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EQUITY ANALYSISKristen Mousa
James Goyer
Paul Stanley
SERITAGEGROWTH PROPERTIES
Seritage Property in Philadelphia, PA
Agenda
Company Overview2
Industry Overview1
Investment Thesis3
Valuation4
Recommendation5
Industry
Overview
Company
Overview
Investment
ThesisValuation Recommendation Appendix
Appendix6
INDUSTRY
OVERVIEWSERITAGEGROWTH PROPERTIES
Seritage Property in San Diego, CA
3.2%
1.0% 1.4%0.5%
7.4%
6.1%
10.1%9.0%
0.0%
2.5%
5.0%
7.5%
10.0%
12.5%
2014 2015 2016 2017
Sale
s G
row
th
Retail Online
Retail REITs Show Strong Fundamentals Despite Discount
Source: Bloomberg, Thasos Group, JLL Research
6.0%
7.5%
9.0%
10.5%
12.0%
$15
$16
$17
$18
$19
2007 2009 2011 2013 2015 YTD2017
Vacancy R
ate
Eff
ective R
ent
Effective Rent (Per Square Ft.) Vacancy Rate
LTM Move-Ins
24.1mm
Sq. Ft.
LTM Move-Outs
15.1mm
Sq. Ft.
1
12x
14x
16x
18x
20x
22x
Dec-15 May-16 Oct-16 Mar-17 Aug-17
Price /
Forw
ard
FF
O
Mall REIT Index Shopping-Center REIT Index Overall REIT Index
…Prompting 18% Discount For Retail REITsE-Commerce Has Disrupted Retail…
9mm Sq. Ft. Absorbed In LTM
Retail REIT Fundamentals Remain Strong
Vacancy Rates Continue To FallMove-Ins Outweigh Move-Outs
18%
Discount
Industry
Overview
Company
Overview
Investment
ThesisValuation Recommendation
(Per Sq. Ft.)
Appendix
COMPANY
OVERVIEWSERITAGEGROWTH PROPERTIES
Seritage Property in St. Petersburg, FL
Seritage Created From Sears’ Strongest Retail Locations
Seritage Growth Properties (NYSE: SRG) Is A Fully Integrated REIT That Owns 266 Retail Properties
Seritage Created In 2015 To Provide Sears With Liquidity In Return For Properties
2
1
Sources: Company Filings, Press Releases
266 Properties
(Top 15%)
266 Properties
(Top 15%)
Sears Becomes
Lessee Of
Formerly Owned
Properties
$2.7bn Cash
Boosts Liquidity
2Industry
Overview
Company
Overview
Investment
ThesisValuation Recommendation Appendix
Sources: Company presentation, Company Filings, JLL Research, REIS
1. US Census Bureau
Master Lease Drives Value for Seritage
Los Angeles
Property Before Recapture
Master Lease Agreement Increases Rent By 4.0x
Property Following Recapture
$4.50
$18.98
$0
$4
$8
$12
$16
$20
Sears Holdings Signed 3rd Party Leases
Rent P
er
Sq. F
t.
… But Seritage Can Recapture Sears LeasesSeritage Leases To Sears For Cheap…
Premier Real Estate Portfolio Attracts Wide Variety Of Tenants
Average Household Income Within 10 Miles Of
Properties Is 40% Higher Than US Average1
Miami
New York
City
Value
Fashion
Everyday
Use
Home
Food
Entertainment
Junior
Anchors
Signed Diversified Tenants
Comparable Property
Rental Rates
$4.50 Per Sq. Ft. $19.00 Per Sq. Ft.
$19.00
3Industry
Overview
Company
Overview
Investment
ThesisValuation Recommendation
Non-
Retail
Retail
4.0x
Higher
Rent
Sears Pays Rental
Rates 1/4th Of
Comparable
Market Rent Rates
Appendix
0.0mm
0.5mm
1.1mm
1.6mm
2.1mm
2.6mm
3.2mm
$30
$35
$40
$45
$50
$55
$60
7/6/2015 1/28/2016 8/22/2016 3/17/2017 10/10/2017
Market Has Sold-Off Seritage Due to High Exposure
7/6/15 7/25/16 6/16 – 6/17
3
Sears continues to wind
down operations and close
stores as its debt balance
balloons to ~$4bn
1
Seritage spun-off
from Sears
2
Investors sell-off Seritage
after Sears announces
store closures and liquidity
concerns
2 3
Source: Bloomberg, Press Releases
As Nears Bankruptcy Investors Have Sold-Off Seritage
1
Rent By Tenant
Diversified
Tenants
In-Place
Seritage Currently
Earns Over Half Of
Its Rental Income
From .
4Industry
Overview
Company
Overview
Investment
ThesisValuation Recommendation
56%
44%
Appendix
87%
13%
75%
12%
13%
Seritage Must Recapture Properties To Hedge Sears Exposure
Seritage Must Recapture 12% Of Sq. Ft. To Make Up For Lost Rent From Bankruptcy
Recapture Needed (% Of Total Sq. Ft.)Current Leases (% Of Total Sq. Ft.)
Source: Company Presentation
Sears Rent
$91mm
12%Recaptures
Needed
Diversified
Tenants
In-Place
Recaptures
Needed
New Rent from Recaptures
~$93mm
Diversified
Tenants
In-Place
5Industry
Overview
Company
Overview
Investment
ThesisValuation Recommendation Appendix
INVESTMENT
THESISSERITAGEGROWTH PROPERTIES
Seritage Property in Naples, FL
12%
13%
$93.1$91.0
$50.0
$60.0
$70.0
$80.0
$90.0
$100.0
Future Rent from In-PlaceRevelopments
Annual R
ent
Future Rent From In-
Process Redevelopments
Catalyst I: Redevelopments Replace Sears Revenue In 2018
Source: Company Presentation
12% Of Properties Under Redevelopment
Properties Must Be Redeveloped Before Seritage Begins To Earn Rental Income
Diversified Tenants
In-Place
In-Process
Redevelopments
For Diversified
Tenants
Redevelopment Rent Replaces Rent
Recapture Notice
Issued
12 Months of
Redevelopment
Diversified Tenants
Pay 4.0x Sears Rent
4
6Industry
Overview
Company
Overview
Investment
ThesisValuation Recommendation
Q1 2017 Q3 2018Q2 2017
Diversified Tenants
Signed On To Lease
1 2 3
Q3 2017 Q4 2017 Q1 2018 Q2 2018
Appendix
Implied Probability Of Survival By Year1
234
50
243
330
0
50
100
150
200
250
300
350
2014 2015 2016 2017
Sto
re S
ale
s
Store Closures
1. Debt Issuances
~$900mm Sale To
Stanley Black &
Decker
Announced Deal To
Sell Products On
Amazon.com
Source: Company Filings, Press Releases
1. Implied probability of default derived from Sears bond pricing data as of August 18, 2017
Additional Brands
For Future Sale
2. Store Sales 3. Brand Sales
$750mm 2020 Secured Term Loan
$500mm 2020 RE Loan Facility
$300mm 2020 2nd Lien Credit Line
$500mm ESL Letter Of Credit
$2.05bn In 2017 YTD Liquidity
Can Generate Liquidity Through…
Catalyst II: Sears Survives Until Redevelopment Completion
- Probability of Survival95%
85%68%
0%
20%
40%
60%
80%
100%
2018 2019 2020
Pro
babili
ty o
f S
urv
ival
Year End 2017 Year End 2018 Year End 2019
7Industry
Overview
Company
Overview
Investment
ThesisValuation Recommendation Appendix
Catalyst III: Short Squeeze On Seritage Shares
Market Is Shorting Seritage As Proxy To Short .
