per share attributable to Seritage Class A |
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$ |
( |
) |
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$ |
( |
) |
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$ |
( |
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$ |
( |
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Weighted average Class A common shares |
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Weighted average Class A common shares |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
- 4 -
SERITAGE GROWTH PROPERTIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited, amounts in thousands, except per share amounts)
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Class A |
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Series A |
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Additional |
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Accumulated |
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Non- |
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Total |
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Shares |
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Amount |
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Shares |
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Amount |
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Capital |
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Deficit |
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Interests |
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Equity |
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Balance at January 1, 2023 |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
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$ |
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Net loss |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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- |
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( |
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Preferred dividends declared ($ |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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— |
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( |
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Vesting of restricted share units |
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— |
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— |
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( |
) |
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— |
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— |
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— |
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Share-based compensation |
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— |
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— |
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— |
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— |
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— |
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— |
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Sale of consolidated VIEs |
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— |
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— |
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— |
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— |
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( |
) |
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— |
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( |
) |
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( |
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Balance at June 30, 2023 |
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$ |
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$ |
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$ |
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$ |
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$ |
( |
) |
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$ |
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$ |
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Balance at January 1, 2024 |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
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$ |
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Net loss |
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— |
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— |
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— |
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— |
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( |
) |
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— |
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( |
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Preferred dividends declared ($ |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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— |
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( |
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Vesting of restricted share units |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Share-based compensation |
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— |
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— |
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— |
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— |
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— |
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— |
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Contributions to consolidated VIEs |
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— |
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— |
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— |
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— |
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— |
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— |
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Balance at June 30, 2024 |
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$ |
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$ |
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$ |
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$ |
( |
) |
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$ |
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$ |
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Class A |
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Series A |
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Additional |
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Accumulated |
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Non- |
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Total |
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Shares |
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Amount |
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Shares |
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Amount |
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Capital |
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Deficit |
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Interests |
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Equity |
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Balance at April 1, 2023 |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
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Net loss |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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- |
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( |
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Preferred dividends declared ($ |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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— |
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( |
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Vesting of restricted share units |
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— |
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— |
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( |
) |
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— |
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— |
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— |
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Share-based compensation |
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— |
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— |
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— |
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— |
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— |
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— |
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Contributions to consolidated variable interest entities |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Balance at June 30, 2023 |
