Defaulting retailers spook listed property sector

By Thabang Mokopanele

If big retailers continue to perform poorly, and even defaulting on rent, there is a real possibility that the distributions from listed property funds, especially those reliant on retail tenants, may fall significantly, warns Stanlib Head of Property Funds Keillen Ndlovu.


Some of the struggling retailers include  Massmart, Edcon, Foschini and Pepkor. Collectively, they have sent shock waves in the property sector since they tend to be major or even anchor tenants in shopping malls. If they can’t make rent that means reduced income for landlords, a case made worse by the current national lockdown to curb the spread of the coronavirus, also known as COVID-19.


Ndlovu says should the big retailers default or push for a reduction in their rent, the pattern could spread to even smaller retailers such as restaurants and beauty salons.


“Major retailers are struggling to pay rent. There’s property industry discussions going with major apparel retailers on this issue. Non-payment of rent by retailers will be a huge challenge, more so for retail-focussed REITs, particularly those with weak balance sheets,” warns Ndlovu.


South Africa’s retail landlords announced an industry-wide assistance and relief package last week for retail tenants hardest hit by the Covid-19 lockdown.

The relief package was revealed by a newly-formed alliance of retail property landlords in the country, known as the Property Industry Group.


It is offering relief in the form of rental discounts of between 15% and 100%, as well as interest-free rental deferrals for April and May to help mitigate the impact on retail businesses that are not allowed to operate during the lockdown.

The initiative is principally focused on supporting affected small, medium and micro enterprises (SMMEs), however, it also provides relief and assistance to all other retail tenants and is set to be rolled out by landlords nationally.


It came in the wake of several major retail tenants, including the likes of TFG, Pepkor and KFC, saying they won’t be paying rentals due to the lockdown. Hundreds of smaller retail businesses have also told landlords they can’t afford to pay rentals, however, Moneyweb is aware of other major clothing and even food and general merchandise retailers now also opting not to pay rent.


“We’ve seen retailers reverting to legal positions, but we don’t believe that litigation provides either side with timeous solutions needed to get through this unprecedented time,” Estienne de Klerk, spokesperson for the Property Industry Group and chairman of SA Reit said in a statement detailing the relief package on Tuesday.


He says banks may have no option but to be accommodative through relaxing some of the debt covenants. “The weakness in the consumer spending as well as a broader bleak economic outlook remains a concern over and above South Africa being oversupplied with retail space.”

South African retailer Massmart said last week decided to close all of its non-performing stores, as cash-strapped consumers battle with high unemployment, modest wage increases and high fuel and utility prices.


Massmart, majority-owned by Walmart, said management will close trading at 23 Dion Wired Stores on March 19 and will decide at a later date whether to cease trading at 11 Masscash stores.


Both Massmart and Edcon each make up 1% of total income for listed property companies on an overall basis.


The company said it would continue talks with labour unions on measures to mitigate job losses and look at moving affected workers into vacant roles in other stores “where practical and reasonable”.


In the year ended December 31, Massmart’s mass discounters division, which comprises hi-tech retailer Dion Wired and general merchandise and food retailer Game, fell to an annual trading loss of R674.6 million from a profit of R32.6 million, hurt by lower consumer spending on electronics.


Massmart owns brands such as Game, Makro, Builder’s Warehouse, Cambridge Food, Dion-Wired, Jumbo and CBW. It said the ongoing process would affect Dion-Wired and Masscash outlets.


In July 2019, Massmart Holdings’ share price declined by more than 17% on the JSE after the group said it expected to report a decline in earnings across all of its four divisions for the six months to end June, mainly impacted by losses in Massdiscounters.


Meanwhile, in his last business update on 26 March, Edcon CEO Grant Pattison said the retail group would be engaging with government and other stakeholders to understand kind of assistance is available to help it reopen its doors after the lockdown to combat the spread of the coronavirus, also known as COVID-19.


The national lockdown, said Pattison, would see the group lose R800 million over a 21-day period. But having received help just a year ago when the Public Investment Corporation, landlords and creditors funded the R2.7 billion recapitalisation deal that enabled the company to keep operating, would there be appetite to extend a lending hand again?


“I think there’s still a case for Edcon to get assistance because they employ so many people, but it’s going to be tricky because there are so many other businesses that are also going to be in the queue, and these are businesses that haven’t been there before, and were healthy businesses prior to COVID-19,” says Evan Robins, portfolio manager at Old Mutual Investment Group’s MacroSolutions business.


Ndlovu says Stanlib believes that banks will support property companies provided they demonstrate appropriate action – defer dividends, reduce pay-out ratio, sell assets or cut costs where appropriate.


However, the weaker one with higher loan to value ratios (LTV) and lower (interest cover ratios) are more at risk in this environment.

On a combined basis and adding all REITs or property companies, Edcon now makes up about 1% of income (so the sector is not as exposed as before though Edcon still plays a major role in the economy, supply chain as well as jobs).


According to Ndlovu, this is down from about 2% before the store rationalisation and store closure exercise by Edcon.  “Edcon initially had about 1,5 million square metres (store rationalisation and store closures) of space but that has been reduced by a third to about 1 million m². We have seen the negative impact already after the 41% rent reductions or equity injection in the business by property funds as well,” he says.


Ndlovu says most REITs have been conservative in how they account for Edcon’ income and some, including some banks, have been excluding Edcon numbers in their forecasts as a precautionary measure.

“The challenge is letting out the vacant space, the costs involved in fit outs and reconfiguring the space as well as the opportunity cost of vacant space while looking for a tenant.”


Property industry interactions 


Property industry bodies are currently in talks with banks regarding relaxing debt covenants. They are also in touch with the Johannesburg Stock Exchange regarding revisiting REITs regulation and the National Treasury around tax implications and retailers regarding how to manage rental payments in this environment. These discussions include the South Africa Property Owners Association (SAPOA), SA REIT Association, and the South Africa Council of Shopping Centres (SACSC).