Deal room, frozen snapshot

Seritage at year-end 2015: how much signed rent is Sears, and how much is already open?

An underwrite of what the disclosed records allow: portfolio-level annualized base rent at share, not a single strip center and not a collections ledger.

Timing. Figures are as of December 31, 2015. They come from the FY2015 supplement (SR1), first publicly available March 10, 2016 with the issuer release (SR0). They were not public at year-end 2015. Mechanical analysis only; not investment or legal advice.

Rent-status bridge

Sears share of total signed annual base rent76.01%$154,255,000 of $202,938,000 (SR1 p.4)
Signed rent left if all Sears base rent were lost (hypothetical)$48,683,000of which $12,936,000 is signed but not yet open, not yet cash
In-place annual base rent (reported status)$190,002,000Sears share of in-place: 81.19%
Annual base rent at share, as of December 31, 2015 (US dollars per year)
ComponentAnnual base rentStatusSource
Sears Holdings$154,255,000In placeSR1 p.4
Third-party leases$35,747,000In placeSR1 p.4
In-place subtotal$190,002,000Derived sumSR1 p.4
Third-party leases signed, not yet open$12,936,000Not yet cashSR1 p.4
Total signed annual base rent$202,938,000Ties to reported total; difference $0SR1 p.4

All rows are annualized contractual base rent at share. Even the in-place amounts are annualized run rates, not proof of what was received in 2015. Signed-not-open rent is contractual but not yet cash.

Annual base rent at share by rent status, US dollars Sorted bars from zero. Sears in place $154,255,000; third-party in place $35,747,000; third-party signed not open $12,936,000, not yet cash. Source SR1 page 4, as of December 31, 2015. $0 $50M $100M $150M Sears Holdings, in place (SR1 p.4) $154,255,000 a year Third-party, in place (SR1 p.4) $35,747,000 a year Third-party, signed not open (SR1 p.4) $12,936,000 a year, not yet cash US dollars per year, at share; scale starts at $0
Three comparable groups of annual base rent at share, sorted, from a zero baseline, US dollars only. Source: SR1 p.4. Hatched bar is signed but not yet open.

Two-factor scenario switch

Mechanical stress, not an actual NOI or cash-flow forecast, and not a prediction of tenant behavior. Delaying an opening never cancels signed rent: only removing the Sears anchor changes the signed total. The default is the reported 2015 status.

All four switch positions (readable without JavaScript)
Sears anchor rentSigned-not-open spaceSigned annual contract rentModeled in-place annual rentSigned, not yet cashStatus
PresentNot open (reported status)$202,938,000$190,002,000$12,936,000Reported 2015 baseline
PresentOpened (hypothetical)$202,938,000$202,938,000$0Hypothetical mechanical stress
RemovedNot open (reported status)$48,683,000$35,747,000$12,936,000Hypothetical mechanical stress
RemovedOpened (hypothetical)$48,683,000$48,683,000$0Hypothetical mechanical stress

Bounded stress set

Named mechanical exposures, no probabilities assigned
StressSigned annual contract rentModeled in-place annual rentSigned, not yet cash
Base: reported 2015 status$202,938,000$190,002,000$12,936,000
Remove anchor base rent$48,683,000$35,747,000$12,936,000
Delayed opening of signed-not-open space$202,938,000$190,002,000$12,936,000
Anchor removed and opening delayed$48,683,000$35,747,000$12,936,000

The delayed-opening stress equals the base case numerically: in-place rent stays at the reported amount while signed rent is unchanged. Its exposure is the $12,936,000 of signed rent that would not be in place for as long as opening is delayed. No replacement tenant, replacement rent or recapture rent reduction is added; old Sears rent and new rent are never counted on the same recaptured space, and the model never exceeds the reported signed total. Whether the reported Sears figure already excludes space the signed-not-open tenants will occupy is UNKNOWN without Side Letter Schedule 2.