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$ |
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$ |
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$ |
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$ |
( |
) |
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$ |
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$ |
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Balance at April 1, 2024 |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
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Net loss |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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— |
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( |
) |
Preferred dividends declared ($ |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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— |
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( |
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Vesting of restricted share units |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Share-based compensation |
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— |
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— |
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— |
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— |
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— |
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— |
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Contributions to consolidated VIEs |
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— |
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— |
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— |
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— |
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— |
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— |
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Balance at June 30, 2024 |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
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$ |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
- 5 -
SERITAGE GROWTH PROPERTIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, amounts in thousands)
|
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Six Months Ended June 30, |
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|||||
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2024 |
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2023 |
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CASH FLOW FROM OPERATING ACTIVITIES |
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Net loss |
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$ |
( |
) |
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$ |
( |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
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Equity in loss of unconsolidated entities |
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Gain on sale of interest in unconsolidated entities |
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— |
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( |
) |
Distributions from unconsolidated entities |
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— |
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Gain on sale of real estate, net |
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( |
) |
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( |
) |
Impairment of real estate assets |
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Share-based compensation |
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Depreciation and amortization |
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Amortization of deferred financing costs |
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— |
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Amortization of above and below market leases, net |
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Straight-line rent adjustment |
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Non-cash lease expenses |
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— |
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Change in operating assets and liabilities |
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Tenants and other receivables |
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Prepaid expenses, deferred expenses and other assets |
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||
Accounts payable, accrued expenses and other liabilities |
|
|
( |
) |
|
|
( |
) |
Net cash used in operating activities |
|
|
( |
) |
|
|
( |
) |
CASH FLOW FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
||
Investment in unconsolidated entities |
|
|
( |
) |
|
|
( |
) |
Net proceeds from disposition of interests in unconsolidated entities |
|
|
— |
|
|
|
|
|
Net proceeds from sale of real estate |
|
|
|
|
|
|
||
Development of real estate |
|
|
( |
) |
|
|
( |
) |
Net cash provided by investing activities |
|
|
|
|
|
|
||
CASH FLOW FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
||
Repayment of term loan |
|
|
( |
) |
|
|
( |
) |
Preferred dividends paid |
|
|
( |
) |
|
|
( |
) |
Contributions from non-controlling member of consolidated variable interest entities |
|
|
|
|
|
— |
|
|
Net cash used in financing activities |
|
|
( |
) |
|
|
( |
) |
Net decrease in cash and cash equivalents |
|
|
( |
) |
|
|
( |
) |
Cash and cash equivalents, and restricted cash, beginning of period |
|
|
|
|
|
|
||
Cash and cash equivalents, and restricted cash, end of period |
|
$ |
|
|
$ |
|
||
- 6 -
SERITAGE GROWTH PROPERTIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited, amounts in thousands)
|
|
Six Months Ended June 30, |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
RECONCILIATION OF CASH AND CASH EQUIVALENTS AND RESTRICTED CASH |
|
|
|
|
|
|
||
Cash and cash equivalents at beginning of period |
|
$ |
|
|
$ |
|
||
Restricted cash at beginning of period |
|
|
|
|
|
|
||
Cash and cash equivalents and restricted cash at beginning of period |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Cash and cash equivalents at end of period |
|
$ |
|
|
$ |
|
||
Restricted cash at end of period |
|
|
|
|
|
|
||
Cash and cash equivalents and restricted cash at end of period |
|
$ |
|
|
$ |
|
||
|
|
Six Months Ended June 30, |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION |
|
|
|
|
|
|
||
Cash payments for interest |
|
$ |
|
|
$ |
|
||
Capitalized interest |
|
|
— |
|
|
|
|
|
Income taxes paid |
|
|
|
|
|
( |
) |
|
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND |
|
|
|
|
|
|
||
Development of real estate financed with accounts payable |
|
$ |
|
|
$ |
|
||
Preferred dividends declared and unpaid |
|
|
|
|
|
|
||
Transfer to / (from) real estate assets held for sale |
|
|
|
|
|
( |
) |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
- 7 -
SERITAGE GROWTH PROPERTIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 – Organization
Seritage Growth Properties (“Seritage”) (NYSE: SRG), a Maryland real estate investment trust formed on June 3, 2015, operated as a fully integrated, self-administered and self-managed real estate investment trust (“REIT”) as defined under Section 856(a) of the Internal Revenue Code (the “Code”) from formation through December 31, 2021. On March 31, 2022, Seritage revoked its REIT election and became a taxable C Corporation effective January 1, 2022. Seritage’s assets are held by and its operations are primarily conducted, directly or indirectly, through Seritage Growth Properties, L.P., a Delaware limited partnership (the “Operating Partnership”). Under the partnership agreement of the Operating Partnership, Seritage, as the sole general partner, has exclusive responsibility and discretion in the management and control of the Operating Partnership. Unless otherwise expressly stated or the context otherwise requires, the “Company” and “Seritage” refer to Seritage, the Operating Partnership and its owned and controlled subsidiaries.
Prior to the adoption of the Company’s Plan of Sale (defined below), Seritage was principally engaged in the ownership, development, redevelopment, disposition, management and leasing of diversified retail and mixed-use properties throughout the United States. Seritage will continue to actively manage each remaining location until such time as each property is sold. As of June 30, 2024, the Company’s portfolio consisted of interests in
The Company commenced operations on July 7, 2015, following a rights offering to the shareholders of Sears Holdings Corporation (“Sears Holdings” or “Sears”) to purchase common shares of Seritage in order to fund, in part, the $
As of March 15, 2021, the Company no longer had any remaining properties leased to Transform Holdco LLC (“Holdco”), an affiliate of ESL Investments, Inc. or Sears Holdings.