Completion Of Redevelopment Pipeline Will Result In Seritage Short Squeeze
17% 38%
>SERITAGE
Seritage Completes
Redevelopments By
Q3 2018
Catalyst I
Sears Survives
Through Q3 2018
Catalyst II Independent Of Sears
8
Seritage No Longer
A Viable Means Of
Shorting Sears…
…Leads To Short Squeeze
On Seritage Shares
Industry
Overview
Company
Overview
Investment
ThesisValuation Recommendation
63% 12%>Short
Interest
Borrowing
Cost
1
1. Cost to borrow Seritage compared at ~17% short interest
Appendix
Market Myopia Has Led To A Buying Opportunity In Seritage
What The Market Believes…
9
Current
Redevelopment
Pipeline Hedges
Downside Risk
From Sears
Sears Can Raise
Liquidity To
Survive Through
2019
Realization Of
Redevelopment
Pipeline Will
Result In Seritage
Short Squeeze
Catalyst
I
Catalyst
II
Catalyst
III
Seritage Doesn’t Have
Enough Time To Finish
Current Redevelopments
Before Sears Bankruptcy
Seritage Has Too Big Of A
Gap To Make Up To
Become Independent Of
Sears
Shorting Seritage Is A Less
Expensive Means Of
Shorting Sears
Industry
Overview
Company
Overview
Investment
ThesisValuation Recommendation Appendix
VALUATIONSERITAGEGROWTH PROPERTIES
Seritage Property in Sacramento, CA
$0 mm
$20 mm
$40 mm
$60 mm
$80 mm
Q42016
Q12017
Q22017
Q32017
Q42017
Q12018
Q22018
Q32018
Q42018
Q12019
Q22019
Q32019
Q42019
Quart
erly R
enta
l R
evenue
Diversified Tenants Rental Income Sears Rental Income
Rent From Completely Replaced By Q3 2018
Seritage Leased Square Footage And Rental Revenue By Quarter
Current Tenant Base
Q2 2017
87%
13%
Q3 2018 llllllllll
Bankruptcy
10Industry
Overview
Company
Overview
Investment
ThesisValuation Recommendation
75%
12%
13%
75%
25%
Redevelopments Completed
by Q3 2018
Available
For Future
Re-leases
$52mm $57mm
Q2
2017
Q3
2018
Source: Operating Model
Appendix
Intrinsic Valuation Implies ~30% Upside In Next 12 Months
Key Valuation Assumptions And Implied Share Prices
Net Asset Value ModelDividend Discount Model Levered DCF
9.0%Cost of
Equity
13.0xMarket Cap /
FFO
Exit Multiple
30.0%FFO Dividend
Payout
9.0%Cost of
Equity
13.0x
6.5%Cap Rate
11Industry
Overview
Company
Overview
Investment
ThesisValuation Recommendation
26%Implied Upside Or
$57.67 Implied Share
Price
25%Implied Upside Or
$58.20 Implied Share
Price
35%Implied Upside Or
$61.81 Implied Share
Price
Market Cap /
FFO
Exit Multiple
Appendix
$51.81 $52.36 $52.09
$35
$40
$45
$50
$55
$60
Dividend DiscountModel
Levered DiscountCash Flow
Net Asset Value
Upside Even In Immediate Sears Bankruptcy Scenario
Seritage Interest Coverage Remains Healthy In Immediate Bankruptcy Scenario
Upside Even In Immediate Sears BankruptcySeritage Has Massive Debt Capacity
0.0x
0.5x
1.0x
1.5x
2.0x
2.5x
3.0x
3.5x
4.0x
Inte
rest
Covera
ge R
atio
$145.8
$128.5
$101.3$91.9
$71.2$62.0
$31.7
$2
$24
$46
$68
$90
$112
$134
$156
1 2 3 4 5 6 7
SRG Commands
Lowest Debt PSF
Ratio Among Peers
10/13/17
Share Price
Source: Capital IQ
12Industry
Overview
Company
Overview
Investment
ThesisValuation Recommendation Appendix
RECOMMENDATIONSERITAGEGROWTH PROPERTIES
Seritage Property in Honolulu, HI
$30 $40 $50 $60 $70 $80 $90
Dividend Discount Model - Bear
Dividend Discount Model - Base
Dividend Discount Model - Bull
Levered DCF - Bear
Levered DCF - Base
Levered DCF - Bull
NAV - Bear
NAV - Base
NAV - Bull
NTM EV / FFO
Market Price Offers Significant Margin of Safety
Target Price: $60.00
Implied Upside: ~30%
Current Price: $45.721
Conclusion
Seritage Will
Complete
Redevelopments…
…Resulting In
Short Squeeze On
Seritage Shares
… Making Seritage
Independent Of
Sears…
30% Implied Upside In Next 12 Months
10/13/17 Share
Price
13Industry
Overview
Company
Overview
Investment
ThesisValuation Recommendation
12-Month Price
Target
1. Share price as of 10/13/17
Appendix
Q & ASERITAGEGROWTH PROPERTIES
Seritage Property Local Mall
APPENDIX
Seritage Property in Los Angeles, CA
Appendix Guide
I. Key Industry Dynamics 14 – 15
II. Redevelopment Pipeline 16 – 21
III. Master Lease Legal Breakdown 22 – 24
IV. Seritage Liquidity Profile 25 – 26
V. Seritage Valuation and Operating Model 27 – 34
VI. Sears Operating Model 35 – 40
Key Industry
Dynamics
Redevelopment
Pipeline
Master Lease
Legal Breakdown
Seritage Valuation
Operating Model
Seritage Liquidity
Profile
Sears Operating
Model
Retail REIT Industry Landscape
Source: Bloomberg, PwC
Mall / Shopping-
Center REITs
Community / Strip-
Center REITs
Retail REIT Have Two Major Classifications
▪ Local discount
stores, groceries,
specialty stores /
category killers
▪ Gross leasable area
of 125,000-400,000
sq. ft.
▪ 1+ Tenants
▪ 3-6 mile trade area
radius
▪ Full-line department
stores, upscale
specialty retail, mass
merchants
▪ Gross leasable area
of 150,000-800,000+
sq. ft.
▪ 2+ Tenants
▪ 5-25 mile trade area
radius
Key
Characteristics
Key
Characteristics
-5mm
0mm
5mm
10mm
15mm
20mm
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Net
Absorp
tion (
Sq.