Missing parcel and lender inputs

The contract language below is not evidence of any parcel's exact rent reduction, reimbursement dollars, NOI, LIBOR fixing, debt coverage, capital expenditures or tax bill. These remain UNKNOWN; no tax reset, CAM cap, replacement lease or scenario probability is invented.

Parcel NOI: UNKNOWN. Debt service coverage: UNKNOWN. Price ceiling: UNKNOWN.

  1. Exact base rent reduction after recapture at any parcel UNKNOWN
    Closes with: Side Letter Schedule 2 and the parcel Recapture Notice
  2. Tax, CAM and other reimbursement dollars by parcel UNKNOWN
    Closes with: Parcel expense reconciliations, tenant estimate statements and executed third-party leases
  3. Property or parcel NOI UNKNOWN
    Closes with: Parcel operating statements and a rent roll with recoveries and expenses
  4. LIBOR fixing applicable to the mortgage UNKNOWN
    Closes with: Loan agreement, rate-setting notices and any hedge confirmations
  5. Debt service coverage UNKNOWN
    Closes with: Loan agreement amortization and interest schedule plus lender NOI definition and parcel allocation
  6. Capital expenditures, redevelopment and tenant improvement costs UNKNOWN
    Closes with: Redevelopment budgets, construction contracts and landlord work letters
  7. Parcel real estate tax bill UNKNOWN
    Closes with: County assessor records and the actual parcel tax bills
  8. Opening and rent commencement dates of signed-not-open leases UNKNOWN
    Closes with: Executed third-party leases and delivery schedules (supplement pages 10 to 13 give context only)
  9. Rent from any replacement tenant on recaptured space UNKNOWN
    Closes with: Executed replacement leases; none is assumed here
  10. Lease terms at joint venture properties UNKNOWN
    Closes with: The separate JV master leases, which differ from the public wholly-owned master lease
  11. Actual 2015 cash rent received UNKNOWN
    Closes with: Cash receipts ledger and accounts receivable aging
  12. Supportable purchase price or valuation UNKNOWN
    Closes with: All of the above plus a lender term sheet; no price is derived here

Reconciliation without a collections ledger

1. The sum

$154,255,000 Sears plus $35,747,000 in-place third-party plus $12,936,000 signed-not-open equals $202,938,000, the reported signed total (SR1 p.4). Difference: $0. This is an arithmetic tie of annualized measures, not a tie to cash receipts.

2. The leased area headline

Gross leasable area is 42,468,000 square feet in total and 39,743,000 square feet at share (SR1 p.4). Leased: 99.5% total and 99.4% at share. Because the percentage is rounded to one decimal, the implied leased area at share lies between about 39,484,670 square feet and 39,524,413 square feet. Area is a separate unit from rent and the packet does not split leased area into open and signed-not-open, so no rent per square foot is derived.

3. The partial-year reported NOI

Total NOI of $89,493,000 after specified noncash adjustments ($99,343,000 before; difference $9,850,000) covers July 7 to December 31, 2015, 178 days, and includes unconsolidated joint ventures (SR1 p.8). It is not annualized here, not a trailing full calendar year, not comparable to the $202,938,000 annualized signed rent and not a parcel NOI.

Debt context

Mortgage notes payable of $1,161,000,000 at LIBOR plus 465 basis points, maturing July 2019 (SR1 p.11). The LIBOR fixing is UNKNOWN, so interest cost and coverage are not computed.

Scope difference

Rent figures are at share and include joint venture interests across 266 properties, whereas the public master lease (SR2) covers the 223 wholly-owned properties; JV properties are governed by similar but distinct leases not in this packet.

Record timeline

  1. June 11, 2015. Master lease filed as SEC Exhibit 10.3 (SR2).
  2. July 7, 2015. $2.7 billion acquisition completed; NOI period begins (SR1 p.2).
  3. December 31, 2015. Measurement date for the rent and area figures; not yet published.
  4. March 10, 2016. Supplement and issuer release first publicly available (SR1, SR0).