On March 1, 2022, the Company announced that its Board of Trustees had commenced a process to review a broad range of strategic alternatives. The Board of Trustees created a Special Committee (the “Special Committee”) of the Company’s Board of Trustees to oversee the process. The Special Committee retained Barclays as its financial advisor. The agreement with Barclays expired in August 2023. The Company’s strategic review process remains ongoing as the Company executes sales pursuant to the Plan of Sale. The Company remains open minded to pursuing value maximizing alternatives, including a potential sale of the Company. There can be no assurance that the review process will result in any transaction or that the Company will be successful in fully executing the Plan of Sale. The Board of Trustees is currently overseeing the Plan of Sale.
As a result of the Company's revocation of its REIT election, the Company is no longer required to operate under REIT rules, including the requirement to distribute at least
As a result of the Company’s change in corporate structure to a taxable C Corporation in fiscal year 2022, the Company incurred a one-time, non-cash deferred tax benefit of approximately $
The Company sought a shareholder vote to approve a proposed plan of sale of the Company’s assets and dissolution (the “Plan of Sale”) that would allow the Board to sell all of the Company’s assets, distribute the net proceeds to shareholders and dissolve the Company. The Plan of Sale allows Seritage and potential buyers to enter into and complete value maximizing transactions without subjecting any such transaction to the delay and conditionality associated with having to seek and obtain shareholder approval. On July 6, 2022, Edward Lampert, the Company’s former Chairman, entered into a Voting and Support Agreement under which he exchanged his equity interest in the Operating Partnership for Class A common shares and agreed to vote his shares in favor of the Plan of Sale. As of June 30, 2024, Mr. Lampert owns approximately
- 8 -
The affirmative vote of at least s of all outstanding common shares of the Company was required to approve the Plan of Sale. The 2022 Annual Meeting of Shareholders occurred on October 24, 2022, following the Company's filing of a final proxy statement with the SEC on September 14, 2022. During the meeting, the Plan of Sale was approved by the shareholders. The strategic review process remains ongoing as the Company executes the Plan of Sale, and the Company remains open minded to pursuing value maximizing alternatives, including a potential sale of the Company. There can be no assurance that the review process will result in any transaction or that the Company will be successful in fully executing on the Plan of Sale.
Liquidity
The Company’s primary uses of cash include the payment of property operating and other expenses, including general and administrative expenses and debt service (collectively, “Obligations”), and certain development expenditures. Property rental income, which is the Company’s primary source of operating cash flow, did not fully fund Obligations and certain development expenditures incurred during the six months ended June 30, 2024 and the Company incurred net operating cash outflows of $
Obligations are projected to continue to exceed property rental income and the Company expects to fund such costs with a combination of capital sources including, but not limited to, cash on hand, sales of Consolidated and Unconsolidated Properties. and potential financing transactions. During the six months ended June 30, 2024, the Company sold
Going Concern
In accordance with ASC 205-40, Presentation of Financial Statements - Going Concern, for each annual and interim reporting period, management evaluates whether there are conditions and events that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. As part of this evaluation, the Company takes into consideration all Obligations due within the subsequent 12 months, as well as cash on hand and expected cash receipts. The Company currently anticipates it will continue to use sales of Consolidated and Unconsolidated Properties as the primary source of capital to fund its Obligations, including the principal payments on the Term Loan Facility, while at the same time pursuing alternative financing arrangements.
As of August 14, 2024, there are four Consolidated Properties under contract for aggregate gross proceeds of $98.4 million and there is
The anticipated proceeds from the sales of assets under contract and existing cash on hand, would not allow the Company to fund its Obligations because the Term Loan Facility which matures July 31, 2025 is presently a current Obligation. As a result, the Company has concluded that management's plans do not alleviate substantial doubt about the Company's ability to continue as a going concern until assets under contract are sufficient to increase the Company's projected cash flows or alternative financing arrangements have been made such that they exceed the Company's Obligations.