Ft.) Q1 Q2 Q3 Q4
1H 2017 Shows Highest Mall / Shopping-Center Net Move-Ins Since 2008 Recession
Absorption was driven
primarily by off-price
retailers and grocery-
anchored centers
Key Industry
Dynamics
Redevelopment
Pipeline
Master Lease
Legal Breakdown
Seritage Valuation
Operating Model
Seritage Liquidity
Profile
Sears Operating
Model 14
1643
796
685
370
319
241
241
216
159
70
59
48
48
36
8
3
0 500 1000 1500 2000
Apparel
Electronics Stores
Shoe Stores
Office Supply
Restaurants
Department Stores
Books & Music
Discount Dept. Stores
Sporting Goods
Drug Stores
Dollar Stores
Home Furnishings
Grocery Stores
Specialty Stores
Thrift Stores
Wholesale Clubs
Consumer Preferences Drive Strong Retail REIT Fundamentals
Apparel And Electronic
Stores Are Shrinking Rapidly,
While Groceries And
Discount Stores Are Growing
2017 Announced Gross Store
Closures
Consumer Staples & Discount Stores Prompt Continued Retail Demand
-12.0%
-8.0%
-4.0%
0.0%
4.0%
8.0%
Oct2016
Nov2016
Dec2016
Jan2017
Feb2017
Mar2017
Apr2017
May2017Y
oY
Mall
Foot T
raff
ic G
row
th
Diversified Malls Class A Malls Class B Malls
Diversified Malls Outperform by ~5%
Source: JLL Research, Statistical 2016 Survey, Company Filings
Retailers Continue to Grow Store Counts
Retailer ‘16 Net Openings ‘17 Net Openings
795 Stores ~900 Stores
56 Stores ~35 Stores
85 Stores ~110 Stores
29 Stores ~30 Stores
28 Stores NA
68%
67%
51%
44%
34%
33%
29%
24%
23%
8%
32%
33%
49%
56%
66%
67%
71%
76%
77%
92%
Books
Electronics
Office Supplies
Sporting Goods
Pet Supplies
Tools
Household Goods
Discount Clothing and Apparel
Consumer Packaged Goods
Perishable Foods / Grocery
Prefer to Purchase Online Prefer to Purchase In-Person
Key Industry
Dynamics
Redevelopment
Pipeline
Master Lease
Legal Breakdown
Seritage Valuation
Operating Model
Seritage Liquidity
Profile
Sears Operating
Model 15
Robust Redevelopment Pipeline Growth
Source: Company Presentation, JLL Research, Company Filings
7 7 9 11 1216
20813
16
19
28
32
33
5
5
5
10
8
5
12
20
25
30
40
48
53
65
0
10
20
30
40
50
60
70
Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017
Pro
jects
Completed In-Process Commenced
Robust Diversified Tenant Demand Has Filled Recaptured Sears Stores
Key Industry
Dynamics
Redevelopment
Pipeline
Master Lease
Legal Breakdown
Seritage Valuation
Operating Model
Seritage Liquidity
Profile
Sears Operating
Model 16
Redevelopment Takes 12 months To Increase Rent By 4.0x
Source: Company Presentation
Before
After
Announce Recapture
Sears Immediately
Vacates 50% Of
Property
New Tenants Sign At
4.0x Sears Rental Rate
12 Months of
Redevelopments
Illustrative Redevelopment
1
3
2
4
New Tenants Move In
And Begin Paying Rent5
Redevelopment Timeline
Redevelopments
Key Industry
Dynamics
Redevelopment
Pipeline
Master Lease
Legal Breakdown
Seritage Valuation
Operating Model
Seritage Liquidity
Profile
Sears Operating
Model 17
Completed: San Antonio, TX
Repurposing Auto Center Located On Highly Visible Corner Across From Regional Mall
Project Details Before
After
Site Map
▪ Total Project Square Feet: 18,900
▪ Construction Start: Q3 2016
▪ Estimated Completion: Q2 2017
Source: Company presentation
Key Industry
Dynamics
Redevelopment
Pipeline
Master Lease
Legal Breakdown
Seritage Valuation
Operating Model
Seritage Liquidity
Profile
Sears Operating
Model 18
In Process: Memphis, TN
100% Recapture; Redeveloping Freestanding Building To Create Multi-tenant Shopping Center
Project Details Before
After
Site Map
▪ Total Project Square Feet: 135,200
▪ Construction Start: Q2 2016
▪ Estimated Completion: Q3 2017
Source: Company presentation
Key Industry
Dynamics
Redevelopment
Pipeline
Master Lease
Legal Breakdown
Seritage Valuation
Operating Model
Seritage Liquidity
Profile
Sears Operating
Model 19
Sears Occupied Property: Local Mall
Building And Auto Center Adjacent To Premier Regional Mall With Strong Surrounding Demographics
Site Map
Key Industry
Dynamics
Redevelopment
Pipeline
Master Lease
Legal Breakdown
Seritage Valuation
Operating Model
Seritage Liquidity
Profile
Sears Operating
Model 20
Inventory Levels Appeared LowStore Was Primarily Empty (Except for Us)
Current Redevelopment Pipeline
Memphis, TN
West Hartford, CT
Rehoboth Beach, DE
Orlando, FL
St. Petersburg, FL
Cockeysville, MD
Kearney, NE
Multiple locations (5)
Multiple locations (5)
Multiple locations (4)
Multiple locations (5) (auto centers)
Property Lead Tenant(s)
Selected Redevelopment Projects
Multiple locations (3)
Source: Company presentation, Company filings
Carson, CA
Santa Cruz, CA
North Miami, FL
Watchung, NJ
Key Industry
Dynamics
Redevelopment
Pipeline
Master Lease
Legal Breakdown
Seritage Valuation
Operating Model
Seritage Liquidity
Profile
Sears Operating
Model 21
Characteristics of Master Lease
Master Lease Benefits Both Companies But Seritage Gaines More As Sears Declines
Key Industry
Dynamics
Redevelopment
Pipeline
Master Lease
Legal Breakdown
Seritage Valuation
Operating Model
Seritage Liquidity
Profile
Sears Operating
Model 22
Benefits To Seritage
• Sears announced exploration of monetizing its owned real estate through a potential sale-
leaseback transaction
• Sears formed Seritage and filed a registration statement on Form S-11 with the SEC
• Sears stockholders given the right to purchase proportionate interest in Sears
• Seritage filed a final prospectus concerning the Seritage Transaction and the Rights Offering
• Sears and Seritage close the Transaction and Rights Offering, approximately 97% of the
rights were exercised
• .
• Master Lease balanced Sears, need for liquidity, while allowing for significant growth
opportunities at Seritage. Seritage can unlock more value as Sears vacates stores.
Source: SEC Filings, Publically Available Information
• Raised needed liquidity
($2.7bn in cash)
• Locked in below market rent
($4.5/sq. ft. vs $ 19/sq. ft. )
• Ability to close Stores up to
20% GLA per year
• Recapture increases
profitability per store
Benefits To ……….
• Received top 15% of Sears Real Estate portfolio
• Sears pays for real estate taxes, building insurance, and maintenance
• Right to recapture properties up to 20% GLA per year
• Right to and release properties to third party tenants
• Right to receive termination payment from Sears in the event of a store
closure equal to (1) years rent
• Should Sears reject the leans in bankruptcy, Seritage has subordinated claim
to the lesser of (1) years rent or 15% of the remaining value of the lease
Nov. 2014
April 2015
June 2015
July 2015
Significance
Legal Precedent Recharacterizing Sale-Leaseback Transaction
Factors Considered by Courts1
1. Robinson v. Builders Supply & Lumber Co., 586 N.E.2d 316, 320–21 (Ill. App. Ct. 1992); In RE PCH Associates, 804 F.2d 193, 200–01 (2d Cir. 1986); U.S. Bank Trust
N.A. v. Nielsen Enterprises Md., LLC, 232 F. Supp. 2d 500 (D. Md. 2002); Helvering v. F&R Lazarus & Co., 308 U.S. 252 (1939)
• Both parties had proper legal council
• Both parties show evidence of Sophistication (Business Judgment Rule)
• Consideration appears adequate for a true sale
• Consideration paid in cash not amortized interest
• Master lease does not trade tax shelter for a fixed return
• No reasonable belief that Seritage owes Sears any unpaid debt
• Seritage assumed tax and insurance obligations
• Seritage assumed the risks and rewards associated of ownership
• Sears has to option or agreement to repurchase properties
• Rent payments compensate Seritage for the use of the land
• Structure of the sale was not unusual
Arguments
Supporting
Seritage
Arguments
Against
Seritage
• Sears liquidity needs surrounding the sale may imply financing arrangement
• Relationship between the parties may imply creation of a financing vehicle
• Seritage settled suit determining purchase sale price was below fair market
value
No View• Continued evidence of debt or liability (Classification of operating lease)
• Prior unsuccessful attempts to obtain a loan (Information not publically
available)
Key Industry
Dynamics
Redevelopment
Pipeline
Master Lease
Legal Breakdown
Seritage Valuation
Operating Model
Seritage Liquidity
Profile
Sears Operating
Model 23
Name: Mary Rottler
Position: EVP, Leasing and Operations
Prior Experience: VP, Real Estate and VP, Realty Supplier Management and Compliance at Walmart
Name: James Bry
Position: EVP, Development and Construction
Prior Experience: SVP, Development and Construction at Vornado Realty Trust
Name: Matthew Fernand
Position: EVP and General Counsel
Prior Experience: Partner in Sidley Austin LLP’s Real Estate Group
Name: Brian Dickman
Position: CFO and EVP
Prior Experience: CFO at Agree Realty, Real Estate Investment Banker at Lehman Brothers, Barclays, and RBC
Name: Benjamin Schall
Position: President and CEO
Prior Experience: COO of Rouse Properties, Inc., SVP at Vornado Realty Trust
SERITAGE Key Management
Management Brings Experience from Wide Range of Real Estate Backgrounds
Key Industry
Dynamics
Redevelopment
Pipeline
Master Lease
Legal Breakdown
Seritage Valuation
Operating Model
Seritage Liquidity
Profile
Sears Operating
Model 24
Enhanced Liquidity Through Debt or JV Sale
Source: Capital IQ, Company Filings
1. As of June 30, 2017
2. Stake value assumed to be equivalent to initial investment in JV. SRG current holds a 50% stake in all 3 JVs
Multiple Avenues to Sell JV Stake
JV Partner Total Sq. Ft. Stake Value2Properties
2.1mm
1.6mm
1.7mm
12
9
10
$165mm
$150mm
$114mm
Seritage Has Substantial Debt Capacity
Metric SRGImplied Debt
Capacity
Industry
Average
NOI
Coverage
Debt /
Total Sq. Ft.
