2015 Annual Report

2015 ANNUAL REPORT Seritage Growth Properties (NYSE: SRG) is a fully integrated, self-administered and self-managed retail REIT with 235 wholly-owned properties and 31 joint venture properties totaling over 42 million square feet across 49 states and Puerto Rico. Pursuant to a master lease, 223 of the wholly-owned properties are leased to Sears Holdings and are operated under either the Sears or Kmart brand. The master lease provides Seritage with the right to recapture certain space from Sears Holdings at each property for retenanting or redevelopment purposes. At several properties, third-party tenants under direct leases occupy a portion of leasable space alongside Sears and Kmart, and 12 properties are leased entirely to third parties. The Company also owns 50% interests in 31 properties through joint venture investments with General Growth Properties, Simon Property Group and The Macerich Company. A substantial majority of the space at the joint venture properties is also leased to Sears Holdings under master lease agreements that provide for similar recapture rights as the master lease governing the wholly-owned properties. Fellow Shareholders, It is our pleasure to present you with Seritage Growth Properties’ first annual report. 2015 was a momentous year for our company, starting with our formation, successful rights offering and listing on the New York Stock Exchange on July 6, 2015. The proceeds from the rights offering, along with new debt financing, facilitated our acquisition of a large portfolio of high quality real estate from Sears Holdings. The portfolio consists of 266 locations totaling over 40 million square feet, making Seritage Growth Properties one of the largest owners of retail space in the country. The origins of our real estate portfolio trace back 30 to 40 years ago, during a period of expansive retail real estate development and the proliferation of super regional malls. Sears played a central role as a leading anchor, property owner and, at times, co-developer of many of these new developments. Sears’ prominence during this era is reflected in two important outcomes evident in today’s real estate landscape. First, Sears received fee ownership over large parcels of land to construct its department stores, auto centers and related uses. Second, and equally important, Sears was able to select prime locations at the front entrance and at the primary intersections at many of these new developments. Seritage Growth Properties is now the beneficiary of this real estate lineage, with fee ownership over some of the most desirable and visible locations in many of the top markets across the country. The premise of Seritage, the reason we were formed, and what we’re focused on each and every day, is unlocking the underlying real estate value of our high quality portfolio, and in turn, creating significant returns for our shareholders. Our objectives as we head into 2016 are to generate substantial growth through three primary strategies: • Converting single-tenant buildings into first-class, multi-tenant shopping centers at meaningfully higher rents; • Maximizing the value of our substantial land holdings through retail and mixed-use densification; and • Leveraging our joint venture relationships with three leading mall REITs Each of these three initiatives presents substantial opportunities to grow earnings, diversify our tenant base and create value through redevelopment, and when executed together, provides Seritage with one of the most significant growth opportunities in the retail REIT industry. National Portfolio of Highly Desirable Real Estate Our portfolio is geographically diverse, with assets in 49 states, and further benefits from having large concentrations in high growth, densely populated markets such as California, Florida, Texas and across the Northeast. The demographics supporting our asset base are some of the strongest in the industry, with an average of 580,000 people with incomes of $75,000 within a 10 mile trade area. Geographic Summary % of Base Rent California 19.7% Florida 11.4% New York 6.2% Texas 6.1% Illinois 4.5% Pennsylvania 4.1% New Jersey 3.5% Michigan 3.2% Virginia 3.2% Puerto Rico 3.1% AK HI PR We are distinctive in the retail REIT industry in that 50 percent of our properties are attached to dominant regional malls and the other 50 percent are part of open air shopping centers or are free standing locations. We see this portfolio diversity as a significant advantage. First and foremost, our breadth of ownership provides for an extensive universe of tenants that we can target as lead anchors for our redevelopments. From malls to freestanding sites, from primary markets to secondary markets, from large format users to growing restaurants, Seritage has a variety of property types and sizes to meet the needs of a wide spectrum of growing retailers. The breadth of our holdings is also a strength given the evolution of retail concepts and increasingly hybrid nature of many retail