Note 2 – Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
These condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q of the Securities and Exchange Commission (“SEC”) and should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K, (the “Annual Report”), for the year ended December 31, 2023. Certain footnote disclosures which would substantially duplicate those contained in our Annual Report have been condensed or omitted from this quarterly report. In the opinion of management, all adjustments necessary for a fair presentation (which include only normal recurring adjustments) have been included in this quarterly report. Operating results for the three and six months ended June 30, 2024 may not be indicative of the results that may be expected for any other interim period or for the year ending December 31, 2024. Capitalized terms used, but not defined in this quarterly report, have the same meanings as set forth in our Annual Report.
The accompanying condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The condensed consolidated financial statements include the accounts of the Company, the Operating Partnership, each of their Consolidated Properties, and all other entities in which the Company has a controlling financial interest. For entities that meet the definition of a variable interest entity (“VIE”), the Company consolidates those entities when the Company is the primary beneficiary of the entity. The Company is determined to be the primary beneficiary when it possesses both the unilateral power to direct activities that most significantly impact the economic performance of the VIE and the obligation to
- 9 -
absorb losses or the right to receive benefits that could potentially be significant to the VIE. The Company continually evaluates whether it qualifies as the primary beneficiary and reconsiders its determination of whether an entity is a VIE upon reconsideration events. As of June 30, 2024, the Company consolidates
To the extent such variable interests are in entities that are not evaluated under the VIE model, the Company evaluates its interests using the voting interest entity model.
As of June 30, 2024, the Company, and its wholly owned subsidiaries, holds a
Certain prior period amounts, if any, have been reclassified to conform to the current period’s presentation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The most significant assumptions and estimates relate to real estate impairment assessments and assessing the recoverability of accounts receivable. These estimates are based on historical experience and other assumptions which management believes are reasonable under the circumstances. Management evaluates its estimates on an ongoing basis and makes revisions to these estimates and related disclosures as experience develops or new information becomes known. Actual results could differ from these estimates.
Segment Reporting
The Company currently operates in a single reportable segment which includes the ownership, development, redevelopment, management, sale and leasing of real estate properties. The Company’s chief operating decision maker, its principal executive officer, assesses and measures the operating and financial results for each property on an individual basis and does not distinguish or group properties based on geography, size, or type. The Company, therefore, aggregates all properties into
Real Estate Investments
Real estate assets are recorded at cost, less accumulated depreciation and amortization.
Expenditures for ordinary repairs and maintenance will be expensed as incurred. Significant renovations which improve the property or extend the useful life of the assets are capitalized. As real estate is undergoing redevelopment activities, all amounts directly associated with and attributable to the project, including planning, development and construction costs, interest costs, personnel costs of employees directly involved, and other miscellaneous costs incurred during the period of redevelopment, are capitalized. The capitalization period begins when redevelopment activities are underway and ends when the project is substantially complete.
Depreciation of real estate assets, excluding land, is recognized on a straight-line basis over their estimated useful lives which generally range between:
Buildings: |
|
Site improvements: |
|
Tenant improvements: |
shorter of the estimated useful life or non-cancelable term of lease |
The Company amortizes identified intangibles that have finite lives over the period they are expected to contribute directly or indirectly to the future cash flows of the property or business acquired, generally the remaining non-cancelable term of a related lease.