Debt /
Equity
$31.75 $90.34 $2,280mm
$1,832mm0.5x 1.2x
Estimated Annual Cash from Operations1Current Liquidity Summary1
Low Leverage and High Liquidity Support ~90% of Capital Needed For Redevelopment Costs
($ in millions)
Cash & Equivalents $9.9
Restricted Cash 172.6
Unsecured Term Loan Facility 115.0
Proceeds from GGP Sale 171.6
Total Liquidity $469.0
($ in millions)
Total NOI from 3rd-Party Tenants $138.4
G&A Expenses (20)
EBITDA 118.4
Interest Expense (75)
Cash from Operations $43.4
Remaining Redevelopment Funding Requirement: $150mm
3.9x 2.1x $1,142mm
Key Industry
Dynamics
Redevelopment
Pipeline
Master Lease
Legal Breakdown
Seritage Valuation
Operating Model
Seritage Liquidity
Profile
Sears Operating
Model 25
$5.5
$11.0$11.8
$15.5 $15.7$13.0
$27.2
$7.3
$15.6 $16.9
$0 bn
$10 bn
$20 bn
$30 bn
$40 bn
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Seritage Existing Debt Profile
Total Retail REIT Debt Issuances Have Grown at a ~13% CAGR since 2008 Recession1
Source: Capital IQ, Company Filings
1. Shaded Area represents YTD figures and patterned area denotes Q4 2017 Estimates
Current credit market conditions
remain highly liquid despite
uncertainty around e-commerce
(1)
$145.8
$128.5
$101.3$91.9
$71.2$62.0
$31.7
$2
$24
$46
$68
$90
$112
$134
$156
1 2 3 4 5 6 7
Retail REIT Debt / Equity Ratios
3.0x
2.3x
1.1x
0.7x 0.7x0.5x 0.5x
0.0x
0.5x
1.0x
1.5x
2.0x
2.5x
3.0x
3.5x
1 2 3 4 5 6 7
SRG Has Enough
Leverage Capacity to
Raise ~2bn in additional
debt
Retail REIT Total Debt / Per Sq. Ft.
SRG commands
Lowest Debt PSF
ratio of its peer group
Key Industry
Dynamics
Redevelopment
Pipeline
Master Lease
Legal Breakdown
Seritage Valuation
Operating Model
Seritage Liquidity
Profile
Sears Operating
Model 26
$51.81 $52.36 $52.09
$57.67 $58.20 $61.81
$63.90 $64.42
$75.11
$30.00
$40.00
$50.00
$60.00
$70.00
$80.00
Dividend Discount Model Levered Discount Cash Flow Net Asset Value
Implie
d S
hare
Price
Immediate Sears Bankruptcy Q3 2018 Sears Bankruptcy Q2 2019 Sears Bankruptcy
Intrinsic Valuation Implies 30% Upside
Dividend Discount Model Net Asset Value Model
Implied Premium Breakdown
▪ Dividend Payout Ratio – 30.0%
▪ Cost of Equity – 9.0%
▪ EV / FFO Exit Multiple – 13.0x
(Industry Average ~13.4x)
▪ Cap Rate – 6.5% (Prime Mall Cap
Rates ~6.0%)
▪ Cost of Equity – 9.0%
▪ Valuation of PV of 2018E Balance
Sheet discounted back at Cost of
EquityAssu
mp
tio
ns
Se
nsitiv
ity
Levered DCF Model
10/13/17
Share Price
▪ Cost of Equity – 9.0%
▪ EV / FFO Exit Multiple – 13.0x
(Industry Average ~13.4x)
▪ Assumes ~150mm funding gap in
redevelopments is funded through
debt
Implied Share Price Implied Perpetuity Growth Rate
Exit Multiple Exit Multiple
12.0x 12.5x 13.0x 13.5x 14.0x
8.0% $56.01 $58.12 $60.22 $62.32 $64.42
8.5% $55.07 $57.13 $59.20 $61.26 $63.32
9.0% $54.15 $56.17 $58.20 $60.23 $62.25
9.5% $53.24 $55.23 $57.22 $59.22 $61.21
10.0% $52.36 $54.32 $56.27 $58.23 $60.18Cost of E
quity
Implied Share Price Implied Perpetuity Growth Rate
Exit Multiple Exit Multiple
12.0x 12.5x 13.0x 13.5x 14.0x
8.0% $55.49 $57.60 $59.70 $61.80 $63.90
8.5% $54.54 $56.61 $58.67 $60.73 $62.80
9.0% $53.61 $55.64 $57.67 $59.69 $61.72
9.5% $52.70 $54.69 $56.68 $58.67 $60.67
10.0% $51.81 $53.77 $55.72 $57.68 $59.63Cost of E
quity
Implied Share Price
Cap Rate
5.5% 6.0% 6.5% 7.0% 7.5%
8.0% $75.11 $68.26 $62.47 $57.51 $53.21
8.5% $74.70 $67.90 $62.14 $57.20 $52.93
9.0% $74.31 $67.54 $61.81 $56.90 $52.65
9.5% $73.91 $67.18 $61.48 $56.60 $52.37
10.0% $73.52 $66.82 $61.16 $56.30 $52.09Cost of E
quity
Key Industry
Dynamics
Redevelopment
Pipeline
Master Lease
Legal Breakdown
Seritage Valuation
Operating Model
Seritage Liquidity
Profile
Sears Operating
Model 27
Relative Valuation Implies ~35% Upside
Seritage Has Shown Strong NOI Growth and Healthy Leverage / Coverage Ratios
Debt Per Sq. Ft.LTM NOI GrowthNOI Interest Coverage
Seritage trades at ~35% Discount to Peers Due to Market Myopia on Sears Bankruptcy
Price / 2018E AFFO1Price / 2019E FFO1Price / 2018E FFO1
17.4 x16.4 x
15.8 x 15.3 x
8.7 x
7.0 x
3.0 x
7.0 x
11.0 x
15.0 x
19.0 x
1 2 3 4 5 6
18.4 x17.9 x16.8 x
14.1 x
8.7 x7.8 x
3.0 x
7.0 x
11.0 x
15.0 x
19.0 x
23.0 x
1 2 3 4 5 6
20.0 x
18.2 x17.6 x16.6 x
9.6 x
7.9 x
3.0 x
7.0 x
11.0 x
15.0 x
19.0 x
23.0 x
1 2 3 4 5 6
3.9x
2.9x
2.3x 2.2x
0.9x
0.3x
0.0x
1.0x
2.0x
3.0x
4.0x
5.0x
1 2 3 4 5 6
8.0%
6.5%
4.0%3.0%
-2.0%
-4.0%-5.0%
0.0%
5.0%
10.0%
1 2 3 4 5 6
$67
$56
$45 $35
$33$28
$0
$20
$40
$60
$80
1 2 3 4 5 6
Key Industry
Dynamics
Redevelopment
Pipeline
Master Lease
Legal Breakdown
Seritage Valuation
Operating Model
Seritage Liquidity
Profile
Sears Operating
Model
1. Share price as of 10/13/17
28
8.2x
Dividend Discount Model (Q3 2018 Sears Bankruptcy)
Key Industry
Dynamics
Redevelopment
Pipeline
Master Lease
Legal Breakdown
Seritage Valuation
Operating Model
Seritage Liquidity
Profile
Sears Operating
Model
1. Implied premium calculated based on current share price as of 10/13/17
Dividend Discount Model Implied Share Price
(Fiscal Year Ending December 31) Historical Period Stub Projection Period '18-'21
($ in Millions) 1H 2015 2016 2017 2018 2019 2020 2021 CAGR
Rental Income $87 $186 $130 $256 $241 $282 $324 8.1%
Tenant Reimbursements 27 62 51 50 41 54 69
Total Revenue 114 249 180 306 281 336 392 8.6%
Property Operating Expense 6 22 10 16 15 17 18
Real Estate Taxes 22 44 24 49 51 52 53
Depreciation and Amorization 66 177 101 203 253 387 546
General and Administrative 10 17 10 16 15 16 17
Other Expenses 18 19 - - - - -
Operating Income (Loss) (9) (30) 35 22 (53) (136) (242) N/A
Net Income (22) (52) 35 9 (74) (139) (232) N/A
Dividends - 39 41 64 54 74 94 13.8%
Present Value of Dividend 40 60 47 59 68