centers. Junior anchors traditionally found in power centers are now key tenants in the repurposing of former department stores at malls. A growing number of traditional mall tenants now seek space in open air shopping centers. And many retail concepts, including entertainment, restaurants, grocers, and gyms, are focused on obtaining the best real estate location in a market, as opposed to occupying a specific retail asset type. Given our ability to undertake redevelopment across multiple formats, Seritage is well positioned to fulfill retailer store growth needs in today’s retail environment. We also feel confident in executing our growth strategies given the current state of supply and demand for quality real estate. Very little new retail real estate, either malls or shopping centers, has been constructed over the last seven years. And with the continued growth of retailers over this time period, most first-class centers are full, with occupancy near peak levels. These supply- demand dynamics are particularly true for larger format space. As a result, many junior anchors, which require 20,000 to 40,000 square foot stores, have found it difficult to meet their store growth plans given the lack of available quality real estate. Seritage is well situated to fill this void while helping our retail partners grow at top locations around the country. Significant Embedded Growth Potential Our first priority is to systematically convert our assets into a portfolio of first class multi-tenant shopping centers at meaningfully higher rents than Sears Holdings pays us today. To understand this strategy, it’s important to understand our master lease structure with Sears. Upon on our acquisition of the portfolio, Sears Holdings leased back the majority of the properties from Seritage under a master lease. Sears Holdings pays us an average base rent of $4.30 per square foot under this lease with a base lease term of 10 years. A unique and critical component of the master lease is that Seritage has the contractual right to downsize Sears Holdings and recapture up to 50 percent of the space at each location. Hence, with a total portfolio of approximately 40 million square feet, Seritage has the contractual right to recapture over 20 million square feet for redevelopment and releasing to new third party tenants. As we recapture and release space to new third party retailers at materially higher rents, we expect to both substantially grow net operating income as well as significantly diversify the credit profile of our tenant roster. Two important reference points are illustrated below, for the portfolio as of December 31, 2015. First, while third party tenants were only 9% of our square footage, these tenants represented 24% of our annual rent given the higher leased rates. Second, average base rents for signed but not yet opened leases equaled $20.73 per square foot across the portfolio, compared to $4.30 per square foot for Sears Holdings, which reflects our opportunity to drive rents higher upon redevelopment. Square Footage Annual Rent Annual Rent PSF $24.00 $20.73 Sears Sears 91% 76% $18.00 $11.78 $12.00 $6.00 $4.30 3rd Party 3rd Party Tenants Tenants $0.00 9% 24% Sears Holdings 3rd Party Tenants 3rd Party Tenants (In Place) (SNO Leases) As a second significant growth opportunity, we are actively working to unlock the value of our vast land holdings. In addition to the 40 million square feet of existing buildings that we purchased, we also acquired fee ownership and control over large land parcels, including parking lots and outparcels. These parcels average 13 acres per site, and total over 3,000 acres across our portfolio. Additionally, at 21 properties, we have the right to recapture 100% of the space currently occupied by Sears Holdings. Many of these sites can support meaningful redevelopment and densification as we seek the highest-and-best use for this valuable land, including potential residential, hotel and office uses. We also have the contractual right to recapture 100% of 160 Sears Auto Centers, which total over 3.5 million square feet, and are in high demand from smaller format retail, fast-casual dining and sit down restaurant tenants. Finally, we expect to create significant value through our existing joint ventures with three leading regional mall REITs on 31 of our 266 properties. At our formation, we acquired Sears Holdings’ interest in newly formed joint ventures with General Growth Properties (NYSE: GGP) on 12 assets, with Simon Property Group (NYSE: SPG) on 10 assets, and with The Macerich Company (NYSE: MAC) on nine assets. As with our wholly-owned assets, the majority of the space at these joint venture assets is leased back to Sears Holdings, with a contractual right to downsize and recapture space at each location. Our equity investment totals $429 million across these three joint ventures, which own assets attached to some of the most productive regional malls in the country.

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