The Company, on a periodic basis, assesses whether there are indicators, including macroeconomic conditions, that the value of the real estate assets may be impaired. If an indicator is identified, management will estimate the real estate asset recoverability based on projected operating cash flows (undiscounted and unleveraged), taking into account the anticipated holding period and capitalization rates, to determine if the undiscounted cash flows are less than a real estate asset’s carrying value. If the carrying value of an asset exceeds the undiscounted cash flows, an analysis is performed to determine the estimated fair value of the real estate asset. In estimating the fair value of an asset, various factors are considered, including expected future operating income, trends and leasing prospects and the effects of demand, competition, and other economic factors such as discount rates and market comparables. Changes in any estimates and/or assumptions, including the anticipated holding period, could have a material impact on the projected operating cash flows. If management determines that the carrying value of a real estate asset is impaired, a loss will be recorded for the excess of its carrying amount over its estimated fair value. The Company recognized impairment charges of $
- 10 -
Real Estate Dispositions
When the Company disposes of all or a portion of a real estate asset, it recognizes a gain or loss on sale of real estate as the difference between the carrying value and consideration received.
The following table summarizes our gain on sale of real estate, net during the three and six months ended June 30, 2024 and 2023 (in millions):
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Dispositions to third parties |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Gross proceeds |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Gain on sale of real estate, net |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Real Estate Held for Sale
When a real estate asset is identified by management as held for sale, the Company ceases depreciation of the asset and estimates its fair value, net of estimated costs to sell. If the estimated fair value, net of estimated costs to sell, of an asset is less than its net carrying value, an adjustment is recorded to reflect the estimated fair value. Properties classified as real estate held for sale generally represent properties that are either under contract for sale or have been identified for sale and all requirements to sell have been satisfied and are probable to close within a year.
In evaluating whether a property meets the held for sale criteria, the Company makes a determination as to the point in time that it is probable that a sale will be consummated. Given the nature of all real estate sales contracts, it is not unusual for such contracts to allow potential buyers a period of time to evaluate the property prior to formal acceptance of the contract. In addition, certain other matters critical to the final sale, such as financing arrangements, often remain pending even upon contract acceptance. As a result, properties under contract may not close within the expected time period or at all.
As of June 30, 2024,
Investments in Unconsolidated Entities
The Company accounts for its investments in unconsolidated entities using the equity method of accounting as the Company exercises significant influence but does not have a controlling financial interest. These investments are initially recorded at cost and are subsequently adjusted for cash contributions, cash distributions, and earnings which are recognized in accordance with the terms of the applicable agreement.
On a periodic basis, management assesses whether there are indicators, including the operating performance of the underlying real estate and general market conditions which include macroeconomic conditions, that the value of the Company’s investments in unconsolidated entities may be impaired. An investment’s value is impaired if management’s estimate of the fair value of the Company’s investment is less than its carrying value and such difference is deemed to be other-than-temporary. To the extent impairment has occurred, the loss is measured as the excess of the carrying amount of the investment over its estimated fair value.
The Company recorded
Restricted Cash
As of June 30, 2024 and December 31, 2023, respectively, restricted cash represents cash collateral for letters of credit, cash held in escrow and cash escrowed for development purposes.
Rental income is comprised of base rent and reimbursements of property operating expenses. The Company commences rental revenue recognition when the lessee takes control of the physical use of the leased asset based on evaluation of several factors. Base rent is recognized on a straight-line basis over the non-cancelable terms of the related leases. For leases that have fixed and measurable base rent escalations, the difference between such rental income earned and the cash rent due under the provisions of the lease is recorded as straight-line rent receivable and included as a component of tenant and other receivables on the condensed consolidated balance sheets. Reimbursement of property operating expenses arises from tenant leases which provide for the recovery of all or a portion of the operating expenses and real estate taxes of the respective property. This revenue is accrued in the same periods as the expenses are incurred.
The Company periodically reviews its receivables for collectability, taking into consideration changes in factors such as the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates, and economic
- 11 -
conditions in the area where the property is located. Tenant receivables, including receivables arising from the straight-lining of rents, are written-off directly when management deems that the collectability of substantially all future lease payments from a specified lease is not probable of collection, at which point, the Company will begin recognizing revenue on a cash basis, based on actual amounts received. Any receivables that are deemed to be uncollectible are recognized as a reduction to rental income in the Company’s condensed consolidated statements of operations. If future circumstances change such that the Company believes that it is reasonably certain that the Company will collect all rental income remaining on such leases, the Company will resume accruing rental income and recognize a cumulative catch up for previously written-off receivables.