Equity Value Implied Equity Value and Share Price
FFO Exit Multiple 13.0x Implied Equity Value 3,179
Equity Value 3,179 FDSO 55
Price Per Share $57.67
Implied Premium to Current Share Price 26.1%
29
Levered DCF Model (Q3 2018 Sears Bankruptcy)
Key Industry
Dynamics
Redevelopment
Pipeline
Master Lease
Legal Breakdown
Seritage Valuation
Operating Model
Seritage Liquidity
Profile
Sears Operating
Model
1. Implied premium calculated based on current share price as of 10/13/17
30
Levered DCF Model Implied Share Price
(Fiscal Year Ending December 31) Historical Period Stub Projection Period '18-'21
($ in Millions) 1H 2015 2016 2017 2018 2019 2020 2021 CAGR
Cash Flow from Operations $21 $110 $97 $135 $130 $178 $231 19.6%
(+) Cash Flow from Investing Activities (2,734) (70) - (197) (228) (126) (129)
Cash Flow Before Financing Activities (2,713) 40 97 (63) (98) 52 101 NM
(+) Non-Equity Cash Flow from Financing Activities (37) 187 139 (10) (22)
Levered FCF (1,581) 29 60 125 40 43 80 -13.9%
Present Value of Levered FCF 60 118 35 34 58
Equity Value Implied Equity Value and Share Price
FFO Exit Multiple 13.0x Implied Equity Value 3,208
Equity Value 3,208 FDSO 55
Price Per Share $58.20
Implied Premium to Current Share Price 27.3%
Net Asset Value Model (6.5% Cap Rate)1
Key Industry
Dynamics
Redevelopment
Pipeline
Master Lease
Legal Breakdown
Seritage Valuation
Operating Model
Seritage Liquidity
Profile
Sears Operating
Model
1. Implied premium calculated based on current share price as of 10/13/17
31
Net Asset Value Model
Projection Period
2017E 2018E 2019E 2020E 2021E
Assumed Cap Rate 6.50% 6.50% 6.50% 6.50% 6.50%
NOI Contribution
Wholly-Owned Properties $221.4 $235.7 $210.6 $260.8 $313.7
JV Properties 30.0 36.5 17.0 15.4 14.0
Total NOI 251.4 272.2 227.6 276.3 327.7
Capitalized Income Value 3,868.2 4,187.5 3,501.1 4,250.1 5,041.4
Balance Sheet Assets:
Non-Operating Real Estate Assets
Construction in Progress $134.2 $418.2 $43.4 $48.5 $48.5
Vacatent Buildings and Land 523.4 640.2 1,733.1 1,620.7 1,463.0
Other Balance Sheet Assets
Cash & Cash Equivalents 50.0 50.0 50.0 52.2 91.5
Restricted Cash 38.4 - - - -
Tenant and Other Recievables, Net 29.5 31.7 29.6 35.0 40.3
Prepaid Expenses, Deferred Expenses, and Other Assets, Net 10.6 7.9 8.3 8.9 9.5
Lease Intangible Assets, Net 389.9 392.2 394.3 396.9 399.8
Total Asset Value: 5,044.3 5,727.7 5,760.0 6,412.2 7,094.0
Liabilities:
Accounts Payable, Accrued Expenses, and Other Liabilities 97.5 71.8 75.4 79.7 84.3
Mortgage Loans Payable, Net 1,250.3 1,250.3 1,250.3 1,250.3 1,250.3
Unsecured Term Loan, Net - - - - -
Additional Borrowings 56.4 260.7 414.9 423.8 423.8
Total Liabilities Value: 1,404.2 1,582.8 1,740.6 1,753.8 1,758.4
Other Claims on Equity:
Noncontrolling Interest 463.2 379.1 301.7 209.4 101.5
Total other Claims on Equity: 463.2 379.1 301.7 209.4 101.5
Net Asset Value: $3,176.8 $3,765.8 $3,717.7 $4,449.0 $5,234.1
FDSO 55.1 55.1 55.1 55.1 55.1
Implied Share Price $57.63 $68.31 $67.44 $80.71 $94.95
PV of Implied Share Price $57.11 $61.81 $55.98 $61.46 $66.34
Current Share Price $45.72 $45.72 $45.72 $45.72 $45.72
Implied Premium (Discount) to Current Share Price 24.9% 35.2% 22.4% 34.4% 45.1%
Used Q4 2018
Balance Sheet
Following
Estimated Sears
Bankruptcy of
Q3 2018. Implied
Share Price was
Discounted Back
at Cost of Equity
of 9.0%
Seritage Operating Model – Income Statement
Key Industry
Dynamics
Redevelopment
Pipeline
Master Lease
Legal Breakdown
Seritage Valuation
Operating Model
Seritage Liquidity
Profile
Sears Operating
Model
Income Statement
Historical Period Projection Period
($ in Millions) 2H 2015A 2016A 2017E 2018E 2019E 2020E 2021E LTM
Rental Income 86.6$ 186.4$ 221.2$ 256.0$ 240.9$ 281.8$ 323.7$ 186.6$
Tenant Reimbursements 26.9 62.3 82.5 50.0 40.5 53.7 68.7 60.5
Total Revenue 113.6 248.7 303.7 306.0 281.4 335.5 392.4 247.1
Property Operating Expense 6.3 21.5 19.5 15.8 15.4 16.8 18.5 18.5
Real Estate Taxes 22.4 43.7 48.5 49.2 50.6 52.0 53.3 44.9
Depreciation and Amorization 65.9 177.1 210.4 203.2 253.3 387.2 545.7 209.5
General and Administrative 10.0 17.5 21.4 15.8 14.9 15.9 17.0 20.0
Nonrecurring Expenses 18.4 19.3 0.1 0.0 0.0 0.0 0.0 19.2
Operating Income (Loss) (9.4) (30.4) 3.8 22.0 (52.8) (136.4) (242.1) (65.0)
Equity Income from Unconsolidated JV Operations 4.8 4.6 1.2 3.8 1.8 1.6 1.5 1.1
Interest and Other Income 0.1 0.3 0.2 0.3 0.3 0.3 0.4 0.3
Interest Expense 30.5 63.6 74.5 80.1 81.1 74.2 73.7 67.2
Unrealized Loss on Interest Rate Cap 2.9 1.4 2.4 3.1 2.8 3.4 3.9 0.1
Operating Income (Loss) Before Income Taxes (37.9) (90.5) (71.6) (57.0) (134.6) (212.1) (317.9) (131.0)
Provision for Income Tax 0.9 0.5 0.7 0.9 0.9 0.9 0.9 0.4
Net Income (Loss) (38.8) (91.0) (72.3) (57.8) (135.4) (213.0) (318.8) (131.4)
Net Income (Loss) Attributable to Minority Interest 16.5 39.5 66.3 67.3 61.9 73.8 86.3 54.3
Net Income (Loss) Attributable to Parent (22.3) (51.6) (6.0) 9.5 (73.5) (139.2) (232.4) (77.2)
Key Assumptions
Projected Annual Income Statement
▪ Assumes Sears Bankruptcy Date of Q3 2018
▪ Current redevelopment projects are completed upon announced date in SRG company filings
▪ Future redeveloped properties are leased at $19.00 per square foot upon completion
▪ Sears vacates roughly 5,000,000 square feet per quarter until bankruptcy due to store closures
▪ Real estate taxes are projected as a % of total square feet and grow at the rate of inflation
▪ Properties are depreciated over a 15-year period
32
Seritage Operating Model – Balance Sheet
Key Industry
Dynamics
Redevelopment
Pipeline
Master Lease
Legal Breakdown
Seritage Valuation
Operating Model
Seritage Liquidity
Profile
Sears Operating
Model
Projected Annual Balance Sheet
