Lots of retail real estate owners were hit hard by Sears Holdings' spiral into bankruptcy and the associated surge of store closures over the past few years. However, Seritage Growth Properties (NYSE: SRG) was uniquely affected. Its history as a Sears Holdings spinoff meant that Sears and Kmart stores accounted for the vast majority of its rental income until recently.
As of the end of 2016, Sears and Kmart still accounted for $148 million of annual base rent at Seritage. That figure now stands at just $20 million. This loss of rent caused adjusted funds from operations (FFO) to fall into negative territory in late 2018 and forced the company to suspend its dividend earlier this year. However, Seritage's third-quarter results show that its efforts to redevelop former Sears and Kmart stores for new tenants are about to start paying off in a big way.
Ever since Kmart and Sears began closing stores at a rapid pace, FFO and other earnings metrics have been in free-fall at Seritage Growth Properties. That didn't change last quarter. Total net operating income (NOI) fell to $14.7 million from $35.7 million a year earlier. Adjusted FFO deteriorated to a loss of $0.14 per share, compared with a loss of $0.01 per share in the prior-year period.