The Company recorded a reduction to rental income of $
In leasing tenant space, the Company may provide funding to the lessee through a tenant allowance. In accounting for a tenant allowance, the Company will determine whether the allowance represents funding for the construction of leasehold improvements and evaluate the ownership of such improvements. If the Company is considered the owner of the improvements for accounting purposes, the Company will capitalize the amount of the tenant allowance and depreciate it over the shorter of the useful life of the improvements or the related lease term. If the tenant allowance represents a payment for a purpose other than funding leasehold improvements, or in the event the Company is not considered the owner of the improvements for accounting purposes, the allowance is considered a lease incentive and is recognized over the lease term as a reduction of rental revenue on a straight-line basis.
Tenant and Other Receivables
Tenant and other receivables includes unpaid amounts billed to tenants, accrued revenues for future billings to tenants for property expenses, and amounts arising from the straight-lining of rent, as discussed above. Tenant and other receivables also includes management fees receivable for services performed for the benefit of certain unconsolidated entities. In the event that the collectability of a management fee receivable is in doubt, a provision for uncollectible amounts will be established or a direct write-off of the specific receivable will be made.
Management and Other Fee Income
Management and other fee income represents property management, construction, leasing and development fees for services performed for the benefit of certain unconsolidated entities.
Property management fee income is reported at
Leasing and development fees are initially reported at the portion of revenue earned attributable to outside ownership of the related unconsolidated entities. The Company’s share in leasing and development fee income is recognized over the useful life of the associated development project, in the case of development fees, or lease term, in the case of leasing fees, as the associated asset is depreciated over the same term and included in equity in loss of unconsolidated entities on the condensed consolidated statements of operations and in other expenses in the combined financial data in Note 4.
Conversely, leasing services are considered to be performance obligations, satisfied as of a point in time. The Company’s leasing fee is typically paid upon the occurrence of certain contractual event(s) that may be contingent and the pattern of revenue recognition may differ from the timing of payment. For these services, the obligations are typically satisfied at lease execution and tenant opening date, and revenue is recognized in accordance with the related agreement at the point in time when the obligation has been satisfied.
Share-Based Compensation
- 12 -
The Company generally recognizes equity awards to employees as compensation expense and includes such expense within general and administrative expenses in the condensed consolidated statements of operations. Compensation expense for equity awards is based on the grant date fair value of the awards. Compensation expense is recognized ratably over the vesting period for awards with time-based vesting and awards with market-based vesting conditions (e.g. total shareholder return). For awards with performance-based vesting determined by Company operating criteria, the Company recognizes compensation expense at the date the achievement of performance criteria is deemed probable for the amount which would have been recognized ratably from the date of the grant through the date the achievement of performance criteria is deemed probable, and then ratably from the date the achievement of performance criteria is deemed probable through the remainder of the vesting period. The Company utilized a third-party valuation firm to measure the grant date fair value of restricted stock unit awards with market-based criteria using the Monte Carlo model. Forfeitures are recorded on an actual basis.