Balance Sheet
Historical Period Projection Period
($ in Millions) 2H 2015A 2016A 2017E 2018E 2019E 2020E 2021E LTM
Real Estate 0 0 0
Land 840.6$ 840.0$ 840.0$ 840.0$ 840.0$ 840.0$ 840.0$ 840.0$
Buildings and Improvements 814.7 839.7 1,000.6 1,036.9 1,639.6 1,760.8 1,890.0 845.6
Gross Real Estate Operating Assets 1,655.2 1,679.7 1,840.7 1,877.0 2,479.6 2,600.8 2,730.1 1,685.6
(-) Accumulated Depreciation (29.1) (89.9) (218.5) (421.7) (675.0) (1,062.2) (1,608.0) (117.3)
Net Operating Real Estate 1,626.1 1,589.7 1,622.2 1,455.3 1,804.6 1,538.5 1,122.1 1,568.3
Construction in Progress 13.1 55.2 134.2 418.2 43.4 48.5 48.5 155.0
Total Real Estate, Net of Accumulated Depreciation 1,639.3 1,645.0 1,756.3 1,873.5 1,848.0 1,587.0 1,170.6 1,723.3
Cash and Cash Equivalents 62.9 52.0 50.0 50.0 50.0 52.2 91.5 9.9
Restricted Cash 92.5 87.6 38.4 - - - - 172.6
Tenant and Other Recievables, Net 9.8 23.2 29.5 31.7 29.6 35.0 40.3 26.4
Prepaid Expenses, Deferred Expenses, and Other Assets, Net 23.1 15.1 10.6 7.9 8.3 8.9 9.5 13.4
Investments in Unconsolidated Joint Ventures 427.1 425.0 425.1 409.7 402.5 396.0 390.2 432.0
Lease Intangible Assets, Net 578.8 464.4 389.9 392.2 394.3 396.9 399.8 388.6
Total Assets 2,833.4 2,712.2 2,699.9 2,764.9 2,732.9 2,476.0 2,101.8 2,766.1
Liabilities and Shareholder's Equity 0 0 0 0 0 0 0
Accounts Payable, Accrued Expenses, and Other Liabilities 120.9 121.1 97.5 71.8 75.4 79.7 84.3 103.3
Mortgage Loans Payable, Net 1,142.4 1,166.9 1,250.3 1,250.3 1,250.3 1,250.3 1,250.3 1,250.3
Unsecured Term Loan, Net - - - - - - - 83.0
Additional Debt Raised - - 56.4 260.7 414.9 423.8 423.8 -
Total Liabilities 1,263.3 1,287.9 1,404.2 1,582.8 1,740.6 1,753.8 1,758.4 1,436.6
Common Stock Class A - Par Value 0.2 0.3 0.0 0.0 0.0 0.0 0.0 0.0
Common Stock Class B - Par Value 0.0 0.0 0.1 0.1 0.1 0.1 0.1 0.1
Common Stock Class C - Par Value 0.1 0.1 0.3 0.3 0.3 0.3 0.3 0.3
Noncontrolling Interest 683.4 619.8 463.2 379.1 301.7 209.4 101.5 512.8
Additional Paid-In Capital 924.5 925.6 996.6 998.1 999.5 1,001.2 1,003.2 995.7
Accumulated Deficit (38.1) (121.3) (164.5) (195.4) (309.3) (488.8) (761.6) (179.4)
Total Shareholder's Equity 1,570.1 1,424.3 1,295.6 1,182.1 992.3 722.2 343.4 1,329.4
Total Liabilities and Shareholder's Equity 2,833.4 2,712.2 2,699.9 2,764.9 2,732.9 2,476.0 2,101.8 2,766.1
33
Seritage Operating Model – Cash Flow Statement
Key Industry
Dynamics
Redevelopment
Pipeline
Master Lease
Legal Breakdown
Seritage Valuation
Operating Model
Seritage Liquidity
Profile
Sears Operating
Model
Projected Annual Cash Flow Statement
Cash Flow Statement
Historical Period Projection Period
($ in Millions) 2H 2015A 2016A 2017E 2018E 2019E 2020E 2021E LTM
Cash Flow from Operations
Net Income (Loss) (22.3)$ (51.6)$ (6.0)$ 9.5$ (73.5)$ (139.2)$ (232.4)$ (77.2)$
Noncontrolling Interest (16.5) (39.5) (66.3) (67.3) (61.9) (73.8) (86.3) (54.3)
Depreciation and Amortization 68.2 181.8 213.8 203.2 253.3 387.2 545.7 215.3
Unrealized Loss on Interest Rate Cap 2.9 1.4 2.4 3.1 2.8 3.4 3.9 0.1
Equity Income from Unconsolidated JVs (4.8) (4.6) (1.2) (3.8) (1.8) (1.6) (1.5) (1.1)
Distribution from Unconsolidated JV 6.7 15.7 16.2 19.2 8.9 8.1 7.4 15.0
Stock Based Compensation 0.9 1.1 1.7 1.5 1.4 1.7 2.0 1.3
Straight-Line Rent Adjustment (8.3) (12.9) (6.6) (5.4) (4.9) (5.9) (6.9) (8.1)
Tenant and other Recievables (1.5) 0.4 (2.9) (2.2) 2.0 (5.3) (5.4) (0.2)
Accounts Payable, Accrued Expenses, and Other Liabilities 21.6 12.1 (28.3) (25.7) 3.6 4.4 4.6 (15.8)
Prepaid Expenses, Deferred Expenses, and Other Assets (25.6) 6.1 3.2 2.7 (0.5) (0.6) (0.6) (6.2)
Cash Flow from Operations 21.4 110.0 126.0 134.8 129.5 178.4 230.5 68.9
Cash Flow from Investing Activities
Restricted Cash (69.87) 4.86 49.23 38.39 - - - (85.52)
Development of Real Estate (11.3) (66.2) (240.3) (320.3) (227.9) (126.3) (129.3) (139.0)
Investment in Unconsolidated JVs (2,653.0) (9.0) (15.0) - - - - (24.0)
Cash Flow from Investing Activities (2,734.2) (70.3) (206.1) (281.9) (227.9) (126.3) (129.3) (248.6)
Cash Flow from Financing Activities
Proceeds from Issuance of Common Stock & Noncontrolling Interest 1,644.0 - - - - - - -
Proceeds from Additional Debt Raised (Paid Off) - - 56.4 204.3 154.2 8.8 - -
Proceeds from Issuance of Mortgage Loans Payable, Net 1,161.2 - - - - - - -
Proceeds from Future Funding Facility - 20.0 80.0 - - - - 100.0
Common Dividend Paid - (39.4) (37.1) (40.4) (40.4) (40.4) (40.4) (32.7)
Noncontrolling Interest Distributions Paid - (30.2) (20.9) (16.8) (15.5) (18.5) (21.6) (23.0)
Other Financings Costs (29.6) (0.9) (2.4) - - - - (3.4)
Proceeds from Unsecured Term Loans - - 2.0 - - - - 85.0
Cash Flow from Financing Activities 2,775.6 (50.5) 78.0 147.1 98.4 (50.0) (61.9) 126.0
Beginning Cash Balance - 62.9 52.0 50.0 50.0 50.0 52.2 63.7
Change in Cash 62.9 (10.8) (2.0) - - 2.2 39.3 (53.8)
Ending Cash Balance 62.9 52.0 50.0 50.0 50.0 52.2 91.5 9.9
34
Implied Default Probability
Assumptions
Calculation
Source: Company filings
Pricing Data as of 9/18/2017
Key Industry
Dynamics
Redevelopment
Pipeline
Master Lease
Legal Breakdown
Seritage Valuation
Operating Model
Seritage Liquidity
Profile
Sears Operating
Model 35
Inputs Bond Data
Today 10/15/2017 Maturity Coupon Price Probability
Risk Free Rate 1.3% 10/15/2017 6.88% 99.05$ 5.36%
Risk Premium 1.0% 10/15/2018 6.63% 94.50$ 14.74%
Recovery Rate 25.0% 12/15/2019 8.00% 86.41$ 31.50%
Default Survival
CF Date CF Prob. FV CF Prob. FV Total CF Price10/15/2017 -$
10/15/2017 $25.00 5.36% 1.34$ 103.44$ 94.64% 97.89$ 99.23$ 99.23$
12/31/2017 25.00 3.09% 0.11 3.31 96.91% 3.21 3.32$
6/15/2018 25.00 6.51% 0.24 3.31 90.61% 3.00 3.24$
