Lakeside shopping center, just outside of London, is a mecca of consumerism. It’s situated in the county of Essex, which loves shopping so much that a reality TV show captures the exploits of its glamorous, bauble-buying residents.
But since last week, the mall has been open for only essential purchases, in line with government guidance. Its owner Intu Properties Plc said last Thursday that it had collected just 29% of the rent due from its tenants there and around the country. At the same time last year, it had received 77% of the amount due.
Occupants including Associated British Foods Plc’s Primark and Swedish fashion retailer Hennes & Mauritz AB, which has shuttered thousands of stores around the world, are withholding payments or seeking better terms.
It’s a scenario that’s being repeated on both sides of the Atlantic. Cheesecake Factory Inc., which has 294 stores throughout the US and Canada, said in a filing last week that it would not pay its April rent, and that was in discussions with its landlords, a who’s who of American mall owners.
While consumer-facing groups such as apparel chains have been the first shoe to drop, landlords look set to be the next. Retailers are bracing for a prolonged shutdown. On Monday, Macy’s Inc. said it was furloughing most of its 130,000 strong workforce after losing the majority of its sales because of store closures.
No wonder some, such as US mall owner Taubman Centers Inc., are fighting back. It told tenants in a memo that they still have to pay, although it added that it’s working with affected occupiers.
The developing stand-off will do nothing to help the plight of stores, nor in the longer term, shopping center owners. As I have argued, the fall-out from the catastrophic loss of business from the coronavirus retail crisis needs to be shared. Some consequences will have to be borne downstream, by suppliers; some upstream, by landlords.
But this could be tricky. With fixed assets like malls, it’s not easy to adjust the cost base. Some also have significant borrowings. Lenders may have to bear some of the burden, while government relief looks increasingly necessary. My colleague Brian Chappatta has warned of the potential dangers to the mortgage market.
Intu, which owns 17 UK malls including Manchester’s Trafford Center and the Metrocentre in Gateshead, is particularly vulnerable. Even before the outbreak, it was struggling under a mountain of borrowings. It said last Thursday that it was in talks with its lenders on waiving covenants, and that it could access the U.K. government’s 330 billion-pound ($410 billion) support mechanism.
Meanwhile, in the US, mall owners CBL & Associates Properties Inc., Macerich Co. and Taubman stand out for their above average net debt-to-Ebitda ratios and heavy use of secured lending, according to Lindsay Dutch, an analyst at Bloomberg Intelligence.
Others look to be in a better position.
Simon Property Group Inc. has one of the strongest balance sheets. But it agreed in February to buy Taubman for $3.6 billion. This deal, if it goes ahead, together with the Covid-19 impact, could increase Simon’s net debt to 7 times Ebitda at the end of 2020, from 5.6 times a year earlier, according to Moody’s. Taubman has some prize assets, such as the Short Hills Mall in New Jersey and the Gardens Mall in Florida , but the higher leverage and integration will be more challenging in the current environment.
Indeed, there will be pain even for the most solid operators. Simon is the biggest landlord to Cheesecake Factory, according to analysts at RBC Capital Markets.
But even when the virus abates, the retail landscape won’t be the same. Some weaker stores and restaurants will not re-open their doors. For others, it will take considerable time for demand to return to normal.
A frank conversation between retailers and landlords is needed to settle on ways for making it easier for everyone to weather this crisis. Alterations could include moving to monthly rent payments in cases where retailers are still expected to pay quarterly installments in advance, and doing so without any additional fees to facilitate the switch. Making it easier for tenants to break leases would also avoid time consuming and costly processes to exit agreements.
While that may seem to favor retailers more than landlords, mall owners too have something to gain. The pandemic, and the retail shake-out that will inevitably follow, will exacerbate the divergence between the most muscular stores and restaurants and the laggards. It will also polarize the vibrant malls and secondary locations even more.
To prosper in this new reality, mall owners will need to ensure they can attract the most desirable brands. The retailers that do emerge from the wreckage will remember how they were treated when the chips were down. On both sides, even-handed negotiations are the best way to help all parties recover, rather than risking bringing about the death of the mall for once and for all.