Executed master lease: qualitative treatment

Each exhibit below is the packet's condensed excerpt of the executed master lease (SR2), with the section number for checking against the primary source. None is quantified for any parcel.

Landlord recapture

Recapture is a contractual option with notice, size and annual-count limits; no parcel is assumed recaptured.

Section 1.7(a) SR2 packet excerpt

landlord may elect to separate the store into tenant-retained and recapture space. Recapture space generally approximately 50% of the store's gross leasable square footage (after stated exclusions), subject to a minimum 40,000 square feet of tenant-retained space at a property and other physical and contractual conditions. This is a contractual framework, NOT an assertion that every property can immediately recapture half its floor area.

SR2, Section 1.7(a), condensed excerpt of the executed master lease
Section 1.7(d) SR2 packet excerpt

recapture notice generally requires at least 180 days, with tenant election and limits; landlord cannot recapture all or substantially all recapture space at more than 50 properties in a lease year.

SR2, Section 1.7(d), condensed excerpt of the executed master lease

Rent reduction after recapture

Rent steps down from the actual recapture date under Side Letter Schedule 2, which is not supplied; the dollar reduction is UNKNOWN and old and new rent are never counted on the same recaptured space.

Section 1.7(h) and (j)(vi) SR2 packet excerpt

from actual recapture date, base rent adjusts DOWN under Side Letter Schedule 2; tenant pays only its proportionate share of property charges. Recapture Notice specifies new rent, share and expenses, with dispute procedure. Side Letter Schedule 2 parcel adjustments are not supplied in this packet. The old and new tenants' rent cannot overlap on the same recaptured square footage in a cash-flow scenario.

SR2, Section 1.7(h) and (j)(vi), condensed excerpt of the executed master lease

Net lease intent

Triple-net intent is subject to adjustment and abatement provisions; landlord expense is not assumed to be zero.

Section 3.4 SR2 packet excerpt

parties intend a triple-net lease, expressly subject to its specific adjustment/abatement provisions. NNN does not mean no landlord expense in every situation.

SR2, Section 3.4, condensed excerpt of the executed master lease

Tax impositions

Tenant pays all or a proportionate share of impositions through estimated installments later reconciled; the parcel tax bill and final recovery are UNKNOWN.

Section 4.1(a) SR2 packet excerpt

tenant pays either 100% or its proportionate share of impositions as applicable, subject to other provisions.

SR2, Section 4.1(a), condensed excerpt of the executed master lease
Section 4.5(a)-(b) SR2 packet excerpt

tenant pays estimated monthly installments for impositions, operating expenses, CAM, other property charges in light of its proportionate share; initial imposition installment may be estimated from 105% of prior calendar year's tax bill, then reconciled. An estimate is not a verified final property recovery.

SR2, Section 4.5(a)-(b), condensed excerpt of the executed master lease

CAM before and after multi-tenant occupancy

Tenant maintains common areas before multi-tenant occupancy; afterward landlord operates them and allocates a share. Reimbursement dollars and any cap are UNKNOWN.

Section 10.2(a) SR2 packet excerpt

before multi-tenant occupancy tenant maintains and pays CAM for common areas; after multi-tenant occupancy landlord operates common areas, tenant retains a nonexclusive right of use, and its share is allocated under the lease. Individual parcel bills, side-letter rent adjustment and third-party reimbursement clauses are unavailable in these extracts.

SR2, Section 10.2(a), condensed excerpt of the executed master lease

Sources

  • SR0: Seritage FY2015 operating results, SEC-filed issuer release, March 10, 2016. Opening paragraph and Supplemental Report section.
  • SR1: Seritage Growth Properties FY2015 supplemental information, first publicly available March 10, 2016. PDF pages 2, 4, 8 and 11.
  • SR2: Seritage and Sears signed master lease, SEC Exhibit 10.3, filed June 11, 2015. Sections 1.7, 3.4, 4.1, 4.5 and 10.2.