10/15/2018 25.00 4.47% 0.16 103.31 86.56% 89.42 89.59$ 94.51$
12/31/2017 25.00 1.11% 0.04 4.00 98.89% 3.96 4.00$
12/31/2018 25.00 6.44% 0.24 4.00 89.24% 3.57 3.81$
6/15/2019 25.00 8.87% 0.33 4.00 81.33% 3.25 3.58$
12/15/2019 25.00 11.54% 0.43 104.00 71.94% 74.82 75.25$ 86.59$
Operating Model – Income Statement
Key Assumptions
Projected Quarterly Income Statement
▪ Assumes ~100 store closures per quarter, in-line with previous quarterly store closures
▪ 4.0% quarterly decline in same store sales, ramping down to 5.0%
▪ Sears is able to gradually sell-off assets in order to make debt payments
o Sears still owns most of their stores and there has been some demand from 3rd parties to purchase these
stores
o Sears sold off the rights to its Craftsman brand to Stanley Black & Decker for ~$900mm in January 2017
Key Industry
Dynamics
Redevelopment
Pipeline
Master Lease
Legal Breakdown
Seritage Valuation
Operating Model
Seritage Liquidity
Profile
Sears Operating
Model
Income Statement
Projection Period Historical Period
($ in Millions) Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018 Q3 2018 Q4 2018
Revenue 4,301.0$ 4,365.0$ 3,713.4$ 4,343.6$ 3,039.1$ 2,985.4$ 2,348.8$ 2,571.2$
COGS 3,334.0 3,239.0 2,896.4 3,366.3 2,340.1 2,298.8 1,796.9 1,967.0
Gross Profit 967.0 1,126.0 816.9 977.3 699.0 686.6 552.0 604.2
SG&A 1,228.0 1,396.0 1,076.9 1,216.2 820.5 776.2 610.7 642.8
Depreciation and Amortization 81.0 75.0 63.2 57.2 54.3 49.6 40.0 33.9
Other Operating Expense / (Income) - - - - - - - -
Operating Income (342.0) (345.0) (323.1) (296.1) (175.8) (139.2) (98.7) (72.4)
Net Interest Expense 128.0 123.0 106.3 99.7 93.1 92.8 88.7 80.5
Other Non-Operating Expenses (Income) - - - - - - - -
EBT Excluding Usual Items (470.0) (468.0) (429.5) (395.8) (269.0) (232.0) (187.4) (152.9)
Restructuring Charges 97.0 141.0 48.7 112.8 62.2 45.6 30.8 66.8
Loss (Gain) on Sale of Assets and Investments (739.0) (368.0) - (506.8) - (133.9) (110.3) (91.0)
Asset Writedown & Other Unusual Items - - - - - - - -
EBT Including Usual Items 172.0 (241.0) (478.2) (1.8) (331.1) (143.7) (108.0) (128.7)
Income Tax Expense (72.0) 10.0 - - - - - -
Net Income 244.0 (251.0) (478.2) (1.8) (331.1) (143.7) (108.0) (128.7)
Net Income Attrib. Minority Interest - - - - - - - -
Net Income to Parent 244.0 (251.0) (478.2) (1.8) (331.1) (143.7) (108.0) (128.7)
36
Operating Model – Balance Sheet
Projected Quarterly Balance Sheet
Key Industry
Dynamics
Redevelopment
Pipeline
Master Lease
Legal Breakdown
Seritage Valuation
Operating Model
Seritage Liquidity
Profile
Sears Operating
Model 37
Balance Sheet
Projection Period Historical Period
($ in Millions) Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018 Q3 2018 Q4 2018
Assets
Cash and Cash Equivalents 264.0$ 442.0$ 222.5$ 150.0$ 274.2$ 150.0$ 150.0$ 150.0$
Accounts Receivable 479.0 370.0 322.9 377.7 303.9 295.3 229.8 251.5
Inventory 3,884.0 3,433.0 3,305.7 3,110.1 2,340.1 2,147.2 1,757.8 1,603.5
Prepaid Expenses 311.0 318.0 256.34 193.00 249.58 171.23 157.49 114.76
Current Assets 4,938.0 4,563.0 4,107.4 3,830.8 3,167.8 2,763.7 2,295.1 2,119.8
Net PP&E 2,130.0 1,969.0 2,057.1 1,395.3 1,373.1 1,130.9 933.2 769.6
Long-Term Investments 12.0 17.0 - - - - - -
Goodwill 269.0 269.0 269.0 269.0 269.0 269.0 269.0 269.0
Other Intangibles 1,251.0 1,249.0 1,249.0 1,249.0 1,249.0 1,249.0 1,249.0 1,249.0
Deferred Tax Assets (NOLs) - - 310.8 312.0 527.2 620.7 690.9 774.5
Other Long-Term Assets 471.0 284.0 170.5 14.6 - - - -
Total Assets 9,071.0 8,351.0 8,163.9 7,070.7 6,586.1 6,033.3 5,437.1 5,181.9
Liabilities and Shareholder's Equity
Accounts Payable 961.0 670.0 1,007.5 658.6 624.0 530.5 546.9 342.1
Current Income Taxes Payable 293.0 302.0 235.3 205.8 189.0 186.6 148.9 121.8
Unearned Revenue 1,982.0 1,908.0 1,915.2 1,809.4 1,725.5 1,676.4 1,491.0 1,428.1
Other Liabilities 2,574.0 2,515.0 2,565.3 2,616.6 2,668.9 2,722.3 2,776.8 2,832.3
Total Current Liabilities 5,810.0 5,395.0 5,723.3 5,290.4 5,207.5 5,115.8 4,963.5 4,724.3
Long-Term Debt 4,281.0 4,003.0 3,984.5 3,444.9 3,431.6 3,149.5 2,872.6 3,081.5
Capital Leases 183.0 230.0 217.0 204.0 196.3 188.5 180.8 173.0
Pension & Other Post-Retirement Benefits 1,677.0 1,731.0 1,731.0 1,731.0 1,731.0 1,731.0 1,731.0 1,731.0
Deferred Tax Liability 647.0 643.0 637.3 531.5 482.0 454.4 403.1 314.6
Total Liabilities 12,598.0 12,002.0 12,293.1 11,201.8 11,048.3 10,639.2 10,151.0 10,024.4
Common Stock 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0
Additional Paid-In Capital 9,116.0 9,102.0 9,102.0 9,102.0 9,102.0 9,102.0 9,102.0 9,102.0
Retained Earnings (5,268.0) (5,519.0) (5,997.2) (5,999.0) (6,330.1) (6,473.9) (6,581.9) (6,710.5)
Treasury Stock (5,875.0) (5,861.0) (5,861.0) (5,861.0) (5,861.0) (5,861.0) (5,861.0) (5,861.0)
Other Comprehensive Income (1,501.0) (1,374.0) (1,374.0) (1,374.0) (1,374.0) (1,374.0) (1,374.0) (1,374.0)
Minority Interest - - - - - - - -
Total Shareholder's Equity (3,527.0) (3,651.0) (4,129.2) (4,131.0) (4,462.1) (4,605.9) (4,713.9) (4,842.5)
Total Liabilities and Shareholder's Equity 9,071.0 8,351.0 8,163.9 7,070.7 6,586.1 6,033.3 5,437.1 5,181.9
Operating Model – Cash Flow Statement
Projected Quarterly Cash Flow Statement
Key Industry
Dynamics
Redevelopment
Pipeline
Master Lease
Legal Breakdown
Seritage Valuation
Operating Model
Seritage Liquidity
Profile
Sears Operating
Model 38
Cash Flow Statements
Projection Period Historical Period
($ in Millions) Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018 Q3 2018 Q4 2018
Cash Flow from Operations
Net Income 244.0$ (251.0)$ (478.2)$ (1.8)$ (331.1)$ (143.7)$ (108.0)$ (128.7)$
Depreciation and Amortization 113.0 105.0 63.2 57.2 54.3 49.6 40.0 33.9