Concentration of Credit Risk
Concentrations of credit risk arise when a number of operators, tenants, or obligors related to the Company’s investments are engaged in similar business activities, or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations, including those to the Company, to be similarly affected by changes in economic conditions. Management believes the Company’s portfolio is reasonably diversified and does not contain any significant concentrations of credit risk. As of June 30, 2024, the Company has
Earnings/(Loss) per Share
The Company has three classes of common stock. The rights, including the liquidation and dividend rights, of the holders of the Company’s Class A common shares and Class C non-voting common shares are identical, except with respect to voting. As the liquidation and dividend rights are identical, the undistributed earnings are allocated on a proportionate basis. The net earnings (loss) per share amounts are the same for Class A and Class C common shares because the holders of each class are legally entitled to equal per share distributions whether through dividends or in liquidation. Since August 29, 2018, all outstanding Class C common shares had been exchanged for Class A common shares and there are currently
Class B non-economic common shares are excluded from earnings/(loss) per share computations as they do not have economic rights. Since December 31, 2020, all outstanding Class B common shares have been surrendered and there are currently
All outstanding non-vested shares that contain non-forfeitable rights to dividends are considered participating securities and are included in computing earnings per share pursuant to the two-class method which specifies that all outstanding non-vested share-based payment awards that contain non-forfeitable rights to distributions are considered participating securities and should be included in the computation of earnings/(loss) per share.
Income Taxes
The condensed consolidated financial statements reflect provisions for federal, state and local income taxes. The Company recognizes deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis, as well as operating loss and tax credit carryforwards. The Company measures deferred tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which those temporary differences and carryforwards are expected to be recovered or settled. The effect on deferred tax assets and liabilities as a result of a change in tax rates is recognized as income in the period that includes the enactment date. For years prior to 2022, the Company was taxed as a REIT and did not expect to pay federal, state or local income taxes at the REIT level (including its qualified REIT subsidiaries). While a REIT, the Company was required to distribute at least
Deferred income taxes are determined based on the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities given the provisions of enacted tax laws. Significant judgments are required to determine the consolidated provision (benefit) for income taxes. Deferred income tax provisions and benefits are based on changes to the assets or liabilities from year to year. Realization of the Company’s deferred tax assets is dependent upon many factors such as tax regulations applicable to the jurisdictions in which the Company operates, estimates of future taxable income and the character of such taxable income.
The Inflation Reduction Act of 2022 was enacted on August 16, 2022 and was effective January 1, 2023. The Inflation Reduction Act includes a
- 13 -
exceeding $
Deferred tax assets are reduced by a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized. A valuation allowance is recorded to adjust net deferred tax assets to the amount which management believes will more likely than not be recoverable. In making such determination, management considers available positive and negative evidence, including future reversals of existing taxable temporary differences, future taxable income, and the implementation of prudent tax planning strategies. In the event that the Company is able to utilize its deferred tax assets in excess of their recorded amount, the valuation allowance will be reduced with a corresponding reduction to income tax expense.
Recently Issued Accounting Pronouncements
In November 2023, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures ("ASU 2023-07"). ASU 2023-7 aims to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. ASU 2023-07 requires disclosure of significant segment expenses that are regularly provided to the chief operating decision maker and included within the segment measure of profit or loss, an amount and description of its composition for other segment items to reconcile segment profit or loss. the update also requires disclosure regarding the chief operating decision maker and expands the interim segment disclosure requirements. ASU 2023-07 will be effective for the year end December 31, 2024. The Company is currently evaluating the impact of the guidance on its consolidated financial statements.
In December 2023, the FASB issued ASU 2023-09, Improvements to Income Tax Disclosures that requires public companies to annually (1) disclose specific categories in the rate reconciliation and (2) provide additional information for reconciling items that meet a quantitative threshold (if the effect of those reconciling items is equal to or greater than five percent of the amount computed by multiplying pretax income or loss by the applicable statutory income tax rate). ASU 2023-09 will be effective for the year end December 31, 2024. The Company is currently evaluating the impact of the guidance on its consolidated financial statements.
Note 3 – Lease Intangible Assets and Liabilities
The following tables summarize the Company’s lease intangible assets (acquired in-place leases and above-market leases) and liabilities (acquired below-market leases, which is included in accounts payable, accrued expenses and other liabilities on the consolidated balance sheets), net of accumulated amortization, as of June 30, 2024 and December 31, 2023 (in thousands):
June 30, 2024 |
|
|
|
|
|
|
|
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|
|||
|
|
Gross |
|
|
Accumulated |
|
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|
|||