(Gain) Loss from Sale of Assets (762.0) (399.0) - (506.8) - (133.9) (110.3) (91.0)
Asset Writedown 21.0 13.0 - - - - - -
Change in Inventories 58.0 451.0 127.3 195.6 770.0 192.9 389.4 154.3
Change in Accounts Payable (87.0) (291.0) 337.5 (348.8) (34.6) (93.5) 16.4 (204.8)
Change in Income Taxes (36.0) 12.0 (66.7) (29.6) (16.8) (2.4) (37.8) (27.0)
Change in Deferred Taxes 182.0 (83.0) (5.7) (105.9) (49.5) (27.6) (51.2) (88.5)
Change in Other Net Operating Activities (613.0) 185.0 (144.6) (47.1) (229.6) (2.2) (121.9) (70.0)
Cash Flow from Operations (880.0) (258.0) (167.1) (787.2) 162.7 (160.8) 16.6 (421.9)
Cash Flow from Investing Activities
Capital Expenditures (22.0) (19.0) (20.8) (19.2) (17.4) (13.5) (11.9) (10.2)
Gain (Loss) from Sale of Assets - - - 506.8 - 133.9 110.3 91.0
Sale of PP&E & Long Term Investments 765.0 669.0 - 779.7 - 206.0 169.6 140.0
Cash Flow from Investing Activities 743.0 650.0 (20.8) 1,267.3 (17.4) 326.4 268.0 220.7
Cash Flow from Financing Activities
Debt Issued (Repaid) 121.0 (203.0) (18.6) (539.6) (13.3) (282.1) (276.9) 208.9
Capital Lease Payments / Pension / Other Financing Actities (6.0) (11.0) (13.0) (13.0) (7.8) (7.8) (7.8) (7.8)
Cash Flow from Financing Activities 115.0 (214.0) (31.6) (552.6) (21.1) (289.8) (284.6) 201.1
Beginning Cash Balance 286.0 264.0 442.0 222.5 150.0 274.2 150.0 150.0
Change in Cash (22.0) 178.0 (219.5) (72.5) 124.2 (124.2) (0.0) -
Ending Cash Balance 264.0 442.0 222.5 150.0 274.2 150.0 150.0 150.0
Operating Model – Debt Schedule
Projected Quarterly Debt Schedule
Key Industry
Dynamics
Redevelopment
Pipeline
Master Lease
Legal Breakdown
Seritage Valuation
Operating Model
Seritage Liquidity
Profile
Sears Operating
Model 39
Debt Schedule
Projection Period Historical Period
($ in Millions) Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018 Q3 2018 Q4 2018
Beginning Cash 442.0 222.5 150.0 274.2 150.0 150.0
(+) Cash Avaliable for Debt Principal Repayment (200.9) (312.6) 137.5 (48.1) 107.3 (348.9)
(-) Minimmum Cash Balance 150.0 150.0 150.0 150.0 150.0 150.0
Subtotal Before Borrowing 91.1 (240.1) 137.5 76.1 107.3 (348.9)
(+) Additional Funds Required - 805.6 - 664.2 209.0 390.2
Sale of PP&E & Other Long Term Assets - 779.7 - 206.0 169.6 140.0
Additional Debt Required - 26.0 - 458.2 39.4 250.2
Total Sources of Funds 91.1 565.6 137.5 740.3 316.3 41.3
Debt Balances
Capital Lease Obligations 97.0$ 84.0$ 71.0$ 63.3$ 55.5$ 47.8$ 40.0$
Note Due 2017 289.0 289.0 - - - - -
Note Due 2018 28.0 28.0 28.0 28.0 28.0 28.0 -
Note Due 2019 613.0 613.0 613.0 613.0 613.0 613.0 613.0
Term Loan I Due 2018 727.0 727.0 727.0 727.0 - - -
Term Loan II Due 2020 555.0 549.5 543.9 538.4 532.8 527.3 521.7
Term Loan III Due 2020 330.0 330.0 330.0 330.0 330.0 330.0 330.0
Secured Loan Facility Due 2017 258.0 258.0 - - - - -
Secured Note Due 2018 303.0 303.0 303.0 303.0 303.0 - -
Senior Loan Facility Due 2020 454.0 454.0 454.0 454.0 454.0 454.0 454.0
Senior Unsecured Due 2019 446.0 446.0 446.0 446.0 446.0 446.0 446.0
Additional Borrowings - 26.0 26.0 458.2 497.6 289.6
Total Outstanding Debt 4,100.0 4,081.5 3,541.9 3,528.6 3,220.5 2,943.6 2,694.3
Mandatory Debt Repayments
Capital Lease Obligations 13.0 13.0 7.8 7.8 7.8 7.8
Note Due 2017 - 289.0 - - - -
Note Due 2018 - - - - - 28.0
Note Due 2019 - - - - - -
Term Loan I Due 2018 - - - 727.0 - -
Term Loan II Due 2020 5.6 5.6 5.6 5.6 5.6 5.6
Term Loan III Due 2020 - - - - - -
Secured Loan Facility Due 2017 - 258.0 - - - -
Secured Note Due 2018 - - - - 303.0 -
Senior Loan Facility Due 2020 - - - - - -
Senior Unsecured Due 2019 - - - - - -
Total Mandatory Debt Repayments 18.6 565.6 13.3 740.3 316.3 41.3
Key Industry
Dynamics
Redevelopment
Pipeline
Master Lease
Legal Breakdown
Seritage Valuation
Operating Model
Seritage Liquidity
Profile
Sears Operating
Model
Letter of Credit Facility
▪ In the event of reductions of the commitments under the LC Facility or a termination of
the LC Facility prior to the six month anniversary of the effective date of the Amendment,
the Borrowers will be required to pay an early reduction/termination fee equal to the
commitment fee that would have accrued with respect to the reduced or terminated
commitments from the date of reduction or termination until the six month anniversary.
Secured Loan Facilities ▪ Must apply the net proceeds of the sale of any real property collateral for the 2017
Secured Loan Facility to repay the loan
▪ Default interest rate equal to the greater of (i) 2.5% in excess of the base interest rate
and (ii) the prime rate plus 1%
▪ Limits on ability to make restricted payments, including dividends and share
repurchases
▪ Customary covenants that restrict ability to make dispositions, prepay debt and make
investments
▪ Cash dominion requirement
▪ Fixed charge ratio at the last day of any quarter be not less than 1.0 to 1.0
▪ In the event of certain prepayments of indebtedness, for a period of one year thereafter,
the Company must maintain availability under the facility of at least 12.5%
Domestic Credit
Agreement / Second
Lien Credit Agreement
Senior Secured Notes ▪ Covenants that (1) limit the ability of the Company and certain of its domestic
subsidiaries to create liens and enter into sale and leaseback transactions and (2) limit
the ability of the Company to consolidate with or merge into, or sell other than for cash
or lease all or substantially all of its assets to, another person
▪ Default would permit or require the principal and accrued and unpaid interest to be due
and payable immediately, at a purchase price equal to 101% of the principal amount if
the borrowing base falls below the principal value
Debt Covenants
Debt Tranche Key Covenants
40